Fitch Affirms Bank of Kaohsiung at 'A+(twn)'; Outlook Stable

Bank of Kaohsiung

22/03/2016 02:12

(The following statement was released by the rating agency)

TAIPEI, March 21 (Fitch) Fitch Ratings has affirmed Bank of Kaohsiung's (BOK) 
National Long-Term Rating of 'A+(twn)' and National Short-Term Rating of 
'F1+(twn)'. The Outlook is Stable. A full list of ratings is at the end of this 
commentary. 

KEY RATING DRIVERS 

NATIONAL RATINGS

The ratings reflect the high probability of support from the Kaohsiung City 
Government (KCG), which owns 45% of the bank, or indirectly from the sovereign 
(A+/Positive), which will flow through the city government, if needed. This is 
because Kaohsiung is the second-largest municipality in Taiwan and BOK has 
strong linkage to KCG. The linkage is evident from KCG's long-running and 
significant ownership, the city government's effective control of the bank's 
board and management, and the policy role that the bank carries out. BOK is the 
KCG's main banker and extends loans, including mortgages to low-income family 
and student loans, in line with the city government's policy objectives.

The Stable Outlook reflects Fitch's belief that the bank's linkage to KCG will 
remain strong in the near to medium term, based on KCG's ownership in the bank 
and the bank's important policy function.

KCG has been supporting BOK's ordinary business development and is likely to 
participate in the bank's rights issues in coming years to enhance 
capitalisation to comply with stricter Basel III requirements. Fitch expects the 
central government, through KCG, to extend extraordinary support to BOK when 
necessary. The bank is modestly capitalised with a Fitch Core Capital ratio of 
7.07% at end-1H15, compared with a sector average of around 10.9%. It has weak 
internal capital generation due to below-average profitability, which is 
primarily due to moderately high exposure in low-yield policy loans. 

SUBORDINATED DEBT

The bank's Basel III-compliant Tier 2 (B3T2) bonds are rated two notches below 
its National Long-Term Rating. This consists of zero notch for non-performance 
risk and two for loss severity, reflecting the limited recovery prospects for 
Taiwanese B3T2 notes. This compares with the typical one notch for standard B3T2 
instruments. B3T2 bonds in Taiwan would hit the point of non-viability (PONV) 
only when the issuing entity enters government receivership. This is a point 
that will be less easily reached compared with the PONV used by standard B3T2, 
which is the point at which regulators decide to write off securities or inject 
public sector capital. Fitch believes Taiwan's authorities would only move a 
bank into insolvency administration when it reaches a very low capital level, 
reducing the recovery prospects for B3T2 notes.

The anchor rating for subordinated bonds is BOK's support-driven National 
Long-Term Rating, as Fitch believes that KCG and the central government have a 
strong interest in supporting BOK to fulfil its financial obligations. 

These aforementioned notching practices for subordinated bonds are in accordance 
with Fitch's criteria on rating bank regulatory capital of financial 
institutions.

RATING SENSITIVITIES

NATIONAL RATINGS

BOK's ratings are sensitive to changes around the perceived propensity of the 
Taiwanese government to support BOK. This may arise from a reduction in the 
policy role that BOK performs for KCG and/or change in their linkage in terms of 
ownership and control. 

SUBORDINATED DEBT

Any change to the BOK's National Long-Term Rating is likely to trigger a similar 
change in its debt ratings.

 The ratings are as follows:

BOK

National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1+(twn)'

Basel III Subordinated Debt:

National Long-Term Rating affirmed at 'A-(twn)' 

Contact: 

Primary Analyst 

Jenifer Chou, CFA, FRM

Director

+886 2 81757605

Fitch Australia Pty Ltd, Taiwan Branch

Suite 1306, 13F, Tun Hwa N. Rd., Taipei

Secondary Analyst

Cherry Huang, CFA

Director

+886 2 81757603

Committee Chairperson 

Tim Roche

Senior Director

+61 2 8256 0310

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

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.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Global Bank Rating Criteria  (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

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