Fitch Affirms Bank of Kaohsiung at 'BBB+', Upgrades Short-Term IDR to 'F1'

Bank of Kaohsiung

30/10/2019 10:12

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-October 30: 

Fitch Ratings has affirmed Bank of Kaohsiung Co., Ltd.'s (BOK) Long-Term Issuer 
Default Rating (IDR) at 'BBB+', and its National Long-Term Rating at 'AA-(twn)'. 
The Outlooks are Stable.

Fitch has also upgraded BOK's Short-Term IDR to 'F1' from 'F2' and removed it 
from Under Criteria Observation (UCO), where it was placed following the 
publication of Fitch's cross-sector Short-Term Ratings Criteria in May 2019. 
Fitch typically assigns the higher of two possible Short-Term IDRs to 
support-driven entities where the issuer is rated lower than the supporting 
entity, which in this case is the Taiwan sovereign (AA-/Stable/F1+), and where 
Fitch sees no significant potential impediments to the prompt flow of funds from 
the support provider. 

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 Support Rating (SR) and 
Support Rating Floor (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, 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 municipal government and is systemically important within 
Kaohsiung, Taiwan's third-largest city, with about 7% deposit market share 
locally. 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, primarily based on the city government's 
commitment to maintain its controlling ownership in BOK and the bank's integral 
and long-lasting policy role.

VIABILITY RATING

BOK's Viability Rating (VR) of 'bb+' is mainly constrained by its low 
profitability and below-average capitalisation. It also reflects the bank's 
limited franchise and less commercially oriented operations, though its overall 
asset quality remains sound, supported by its stringent collateralisation 
policy, and its funding and liquidity profile remains stable, benefitting from 
its strong relationship with KCG. 

The bank's profitability is likely to remain below the peer average 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. That said, the 
bank's operating profit/risk-weighted assets improved to 0.5% in 1H19, slightly 
higher than its four-year average of 0.4% during 2015-2018, on lower 
loan-impairment charges and better net interest margins due to growth in 
offshore loans and foreign-currency bonds. 

 

BOK's capitalisation may increase from the lowering of regulatory risk weights 
for mortgages and small-amount personal loans starting 2020, in line with most 
domestic peers. However, BOK's capitalisation is likely to remain the lowest 
among Fitch-rated Taiwanese banks. The bank had a Fitch Core Capital ratio of 
8.9% at end-1H19 compared with the local peer average of 11.7%. 

SUBORDINATED DEBT

The bank's Basel III-compliant Tier 2 (B3T2) bond's 'A(twn)' National Rating is 
two notches below its 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.

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 the bank. This may 
arise from a dilution in the policy role that BOK performs for KCG and/or 
weakened linkages between the two in terms of ownership and control. BOK's SR, 
SRF, IDRs and National Ratings are also sensitive to a change in Taiwan's 
sovereign rating.

VIABILITY RATING

A VR downgrade could be triggered by a notable deterioration in BOK's 
profitability, potentially from rising impairment charges over offshore loans, 
or significant investment losses, especially in relation to foreign-currency 
bonds. Further erosion in capitalization, 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. However, this would be challenging without sustained 
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.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on the entity, either due to their nature or the way in which they 
are being managed by the entity.

BOK has an ESG Relevance Score of 4 for Governance Structure due to potential 
influence by the government on the bank's risk governance given the government's 
control over the bank's board and management, which has a negative impact on the 
credit profile, and is relevant to the rating in conjunction with other factors. 


For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg

Bank of Kaohsiung Co., Ltd.; Long Term Issuer Default Rating; Affirmed; BBB+; 
RO:Sta

; Short Term Issuer Default Rating; Upgrade; F1

; National Long Term Rating; Affirmed; AA-(twn); RO:Sta

; National Short Term Rating; Affirmed; F1+(twn)

; Viability Rating; Affirmed; bb+

; Support Rating; Affirmed; 2

; Support Rating Floor; Affirmed; BBB+

----subordinated; National Long Term Rating; Affirmed; A(twn)

Contacts: 

Primary Rating Analyst

Sophia Chen, 

Director

+886 2 8175 7604

Fitch Australia Pty Ltd, Taiwan Branch

Suite 1306, 13F No. 205, Dunhwa North Road, Songshan District

Taipei 105

Secondary Rating Analyst

Cherry Huang, 

Director

+886 2 8175 7603

Committee Chairperson

Parson Singha, 

Senior Director

+66 2 108 0151

 

Media Relations: Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; 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

Short-Term Ratings Criteria (pub. 02 May 2019)

https://www.fitchratings.com/site/re/10073011

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10099957

Solicitation Status 

https://www.fitchratings.com/site/pr/10099957#solicitation

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https://www.fitchratings.com/regulatory

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