(The following was released by the rating agency)
TAIPEI/SYDNEY, January 15 (Fitch) Fitch Ratings has upgraded Taiwan-based Yuanta Commercial Bank’s (YCB) Long-Term Issuer Default Rating (IDR) to ‘BBB+’ from ‘BBB’. The Outlook is Stable.
The agency has also affirmed YCB’s parent, Yuanta Financial Holding Co. Ltd. (YFH), and Yuanta Securities Co., Ltd. (YS), the principal subsidiary of YFH, at ‘BBB+’ with Stable Outlook. A full rating breakdown is provided at the end of this comment.
YCB’s IDR and National Long-Term Rating have been upgraded to equalise with those of YFH to reflect the bank’s growing importance as a major subsidiary of the group’s dual-core, securities and banking franchise.
The upgrade also takes into account Fitch’s belief of increased support from YFH for the bank’s future growth, based on the agency’s criteria ‘Rating FI Subsidiaries and Holding Companies’. This is based on demonstrated support via a series of capital injections over the past four years and modest leverage at the parent.
The bank’s Long-Term Ratings will move in tandem with those of YFH and its Stable rating Outlook is aligned with that of YFH. The affirmations of YFH and YS reflect the group’s dominant market position in Taiwan’s securities industry, resilient through-the-cycle earnings, excess capital and fungibility across major subsidiaries and the holding parent’s modest leverage.
The ratings also reflect the group’s small franchise among global investment banks. YS’s ratings are aligned with those of YFH based on the close linkages between the two entities. The Stable Outlook is underpinned by the group’s moderate risk appetite, expanding securities franchise as a result of YS’s merger with Polaris Securities in 2012, improved profitability at the banking franchise and Fitch’s expectation that the group’s growth strategy would not severely undermine its financial flexibility.
An upgrade of YFH‘s, YS’s and YCB’s Long-Term ratings is unlikely in the near term as it will require YCB to significantly improve its internal capital generation via robust and sustainable franchise earnings. Severely weakened capitalisation or a sharp increase in leverage arising from aggressive growth or acquisition strategy could result in a rating downgrade.
The group’s scale, strong market position in the securities industry and prudent risk management render it less vulnerable than peers to capital market volatility. YS has generally outperformed its peers while YCB continues to increase its share of group earnings. The group’s return on equity declined to 4.3% (annualised) for 9M12, from 10.5% in 2011, mainly due to sluggish stock trading in 2012 and a high base comparison resulting from divestment gains of Singapore-based Kim-Eng Holdings Limited in 2011.
Earnings outlook is stable on the back of an enhanced securities franchise and YCB’s improved earnings. YFH’s and YS’s comparably favourable financial flexibility enables the holding company to undertake a series of capital re-allocation among its subsidiaries. Specifically, excess capital at its securities subsidiaries is leveraged to strengthen the banking franchise and to exploit any M&A potential such as Polaris. YFH’s capitalisation has remained sound with a 158% capital adequacy ratio and a 112% double leverage ratio at end-Q312.
YCB returned to profitability since 2009 and posted a return on equity of 6.7% (annualised) in 9M12, which contributed over 30% of the group’s earnings. Its non-performing loan (NPL) ratio remained low at 0.33% at end-Q312 and IFRS-based impaired loan ratio (largely NPL plus restructured loan) was accordingly low at 1.6%. The bank’s tier 1 ratio fell to 7.81% at end-2011 due to loan growth before recovering to 11.1% at end Q312 via capital injection of TWD12bn.
YCB’s Viability Rating of ‘bb+’ reflects its moderate, albeit improved, core earnings, enhanced risk profile following a gradual clean-up of legacy problem loans and a largely revamped risk management system. Significantly strengthening internal capital generation, sustaining a robust capital position and containing asset quality deterioration amid its pursuit of above-sector loan growth will benefit the Viability Rating.
Conversely, excessive growth and, consequently, sharply weakened capitalisation and asset quality will weigh on its Viability Rating. YFH is a mid-sized and securities-centric financial holding group in Taiwan.
The group provides diversified financial services through its wholly-owned subsidiaries engaged in securities (YS), securities finance (Yuanta Securities Finance), banking (YCB), investment trust, asset management and venture capital. YS held a 14.13% market share of Taiwan’s stock brokerage in 9M12. YSF is a distant leader of Taiwan’s only two securities finance companies. YCB had 88 branches and a small deposit market share of 1.59% in Taiwan at end-October 2012.
A Credit Update on YS and YCB and a Credit Analysis on YFH will be published shortly on www.fitchratings.com.
The rating actions on YFH, YS, YSF and YCB are as follows:
Long-Term IDR: affirmed at ‘BBB+'; Stable Outlook Short-Term IDR: affirmed at ‘F2’ National Long-Term rating: affirmed at ‘AA-(twn)'; Stable Outlook National Short-Term rating: affirmed at ‘F1+(twn)’
Long-Term IDR: upgraded to ‘BBB+’ from ‘BBB’; Stable Outlook Short-Term IDR: upgraded to ‘F2’ from ‘F3’ National Long-Term rating: upgraded to ‘AA-(twn)’ from ‘A+(twn)'; Stable Outlook National Short-Term rating: upgraded to ‘F1+(twn)’ from ‘F1(twn)’ Viability Rating: affirmed at ‘bb+’ Support Rating: affirmed at ‘2’
Long-Term IDR: affirmed at ‘BBB+'; Stable Outlook Short-Term IDR; affirmed at ‘F2’ National Long-Term rating: affirmed at ‘AA-(twn)'; Stable Outlook National Short-Term rating; affirmed at ‘F1+(twn)’ Senior unsecured debt: affirmed at ‘AA-(twn)'