18 Oct 2007 3:12(EDT)

Fitch Ratings has today assigned an expected rating of 'BBB' to Busan Bank's planned issuance of Lower Tier 2 subordinated notes due 2017 (callable in 2012). The final rating is contingent upon receipt of final documents conforming to information already received.

The expected rating is based on Pusan's Long-term foreign currency Issuer Default Rating (IDR) of 'BBB+'. Busan's other ratings are: Short-term foreign currency rating 'F2', Individual 'B/C', Support '2' and Support Rating Floor 'BBB'.

Busan's ratings reflect its good profitability and asset quality, its adequate capitalisation, and strong homemarket franchise in Busan, South Korea's second-largest city and major port. Through solid local patronage, Busan is the dominant bank in the Busan city/region, with a c. 33% share of deposits and a c. 25% share of loans (versus 25% and 16% in 1999, respectively). Busan's closest rival is Kookmin Bank, with a c. 15% share of the Busan market. In recent years, Pusan has expanded into the neighboring Kyongnam where it now has 2% of deposits and 5% of loans.

Busan has grown its loans strongly in recent years (12% in 1H07 and 23% in FY06). The bank advises that for FY07, loan growth is expected to come in at around 18%. Approximately 80% of Busan's loans are to businesses (mostly small and medium enterprises (SMEs)), with the rest comprising largely of mortgages.

In 1H07, Busan achieved a net income of KRW155 billion for a very good 1.34% RoAA, up strongly from FY06's still satisfactory 0.90%. Much of the improvement came from better efficiency, with stable costs supporting its considerably larger loan/asset base. Lower provisioning was also a factor, at a negligible 0.11% of average-loans versus 0.38% in FY06 (which was good given that it was negatively affected by more stringent regulatory requirements), reflecting the very benign lending environment in Korea over recent

years. At mid-2007, Pusan's NPL ratio was just 0.68% (180% covered by reserves, versus 0.83% and 176%, respectively, at end-07). Meanwhile, its net interest income declined over 1H07, but only slightly, to 2.92% of average-assets from 3.03%. This was still much better than the c. 2.5% of its larger peers, highlighting Busan's strong franchise in Busan, especially amongst SMEs.

Like its RoAA, Busan's 1H07 RoAE was similarly impressive at 23.4% in 1H07, versus 16.2% in FY06. Meanwhile, the bank's capitalisation remained adequate, with equity/assets, Tier 1 and Total CAR ratios of 5.6%, 8.1% and 11.4% respectively - versus 5.9%, 8.1% and 11.1% respectively at end-2006.

Established in 1967, Pusan was listed in 1972 and boasts a diverse ownership (including a c. 80% level of foreign ownership). With total assets of KRW25 trillion, it is Korea's ninth largest bank with c. 2% of systemwide assets.