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.
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.
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
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.
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.
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.