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Fitch Downgrades Standard Chartered Bank (Taiwan) to 'A'; Outlook Stable
October 17, 2016 / 7:41 AM / a year ago

Fitch Downgrades Standard Chartered Bank (Taiwan) to 'A'; Outlook Stable

(The following statement was released by the rating agency) TAIPEI, October 17 (Fitch) Fitch Ratings has today downgraded Standard Chartered Bank (Taiwan) Limited's (SCBTL) Long-Term Issuer Default Rating (IDR) to 'A' from 'A+', and National Long-Term Rating to 'AA+(twn)' from 'AAA(twn)'. The Outlooks are Stable. At the same time, the agency has downgraded SCBTL's Viability Rating to 'bbb-' from 'bbb'. A full list of rating actions is at the end of this rating action commentary. The rating downgrade follow Fitch's downgrade on the Viability Rating of SCBTL's parent, Standard Chartered Bank (SCB) to 'a' from 'a+' on 14 October 2016 (see <a href="">Fitch Affirms Standard Chartered at 'A+'; Outlook Revised to Stable ). KEY RATING DRIVERS IDRS, NATIONAL RATINGS, SUPPORT RATING AND SENIOR DEBT The IDRs and Support Rating of '1' on SCBTL reflect the extremely high probability of support from its parent, if needed. SCBTL's IDR and Outlook is aligned with those of its parent. Fitch views SCBTL as a core subsidiary within the group's international network, specifically its role in the group's greater China strategy. This is underpinned by their aligned risk management, a shared brand name and global network. The bank's National Long-Term Rating has been downgraded following the downgrade in the IDR, and the Outlook remains in line with the parent's. The senior unsecured bonds are rated at the same level as SCBTL's National Long-Term Rating and accordingly downgraded. The bond rating reflects the relative vulnerability of default on its senior obligations within a national scale for Taiwan. VIABILITY RATING The downgrade of SCBTL's Viability Rating (VR) reflects its weakening franchise and profitability as a result of portfolio restructuring. The bank aims to enhance return through reducing low-yield single-loan-product borrowers and rebuilding its customer base of small and medium enterprises with regional operations. These kinds of customers offer cross-selling opportunities and use services that generate fee income. The bank's loan book contracted by 10% each in 1H16 (unannualised) and 2015. Fitch believes its franchise will take some time to strengthen amid slower economic growth, while earnings may continue to be pressured in 2-3 years. The bank may find it difficult to achieve its goal of total returns, including lending and non-lending income, in the highly competitive banking sector in Taiwan. SCBTL's ROA fell to 0.1% in 1H16 from 0.2% in 2015 and 0.4% in 2014. The sector's average ROA was 0.65%. SCBTL's interest income fell because of a smaller balance sheet and narrower margin due to rates cuts. Increased provisions for Chinese yuan-linked Target Redemption Forward derivatives and lower fee income due to weakened investment sentiment also pressured the bottom line. The bank's impaired loan ratio modestly rose to 2.5% at end-1H16 from 2.2% at end-2014 as the loan book shrank, while loan impairment amounts declined. Capitalisation will remain solid in the near term in light of subdued growth prospects and its stable asset quality. Its Fitch Core Capital ratio was healthy at 11.8% at end-1H16, compared with 9.9% at end-2014. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES SCTBL's Basel II-compliant Tier 2 bonds are rated one notch below its National Long-Term Rating and accordingly downgraded, to reflect their subordinated status and the absence of going concern loss-absorption features. SCBTL's Basel III-compliant Tier 2 (B3T2) bonds are rated two notches below its National Long-Term Rating and accordingly downgraded. The two notches comprise zero notches for non-performance risk and two for loss severity, reflecting the limited recovery prospects for Taiwanese B3T2 notes at the point of non-viability (PONV) or government receivership. This is in contrast to the typical one notch for standard B3T2, which reach the PONV at regulatory decisions to write-off securities or inject public sector capital. Fitch believes Taiwan's authorities would only move a bank into insolvency administration when it reaches a very low level of capital, reducing the recovery prospects for B3T2 notes. The anchor rating for SCBTL's Tier 2 bonds is the support-driven National Long-Term Rating or equivalent to the parent's VR, rather than SCBTL's VR, as Fitch believes the parent has a strong interest in supporting its subsidiary to fulfil its debt obligations. These aforementioned notching practices for Tier 2 bonds are in accordance with Fitch's criteria on rating the regulatory capital of financial institutions. RATING SENSITIVITIES IDRS, NATIONAL RATINGS, SUPPORT RATING AND SENIOR DEBT Any change of SCB's Viability Ratings could trigger a similar rating action on SCBTL's IDR, National Long-Term Rating and senior unsecured debt rating. VIABILITY RATING SCBTL's VR may be upgraded if the bank demonstrates significant and sustainable improvement in its local franchise and profitability without excessive risk-taking. A VR downgrade is less likely in the near term based on the bank's sound capitalisation relative to its risk profile. SUPPORT RATING The SR is sensitive to any change in the ability and propensity of SCB to provide timely support to SCBTL and is unlikely to be downgraded. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Any change in SCBTL's IDR and National Long-Term Rating could trigger a similar rating action on the Basel II and Basel III-compliant Tier 2 bonds. The rating actions are as follows: - Long-Term IDR downgraded to 'A' from 'A+'; Outlook Stable - Short-Term IDR affirmed at 'F1' - National Long-Term Rating downgraded to 'AA+(twn)' from 'AAA(twn)'; Outlook Stable - National Short-Term Rating affirmed at 'F1+(twn)' - Viability Rating downgraded to 'bbb-' from 'bbb' - Support Rating affirmed at '1' - National Long-Term Rating on senior unsecured debt downgraded to 'AA+(twn)' from 'AAA(twn)' - National Long-Term Rating on Basel II-compliant Tier 2 bonds downgraded to 'AA(twn)' from 'AA+(twn)' - National Long-Term Rating on Basel III-compliant Tier 2 bonds downgraded to 'AA-(twn)' from 'AA(twn)' Contact: Primary Analyst Cherry Huang, CFA Director +886 2 8175 7603 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, Tun Hwa N. Rd., Taipei Secondary Analyst Jenifer Chou Director +886 2 8175 7605 Committee Chairperson Mark Young Managing Director +65 6796 7229 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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