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2845 - Far Eastern International Bank News Story

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Fitch Takes Rating Action on Seven Taiwanese Private Banks

Fri 24th May, 2019 10:20am
(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: wailun.wan@thefitchgroup.com. 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 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10076636 Solicitation Status https://www.fitchratings.com/site/pr/10076636#solicitation 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, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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