Bankrupt Hanjin Shipping's creditor banks are well-reserved

ON Friday, Hanjin Shipping Co., Ltd. (unrated), Korea’s largest container shipping company by asset size, was declared bankrupt. Hanjin Shipping was put under court receivership on 1 September 2016 after its creditor banks, led by Korea Development Bank (KDB, Aa2/Aa2 stable, ba29 ), rejected the shipping company’s selfrescue plan and said they would cease providing financial assistance.

The bankruptcy declaration is credit neutral for Hanjin Shipping’s creditor banks because they were already nearly 100% provisioned against their exposures and now, no longer face the risk of having to extend further credit to sustain the company, thereby capping their losses to current exposures.

 

The creditor banks comprise three policy banks and four commercial banks that together have an exposure to Hanjin Shipping of KRW1.06 trillion ($923 million), or 11 basis points of their risk-weighted assets as of 30 June 2016. The policy banks, The Export-Import Bank of Korea (Aa2 stable), KDB and NongHyup Bank (A1/A1 stable, baa3), together account for around 77% of the banks’ total exposure to Hanjin Shipping. After Hanjin Shipping filed for court receivership, these three policy banks reclassified their Hanjin Shipping exposures as estimated losses and in the second half of 2016 set aside nearly 100% provisioning against these loans. Hanjin Shipping’s bankruptcy will therefore have a minimal effect on their profitability and capital ratios.

 

Exposures at the commercial banks, which accounted for 23% of Hanjin Shipping’s bank borrowings, are relatively small and also well provisioned. These banks are Kookmin Bank (A1/A1 stable, baa1), KEB Hana Bank (A1/A1 negative, baa1), Woori Bank (A2/A2 stable, baa3) and Busan Bank (A2/A2 negative, baa1). We estimate that these commercial banks, in aggregate, provisioned for 75% of their exposures to Hanjin Shipping before its court receivership and set aside additional provisions after the court receivership, which would translate into a minor one-basis-point decline in their common equity Tier 1 capital ratios in the second half of 2016.

 

We also expect a limited credit effect on the emergency financial assistance loans that KDB and Industrial Bank of Korea (Aa2/Aa2 stable, baa2) extended after the September 2016 court receivership. The two policy banks, together with Korea Credit Guarantee Fund and Korea Technology Finance Corporation, provided emergency financial assistance totaling KRW480.3 billion ($422.0 million) to subcontractors of Hanjin Shipping and to small and midsize shippers suffering from cargo delays and receivables payment delays following Hanjin Shipping’s court receivership, based on the Financial Services Commission’s estimate as of 6 February 2017.

 

Although the bankruptcy raises the risk that a large portion of these emergency financial assistance loans will default, much of the resultant loss will be covered either by the government’s guarantee under the KRW800 billion restructuring fund allocated in its supplementary budget or by collateral. In addition, the KRW480.3 billion of credit assistance accounted for merely 0.1% of the total outstanding credit of the two policy banks.

 

We also do not expect the Hanjin Shipping bankruptcy to affect Korean banks’ other shipping exposure because the government’s KRW6.5 trillion financial support package for Korean shippers, which it introduced after court receivership of Hanjin Shipping, has added to the industry’s resilience and adjustment capacity. Nevertheless, we continue to expect that the shipping industry will remain under pressure from a weak global economy and a surge in new vessel deliveries in the coming year. 9 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment.