September 20, 2017 / 8:05 AM / a year ago

Fitch Affirms CTBC Bank; Downgrades CTBC Holding and Taiwan Life

(The following statement was released by the rating agency) TAIPEI/HONG KONG, September 20 (Fitch) Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and National Ratings on Taiwan-based CTBC Bank Co., Ltd. (CTBC Bank) and revised the Outlook to Stable from Negative. Fitch has simultaneously downgraded by one-notch the ratings on its parent CTBC Financial Holding Co., Ltd. (CTBC Holding) and its sister companies Taiwan Life Insurance Co., Ltd. (Taiwan Life) and CTBC Securities Co., Ltd. (CTBC Securities) to reflect the growing life insurance operation and the holding company's high common-equity double leverage ratio. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS IDRS, VIABILITY RATING, NATIONAL RATINGS AND SENIOR DEBT RATINGS - CTBC Bank and CTBC Holding CTBC Bank's rating affirmation and Outlook revision to Stable from Negative is primarily based on the bank's enhanced capital profile and its focus on organic growth in domestic and offshore markets in the near to medium term. It also reflects Fitch's expectation that Taiwan Life should not require capital from CTBC Holding, and ultimately CTBC Bank, to support its business growth in the near to medium term. We expect CTBC Bank's capitalisation to hold steady in 2017-2018, based on its satisfactory internal capital generation. CTBC Bank's IDRs, Viability Rating, National Ratings and senior debt ratings primarily reflect its strong and stable domestic banking franchise and sound capitalisation relative to its risk profile. They also consider its well-established centralised risk management, diversified earnings mix and generally healthy asset quality. The downgrade of the ratings on the bank's parent mainly reflects the continued growth of Taiwan Life, which forms a significant part of CTBC group but has weaker standalone strength than CTBC Bank. Taiwan Life amounted to 28% of CTBC group's consolidated assets as of end-1H17. The downgrade also takes into account the high leverage at the holding parent, as measured by common equity double leverage ratio, of 125% at end-1H17. CTBC Holding will issue up to TWD20 billion in perpetual preferred shares by end-2017 to lower its regulatory double leverage ratio. However, Fitch uses a double leverage calculation based on common equity, and estimates that CTBC Holding's common equity double leverage ratio is likely to remain high at around 124% in 2H17-2018. The Stable Outlooks on the ratings of CTBC Holding are aligned with those of CTBC Bank. SUPPORT RATING AND SUPPORT RATING FLOOR - CTBC Bank The revision of CTBC Bank's Support Rating to '2' from '3' and Support Rating Floor to 'BBB-' from 'BB+' is based on the bank's increased systemic importance. For example, the bank's system interconnectedness and deposit market share (6.2% at end-1H17) has gradually increased over the past several years. Fitch believes there is a high probability of external support provided to CTBC Bank, if needed. SUBSIDIARIES AND AFFILIATES The rating actions on Taiwan Life and CTBC Securities correspond to the rating actions on CTBC Holding. Taiwan Life's Insurer Financial Strength (IFS) ratings reflect the progress in strengthening its business franchise, and the company's adequate profitability and capitalisation. Fitch has provided a one-notch uplift from Taiwan Life's standalone credit profile to recognise the high possibility of capital or liquidity support from CTBC Holding, if needed. CTBC Holding will maintain Taiwan Life's regulatory risk-based capital ratio above 250% (end-1H17: 345%). The insurer delivered good first-year premium growth (13% yoy) in 1H17 with a market share by first-year premiums increasing to 10.8% in 1H17, from 7.9% in 2015 (pro-forma), putting it in fourth place out of 23 life insurers in Taiwan. Taiwan Life has gradually diversified its assets to other classes, such as equities and property, for better investment yields and profitability. This sustained its pre-tax operating ROA of about 0.7% in 1H17 and 0.4% in 2016, respectively. CTBC Securities' ratings are aligned with those of CTBC Holding, reflecting the holding parent's obligatory support under Taiwan's Financial Holding Company Act and the parent's strong ability to provide support due to CTBC Securities' small size. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The rating actions on the subordinated debt and hybrid securities of CTBC Bank and CTBC Holding are consistent with the rating actions on the issuers because they are notched from the companies' Long-Term Foreign-Currency IDRs, which are on a par with their Viability Ratings and National Long-Term Ratings. CTBC Bank's Basel II-compliant subordinated bonds are rated one notch below the issuer's Long-Term IDR and National Long-Term Rating to reflect their subordinated status and the absence of going-concern loss-absorption features. CTBC Bank's Basel III-compliant subordinated debt is rated two notches below its National Long-Term Rating to reflect the bonds' limited recovery prospects. Bondholders risk significant loss at the point of non-viability, when common equity capital would be low, resulting in a thin loss-absorption buffer. At the point of non-viability, which is reached upon government receivership, the bonds would rank equally with common shares under the regulatory order for resolution or liquidation. CTBC Bank's perpetual non-cumulative subordinated bonds are rated four notches down from its National Long-Term Rating. The notching comprises two notches for non-performance risk, based on standard and less-easily triggered profit and capital thresholds for coupon omission and deferral, and two notches for poor recovery prospects. CTBC Holding's Basel II-compliant subordinated bonds are rated three notches below its National Long-Term Rating to reflect the bonds' going-concern loss-absorption mechanism (mainly coupon deferral under specified conditions). RATING SENSITIVITIES IDRS, VIABILITY RATINGS, IFS RATINGS, NATIONAL RATINGS AND SENIOR DEBT RATINGS Positive rating actions on CTBC Bank's IDRs, National Ratings, Viability Rating and senior debt ratings are not likely, unless CTBC Bank further strengthens its banking franchise and capitalisation significantly. Downward rating pressure would build if there is weakening of CTBC Bank's capital profile, which may be due to the bank's pursuit of aggressive growth or large-scale acquisitions or capital support to Taiwan Life. Any changes in CTBC Bank's ratings will affect the ratings of CTBC Holding, Taiwan Life and CTBC Securities to a similar extent. CTBC Holding's ratings could be aligned to those of CTBC Bank if CTBC Holding demonstrates its ability to maintain its common equity double leverage ratio consistently below 120% and Taiwan Life's standalone credit profile improves, making the standalone rating gap between Taiwan Life and CTBC Bank narrower. SUPPORT RATING AND SUPPORT RATING FLOOR CTBC Bank's Support Rating and Support Rating Floor are sensitive to changes in assumptions around the propensity or ability of the Taiwan government to provide timely support to the bank. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Any rating action on CTBC Bank and CTBC Holding will trigger similar moves on their subordinated debt and hybrid securities ratings. The rating actions are as follows: CTBC Bank Co., Ltd. Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook revised to Stable from Negative Short-Term Foreign-Currency IDR affirmed at 'F1' National Long-Term Rating affirmed at 'AA+(twn)'; Outlook revised to Stable from Negative National Short-Term Rating affirmed at 'F1+(twn)' Viability Rating affirmed at 'a' Support Rating revised to '2' from '3' Support Rating Floor revised to 'BBB-' from 'BB+' National Long-Term Rating on senior unsecured bonds affirmed at 'AA+(twn)' Long-Term Rating on subordinated bonds (Basel II Tier 2 capital) affirmed at 'A-' and National Long-Term Rating affirmed at 'AA(twn)' National Long-Term Rating on subordinated bonds' (Basel III Tier 2 capital) affirmed at 'AA-(twn)' National Long-Term Rating on perpetual non-cumulative subordinated bonds' (Basel III Additional Tier 1 capital) affirmed at 'A(twn)' CTBC Financial Holding Co., Ltd. Long-Term Foreign-Currency IDR downgraded to 'A-'from 'A'; Outlook revised to Stable from Negative Short-Term Foreign-Currency IDR downgraded to 'F2' from 'F1' National Long-Term Rating downgraded to 'AA(twn)' from 'AA+(twn)'; Outlook revised to Stable from Negative National Short-Term Rating affirmed at 'F1+(twn)' Viability Rating downgraded to 'a-' from 'a' Subordinated bonds (Basel II deferrable lower Tier 2 capital) downgraded to 'A(twn)' from 'A+(twn)' Taiwan Life Insurance Co., Ltd Insurer Financial Strength Rating downgraded to 'A-' from 'A', Outlook revised to Stable from Negative National Insurer Financial Strength Rating downgraded to 'AA(twn)' from 'AA+(twn)'; Outlook revised to Stable from Negative CTBC Securities Co., Ltd. Long-Term Foreign-Currency IDR downgraded to 'A-' from 'A', Outlook revised to Stable from Negative Short-Term Foreign-Currency IDR downgraded to 'F2' from 'F1' National Long-Term Rating downgraded to 'AA(twn)' from 'AA+(twn)'; Outlook revised to Stable from Negative National Short-Term Rating affirmed at 'F1+(twn)' Contact: Primary Analysts Sophia Chen, CFA, CPA (CTBC Holding, CTBC Bank, and CTBC Securities) Director +886 2 8175 7604 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, 205, Tun Hwa North Road Taipei City, Taiwan Joyce Huang, CFA (Taiwan Life) Director +852 2263 9595 Fitch Ratings (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analysts Jenifer Chou (CTBC Holding, CTBC Bank, and CTBC Securities) Director +886 2 8175 7605 Jeffrey Liew (Taiwan Life) Senior Director +852 2263 9939 Committee Chairpersons Parson Singha, CFA (CTBC Holding, CTBC Bank, and CTBC Securities) Senior Director +662 108 0151 Siew Wai Wan (Taiwan Life) Senior Director +65 6796 7217 Summary of Financial Statement Adjustments: The following assumptions were made in analysing the banks' Fitch Core Capital ratios: Taiwan's regulator uses the standardised approach and imposes higher risk weights on mortgage than regulators in most other developed markets. We have considered the potential effect of these higher risk weights on the banks' Fitch Core Capital ratios compared with international peers that use lower mortgage risk weights. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Insurance Rating Methodology (pub. 26 Apr 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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