Fitch Assigns First-Time 'BBB-' to Capital Securities Corporation; Outlook Stable

Capital Securities

17/09/2019 08:45

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong/Taipei-September 17: Fitch Ratings has assigned 
Taiwan-based Capital Securities Corporation a first-time Long-Term Issuer 
Default Rating (IDR) of 'BBB-' and National Long-Term Rating of 'A(twn)'. The 
Outlook is Stable. Fitch has also assigned a National Short-Term Rating of 
'F1(twn)'.

Capital Securities is a major comprehensive securities firm in Taiwan, with a 
market share of about 4.5% in domestic brokerage business. It is the country's 
largest independent securities firm. Its rank and market share in retail 
brokerage have been steady since 2015. It also has strong market positions in 
fixed income underwriting and warrant issuance.

KEY RATING DRIVERS 

Capital Securities' ratings are driven by its long-standing and stable franchise 
in Taiwan's stockbroking sector, sound capital profile and a well-articulated 
risk-management framework. The ratings are constrained by the company's limited 
diversity, which could lead to volatile earnings. Its major income source, 
brokerage, is liable to weak market sentiment, while income from trading and 
underwriting is inherently volatile and less predictable. 

Capital Securities has maintained a sound capital profile. Its Fitch-defined net 
adjusted leverage ratio was low at 3.6x as of 2018 and hovered between 3.2x-4.6x 
from 2015 to 2018.  High capital levels allow Capital Securities to absorb 
unexpected asset quality and market value shocks. It also leaves a large cushion 
over the minimum regulatory level, which will remains so even if its business 
exposure increases to its internal risk limit level.

The company is run by a professional management team with adequate depth and 
experience in the industry. The senior executives are mostly promoted from 
within, which Fitch believes enhances the stability of the management team, 
business continuity and staff loyalty. Management also has established a 
corporate culture that emphasises risk control; the company has an effective 
risk-control system that governs its risk taking in trading and securities 
financing as well as operational risks. It has set adequate risk limits for key 
risk exposures, which are monitored and executed.

Investments made up 38% of Capital Securities' assets as of end-2018 and the 
ratio has been stable over years. Bonds and equities accounted for 81% and 17%, 
respectively, of total investments. Risk concentration is possible, although we 
regard the company's investments to be of relatively lower risk, as we estimate 
that 85% of bonds are government or investment-grade private-sector bonds, while 
28% of equities are for hedging purposes and the remaining 72% are diversified 
through fund investments and individual stocks, with the largest 20 accounting 
for just about 25% of total equities holdings. Capital Securities' market risk 
could be higher than that of its 'BBB' category counterparts, but this is 
mitigated by its record of avoiding substantial trading losses and hedging 
positions.   

CS had an operating income/equity ratio of 4.5% or above in each of the past 
four years, while some industry peers suffered losses due to weak trading 
performance and lackluster brokerage income. Fitch expects Capital Securities to 
remain profitable on resilient brokerage income.

The Stable Outlook on the Long-Term IDR and National Long-Term Rating reflects 
Fitch's expectation that Capital Securities' credit worthiness will remain 
steady in the absence of a drastic change in business direction or risk 
appetite.  

RATING SENSITIVITIES

Capital Securities' ratings would face pressure if pursuit of business expansion 
and profitability undermined its capital and funding and liquidity profiles. 
Ratings would also be sensitive to an increased appetite for risk, in 
particular, higher balance-sheet exposure to market risk or greater revenue 
sensitivity from trading activities. 

Sustained improvement in business diversity and earning quality would be 
positive for the ratings. Fitch, however, does not foresee a change that would 
be substantial enough to warrant a rating upgrade in the near term.   

Contact:

Primary Analyst

Leo Wah, CFA

Director

+852 2263 9951

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central

Hong Kong

Secondary Analyst

Rowena Chang

Associate Director

+886 2 8175 7602

Committee Chairperson

Mark Young

Managing Director

+ 44 20 3530 1318

Date of the Relevant Rating Committee: 22 August 2019

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.

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

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: Yee Man 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 

National Scale Ratings Criteria (pub. 18 Jul 2018)

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

Non-Bank Financial Institutions Rating Criteria (pub. 12 Oct 2018)

https://www.fitchratings.com/site/re/10044407

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10088387

Solicitation Status 

https://www.fitchratings.com/site/pr/10088387#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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