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Fitch Affirms Seven Taiwanese Banks; Outlook Stable

Tue 5th June, 2018 8:28am
(The following statement was released by the rating agency)


Fitch Ratings-Taipei-June 05: Fitch Ratings has affirmed most of the ratings of 
EnTie Commercial Bank, Far Eastern International Bank (FEIB), King's Town Bank 
(KTB), Sunny Bank Ltd., Taichung Commercial Bank Company Limited, Taipei Star 
Bank (TSB) and The Shanghai Commercial & Savings Bank, Ltd. (SCSB). The Rating 
Outlooks are Stable. The National Short-Term Ratings of Taichung and Sunny have 
been upgraded to 'F1(twn)' from 'F2(twn)'. 

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

KEY RATING DRIVERS 

ISSUER DEFAULT RATINGS, NATIONAL RATINGS AND VIABILITY RATINGS

The banks' ratings are driven by their intrinsic credit profiles and have been 
affirmed with Stable Outlooks as Fitch expects the banks to maintain their 
financial strength, underpinned by largely stable profitability and 
capitalisation as well as a strong liquidity profile in 2018 and 2019. Their 
ratings are mostly constrained by their smaller franchise - particularly for 
FEIB, Taichung, Sunny and TSB - but are counterbalanced by their ability to 
sustain adequate capital buffers relative to their growth and risk-taking.

We expect Taiwan's modest economic recovery to help sustain the banks' credit 
profiles, underpinned by easing margin pressure, sustained benign credit costs, 
and adequate asset quality. Many of the banks reviewed have above-sector average 
level of property exposure; however, we view associated risks to have moderated 
in light of stabilising property prices and a continuing low interest rate 
environment. We expect most banks to pursue reasonable loan growth without 
noticeably undermining their underwriting quality or capitalisation.

Many of the banks reviewed have increased loans to SMEs over the last two years 
in search of higher yield. The associated risks, however, are mitigated partly 
by adequate collateralisation and the government's guarantee. The impaired loan 
ratio and operating profit/risk-weighted assets were largely stable for the 
overall sector. However, performance varied among the banks reviewed, mostly as 
a result of their different franchise and niche strategy. 

SCSB is rated the highest at 'A-'/'a-' among the banks reviewed due to its 
satisfactory capitalisation and robust earnings, backed by its long-established 
SME clients and greater-China franchise through its Hong Kong-based subsidiary, 
Shanghai Commercial Bank Limited (A-/Stable/a), and major Chinese partner, Bank 
of Shanghai. KTB is rated at 'BBB'/'bbb', higher than most Fitch-rated small 
banks in Taiwan, as it maintains sound capital generation by consistently 
implementing its strategy to diversify credit exposure by investing in foreign 
bonds and pursuing selective lending in niche markets.  

We expect EnTie to continue to sustain its above-peer capitalisation through 
earnings retention and modest growth, which will provide a sufficient buffer for 
the likely asset quality volatility associated with its high single-borrower 
lending concentration.

FEIB's rating affirmation reflects our expectations that the bank will sustain 
its capitalisation through managed credit growth and maintain largely stable 
profitability and asset quality over the next year or two. The ratings also 
consider its below-peer risk-adjusted profitability and modest banking 
franchise.

Sunny's ratings are constrained by its small franchise, below-peer profitability 
and capitalisation and concentrated property exposure, mitigated by its average 
asset quality.  Taichung's ratings reflect Fitch's expectation that the bank's 
credit growth will remain moderate in 2018-2019 and the bank will sustain its 
capitalisation commensurate with its risk profile. The ratings also reflect its 
less diversified earnings and weaker-than-peer asset quality. 

The upgrade in the National Short-Term Ratings for Sunny and Taichung reflect 
the two banks' sound short-term liquidity profile, which Fitch believes is in 
line with similarly rated banks in the system.

A limited franchise and business scope underpin TSB's weak profitability and 
constrain its ratings. This is in spite of our view that the bank has 
consistently maintained adequate underwriting standards and modest appetite for 
risks, resulting in sound asset quality. 

SUPPORT RATING AND SUPPORT RATING FLOOR 

FEIB, Taichung and SCSB have a Support Rating of '4' and Support Rating Floors 
of 'B+', reflecting their low systemic importance. KTB's Support Rating is '5' 
and its Support Rating Floor is 'NF' due to its smaller presence in the 
financial system. 

SUBORDINATED DEBT 

FEIB 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

ISSUER DEFAULT RATINGS, NATIONAL RATINGS AND VIABILITY RATINGS

The banks' ratings are sensitive to a significant increase in risk appetite in 
pursuit of yield, which could result in significant deterioration in asset 
quality and heightened impairment costs leading to weakening profitability and 
capitalisation. A sharp property-market decline and an abrupt interest rate 
increase hurting borrower repayment capacity could weaken their credit profile, 
though not our base case.

Rating upside prospects are limited in light of the banks' modest franchises and 
concentration risks for several of the banks. Lower-rated banks' financial 
strength would also be constrained by modest profit generation capacity owing to 
thin margins and relatively weaker fee income.

Excessive risk-taking - particularly in Asian emerging markets - may put 
downward pressure on SCSB's ratings. Upside potential is limited by the bank's 
growing emerging market operations and exposures, including those in China.

A downgrade of EnTie's ratings could stem from failure to maintain adequate 
capitalisation relative to its risk-taking and/or inability to sustain its niche 
in fee-based structured finance and property-related lending. 

Downward rating pressure on KTB could stem from failure to execute its strategy 
or an unexpected change in senior management. Any notable deterioration in asset 
quality arising from its rapid growth in SME loans could also pressure the 
bank's credit profile.

Pressure for negative rating action for FEIB, Sunny, Taichung and TSB is likely 
to come from excessive risk-taking leading to weaker asset quality or 
capitalisation. This could come from rapid growth in emerging markets in Asia or 
new product lines or a relaxation of underwriting standards for growth. They are 
also more sensitive to a market downturn given below-average capital generation 
and/or a lower capital buffer. 

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, or in the banks' level of systemic 
importance. 

SUBORDINATED DEBT 

The subordinated debt ratings of FEIB and Taichung are sensitive to the same 
considerations that might affect their Viability 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 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 '4'

Support Rating Floor affirmed at 'B+'

Subordinated debt (Basel II Tier 2 capital) affirmed at 'A-(twn)'

Subordinated debt (Basel III-compliant) affirmed at '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 upgraded to 'F1(twn)' from 'F2(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 upgraded to 'F1(twn)' from 'F2(twn)'

Viability Rating affirmed at 'bb+'

Support Rating affirmed at '4' 

Support Rating Floor affirmed at 'B+' 

Subordinated debt (Basel II Tier 2 capital) 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-'; Stable Outlook

Short-Term Issuer Default Rating affirmed at 'F1'

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

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 

Cherry Huang, CFA (EnTie, FEIB, KTB and SCSB)

Director

+886 2 8175 7603

Fitch Australia Pty Ltd, Taiwan Branch

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

Sophia Chen, CFA, CPA (Sunny, Taichung and TSB)

Director

+886 2 8175 7604

Fitch Australia Pty Ltd, Taiwan Branch

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

Secondary Analyst

Sophia Chen, CFA, CPA (EnTie, FEIB, KTB and SCSB) 

Director

+886 2 8175 7604

Cherry Huang, CFA (Sunny, Taichung and TSB)

Director

+886 2 8175 7603

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

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023430

National Scale Ratings Criteria (pub. 07 Mar 2017)

https://www.fitchratings.com/site/re/895106

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10033360

Solicitation Status 

https://www.fitchratings.com/site/pr/10033360#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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