Fitch Affirms Bank of Kaohsiung at 'AA-(twn)'; Outlook Stable

Bank of Kaohsiung

01/03/2018 03:19

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-February 28: Fitch Ratings has affirmed Bank of Kaohsiung 
Co., Ltd.'s (BOK) National Long-Term Rating at 'AA-(twn)' and National 
Short-Term Rating at '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 high probability of support from the Kaohsiung City 
Government (KCG), which owns a controlling 43% stake in the bank, or from the 
Taiwan sovereign (AA-/Stable), which will flow through the city government, if 
needed. 

Fitch views the propensity for state support as high, because Kaohsiung City is 
the third-largest municipality in Taiwan and BOK has close ties with the city 
government. The ties include KCG's long-term and significant ownership, 
effective control of the bank's board and management, as well as BOK's role as 
KCG's main banker and policy functions to support the city government's 
objectives. 

BOK's National Long-Term Rating reflects its adequate credit strength based on 
high probability of state support if needed, which is comparable with 'AA-(twn)' 
rated private banks in Taiwan. The bank's National Long-Term Rating denotes very 
low default risk relative to domestic peers.      

The Stable Outlook reflects Fitch's belief that the bank's linkage to KCG will 
remain steadfast in the near to medium term, primarily based on KCG's commitment 
to maintain its controlling ownership in BOK and BOK's enduring policy function. 
 

BOK has weak profitability as around 14% of its loans are low-yielding policy 
loans and its operating efficiency is below the domestic peer average due to its 
small scale. We estimate the bank's Fitch Core Capital ratio to have increased 
to 8.8% at end-2017 (end-2016: 7.5%), thanks to the KCG-backed rights issue in 
March 2017, the regulator's relaxation of risk weights for mortgages and equity 
securities in 4Q17, and the bank's controlled loan growth. Fitch expects BOK's 
capitalisation to remain compliant with Basel III regulatory minimum 
requirements through continued modest credit growth and KCG's support, if 
necessary.      

SUBORDINATED DEBT

The bank's Basel III Tier 2 (B3T2) bonds are rated two notches below its 
National Long-Term Ratings. This consists of zero notches for non-performance 
risk and two for loss severity, reflecting the limited recovery prospects for 
Taiwanese B3T2 notes, in contrast with the typical one notch for standard B3T2 
instruments. Taiwan's B3T2 bonds adopted a less easily triggered government 
receivership as the point of non-viability (PONV) than the standard B3T2's PONV 
(i.e. regulatory decisions to write-off securities or inject public sector 
capital). Fitch believes Taiwan's authorities would take over a failing bank 
only when the authorities have exhausted all alternatives and the bank 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. This is because 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 the bank regulatory capital of financial 
institutions.

RATING SENSITIVITIES

NATIONAL RATINGS

BOK's ratings are sensitive to any changes around the perceived propensity of 
the Taiwan government to support BOK. This may arise from dilution in the policy 
role that BOK performs for KCG and/or weakened linkage between them in terms of 
ownership and control. At the same time, a change in Taiwan's sovereign rating 
could have a corresponding impact on BOK's ratings.

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 on BOK are as follows:

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

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

Basel III-compliant subordinated debt:

ISIN TW000G103105 TWD1.3 billion bonds due on 6 August 2020 affirmed at 'A(twn)' 


ISIN TW000G103147 TWD0.15 billion bonds due on 3 December 2021 affirmed at 
'A(twn)'

ISIN TW000G103139 TWD0.65 billion bonds due on 29 October 2021 affirmed at 
'A(twn)' 

ISIN TW000G103113 TWD0.7 billion bonds due on 5 September 2020 affirmed at 
'A(twn)' 

ISIN TW000G103121 TWD1.2 billion bonds due on 25 March 2021 affirmed at 'A(twn)'

Contact: 

Primary Analyst 

Sophia Chen, CFA, CPA

Director

+886 2 81757604

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 

Parson Singha

Senior Director

+66 2108 01514

Summary of Financial Statement Adjustments: The Taiwanese 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: 
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. 25 Nov 2016)

https://www.fitchratings.com/site/re/891051

National Scale Ratings Criteria (pub. 07 Mar 2017)

https://www.fitchratings.com/site/re/895106

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https://www.fitchratings.com/site/pr/10021949#solicitation

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https://www.fitchratings.com/regulatory

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