In just 12 months, Korea First Bank has effectively reopened the Korean cross border ABS market with an unprecedented four MBS deals. It has established itself as a legitimate repeat issuer, and has helped to transform Korean ABS from an international exile to an understood and accepted asset class. Following the completion of Standard Chartered's takeover last month, we talk with Ranvir Dewan, KFB's CFO. Here he reflects on the success of the bank's MBS programme and what will the next phase bring under Standard Chartered.
What's been KFB's impetus for such a prolific MBS programme?
Dewan: The motivation, basically, is that it improves our asset liability management liquidity ratios, and it improves our equity ratio and allows us to achieve continued growth of our mortgage portfolio, which we've been aggressively expanding. Essentially it provides matched funding because our mortgages are by and large priced off CD's and we are able to attain floating rate funding by swapping the proceeds into CD based funding, so that helps our asset liability management.
What do you think has made the ABS programe a success?
The market is becoming more and more familiar with our credit story. The first deal we did was wrapped by AMBAC, who did quite a thorough due diligence, and they came to realize that the quality of our portfolio is excellent and we have good underwriting standards. Basically the bank has established strong controls and profitability before accelerating growth. We've also strongly differentiated offerings from our peer group.
We provision conservatively, we do not re-age loans in order to avoid provisioning. Re-aging results in the overstating of asset quality, understatement of provisions and overstating of profitability. Our NPL ratio is the lowest in the market at 1.37% for the overall portfolio of the bank and it has been declining since last year.
We maintain a relatively strong capital ratio; at the end of March '05 it was 11.73%.
How important has the European investor base been for KFB?
I think the third and fourth deal were Euro driven deals. There was strong demand from Europe and we continue to increase our fan base as more and more investors become familiar with our credit story.
How will the Standard Chartered buyout of KFB affect your MBS deal flow?
For KFB as a stand-alone bank, mortgage securitization was providing funding at a very favorable price, and as you know we were able to bring the price down on each deal. We're looking into various programmes and whether or not we could do something else more cheaply is being evaluated. Since Standard Chartered purchased the bank our ratings have gone up three notches, by both S&P and Moody's. We're now one of only two banks to have had our financial strength rating increased to D+ from D. This gives us an even more favorable profile for overseas investors and having the resources of an international bank such as Standard Chartered should make our credits much more attractive.
Having had such success with the MBS deal, will KFB look at deals back by other asset classes, i.e. auto loans, credit cards, etc?
At this point in time our card business is profitable but quite small, and we'd like to grow that business, but no we are not looking at other assets at the moment.
How did KFB's card portfolio manage to avoid much of the crush from the consumer loan crisis?
We have prudent underwriting standards. By applying international credit assessment and credit scoring techniques, the bank has grown its total assets while maintaining the high credit quality of its asset portfolios. We continue to emphasize the need for strong financial disciplines and rigorous risk management practices, including a properly staffed, well run collections unit. We have a group called the Decision Science Group who set out our underwriting methodology for the consumer business. Their simulations help the bank to identify certain customers with certain demographics, which results in a higher grade of credit than the average market.
In the future, do you forsee KFB bringing an ABS deal to American investors?
Indeed, some of our other capital transactions, such as the Hybrid Tier 1, which was issued in March 2004, have sold extremely well in the United States. That deal was the lowest coupon Tier 1 issue out of Asia, regardless of rating, and it was the lowest rated Hybrid Tier 1 priced globally. It was also ten times oversubscribed and had the highest number of investors for an Asian Tier 1 issue.
The deal was only supposed to be $200 million but was 10 times oversubscribed. We had subscription orders for more than $2 billion just two to three days into our roadshows. Clearly we have had success in the US market and we could raise more capital in that market.