Fitch Affirms 6 Taiwan Bills Finance Companies

China Bills Finance

28/07/2016 05:17

(The following statement was released by the rating agency)

TAIPEI, July 28 (Fitch) Fitch Ratings has today affirmed the Issuer Default 
Ratings (IDRs) on six Taiwanese bills finance companies (BFCs): International 
Bills Finance Corporation (IBF), China Bills Finance Corporation (CBF), Grand 
Bills Finance Corporation (Grand), Taching Bills Finance Corporation (Taching), 
Dah Chung Bills Finance Corporation (Dah Chung), and Taiwan Finance Corporation 
(TFC). Simultaneously, the agency has upgraded TFC's Viability Rating (VR) to 
'bb+' from 'bb'.  

At the same time, Fitch has affirmed the ratings of Waterland Financial Holdings 
(Waterland Financial) and Waterland Securities Corporation (Waterland 
Securities), which are derived and equalised with the ratings of IBF, the 
principal operating subsidiary of the group. The Outlooks are all Stable. A full 
list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS 

IDRS AND NATIONAL RATINGS 

The IDRs and National Ratings of IBF, CBF, Grand, Taching and Dah Chung are 
driven by their standalone credit profiles, which are reflected in their VRs. 
Their Stable Outlooks underline Fitch's expectation that these BFCs will 
maintain satisfactory capital strength and adequate liquidity relative to their 
growing commercial paper guarantee books and unexpected losses in their bond 
investments amid the low interest rate environment. 

TFC's IDRs and National Ratings reflect the potential for institutional support 
from its largest shareholders - Mega International Commercial Bank Company 
Limited, IBF and Cathay United Bank - which is reflected in its Support Rating. 
The Stable Outlook is based on Fitch's belief that the shareholders' support is 
not likely to weaken in the near to medium term.

VIABILITY RATINGS 

IBF and CBF have higher VRs of 'bbb', reflecting their stronger market positions 
in the Taiwanese bills finance sector, adequate underwriting quality in the 
guarantee business, and well-maintained, healthy core capitalisation. The 
ratings also take into account their structural weaknesses, including limited 
business scope, susceptibility to interest-rate volatilities, reliance on 
wholesale funding and higher concentration risk in credits and liquidity 
compared with domestic banks. 

Dah Chung, Grand and Taching have VRs at 'bbb-', based on their modest 
franchises in guarantee and fixed-income market making and higher concentrations 
in guarantee exposures and repo counterparties. Their focus on creditworthy 
corporates and highly liquid assets as well as maintenance of sound capital 
buffers helps mitigate the associated risks. 

The upgrade of TFC's VR to 'bb+' from 'bb' reflects its improved underlying 
profitability and generally sound balance-sheet strength, which Fitch expects 
can be sustained. TFC's lower VR of 'bb+' considers its higher growth risk than 
other rated BFCs and its rapid increase in guarantees to property sector in 
2011-2015.     

Fitch expects the BFCs' profitability to moderate in 2016 and 2017 as widened 
spreads may not be sustainable, given intensified industry competition and 
abundant liquidity in the system. All rated BFCs reported better-than-expected 
profitability in 2015 due to widened spreads, which were helped by lower funding 
costs following the central bank's rate cuts in 2H15. 

The low interest-rate environment in Taiwan will likely encourage BFCs to hold 
more higher-yielding private-sector bonds and foreign-currency bonds. However, 
Fitch believes the increase in risk appetite will be moderate based on the BFCs' 
stated policy to maintain their regulatory capital ratios at 12%-14%. At 
end-2015, rated BFCs' Fitch Core Capital ratios and regulatory capital ratios 
were between 13% and 17% and between 13% and 16%, respectively, indicating 
healthy capital buffers to withstand stress.   

The increase in exposures to the property sector slowed to 8% in 2015 from 16% 
in 2013. The exposures were mainly to leading, creditworthy corporates in the 
property sector. Sound provisioning and collateralisation, and the short tenor 
of the guarantees (one to six months) would help contain associated risks. At 
end-2015, property exposures amounted to 26% of the rated BFCs' total guarantee 
book.   

WATERLAND FINANCIAL AND WATERLAND SECURITIES

Waterland Financial's ratings and Outlook are aligned with those of IBF, based 
on the high level of integration between the two and the modest leverage and 
sound standalone liquidity at the parent. Waterland Securities' rating and 
Outlook are aligned with Waterland Financial's, reflecting its status as a core 
subsidiary of the group, the obligatory support from the holding parent under 
Taiwan's Financial Holding Company Act and the inseparability of its risk 
profile from that of the group.

SUPPORT RATING AND SUPPORT RATING FLOOR 

IBF's and CBF's Support Ratings (SRs) and Support Rating Floors (SRFs) reflect a 
significantly limited probability of government support, if needed. SRs and SRFs 
for Grand, Taching and Dah Chung reflect Fitch's view that state support cannot 
be relied upon, due to their low systemic importance. TFC's SR is driven by the 
expectation that its bank shareholders would provide support to the company, if 
needed.

RATING SENSITIVITIES

IDRS AND NATIONAL RATINGS

The IDRs and National Ratings of IBF, CBF, Grand, Taching and Dah Chung are 
sensitive to same factors that could change their VRs. A change in Fitch's 
assessment of the ability or propensity of TFC's largest shareholders to provide 
support is likely to result in a change in its IDRs and National Ratings.

VIABILITY RATINGS 

The rated entities' VRs have limited upside due to the sector-wide structural 
limitations, including limited business scope, susceptibility to interest-rate 
volatilities, reliance on wholesale funding and higher concentration risk in 
credits and liquidity compared with domestic banks. Negative rating action may 
result from any compromises in underwriting quality, weakened capital strength 
arising from aggressive growth in the guarantee book or market risk, or 
unexpected market disruptions resulting in liquidity stress. 

WATERLAND FINANCIAL AND WATERLAND SECURITIES

Waterland Financial's ratings are driven by the financial strength of its 
principal operating subsidiary, IBF. Any weakening of IBF's credit profile or 
Waterland Financial's standalone liquidity and leverage could pressure its 
ratings. Waterland Securities' ratings will move in tandem with the ratings of 
its parent, Waterland Financial.

SUPPORT RATING AND SUPPORT RATING FLOOR 

The SRs and SRFs of IBF, CBF, Grand, Taching and Dah Chung are sensitive to 
changes in assumptions around the propensity of the government to provide timely 
support. TFC's SR may be downgraded if the willingness or ability of its large 
bank shareholders to extend support were deemed to have deteriorated.

The rating actions are as follows: 

IBF:

Long-Term Issuer Default Rating (IDR) affirmed at 'BBB'; Outlook Stable

Short-Term IDR affirmed at 'F3'

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

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

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '4'

Support Rating Floor affirmed at 'B+'

Waterland Financial:

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

Short-Term IDR affirmed at 'F3'

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

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

Viability Rating affirmed at 'bbb' 

Waterland Securities:

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

Short-Term IDR affirmed at 'F3'

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

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

CBF:

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

Short-Term IDR affirmed at 'F3'

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

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

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '4'

Support Rating Floor affirmed at 'B+'

Dah Chung:

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

Short-Term IDR affirmed at 'F3'

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

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

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Taching:

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

Short-Term IDR affirmed at 'F3'

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

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

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Grand:

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

Short-Term IDR affirmed at 'F3'

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

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

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

TFC:

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

Short-Term IDR affirmed at 'F3'

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

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

Viability Rating upgraded to 'bb+' from 'bb'

Support Rating affirmed at '2'

Contact: 

Primary Analyst 

Sophia Chen, CFA, CPA (CBF, Grand, TFC)

Director

+886 2 81757604

Fitch Australia Pty Ltd, Taiwan Branch

Suite 1306, 13F, Tun Hwa N. Rd., Taipei

Clark Wu (IBF, Waterland Financial, Waterland Securities, Taching and Dah Chung)

Associate Director

+886 2 81757602

Secondary Analyst

Sophia Chen, CFA,CPA (IBF, Waterland Financial, Waterland Securities, Taching 
and Dah Chung) 

Director

+886 2 81757604

Clark Wu (CBF, Grand, TFC)

Associate Director

+886 2 81757602

Committee Chairperson 

Parson Singha, CFA

Senior Director

+662 108 0151

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

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Applicable Criteria 

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884135

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884128

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

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