Moody's: Kookmin's covered bond programme highlights new funding option for Korean banks

Moody's Investors Service says that Kookmin Bank's (LT rating A1/Senior unsecured rating A1/Outlook stable/bca baa1) launch on 12 June 2015 of Korea's first covered bond programme under the covered bond law effective April 2014 highlights the availability of a new funding option for Korean banks generally, and improves protection for investors.

"Unlike previous Korean covered bonds, Kookmin's transaction is a multi-series programme that allows for more timely issuance," says Joe Wong, a Moody's Assistant Vice President and Analyst. "As observed in other countries, covered bond markets have stayed open and provided banks with more readily available funding even during financial crises."

Wong was speaking on the release of a new Moody's report, "Korean Covered Bonds: Kookmin Bank Covered Bond Demonstrates New Funding Option for Korean Banks and Improved Credit Protection to Investors". The report was co-authored by Wong and Sophia Lee, a Moody's Vice President and Senior Analyst.

Covered bond programmes in Korea also help mitigate the rising level of interest rate risk at banks because of the increasing proportion of fixed-rate mortgages, in turn driven by regulatory requirements. Covered bonds will provide an alternative for banks to manage their long-term assets and liabilities, in addition to selling conforming mortgage loans to Korea Housing Finance Corporation (LT rating Aa3/ST rating P-1/Outlook positive).

This alternative source of funding will particularly benefit commercial banks with sizable mortgage loan books. As of December 2014, Kookmin had the biggest mortgage loan book, followed by Woori Bank (LT rating A1/Senior unsecured rating A1/Outlook negative/bca baa2) and Shinhan Bank (LT rating Aa3/Senior unsecured rating Aa3/Outlook stable/bca a3).

Kookmin's new covered bond programme features a pre-maturity test and maturity extension, which were not present in previous Korean covered bond transactions. These features reduce the need to sell the mortgage loans in a short time, which could attract large market value loss given the illiquid nature of Korea's secondary mortgage market. The new programme can be a precedent for future programs to adopt similar features to mitigate such risk.