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Rating Action:

Moody's affirms Land Bank of Taiwan's deposit ratings at Aa3/P-1 and upgrades its BCA to baa2 from baa3; outlook stable

13 Nov 2020

Hong Kong, November 13, 2020 -- Moody's Investors Service has affirmed Land Bank of Taiwan's ("the bank") foreign and local currency long-term deposit ratings at Aa3 with a stable outlook. At the same time, Moody's has upgraded the bank's Baseline Credit Assessment (BCA) and Adjusted BCA to baa2 from baa3.

Moody's has also affirmed the bank's foreign and local currency short-term deposit ratings at P-1, foreign and local currency long-term and short-term Counterparty Risk Ratings (CRRs) at Aa3/P-1 and Counterparty Risk Assessment (CR Assessment) at Aa3(cr)/P-1(cr).

The outlook remains stable.

RATINGS RATIONALE

The upgrade of Land Bank of Taiwan's BCA to baa2 from baa3 takes into account its good asset quality performance, sound liquidity profile, and modestly strengthening capitalization despite the challenges brought about by the coronavirus pandemic.

Land Bank of Taiwan's asset quality metrics were steady in the first half of 2020, with a stable impaired loan ratio of 0.5% as of the end of June 2020. Moody's expects the bank's problem loan ratio to increase only moderately in second half 2020 amid a gradual recovery in Taiwan, due to the lagged impact of the pandemic on the bank's problem loan ratio. Land Bank of Taiwan maintains a higher problem loan reserve coverage ratio than its rated Taiwanese peers.

Real estate-related lending accounted for 43% of Land Bank of Taiwan's overall loans as of the end of June 2020, with the bulk of real estate lending consisting of residential mortgages. The credit risk on the bank's residential mortgages is manageable. The average loan-to-value ratio for newly underwritten mortgages is between 60% and 70%, and property prices have risen in Taiwan in 2020 due to a decline in mortgage interest rates.

Lending to government entities accounts for a higher proportion of the bank's overall loans compared with most other rated Taiwanese banks, due partly to the bank's full government ownership. Moody's considers the credit risk on the bank's government-related lending to be low, given the government's strong fiscal position.

Land Bank of Taiwan's 9.4% Common Equity Tier 1 (CET1) ratio remains below the industry average of 10.6% as of the end of June 2020. Nevertheless, the bank has steadily improved its capitalization since 2015, due to its moderate balance sheet growth and profit retention. The bank has not made any dividend payouts to the government since 2015.

The bank's loan-to-deposit ratio is in line with the average of its rated Taiwanese peers. Although the bank's deposit base is more concentrated than those of its domestic peers, most of its top depositors are government-related entities or non-profit organizations. Given Land Bank of Taiwan's fully government-owned status, the bank is likely to benefit from deposit flight to quality in times of market stress given expected strong government support.

Land Bank of Taiwan's profitability has been below the average of its rated Taiwanese peers, with a return on average assets of 0.3% in first half of 2020 and 0.4% in first half of 2019. The bank has narrower net interest margins than the average of rated Taiwanese banks, due to its large book of residential mortgages, high proportion of low-yielding government loans, and high cost of funding when compared to its peers. The bank also has lower non-interest income in its revenue mix compared with its local peers, due to its weaker wealth management and credit card businesses.

Moody's does not incorporate any affiliate support in Land Bank of Taiwan's ratings. In line with the bank's BCA, its Adjusted BCA has also been upgraded to baa2 from baa3. Moody's adopts the basic loss-given-failure framework to assess Land Bank of Taiwan's liabilities, and the Preliminary Rating Assessment (PRA) on the bank's deposits is at the same level as its BCA and Adjusted BCA at baa2. The PRA for the bank's CRRs and CR Assessment are at baa1/baa1(cr), one notch above the bank's Adjusted BCA.

The affirmation of Land Bank of Taiwan's Aa3 deposit ratings takes into account Moody's expectation of very strong government support, given its fully government-owned status. The bank carries out the policy function of providing lending to Taiwan's real estate sector. The bank's deposit ratings are at the same level as those of the Taiwan government, incorporating a five-notch uplift. The affirmation of the bank's CRRs and CR Assessment also factors in the expectation of very strong government support, with the CRRs and CR Assessment incorporating a four-notch government support uplift. Land Bank of Taiwan's government support uplift for its deposit ratings, CRRs and CR Assessment has narrowed following the BCA upgrade, as the deposit ratings, CRRs and CR Assessment remain at the same level as the Taiwan government's rating.

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

Land Bank of Taiwan's deposit ratings are at the same level as the rating of the Government of Taiwan and would only be upgraded if the government's rating is upgraded. Nonetheless, the bank's BCA could be upgraded if it improves its capitalization, with its Common Equity Tier 1 ratio rising to 12%, or if return on average assets rises sustainably above 0.6%.

Land Bank of Taiwan's ratings could be downgraded if the government reduces its stake in the bank or if the bank's policy role diminishes. In addition, Moody's may lower the bank's BCA if its (1) asset quality deteriorates significantly and credit costs rise sharply, with problem loans rising to above 3% of gross loans; (2) financial metrics deteriorate as a result of government-directed acquisitions.

The principal methodology used in these ratings 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 this methodology.

Land Bank of Taiwan, headquartered in Taipei, reported total assets of TWD3.0 trillion ($102 billion) as of 30 June 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 unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management: YES

For additional information, 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 entity is participating and the rated entity or its agent(s) generally provides 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_1133569.

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.

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.

Sonny Hsu, CFA
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
Client Service: 852 3551 3077

Sophia Lee, CFA
Associate Managing Director
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

No Related Data.
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