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Rating Action:

Moody’s affirms Fubon Financial, Taipei Fubon Bank and Fubon Securities’ ratings following the proposed acquisition of Jih Sun Financial

22 December 2020


Hong Kong , December 22, 2020 Moody's Investors Service has affirmed the Baa1 issuer rating of Fubon Financial Holding Co., Ltd. The outlook remains negative.

At the same time, Moody's has affirmed Taipei Fubon Commercial Bank Co Ltd's (Taipei Fubon Bank) long-term deposit ratings at A2 with stable outlook. Moody's has also affirmed the bank's Baseline Credit Assessment (BCA) and adjusted BCA at baa2, short-term deposit ratings at P-1, long-term and short-term Counterparty Risk Assessment (CR Assessment) at A1(cr)/P-1(cr), and long-term and short-term Counterparty Risk Ratings (CRR) at A1/P-1. The outlook remains stable.

Moody's has also affirmed Fubon Securities Co., Ltd.'s Baa1 issuer rating and maintained its standalone assessment at Baa3. The entity-level outlook remains negative.

The ratings and outlooks on Fubon Life Insurance Co., Ltd. (Insurance Financial Strength (IFSR) A3 negative), Fubon Insurance Co., Ltd. (IFSR A1 stable), Fubon Property & Casualty Insurance Co., Ltd. (IFSR A3 negative) and Fubon Bank (China) Co., Ltd. (long-term deposit ratings Baa1 negative, BCA ba2) are not affected by these rating actions.

RATINGS RATIONALE

These rating actions follow the announcement on 18 December 2020 that Fubon Financial will launch a tender offer to purchase 50%-100% of the outstanding common shares of Jih Sun Financial Holding Co., Ltd. (Jih Sun Financial). The expected total offer value could reach TWD49 billion, and the tender offer period will be from 22 December 2020 to 1 February 2021. The offer is conditional upon receiving a minimum of 50% of outstanding common shares and obtaining approval from the Taiwan Fair Trade Commission. If Fubon Financial's offer is accepted by Jih Sun Financial's shareholders, Fubon Financial will merge Jih Sun Financial entity into Fubon Financial. Fubon Financial will then merge Jih Sun Securities and Jih Sun International Bank into Fubon Securities and Taipei Fubon Bank, respectively.

Fubon Financial

Moody's has affirmed Fubon Financial's Baa1 issuer rating because the negative pressure from the proposed acquisition will not be material to the company if executed as planned. The TWD49 billion consideration is not material compared to Fubon Financial's large capital base of TWD672 billion as of the end of September 2020. Because Moody's expects the proposed acquisition to be fully funded by equity and preference shares, the group's financial leverage will remain below 25% and its double leverage ratio to remain below 120%, which is around the same level from those as of June 30, 2020.

Moody's also views the execution risks of the proposed mergers as manageable, considering Fubon Financial's track record in successfully integrating acquired businesses. The company's operating track record in the banking and securities businesses will also help to mitigate the risk of operational disruptions brought by the proposed mergers.

Moody's expects the proposed acquisition to enhance Fubon Financial's competitiveness by boosting the market presence and earnings of its banking and securities businesses. This, in turn, will increase slightly Fubon Financial's diversification in terms of revenue and earnings. In addition, the proposed acquisition could generate cost savings at the merged entities.

Fubon Financial's Baa1 issuer rating continues to reflect the aggregate weighted average financial strength of its main subsidiaries and the structural subordination of the holding company to its operating subsidiaries. Fubon Financial also benefits from the diversification of its earnings sources through its various subsidiaries across the financial services industry. The rating also considers a degree of government support for its banking subsidiary, which has a well-established franchise and sizable market share of loans and deposits in Taiwan.

Moody's maintains the negative outlook on Fubon Financial, however, primarily reflecting the continuous negative pressure on its profitability from prolonged low interest rates and the strain on capitalization from capital market volatility at Fubon Life. Fubon Life is Fubon Financial's largest subsidiary by assets, shareholders' equity and net income. The negative outlook also incorporates the fact that Fubon Financial's financial and double leverage will temporarily be high in the bridge financing period until it completes its equity and preference shares raising, targeted in 2Q 2021, for funding the Jih Sun Financial acquisition.

Our rating action assumes that the consideration for the transaction is TWD49 billion. If Fubon Financial will raise the offer price significantly or materially change the terms of the transaction, such as the mix of the funding, we will reassess the credit impact to Fubon Financial.

Taipei Fubon Bank

The affirmation of Taipei Fubon Bank's ratings with a stable outlook reflects that the proposed merger between Taipei Fubon Bank and Jih Sun International Bank will not have a significant impact on its credit profile, given the small size and good financial metrics of Jih Sun International Bank. Taipei Fubon Bank and Jih Sun International Bank had total assets of TWD3.2 trillion and TWD265 billion as of 30 September 2020, respectively.

The combined bank will achieve greater scale and a domestic market share of 5.0% in terms of loans. Although the proposed merger raises operational and integration risks, Taipei Fubon Bank's good performance track record and Jih Sun Bank's relatively smaller balance sheet size lower the potential risks.

Moody's expects the group will maintain strong capitalization for the merged bank, as Taipei Fubon Bank is already classified as a domestic systemically important bank (D-SIB) prior to the transaction and will further increase its systemic importance.

Jih Sun International Bank's footprint overlaps with Taipei Fubon Bank's domestic operations. Both banks are active in retail and commercial banking businesses, with Taipei Fubon Bank having relatively more mortgage and other consumer lending exposures. Although asset quality deteriorated moderately for both banks following the onset of the coronavirus pandemic in 2020, both banks still maintain low problem loan ratios.

Moody's does not incorporate affiliate support in Taipei Fubon Bank's ratings, and follows the basic loss-given-failure framework to assess the bank's liabilities. Moody's incorporates a three-notch uplift of support from the government in Taipei Fubon Bank's long-term A2 deposit ratings, long-term A1 CRR and long-term A1(cr) CR Assessment, taking into account the bank's market share and systemic importance.

Fubon Securities

The affirmation of Fubon Securities' Baa1 issuer rating reflects Moody's view that the proposed merger with Jih Sun Securities would not materially change Fubon Securities' credit profile, as it would not leverage its balance sheet to acquire Jih Sun Securities. Consequently, Fubon Securities' leverage after the merger would remain conservative, after taking into consideration the TWD6 billion capital reduction in Q4 2020. In addition, we expect Fubon Securities will maintain prudent liquidity management and risk control of the merged entity, which mitigates concerns around increasing operating and management challenges amid integration.

Jih Sun Securities has a long-established retail brokerage franchise, low leverage and sound profitability. Its total assets amounted to TWD85.3 billion as of 30 September 2020 and amounted to 59% of Fubon Securities' assets. In addition, Jih Sun Securities has sound profitability, although it remains sensitive to market volatility. On the other hand, the combination of Jih Sun Securities will enhance Fubon Securities' retail client base and brokerage market share.

Fubon Securities' Baa1 issuer rating considers its Baa3 standalone assessment and a two-notch uplift for affiliate support, reflecting Moody's assumption that the company will receive a very high level of support from Fubon Financial in times of need. The negative outlook reflects the negative outlook on Fubon Financial, the company's parent holding company.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Fubon Financial

Given the negative outlook, an upgrade is unlikely. Moody's could change the outlook to stable if the outlook on its key operating subsidiary, Fubon Life, returns to stable, and the outlook on Taipei Fubon Bank and Fubon Insurance remains stable. At the same time, the group's financial leverage and double leverage do not meaningfully increase from the current levels due to the proposed acquisition.

Moody's could downgrade Fubon Financial's rating if (1) the ratings of its key operating subsidiaries, mainly Fubon Life and Taipei Fubon Bank, are downgraded; (2) its double leverage increases significantly or financial leverage rises above 30% and earnings coverage falls below 8x on a sustained basis, which could arise from additional debt issuances to fund the proposed acquisition; (3) significant acquisitions or expansions significantly straining the group's financial profile; and/or (4) the company reduces the business mix diversification of its life and non-life insurance and banking operations.

Taipei Fubon Bank

Moody's could upgrade Taipei Fubon Bank's BCA, deposit rating and CRRs if the bank improves its profitability and asset-quality metrics, with a return on assets above 1.0% and an impaired loan ratio below 0.7%.

Moody's could downgrade Taipei Fubon Bank's BCA and ratings if it mismanages its integration with Jih Sun International Bank. The BCA and ratings may also be downgraded if (1) keen competition leads to lower profitability, with the bank's return on assets remaining consistently below 0.6%; (2) its asset quality deteriorates materially, with impaired loans/gross loans rising above 2.7%; (3) its CET1 capital ratio falls below 8%; or (4) rapid growth strains its financial profile and management resources.

Fubon Securities

Given the negative outlook, an upgrade of Fubon Securities' Baa1 long-term issuer rating is unlikely. Moody's could change the outlook to stable if the outlook on Fubon Financial is changed to stable.

Fubon Securities' standalone assessment could improve if (1) its funding and liquidity profiles materially improve; and (2) the company develops a business model with more stable revenue to offset the potential decline in its brokerage commission, without incurring material additional market and credit risk.

Moody's could downgrade Fubon Securities' rating if Fubon Financial's rating is downgraded and if the credit profiles of its banking and insurance affiliates deteriorate materially, which would weaken the holding company's ability and capacity to support Fubon Securities.

Fubon Securities' standalone assessment could be lowered if it (1) it mismanages its integration with Jih Sun Securities; (2) significantly increases its balance-sheet leverage; (3) experiences a material weakening in liquidity and funding profile; (4) expands into high-risk assets and investments; (5) demonstrates material weakness in risk controls, especially in terms of market and operational risk; or (6) experiences weakened profitability on a sustained basis.

PRINCIPAL METHODOLOGIES

The principal methodologies used in rating Fubon Financial Holding Co., Ltd. were Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 , Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 , and Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865 . The principal methodology used in rating Fubon Securities Co., Ltd. was Securities Industry Market Makers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187332 . The principal methodology used in rating Taipei Fubon Commercial Bank Co Ltd was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Fubon Financial Holding Co., Ltd., which is listed on the Taiwan Stock Exchange, is one of the largest financial holding companies in Taiwan. At the end of 2019, its total assets and shareholders' equity totaled TWD8.5 trillion and TWD619.7 billion, respectively, on a consolidated basis.

Taipei Fubon Commercial Bank Co Ltd is headquartered in Taipei. It reported total assets of TWD3.2 trillion at 31 September 2020.

Fubon Securities Co., Ltd. is headquartered in Taipei with consolidated assets of TWD145 billion (USD5 billion) at the end of September 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406 .

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The below contact information is provided for information purposes only. Please see 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 the ratings.

The person who approved Fubon Financial Holding Co., Ltd.'s credit ratings is Sally Yim, MD-Financial Institutions, Financial Institutions Group, 852 3758 1350, 852 3551 3077. The person who approved Fubon Securities Co., Ltd. and Taipei Fubon Commercial Bank Co Ltd's credit ratings is Sophia Lee, Associate Managing Director, Financial Institutions Group, 852 3758 1350, 852 3551 3077.

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.

Kelvin Kwok, CFA
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
Client Service : 852 3551 3077

Sally Yim, CFA
MD-Financial Institutions
Financial Institutions Group
JOURNALISTS : 852 3758 1350
Client Service : 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
Client Service : 852 3551 3077

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