Fitch Upgrades SinoPac Financial, Bank SinoPac, Bank SinoPac (China)

SINOPAC FINANCIAL HOLDINGS

05/09/2019 07:46

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-September 05: Fitch Ratings has upgraded the Issuer Default 
Ratings (IDRs) of Taiwan-based SinoPac Financial Holdings Company Limited (SPH) 
and its principal subsidiary Bank SinoPac (BSP) to 'BBB+' from 'BBB', their 
National Long-Term Rating to 'AA-(twn)' from 'A+(twn)', and their Viability 
Ratings (VRs) to 'bbb+' from 'bbb'. The Rating Outlook is Stable. 

The agency has simultaneously upgraded the IDR of BSP's wholly owned subsidiary 
in Nanjing, Bank SinoPac (China)  Ltd. (BSP (China)), to 'BBB' from 'BBB-' with 
a Stable Outlook, and assigned a Support Rating of '2'. 

A full list of rating actions is at the end of this Rating Action Commentary.

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS AND SENIOR DEBT

BSP

The upgrade of BSP's IDRs, which are driven by its VRs, reflects an improving 
company profile and reduced risk appetite, particularly in relation to its China 
strategy. The bank has steadily regained its deposit market share to 3.3% by 
end-April 2019 compared with around 3% in mid-2018, and its share in 
foreign-currency deposits has risen to 4.4% from 3.5% over the same period. We 
believe this improvement in market positioning is meaningful, considering 
Taiwan's over-banked and fiercely competitive banking sector, and reflects 
changes in BSP's senior management to address the bank's previous governance 
issues. 

BSP has cultivated a niche in renminbi-related forex and derivatives 
transactions over the past two years, which supports its leading position in the 
renminbi business among Taiwanese peers. BSP operates an integrated greater 
China banking platform via its Hong Kong branch and China subsidiary, to serve 
both corporate and retail customers and their cross-straits banking needs.

Downside risk from the economic headwinds in Taiwan and China should be 
manageable, assuming our base case for a gradual slowdown in China. We expect 
credit growth at BSP to align with the sector average, and for the bank to 
diversify its revenue among its home market and Asian countries, thus moderating 
its concentration risk to China. The relocation in production of Taiwan 
enterprises from China back to Taiwan and/or south-east Asia over the medium 
term should provide some support to BSP's loan growth. Mortgages made up 45% of 
BSP's loan book as of 1Q19, and we expect mortgage credit quality to be 
supported by a stable housing market in Taiwan. Its impaired-loan ratio has been 
consistently below the sector average through the cycle despite BSP's above-peer 
exposure to China; its ratio was 0.55% at end-2018, compared with the sector 
average of around 1%.

Fitch expects BSP to maintain a satisfactory capital buffer over regulatory 
requirements in the near term, although its high dividend payout (i.e. around 
70%) and continued growth may bring down its Fitch Core Capital (FCC) ratio 
closer to the sector average. Fitch estimates BSP's FCC ratio had fallen to 
around 11.5% by end-1H19 from 12.5% at end-2018 (sector average at end-2018: 
11.7%).

BSP's profitability has improved steadily in recent years, with its annualised 
operating profits/risk-weighted assets increasing to around 1.2% in 1H19, 
compared with a trough of around 0.8% in 2016, thanks to moderate loan growth in 
recent years as well as steady growth in fee income from its wealth-management 
business, in addition to bond trading gains. 

SPH

The upgrade of SPH's IDRs and VRs with a Stable Outlook is in line with the 
rating action on BSP, and Fitch's expectation that SPH will maintain moderate 
leverage at the holding-company level. SPH and BSP are highly integrated in 
terms of risk management and business strategy. 

Following today's upgrade, the National Long-Term Ratings of BSP and SPH are at 
the high end of Taiwan's national rating scale, reflecting very low default risk 
relative to domestic peers.

SUPPORT RATING AND SUPPORT RATING FLOOR 

BSP's Support Rating (SR) of '3' and Support Rating Floor (SRF) of 'BB+' reflect 
a moderate probability of state support, if needed, due to its limited systemic 
importance - with a 3.3% deposit market share in Taiwan's highly fragmented 
banking system. 

SUBSIDIARY - BSP (China)

The upgrade of BSP (China)'s IDR with a Stable Outlook is in line with the 
rating action on the parent. The subsidiary's IDR and Support Rating reflect 
Fitch's view of a high propensity of support from its parent, BSP, if needed. 
BSP (China)'s IDR is rated one notch below that of the parent, as China is a 
strategically important market for the group and we believe BSP (China) has 
strong synergies with its parent, and provides a comprehensive cross-strait 
financial platform for BSP's customers. Fitch did not assign a VR to BSP (China) 
due to its lack of a meaningful standalone franchise. The Short-term IDR of BSP 
(China) was upgraded to 'F2' from 'F3', which is now aligned with that of the 
parent and reflects the strong parent support propensity.

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND SENIOR DEBT

Significant deterioration of balance sheet strength due to excessive risk-taking 
in Asian emerging markets, including China, may lead to negative rating action 
for BSP. Similar to its peers, BSP's ratings are also sensitive to the 
deteriorating operating environment for Taiwanese banks due to a potential 
escalation in US-China trade tensions. Rating upside potential is limited after 
today's upgrade, as further significant improvement in BSP's balance-sheet 
strength is less likely over the medium term.

Any rating action on BSP could trigger a similar move on SPH's ratings. In 
addition, a sustained increase in SPH's common-equity double leverage, which may 
for example arise from large-scale acquisitions - to above 120% from 114% 
currently - may lead to a rating downgrade for SPH. 

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit 
relevance is a score of 3 - ESG issues are credit neutral or have only a minimal 
credit impact on BSP, either due to their nature or the way in which they are 
being managed by BSP. For more information on our ESG Relevance Scores, visit 
www.fitchratings.com/esg.

SUPPORT RATING AND SUPPORT RATING FLOOR 

BSP's SR and SRF are sensitive to any change in assumptions around the 
propensity or ability of the Taiwan government to provide timely support to the 
bank. 

SUBSIDIARY 

BSP (China)'s ratings will move in tandem with the ratings of its parent, BSP. 
The lender's ratings are also sensitive to a change in Fitch's assumptions 
around the parent's propensity to support the subsidiary. An increased 
significance of BSP (China)'s role in the group could lead to an upgrade, 
although this appears unlikely in the near term due to its limited franchise and 
contribution to the group. Conversely, BSP (China)'s rating may be downgraded if 
the perceived linkage between the subsidiary and its parent and/or its role in 
group were to weaken significantly.

The rating actions are as follows: 

SinoPac Financial Holdings Company Limited:

Long-Term IDR upgraded to 'BBB+' from 'BBB'; Outlook Stable

Short-Term IDR affirmed at 'F2'

National Long-Term rating upgraded to 'AA-(twn)' from 'A+(twn)'; Outlook Stable

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

Viability Rating upgraded to 'bbb+' from 'bbb'

Bank SinoPac:

Long-Term IDR upgraded to 'BBB+' from 'BBB'; Outlook Stable

Short-Term IDR affirmed at 'F2'

National Long-Term rating upgraded to 'AA-(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 '3'

Support Rating Floor affirmed at 'BB+'

Bank SinoPac (China) Ltd.:

Long-Term IDR upgraded to 'BBB' from 'BBB-'; Outlook Stable

Short-Term IDR upgraded to 'F2' from 'F3'

Support Rating assigned at '2'

Primary Analyst

Cherry Huang, CFA

Director

+886 2 8175 7603

Fitch Ratings Limited, Taiwan Branch

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

Secondary Analyst 

Janet Lu

Associate Director

+886 2 8175 7613

Committee Chairperson

Parson Singha

Senior Director

+66 2108 0151

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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

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