Correction: Fitch Affirms Ratings on Taiwan's Hua Nan Commercial Bank

HUA NAN FINANCIAL HOLDINGS

02/03/2018 10:06

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-March 02: This commentary replaces the version published on 
1 March 2018.

Fitch Ratings has affirmed Taiwan-based Hua Nan Commercial Bank, Ltd.'s (HNB) 
Long-Term Issuer Default Rating (IDR) at 'A-', and its Viability Rating (VR) at 
'bbb'. The Outlook is Stable. A full list of rating actions is available at the 
end of this rating action commentary.

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR 

The affirmation of HNB's IDRs and National Ratings is driven by its Support 
Rating (SR) and Support Rating Floor (SRF), which reflect Fitch's belief of an 
extremely high probability of support from the state, given its systemic 
importance and close ties with the Taiwan government. This is evident in the 
state's long-term and controlling ownership (currently 33%) in HNB's parent, Hua 
Nan Financial Holding Company, and the bank's leading franchise in Taiwan with 
the third-largest branch network and 5.6% share of deposits domestically at 
end-September 2017. 

HNB's National Long-Term Ratings are at the high end of Taiwan's national rating 
scale, reflecting very low default risk relative to domestic peers due to strong 
state support, if needed.

VR 

The affirmation of the VR reflects HNB's improved capitalisation, earnings and 
asset quality that are around the sector average, and stable liquidity profile 
backed by its state ownership and solid deposit franchise. Fitch expects the 
bank to sustain its capitalisation through controlling credit growth, in line 
with local peers' average. Its capitalisation has comfortably met Taiwan's 
additional 200bp of Pillar II capital required for offshore expansion. The 
bank's Fitch Core Capital ratio increased to above 11.5% by end-2017 by Fitch 
estimates (end-2014: 9.9%) due to state-supported rights issues and earnings 
retention. The ratio has also factored in the local regulator's relaxation of 
risk weights for mortgage and equity securities in 4Q17.  

Fitch believes that any potential deterioration in HNB's asset quality in the 
next one to two years will be manageable, in light of the steady domestic 
economy. The impaired loan ratio slightly rose to around 1.5% at end-2017 (1.3% 
at end-2016). Around 17% of HNB's mortgages are extended to government 
employees, who tend to have lower default rates. Its large exposures also mostly 
involve lending to the government and state-owned companies or are guaranteed by 
the state. Exposure to China remained subdued at around 5% of total assets in 
3Q17 and those to Asian emerging markets excluding China were small at less than 
2%. We expect HNB to maintain its modest appetite for growth in Asian emerging 
markets.

Fitch expects largely stable earnings prospects for HNB in 2018, based on easing 
margin compression and stabilising asset quality and credit costs amid a steady 
economy. Return on assets fell to around 0.5% in 2017 from 0.6% in 2016 due to 
lower interest margins, increased credit costs in 2017 for loan impairments, and 
higher investment and trading income in 2016.

HNB has been fined in Taiwan due to lapses in its internal controls in December 
2017, which also applies to most other state banks. However, Fitch believes the 
impact on HNB's franchise and operations will be modest. The bank's risk 
controls are generally adequate for its rating level, but may be less pervasive 
throughout its widespread network.  

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR

Changes in the Taiwan government's ability and willingness to support HNB could 
lead to changes in its SR, SRF, IDRs and National Ratings. Fitch believes the 
state support will remain steadfast in the near to medium term.

VR 

A VR downgrade would likely come from significant increase in risk appetite in 
pursuit of yield, including excessive growth in high-risk Asia-Pacific emerging 
markets. A VR upgrade is less likely in the near term and could occur if HNB 
notably improves its profitability and capitalisation while asset quality 
remains satisfactory and the risk profile is not significantly raised. 

The rating actions are as follows: 

HNB:

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

Short-Term IDR affirmed at 'F1' 

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

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

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '1' 

Support Rating Floor affirmed at 'A-' 

Contact: 

Primary Analyst 

Cherry Huang, CFA

Director

+886 2 8175 7603

Fitch Australia Pty Ltd, Taiwan Branch

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

Secondary Analyst 

Sophia Chen

Director

+886 2 8175 7604

Committee Chairperson

Parson Singha

Senior Director

+66 2108 0151

Summary of Financial Statement Adjustments: 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: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 
leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Global Bank Rating Criteria (pub. 25 Nov 2016)

https://www.fitchratings.com/site/re/891051

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/10022320

Solicitation Status 

https://www.fitchratings.com/site/pr/10022320#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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