7 Min Read
(The following statement was released by the rating agency)
Nov 30 -
Summary analysis -- DBS Bank (Taiwan) Ltd. ------------------------ 30-Nov-2012
CREDIT RATING: A+/Stable/A-1 Country: Taiwan
Credit Rating History:
Local currency Foreign currency
05-Dec-2011 A+/A-1 A+/A-1
The stable outlook reflects our expectation that DBS Taiwan will maintain its current credit profile over the next one to two years including "strong" capitalization and "average" funding and "adequate" liquidity, supported by the group's prudent financial policies and satisfactory risk management. We also expect DBS Taiwan to remain a "highly strategic" member of the DBS group. As such, the ratings on DBS Taiwan will move in tandem with those on its parent group.
We may lower the ratings on DBS Taiwan if evidence shows that the capacity and willingness of the DBS group to support DBS Taiwan significantly weakens. Conversely, we may raise the ratings on DBS Taiwan if the bank becomes a core member of the DBS group.
The ratings on DBS Bank (Taiwan) Ltd. (DBS Taiwan) reflect the bank's 'bbb' anchor, "moderate" business position, "strong" capital and earnings, "moderate" risk position, "average" funding and "adequate" liquidity, as our criteria define those terms. The ratings also reflect the implicit support from DBS Bank Ltd. (AA-/Stable/A-1+) due to the bank's "highly strategic" status to the DBS group. The stand-alone credit profile (SACP) of DBS Taiwan is 'bbb-'.
Our bank criteria use our 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 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.
In our assessment, DBS Taiwan has a "moderate" business position. As of the end of June 2012, the bank has total assets of New Taiwan dollar (NT$) 251.3 billion, representing about 0.7% of domestic banking system assets. We expect the bank to maintain a similar business position over the next one to two years, due to the constraint of its moderate network distribution and the bank's relatively short operating record in Taiwan's competitive banking system. This is despite our expectation that DBS Taiwan will leverage group resources and support to make above-average growth over the next one to two years. DBS Taiwan has a higher presence in corporate banking than in retail banking. We believe it will take time for the bank to establish a satisfactory and stable retail customer base.
Capital and earnings
Our assessment of DBS Taiwan's "strong" capital and earnings reflects our expectation that the bank will be able to maintain its risk-adjusted capital (RAC) ratio before diversification above 10% in 2012 and 2013. As of the end of June 2012, DBS Taiwan's RAC ratio was about 13.4%. We believe that DBS Taiwan will maintain strong capitalization during the current period of high asset growth as supported by the group's prudent financial management. This includes conservative capital ratio targets and a high earning-retention policy on DBS Taiwan. Despite the weak earnings capacity of DBS Taiwan due to its small operating scale and higher expense level during the current expansionary stage, we expect the parent to provide additional capital resources if needed.
We consider DBS Taiwan's risk position to be "moderate" in view of the bank's relatively higher risk concentration on single-name exposures and above-average asset growth strategy by domestic standards. Although the bank follows the group's satisfactory underwriting and risk control standards, it will take time to see if DBS Taiwan's fast initial growth stance will dilute its overall asset quality and profit margins amid highly competitive market and global economic slowdown. DBS Taiwan's higher-than-average risk concentration on several large groups is mainly due to the fact that its previous branch status loan extensions are benchmarked with the parent DBS Bank's total net worth, which is significantly higher than that of DBS Taiwan. The bank plans to gradually dilute the concentration via expanding its loan scale with focuses on the small to mid-size enterprise and retail sectors. This, however, will take time to materialize.
Funding and liquidity
In our view, DBS Taiwan's funding is "average" and liquidity "adequate," supported by the DBS Bank group's resources and name association. As of the end of June 2012, customer deposits accounted for about 65% of the bank's total adjusted assets, up from 56% in 2010. Despite its higher-than-average loan-to-deposit ratio and a moderate usage of wholesale funding (mainly intra-group funding), we believe that DBS Taiwan will continue to make progress to establish its retail deposit base and franchise and develop more diversified funding sources over the next two to three years.
The long-term counterparty credit rating factors in a high degree of implicit group support, reflecting the bank's "highly strategic" status to its parent DBS Bank. DBS Taiwan is highly important in supporting the group's Asian-centric business strategy, and is part of the group's Greater China platform and franchise. We believe that the group will continue to provide necessary financial support to DBS Taiwan in times of need.
Related Criteria And Research
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Banks: Rating 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