TEXT-Fitch Affirms Chinatrust Holding and Chinatrust Bank; Upgrades Chinatrust Securities

Thu Nov 22, 2012 1:30am EST

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(The following was released by the rating agency)

TAIPEI/SYDNEY, November 22 (Fitch) Fitch Ratings has affirmed Chinatrust Financial Holding Company (CFHC) and its principal subsidiary Chinatrust Commercial Bank (CTCB) at Long-Term Issuer Default Rating (IDR) 'A'. At the same time, the agency has upgraded the Long-Term IDR of Chinatrust Securities Co. (CTSC), a subsidiary of CFHC, to 'A' from 'A-'. The Outlooks are Stable.

Simultaneously, Fitch has withdrawn the Support Rating and Support Rating Floor of CFHC as they are no longer considered by Fitch to be relevant to the agency's rating coverage. A full rating breakdown can be found at the end of this commentary.

CTCB's ratings reflect the bank's strong commercial banking franchise in Taiwan and the high quality of its earnings, risk management, liquidity and capitalisation. The ratings are constrained by CTCB's limited geographical diversification and concentrated loan portfolio. The Stable Outlook underlines Fitch's expectation that CTCB will maintain its stable credit profile, underpinned by its well-developed fee-based business model and sound asset quality.

Positive rating action is a remote prospect in the near term, given the bank's small franchise in the region. Negative rating action may result from aggressive expansion in the region that leads to considerable deterioration in its credit profile. CTCB's Support Rating of '3' and Support Rating Floor of 'BB+' reflect Fitch's expectation of moderate state support in case of need, given the bank's moderate systemic importance in Taiwan.

CFHC's ratings are mostly driven by the credit profile of CTCB. Any changes in CTCB's ratings will most likely have a similar effect on CFHC. CFHC's IDRs and National ratings are aligned with those of CTCB, reflecting the close linkage between the two under the Financial Holding Company Act and low financial leverage and strong liquidity at the holding parent. Meanwhile, any aggressive investments or acquisitions by CFHC leading to significant weakening of the group's consolidated financial strength will put pressure on CFHC's and CTCB's ratings.

The upgrade of CTSC's ratings follows Fitch's re-assessment of the subsidiary's role within the group. Under the agency's new criteria 'Rating FI Subsidiaries and Holding Companies', Fitch has aligned the ratings of CTSC - as a core subsidiary - with those of its parent CFHC. Any rating action on CFHC and CTCB could trigger a similar move on CTSC. A significant reduction in CTSC's strategic importance to the group could trigger a negative rating action on CTSC.

The liberalisation of cross-border banking policies between Taiwan and China in September 2011 led to a moderate increase in CTCB's and CFHC's direct exposure to China. Nonetheless, Fitch is of the view that the impact of this exposure on the group's consolidated risk profile should remain moderate in the near- to medium-term given the conservative regulatory environment in Taiwan. Fitch expects CTCB's loan growth to remain moderate in 2013 despite regional expansion. This is in light of continued downturn in the global economy and moderating domestic economic activity.

Concentration on exposure to certain financially weak technology companies (around 1.5% of CTCB's total loans as of end-June 2012) may expose the bank to asset quality deterioration. Nonetheless, a marked erosion of capital is unlikely. This is because CTCB has limited non-performing loans and accumulated reasonably strong loan loss reserves at 1.15% of total loans at end-June 2012.

CFHC's cash and highly liquid assets are more than sufficient to cover its standalone short-term liabilities, interest and preferred shares dividend obligations, as well as maturing preferred shares in 2012. Moreover, CTCB's strong local franchise provides satisfactory deposit-based funding, as evidenced by a high share of retail demand deposits. CTSC has sound liquidity and mostly funds its operations with its own capital.

CFHC has low financial leverage, with double leverage of 100% at end-Q212 based on Fitch's eligible capital calculations. At end-Q212, it had a statutory sum-of-parts capital adequacy ratio of 153% against the regulatory minimum of 100%, reflecting sound capitalisation among its subsidiaries. CTCB's Fitch core capital/risk weighted assets was 10.9% at end-H112, providing strong buffer to withstand a sharp increase in credit costs. CTSC has a small but sound balance sheet with limited leverage.

CFHC's subordinated bonds and CTCB's perpetual cumulative bonds are rated three notches below their Long-Term IDRs and National Long-Term ratings, respectively, to reflect the bonds' going-concern loss-absorption mechanism (mainly coupon deferral under specified conditions). CTCB's subordinated bonds are rated one notch below the issuer's National Long-Term rating, to reflect their subordinated status and the absence of going-concern loss-absorption feature. These notching practices are in accordance with Fitch's criteria on rating bank regulatory capital and similar securities. Any rating action on CFHC and CTCB could trigger a similar move on their debt ratings.

CFHC, established in 2002, is a bank-centric financial holding company. CTCB is the largest privately-held bank in Taiwan by assets, with a market share of 5% in deposits. CTSC is a small fully licensed securities company in Taiwan.

The detailed list of rating actions is as follows: Chinatrust Financial Holding Company (CFHC):

- Long-Term IDR affirmed at 'A'; Outlook Stable - Short-Term IDR affirmed at 'F1'

- National Long-Term rating affirmed at 'AA+(twn)'; Outlook Stable - National Short-Term rating affirmed at 'F1+(twn)'

- Viability Rating affirmed at 'a'

- Support Rating affirmed at '5'; withdrawn

- Support Rating Floor affirmed at 'No Floor'; withdrawn - Subordinated debt rating affirmed at 'A+(twn)' Chinatrust Commercial Bank (CTCB):

- Long-Term Foreign Currency IDR affirmed at 'A'; Outlook Stable

- Short-Term Foreign Currency IDR affirmed at 'F1'

- National Long-Term rating affirmed at 'AA+(twn)'; Outlook Stable

- National Short-Term rating affirmed at 'F1+(twn)'

- Viability Rating affirmed at 'a'

- Support Rating affirmed at '3'

- Support Rating Floor affirmed at 'BB+'

- Subordinated bonds' Long-term rating affirmed at 'A-' and National Long-term rating affirmed at 'AA(twn)'

- Perpetual cumulative TWD subordinated bonds' Long-term rating affirmed at 'BBB' and National Long-term rating affirmed at 'A+(twn)'

- Perpetual cumulative USD subordinated bonds' Long-term rating affirmed at 'BBB' Chinatrust Securities Co. (CTSC):

- Long-Term IDR upgraded to 'A' from 'A-'; Outlook Stable

- Short-Term IDR affirmed at 'F1'

- National Long-Term rating upgraded to 'AA+(twn)' from 'AA(twn)'; Outlook Stable

- National Short-Term rating affirmed at 'F1+(twn)'

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