September 20, 2017 / 7:50 AM / a year ago

Fitch Affirms Taiwan's SinoPac Financial Group at 'BBB'/Stable

(The following statement was released by the rating agency) TAIPEI, September 20 (Fitch) Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Taiwan-based Bank SinoPac (BSP) and its parent, SinoPac Financial Holdings Company Limited (SPH), at 'BBB', with a Stable Outlook for both. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, NATIONAL RATINGS AND VIABILITY RATING (VR) The affirmation of BSP's IDR and VR with the Stable Outlook reflects its stable credit profile that is underpinned by its well-managed asset quality and healthy capitalisation. The ratings also consider pressure on the bank's core profitability amid a slow economic recovery. BSP has been more active in pursuing growth opportunities in Greater China compared with other local peers. The bank has consistently maintained a China exposure that is higher than its peers and seeks to expand its footprint further through its strategic alliance with Industrial and Commercial Bank of China Limited (ICBC, A/Stable) and a locally incorporated subsidiary in Nanjing. Fitch assessed that the inherent risk of its current China exposure remains moderate; however, meaningful growth in China could ultimately alter the bank's risk profile. The bank has maintained sound capitalisation with a Fitch Core Capital ratio sustained at a high 12% at end-1H17 (which could be higher at about 13% if adjusted for higher capital charges for mortgages in Taiwan compared with other developed markets) due to earnings retention and moderate asset growth. Fitch views BSP's adequate capital position and high reserve coverage ratio as sufficient to provide a buffer against earnings and asset quality volatility. BSP's asset quality metrics are better than other similarly rated peers as a result of the bank's conservative credit standards, with most of its loans going towards housing purchases or to large corporates with lower risks. The bank's profitability has shown some improvement from a bottom in 2016, when it was hit by higher credit costs associated with loan write-offs and additional general provisioning required for mortgages in Taiwan. Annualised return on assets increased to 0.6% in 1H17 from 0.5% in 2016 due to a better trading performance and reduced credit costs, while core revenue (net interest income and fee income) remained under pressure. BSP's funding and liquidity profile is adequate with a 76% loans-to-deposits ratio at end-1H17. A recent investigation by Taiwan's Financial Supervisory Commission into lending irregularities at the group has unveiled deficiencies in corporate governance. Despite a reshuffling of the group's senior management, Fitch has not yet seen any notable damage to the bank's franchise and credit profile following the investigation. The affirmation of SPH's IDR and VR is in line with the rating action on its principle subsidiary, BSP. Fitch views SPH and BSP as highly integrated in terms of management and operations while SPH maintains moderate leverage at the holding company level. SUPPORT RATING AND SUPPORT RATING FLOOR BSP's Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB+' reflect a moderate probability of state support, if needed, due to its moderate systemic importance with about 3.3% share of the deposits in Taiwan's fragmented banking system. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND VIABILITY RATING (VR) A rating upgrade may occur if BSP is able to establish a solid cross-strait franchise, leading to sustained and robust profitability without materially raising risk appetite. A significant deterioration of its franchise and a weakened risk profile arising from aggressive growth in its China-related exposure may result in negative rating action. Any rating action on BSP could trigger a similar move on SPH's ratings. In addition, a significant increase in leverage at SPH may lead to a rating downgrade. SUPPORT RATING AND SUPPORT RATING FLOOR The SR and SRF are sensitive to any change in assumptions around the propensity or ability of the Taiwan government to provide timely support to the bank. The rating actions are as follows: Bank SinoPac: Long-Term IDR: affirmed at 'BBB'; Outlook Stable Short-Term IDR: affirmed at 'F2' 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 '3' Support Rating Floor: affirmed at 'BB+' SinoPac Financial Holdings Company Limited: Long-Term IDR: affirmed at 'BBB'; Outlook Stable Short-Term IDR: affirmed at 'F2' National Long-Term rating: affirmed at 'A+(twn)'; Outlook Stable National Short-Term rating: affirmed at 'F1+(twn)' Viability Rating: affirmed at 'bbb' Contact: Primary Analyst Shirley Hsu Associate Director +886 2 8175 7606 Fitch Ratings Limited, Taiwan Branch Suite 1306, 13F, Tun Hwa N. Rd., Taipei Secondary Analyst Cherry Huang, CFA Director +886 2 8175 7603 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. 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. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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