Fitch Affirms Bank of Kaohsiung at 'BBB+'; Outlook Stable

Bank of Kaohsiung

21/02/2019 07:27

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-February 21: Fitch Ratings has affirmed Bank of Kaohsiung 
Co., Ltd.'s (BOK) Long-Term Issuer Default Rating (IDR) of 'BBB+' and Short-Term 
IDR of 'F2'. Fitch has also affirmed the bank's Support Rating (SR) of '2', 
Support Rating Floor (SRF) of 'BBB+', and Viability Rating (VR) of 'bb+'. At the 
same time, the agency has affirmed BOK's National Long-Term Rating at 'AA-(twn)' 
and National Short-Term Rating at 'F1+(twn)'. The Outlook is Stable. A full list 
of rating actions is available at the end of this rating action commentary. 

	

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR

BOK's IDRs and National Ratings are driven by its SR and SRF, which reflect a 
high probability of support from the Kaohsiung City Government (KCG), which owns 
a controlling 43% stake in the bank, and ultimately from the Taiwan sovereign 
(AA-/Stable), which will flow through the city government, if needed. 

Fitch believes the propensity for state support is high because BOK has close 
ties with the city government and is systemically important within Kaohsiung. 
The ties include KCG's long-term and significant ownership, effective control of 
the bank's board and management, as well as BOK's policy roles, including being 
KCG's main banker, providing the city government with treasury services, 
underwriting and issuing KCG's bonds, lending to the municipal government and 
distributing policy loans. 

BOK's National Long-Term Rating of 'AA-(twn)' is underpinned by the agency's 
expectation of a high probability of state support, if needed. The bank's 
National Long-Term Rating denotes very low default risk relative to domestic 
peers.      

The Stable Outlook reflects Fitch's view that the bank's linkage to KCG will 
remain unchanged in the medium term despite the change in Kaohsiung's mayor 
following the municipal election in November 2018, primarily based on KCG's 
commitment to maintain its controlling ownership in BOK and the bank's integral 
and long-lasting policy role to KCG.  

VIABILITY RATING

BOK's VR of 'bb+' is mainly constrained by its low profitability and modest 
capital buffer above the regulatory minimum requirements. It also reflects the 
bank's limited franchise and less commercially oriented operations, though its 
overall asset quality and risk appetite have been improving in recent years. 

The bank has weak profitability as about 14% of its loans are low-yield 
public-sector loans and its operating efficiency is lower than the domestic peer 
average due to its small scale. We expect the bank's Fitch Core Capital (FCC) 
ratio to stay around 8.5%-9% in 2019-2020, compared with 8.4% at end-1H18, based 
on its modest loan growth and internal capital generation. This is among the 
lowest within Fitch's rated Taiwanese banks. 

SUBORDINATED DEBT

The bank's Basel III-compliant Tier 2 (B3T2) bond's 'A(twn)' National Rating is 
two notches below BOK's National Long-Term Rating of 'AA-(twn)'. This comprises 
zero notching for non-performance risk and two notches for loss severity, 
reflecting the poor recovery prospects for B3T2 debt. Taiwan's B3T2 bonds adopt 
a less easily triggered government receivership as the point of non-viability. 
Fitch believes Taiwan's authorities would take receivership over a bank only 
when the bank's total capital-adequacy ratio has fallen to below 2%, reducing 
the recovery prospects for B3T2 notes.

The anchor rating for the 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. 

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

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR

BOK's SR, SRF, IDRs and National 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 the two 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 
SR, SRF, IDRs and National Ratings.

VIABILITY RATING

A VR downgrade could be triggered by notable deterioration in BOK's 
profitability, potentially from rising impairment charges over offshore loans, 
or increases in risk appetite that are not adequately priced, or significant 
investment losses (especially in relation to foreign-currency bonds). BOK's low 
levels of profitability already limit its capital generation, and further 
erosion in capitalisation possibly caused by excessive growth in high-risk 
offshore loans and investments, could also be credit negative to its VR. A VR 
upgrade is less likely unless the bank's profitability and capitalisation 
improve significantly to levels that are more comparable with higher-rated 
peers, though this would be difficult in the absence of a substantial 
improvement in the bank's franchise.  

SUBORDINATED DEBT 

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

The rating actions on BOK are as follows:

Long-Term IDR affirmed at 'BBB+'; Outlook Stable

Short-Term IDR affirmed at 'F2' 

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

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

Viability Rating affirmed at 'bb+'

Support Rating affirmed at '2' 

Support Rating Floor affirmed at 'BBB+'

Basel III-compliant subordinated debt:

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

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

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

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

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

TWD1.5 billion bonds (ISIN TW000G103154) due 15 March 2025 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 

Ambreesh Srivastava

Senior Director

+65 6796 7218

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.

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@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 12 Oct 2018)

https://www.fitchratings.com/site/re/10044408

National Scale Ratings Criteria (pub. 18 Jul 2018)

https://www.fitchratings.com/site/re/10038626

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Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10064006

Solicitation Status 

https://www.fitchratings.com/site/pr/10064006#solicitation

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https://www.fitchratings.com/regulatory

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