Fitch Revises Outlooks on Sunny Bank, Taipei Star Bank to Negative; Affirms EnTie

EnTie Commercial Bank Co

12/05/2020 13:16

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-May 12: 

Fitch Ratings has revised the Outlook on Sunny Bank Ltd. and Taipei Star Bank 
(TSB) to Negative from Stable and affirmed their National Long-Term Ratings at 
'A-(twn)'. Fitch has also affirmed the National Long-Term Rating on EnTie 
Commercial Bank at 'A(twn)' and the Outlook is Stable.

The rating actions were taken after a periodic peer review of the three private 
banks in Taiwan. A full list of rating actions is included below. 

Fitch has revised the outlook on the 'a' operating environment score for 
Taiwanese banks to negative from stable, due to the large demand shock to 
Taiwan's export-dependent economy brought on by the global coronavirus pandemic. 
While the operating environment score is not a high influence on the credit 
profiles of these three banks, the substantially weaker global economic 
environment will put pressure on the banks' financial performance and their 
borrowers' repayment ability. 

The agency forecasts a deep global recession with the world economy contracting 
by 3.9% in 2020 and Taiwan's GDP growth to fall to 0% in 2020, from 2.7% in 
2019. Under this base case, we expect the economic downturn in 1H20 to be 
followed by a partial stabilisation in 3Q20 and a gradual recovery beginning in 
4Q20, but downside risks to these forecasts remain and are outlined in "Fitch 
Ratings Coronavirus Scenarios: Baseline and Downside Cases — Update", published 
29 April 2020 at https://www.fitchratings.com/site/re/10120570. 

The Negative Outlook on Sunny and TSB reflects the growing pressure on their 
risk buffers due to the former's risk appetite as well as the pressure on 
capitalisation at both banks. In addition, they both face broader deterioration 
in system asset quality and profitability given the coronavirus. The Stable 
Outlook on EnTie reflects our expectations that the bank will maintain adequate 
loss-absorption buffers that are commensurate with its rating. 

We expect ample system-wide liquidity as well as strengthened loan-loss 
allowances and capitalisation at individual banks to counter some of the 
negative pressures from the challenging operating environment. Taiwan had proven 
to be less susceptible to global liquidity flight in prior episodes of market 
stress, both in terms of Taiwan dollar and US dollars, backed by its strong 
foreign-exchange reserves and robust system liquidity. Furthermore, we expect 
the domestic property market to remain supported by the reshoring of 
manufacturing activities to Taiwan, which underpins the credit quality of our 
rated banks' property-related exposures. Nonetheless these banks face 
concentration risks as the property-related sector, including mortgage and 
construction loans, accounts for a large share of their loans and the majority 
of their loan collateral is real estate. 

Key Rating Drivers

The ratings of the three banks in this review are driven by their intrinsic 
credit profiles. 

EnTie, Sunny and Taichung's National Long-Term Ratings are in 'A' category, 
reflecting low default risks relative to the domestic issuers in Taiwan.

Sunny Bank Ltd.

The Negative Outlook on Sunny's National Long-Term Rating reflects the bank's 
rising risk appetite in SME lending, with the average loan-to-value ratio 
increasing to around 70% by end-2019 from 65% during 2016-2018. This is in 
addition to pressure on the bank's capitalisation due to the bank's growth 
appetite in recent years, which could increase as profitability is likely to 
deteriorate in 2020. 

Sunny's rating is mainly constrained by its modest franchise, concentration in 
the property sector, and below-average profitability and capitalisation, despite 
its stable funding and liquidity. The bank's operating profit/risk weighted 
assets ratio was 0.8% in 2019, lower than the local peer average of 1.2%. Its 
common equity Tier 1 (CET1) ratio was 8.6% at end-2019, below an estimated peer 
average of 10.9%. 

Taipei Star Bank

The Negative Outlook on TSB's National Long-Term Rating reflects our expectation 
that the bank's pursuit of growth, despite the current economic downturn and 
weakened profitability, will put pressure on its capitalisation. TSB's rating is 
mainly capped by its small franchise, limited business scope and weak internal 
capital-generation capability, despite its stable funding and liquidity profile.

EnTie Commercial Bank

EnTie's rating reflects our expectation the bank will continue to sustain 
capitalisation at levels well above that of peers through modest asset growth 
and focus on core operation. EnTie's CET1 ratio was 14.3% at end-2019, compared 
with an estimated sector average of 10.9%. The affirmation of the rating with a 
Stable Outlook takes into account that these factors will mitigate risks from 
potential asset-quality volatility associated with its growing structured loan 
position and its higher single-borrower concentration in the property and 
construction sectors.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating 
action/upgrade: 

Changes in Fitch's perception of all rated banks' credit profiles relative to 
the national-rating universe in Taiwan could affect their National Ratings.

Sunny Bank Ltd. 

Sunny's rating outlook could be revised back to Stable if the bank reins in its 
risk appetite or tightens its collateralisation standards, or if its CET1 ratio 
improves closer to 9% for a sustained period. Upside to the rating is currently 
limited given the Negative Outlook.

Taipei Star Bank

TSB's rating outlook could be revised back to Stable if the bank demonstrates a 
more prudent growth appetite, and if its CET1 ratio improves closer to 9% for a 
sustained period. Upside to the rating is currently limited given the Negative 
Outlook.

EnTie Commercial Bank

Rating upside for EnTie is possible if there is a meaningful enhancement in its 
franchise and a significant improvement in asset quality, for example, if the 
bank's impaired loan ratio is sustained at 3% or less, alongside reduction of 
its single-borrower concentrations in property and construction sectors.

Factors that could, individually or collectively, lead to negative rating 
action/downgrade:

A downgrade of all rated banks' National Ratings would arise from a weakening in 
their overall credit profiles on a relative basis to the national-rating 
universe.

Sunny Bank Ltd.

Sunny's National Ratings could be downgraded by one notch if the bank continues 
to relax its collateralisation policy for secured loans, or if the bank 
experiences sustained losses such that its CET1 ratio erodes to below 8%.

Taipei Star Bank

TSB's National Ratings could be downgraded by one notch if the bank continues to 
pursue rapid growth and its key financial metrics deteriorate for a sustained 
period, which may be evident in its CET1 ratio staying below 8%.

Entie Commercial Bank

EnTie's rating may be downgraded if the bank increases its risk appetite by 
pursuing excessive growth and risk-taking, which may be evident in a large 
increase in its structured loan portfolio or unsustainable expansion of its 
balance sheet that results in its CET1 ratio dropping to below 11%.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions issuers have a 
best-case rating upgrade scenario (defined as the 99th percentile of rating 
transitions, measured in a positive direction) of three notches over a 
three-year rating horizon; and a worst-case rating downgrade scenario (defined 
as the 99th percentile of rating transitions, measured in a negative direction) 
of four notches over three years. The complete span of best- and worst-case 
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. 
Best- and worst-case scenario credit ratings are based on historical 
performance. For more information about the methodology used to determine 
sector-specific best- and worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the 
Applicable Criteria.

Taipei Star Bank; National Long Term Rating; Affirmed; A-(twn); RO:Neg

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

Sunny Bank Ltd.; National Long Term Rating; Affirmed; A-(twn); RO:Neg

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

EnTie Commercial Bank; National Long Term Rating; Affirmed; A(twn); RO:Sta

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

Contacts: 

Primary Rating Analyst

Philip Hsiao, 

Analyst

+886 2 8176 7607

Fitch Australia Pty Ltd, Taiwan Branch

Level 37 TAIPEI NANSHAN PLAZA, No. 100, Songren Road, Xinyi District

Taipei 110

Primary Rating Analyst

Sophia Chen, 

Director

+886 2 8175 7604

Fitch Australia Pty Ltd, Taiwan Branch

Level 37 TAIPEI NANSHAN PLAZA, No. 100, Songren Road, Xinyi District

Taipei 110

Primary Rating Analyst

Janet Lu, 

Associate Director

+886 2 8175 7613

Fitch Australia Pty Ltd, Taiwan Branch

Level 37 TAIPEI NANSHAN PLAZA, No. 100, Songren Road, Xinyi District

Taipei 110

Secondary Rating Analyst

Cherry Huang, 

Director

+886 2 8175 7603

Secondary Rating Analyst

Sophia Chen, 

Director

+886 2 8175 7604

Committee Chairperson

Parson Singha, 

Senior Director

+66 2 108 0151

 

Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com; Alanis Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10110041

National Scale Ratings Criteria (pub. 18 Jul 2018) 

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

Additional Disclosures 

Solicitation Status 

https://www.fitchratings.com/site/pr/10122052#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10122052#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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