September 20, 2017 / 9:30 AM / a year ago

Fitch Affirms Seven Taiwanese Banks; Outlook Stable

(The following statement was released by the rating agency) TAIPEI, September 20 (Fitch) Fitch Ratings has affirmed the ratings of EnTie Commercial Bank, Far Eastern International Bank (FEIB), King's Town Bank (KTB), Sunny Bank, Taichung Commercial Bank Company Limited, Taipei Star Bank (TSB) and The Shanghai Commercial and Savings Bank (SCSB). The Rating Outlooks are Stable. At the same time, Fitch has upgraded Taichung's Support Rating to '4' from '5' and revised Support Rating Floor to 'B+' from 'NF' due to bank's increasing regional significance in Taichung City, Taiwan's second largest city by population. The bank has steadily expanded its deposit market share to 1.6% at end-1Q17, from 1.1% at end-2010. A full list of rating action is at the end of this commentary. KEY RATING DRIVERS ISSUER DEFAULT RATINGS, NATIONAL RATINGS AND VIABILITY RATINGS The banks' ratings are driven by their intrinsic credit profiles and have been affirmed with Stable Outlooks as Fitch expect the banks to maintain stable balance-sheet strength in 2017 and 2018, including enhanced provision buffers, adequate capitalisation and healthy liquidity. A modest economic recovery would support the banks' asset quality and earnings. The central bank ended its rate cuts in 3Q16 in light of renewed economic growth and a small pick-up in loan growth and easing margin compression suggest a stable earnings outlook. The banks' impaired loan ratio and return on assets generally exhibited stable performance in 1H17. 'BBB' and 'BB' category banks' asset quality and funding and liquidity look positive against that of international peers and benefits from ample system liquidity stemming from a steadily growing deposit base. KTB and SCSB are rated higher due to their strong balance sheets and financial performance. KTB maintains sound capital generation and a stable risk profile. It has a consistent strategy to diversify credit exposure by investing in foreign bonds and to pursue selective lending in niche markets. SCSB has sound capitalisation and satisfactory earnings, backed by long-established SME clients and greater-China franchise through its Hong Kong-based subsidiary, Shanghai Commercial Bank Ltd (A-/Stable), and major Chinese partner, Bank of Shanghai. Fitch considers the remaining five banks' capitalisation more vulnerable to cyclical downturns due to their modest internal capital generation or higher credit concentration. We expect EnTie to sustain its above-peer capitalisation through earnings retention and modest growth, which will provide a sufficient buffer for the likely asset quality volatility associated with its high single-borrower lending concentration. FEIB's ratings reflect its adequate risk buffer, which it has maintained through managed credit growth, and our expectations of easing pressure on profitability and asset quality over the next year or two. The ratings also consider its below-peer capitalisation and modest banking franchise. Sunny's ratings are constrained by its limited franchise, below-peer capitalisation and concentrated property exposure. They also factor in the bank's peer-average profitability and steady asset quality. Taichung's ratings reflect Fitch's expectation that the bank will moderate its credit growth in the next year or two and sustain its capitalisation commensurate with its risk profile. The ratings also reflect its peer-average profitability and weaker-than-peer asset quality. A limited franchise and business scope underpin TSB's weak profitability and constrain its ratings. The bank's balance-sheet strength remains stable, including sound asset quality and adequate capitalisation. SUPPORT RATING AND SUPPORT RATING FLOOR FEIB, KTB, Taichung and SCSB have Support Ratings of '4' or '5' and Support Rating Floors of 'B+' or 'NF', reflecting their modest systemic importance. SUBORDINATED DEBT EnTie, FEIB and Taichung's Basel II-compliant subordinated debt is rated one notch below their National Long-Term Ratings to reflect its subordinated status and the absence of a going-concern loss-absorption mechanism. FEIB and Taichung's Basel III-compliant subordinated debt is rated two notches below their National Long-Term Ratings, which are anchored by their respective Viability Ratings, to reflect the bonds' limited recovery prospects. Bondholders risk significant loss at the point of non-viability, which is reached upon government receivership or a regulatory order for resolution or liquidation, because the bonds would rank equally with common shares in Taiwan. RATING SENSITIVITIES ISSUER DEFAULT RATINGS, NATIONAL RATINGS AND VIABILITY RATINGS The banks' ratings are sensitive to a significant increase in risk appetite in pursuit of yield, which would compromise underwriting standards, and a significant deterioration in asset quality arising from a sharp property market correction. Rating upside prospects are limited in light of the banks' modest franchises and concentration risks for some. Further, for lower-rated banks, balance-sheet strength is not likely to be enhanced significantly in the near term due to still-thin interest margins. A downgrade of EnTie's ratings could stem from a failure to maintain an adequate risk buffer relative to its risk-taking and a significant deterioration of its niche in fee-based structured finance and property-related lending. FEIB's ratings are more sensitive to a sharp fall in housing prices than local peers given its concentrated mortgage book. Excessive risk-taking in emerging Asian markets could also lead to a rating downgrade. Downward rating pressure on KTB could stem from a failure to execute its strategy or an unexpected change in senior management. Negative rating action for Sunny is likely to come from an unexpected sharp property-market correction, compromised underwriting standards leading to weaker asset quality or significant growth pressuring capitalisation. Negative rating action on Taichung could occur if the bank takes on excessive risks that dampen its asset quality and capital position to the level substantially below that of its ratings peer group. Downward pressure on TSB's ratings could come from unexpected large growth in corporate lending outside of its home market or a sharp property-market decline leading to significant asset-quality deterioration. A downgrade of SCSB's ratings is likely to be driven by a downgrade of its subsidiary's rating or a weakened risk profile due to excessive risk-taking in Asian emerging markets. Rating upside is limited given its appetite for expanding into the region's higher-risk emerging markets. SUPPORT RATING AND SUPPORT RATING FLOOR The Support Ratings and Support Rating Floors are sensitive to changes in Fitch's assumptions around the propensity of the Taiwan government (AA-/Stable) to provide timely support to the banks. SUBORDINATED DEBT The subordinated debt ratings of EnTie, FEIB and Taichung are sensitive to the same considerations that might affect their Viability Ratings. The rating actions are as follows: EnTie: National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1(twn)' Subordinated debt affirmed at 'A-(twn)' FEIB: Long-Term Issuer Default Rating affirmed at 'BBB-'; Outlook Stable Short-Term Issuer Default Rating affirmed at 'F3' National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1(twn)' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '4' Support Rating Floor affirmed at 'B+' Subordinated debt affirmed at 'A-(twn)' Subordinated debt (Basel III-compliant) affirmed at 'BBB+(twn)' Convertible bond affirmed at a Long-Term Rating of 'BBB-' and National Long-Term Rating of 'A(twn)' KTB: Long-Term Issuer Default Rating affirmed at 'BBB'; Outlook Stable Short-Term Issuer Default Rating affirmed at 'F3' National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1(twn)' Viability Rating affirmed at 'bbb' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' Sunny: National Long-Term Rating affirmed at 'A-(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F2(twn)' Taichung: Long-Term Issuer Default Rating affirmed at 'BB+'; Outlook Stable Short-Term Issuer Default Rating affirmed at 'B' National Long-Term Rating affirmed at 'A-(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F2(twn)' Viability Rating affirmed at 'bb+' Support Rating upgraded to '4' from '5' Support Rating Floor revised to 'B+' from 'No Floor' Subordinated debt affirmed at 'BBB+(twn)' Subordinated debt (Basel III-compliant) affirmed at 'BBB(twn)' TSB: National Long-Term Rating affirmed at 'A-(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1(twn)' SCSB: Long-Term Issuer Default Rating affirmed at 'A-'; Stable Outlook Short-Term Issuer Default Rating affirmed at 'F1' National Long-Term Rating affirmed at 'AA(twn)'; Stable Outlook National Short-Term Rating affirmed at 'F1+(twn)' Viability Rating affirmed at 'a-' Support Rating affirmed at '4' Support Rating Floor affirmed at 'B+' Contact: Primary Analysts Cherry Huang, CFA (FEIB and SCSB) Director +886 2 8175 7603 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, 205, Tun Hwa N. Rd., Taipei Sophia Chen, CFA, CPA (Sunny) Director +886 2 8175 7604 Jenifer Chou, CFA, FRM (KTB, TSB) Director +886 2 8175 7605 Rowena Chang (Taichung) Associate Director +886 2 8175 7602 Shirley Hsu (Entie) Associate Director +886 2 8175 7606 Secondary Analysts Cherry Huang (KTB, TSB, EnTie, Sunny) Director +886 2 8175 7603 Sophia Chen, CFA, CPA (Taichung) Director +886 2 8175 7604 Shirley Hsu (FEIB, SCSB) Associate Director +886 2 8175 7606 Committee Chairperson Parson Singha Senior Director +66 2108 0151 Summary of Financial Statement Adjustments: The following assumptions were made in analysing the banks' Fitch Core Capital ratios; Taiwan's regulator uses the standardised approach and imposes higher risk weights on mortgage than regulators in most other developed markets. We have considered the potential effect of these higher risk weights on the banks' Fitch Core Capital ratios compared with international peers that use lower mortgage risk weights. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable. 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