KB Securities Co. Ltd. Assigned #A-/A-2# Outlook Stable

Stocks and Financial Services Press Releases Tuesday July 3, 2018 17:55
HONG KONG--3 Jul--S&P Global Ratings

HONG KONG (S&P Global Ratings) July 3, 2018--S&P Global Ratings assigned its 'A-' long-term and 'A-2' short-term issuer credit ratings to Korea-based KB Securities Co. Ltd. The outlook on the long-term rating is stable.

The rating on KB Securities reflects our view that the company is integral to KB Financial Group. KB Securities carries out several groupwide activities, including corporate investment banking operations, where several group subsidiaries are managed under the company. We therefore view KB Securities as a core subsidiary of the group and equalize the rating on the company with the group's 'a-' unsupported group credit profile (GCP), which excludes potential government support.

We expect KB Securities to remain important for KB Financial Group. The group is strengthening its non-banking operations, especially its capital markets offerings, to improve cross-selling opportunities and diversify revenue streams.

We see limited integration risks for KB Securities, which was established in 2016 when KB Financial Group purchased Hyundai Securities Co. Ltd. and merged it with its existing brokerage operations KB Investment and Securities Co. Ltd. (KB I&S). KB I&S has been a fully owned subsidiary of KB Financial Group since 2008. In our view, the integration between the two companies, especially in terms of risk management and operational management, has progressed well. KB Securities' risk appetite is set by the group through a top-down process, which ensures that the group's total risk exposure is within reasonable boundaries.

KB Financial Group has provided support to KB Securities, including through capital injections as recently as in 2016 to help the company meet the regulatory guidelines for conducting new businesses. KB Securities' size is also material, in our view. Its total equity and net profit accounted for about 13% and 8% of the group's total equity and net profit, respectively, as of end-2017.

We do not factor extraordinary government support into our ratings on KB Securities because a potential failure of the company would not likely result in significant financial system distress in Korea.

Given KB Securities' group status, the company's stand-alone credit profile (SACP) is not a major rating driver. In our view, KB Securities has a firm market presence with adequate capitalization and risk management capabilities.

We expect KB Securities to maintain its firm presence in the domestic market. The company is the fifth-largest securities company in Korea in terms of assets as of end-2017. We anticipate that KB Securities will maintain a good customer base in Korea's retail brokerage market. The company is well recognized in the fragmented domestic securities market, in part due to its parent bank's strong brand image. The cross-selling opportunities between KB Securities and KB Kookmin Bank (the dominant operating subsidiary of the group) provide the company a stickier customer base compared to stand-alone companies, in our view.

KB Securities' business structure is fairly diversified and is broadly in line with that of its domestic peers. KB Securities' business position is weaker than that of Korea Investment Securities Co. Ltd., which has a more diversified revenue owing to its asset management subsidiaries and higher profitability, in our view.

We estimate that KB Securities' risk-adjusted capital (RAC) ratio before diversification and concentration adjustments will remain adequate at 7%-8% in the coming one to two years. This is based on our expectation that the company will not excessively grow its balance sheet, given the parent group's prudent risk management record in recent years, and that the group will not enforce an aggressive dividend policy. We estimate KB Securities' RAC ratio to be at 7.3% as of end 2017.

We expect KB Securities' profitability to remain broadly stable despite rising interest rates that could result in trading and valuation losses on fixed-income securities holdings, and stiff competition. We also expect the group to maintain an adequate capitalization to support KB Securities' business growth. KB Financial Group injected Korean won (KRW) 180 billion of common equity capital into KB Securities in 2016, enabling the company to become eligible to apply for a license for new businesses such as corporate lending through promissory note issuance and foreign currency exchange business for corporate finance. The regulators require a company to have a minimum equity base of KRW4 trillion for such operations.

KB Securities could face market risks, including interest rate risk, given its large holding of fixed-income securities. Such securities account for almost half of the company's total assets, and unfavorable movements in interest rates could result in trading and valuation losses. KB Securities has been expanding its bond portfolio, thanks partly to its cash management accounts (CMA) and repurchase agreements, from which it derives funds to invest mostly in government securities to earn a mark-up.

KB Securities has also taken some counter-positions in structured securities that it sold, which totaled about KRW9.7 trillion, as of end 2017. Although the company's direct risks are liquid exposures that can be hedged under regular market conditions, hedging may not function efficiently in times of severe stress due to market dislocation and contracting liquidity.

We expect KB Securities to maintain its adequate funding and liquidity profiles in the coming few years. KB Financial Group and KB Kookmin Bank are likely to support the company on an as-needed basis. We believe KB Financial Group has sufficient funding and liquidity to support KB Securities. The parent has a record of injecting capital into the company. We see such capital injections as an indication of the group's willingness to provide support on an ongoing basis.

The stable outlook on KB Securities reflects our view that KB Financial Group will maintain its credit profile and strong commitment of support to the company for the next two years at least. We also expect KB Securities to remain of core importance to the group. The ratings on the company will therefore remain highly correlated with the creditworthiness of the group.

We could lower the ratings on KB Securities if the group's asset quality worsens considerably or its capitalization weakens significantly.
We could also lower the ratings if KB Securities' importance to the group weakens, possibly due to the company's weaker financial performance.

We could upgrade KB Securities if: (1) Kookmin Bank and KB Financial Group's capitalization improve such that Kookmin Bank's RAC ratio remains sustainably above 10%; or (2) Kookmin Bank's asset quality improves substantially compared to peers', with low credit costs.


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