Fitch Takes Rating Action on Four Taiwanese Private Banks

Far Eastern International Bank

12/05/2020 09:03

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-May 12: 

Fitch Ratings has taken the following rating actions after a periodic peer 
review of four private banks in Taiwan: 

- Affirmed King's Town Bank's (KTB) ratings and revised its rating Outlook to 
Negative from Stable.

- Affirmed all ratings of Far Eastern International Bank (FEIB), The Shanghai 
Commercial  Savings Bank, Ltd. (SCSB), and Taichung Commercial Bank Company 
Limited (Taichung) with a Stable Outlook. 

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

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

The agency forecasts a deep global recession with the world economy contracting 
by 3.9% in 2020 and Taiwan's GDP growth slowing 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 
risks to these forecasts remain and are outlined in our report Fitch Ratings 
Coronavirus Scenarios: Baseline and Downside Cases -- Update, published 29 April 
2020. 

The Negative Outlook on KTB reflects the rising pressure on its ratings due to 
potentially larger erosion of risk buffers compared with peers due to its larger 
investment book, loan concentration risks and rapid growth in SME loans in the 
past few years. The Stable Outlook on FEIB, SCSB and Taichung reflects our 
expectations these banks will maintain adequate loss-absorption buffers that are 
commensurate with the maintenance of their ratings. 

We expect ample system-wide liquidity as well as strengthened loan-loss 
allowances and capital levels at most banks to counter some of the pressures 
from the challenging operating environment. Taiwan was less susceptible to a 
global liquidity flight in earlier episodes of market stress, both in terms of 
the Taiwan 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 return of manufacturing activities to Taiwan from 
overseas, which underpins the credit quality of our rated banks' 
property-related exposures. Nonetheless, these banks continue to face 
concentration risks as their loans are highly focused on property-related 
sectors, including mortgage and construction loans, and the majority of their 
loan collateral is in real estate. 

Key Rating Drivers

ISSUER DEFAULT RATINGS (IDR) AND VIABILITY RATINGS (VR)

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

Far Eastern International Bank

The rating affirmation and Stable Outlook is driven by the bank's adequate 
capital, with a common equity Tier 1 (CET1) ratio of 10.6% at end-2019, and 
liquidity buffers, with a loan-to-deposit ratio of 75%, relative to its ratings. 
We believe these buffers are sufficient to counterbalance near-term pressure on 
asset quality and profitability arising from the narrowing margin between Taiwan 
and US dollars, subdued growth in fee income, rising credit costs and 
mark-to-market losses on its credit derivatives trading position. 

King's Town Bank

The Negative Outlook on KTB's VR-driven IDR reflects our expectation that the 
economic fallout from the pandemic will increase its earnings volatility 
(operating profit/risk-weighted assets: 1.6% in 2019) and capitalisation 
pressures (CET1: 14.6% at end-2019) due to mark-to-market adjustments on its 
above-sector investment book. This is in addition to the profitability 
challenges from subdued credit growth, narrowing margins, muted growth in fees, 
and rising credit costs for increased loan impairments. That said, the rating 
affirmation is supported by capitalisation that is higher than that of peers and 
its sound liquidity profile, counterbalancing near-term pressures on asset 
quality and profitability. 

The Shanghai Commercial  Savings Bank, Ltd.

The bank's ratings have been affirmed with a Stable Outlook, underpinned by its 
unique and established cross-strait business model, consistent risk appetite as 
well as our expectation that its capital and liquidity strengths will help 
mitigate the external shock on its asset quality and profitability. There is 
some rating headroom based on the bank's financial performance metrics to 
support its current ratings, although we expect the severe economic downturn in 
the region, including in greater China, to pressure SCSB's asset quality 
(impaired-loan ratio of 0.4% at end-2019) and profitability (operating 
profit/risk-weighted assets ratio of 1.6%). SCSB serves Taiwanese SMEs through 
its greater China platform, including its Hong Kong subsidiary, Shanghai 
Commercial Bank Limited (SCB, A-/Stable/a-), and its Chinese partner, Bank of 
Shanghai. SCB contributed over 50% of SCSB's consolidated profit and 38% of 
assets in 2019. 

Taichung Commercial Bank Company Limited

The affirmation of Taichung's 'BB+' IDR reflects its modest company profile with 
high concentration on the domestic property sector and below-average asset 
quality and profitability. The bank's impaired-loan ratio of 2.2% at end-2019 
was higher than the domestic peer average of 1%. Its operating 
profit/risk-weighted assets ratio improved to 1.1% in 2019, although still 
slightly lower than the local peer average of 1.2%. The Stable Outlook reflects 
our view that Taichung's improved capitalisation and its stable funding and 
liquidity profile will help the bank to maintain its rating despite the economic 
challenges from the coronavirus outbreak. 

NATIONAL RATINGS

SCSB's 'AA(twn)' rating is at the high end of the national rating scale, 
reflecting very low default risks relative to domestic issuers. The other three 
rated banks' National Ratings are in the 'A' category, reflecting low default 
risks relative to issuers in Taiwan.

FEIB, KTB, SCSB and Taichung 

The Outlook for KTB's National Rating has been revised to Negative from Stable, 
in line with the revision on the Outlook for its IDR. 

The Stable Outlooks on the National Ratings of FEIB, SCSB and Taichung are in 
line with the Outlook on their IDRs. The affirmation of these four banks' 
National Ratings is an indication that there is no change in Fitch's view of 
their credit profiles relative to Taiwan's national-rating universe.

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 

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 
VRs, 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 AND VIABILITY RATINGS

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

FEIB

FEIB's ratings upside is limited, unless the bank can significantly improve its 
franchise and profitability, for example, operating profit/risk-weighted assets 
rising towards 1.6%, without sacrificing asset quality, while sustaining 
improvement in capitalisation, including the CET1 ratio rising above 12%, 
through more managed growth. 

KTB

KTB's rating Outlook could be revised back to Stable if the bank can demonstrate 
improved stability in earnings, with operating profit/risk-weighted assets 
sustained at around 1.6%, and maintain satisfactory capitalisation on a 
sustained basis, including the CET1 ratio rising above 15%.

SCSB

Positive rating action for SCSB is unlikely in the near term, as it is already 
the highest rated among local peers and we have a negative outlook on Taiwan's 
operating environment.

Taichung

Positive rating action could be triggered in the longer term if Taichung's 
operating profit/risk-weighted assets ratio increases closer to 1.2% on a 
sustained basis, possibly through a more diversified revenue mix, and/or its 
CET1 ratio rises towards 11% on a sustained basis.

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

FEIB

Excessive risk taking in financial-market trading and investment could render 
its credit profile more vulnerable relative to peers and pressure its ratings, 
given its above-peer credit derivatives trading. A significant rise in the 
unemployment rate could weigh further on the credit quality of its larger 
mortgages (around 47% of total loans at end-2019), profitability and ratings. A 
downgrade could arise from further and sustained deterioration in asset quality 
(impaired loan ratio rising to above 4%), profitability (operating 
profit/risk-weighted assets falling sustainably below 0.75%) and/or 
capitalisation (CET1 ratio falling towards 10%). 

KTB

A downgrade could arise from rising market fluctuations and/or provisioning, 
leading to greater erosion in profitability, for example, if the operating 
profit/risk-weighted assets falls sustainably below 1.2%, which results in 
capital erosion, with the CET1 ratio falling towards 12%, and/or increased 
vulnerability to asset quality, with the impaired-loan ratio rising to over 3%, 
in light of the size of its investments and loan concentration risks. 

SCSB

A downgrade in the VR of its Hong Kong subsidiary, SCB, which accounts for 38% 
of SCSB's assets, or a delayed economic recovery in the region beyond 2H20 as a 
result of a prolonged pandemic could add pressure on SCSB's asset quality 
(impaired-loan ratio rising to above 2%), profitability (operating 
profit/risk-weighted assets sustainably below 1.6%), capitalisation (Fitch Core 
Capital ratio falls towards 12%) and in turn, SCSB's ratings. We use the Fitch 
Core Capital ratio, instead of the CET1 ratio, as the minority interest at its 
Hong Kong subsidiary is partially recognised in the CET1 ratio under the Basel 
framework, whereas we base our analysis on the consolidated financial statement, 
including total assets and total liabilities of the Hong Kong subsidiary. 

Taichung

Negative rating action on Taichung's IDRs and VR could arise if the bank 
incurred sizeable losses, resulting in the CET1 ratio falling below 9% for a 
sustained period.

NATIONAL RATINGS

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

Changes in Fitch's perception of the rated banks' credit profiles relative to 
the national-rating universe in Taiwan could affect their National Ratings. An 
upgrade of the National Ratings for KTB is unlikely in the near term, given its 
Negative rating Outlook. Strengthening in the overall credit profiles of FEIB, 
SCSB and Taichung on a relative basis to the national-rating universe could lead 
to an upgrade of their National Ratings.

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

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

SUPPORT RATING AND SUPPORT RATING FLOOR 

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

The Support Rating Floor could be upgraded if Fitch assesses that there is a 
higher propensity of the Taiwan government (AA-/Stable) to provide timely 
extraordinary support to FEIB, KTB, SCSB and Taichung. However, Fitch does not 
expect such a change over the medium term. 

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

Fitch may take negative action on the Support Ratings and Support Rating Floors 
for FEIB, SCSB and Taichung if we believe there is lower propensity for the 
state to provide extraordinary support to them. There is no downside for KTB's 
Support Rating and Support Rating Floor as they are already at the lowest level.

SUBORDINATED DEBT 

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

The subordinated debt ratings of FEIB and Taichung are sensitive to the same 
considerations that might affect their VRs or National Long-Term Ratings. An 
upgrade of the VR or National Long-Term Rating, the anchor for the subordinated 
debt rating, could lead to an upgrade of FEIB's and Taichung's subordinated debt 
ratings.

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

A downgrade of their VRs or National Ratings could lead to a downgrade of the 
subordinated debt ratings of FEIB and Taichung.

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.

ESG Considerations

King's Town Bank has an ESG Relevance Score of '4' for Governance Structure due 
to the tight control of top management that affects the bank's strategic 
planning and may compromise the interests of minority shareholders, which has a 
negative impact on the credit profile, and is relevant to the rating in 
conjunction with other factors.

Except for the matters discussed above, the highest level of ESG credit 
relevance, if present, is a score of 3. This means ESG issues are credit-neutral 
or have only a minimal credit impact on the entity(ies), either due to their 
nature or to the way in which they are being managed by the entity(ies). For 
more information on Fitch's ESG Relevance Scores, visit 
www.fitchratings.com/esg.

Taichung Commercial Bank Company Limited; Long Term Issuer Default Rating; 
Affirmed; BB+; RO:Sta

; Short Term Issuer Default Rating; Affirmed; B

; National Long Term Rating; Affirmed; A-(twn); RO:Sta

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

; Viability Rating; Affirmed; bb+

; Support Rating; Affirmed; 4

; Support Rating Floor; Affirmed; B+

----subordinated; National Long Term Rating; Affirmed; BBB(twn)

King's Town Bank; Long Term Issuer Default Rating; Affirmed; BBB; RO:Neg

; Short Term Issuer Default Rating; Affirmed; F3

; National Long Term Rating; Affirmed; A+(twn); RO:Neg

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

; Viability Rating; Affirmed; bbb

; Support Rating; Affirmed; 5

; Support Rating Floor; Affirmed; NF

The Shanghai Commercial  Long Term Issuer Default Rating; Affirmed; A-; RO:Sta

; Short Term Issuer Default Rating; Affirmed; F2

; National Long Term Rating; Affirmed; AA(twn); RO:Sta

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

; Viability Rating; Affirmed; a-

; Support Rating; Affirmed; 4

; Support Rating Floor; Affirmed; B+

Far Eastern International Bank; Long Term Issuer Default Rating; Affirmed; BBB; 
RO:Sta

; Short Term Issuer Default Rating; Affirmed; F3

; National Long Term Rating; Affirmed; A+(twn); RO:Sta

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

; Viability Rating; Affirmed; bbb

; Support Rating; Affirmed; 4

; Support Rating Floor; Affirmed; B+

----subordinated; National Long Term Rating; Affirmed; A-(twn)

Contacts: 

Primary Rating Analyst

Cherry Huang, 

Director

+886 2 8175 7603

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

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

Secondary Rating Analyst

Janet Lu, 

Associate Director

+886 2 8175 7613

Secondary Rating Analyst

Cherry Huang, 

Director

+886 2 8175 7603

Secondary Rating Analyst

Philip Hsiao, 

Analyst

+886 2 8176 7607

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 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10122054

Solicitation Status 

https://www.fitchratings.com/site/pr/10122054#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10122054#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE 
FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS 
FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, 
INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF 
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE 
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE 
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD 
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED 
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS 
ISSUER ON THE FITCH WEBSITE.

Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its 
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, 
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or 
in part is prohibited except by permission. All rights reserved. In issuing and 
maintaining its ratings and in making other reports (including forecast 
information), Fitch relies on factual information it receives from issuers and 
underwriters and from other sources Fitch believes to be credible. Fitch 
conducts a reasonable investigation of the factual information relied upon by it 
in accordance with its ratings methodology, and obtains reasonable verification 
of that information from independent sources, to the extent such sources are 
available for a given security or in a given jurisdiction. The manner of Fitch's 
factual investigation and the scope of the third-party verification it obtains 
will vary depending on the nature of the rated security and its issuer, the 
requirements and practices in the jurisdiction in which the rated security is 
offered and sold and/or the issuer is located, the availability and nature of 
relevant public information, access to the management of the issuer and its 
advisers, the availability of pre-existing third-party verifications such as 
audit reports, agreed-upon procedures letters, appraisals, actuarial reports, 
engineering reports, legal opinions and other reports provided by third parties, 
the availability of independent and competent third- party verification sources 
with respect to the particular security or in the particular jurisdiction of the 
issuer, and a variety of other factors. Users of Fitch's ratings and reports 
should understand that neither an enhanced factual investigation nor any 
third-party verification can ensure that all of the information Fitch relies on 
in connection with a rating or a report will be accurate and complete. 
Ultimately, the issuer and its advisers are responsible for the accuracy of the 
information they provide to Fitch and to the market in offering documents and 
other reports. In issuing its ratings and its reports, Fitch must rely on the 
work of experts, including independent auditors with respect to financial 
statements and attorneys with respect to legal and tax matters. Further, ratings 
and forecasts of financial and other information are inherently forward-looking 
and embody assumptions and predictions about future events that by their nature 
cannot be verified as facts. As a result, despite any verification of current 
facts, ratings and forecasts can be affected by future events or conditions that 
were not anticipated at the time a rating or forecast was issued or affirmed. 

The information in this report is provided "as is" without any representation or 
warranty of any kind, and Fitch does not represent or warrant that the report or 
any of its contents will meet any of the requirements of a recipient of the 
report. A Fitch rating is an opinion as to the creditworthiness of a security. 
This opinion and reports made by Fitch are based on established criteria and 
methodologies that Fitch is continuously evaluating and updating. Therefore, 
ratings and reports are the collective work product of Fitch and no individual, 
or group of individuals, is solely responsible for a rating or   a report. The 
rating does not address the risk of loss due to risks other than credit risk, 
unless such risk is specifically mentioned. Fitch is not engaged in the offer or 
sale of any security. All Fitch reports have shared authorship. Individuals 
identified in a Fitch report were involved in, but are not solely responsible 
for, the opinions stated therein. The individuals are named for contact purposes 
only. A report providing a Fitch rating is neither a prospectus nor a substitute 
for the information assembled, verified and presented to investors by the issuer 
and its agents in connection with the sale of the securities. Ratings may be 
changed or withdrawn at any time for any reason in the sole discretion of Fitch. 
Fitch does not provide investment advice of any sort. Ratings are not a 
recommendation to buy, sell, or hold any security. Ratings do not comment on the 
adequacy of market price, the suitability of any security for a particular 
investor, or the tax-exempt nature or taxability of payments made in respect to 
any security. Fitch receives fees from issuers, insurers, guarantors, other 
obligors, and underwriters for rating securities. Such fees generally vary from 
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In 
certain cases, Fitch will rate all or a number of issues issued by a particular 
issuer, or insured or guaranteed by a particular insurer or guarantor, for a 
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 
(or the applicable currency equivalent). The assignment, publication, or 
dissemination of a rating by Fitch shall not constitute a consent by Fitch to 
use its name as an expert in connection with any registration statement filed 
under the United States securities laws, the Financial Services and Markets Act 
of 2000 of the United Kingdom, or the securities laws of any particular 
jurisdiction. Due to the relative efficiency of electronic publishing and 
distribution, Fitch research may be available to electronic subscribers up to 
three days earlier than to print subscribers. 

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd 
holds an Australian financial services license (AFS license no. 337123) which 
authorizes it to provide credit ratings to wholesale clients only. Credit 
ratings information published by Fitch is not intended to be used by persons who 
are retail clients within the meaning of the Corporations Act 2001

Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange 
Commission as a Nationally Recognized Statistical Rating Organization (the 
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on 
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on 
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other 
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and 
therefore credit ratings issued by those subsidiaries are not issued on behalf 
of the NRSRO. However, non-NRSRO personnel may participate in determining credit 
ratings issued by or on behalf of the NRSRO