Fitch Takes Rating Action on Seven Taiwanese Private Banks

EnTie Commercial Bank Co

24/05/2019 10:20

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-May 24: Fitch Ratings has taken the following rating 
actions after the periodic peer review of seven private banks in Taiwan: 

- Upgraded Far Eastern International Bank's (FEIB) Long-Term Issuer Default 
Rating (IDR) to 'BBB' from 'BBB-', National Long-Term Rating to 'A+(twn)' from 
'A(twn)', Basel II-compliant subordinated debt to 'A(twn)' from 'A-(twn)', and 
Basel III-compliant subordinated debt to 'A-(twn)' from 'BBB+(twn)', and 
affirmed all other ratings; 

- Resolved the Under Criteria Observation (UCO) on The Shanghai Commercial & 
Savings Bank, Ltd.'s (SCSB) Short-Term IDR and downgraded the rating to 'F2' 
from 'F1' while affirming all other ratings; and

- Affirmed all ratings of Taichung Commercial Bank Company Limited (Taichung), 
EnTie Commercial Bank (EnTie), King's Town Bank (KTB), Sunny Bank Ltd. (Sunny), 
and Taipei Star Bank (TSB). 

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

Fitch believes the Taiwanese private banks covered in today's rating action 
possess adequate buffers to withstand near-term asset quality challenges, 
despite a slowing economy and growing external uncertainties stemming from the 
US-China trade tensions. This is in part due to persistently low interest rates 
and ample system liquidity domestically, which should alleviate borrowers' 
debt-servicing burden. There have been some signs of a mild recovery in the 
domestic property market in recent months, with housing prices rising around 5% 
on average from the latest trough in 2016 on the back of higher transaction 
volume. The loan quality at most of these private banks is highly correlated to 
the performance of the domestic property market as they are highly concentrated 
on the property sector and the majority of their loan collateral is in real 
estate.   

We believe US tariffs will have a moderate impact on Taiwan's economic growth in 
2019-2020 as the current 25% tariff imposed on USD200 billion of Chinese goods 
does not apply to major consumer electronics. However, there may be downside 
risks to the Taiwanese banking sector's operating environment if US-China trade 
tensions escalate and result in further tariff increases in July on the 
remaining US imports from China, which include electronic products. Taiwanese 
companies supply a large portion of the components used in US consumer 
electronic products that are assembled in China. 

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS AND VIABILITY RATINGS

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

Far Eastern International Bank

Today's upgrade of FEIB's Long-Term IDR to 'BBB' from 'BBB-' reflects the 
improvement in its company profile, helped by an increasingly diverse business 
model and disciplined growth in its offshore business as well as domestically. 
The bank has gradually established a record in leading regional syndication over 
the past four years, which helps to diversify its business mix against the 
highly competitive domestic banking system. Its domestic loan asset quality 
remains resilient, as around half of its loan book is in mortgages (including 
revolving mortgages), while its exposures to China and other Asian emerging 
markets remain below sector average despite its strategy to expand regionally in 
recent years. We do not expect FEIB's risk profile to increase significantly 
from the current level, and believe that its asset quality and capital buffers 
should remain stable. 

Taichung Commercial Bank Company Limited

Taichung's IDR of 'BB+' considers its regional significance in central Taiwan, 
which underpins its stable funding and liquidity profile alongside improving 
core capitalisation, balanced against its high concentration in the property 
sector and below-peer asset quality and profitability. Taichung has reported 
mild increases in its core capitalisation over the past few years, and Fitch 
believes there is scope for further improvement, helped by increasing internal 
capital generation. We expect the bank to reduce its risk appetite over time and 
slow its loan growth, and focus on enhancing its fee-income generation to narrow 
its capitalisation gap against other higher-rated peers. 

The Shanghai Commercial & Savings Bank, Ltd.

The downgrade of SCSB's Short-Term IDR was due to a change in Fitch's rating 
criteria (see Short-Term 
Ratings Criteria /a , dated 2 May 2019). The bank's funding and liquidity score 
of 'a-' that feeds into its Viability Rating (VR) is below the minimum level 
required to maintain its short-term rating under the new criteria. However, 
there has been no deterioration in SCSB's liquidity profile since the last 
review and we expect the bank to maintain a steady loan/customer-deposit ratio, 
which remains below the sector average (end-2018: 67% for SCSB; 76% for sector). 
The bank's Short-Term IDR remains relatively high among Fitch-rated Taiwanese 
private banks. Its long-standing relationship with and focus on being the 
operating bank of SME customers, particularly for Greater China remittance and 
trade finance, will continue to underpin its solid deposit base and strong 
liquidity.

SCSB is rated the highest at 'A-' among the banks in today's review. The bank 
has a strong cross-strait business model, backed by its established SME clients 
and Greater China franchise through its Hong Kong subsidiary, Shanghai 
Commercial Bank Limited (A-/Stable/a-), and Chinese partner, Bank of Shanghai. 
The rating also reflects its broadly conservative risk appetite, healthy asset 
quality and stable funding and liquidity profile.  

EnTie Commercial Bank

EnTie's rating of 'A(twn)' reflects our expectation the bank will continue to 
sustain its above-peer capitalisation through modest asset growth, which will 
mitigate risks from potential asset-quality volatility associated with the high 
concentration in real estate among its top-20 borrowers.

King's Town Bank

KTB is rated 'BBB' as its above-peer capitalisation and stable asset quality 
offset its limited scale, and support a rating that is high among Fitch-rated 
small Taiwanese banks. However, its larger investment exposure relative to other 
small banks means KTB's profitability can be more volatile and is vulnerable to 
fluctuations in market valuations. KTB's profitability deteriorated in 2018 
because of mark-to-market losses on its investments and large credit write-offs, 
resulting in a decline in its Fitch Core Capital (FCC) ratio to 14.4% by 
end-2018 from 16.2% at end-2017, though its core capitalisation remains above 
its peer average. Fitch expects KTB's financial profile to remain commensurate 
with its VR. 

Sunny Bank Ltd.

Sunny's rating of 'A-(twn)' is mainly constrained by its modest franchise, 
concentrated property exposure, less-diverse profitability and below-average 
capitalisation, despite its steady asset quality and generally stable funding 
and liquidity.  

 

Taipei Star Bank

TSB's ratings are mainly capped by its small franchise, limited business scope 
and weak internal capital-generation capability. That said, the bank has thus 
far maintained reasonable asset quality due to the high collateralisation of its 
loans and the mild recovery in the property market. The bank's funding profile 
also appears sound and in line with peers. 

SUPPORT RATING AND SUPPORT RATING FLOOR 

FEIB, Taichung and SCSB have a Support Rating of '4' and a Support Rating Floor 
of 'B+', reflecting their low systemic importance. KTB's Support Rating is '5' 
and its Support Rating Floor is 'No Floor' due to its lower systemic importance.

SUBORDINATED DEBT 

Fitch upgraded FEIB's Basel II-compliant subordinated debt to 'A(twn)' from 
'A-(twn)', and Basel III-compliant subordinated debt to 'A-(twn)' from 
'BBB+(twn)', alongside the upgrade of its National Long-Term Rating. 

FEIB's and Taichung's Basel II-compliant subordinated debt is rated one notch 
below their National Long-Term Ratings to reflect its subordinated status and 
the absence of a going-concern loss-absorption mechanism. 

FEIB and Taichung's Basel III-compliant subordinated debt is rated two notches 
below their National Long-Term Ratings, which are anchored by their respective 
Viability Ratings, to reflect the bonds' limited recovery prospects. Bondholders 
risk significant loss at the point of non-viability, which is reached upon 
government receivership or a regulatory order for resolution or liquidation, 
because the bonds would rank equally with common shares in Taiwan.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND VIABILITY RATINGS

The banks' ratings are sensitive to the potential impact from a further 
escalation in US-China trade tensions on the Taiwan banking sector's operating 
environment. Their ratings are also sensitive to any sharp increase in risk 
appetite, including excessive loan growth, particularly with entry into areas 
outside the banks' core competencies and/or Asian emerging markets, as their 
profitability and capitalisation could weaken due to deteriorating asset quality 
and high impairment costs. A sharp property-market decline would weaken their 
credit profiles and trigger potential rating downgrades as most of these banks 
are highly concentrated in the property sector, although this is not our base 
case. 

Upside is limited in the near term for FEIB after today's rating upgrade, unless 
the bank can demonstrate further improvement in its ability to increase its 
franchise or diversify its business mix without sacrificing its asset quality, 
especially in its offshore businesses.

Taichung's IDRs and National Ratings will be sensitive to sustained improvement 
in its core capitalisation to levels that are more aligned with higher-rated 
peers, and this will be partly dependent on Taichung's ability to lift its 
earnings capability through fee-income generation, while safeguarding its asset 
quality and maintaining a similar growth appetite. 

Upside potential for SCSB is limited as it is already the highest rated among 
rated peers; aggressive expansion into Asian emerging markets could be credit 
negative for SCSB, if such growth is not managed prudently and results in a 
significant rise in the bank's risk appetite. 

Rating upside is limited for KTB given its small scale. Market fluctuations 
leading to greater erosion in profitability (such as stemming from its sizeable 
investment portfolio) and in turn, capitalisation, would be credit negative for 
KTB, as this may also pressure KTB's overall asset quality given the size of its 
investments. 

Rating upside for EnTie could come from a meaningful improvement in its 
franchise and reduced asset-quality volatility associated with its high loan 
concentration.

A rating upgrade for Sunny and TSB is not likely in the near term unless there 
is meaningful improvement in the banks' franchises, leading to higher and 
sustained levels of profitability and capitalisation. 

SUPPORT RATING AND SUPPORT RATING FLOOR 

The Support Ratings and Support Rating Floors are sensitive to changes in 
Fitch's assumptions around the propensity of the Taiwan government (AA-/Stable) 
to provide timely support to the banks. 

SUBORDINATED DEBT 

The subordinated debt ratings of FEIB and Taichung are sensitive to the same 
considerations that might affect their National Long-Term Ratings. 

The rating actions are as follows: 

EnTie:

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

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

FEIB:

Long-Term Issuer Default Rating upgraded to 'BBB' from 'BBB-'; Outlook Stable

Short-Term Issuer Default Rating affirmed at 'F3'

National Long-Term Rating upgraded to 'A+(twn)' from 'A(twn)'; Outlook Stable

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

Viability Rating upgraded to 'bbb' from 'bbb-'

Support Rating affirmed at '4'

Support Rating Floor affirmed at 'B+'

Subordinated debt upgraded to 'A(twn)' from 'A-(twn)'

Subordinated debt (Basel III-compliant) upgraded to 'A-(twn)' from 'BBB+(twn)'

KTB:

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

Short-Term Issuer Default Rating 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'

Sunny:

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

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

Taichung:

Long-Term Issuer Default Rating affirmed at 'BB+'; Outlook Stable

Short-Term Issuer Default Rating affirmed at 'B'

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

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

Viability Rating affirmed at 'bb+'

Support Rating affirmed at '4' 

Support Rating Floor affirmed at 'B+' 

Subordinated debt affirmed at 'BBB+(twn)'

Subordinated debt (Basel III-compliant) affirmed at 'BBB(twn)'

TSB:

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

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

SCSB: 

Long-Term Issuer Default Rating affirmed at 'A-'; Outlook Stable 

Short-Term Issuer Default Rating downgraded to 'F2' from 'F1'; removed from UCO

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

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

Viability Rating affirmed at 'a-'

Support Rating affirmed at '4'

Support Rating Floor affirmed at 'B+'

Contact: 

Primary Analyst 

Sophia Chen, CFA, CPA (Sunny and Taichung)

Director

+886 2 8175 7604

Fitch Australia Pty Ltd, Taiwan Branch

Suite 1306, 13F, 205, Tunhwa North. Rd., Taipei City

Cherry Huang, CFA (FEIB and SCSB)

Director

+886 2 8175 7603

Janet Lu (Entie, KTB and TSB)

Associate Director

+886 2 8175 7613

Secondary Analyst

Sophia Chen, CFA, CPA (TSB and SCSB) 

Director

+886 2 8175 7604

Cherry Huang, CFA (EnTie, Sunny and KTB)

Director

+886 2 8175 7603

Janet Lu (FEIB and Taichung)

Associate Director

+886 2 8175 7613

Committee Chairperson 

Parson Singha

Senior Director

+66 2108 0151

Summary of Financial Statement Adjustments: The following assumptions were made 
in analysing the banks' Fitch Core Capital ratios; Taiwan's regulator uses the 
standardised approach and imposes higher risk weights on mortgage than 
regulators in most other developed markets. We have considered the potential 
effect of these higher risk weights on the banks' Fitch Core Capital ratios 
compared with international peers that use lower mortgage risk weights.

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: 
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Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 12 Oct 2018)

https://www.fitchratings.com/site/re/10044408

National Scale Ratings Criteria (pub. 18 Jul 2018)

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

Short-Term Ratings Criteria (pub. 02 May 2019)

https://www.fitchratings.com/site/re/10073011

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https://www.fitchratings.com/site/dodd-frank-disclosure/10076636

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https://www.fitchratings.com/site/pr/10076636#solicitation

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https://www.fitchratings.com/regulatory

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