TEXT-S&P summary: The Shanghai Commercial & Savings Bank Ltd.
(The following statement was released by the rating agency)
Dec 18 -
Summary analysis -- The Shanghai Commercial & Savings Bank Ltd. --- 18-Dec-2012
CREDIT RATING: BBB+/Stable/A-2 Country: Taiwan
Primary SIC: Commercial banks,
Credit Rating History:
Local currency Foreign currency
17-Dec-2012 BBB+/A-2 BBB+/A-2
04-Feb-1999 --/-- --/--
The stable outlook reflects our expectation that SCSB's good franchise in trade finance and corporate banking business will support the bank to maintain a stable revenue profile and funding source. We also expect the bank's adequate earning buffer, along with manageable business growth strategy and capital policy to sustain its strong capitalization.
We may raise the rating on SCSB if the bank further strengthens its capitalization and sustain its RAC ratio above 15% through higher retained earnings or prudent business expansion. We may also raise the rating on SCSB if the bank significantly enhances its business position in domestic and overseas markets while maintaining a satisfactory financial profile. We may lower the rating if the bank's core earnings ability deteriorates or if it pursues an aggressive growth strategy that hurts its asset quality and weakens its capitalization, as indicated by a sustained RAC ratio below 10%.
Standard & Poor's Ratings Services bases its ratings on Taiwan-based SCSB on the bank's 'bbb' anchor, "adequate" business position, "strong" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define those terms. The stand-alone credit profile (SACP) of SCSB is 'bbb+'.
Our bank criteria use Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating (ICR). The anchor for a bank operating only in Taiwan is 'bbb'. The BICRA score is informed by our evaluation of economic risk; we view Taiwan as a middle-income, moderately stable economy with a dynamic private sector, manageable growth in asset prices in recent years, and strong household net financial positions. These factors somewhat offset the intermediate level of private sector indebtedness, in our view. With regard to industry risk, we characterize Taiwan's banking sector as highly competitive and fragmented. This results in a very low earning capacity to cushion against potential credit costs during economic downturns. Nonetheless, very strong and stable system-wide funding partly offset these weaknesses.
We base our assessment of SCSB's "adequate" business position on our view that the bank's customer profile and revenue are stable. Support for this is derived from SCSB's established franchise in trade finance, and its prudent management and strategy to increase geographical diversification. This is despite SCSB's relatively smaller branch network in the domestic market compared with its similarly rated local peers'. The bank has better geographical diversification than its peers because its overseas business has contributed over half of its total revenue over the past few years, partly from its 57.6% owned Hong Kong-based subsidiary, Shanghai Commercial Bank Ltd. (SCB-HK; not rated).
Capital and earnings
We view SCSB's capital and earnings as "strong," which reflects our projection that the bank's risk-adjusted capital (RAC) ratio (before diversification) based on our RAC framework will be above 10% on consolidated basis in the next two years. SCSB's RAC ratio was 14.4% as of the end of June 2012, consolidating the risk profile of SCSB and SCB-HK. We believe the strong capital base of SCSB and SCB-HK, as well as both entities' prudent capital policy and adequate earning buffer, will prevent this RAC ratio from significantly deteriorating in the coming two years. Although SCSB's profitability from domestic banking business is only about the industry average, given stiff local competition, the bank's higher contribution from overseas business somewhat offsets this weakness.
Our risk position assessment for SCSB is "adequate," supported by the bank's prudent underwriting risk control and manageable growth strategy. We view SCSB's asset quality to be superior to the domestic peer average. The bank has had better credit loss experiences in previous down-cycles, thanks to its prudent underwriting policy and focus on transactional-based lending. SCSB's 10 largest loan exposures account for about 5.9% of its total loans on a consolidated basis and 8.4% on stand-alone basis, both of which are much lower than the industry average of about 10%-15%. This is despite the bank's corporate banking-oriented business nature.
Funding and liquidity
SCSB has "average" funding and "adequate" liquidity, in our view. We believe the bank can maintain its stable funding profile despite its higher reliance on corporate deposits. SCSB's good franchise in trade finance enables it to attract corporate deposits with good customer retention. The bank has an adequate loan-to-deposit ratio of 63.2% on consolidated basis and 70.7% on stand-alone basis as of the end of June 2012. Meanwhile, the bank's cash plus money market instruments account for about 30.4% of total assets on consolidated basis and 27.3% on stand-alone basis, which is better than its domestic peers'.
Related Criteria And Research
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Credit FAQ: Greater China Credit Rating Scale Explained, April 27, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010
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