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Announcement:

Moody's affirms Chang Hwa Commercial Bank, First Commercial Bank, and Hua Nan Commercial Bank's A3/P-1 deposit ratings; outlook stable

 The document has been translated in other languages

16 Mar 2012

Hong Kong, March 16, 2012 -- Moody's Investors Service has affirmed the A3 long-term deposit ratings, as well as the P-1 short-term deposit ratings of Taiwan's Chang Hwa Commercial Bank (CHCB), First Commercial Bank (FCB) and Hua Nan Commercial Bank with a stable outlook.

At the same time, Moody's has upgraded the standalone bank financial strength ratings (BFSRs) of these three banks to D+ from D. The D+ BFSRs now map to Ba1 on Moody's long-term rating scale. The outlook on their BFSRs is also stable.

Because there is no change in FCB's long-term deposit rating, the issuer rating of First Financial Holding Co Ltd (FFHC), its parent company, remains unchanged at Baa1/stable.

RATINGS RATIONALE

The upgrades in the BFSRs of the "Big Three" state-controlled commercial banks, CHCB, FCB, and HNCB, reflect their improved financial fundamentals in terms of profitability, good asset quality, and strong liquidity that have been maintained in the past two years following the financial crisis.

The improvement in the capital adequacy of FCB and HNCB due to recent capital injections from their parents, as well as their reduced cash dividend payouts, also support our decision for an upgrade in their BFSRs.

FCB's Tier 1 capital ratio (preliminary unconsolidated) improved to 8.34% as of end-2011, from 7.0% at end-2010, following a capital injection of TWD15 billion by FFHC in 2H2011.

Meanwhile, HNCB's Tier 1 capital ratio is also expected to improve to above 8.5% from 7.55% (consolidated) at end-2010, following a capital injection of TWD20 billion from its parent Hua Nan Financial Holding Co Ltd in 1Q2012.

CHCB's Tier 1 capital ratio was 8.04% as at end-3Q2011.

Moody's expects that these banks will endeavor to maintain a Tier 1 capital ratio of at least 8% to meet the regulatory requirements for their China expansions. The 8% threshold is the requirement by Taiwanese regulator for banks who want to set up a subsidiary in China.

In addition, these three banks have demonstrated consistent improvements in their profitability, as measured by both pre-provision income (PPI) and net income as a percentage of risk-weighted assets in 2011. All of them reported stronger net profits for the first nine months of 2011, which was mainly driven by higher net interest margins, increased loan balances, and lower loan loss provisions. Nonetheless, core profitability continues to be weak compared to banks globally and this is a constraining factor for all Taiwanese bank ratings.

The asset quality of these three banks held up well throughout the global financial crisis, and significantly outperformed their regional and global peers. Their non-performing loan (NPL) ratios were very low, and remained below 1% as of end-2011. However, given sluggish global economic growth and its impact on Taiwan's economy, which is largely export-driven, we expect these banks' NPL ratios to deteriorate slightly in the next 12-18 months. According to our stress test assumptions, the deterioration in asset quality should remain manageable despite stresses in the troubled DRAM and TFT-LCD industries.

These banks have strengthened their loan loss reserves to around 1% of their total loans, which bolster their abilities to absorb potential credit costs from the troubled tech sector, following encouragement by the regulator to raise loan loss reserves to cover at least 1% of their total loans, despite very low NPL ratios.

The upgrade also incorporates Moody's view that the strong franchises of these banks as well as their association to the government engender trust among customers. This strong customer confidence should allow these banks to withstand severe stress over an extended period of time.

Despite the favorable trends in their financial fundamentals, one of the credit challenges for these three banks, which is common for other Taiwanese banks, remains their high single-borrower concentration. Compared to global peers, CHCB, FCB and HNCB have high top 20 borrower concentration relative to their Tier 1 capital and PPI. Such concentration could lead to heightened volatility in their asset quality and profitability and, by extension, in their capital, in the event of a significant economic downturn.

The affirmation of CHCB, FCB and HNCB's A3/P-1 deposit ratings considers the very high support from the Taiwan government due to the banks' status as important government-controlled banks with a strong market presence. The Taiwan government -- the systemic support provider and with high propensity for support -- has a local currency deposit ceiling of Aa3 with a stable outlook. It also reflects the strong liquidity of these banks given their little reliance on wholesale funding and the fact that they are largely deposit-funded.

There is limited upside potential on these ratings in the short term. Upward rating pressure could emerge over the longer-term if these banks have: (1) consistent improvement in profitability with net income exceeding 1.1% of risk-weighted assets; (2) core Tier 1 capital ratio rising above 10%; (3) asset quality metrics maintained at around the current levels; and (4) a material reduction in their top 20 borrower exposures as a percentage of Tier 1 capital declining below 200%, and as percentage of PPI declining below 750%.

Nonetheless, their ratings could be downgraded if any individual bank has (1) significant deterioration in its asset quality and a rise in credit costs, with problem loans rising above 2.5% of gross loans; (2) Tier 1 capital ratio falling below 7%; (3) weakened profitability, with net income below 0.6% of risk-weighted assets; and (4) lower systemic support as a result of reduced government ownership.

RATING METHODOLOGIES

The methodologies used in these ratings were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Taichung, Taiwan, Chang Hwa Commercial Bank had unconsolidated assets of TWD1.56 trillion as of 30 September 2011.

Headquartered in Taipei, Taiwan, First Commercial Bank is one of the major subsidiaries of FFHC and had unconsolidated assets of TWD2.06 trillion as of 30 September 2011.

Headquartered in Taipei, Taiwan, Hua Nan Commercial Bank is one of the major subsidiaries of HNFHC had unconsolidated assets of TWD1.91 trillion as of 30 September 2011.

REGULATORY DISCLOSURES

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Sally Yim
VP - Senior Credit Officer
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

Sonny Hsu, CFA
Vice President - Senior Analyst
Financial Institutions Group
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 Chang Hwa Commercial Bank, First Commercial Bank, and Hua Nan Commercial Bank's A3/P-1 deposit ratings; outlook stable
No Related Data.
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