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Rating Action:

Moody's affirms CTBC Bank's ratings; maintains CTBC Financial's ratings on review for downgrade following proposed transactions

 The document has been translated in other languages

29 May 2015

Hong Kong, May 29, 2015 -- Moody's Investors Service has affirmed CTBC Bank Co., Ltd's A2/P-1 local currency and foreign currency long-term/short-term deposit ratings, its baa2 baseline credit assessment (BCA) and baa2 adjusted BCA. The rating outlook remains negative.

At the same time, CTBC Financial Holding Co., Ltd.'s (CTBC Financial) A3 long-term foreign currency issuer rating remains under review for downgrade.

Moody's rating actions follow the announcement by CTBC Financial on 26 May 2015 of (1) the proposed acquisition by CTBC Bank of a 100% stake in CITIC Bank International (China) Limited (CITIC Bank Int'l (China), unrated) for a total consideration of TWD11.67 billion (RMB2.35 billion); and (2) China CITIC Bank Corporation Limited's (China CITIC Bank, deposits Baa1 stable, BCA ba1) plan to acquire 3.8% of CTBC Financial through a private placement for a total consideration of TWD13.09 billion.

In the same announcement, CTBC Bank also proposed to invest RMB350 million initially for a 35% stake in a consumer finance joint-venture company in Hefei, China.

The deals are subject to relevant regulatory and shareholder approvals. CTBC Financial expects to complete the transactions by the end of 2015.

RATINGS RATIONALE

RATING RATIONALE FOR CTBC BANK

"Given the relatively small size of the proposed acquisition, we have affirmed CTBC Bank's ratings and maintained the negative outlook, which was initially and largely driven by the acquisition of Tokyo Star Bank Limited (unrated)," says Ginger Kao, a Moody's Analyst.

The acquisition of CITIC Bank Int'l (China) is small when compared to the bank's existing business. The consideration of TWD11.67 billion equaled about 6% of CTBC Bank's standalone shareholders' equity at 31 December 2014.

"We also do not expect any material impact on CTBC Bank's financial profile, as the bank will fund the acquisition from internal resources," adds Kao.

CTBC Financial expects to inject TWD12 billion into CTBC Bank to support the acquisition. Therefore, despite a mild capital ratios decline due to goodwill deduction, Moody's believes the transaction will not significantly affect CTBC Bank's capitalization. The bank's tangible common equity to risk-weighted assets stood at 8.5% at 31 December 2014.

CITIC Bank Int'l (China) is a wholly owned Mainland subsidiary of Hong Kong-based China CITIC Bank International Limited (deposits Baa1 review for upgrade, BCA baa3) and based in Shenzhen. It had assets of RMB12.62 billion and shareholders' equity of RMB1.45 billion, and the deal's implied transaction multiple would be 1.63x of CITIC Bank Int'l (China)'s book value at 31 December 2014.

In addition, CTBC Bank's plan to set-up a consumer finance joint-venture company will have no immediate impact on its credit profile. As the single largest shareholder with control, CTBC Bank can directly tap into the retail financing business in China, and leverage the strong risk and product management expertise it gained in Taiwan.

CTBC Bank's increasing exposures in the Mainland subject it to China's growth slowdown and economic rebalancing. Nevertheless, the Taiwanese regulator limits banks' China exposures to 100% of their net assets, limiting CTBC Bank's ability to expand aggressively in China without a higher capital base.

The outlook on CTBC Bank's ratings has been negative since its June 2014 acquisition of Tokyo Star Bank.

Tokyo Star Bank has a weaker business profile than CTBC Bank and has a legacy of asset quality problems. Although CTBC Bank plans to reorient Tokyo Star Bank to a business model focused on cross-border business between Japan and Greater China, this will take time and involve some execution risk.

In addition, Moody's expects Tokyo Star Bank's credit cost to rise as the bank accelerates charging off its problem loans. Finally, there is execution risk in CTBC Bank's plans to restore its core capital ratios to levels similar to those before the Tokyo Star Bank acquisition. The proposed acquisition of CITIC Bank Int'l (China) adds to CTBC Bank's execution challenges at a time when it is still absorbing Tokyo Star Bank. Any additional acquisitions or execution problems at either newly acquired subsidiaries could trigger a downgrade of CTBC Bank's ratings.

WHAT COULD DRIVE CTBC BANK'S RATINGS DOWN/UP

CTBC Bank's ratings are unlikely to be upgraded, given the negative rating outlook.

On the other hand, the ratings could be downgraded if the bank's: (1) consolidated profitability deteriorates relative to the risks it takes, such that net income falls below 0.5% of tangible assets; (2) consolidated capitalization weakens, with its tangible common equity staying below 8% of risk-weighted assets; and/or (3) consolidated asset quality deteriorates, such that its impaired loan ratio exceeds 3% (4) execution problems surface in either of its recent acquisitions.

RATING RATIONALE FOR CTBC FINANCIAL

Moody's continues the review for downgrade of CTBC Financial's rating, reflecting Moody's expectation that the two proposed transactions will not create additional pressure for the company's financials. According to a pro-forma analysis, the holding company's double leverage ratio would be maintained at a healthy level of 104% following the transaction.

Moody's placed the A3 issuer rating of CTBC Financial on review for downgrade on 14 May 2015, following the company's announcement of its second attempt to acquire 100% of Taiwan Life Insurance Co. Ltd. (unrated) via a share swap.

In addition, CTBC Financial's expansion ambitions could indicate increased risk tolerance. CTBC Financial's changing credit profile -- due to the shifting geographic and banking/non-banking mix of its business -- could result in negative rating pressure over time.

After the acquisition of CITIC Bank Int'l (China), the banking business would represent about 80% of the group's total assets or shareholders' equity.

Moody's review will focus on (1) the group's strategy to integrate these businesses; (2) the financial policy of the group and its major subsidiaries, especially on future capital needs; (3) the business plan of Taiwan Life going forward; and (4) evaluating the business and financial profiles of Taiwan Life and its impact on CTBC Financial's credit profile. Further, Moody's will assess potential synergies as well as operating challenges for the management of the bank and life insurance subsidiaries.

RATINGS LIST

The following rating remains under review for downgrade:

CTBC Financial Holding Co., Ltd.: A3 long-term foreign currency issuer rating

The following ratings are affirmed with a negative outlook:

CTBC Bank Co., Ltd: A2/P-1 local currency and foreign currency long-term/short-term deposits ratings

RATING METHODOLOGY

The principal methodology used in rating CTBC Bank Co., Ltd. was Banks published in March 2015. The principal methodologies used in rating CTBC Financial Holding Co., Ltd. were Banks published in March 2015, and Global Life Insurers published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

CTBC Financial Holding Co., Ltd. reported consolidated assets of TWD3.654 trillion at 31 December 2014 , while CTBC Bank Co., Ltd. reported consolidated assets of TWD3.235 trillion. Both entities are headquartered in Taipei.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Ginger Kao
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms CTBC Bank's ratings; maintains CTBC Financial's ratings on review for downgrade following proposed transactions
No Related Data.
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