Fitch Affirms Six Taiwanese Bills Finance Companies, IBF Financial and IBF Securities

China Bills Finance

05/07/2019 10:29

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-July 05: Fitch Ratings has affirmed all ratings of six 
Taiwanese bills finance companies (BFCs): International Bills Finance 
Corporation (IBFC), 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).  

Fitch has also affirmed the ratings of IBF Financial Holdings Co., Ltd. and its 
subsidiary, IBF Securities Co., Ltd., which are driven by and equalised with the 
ratings of IBFC, the principal operating subsidiary of the group. 

The Outlooks are all Stable. 

A full list of the rating actions is provided at the end of this commentary.

Fitch believes the BFCs possess adequate buffers to withstand near-term asset 
quality challenges, despite a slowing economy and growing external uncertainties 
arising from the US-China trade tensions. This is due in part to their focus on 
creditworthy borrowers and the high credit quality of fixed-income investments, 
and modest exposures to the at-risk electronics industry. The domestic property 
market has shown signs of recovery, with housing prices up by 6%, on average, 
from the last trough in 2016, backed by higher transaction volume. The credit 
quality of most rated BFCs' commercial paper (CP) guarantees is highly 
correlated to the performance of the domestic property market as the CP 
guarantees are concentrated in the property sector and the majority of their 
collateral is in real estate.   

BFCs have significant exposure to market risks - about 35% of total 
risk-weighted assets - due to their large holdings of bonds and bills. Local 
commercial banks' exposures are below 10%. Still, the associated risk is 
mitigated by BFCs' sound capital buffers and well-established investment 
policies. The impact of a 100bp change in rates on BFCs' fixed-income 
investments averaged around 14% of their equity at end-2018, and is stable from 
prior periods. Currency risk from the BFCs' foreign-currency bond investments 
should remain insignificant, as they are mostly funded by foreign-currency repo 
transactions.    

Fitch expects rated BFCs' profitability in 2019 to remain stable relative to 
2018 as their funding costs in the money market in 2H19 are likely to return to 
the level in 2017-1H18 (about 40bp) from 50bp-60bp in 2H18-1H19, in light of the 
abundant liquidity in the system. Meanwhile, the BFCs' ability to increase their 
guarantees and realise valuation gains on their fixed-income investments could 
help alleviate earnings pressure from narrowing domestic bond spreads as 
higher-yield bonds gradually mature. Rated BFCs' average operating 
profit/risk-weighted asset ratio declined to 1.0% in 2018 from 1.1% in 2017 due 
mainly to elevated funding costs, triggered by market expectations of domestic 
rate hikes. 

The average regulatory capital ratio and Fitch Core Capital (FCC) ratio of rated 
BFCs stayed steady at about 13.7% at end-2018, higher than the average of 11.8% 
for Taiwanese banks. Rated BFCs aim to maintain their regulatory capital ratios 
at around 13%-14%, versus the regulatory minimum of 12%-13%, depending on their 
guarantee size relative to equity. 

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS AND VIABILITY RATINGS

The IDRs and National Ratings of the six BFCs are driven by their Standalone 
Credit Profiles, which are reflected in their Viability Ratings (VR). 

IBFC

IBFC's IDR of 'BBB' reflects its strong position in the Taiwanese bills finance 
sector, with 21% market share in the CP guarantee market, underpinned by sound 
asset quality, steady profitability and a stable funding and liquidity profile, 
despite heavy reliance on repo to fund its larger foreign-currency bond 
investment portfolio relative to rated BFCs. IBFC's FCC ratio declined to 15% at 
end-2018 from 16% at end-2017, due mainly to the increase of its 
foreign-currency bond investments. We expect the ratio to decline further in 
2019-2020 to about 14%, similar to peer average, due to IBFC's ambition to grow 
its foreign-currency bonds.  

CBF

CBF's IDR of 'BBB' reflects its significant market position in the Taiwanese 
bills finance sector, with 19% market share in the CP guarantee market, and its 
less variable underwriting standards which underpin its healthy asset quality 
and steady profitability alongside satisfactory capital buffer. This is balanced 
against its above-average single borrower concentration and high market risk 
exposures. CBF maintains a stable funding and liquidity profile, despite its 
reliance on repos for funding, due to its more diversified repo counterparties 
than its peers.    

Grand

Grand's IDR of 'BBB-' reflects its modest franchise, with 7% market share by 
outstanding CP guarantees in 2018, the highest market risk exposures among rated 
BFCs, significant single borrower concentration and concentrated repo 
counterparties. Still, the rating also takes into account its adequate asset 
quality, which is backed by its focus on well-established borrowers and high 
investment grade fixed-income investments, average profitability and sound 
capitalisation.     

Taching

Taching's IDR of 'BBB-' reflects its smaller franchise in CP guarantees, with 5% 
market share, significant single borrower concentration, above-peer market risk 
exposures and modest constraint in its funding and liquidity profile due to its 
higher portion of non-investment grade fixed-income investments. The rating also 
considers the healthy credit quality of its CP guarantees, which is supported by 
its focus on creditworthy borrowers and sufficient reserve coverage, in addition 
to its steady profitability and sound capitalisation. 

Dah Chung

Dah Chung's IDR of 'BBB-' reflects its modest franchise, with 7% market share by 
outstanding CP guarantees in 2018, the highest exposure to the property sector 
among rated BFCs and significant market risk exposures. These are 
counterbalanced by its adequate asset quality, which is underpinned by its sound 
collateralisation policy and high credit quality of investment grade 
fixed-income investments, average profitability and sound capitalisation. Its 
funding profile appears in line with that of the industry, but is constrained by 
its higher reliance on financial institution repo counterparties.

 

TFC 

TFC's IDR of 'BBB-' takes into account its enhanced market position in the CP 
market, with market share of 6% and a moderate appetite for growth following its 
rapid business expansion in 2010-2015. These improvements help sustain its 
adequate asset quality, steady profitability and sound capitalisation. The 
rating also reflects its more variable credit standards, high market risk 
exposures and greater concentration in both borrower and repo counterparties. 

IBF FINANCIAL AND IBF SECURITIES

IBF Financial's rating and the Stable Outlook are aligned with that of IBFC due 
to the parent's continuing moderate levels of double leverage, sound liquidity 
management and full ownership in IBFC. Furthermore, there is a high level of 
integration between the two companies. 

IBF Securities' rating and the Stable Outlook are aligned with that of IBF 
Financial, reflecting the high level of management and operational integration 
with the group and the obligatory support from the holding parent under Taiwan's 
Financial Holding Company Act.

SUPPORT RATING AND SUPPORT RATING FLOOR

TFC's Support Rating of '2' is driven by Fitch's expectation of institutional 
support from its two largest shareholders, if needed, given their long and 
stable ownership at TFC since 1998 and committed liquidity support when needed.

The Support Ratings of '4' and Support Rating Floors of 'B+' of both IBFC and 
CBF reflect a limited probability of government support, if needed, due to the 
companies' low systemic importance.

The Support Ratings of '5' and Support Rating Floors of 'NF' of Grand, Taching 
and Dah Chung reflect Fitch's assessment that state support cannot be relied on 
due to the companies' lack of systemic importance. 

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND VIABILITY RATINGS

The IDRs and National Ratings of IBFC, CBF, Grand, Taching and Dah Chung are 
sensitive to the same factors that affect their VRs.

Upside for TFC's IDR and National Rating is sensitive to the factors affecting 
its VR, assuming no changes in our assessment of institutional support. 
Meanwhile, a downgrade of TFC's IDR and National Rating would necessitate a 
downgrade of both its VR and Support Rating. 

VIABILITY RATINGS

The BFCs' VRs are sensitive to the potential impact from a further escalation in 
US-China trade tensions on the Taiwanese banks' and BFCs' operating environment. 
Their VRs are also sensitive to any sharp increase in risk appetite, including 
aggressive growth in CP guarantees, lower rated fixed-income investments and 
increased market risks, as these could heighten impairment costs and volatility 
in valuation and result in weakened profitability and capitalisation. Any sharp 
decline in the property market would also undermine their credit profiles and 
potentially trigger VR downgrades, as most rated BFCs are highly concentrated in 
the property sector, although this is not our base case.     

For IBFC, any further significant build up in risk appetite that Fitch believes 
could result in a notable erosion of capital buffers could be negative for its 
VR, in light of its higher appetite for expanding its foreign-currency bond 
investments

Upside potential for IBFC and CBF is limited due to their concentrated business 
models and modest franchises compared with similarly rated domestic banks. 

An upgrade for Grand, Taching, Dah Chung and TFC is possible if the companies 
improve meaningfully their franchises, demonstrate more consistent risk 
appetites through economic cycles and reduce concentration risks in credit and 
liquidity. 

IBF FINANCIAL AND IBF SECURITIES

IBF Financial's ratings are driven by the financial strength of its principal 
operating subsidiary, IBFC. Any weakening of IBFC's credit profile or IBF 
Financial's standalone liquidity and leverage could pressure its ratings. IBF 
Securities' ratings will move in tandem with the ratings of its parent, IBF 
Financial. Any indication of weakening integration between IBF Securities and 
its parent could lead to downgrades of IBF Securities' Long-Term IDR and 
National Long-Term rating to one notch below those of IBF Financial. 

SUPPORT RATING AND SUPPORT RATING FLOOR

TFC's Support Rating may be downgraded if the willingness or ability of its two 
large bank shareholders (Mega International Commercial Bank Co., Ltd. and Cathy 
United Bank Co. Ltd.) to extend support was deemed to have deteriorated.

The Support Ratings and Support Rating Floors of IBFC, CBF, Grand, Taching and 
Dah Chung are all sensitive to changes in assumptions around the propensity of 
the government to provide timely support. 

The rating actions are as follows: 

IBFC:

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+'

IBF 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' 

IBF 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+'

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'

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'

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'

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 affirmed at 'bbb-'

Support Rating affirmed at '2'

Criteria Variation

Under Fitch's Global Bank Rating Criteria, the analysis of an entity's funding 
and liquidity includes an assessment based on the core metric of loans/customer 
deposits. Despite carrying bank licenses, Taiwan BFCs are restricted from taking 
deposits. As this aspect of the Bank Rating Criteria is not applicable to the 
BFCs we have utilised Fitch's Non-Bank Financial Institutions Rating Criteria to 
assess their funding and liquidity profiles. This variation to criteria involves 
using the ratio of liquid assets/short-term funding as the core metric in the 
analyses. This metric is typically the most relevant for entities, such as 
securities firms, that rely on wholesale funding for their investment 
activities.

Contact: 

Primary Analyst 

Sophia Chen, CFA, CPA (CBF and Grand)

Director

+886 2 8175 7604

Fitch Australia Pty Ltd, Taiwan Branch

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

Janet Lu (IBFC, IBF Financial, Taching and Dah Chung)

Associate Director

+886 2 8175 7613

Philip Hsiao (TFC)

Analyst 

+886 2 8175 7607

Shirely Hsu (IBF Securities)

Associate Director

+886 2 8175 7606

Secondary Analyst

Sophia Chen, CFA,CPA (IBFC, IBF Financial, Taching, Dah Chung and TFC) 

Director

+886 2 8175 7604

Janet Lu (CBF)

Associate Director

+886 2 8175 7613

Philip Hsiao (Grand)

Analyst 

+886 2 8175 7607

Carol Liu (IBF Securities)

Associate Director

+86 21 6898 8001

Committee Chairperson 

Parson Singha, CFA

Senior Director

+662 108 0151

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