Embed Size (px)
Citation preview
MOODYS.COM
13 OCTOBER 2016
NEWS & ANALYSIS Corporates 2 » Boeing Lands Significant Order from Qatar Airways, a
Credit Positive » EU Tariffs on Chinese Steel Are Credit Positive for
European Producers » Misys' Planned IPO and Refinancing Are Credit Positive
Infrastructure 6 » Duke Energy's Agreements to Sell Its Latin American Businesses
Are Credit Positive
Banks 7 » ING's Updated Strategic Plan Is Credit Positive » Portugal's Banco BPI Agrees to Reduce Exposure to Angola, a
Credit Positive » Attica Bank's Emergency Liquidity Assistance Increase Is
Credit Negative » Norway Proposes Financial Services Tax, a Credit Negative
for Banks » Korean Banks' Loan Delinquencies Climb as Shipbuilders and
Shippers Restructure » Bank of East Asia's Sale of Tricor Holdings Stake Is
Credit Positive
Insurers 18 » Penn Mutual's Acquisition of Vantis Life Is Credit Positive
RECENTLY IN CREDIT OUTLOOK
» Articles in Last Monday’s Credit Outlook 19 » Go to Last Monday’s Credit Outlook
Click here for Weekly Market Outlook, our sister publication containing Moody’s Analytics’ review of market activity, financial predictions, and the dates of upcoming economic releases.
NEWS & ANALYSIS Credit implications of current events
2 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Corporates
Boeing Lands Significant Order from Qatar Airways, a Credit Positive Last Friday, The Boeing Company (A2 stable) landed an order for 40 widebody aircraft and a letter of intent for up to 60 narrowbodies from Qatar Airways (unrated). If Qatar Airways exercises all options, the deal would be valued at almost $18 billion (at list prices). The order is credit positive for Boeing because the widebody orders help fill a gap in the production run for 777 aircraft ahead of its transition to a next-generation variant in 2019. Meanwhile, the option suggests a growing likelihood of winning over a big Middle Eastern customer that to date has only ordered competing narrowbody product from Airbus Group SE (A2 stable).
Boeing and Airbus compete in a virtual duopoly market for large commercial aircraft, but Airbus has gotten the better of Boeing with its next-generation narrowbody product, the A320neo, over Boeing’s 737 MAX. Even so, Airbus has had issues recently with initial deliveries owing to problems with the new geared turbofan engine, a product of United Technologies Corporation (A3 stable) subsidiary Pratt & Whitney.
Similar supply-chain issues have delayed Airbus A350 widebody deliveries to Qatar Airways, eliciting public criticism from the airline’s CEO. We believe this influenced the follow-on order for Boeing widebodies, and that Airbus runs the risk that Qatar Airways cancels its remaining order for 46 Airbus narrowbodies (four have already been canceled). Qatar Airways is a significant customer for both manufacturers and will continue to press both companies for price concessions, including potentially on existing orders in consideration of forestalled cancellations.
Cancellation of the bigger order would also constitute another dark mark for United Technologies, and would presumably bolster the opportunity for competing product from General Electric Company (A1 stable) for engines on the A320neo, particularly from carriers that have not yet picked a power source for equipment they have already ordered.
Although there is little doubt that the Qatar Airways order constitutes a nice win for Boeing, the large size of the deal, along with the inclusion of current generation equipment, the importance of the customer and a tight pricing environment, collectively imply a high likelihood of very aggressive price discounting from Boeing to secure the deal. Qatar Airways had added negotiating leverage in that Boeing (like Airbus) has received only limited net new orders for widebody aircraft this year, particularly because of a subdued market appetite amid persistently low oil prices. Economic returns to Boeing are therefore likely to be considerably lower than historical norms.
It is also noteworthy that Qatar had held off on finalizing the order until after it received approval from the US government for the purchase of F-15 fighter jets. From our perspective, the letter of intent for Boeing narrowbodies looks like a not so subtle warning to all interested parties about the growing amount of optionality available to aerospace customers, in both the civil and defense markets. Political considerations have taken on added importance in recent transactions, with increasing evidence of more onerous offset requirements including greater localization of production facilities and requisite technology transfer. We believe that both Qatar Airways and the Qatari government successfully flexed their collective economic clout to secure these new contracts, just like India likely did earlier this month with its purchase of Rafale fighters. Such trends are likely to be the new norm for conducting business for some time.
Russell Solomon Senior Vice President +1.212.553.4301 [email protected]
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.
NEWS & ANALYSIS Credit implications of current events
3 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
EU Tariffs on Chinese Steel Are Credit Positive for European Producers Last Friday, the European Commission (EC) imposed provisional anti-dumping duties on European Union (EU) imports of China’s hot-rolled steel coil products (HRC) and heavy steel plates. The trade sanctions are credit positive for European steel manufacturers in general, and ArcelorMittal (Ba2 stable), thyssenkrupp AG (Ba2 stable) and Tata Steel Ltd. (Ba3 negative) in particular, because they are the EU’s largest. The measures should support the prices of HRC and heavy plates.
The EC imposed tariffs on cold-rolled steel coil (CRC) products from China and Russia earlier this year. Its latest action, which the EC took rapidly and in advance of its original calendar, along with high duties proposed for heavy plate imports, show the EU’s support for the industry, which is grappling with global oversupply of steel. The actions follow an EC investigation of HRC and heavy plate imports that began in February 2016. The EC will decide in April 2017 whether to confirm the tariffs for up to three years.
The provisional duties are 65.1%-73.7% for heavy plates and 13.2%-22.6% for HRC products. China was the biggest exporter of hot-rolled wide strip and cold-rolled coils to the EU in 2015. We believe that the EC targeted Chinese steelmakers in its latest action because high volumes of cheap imports weigh on domestic prices by creating a reference market base-price. Chinese export prices (FOB) on average tend to be €56-€78 per tonne less than European domestic prices.
The tariffs should slow the growth rate of Chinese imports, which have consistently risen over the past three years (see Exhibit 1) and give domestic players more scope to increase prices and capture any increasing demand from main steel-using sectors, which are automotive, construction and infrastructure. However, we do not expect a significant recovery in EU HRC and plate prices as a result of the EC’s action.
EXHIBIT 1
Yearly Change in European Union Flat Steel Products Imports, including HRC, CRC and Plates
Sources: Eurofer and Comext
+27%
-33%+14%
+15%
+29%
+8.3%
0
2
4
6
8
10
12
14
16
18
20
2011 2012 2013 2014 2015 Year to July 2016
Mill
ion
Met
ric T
onne
s
Hubert Allemani Vice President - Senior Analyst +44.20.7772.1785 [email protected]
NEWS & ANALYSIS Credit implications of current events
4 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
HRC prices from northern and southern Europe have been volatile this year, rebounding from five-year lows hit in January. On average, HRC prices rose 39% from January to July 2016, peaking at €428 per ton in May. Prices softened over the summer to around €412 per ton in July but returned to €428 at the end of September (see Exhibit 2).
EXHIBIT 2
Chinese Export versus European Union Domestic Hot-Rolled Steel Coil Prices
Source: MetalBulletin
ArcelorMittal, the world’s largest steelmaker by volume, thyssenkrupp and Tata Steel will benefit most from these protection measures. HRC products accounted for 25% of ArcelorMittal’s European shipments in 2015, and 38.7% of thyssenkrupp’s Steel Europe division’s shipment in its fiscal year that ended 30 September 2015. We estimate that those percentages are fairly stable year on year. The provisional anti-dumping duties will help support higher prices and profitability at these companies because of HRC’s relatively high weight in their total output.
Together with the existing duties on CRC products, which the EC confirmed in August 2016, the tariffs will continue to support the increase in prices for European steel manufacturers since the end of the first quarter of 2016, which should translate in higher profitability in 2016 versus 2015. The EC is also investigating HRC products imported from Russia, Ukraine, Iran, Brazil and Serbia.
€ 0
€ 50
€ 100
€ 150
€ 200
€ 250
€ 300
€ 350
€ 400
€ 450
€ 500
€ 550
Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16
€pe
r Ton
ne
China Export FOB EU Domestic Northern Europe EU Domestic Southern Europe
NEWS & ANALYSIS Credit implications of current events
5 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Misys’ Planned IPO and Refinancing Are Credit Positive On 6 October, UK-based banking software vendor Misys Newco 2 S.a.r.l. (B2 review for upgrade) announced its intention to raise at least £500 million from an initial public offering (IPO) and use the proceeds, as well as $1.3 billion of new senior secured term loans, to repay all existing debt. The proposed credit-positive transaction will reduce Misys’ financial leverage and improve its cash flow.
Following the announcement, we placed Misys’ ratings on review for upgrade and assigned a (P)Ba3 rating to its new senior secured credit facilities. The debt refinancing is contingent upon the IPO and therefore we will withdraw the newly assigned ratings should Misys not raise the intended proceeds or float at least 25% of its share capital, as required by the London Stock Exchange, where it plans to list.
As Exhibit 1 shows, if the IPO proceeds as planned, Misys’ leverage, as measured by Moody’s-adjusted gross debt to EBITDA, will decrease by around 1.5x to approximately 3.6x, and free cash flow (FCF) generation will be significantly enhanced such that FCF/debt will rise above 10% owing to both the reduced debt amount and lower borrowing costs.
EXHIBIT 1
Misys Actual, Pro Forma and Estimated Leverage and Free Cash Flow
Notes: EBITDA includes the benefit of the capitalisation of software development costs; EBITDAC includes software development costs. Misys’ fiscal year ends 31 May. Sources: Misys and Moody’s Investors Service estimates
We expect that Misys will reduce its interest bill by approximately two thirds (around €100 million), primarily from refinancing its expensive $625 million second-lien term loan, which pays 12% per year, compared with the new term loans carrying a 325-basis-point margin over Euribor or Libor. Misys’ prospective capital structure will also largely improve its interest coverage, bringing it close to 5.0x, versus 1.9x in fiscal 2016 (which ended 31 May 2016). We expect Misys to generate healthy free cash flow of €130-€160 million in the next few years, even after dividend payouts. We expect that the company’s future financial policy will partially depend on the level of free float at closing and over the next few quarters, but predict that financial sponsor Vista Equity Partners will retain a majority stake in the company until at least 2017.
Misys provides software solutions across all banking activities, from retail to capital markets, and has approximately 2,000 customers spread across 125 countries. Misys generated $900 million (€811 million) of revenue in fiscal 2016. Misys has been majority-owned by Vista Equity Partners since its de-listing from the London Stock Exchange in 2012.
0.0%
2.5%
5.0%
7.5%
10.0%
12.5%
15.0%
0x
1x
2x
3x
4x
5x
6x
FY 2016 Actual FY 2016 Pro Forma FY1 2017 Estimate FY1 2018 Estimate
Debt/EBITDAC - left axis Debt/EBITDA - left axis Free Cash Flow/Debt - right axis
Frederic Duranson Analyst +44.20.7772.1950 [email protected]
NEWS & ANALYSIS Credit implications of current events
6 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Infrastructure
Duke Energy’s Agreements to Sell Its Latin American Businesses Are Credit Positive On Monday, Duke Energy Corporation (Baa1 negative) announced that it had reached two agreements to sell its Latin American businesses in two transactions that have a total enterprise value of approximately $2.4 billion. Duke will sell its operations in Brazil, which include 2,090 megawatts of hydroelectric generating facilities, to China Three Gorges Corporation (CTG, Aa3 negative) for $1.2 billion. Duke will also sell its businesses in Peru, Chile, Ecuador, Guatemala, El Salvador and Argentina, which include 2,300 megawatts of hydroelectric and natural gas generation plants, transmission infrastructure and natural gas processing facilities, to I Squared Capital (unrated) for $1.2 billion.
The sales are credit positive because Duke will use the net cash proceeds to repay a portion of the approximately $4.2 billion of debt that the company incurred to finance last week’s acquisition of Piedmont Natural Gas Company, Inc. (A2 stable). These sales will also eliminate Duke’s exposure to more volatile Latin American operations and are consistent with the company’s strategy of focusing on its core domestic regulated utility business.
As a result of the transactions and planned deleveraging, we expect that debt at Duke will decline by $1.7-$1.9 billion. As such, we estimate that the percentage of parent company debt within Duke’s consolidated capital structure, which includes about $50 billion of debt obligations, will decline to approximately 32% versus 35% absent the sale. This is a meaningful reduction in the debt to be serviced with dividends from Duke’s primarily regulated operating company subsidiaries.
Following the sales, Duke will generate cash from operations almost entirely from its lower-risk businesses, including its US state-regulated electric and gas utilities (approximately 95%), as well as its contracted renewables and federally regulated pipeline and transmission businesses (approximately 5%). Although Duke’s international businesses accounted for less than 10% of its operations as of December 2015, those businesses’ exposure to exchange-rate risk and hydrology conditions added volatility to Duke’s cash flows.
The transactions are subject to local regulatory approvals and Chinese regulatory approval for the CTG acquisition. Duke expects to close the Brazilian sale in two to four months, and the sale to I Squared Capital in the first half of 2017. Duke completed the $4.9 billion acquisition of Piedmont Natural Gas, a Charlotte, North Carolina-based natural gas distribution company, on 3 October, funding the acquisition with $750 million of equity and approximately $4.2 billion of debt.
Laura Schumacher Vice President - Senior Credit Officer +1.212.553.3853 [email protected]
NEWS & ANALYSIS Credit implications of current events
7 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Banks
ING’s Updated Strategic Plan Is Credit Positive On 3 October, ING Groep N.V. (ING, Baa1 stable) announced that it will accelerate plans to digitalize its retail business, and, in addition to previously announced cost cutting, will cut another €900 million by 2021 as part of its updated “Think Forward” strategic plan. The updated plan will help the bank preserve profitability, a credit positive.
Although ambitious, we believe the updated plan can be implemented as scheduled, which will help ING preserve its profitability and reach its 50%-52% cost/income target ratio by 2021 (versus 56.2% as of June 2016), a good performance relative to the European Union bank average of 63%. ING is accelerating its transformation plan amid persistent low interest rates that negatively pressure its net interest margin and what it estimates is a 52% increase in regulatory costs in 2016.
The new measures aim to reduce ING’s cost base, focus on direct banking and gain primary relationships with customers. ING expects to meet these targets by merging Record Bank (unrated) within ING Belgium and building a single bank platform for the Dutch and Belgian entities; accelerating the retail bank’s digitalization; closing about 600 of 1,245 branches in Belgium; building a uniform range of products for retail customers in other markets including Spain, Italy, France, Czech Republic and Austria; and optimizing support functions globally. Through these measures, ING plans to reduce staff by 7,000 by 2021 (including 3,500, or 34%, of its workforce in Belgium and 2,300, or 18%, in the Netherlands). ING expects IT expenses of about €800 million between now and 2021, but forecasts the upgrades delivering €900 million of gross annual cost savings during the same period. The restructuring costs will be covered by a €1.1 billion provision, €1 billion of which will be booked in the fourth quarter of this year.
Since announcing its Think Forward plan in 2014, ING has improved its group common equity Tier 1 capital ratio to 13.1% as of June 2016, from 10% in 2013, and the bank has increased its return on equity to 10.8%, which is within its 10%-13% target range. ING also resumed dividends to shareholders in 2015.
Although ING’s profitability and net interest margin have increased since 2013, they have started reaching a plateau (see exhibit below), especially in the Netherlands and Belgium, and its cost-to-income ratio (including regulatory costs) increased above its 50%-53% target. Belgian deposit rates have fallen to the legal minimum, leaving the bank with no headroom to further re-price its liabilities there. ING’s new set of measures seek to adapt the bank’s business model to margin pressure arising from a prolonged low rate environment and increased customer expectations in digital banking.
Laurent Le Mouël Vice President - Senior Analyst +33.1.5330.3340 [email protected]
NEWS & ANALYSIS Credit implications of current events
8 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
ING Bank’s Net Profits and Net Interest Margin, 2010-16
Note: Figures are adjusted according to Moody’s methodology. Sources: ING and Moody’s Investors Service
0.00%0.15%0.30%0.45%0.60%0.75%0.90%1.05%1.20%1.35%1.50%1.65%1.80%
€ 0
€ 1
€ 2
€ 3
€ 4
€ 5
€ 6
2010 2011 2012 2013 2014 2015 First-Half 2016Annualized
€Bi
llion
s
Net Profit - left axis Net Interest Margin - right axis
NEWS & ANALYSIS Credit implications of current events
9 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Portugal’s Banco BPI Agrees to Reduce Exposure to Angola, a Credit Positive Last Friday, Portugal’s Banco BPI S.A. (Ba3/Ba3 review direction uncertain, b1 review for downgrade1) said that Unitel S.A. (unrated) will acquire 2% of its stake in Banco de Fomento de Angola S.A. (BFA, unrated). This transaction would decrease BPI’s stake in the Angolan bank to 48.1% and increase Unitel’s to 51.9%. The sale is credit positive for BPI because it would allow the bank to deconsolidate the Angolan subsidiary and remedy BPI’s breach of the regulated large-exposure limits in Africa. Additionally, the sale increases the likelihood that BPI will avoid European Central Bank (ECB) fines for excess exposure to Angola. BPI sent a purchase and sale proposal to Unitel on 20 September to transfer 26,111 shares, or 2%, of BFA for €28 million.
Ensuring regulatory compliance is also beneficial for BPI and its financially much-stronger key stakeholder, Spain’s CaixaBank S.A. (Baa2/Baa2 negative, ba1), which launched a public tender offer on 18 April to acquire the 54.50% of BPI’s share capital that it does not already own. Concurrently, CaixaBank requested that the ECB suspend any sanction proceedings against BPI for its excess risk concentration in Angola to allow it to find a solution for BPI’s African operations. The ECB decided to allow CaixaBank four months after its takeover of BPI, together with the suspension of ongoing sanction proceedings against the Portuguese bank for these exposures.
Angola falls outside of the European Commission’s (EC) 2014 list of countries that have supervisory and regulatory arrangements equivalent to those of the European Union. As a consequence, BPI’s €3.6 billion exposure to Angola and its €1.3 billion exposure to the National Bank of Angola exceed the limit to large exposures by €3.0 billion and €184 million, respectively. The EC imposed a 10 April 2016 deadline for BPI to reduce its exposures to the maximum allowable amounts. BPI presented a plan to spin off its African operations, but its shareholders failed to agree on a solution before the 10 April deadline.
BPI announced on 21 September its general assembly’s decision to eliminate the 20% voting cap in its bylaws. The elimination was one of CaixaBank’s pre-conditions to proceed with the public tender offer. Pending regulatory approvals and CaixaBank achieving more than a 50% stake in BPI in its offer, the banks expect to close the acquisition in the fourth quarter. Last Friday’s announced transaction is still subject to Banco Nacional de Angola’s authorisations and the approval by BPI shareholders at its general meeting.
1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment.
María Vinuela Assistant Vice President - Analyst +34.91.768.8237 [email protected]
NEWS & ANALYSIS Credit implications of current events
10 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Attica Bank’s Emergency Liquidity Assistance Increase Is Credit Negative Last Monday, the European Commission’s Directorate General for Competition approved Attica Bank S.A.’s (Caa3 stable, caa32) request to issue and retain around €380 million of state-guaranteed bonds through its euro medium-term note programme, under the government’s ongoing Pillar 2 liquidity support programme. The bonds will qualify and can be posted as collateral to draw Emergency Liquidity Assistance (ELA) from the Bank of Greece. Attica Bank’s need to tap additional ELA funds is credit negative.
The recent sharp increase of Attica Bank’s ELA contrasts with the ELA decrease that Greece’s four larger banks reported in the past few months. We estimate that the bank will be able to draw down around €220 million in cash from the ELA, after the haircut imposed on such collateral by the Bank of Greece. Attica Bank Deputy CEO Thanasis Tsadaris told Reuters last Thursday that this bond issue has the full support of the Bank of Greece, while the Directorate General for Competition concluded on Monday that this liquidity support measure is in line with European Union state aid rules.
In case the bank makes full use of the bond, we estimate that it will increase its total outstanding ELA balance to approximately €1.3 billion (or around 35% of its total assets, see exhibit below), from €970 million reported in June 2016. Indicatively, the banking system’s ELA balance declined to €48.9 billion in August 2016 (or around 15% of the system’s total assets) from €54.4 billion in June 2016.
Attica Bank’s Funding Sources as a Percent of Total Assets
Sources: Attica Bank and Moody’s Investors Service estimate
Attica is increasing its ELA-eligible collateral through government-guaranteed bonds after customer deposits significantly decreased following the Bank of Greece and the European Central Bank release of findings last month from their joint onsite audit between 16 March 2016 and 27 May 2016. The recent decline exacerbated declines during the first six months of 2016. The bank’s customer deposits decreased to around €2.0 billion in June 2016 from €2.1 billion in December 2015, and we estimate that they dropped further to €1.9 billion in September 2016. We understand that deposit outflows have now eased, and that the bank’s deposit balances have stabilised somewhat.
2 The bank ratings shown in this report are the bank’s deposit rating and baseline credit assessment.
25% 21% 26%35%
72%
58% 54%48%
0%5%
10%15%20%25%30%35%40%45%50%55%60%65%70%75%
Jun-15 Dec-15 Jun-16 Oct-16 Estimate
Emergency Liquidity Assistance Deposits
Nondas Nicolaides Vice President - Senior Credit Officer +357.25.693.006 [email protected]
NEWS & ANALYSIS Credit implications of current events
11 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
The onsite audit identified a number of shortcomings at Attica Bank, including weaknesses in the bank’s corporate governance practices, business model, credit risk management processes, information technology and systems. In addition, €55.7 million was identified from the bank’s capital increase in December 2015, which was either directly or indirectly financed by the bank. As a result, it is likely that this amount will no longer be recognised as common equity Tier 1 capital by the regulator, which will further increase the bank’s capital shortfall from the pending €67 million identified by the Bank of Greece in October 2015 under its adverse stress-test scenario. These findings prompted a top management shakeup and the bank appointed a new chairman and CEO to turn it around.
NEWS & ANALYSIS Credit implications of current events
12 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Norway Proposes Financial Services Tax, a Credit Negative for Banks Last Thursday, the Norwegian parliament proposed that banks pay a 5% payroll tax and a corporate tax rate that is one percentage point higher than non-financial companies and other finance companies with at least 30% of their salary costs related to financial activities. The proposal is likely to pass a vote in parliament and become law later this year, with implementation of the tax beginning 1 January 2017. The new tax is credit negative for all 19 Moody’s-rated Norwegian banks, all of which would be affected, because we estimate it will reduce their 2017 net income by 3%-4%.
Banks and finance companies are currently largely exempt from value-added tax (VAT) in Norway, which means a 2016 tax advantage of around NOK8.85 billion, according to the 2017 state budget of Norway. The legislature’s introduction of special taxation for banks and finance companies would generate NOK2.25 billion in taxes in 2017, according to the Norwegian Ministry of Finance, and would reduce the industry’s historical tax advantages.
We expect the largest negative effect to come from the payroll tax component, which would effectively increase the cost of each employee by 5%, or more than NOK800 million combined for our rated banks. Since the payroll tax will apply to personnel expenses in the income statement, it will reduce banks’ loss-absorbing capacity by lowering pre-provision income. Furthermore, because the calculation base is salaries, rather than pre-tax income, the tax will more significantly affect banks with low profitability and high salary bases, while smaller online-focused banks without a branch network and a low cost to income, such as Skandiabanken ASA (A3 stable, baa13), would be less affected.
For example, the tax might affect banks adversely during economic downturns. Evidence from previous crises suggests that banks are unable to reduce salary expenses fast enough to compensate for falling business volumes and increasing loan losses. Banks often need two to three years to adjust to the new macroeconomic environment, during which time we expect that the payroll tax would have a much larger effect on net income than our 2017 estimate of 2%-3%.
The second tax component is that banks will need to pay a higher corporate tax rate than non-financial companies. Although banks will be subject to a 25% corporate tax rate in 2017, the tax rate for non-financial companies will fall to 24% from 25% in 2016. We estimate that a one-percentage-point higher tax rate for banks is around NOK400 million aggregate net income for our rated banks, more than 1% of 2017 estimated net income, and comes in addition to the payroll tax.
In the exhibit below, the bar graph on the left shows how the two tax components, payroll tax and extra corporate tax for financial institutions, affects a typical bank with salary expenses at around 40% of pre-tax income. The bar graph on the right shows the tax structure for a non-financial corporate for comparison.
3 The ratings shown are Skandiabanken’s deposit rating and baseline credit assessment.
Aleksander Henskjold Associate Analyst +44.20.7772.1954 [email protected]
NEWS & ANALYSIS Credit implications of current events
13 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Norway’s Proposed Tax Effects for Banks and Non-financial Corporates in 2017 Banks Non-financial Corporates
Note: Percentages are out of pre-tax income. The data use a simple tax structure without eligible deductions to reduce effective tax rate. Sources: Royal Norwegian Ministry of Finance and Moody’s Investors Service
In addition to the direct effect on profitability, the new tax proposal will reduce Norwegian banks’ international competitiveness because they will be subject to the payroll tax on the salary base of all Norwegian employees, even for services offered abroad. It will also create a favourable environment for foreign banks in Norway because, they are likely to have a lower taxable base in Norway relative to their domestic peers.
To mitigate the negative effects of the tax, we expect Norwegian banks to reduce branches and staff. The proposal will also incentivise outsourcing, but large savings from outsourcing are unlikely because banks will outsource domestically owing to the specialised knowledge and language requirements for most roles.
We expect that banks will aim to transfer some of the increased tax bill to their customers through higher prices and to lower bank employees’ salary growth. However, this will take time, and increasing prices runs the risk of reducing demand that may hurt banks’ new business and growth prospects, particularly given that foreign banks will be largely sheltered from the tax increase.
100%
2%
24%1%
73%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pre-TaxIncome
Tax onPayroll
RegularCorporate
Tax
AdditionalTax
Net Profit
100%
24%
76%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Pre-tax Income Corporate Tax Net Profit
NEWS & ANALYSIS Credit implications of current events
14 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Korean Banks’ Loan Delinquencies Climb as Shipbuilders and Shippers Restructure Last Friday, Korea’s Financial Supervisory Service (FSS) announced that Korean banks’ won-denominated loan delinquency rate was 0.87% in August, up nine basis points from 0.78% in July, 11 basis points from 0.76% a year earlier, and at its highest since December 2014, a credit negative for Korean banks.
We expect asset deterioration, particularly on loans to the shipbuilding and shipping sectors, to continue over the next six to 12 months. We expect this deterioration to increase delinquencies, weaken banks’ profitability and slow their buildup of capital buffers. As the exhibit below shows, large corporate loans, particularly to the shipbuilding and shipping sectors, were the main driver for the system’s rising delinquency rate and credit charges. Corporate delinquencies were 2.59% in August, up 28 basis points from July and 155 basis points from a year ago. Otherwise, the delinquency rate for small and midsize enterprise (SME) loans was 0.93% in August, up 11 basis points from July, but down six basis points from a year ago. The delinquency rate for household loans was 0.34% in August, up two basis points from July and down 12 basis points from a year ago.
Korean Banks’ Won-denominated Loan Delinquency Ratio by Sector
Source: Korean Financial Supervisory Service
The default of STX Offshore and Shipbuilding Co., Ltd. (unrated), which went into court receivership on 8 June, accounted for 140 basis points of total large corporate loans, and STX Heavy Industries Co. Ltd (unrated) went into receivership on 2 August, adding to the number of delinquent loans. On 31 August, Hanjin Shipping Co., Ltd. (unrated) filed for court receivership, adding around KRW1.06 trillion ($923 million) to the system’s delinquent loan total in September 2016. Hanjin’s loans were not classified as delinquent and were excluded from total delinquencies while the company was restructuring and its interest payments were waived.
We believe the government’s restructuring plan for the shipbuilding and shipping sectors, which it announced in June, will expedite the recognition of non-viable loans within the already-high 12.03% nonperforming loan ratio for shipbuilding and 11.43% ratio for shipping as of March 2016.
The delinquency ratios and credit charges, particularly for policy banks, may rise significantly if creditor-led restructurings enter court receivership. Around 70% of loans to shipbuilding and shipping companies
0.76% 0.87%
1.04%
2.59%
0.99%0.93%
0.46%0.34%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%Total Loans Large Corporate Loans SME Loans Household Loans
Hyun Hee Park Assistant Vice President - Analyst +852.3758.1514 [email protected]
NEWS & ANALYSIS Credit implications of current events
15 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
originated from policy banks and 30% from commercial banks, including KEB Hana Bank (A1/A1 negative, baa14), Kookmin Bank (A1/A1 stable, baa1), Shinhan Bank (Aa3/Aa3 negative, a3), Woori Bank (A2/A2 negative, baa3) and NongHyup Bank (A1/A1 stable, baa3). We estimate that the banking sector’s exposure to shipping and shipbuilding was 5%-6% of total loans as of year-end 2015.
Therefore, the risk is somewhat restricted to policy banks, mainly Korea Development Bank (KDB, Aa2/Aa2 stable, ba2) and Export-Import Bank of Korea (KEXIM, Aa2 stable). If a risk to financial sector stability emerges, the government’s plan calls for an KRW11 trillion recapitalization fund, with KRW10 trillion in loans from the Bank of Korea and KRW1 trillion in subordinated loans from Korea Asset Management Corporation (unrated) to directly inject capital into the policy banks. In addition, Korean laws stipulate that the government must cover annual net losses at KDB and KEXIM if the banks’ own reserves are insufficient to cover the losses.
4 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating and baseline credit assessment..
NEWS & ANALYSIS Credit implications of current events
16 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Bank of East Asia’s Sale of Tricor Holdings Stake Is Credit Positive On 5 October, Bank of East Asia, Limited (A3/A3 negative, baa25) announced that the bank and NWS Holdings Limited had entered into an agreement to sell their respective stakes in Tricor Holdings Limited for HKD6.5 billion to Trivium Investment Limited. The transaction, which is subject to regulatory approval, is credit positive for Bank of East Asia, because it will strengthen the bank’s capitalization.
Bank of East Asia owns a 75.61% stake in Tricor, a corporate and investor service provider with a presence in 37 cities across 20 countries, while NWS Holdings Limited owns the remainder. The bank expects to receive HKD4.9 billion in sales proceeds and book an approximately HKD3.1 billion gain on the sale of its stake in Tricor. We estimate that the sale will boost the bank’s common equity Tier 1 (CET1) ratio by 78 basis points to 13.4% from 12.6% as of the end of June 2016 on a pro forma basis.
Bank of East Asia’s designation as a domestic systemically important bank (D-SIB) in Hong Kong means that it is subject to a capital surcharge on top of the capital conservation buffers and countercyclical buffers that apply to all locally incorporated banks. Even after this potential improvement, its CET1 ratio will remain lower than that of other D-SIBs in Hong Kong (see Exhibit 1).
EXHIBIT 1
Hong Kong Domestic Systemically Important Banks’ Common Equity Tier 1 Ratios as of the End of June 2016
Key: BEA = Bank of East Asia; HSBC=Hongkong and Shanghai Banking Corp. Limited; HSB = Hang Seng Bank, Limited; Stn Char HK = Standard Chartered Bank (Hong Kong) Ltd.; BOCHK = Bank of China (Hong Kong) Limited. Notes: *The D-SIB surcharge is 2.5% for HSBC and 1.5% for Hang Seng Bank, Standard Chart HK and Bank of China (Hong Kong). The capital conservation buffer, countercyclical buffer and D-SIB surcharge are subject to phase-in. Sources: Hong Kong Monetary Authority and Moody’s Banking Financial Metrics
The positive effect on the bank’s capitalization outweighs the profit hit that the bank will sustain from the loss of Tricor’s steady future income stream. Tricor generated HKD159 million of net profits in the first half of 2016, which amounted to 7.4% of Bank of East Asia’s overall net profits. We expect Bank of East Asia’s underlying profitability to remain challenged by narrowing interest margins and elevated credit costs amid adverse operating conditions in both Hong Kong and China (see Exhibit 2).
5 The bank ratings shown in this report are Bank of East Asia’s deposit rating, senior unsecured debt rating and baseline credit
assessment.
4.5%
12.6%16.1% 16.8%
14.2%
18.6%
2.5%
2.5%1.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Effective MinimumCET1 Requirement for
BEA by 2019
BEA HSBC HSB Stn Char HK BOCHK
Minimum CET1 Capital Conservation Buffer Countercyclical Buffer D-SIB Surcharge*
Crystal Guo Associate Analyst +852.3758.1476 [email protected]
Sherry Zhang Analyst +852.3758.1392 [email protected]
NEWS & ANALYSIS Credit implications of current events
17 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
EXHIBIT 2
Bank of East Asia’s Declining Profitability
Source: Moody’s Banking Financial Metrics
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%
2012 2013 2014 2015 1H 2016
Return on Average Assets - left axis Credit Costs/Gross Loans - right axis
NEWS & ANALYSIS Credit implications of current events
18 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
Insurers
Penn Mutual’s Acquisition of Vantis Life Is Credit Positive On Monday, Penn Mutual Life Insurance Company (financial strength Aa3 stable) announced that it had reached an agreement to acquire Vantis Life Insurance Company (unrated) and its operating subsidiary Vantis Life Insurance Company of New York (collectively called Vantis Life) for an undisclosed amount. The credit-positive acquisition will give Pennsylvania-based Penn Mutual a new set of products with their own distribution network to an audience different from the company’s historically affluent customer base. Both companies will continue to operate under their current brands and maintain their respective management teams and workforces.
This acquisition will allow Penn Mutual to broaden its reach into the insurance market, particularly in the middle-market segment, which is largely underserved. In addition, the acquisition creates additional distribution avenues for Penn Mutual, particularly in the direct-to-consumer and bank channels. These additional capabilities are in contrast to the adviser network that currently does business with Penn Mutual.
Penn Mutual markets life insurance protection products primarily to affluent individuals, professionals, and small business owners through a multi-faceted distribution network of career and independent agents. Vantis Life, based in Windsor, Connecticut, markets its whole life insurance, term life insurance and fixed-annuity products through financial institutions and directly to the consumer. Vantis has distribution agreements with more than 150 banks and credit unions, including large super-regional and regional banks, and a footprint that spans 45 states with more than 10,000 branch locations. As of 30 June 2016, Vantis Life had total assets of $259 million and total statutory surplus of $80 million.
The acquisition, which the parties expect to close in the fourth quarter of 2016, subject to regulatory approvals, will be financed with excess capital at Penn Mutual. As of year-end 2015, the company reported a National Association of Insurance Commissioners company action level risk-based capital (RBC) ratio of 612%, among the highest in the life insurance industry, and reported statutory total adjusted capital of $1.9 billion. We estimate the RBC ratio remaining strong at more than 580% at year-end 2016. The exhibit below shows a five-year trend in Penn Mutual’s RBC ratio.
Penn Mutual’s Risk-Based Capital Ratio
Sources: Company filings and SNL Financial LC. Contains copyrighted and trade secret materials distributed under license from SNL. For recipient's internal use only.
656%612% 623%
652%612%
0%
100%
200%
300%
400%
500%
600%
700%
2011 2012 2013 2014 2015
Manoj Jethani Assistant Vice President - Analyst +1.212.553.1048 [email protected]
RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Monday’s Credit Outlook on moodys.com
19 MOODY’S CREDIT OUTLOOK 13 OCTOBER 2016
NEWS & ANALYSIS Corporates 2 » ConvaTec’s Planned IPO and Revamped Capital Structure Are
Credit Positive » TransDigm’s Special Dividend Will Increase Leverage » Cardtronics’ Planned Acquisition of DirectCash Payments
Will Increase Leverage » Constellation Takes a Shot at Another Premium Brand, a
Credit Positive » Telecom Argentina Gets Capital Boost from World Bank’s IFC » AstraZeneca’s Failed Drug Trial Is Credit Negative, but
Pipeline Remains Strong » TOTAL’s Sale of Its Specialty Chemicals Affiliate Is
Credit Positive » OHL’s Sale of Additional Abertis Stake Is Credit Positive » Hitachi Construction’s Acquisition of Australia’s Bradken Is
Credit Negative » Sime Darby’s Share Placement Is Credit Positive
Infrastructure 14 » Kansai Electric Will Benefit from Japanese Regulator’s
Preliminary Okay to Extend Older Reactor’s Life
Banks 15 » US Regulator’s Final Rule on Prepaid Cards Is Credit Negative
for Consumer Finance Companies » Canada’s Proposed Policy of Mortgage Lender Risk Sharing Is
Credit Negative for Banks » Citibanamex’s Investment Plan Is Credit Positive » Heta Debt Exchange Creates Windfall Profits for
Accepting Banks » Poland’s Additional Capital Requirements for Systemically
Important Banks Are Credit Positive » Uganda’s Falling Loan Volumes and Rising Problem Loans
Will Damage Banks’ Profitability
Insurers 26 » Hurricane Matthew Threatens to Cause Significant Losses for
P&C Insurers and Reinsurers » Sompo Japan Nipponkoa’s Proposed Acquisition of
Endurance Is Negative for Buyer, Positive for Target
Asset Managers 29 » Janus-Henderson Merger Is Credit Positive and a Response to
Active Management’s Loss of Assets » Canada Pension Plan Enhancements Are Credit Positive for
CPPIB Capital
Sovereigns 31 » Canada’s Measures to Reduce Housing Market Risks Are
Credit Positive for the Sovereign » Chile’s Fiscal Deficits Push Debt to Its Highest Level in
Two Decades
US Public Finance 36 » New Jersey’s Tax Plan Has Negative Implications for State's
General Fund » US Federal Court Upholds Detroit’s Pension Cuts, a
Credit Positive
MOODYS.COM
Report: 192667
© 2016 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY’S (“MOODY’S PUBLICATIONS”) MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s Publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
EDITORS SENIOR PRODUCTION ASSOCIATE Elisa Herr and Jay Sherman Amanda Kissoon
