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Fundamental View
AS OF 15 Jun 2022KDB was established in 1954 to finance the reconstruction of South Korea after the Korean war and it financed the rapid industrialization of Korea from the 1960s.
In 2009, KDB was restructured, spinning out Korea Finance Corp and KDB was due to be privatized but the next government scrapped the plan and revised the KDB Act to re-merge KDB and KoFC which was done at the end of 2014. Its policy role has been re-affirmed and, as such, KDB remains a quasi-sovereign bank. Its credit standing is based on the strong likelihood of government backing.
Business Description
AS OF 15 Jun 2022- In 2009, KDB was restructured and the aim of the government at the time was to eventually privatise KDB, which was seen to have long outgrown its policy role and to be competing with the commercial banks.
- The Park Geun-hye government subsequently reversed this plan which was opposed by KDB and was impractical given KDB's poor returns and non-commercial management culture.
- KDB's new policy role is to support start-ups and SMEs, as well as large-scale overseas projects. Its vision is summed up as: "An advanced policy bank, at the forefront of Korea's sustainable growth". It also acts as a "market safety net", helping with the restructuring of troubled industries.
- KDB is 100% owned by the Korean government. Under Article 32 of the KDB Act is required to offset any annual losses that exceed the banks' reserves. This is a solvency guarantee and the government has in practice always undertaken proactive moves to ensure the bank remains not only solvent but also adequately capitalised.
Risk & Catalysts
AS OF 15 Jun 2022The KDB Act continues to include a solvency guarantee from the government which is committed to supporting the bank and to keep its stake above 50%.
KDB is therefore viewed as a Korean quasi-sovereign entity and its ratings of Aa2/AA/AA- are in line with Korea’s sovereign ratings.
KDB has regularly incurred bad debts due to both poor risk management and its role of helping corporate Korea through difficult times, and in 2020 it stepped up to help businesses hit by the COVID-19 downturn.
The profitability of its banking business is low and it regularly needs and receives capital injections from the government.
Key Metrics
AS OF 15 Jun 2022| KRW bn | FY21 | FY20 | FY19 | FY18 | FY17 |
|---|---|---|---|---|---|
| Pre-Impairment Operating Profit / Average Assets | 0.92% | 0.71% | 0.39% | 0.68% | 0.65% |
| ROAA | 0.69% | 0.67% | 0.11% | 0.84% | 0.21% |
| ROAE | 4.8% | 4.7% | 0.8% | 6.3% | 1.9% |
| Provisions/Average Loans | 0.29% | 0.84% | (0.11%) | 0.07% | 0.95% |
| Nonperforming Loans/Total Loans | 1.70% | 2.48% | 2.71% | 4.23% | 3.49% |
| CET1 Ratio | 13.7% | 14.3% | 12.1% | 12.7% | 13.2% |
| Total Equity/Total Assets | 13.82% | 13.44% | 13.05% | 13.27% | 11.31% |
| Net Interest Revenue/Ave. Assets | 0.62% | 0.54% | 0.52% | 0.83% | 0.71% |
CreditSights View
AS OF 15 Jun 2022We have a Market perform recommendation on KDB as we see it trading in an appropriate band for the quasi-sovereign credit that it is, with robust state support. KDB is 100% owned by the Korean Government. As with most policy banks, KDB has not sought to maximise returns, and together with its lending bias towards large companies, its margins are thin and asset quality is volatile. However, strong government support underpins the weak credit, including a solvency guarantee and timely capital injections received in the past.
Recommendation Reviewed: February 08, 2023
Recommendation Changed: September 22, 2020
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