Fitch Affirms Ratings on Taiwan's Hua Nan Commercial Bank

HUA NAN FINANCIAL HOLDINGS

22/03/2016 06:22

(The following statement was released by the rating agency)

TAIPEI, March 22 (Fitch) Fitch Ratings has affirmed Taiwan-based Hua Nan 
Commercial Bank's (HNB) ratings - including its Long-Term Issuer Default Rating 
(IDR) - at 'BBB+', 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 the high probability 
of support from the state - given its systemic importance and close ties with 
government. This is evident in the state's long-term and controlling ownership 
(currently around 33%) in HNB's parent, Hua Nan Financial Holding Company, and 
the bank's leading franchise with the third-largest branch network and close to 
a 6% share of deposits in Taiwan.

VR 

The VR affirmation reflects HNB's stable and moderate risk profile and 
strengthened capitalisation and loan-loss reserves; these will help absorb 
cyclically rising credit costs in a slowing economy in Taiwan and China. Fitch 
expects the bank to maintain its adequate capitalisation through measured credit 
growth commensurate with its business development and strategy. The FCC ratio 
had increased to 10.7% by end-2015 by Fitch estimates (end-2014: 9.9%) due to 
earnings retention, which is comparable with similarly rated regional peers.  

Fitch expects HNB to continue to manage its offshore risk efficiently - 
primarily the China exposure - in line with its modest appetite for growth. 
China exposures had fallen to 82% of Fitch Core Capital by end-3Q15 (versus 107% 
at end-2014) due to weakened credit demand in China. The sector average is 
100%-110%. The exposures are fairly diversified, and focus on investment-grade 
Chinese banks and state-owned Chinese entities that have dominant market 
positions in their respective industrial sectors - and are hence less vulnerable 
to cyclicality. 

HNB has gradually enhanced revenue from fee-income generation and margin uplift 
in offshore lending in the last few years, and these measures have now 
approached the sector average. HNB's pre-tax return on assets rose to an 
annualised 0.72% in 9M15 (versus 0.68% in 2014), compared with the sector 
average of 0.75%. Fitch expects HNB's earnings to decline moderately like most 
of peers, as its credit costs rise from a very low level in 2015.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR Changes in the 
Taiwan government's 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 upgrade could occur if HNB sustains higher profitability and a stronger 
risk buffer while asset quality remains satisfactory and the risk profile is not 
significantly raised. A VR downgrade would be likely to come from any excessive 
growth and/or aggressive acquisition in the region which substantially weakens 
HNB's risk profile.

 

The rating action is as follows: 

HNB:

Long-Term IDR: affirmed at 'BBB+'; Outlook Stable

Short-Term IDR: affirmed at 'F2'

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 '2'

Support Rating Floor: affirmed at 'BBB+'

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 

Clark Wu

Associate Director

+886 2 8175 7602

Committee Chairperson

Tim Roche

Senior Director

+612 8256 0310

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. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

National Scale Ratings Criteria (pub. 30 Oct 2013)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720082

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr 
_id=1001294

Solicitation Status 

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001294

Endorsement Policy 

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det 
ail=31

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