Fitch Upgrades Viability Rating on Taiwan Finance; Affirms IDR of Six Bills Finance Companies

IBF Financial Holdings Co

17/07/2018 05:37

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-July 17: Fitch Ratings has upgraded the Viability Rating of 
Taiwan Finance Corporation (TFC) to 'bbb-' from 'bb+'. Simultaneously, the 
agency has affirmed the Issuer Default Ratings (IDR) on TFC and five Taiwanese 
bills finance companies (BFCs), including International Bills Finance 
Corporation (IBF), China Bills Finance Corporation (CBF), Grand Bills Finance 
Corporation (Grand), Taching Bills Finance Corporation (Taching) and Dah Chung 
Bills Finance Corporation (Dah Chung).  

Fitch has also affirmed the ratings of Waterland Financial Holdings (Waterland 
Financial) and its subsidiary, Waterland Securities Corporation (Waterland 
Securities), which are driven by and equalised with the ratings of IBF, the 
principal operating subsidiary of the group. 

The Outlooks are all Stable. A full list of rating action is provided at the end 
of this commentary.

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS AND VIABILITY RATINGS

The IDRs and National Ratings of the six BFCs are driven by their standalone 
credit profiles, which are reflected in their Viability Ratings. 

The upgrade of TFC's Viability Rating reflects the company's improved risk 
appetite, alleviating downward pressure on capitalisation, continued decline in 
impaired guarantees and sustained improvement in underlying profitability, which 
is generally commensurate with the local peer average. The upgrade also takes 
into account TFC's gradually enhanced market position and institutional support 
from its largest shareholders - Mega International Commercial Bank Co., Ltd., 
IBF and Cathay United Bank - delivered through strategic objectives and risk 
appetite setting.

The 'bbb' Viability Ratings of IBF and CBF reflect the companies' generally 
consistent risk appetite and broadly sound financial performance, which has 
reinforced their significant market positions over economic cycles. The ratings 
also take into account the sector's inherently weak business model, which has 
limited business scope (mainly market-making of commercial papers and investing 
in fixed-income securities), high concentration risk, significant exposure to 
interest rate risk and complete reliance on wholesale funding.

The 'bbb-' Viability Ratings of Grand, Taching and Dah Chung reflect a slightly 
more variable risk appetite over economic cycles, higher concentration in repo 
counterparties and small franchise in guarantee and fixed-income market making. 
Their focus on creditworthy corporates, consistent profitability and maintaining 
satisfactory capital buffers helps mitigate associated risks.

The Stable Outlooks underline Fitch's expectation that the BFCs will deliver 
sound financial performance over 2018-2019, despite complete reliance on 
wholesale funding and potential interest-rate hikes.

Fitch expects the BFCs' profitability to decline modestly in 2018-2019 assuming 
no major changes in the central bank policy rate. Spreads are likely to narrow, 
as some higher-yield bonds mature and abundant system liquidity pressures 
guarantee pricing. Yet, the BFCs' ability to increase their guarantees and 
realise valuation gains of their fixed-income investments could partly alleviate 
earning pressure. Rated BFCs reported an average operating profit/risk-weighted 
asset ratio of 1.1% in 2017, flat from 2016. 

We expect the BFCs' risk-asset growth to remain moderate in 2018, at about 4.0% 
versus nominal GDP growth of 2.6%, in light of capitalisation constraints. The 
average regulatory capital ratio and Fitch Core Capital ratio of rated BFCs 
stayed steady at about 13.9% in 2017. Rated BFCs aim to maintain their 
regulatory capital ratios at around 13.0%-14.0%, versus the regulatory minimum 
of 12.0%-13.0% depending on guarantee size relative to equity. 

BFCs have significant exposure to market risks due to their concentrated 
business models. Risk-weighted assets/market risk amounted to about 35% of total 
risk-weighted assets, notably higher than the below 10% of local commercial 
banks. The effect of a 100bp rate hike would have been about 14% of BFCs' equity 
in 2017. Currency risk from the BFCs' foreign-currency bond investments are 
likely to remain small, as they are not inclined to expand their portfolios 
significantly amid the rising US-dollar interest-rate environment.    

WATERLAND FINANCIAL AND WATERLAND SECURITIES

Waterland Financial's rating and the Stable Outlook are aligned with that of IBF 
due to the high level of integration between the two companies and the parent's 
modest leverage and sound standalone liquidity. 

Waterland Securities' rating and the Stable Outlook are aligned with that of 
Waterland Financial, reflecting the obligatory support from the holding parent 
under Taiwan's Financial Holding Company Act and huge reputational risk to the 
group in case of subsidiary default.

SUPPORT RATING AND SUPPORT RATING FLOOR

TFC's Support Rating of '2' is driven by Fitch's expectation that its major 
shareholders would provide support to the company, if needed.

The Support Ratings of '4' and Support Rating Floors of 'B+' of IBF and CBF 
reflect a limited probability of government support, if needed, due to the 
companies' low systemic importance.

The Support Ratings of '5' and Support Rating Floors of 'NF' of Grand, Taching 
and Dah Chung reflect Fitch's view that state support cannot be relied on due to 
the companies' lack of systemic importance. 

RATING SENSITIVITIES

IDRS AND NATIONAL RATINGS

Upside for TFC's IDR and National Rating is sensitive to the factors affecting 
its Viability Rating in the absence of any changes in support assumptions. 
Meanwhile, a downgrade of TFC's IDR and National Rating would necessitate a 
downgrade of both its Viability Rating and Support Rating.

The IDRs and National Ratings of IBF, CBF, Grand, Taching and Dah Chung are 
sensitive to the same factors that affect their Viability Ratings. 

VIABILITY RATINGS 

The Viability Ratings of IBF and CBF have limited upside due to their 
concentrated business model and modest franchise compared with similarly rated 
domestic banks. 

An upgrade for TFC, Grand, Taching and Dah Chung could be considered if the 
companies meaningfully improve their franchise, demonstrate a more consistent 
risk appetite through economic cycles and moderate concentration risk in credit 
and liquidity. 

Negative rating action to the BFCs' Viability Ratings may result from weakened 
capital strength due to further aggressive growth in the guarantee book or 
market risk, but this is not our base-case scenario.

WATERLAND FINANCIAL AND WATERLAND SECURITIES

Waterland Financial's ratings are driven by the financial strength of its 
principal operating subsidiary, IBF. Any weakening of IBF's credit profile or 
Waterland Financial's standalone liquidity and leverage could pressure its 
ratings. Waterland Securities' ratings will move in tandem with the ratings of 
its parent, Waterland Financial.

SUPPORT RATING AND SUPPORT RATING FLOOR

TFC's Support Rating may be downgraded if the willingness or ability of its 
large bank shareholders to extend support was deemed to have deteriorated.

The Support Ratings and Support Rating Floors of IBF, CBF, Grand, Taching and 
Dah Chung are sensitive to changes in assumptions around the propensity of the 
government to provide timely support. 

 

The rating actions are as follows: 

TFC:

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 upgraded to 'bbb-' from 'bb+'

Support Rating affirmed at '2'

IBF:

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+'

Waterland Financial:

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' 

Waterland Securities:

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)'

CBF:

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+'

Grand:

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'

Taching:

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'

Dah Chung:

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'

Contact: 

Primary Analyst 

Sophia Chen, CFA, CPA (CBF, Grand, TFC)

Director

+886 2 8175 7604

Fitch Australia Pty Ltd, Taiwan Branch

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

Cherry Huang, CFA (IBF, Waterland Financial, Waterland Securities, Taching and 
Dah Chung)

Director

+886 2 8175 7603

Secondary Analyst

Sophia Chen, CFA,CPA (IBF, Waterland Financial, Waterland Securities, Taching 
and Dah Chung) 

Director

+886 2 8175 7604

Cherry Huang, CFA (CBF, Grand, TFC)

Director

+886 2 8175 7603

Committee Chairperson 

Parson Singha, CFA

Senior Director

+662 108 0151

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Applicable Criteria 

Bank Rating Criteria (pub. 22 Jun 2018)

https://www.fitchratings.com/site/re/10034713

National Scale Ratings Criteria (pub. 07 Mar 2017)

https://www.fitchratings.com/site/re/895106

Non-Bank Financial Institutions Rating Criteria (pub. 22 Jun 2018)

https://www.fitchratings.com/site/re/10034715

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