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Rating Action:

Moody's affirms the ratings of Land Bank of Taiwan and Mega International Commercial Bank and upgrades their BCAs; Outlook stable

26 Jun 2018

Hong Kong, June 26, 2018 -- Moody's Investors Service has affirmed Land Bank of Taiwan's deposit ratings at Aa3/P-1, and Mega International Commercial Bank's deposit ratings at A1/P-1. At the same time, Moody's has upgraded Land Bank of Taiwan's Baseline Credit Assessment (BCA) and Adjusted BCA to baa3 from ba1, and Mega International Commercial Bank's BCA and Adjusted BCA to baa1 from baa2. Both banks' Counterparty Risk Assessments (CR Assessment) are affirmed at Aa3(cr)/P-1(cr).

The outlook on both banks' deposit ratings remains stable.

RATINGS RATIONALE

The upgrade for Land Bank of Taiwan and Mega International Commercial Bank's BCAs takes into account their improving standalone credit strength. Both Land Bank of Taiwan and Mega International Commercial Bank have reported steady improvement in their asset quality metrics and capitalization since 2015. Both banks have also strengthened their liquidity profiles, either through a reduction in reliance on market funds, or due to an increase in holdings of highly liquid assets. The improvement in both banks' loss absorbing capability and liquidity profiles should bolster their ability to withstand adverse developments prior to government support should operating conditions worsen.

Both Land Bank of Taiwan and Mega International Commercial Bank have modest balance sheet growth in recent years. That, coupled with their internal capital generation, have led to the improvement in both banks' capitalization. In addition, the government lowered the regulatory risk weights on residential mortgages in December 2017. Although the change in regulatory risk weight did not lead to changes in the banks' financial profiles, it nevertheless contributed to the banks' higher reported regulatory capital ratios.

Meanwhile, we consider the risks on both banks' loan exposures to be manageable. Credit growth in Taiwan has been modest in recent years, leading to steady balance sheet leverage metrics for large Taiwanese borrowers. Mega International Commercial Bank has a focus on lending to large corporate borrowers, and the bank's asset quality should improve steadily amid stable economic growth.

Land Bank of Taiwan, on the other hand, has a focus on property-related lending. The housing market in Taiwan has been subdued since 2015, with property prices falling by around mid-single digits since its peak. Given the bank's conservative underwriting on residential mortgages with low loan-to-value ratios, the bank is unlikely to experience material losses on its direct mortgage exposures even if property prices decline further.

Land Bank of Taiwan has a strong deposit base, with stable deposits from retail customers and state-owned enterprises (SOEs) accounting for material share of the bank's overall deposits. The bank has very little reliance on wholesale funding. Mega International Commercial Bank, on the other hand, has more interbank deposits due to its role as a settlement bank for US dollars in Taiwan. Mega also has a greater share of deposits from large corporate customers, which tend to be more confidence-sensitive and volatile. That said, the bank has been focused on growing its retail deposits in order to meet the phasing-in of Basel III liquidity requirements.

The affirmation of both banks' deposit ratings takes into account our expectation of very strong government support for both banks. Land Bank of Taiwan is fully owned by the Taiwanese government, and the bank's deposit ratings are at the same level as those of the government at Aa3, incorporating six notches of uplift due to expected government support. The government also exercises effective control over Mega International Commercial Bank through its direct and indirect ownership. Both banks carry out policy mandates, with Land Bank of Taiwan mandated to provide credit to the property market, while Mega International Commercial Bank helps manage a part of Taiwan's foreign exchange reserves. Mega International Commercial Bank's A1 deposit rating factors in three notches of expected government support.

Factors That Could Lead To An Upgrade/Downgrade -- Land Bank of Taiwan

Land Bank's Aa3 deposit rating is at the same level as Taiwan's sovereign rating. Therefore, an upgrade of its deposit ratings is unlikely.

Nevertheless, its BCA could be raised if the bank can improve its capitalization and profitability, with a Common Equity Tier 1 ratio above 10.5% and net income / tangible assets ratio above 0.6% while maintaining its other financial metrics at current levels.

The bank's deposit ratings could be downgraded if government support weakens or if the bank's policy role diminishes.

The bank's BCA could be lowered if (1) its asset quality deteriorates significantly, with problem loan ratio above 3.5%; (2) its financial profile weakens owing to government-directed mergers and acquisitions, or due to government directives to carry out unprofitable policy functions.

Factors That Could Lead To An Upgrade/Downgrade -- Mega International Commercial Bank

The bank's A1 deposit rating is high and unlikely to be upgraded. The bank's BCA may be raised if it can reduce its concentration in the commercial real estate/construction sector and further improves its capitalization, with Common Equity Tier 1 ratio rising above 14%. An improvement in the bank's liquidity profile, with an increase in retail deposits, would also contribute to an improvement in its standalone financial profile.

The bank's deposit rating may be downgraded if there is a reduction in the expected government support for the bank.

Its BCA could be downgraded if (1) asset quality deteriorates significantly, with impaired loans rising to more than 3% of gross loans, (2) capital adequacy falls materially, with Common Equity Tier 1 ratio falling below 10%, or (3) the bank's funding position weakens materially, with material increases in the bank's wholesale funding.

The principal methodology used in these ratings was Banks published in June 2018. 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 TWD2.9 trillion ($97 billion) as of 31 December 2017.

Mega International Commercial Bank of Taiwan, headquartered in Taipei, reported total assets of TWD3.1 trillion ($107 billion) as of 31 March 2018.

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 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.

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.

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

Minyan Liu
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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