Fitch Revises Outlooks on Taishin Holdco and Securities to Negative; Outlook on Bank Stable

TS Financial Holding Co

12/09/2018 09:03

(The following statement was released by the rating agency)


Fitch Ratings-Taipei-September 12: Fitch Ratings has revised our Outlook on the 
ratings of Taiwan's Taishin Financial Holding Co., Ltd. (TFHC) and Taishin 
Securities Co., Ltd. (TSS) to Negative from Stable, while the Outlook on Taishin 
International Bank (TIB) remains Stable. A full list of ratings is provided at 
the end of this commentary.

KEY RATING DRIVERS 

IDRS, NATIONAL RATINGS AND VIABILITY RATING

TFHC's Long-Term Issuer Default Rating (IDR) is affirmed at one notch below that 
of TIB to reflect TFHC's high common equity double leverage ratio. The Outlook 
revision to Negative from Stable reflects the holding company's deteriorating 
common equity double leverage ratio (143% as of end-1H18 versus 124% at 
end-1H16) as it issued perpetual preferred shares rather than common equity to 
provide capital support to its subsidiaries. We see TFHC maintaining its 
appetite to sustain TIB's growth at above the sector's average, as well as its 
ambition to pursue inorganic growth. 

Our affirmation on TIB reflects the bank's adequately sustained consumer banking 
franchise, generally consistent risk appetite, healthy asset quality, gradually 
improving profitability and stable funding and liquidity profile. 

   

TIB's strength in consumer banking, in particular credit cards and wealth 
management, is built upon a well-established wealth-management advisory platform 
and a highly targeted customer acquisition and penetration plan. It is also 
relatively active in "fintech" development. The rating also reflects rising 
competition in digital and retail banking, especially credit cards and wealth 
management. 

TIB has been pursuing higher loan growth relative to that of the sector's 
average in the past five years, and the trend is likely to continue as the bank 
pursues further growth in mortgages and SME loans. The loan mix has remained 
largely unchanged, with corporate loans and retail loans (mainly mortgages and 
home equity) making up 42% and 58%, respectively, of the total loans at 
end-1H18. There has been no significant recent change in the credit quality of 
its corporate loan portfolio. Current loan-to-value ratios for mortgages have 
stayed consistently below 40% in 2014-1H18. The impaired-loan ratio (based on 
stage 3 under IFRS 9) was 1.1% as of end-1H18, generally in line with the 
average of domestic banks. 

We expect TIB's profitability to improve gradually, due mainly to a pick-up in 
fee income from its expanding retail client base and some margin expansion 
benefiting from the potentially rising-interest-rate environment in 2018-2019. 
Credit costs are likely to be contained at a modest level, backed by a mildly 
recovered domestic economy and the bank's focus on creditworthy borrowers. 

We expect TIB's capitalisation to improve in 2018-2019 as the bank will increase 
its common equity Tier 1 ratio to 9% by end-2018 (8.5% at end-1H18), as per 
Basel III standards, plus a 200bp Pillar 2 buffer for overseas expansion 
required by the local regulator. We believe this will be achieved through TIB's 
internal capital generation and parental capital support if needed. Hence we 
expect TIB's Fitch Core Capital ratio to rise modestly from 10.2% at end-1H18. 
We believe TIB has a healthy liquidity profile, as it is funded mostly by 
customer deposits and would continue to benefit from the abundant liquidity in 
Taiwan.

The ratings and outlooks of TSS are aligned with its parent holding company, 
TFHC. This reflects TSS's small size in relation to that of the parent, together 
with TFHC's obligation to provide support under Taiwan's Financial Holding 
Company Act and high level of integration between TSS and TFHC. 

SUPPORT RATING AND SUPPORT RATING FLOOR 

TIB's Support Rating '3' and Support Rating Floor 'BB+' reflect a moderate 
probability of state support, if needed, given its moderate systemic importance 
with a deposit market share of about 3%.

SUBORDINATED DEBT 

TIB's subordinated bonds are rated one notch below its National Long-Term Rating 
to reflect their subordinated status and the absence of the going-concern 
loss-absorption feature. TFHC's subordinated bonds are rated three notches below 
its National Long-Term Rating, reflecting the bonds' subordination status and 
going-concern loss-absorption features. The bonds' ratings have thus been 
affirmed due to the affirmation of TFHC and TIB. 

RATING SENSITIVITIES

IDRS, NATIONAL RATINGS AND VIABILITY RATING

TIB's IDRs, National Ratings and Viability Rating are sensitive to changes in 
Fitch's assessment of TIB's capital flexibility as well as ability to sustain 
its consumer banking franchise. Downward rating pressure would build if 
capitalisation were not to improve as the agency expects, and if there is a 
noticeable deterioration in capital generation and profitability at TIB.

An upgrade on TIB's ratings is improbable, given the Negative Outlook on its 
parent for a foreseeable future.

Any changes in TIB's ratings will affect the ratings of TFHC and TSS to a 
similar extent. Continued deterioration of the common equity double leverage 
ratio at TFHC to a very high level may cause TFHC's rating to be rated two 
notches below that of TIB. Conversely, TFHC's ratings may be equalised with 
those of TIB if TFHC establishes a record of prudent leverage use by reducing 
its common equity double leverage ratio to consistently below 120%.  The latter 
could be triggered by the final court ruling on the decade-long legal dispute on 
TFHC's control on Chang Hwa Bank.

SUPPORT RATING AND SUPPORT RATING FLOOR 

TIB's Support Rating and Support Rating Floor are sensitive to a change in 
Fitch's assumptions around the propensity or ability of the Taiwan government to 
provide timely support, if needed. 

SUBORDINATED DEBT 

Any rating action on TFHC and TIB could trigger a similar move on their debt 
ratings, as the subordinated debt ratings are broadly sensitive to the same 
considerations that might affect TFHC and TIB. 

The rating actions are as follows: 

Taishin International Bank

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 '3'

Support Rating Floor affirmed at 'BB+'

Subordinated (Basel II Tier 2 capital) debt rating affirmed at 'A+(twn)'

Taishin Financial Holding Co., Ltd.

Long-Term IDR affirmed at 'BBB'; Outlook revised to Negative from Stable

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A+(twn)'; Outlook revised to Negative 
from Stable

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

Viability Rating affirmed at 'bbb'

Subordinated (Basel II deferrable lower Tier 2 capital) debt rating affirmed at 
'BBB+(twn)'

Taishin Securities Co., Ltd.

Long-Term IDR affirmed at 'BBB'; Outlook revised to Negative from Stable

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A+(twn)'; Outlook revised to Negative 
from Stable

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

Contact: 

Primary Analyst 

Sophia Chen, CFA, CPA (TIB and TFHC)

Director

+886 2 8175 7604

Fitch Australia Pty Ltd, Taiwan Branch

Suite 1306, 13F, 205, Tunhwa North. Rd., Taipei City

Katie Chen (TSS)

Director

+886 2 8175 7614

Fitch Australia Pty Ltd, Taiwan Branch

Suite 1306, 13F, 205, Tunhwa North. Rd., Taipei City

Secondary Analyst

Cherry Huang, CFA (TIB and TFHC)

Director

+886 2 8175 7603

Shirley Hsu (TSS)

Associate Director

+886 2 8175 7606

Committee Chairperson (TIB and TFHC)

Parson Singha 

Senior Director

+66 2108 0151 

Mark Young (TSS)

Managing Director

+44 20 3530 1318

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.

Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234 , Email: 
leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935 , 
Email: wailun.wan@fitchratings.com.

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.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 22 Jun 2018)

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

National Scale Ratings Criteria (pub. 18 Jul 2018)

https://www.fitchratings.com/site/re/10038626

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

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

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https://www.fitchratings.com/site/dodd-frank-disclosure/10044397

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https://www.fitchratings.com/site/pr/10044397#solicitation

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https://www.fitchratings.com/regulatory

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