Nov 19 - Fitch Ratings has assigned Taiwan-based Cosmos Bank (Cosmos) a National Long-Term rating of 'BBB(twn)' and a National Short-Term rating of 'F3(twn)'. The Outlook is Stable.
The ratings reflect the bank's overall improving trend in asset quality and its return to profitability in H112. Cosmos capitalisation is adequate to accommodate risks arising from its concentrated unsecured personal lending exposure. These strengths are, however, tempered by its small franchise, high cost structure and future loan growth that is likely to outpace economic growth in 2013 and, possibly, in 2014.
Cosmos has gone through significant restructuring since a new management team was put in place following a change in ownership in 2008. The restructuring was notable in its improved risk management, a substantive clean-up of impaired legacy loans and a strategic shift towards a more balanced business mix. Nevertheless, the bank's plan to enlarge its balance sheet to improve earnings quality and business scope is yet to be fully implemented and could bring about new risks.
The Stable Outlook underlines Fitch's expectation that Cosmos will maintain satisfactory profitability and adequate capitalisation while expanding its business in 2013. The rating may be upgraded if the bank takes a prudent approach to its expansion, particularly in less familiar market segments, while maintaining its balance sheet strength. On the other hand, overly aggressive credit growth, particularly in areas outside the bank's core competence, could put pressure on its ratings.
Cosmos' annualised return on average assets turned positive at 1.7% in H112, compared with -0.2% in 2011, after fully amortising legacy costs related to losses from the sale of its non-performing loans. Nevertheless, Fitch expects long-term profitability to trend down, due to slower recoveries from write-offs of its cash card portfolio and diversification into lower-yielding exposures. Asset quality may see modest deterioration in a prolonged economic slowdown. Nevertheless, adequate provisioning should keep credit costs manageable, provided the bank does not undertake rapid loan growth.
Cosmos' capital is of high quality and will consist of only Tier 1 capital after the conversion of the bank's mandatory convertible bonds by end-2012. Fitch views the bank's liquidity profile as adequate given that the bank has a reasonably diversified retail deposit base and a large holding of central bank certificate of deposits, both of which provides short-term liquidity.
Cosmos is a small commercial bank in Taiwan, with 49 branches and about 0.4% of system assets at end-H112. It has a leading position in the cash card business, with a market share of 57% at end-July 2012. The bank's large shareholders include S.A.C. (32.3%), GE Capital (31.9%), and China Development Industrial Bank (11.9%). Corporate governance is adequate given the presence of independent directors, management committees which directly report to the Board, limited related party transactions and adequate information disclosure.
A Credit Analysis on Cosmos will shortly be available on www.fitchratings.com.