Fitch Revises Outlook on Capital Securities Corporation to Negative; Affirms 'BBB-'

Capital Securities

24/03/2020 08:35

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong/Taipei-March 24: 

Fitch Ratings has revised the Outlook on Taiwan-based Capital Securities 
Corporation's Long-Term Issuer Default Rating (IDR) of 'BBB-' and National 
Long-Term Rating of 'A(twn)' to Negative from Stable and has affirmed the 
ratings. Fitch has also affirmed the National Short-Term Rating of 'F1(twn)'.

The Outlook revision reflects heightened uncertainty in the operating 
environment of Taiwan's securities industry arising from the coronavirus 
pandemic. It also reflects the associated pressure on Capital Securities' 
profitability amid potential proprietary trading losses due to increased 
capital-market volatility as well as lower brokerage income over the medium 
term. 

The rating affirmation reflects Fitch's view that Capital Securities has 
adequate capital buffers to withstand the immediate shock brought about by the 
pandemic.

Capital Securities is a major comprehensive securities firm in Taiwan, with a 
market share of 4.2% 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, and sound capital profile. 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 more 
volatile and subject to market risk. 

Capital Securities' proprietary trading performance has been under pressure amid 
the challenging capital market as a result of the coronavirus pandemic. The 
company's investment portfolio comprises large exposure to government and 
investment-grade private-sector bonds and a largely diversified stock portfolio. 
However, increased correlation in asset markets has heightened systemic risk, 
resulting in impairment loss to its investment portfolio.

Capital Securities has maintained a sound capital profile. Its Fitch-defined net 
adjusted leverage ratio was a low 4x as of end-2019 and hovered between 
3.2x-4.6x from 2015 to 2019. High capital levels allow Capital Securities to 
absorb potential trading losses. A large capital base is essential for the 
company as a buffer to capital-market fluctuations, since its business model 
relies on stockbrokerage and proprietary trading income.

RATING SENSITIVITIES

The ratings would face downward pressure if the uncertain environment 
contributed to ongoing weak proprietary trading performance that leads to 
significant losses and severely erodes its capital base. 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. 
A weakening in franchise strength due to an inability to navigate current 
conditions would also lead to negative rating action. 

Rating upgrade is less likely in light of the current environment. 

Capital Securities Corporation; Long Term Issuer Default Rating; Affirmed; BBB-; 
RO:Neg

; National Long Term Rating; Affirmed; A(twn); RO:Neg

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

Contacts: 

Primary Rating Analyst

Leo Wah, 

Director

+852 2263 9951

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central

Hong Kong

Secondary Rating Analyst

Rowena Chang, 

Associate Director

+6 8175 7602

Committee Chairperson

Mark Young, 

Managing Director

+44 20 3530 1318

 

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 

National Scale Ratings Criteria (pub. 18 Jul 2018)

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

Non-Bank Financial Institutions Rating Criteria (pub. 28 Feb 2020)

https://www.fitchratings.com/site/re/10110170

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10115304

Solicitation Status 

https://www.fitchratings.com/site/pr/10115304#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE 
FOLLOWING 
https://www.fitchratings.com/site/dam/jcr:6b03c4cd-611d-47ec-b8f1-183c01b51b08/R 
ating%20Definitions%20-%203%20May%202019%20v3%206-11-19.pdf DETAILS FITCH'S 
RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING 
DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES 
ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, 
CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND 
OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO