Fitch Affirms Six Taiwanese Banks; Outlook Stable

Far Eastern International Bank

21/09/2016 05:51

(The following statement was released by the rating agency)

TAIPEI, September 21 (Fitch) Fitch Ratings has today affirmed the ratings of 
EnTie Commercial Bank (EnTie), Far Eastern International Bank (FEIB), King's 
Town Bank (KTB), Shanghai Commercial and Savings Bank (SCSB), Taichung 
Commercial Bank (Taichung), and Taipei Star Bank (TSB). The Rating Outlooks are 
Stable. A full list of rating actions is at the end of this rating action 
commentary.

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS AND VIABILITY RATINGS

The ratings of the aforementioned are driven by their intrinsic credit profiles. 


The affirmation of the banks' ratings and the Stable Outlooks reflect Fitch's 
expectation that their enhanced risk buffers will help them to withstand rising 
pressures on earnings and asset quality emanating from the economic slowdown in 
Taiwan and China and softening property market in Taiwan. Like most other banks, 
these six banks' interest margins narrowed or fee income growth slowed in 2015 
or 1H16, following four rate cuts by Taiwan's central bank since September 2015 
and reduced customers' appetite for loans and wealth management services. The 
six banks' impaired loans or charge-offs increased modestly in 1H16. Fitch 
believes their manageable exposures to the property sector and offshore market, 
and the low interest rates will help contain risks of rising credit losses.

SCSB and KTB are rated relatively higher at 'A-/AA(twn)' and 'BBB/A+(twn)', 
based on their above-average balance sheet strength and financial performance. 
SCSB has sound risk buffers and satisfactory earnings, backed by its 
long-established SME clients and Greater China franchise through its subsidiary 
in Hong Kong, Shanghai Commercial Bank, and major partner in China, Bank of 
Shanghai. KTB maintains superior capital generation and a stable risk profile 
through its consistent strategy to reduce concentration by diversifying into 
overseas bonds and to pursue cautious lending by developing niche markets. 

Fitch considers the remaining four banks' capitalisation to be more vulnerable 
to cyclical downturns, largely due to their modest internal capital generation. 
They have higher credit concentration, in terms of single borrower lending 
(EnTie), mortgages (TSB and FEIB) or property-related sectors (Taichung). 

Taichung and TSB are rated lower. Taichung has higher risk appetite in property 
exposures and weaker asset quality than peers with an impaired loan ratio of 
2.6% at end-1H16 (Fitch-rated banks' average: 1.2%). TSB's risk profile is 
stable and its balance sheet strength adequate, despite being small in size. 
TSB's business scope constrains profitability, which is structurally weaker than 
that of its peers.     

SUPPORT RATINGS AND SUPPORT RATING FLOORS 

Support Ratings (SRs) and Support Rating Floors (SRFs) are driven by the 
respective banks' systemic importance. SCSB, FEIB, KTB and Taichung have SRs of 
4 or 5, reflecting their modest systemic importance.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

EnTie, FEIB, and Taichung's Basel II-compliant subordinated debts are rated one 
notch below their National Long-Term Ratings to reflect their subordinated 
status and the absence of any going-concern loss-absorption mechanism.

FEIB and Taichung's Basel III-compliant subordinated debts are rated two notches 
below the banks' National Long-Term Ratings (which are anchored by their 
respective VRs) to reflect the bonds' limited recovery prospects. The 
bondholders would risk significant loss at the point of non-viability, when 
common equity capital would be very low, resulting in a very thin 
loss-absorption buffer. At the point of non-viability, which is reached upon 
government receivership, regulatory order for resolution or liquidation, the 
bonds would be ranked equally with common shares.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND VIABILITY RATINGS

Fitch believes that these six banks' ratings will be most sensitive to any 
significant increase in risk appetite in pursuit of yield, which would 
compromise credit standards, and material deterioration in asset quality arising 
from a sharp correction in housing price. Any excessive risk-taking in emerging 
markets in Asia could also lead to negative rating action on SCSB and FEIB. 
Meanwhile, failure to execute its current strategy or a change in senior 
management could also have downward rating pressure on KTB. 

Rating upside prospects for all six banks are muted given the likely prolonged 
economic slowdown, which would put pressure on profitability and asset quality.  


 

SUPPORT RATINGS AND SUPPORT RATING FLOORS 

The SRs and SRFs are potentially sensitive to any change in assumptions around 
the propensity of the Taiwan government to provide timely support to these 
banks. An upgrade of Taiwan's sovereign rating (A+/Positive) is less likely to 
affect the SRs or SRFs due to their modest systemic importance.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt ratings of EnTie, FEIB, and Taichung are broadly sensitive to 
the same considerations that might affect their VR.

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)

Subordinated debt affirmed at 'A-(twn)'

FEIB:

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+'

Subordinated debt affirmed at 'A-(twn)'

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

Convertible bond affirmed at Long-Term Rating of 'BBB-' and National Long-Term 
Rating of 'A(twn)'.

KTB:

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'

SCSB: 

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

Short-Term IDR 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+'

Taichung:

Long-Term IDR affirmed at 'BB+'; Outlook Stable

Short-Term IDR affirmed at 'B'

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

National Short-Term Rating affirmed at 'F2(twn)'

Viability Rating affirmed at 'bb+'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

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)'.

Contact: 

Primary Analysts 

Cherry Huang, CFA (FEIB and SCSB)

Director

+886 2 8175 7603

Fitch Australia Pty Ltd, Taiwan Branch

Suite 1306, 13F, 205, Tun Hwa N. Rd., Taipei

Jenifer Chou, CFA, FRM (KTB)

Director

+886 2 8175 7605

Clark Wu (TSB and Taichung)

Associate Director

+886 2 8175 7602

Shirley Hsu (Entie)

Associate Director

+886 2 8175 7606

Secondary Analysts

Cherry Huang (TSB, KTB, EnTie)

Director

+886 2 8175 7603

Jenifer Chou (SCSB)

Director 

+886 2 8175 7605

 

Sophia Chen, CFA, CPA (Taichung, FEIB)

Director

+886 2 8175 7604

Committee Chairperson

Parson Singha

Senior Director

+66 2108 0151

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

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.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

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

https://www.fitchratings.com/site/re/884128

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/site/re/720082

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