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Rating Action:

Moody's affirms CTBC Financial's ratings; outlook negative

 The document has been translated in other languages

09 Aug 2013

Hong Kong, August 09, 2013 -- Moody's Investors Service has affirmed the long-term foreign currency A3 issuer rating of CTBC Financial Holding Co., Ltd. (CTBC FHC) while revised its rating outlook to negative from stable.

Moody's also has affirmed the ratings of CTBC Bank Co., Ltd. and Chinatrust Commercial Bank, Hong Kong Branch with a stable outlook.

The rating action follows a recent acquisition by CTBC FHC and also considers broader trends in the company's overall credit profile.

RATINGS RATIONALE

CTBC FHC

On 31 July 2013, CTBC FHC said that its Board of Directors had approved the acquisition of 100% of the Taiwan branch of Manulife (International) Limited (Manulife Taiwan, unrated) for TWD724 million (about $24.2 million) in cash. Manulife Taiwan will be consolidated with CTBC Life Insurance Co., Ltd. (unrated), which was formerly the Taiwanese subsidiary of MetLife Inc. (A3 negative) and acquired by CTBC FHC in November 2011.

While the deal is subject to regulatory approvals, CTBC FHC expects to complete the transaction in November 2013.

"CTBC FHC's rating was affirmed because the acquisition will account for only 0.41% of the firm's equity as of March 2013 and is still mainly dependent on the performance of CTBC Bank, which maintains its bank-centric status. In addition, CTBC FHC's double leverage is likely to remain at a healthy level after the acquisition," says Ginger Kao, a Moody's Analyst.

"The negative rating outlook, however, reflects our concerns that CTBC FHC's growth ambitions could increase the group's risk profile over time. More specifically, the growth focus could be on the non-banking business, where we believe financial strength is likely to be weaker and government support is less certain," she adds.

CTBC FHC's non-banking business, mainly in life insurance and securities, represented 9% of the group's total consolidated assets in 1Q 2013, increased from 8% in 2012 and 6% in 2011. Moody's would view growth of CTBC FHC's non-banking assets to over 10% of group assets to materially start altering the risk profile of the group.

In the past two years, CTBC FHC has been seeking expansion through acquisitions to better compete with its Taiwanese peers, particularly in terms of supplementing the life insurance and asset management arms to the group. While there are benefits in the form of business diversification and cross-selling opportunities for CTBC FHC, additional capital would likely be necessary over time to support business growth at these subsidiaries.

Due to the highly competitive market in Taiwan and the group's growth ambitions, an upgrade of CTBC FHC's rating is unlikely in the near term, as highlighted by the negative rating outlook.

CTBC FHC's rating could be downgraded if: (1) CTBC Bank's ratings are downgraded; (2) the double leverage ratio at the holding company increases to over 120% owing to debt-funded acquisitions; and/or (3) the assets of, or earnings contribution from, its non-banking business increases to more than 10% of the group's assets or earnings.

In terms of the acquisition target, Manulife Taiwan's risk-based capital ratio went down to the 250%-300% disclosure band in 2012 from over 300% in 2011, because of a robust growth of 45% in premiums.

Manulife Taiwan has a strong focus on investment-linked policies, which accounted for 92% of its total first-year premium for 1H 2013, and which would complement CTBC Life's existing traditional product-focused business.

In addition, the distribution channel of CTBC Life -- which is now primarily through the CTCB Bank channel -- will also become more diversified with the addition of Manulife Taiwan's agency force, which accounts for about 80% of Manulife Taiwan's distribution. The addition of an existing agency force to CTBC Life's business will boost growth of the life insurance business.

CTBC BANK

CTBC Bank's ratings were affirmed with a stable outlook, as the acquisition at the holding company level is unlikely to result in significant changes in the bank's performance or financial policy. But, if CTBC FHC makes further sizeable acquisitions, CTBC Bank could be under pressure to up-stream more dividends to its parent, and which would be negative for its ratings.

CTBC Bank has a strong commercial banking franchise in Taiwan, particularly in consumer banking and treasury products. It is also the biggest credit card issuer in Taiwan and has significant market shares in unsecured consumer lending, wealth-management and treasury products.

Furthermore, the bank has a sound liquidity profile and solid capitalization. It reported a consolidated loan-to-deposit ratio of 79.5% and a Tier 1 ratio of 11.2% at end-March 2013.

However, asset quality is one of the key credit challenges of CTCB Bank. The bank had an impaired loan ratio of 3.96% at end-March 2013, which is slightly higher than other rated Taiwanese peers.

The pressure on the bank's asset quality will increase because of the sluggish recovery of Taiwan's economy, and which in turn would result in a slight deterioration of its impaired loan or NPL ratio. Besides, the bank is still in the process of building up its 1% general provision of normal loans. Its reserve coverage against its impaired loan was 27.37% at end-March 2013, which Moody's considers low.

In addition, the bank's high borrower concentration and low profitability by global standards remain its two other major weaknesses, undermining its credit profile.

CTBC Bank's deposit ratings also take into account Moody's assessment of a very high probability of support from the Taiwanese government (Aa3 stable), given the bank's good franchise in the domestic market and Moody's assessment that Taiwan is a high support system.

CTBC Bank's deposit ratings will be upgraded if it can: (1) improve its pre-provision income (PPI) to over 2.5% and its net income to over 1.8% of average risk weighted assets (RWA); (2) significantly reduces its top 20 borrower concentrations to less than 750% of PPI and less than 200% of Tier 1 capital; and/or (3) maintain its asset quality metrics at close to its current levels.

CTBC Bank's deposit ratings will be downgraded if its: (1) asset quality deteriorates significantly as a result of aggressive loan growth, with impaired loans rising to above 3.5% of gross loans; (2) profitability deteriorates relative to the risks it takes, such that net income falls below 0.8% of average RWA; and/or (3) capitalization weakens, with the common equity Tier 1 capital ratio falling below 8.5%, and if the parent company or the bank engages in material acquisitions without adequate funding, expands aggressively, or needs to up-stream capital owing to negative developments at its parent or affiliated companies.

AFFECTED RATINGS

Moody's has affirmed CTBC FHC's rating but changed the rating outlook to negative from stable:

• A3 long-term foreign currency issuer rating.

Moody's has affirmed the following ratings of CTBC Bank with a stable outlook:

• C- /baa2 standalone credit assessment

• A2/P-1 local currency and foreign currency long-term/short-term deposit ratings

Moody's has affirmed the following rating of Chinatrust Commercial Bank, Hong Kong Branch with a stable outlook:

• Baa3 foreign currency junior subordinated debt

RATING METHOLODLOGY

The methodologies used in this rating were Moody's Global Rating Methodology for Life Insurers published in May 2010, and Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

CTBC FHC reported consolidated assets of TWD2.2 trillion, while CTBC Bank reported consolidated assets of TWD2.0 trillion at end-March 2013. Both entities are headquartered in Taipei.

Manulife Taiwan had a market share of 0.4% in terms of total premiums in Taiwan as of June 2013. It reported TWD38.8 billion in total assets and TWD2.1 billion in shareholders' equity at end-March 2013. On a pro-forma basis, Manulife Taiwan represents 1.7% of the CTBC group's consolidated assets and 1.2% of shareholders' equity.

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 Wei Chun 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 Financial's ratings; outlook negative
No Related Data.
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