October 13, 2017 / 4:43 AM / a year ago

Fitch Affirms Standard Chartered Bank (Taiwan) at 'A'; Outlook Stable

(The following statement was released by the rating agency) TAIPEI, October 13 (Fitch) Fitch Ratings has affirmed Standard Chartered Bank (Taiwan) Limited's (SCBTL) Long-Term Issuer Default Rating (IDR) at 'A' and National Long-Term Rating at 'AA+(twn). The Outlooks are Stable. A full list of rating action is at the end of this rating action commentary. The rating action follows the rating affirmation on Standard Chartered Bank (SCB: A+/Stable/a), the sole owner of SCBTL, on 11 October 2017 (see <a href="https://www.fitchratings.com/site/pr/1030516">Fitch Affirms Standard Chartered's 'A+' Rating, Revises Holdco's Outlook to Negative). KEY RATING DRIVERS IDRS, NATIONAL RATINGS, SUPPORT RATING AND SENIOR DEBT The IDRs, National Ratings and Support Rating reflect Fitch's belief in the extremely high probability of timely support from SCBTL's parent, if needed. Fitch sees SCBTL as a key and integral subsidiary within the group's international network, as it operates within a market that we consider as being core. This is underpinned by, but not limited to, a shared brand name, highly integrated management and huge reputational risk to the parent should SCBTL default. SCBTL's IDR is aligned with the Viability Rating of its parent, not the parent's IDR. This is because we do not believe SCBTL would benefit from the presence of a significant junior debt buffer at SCB. The Stable Outlooks on the IDR and National Long-Term Rating are also aligned with that of SCB. SCBTL's senior unsecured bonds are rated at the same level as its National Long-Term Rating and accordingly affirmed. The bond ratings reflect the vulnerability of default on the bank's senior obligations within Taiwan's national scale. VIABILITY RATING SCBTL's Viability Rating reflects its modest franchise within a highly competitive banking sector in Taiwan and weak, albeit improving, profitability. This is counterbalanced by our expectation that the bank will retain its stable risk appetite in relation to its loan rebuild and strategic focus, while maintaining balance sheet strength. Fitch expects SCBTL to rebuild its loan portfolio by shifting to small- to medium-enterprise borrowers from borrowers of low-yield single-loan-products, such as mortgages, while focusing on treasury, cash management and trade financing services. This follows a significant loan-book contraction of about 9% per year since 2013, in line with its parent's de-risking strategy. The bank also aims to strengthen its wealth management businesses, expand its customer base through enhanced partnerships and cross-selling between corporate and retail banking, and transform itself through digitalisation. Loan growth momentum is likely to improve only slightly, with a mildly recovering domestic economy, while SCBTL remains selective in its growth. Operating profit/risk-weighted assets increased to 1.0% in 1H17 (annualised), from 0.3% in 2016, when the bank's profitability was severely hit by provisioning costs from the sale of target redemption forwards. We expect the bank to sustain its capitalisation at a healthy level in 2017-2018, with improved profitability and modest loan growth. Its liquidity profile should remain sound, as SCBTL is likely to remain largely funded by customer deposits and hold a large amount of liquid government paper. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES SCBTL's Basel III-compliant Tier 2 (B3T2) bonds are rated two notches below its National Long-Term Rating to reflect the limited recovery prospects and no incremental non-performance risk relative to senior debt securities. This is in contrast to the typical one-notch for standard B3T2 bonds, which reach the point of non-viability at regulatory decisions to write-off securities or inject public-sector capital. The point of non-viability trigger for typical Taiwanese B3T2 notes is government receivership. Fitch believes Taiwan's authorities would only move a bank into insolvency administration when it reaches a very low level of capitalisation, reducing recovery prospects for B3T2 notes. The anchor rating for SCBTL's B3T2 bonds is its parent's Viability Rating, rather than that of SCBTL, or the support-driven National Long-Term Rating, as Fitch believes the parent has a strong interest in supporting its subsidiary to fulfil its debt obligations. These aforementioned notching practices for B3T2 bonds are in accordance with Fitch's criteria. RATING SENSITIVITIES IDRS, NATIONAL RATINGS, SUPPORT RATING AND SENIOR DEBT SCBTL's IDRs, National Ratings, Support Rating and senior unsecured debt rating are sensitive to changes in Fitch's assumption around the ability or propensity of SCB to extend timely support to SCBTL. This could arise from any change in the relationship between SCBTL and its parent and/or SCBTL's role in the group. Any change of SCB's Viability Rating could trigger similar rating action on SCBTL. SCBTL's National Ratings are also sensitive to a change in Taiwan's sovereign ratings. An upgrade of the sovereign's 'AA-' Long-Term Local-Currency IDR may lead to SCBTL's National Rating being downgraded. A downgrade is unlikely to occur in the near term, given the Stable Outlook on Taiwan's IDR. VIABILITY RATING SCBTL's Viability Rating may be upgraded if the bank demonstrates significant and sustainable improvement in its market position and profitability. A Viability Rating downgrade is less likely in the near term, based on the bank's sound capitalisation relative to its overall risk taking. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Any change in SCBTL's IDR and National Long-Term Rating could trigger similar rating action on the Basel III-compliant Tier 2 bonds. The rating action is as follows: Standard Chartered Bank (Taiwan) Limited 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 'bbb-' Support Rating affirmed at '1' National Long-Term Rating on senior unsecured debt affirmed at 'AA+(twn)' National Long-Term Rating on Basel III-compliant Tier 2 bonds affirmed at 'AA-(twn)' Contact: Primary Analyst Jenifer Chou, CFA, FRM Director +886 2 8175 7605 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, 205, Tunhwa North. Rd., Taipei City Secondary Analyst Cherry Huang, CFA Director +886 2 8175 7603 Committee Chairperson Jonathan Cornish Managing Director +852 2263 9901 Summary of Financial Statement Adjustments: The following assumptions were made in analysing the bank's Fitch Core Capital ratios: Taiwan's regulator uses the standardised approach and imposes higher risk-weights on mortgages than regulators in most other developed markets. We have considered the potential effect of these higher risk-weights on the bank's Fitch Core Capital ratios compared with international peers that use lower mortgage risk-weights. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable. Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) 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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