Actions follow conclusion of methodology-related review
Hong Kong, June 09, 2015 -- Moody's Investors Service has concluded its rating reviews on Taiwanese
banks. These reviews were initiated on 17 March 2015 (see press
release at https://www.moodys.com/research/Moodys-reviews-global-bank-ratings--PR_321005),
following the publication of Moody's new bank rating methodology.
Among the actions Moody's has taken are the following:
- Three long-term/short-term bank deposit ratings
upgraded, one affirmed and six unchanged
- One long-term senior unsecured debt rating unchanged
- One subordinated debt rating affirmed
- Four baseline credit assessments (BCAs)/adjusted BCAs upgraded
and six unchanged
- One long-term issuer rating of financial holding company
upgraded
Moody's has also assigned Counterparty Risk (CR) Assessments to the ten
banks in line with its new bank rating methodology.
Moody's has withdrawn the outlooks on all junior instrument ratings
for its own business reasons. Please refer to Moody's Investors
Service's Policy for Withdrawal of Credit Ratings, available on
its website, www.moodys.com.
Outlooks, which provide an opinion on the likely rating direction
over the medium term, are now assigned only to long-term
deposit, long-term issuer and senior unsecured debt ratings.
Moody's has assigned stable outlook to the long-term deposit ratings
of Chang Hwa Commercial Bank, and positive outlooks to First Commercial
Bank and Hua Nan Commercial Bank Ltd, as well as assigned positive
outlook to the issuer ratings of First Financial Holding Company,
Ltd. Moody's has also maintained stable outlook to the long-term
deposit ratings of Land Bank of Taiwan.
For more information on the new bank rating methodology, please
see Moody's press release at https://www.moodys.com/research/Moodys-reviews-global-bank-ratings--PR_321005.
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE -- KEY DRIVERS
The new bank rating methodology includes a number of elements that Moody's
has developed to help accurately predict bank failures and determine how
each creditor class is likely to be treated when a bank fails and enters
resolution. These new elements capture insights gained from the
crisis and the fundamental shift in the banking industry and its regulation.
In light of the new banking methodology, Moody's rating actions
generally reflect the following considerations: 1) Moody's view
of Taiwan's "Strong" macro profile; 2) the banks'
strong financial profile; and 3) Moody's assessment of government
support for these banks.
1) The "Strong" macro profile of Taiwan
As the banks mainly operate in Taiwan, its operating environment
is heavily influenced by Taiwan and its Macro Profile is thus aligned
with that of Taiwan at "Strong".
Taiwanese banks operate in an economy with a high level of wealth and
comparatively dynamic growth. The banking industry also benefits
from Taiwan's track record of macroeconomic stability, strong institutional
strength and solid funding conditions.
Taiwan's susceptibility to event risk is moderate and mainly driven by
cross-straits relations, which have improved since 2008.
On the other hand, our analysis of Taiwan's macro profile also considers
the risks associated with rising private-sector debt levels and
a fragmented banking industry structure.
2) The banks' strong financial profile
The stable operating environment and banks' solid financial base both
support Taiwanese banks' BCAs. The Taiwanese banks' solid financial
base includes strong liquidity profiles, favorable asset quality,
adequate capital adequacy, and improving profitability. Following
today's rating actions, the weighted-average BCA of these
10 banks stands at baa2.
The creditworthiness of the Taiwan sovereign and the country's solid economic
performance -- Moody's forecasts Taiwan GDP to grow 3.5%
in 2015 and 3.5% in 2016 -- as well as its
low unemployment level, support Moody's view of a continued,
stable operating environment for Taiwanese banks. Persistently
low interest rates, property price inflation and China's economic
slowdown are the main fundamental challenges for Taiwanese banks over
the next 12-18 months.
3) The assessment of government support
Taiwan government (Aa3 stable) support for banks has been and will continue
to be high. Our view is based on the substantial government effective
interests in several major banks, the government's record
of maintaining confidence in the banking system in times of economic volatility,
and the absence of bank deposit defaults in the past.
All ten Taiwanese banks' ratings continue to benefit from rating uplift
in the range of two to seven notches.
BANK SPECIFIC DRIVERS
- Firsts Commercial Bank
The upward revision of its BCA reflects its enhanced loss absorption buffer,
which will strengthen the bank's resilience against future downturns.
This is reflected in First Commercial Bank's improved capitalization
as well as better loan loss coverage while asset quality remains healthy
since 2012.
In addition, its consistently robust funding structure and liquidity
profile also contribute to its stronger credit profile, placing
the bank in a comparable position to global banks with a baa3 BCA.
First Commercial Bank's reliance on wholesale funding is low and
it holds ample liquid assets, including Negotiable Certificate of
Deposits issued by Taiwan's central bank.
The upgrade of First Commercial Bank's deposit ratings also factor
in Moody's assessment that the probability of support from the Taiwanese
government remains very high. Moody's bases its assessment
on the bank's status as a state-controlled bank and its solid
market positions with a 5%-6% loans and deposits
market share in a highly fragmented system. The assessment also
reflects the Taiwanese government's history of high willingness
to support the banking industry, given its importance to the country's
economy. Consequently, the A2 rating includes a government
support uplift of four notches from the bank's baa3 adjusted BCA.
The positive outlook on First Commercial Bank's deposit ratings reflects
a further improvement in its capitalization and a benign asset quality
outlook. Following a planned capital injection of TWD20 billion
from its parent in the third-quarter of 2015, we expect the
bank's capital ratios to improve by at least 100 basis points as
a result. As of December 2014, First Commercial Bank had
a common equity Tier 1 ratio of 9.10% and an impaired loan
ratio of 1.43%.
The bank's BCA could be upgraded if the bank is able to maintain its financial
metrics at current levels, particularly with an impaired loan ratio
below 3% and/or a tangible common equity (TCE) to risk-weighted
assets (RWA) or core Tier 1 ratio above 9%.
First Commercial Bank's ratings are unlikely to be downgraded in the near
term. Nevertheless, the bank's ratings could be downgraded
if its (1) asset quality deteriorates significantly; (2) profitability
weakens; (3) core Tier 1 capital falls below 7.5%;
(4) credit profile weakens due to aggressive expansion in overseas or
Mainland China markets; and/or (5) government support decreases,
owing to a decrease in government ownership.
- Hua Nan Commercial Bank
The upward revision of its BCA reflects its enhanced loss absorption buffer,
which will strengthen the bank's resilience against future downturns.
This is reflected in Hua Nan Commercial Bank's stable capitalization
as well as better loan loss coverage while asset quality has been healthy
since 2012.
In addition, its consistently robust funding structure and liquidity
profile also contribute to its stronger credit profile, placing
the bank in a comparable position to global banks with a baa3 BCA.
Hua Nan Commercial Bank's reliance on wholesale funding is low and
it holds ample liquid assets, including Negotiable Certificate of
Deposits issued by Taiwan's central bank.
The upgrade of Hua Nan Commercial Bank's deposit ratings also factor
in Moody's assessment that the probability of support from the Taiwanese
government remains very high. Moody's bases its assessment
on the bank's status as a state-controlled bank and its solid
market positions with market share of a 5%-6% loans
and deposits market share in a highly fragmented system. The assessment
also reflects the Taiwanese government's history of high willingness
to support the banking industry, given its importance to the country's
economy. Consequently, the A2 rating includes an uplift of
four notches from the bank's baa3 adjusted BCA.
The positive outlook on Hua Nan Commercial Bank's deposit ratings reflects
a potential further improvement in its capitalization and a benign asset
quality outlook. As of December 2014, Hua Nan Commercial
Bank had a common equity Tier 1 ratio of 9.02% and an impaired
loan ratio of 1.54%.
The bank's BCA could be upgraded if the bank is able to maintain its financial
metrics at current levels, particularly with an impaired loan ratio
below 2% and/or a TCE to RWA or core Tier 1 ratio above 9%.
Hua Nan Commercial Bank's ratings are unlikely to be downgraded in the
near term. Nevertheless, the bank's rating could be downgraded
if its (1) asset quality deteriorates significantly; (2) profitability
weakens; (3) core Tier 1 capital ratio falls below 7.5%;
(4) credit profile weakens due to aggressive expansion overseas and in
Mainland China; and/or (5) government support decreases, owing
to a decrease in government ownership.
- Chang Hwa Commercial Bank
The upward revision of its BCA reflects its enhanced loss absorption buffer,
which will strengthen the bank's resilience against future downturns.
This is reflected in Chang Hwa Commercial Bank's better loan loss
coverage while asset quality remains healthy since 2012.
In addition, its consistently robust funding structure and liquidity
profile also contribute to its stronger credit profile, placing
the bank in a comparable position to global banks with a baa3 BCA.
Chang Hwa Commercial Bank's reliance on wholesale funding is low
and it holds ample liquid assets, including Negotiable Certificate
of Deposits issued by Taiwan's central bank.
The upgrade of Chang Hwa Commercial Bank's deposit ratings also
factor in Moody's assessment that the probability of support from
the Taiwanese government remains very high. Moody's bases
its assessment on the bank's status as a state-controlled
bank and its solid market positions with a 4%-5%
market share for loans and deposits in a highly fragmented system.
The assessment also reflects the Taiwanese government's history
of high willingness to support the banking industry, given its importance
to the country's economy. Consequently, the A2 rating
includes an uplift of four notches from the bank's baa3 adjusted
BCA.
Although the bank retains adequate capitalization, its capital management
policies will affect its credit assessment going forward. In particular,
its ownership structure, with Taishin Financial Holding Company
(unrated) and the Taiwanese government as its two largest shareholders,
renders it less likely to raise fresh new capital owing to the ongoing
dispute between these large shareholders.
The bank's BCA could be upgraded if the bank is able to improve its capitalization,
such as maintaining a common equity Tier 1 ratio to above 9%,
and good profitability while retaining its current asset quality level.
Nevertheless, downward ratings pressure could arise if the bank's
(1) asset quality deteriorates significantly; (2) profitability weakens;
(3) core Tier 1 capital ratio falls below 7.5%; and/or
(4) government support decreases, owing to a decrease in government
ownership.
- Land Bank of Taiwan
The upward revision of its BCA reflects its strong liquidity position
which is reflected in its solid funding structure and liquidity resources.
The bank is mainly funded by customer deposits with limited reliance on
market funding, as well as by holdings of high-quality liquid
assets. It reported a loan-to-deposit ratio of 89.23%
and liquid assets to total tangible banking assets of 22.91%
at 30 December 2014.
Its BCA also takes into consideration its fair solvency profile,
which includes a weak capital position and weak profitability, despite
a satisfactory asset risk profile. At 31 December 2014, it
reported a common equity Tier 1 capital ratio of 6.75%,
an after-tax return on average assets of 0.38%,
and an impaired loan ratio of 1.26%.
The bank's BCA is constrained by its high level of concentration in the
real estate sector relative to its TCE. Such exposure makes it
vulnerable to large losses in downturns.
The affirmation of Land Bank of Taiwan's deposit ratings is based
on Moody's assessment of government-backed support from the
Taiwanese government to the bank in times of stress. Despite the
potential government ownership dilution, after raising new capital
of TWD30 billion through an initial public offering (IPO) planned in the
next two years, at this stage, Moody's still believes
that its important role as a policy bank for the real estate sector will
continue.
Land Bank's Aa3 deposit rating is at the same level as Taiwan's sovereign
rating and is at the country ceiling. Therefore, an upgrade
of its deposit ratings is unlikely.
Nevertheless, its BCA could be raised if the bank is able to raise
fresh capital of TWD30 billion while maintaining its other financial metrics
at current levels. A successful new rights issuance of TWD30 billion
would boost the bank's core capital position by about 1.5%,
thereby improving its loss-absorption capacity. In addition,
the capital raise would help the bank to better pursue its business expansion
strategy.
The bank's deposit ratings could be downgraded if the government further
reduces its ownership or if the bank's policy role diminishes.
The bank's BCA could be lowered if the bank's (1) asset quality deteriorates
significantly, with rising credit costs; (2) capitalization
declines, with TCE to RWA below 6%; and/or (3) financial
profile weakens owing to government-directed mergers and acquisitions,
or government directives to carry out unprofitable policy functions.
- Cathay United Bank
The affirmation of the bank's Basel II-compliant subordinated
debt rating reflects a moderate level of Taiwan government support,
leading to a one-notch uplift to Baa2 from its baa3 Preliminary
Rating Assessment (PRA), which is a minus-one notch under
Moody's Basic Loss Given Failure analysis from the bank's
baa2 adjusted BCA.
This is based on our belief that the complexity of the financial holding
structure poses contagion risk to the rest of the financial group in the
case of default, as well as to the system.
Our assumption of moderate support also reflects the fact that Taiwan
is not a member of the G20, the Financial Stability Board or the
Basel Committee on Banking Supervision. Therefore, we do
not expect Taiwan to be at the forefront of moves towards burden sharing
in near-future banking resolutions.
Cathay United Bank's BCA of baa2 reflects its robust liquidity position,
which is supported by its strong funding structure and ample liquidity
resources. The bank is mainly funded by customer deposits with
limited reliance on market funding as well as holdings of high-quality
liquid assets.
Its BCA also takes into consideration its sound solvency profile,
which includes a sound capital position, good asset quality as well
as improving profitability.
The upgrade pressure on Cathay United Bank's ratings could emerge
if the bank (1) generates sustainable net income and maintains its core
capital at the current level; (2) achieves meaningful geographical
diversification without pressuring its financial fundamentals and management
resources; and/or (3) reduces its loan concentration on real estate-related
sectors.
On the other hand, the bank's ratings could experience downward
pressure if there is (1) keen price competition, which pressures
its profitability; (2) significant weakening in its operating environment
or more relaxed underwriting practices, resulting in asset quality
deterioration; and/or (3) a decline in its TCE to RWA ratio to below
9%.
- First Financial Holding Company, Ltd.
The upgrade of its issuer ratings to A3 from Baa1 mirrors the upgrade
of First Commercial Bank's adjusted BCA to baa3 from ba1.
The issuer ratings reflects First Financial's status as one of Taiwan's
largest financial groups, solid financials with reasonable balance
sheet leverage, and the significant market share of its flagship
subsidiary, First Commercial Bank.
The company's A3 issuer ratings incorporates four notches of government
support uplift from its ba1 Preliminary Rating Assessment, which
is positioned one notch below the First Commercial Bank's baa3 adjusted
BCA to reflect the structural subordination of a holding company's obligations
compared to those of its operating subsidiaries.
First Financial's issuer ratings also incorporate our expectation of a
very high degree of support from the Taiwanese government for financial
holding groups in Taiwan, particularly those heavily engaged in
the banking sector.
Moody's believes that the company's banking subsidiary is of significant
systemic importance and is therefore likely to receive a very high level
of government support in case of need. Moody's expectation is that
this support would be channeled via First Financial.
The Taiwan government's control of First Financial, with an approximate
30% indirect stake through entities such as the Ministry of Finance,
state-owned banks, and government funds, also increases
the probability of government support in a stress situation.
The issuer ratings could be upgraded if (1) there is an upward revision
of First Commercial Bank's adjusted BCA; and (2) there are acquisitions
that significantly increase revenue diversification and enhance its market
position without considerably raising its double leverage.
First Financial's ratings are unlikely to be downgraded in the near term.
Nevertheless, the company's issuer ratings could be downgraded
if (1) there is a trend of weakening financials of First Commercial Bank;
(2) there is a significant reduction in the government's shareholding
signifying a lower probability of government support; (3) there are
aggressive acquisitions that increase leverage, thereby pressuring
the company's financials.
RATIONALE FOR COUNTERPARTY RISK ASSESSMENTS
Moody's has also assigned CR Assessments to ten Taiwanese banks.
CR Assessments are opinions of how counterparty obligations are likely
to be treated if a bank fails, and are distinct from debt and deposit
ratings in that they (1) consider only the risk of default rather than
expected loss and (2) apply to counterparty obligations and contractual
commitments rather than debt or deposit instruments. The CR Assessment
is an opinion of the counterparty risk related to a bank's covered bonds,
contractual performance obligations (servicing), derivatives (e.g.,
swaps), letters of credit, guarantees and liquidity facilities.
The CR Assessment takes into account the issuer's standalone strength
as well as the likelihood of affiliate and government support in the event
of need, reflecting the anticipated seniority of these obligations
in the liabilities hierarchy. The CR Assessment also incorporates
other steps authorities can take to preserve the key operations of a bank
should it enter a resolution.
For Taiwanese banks, the CR Assessment is positioned, prior
to government support, one notch above the Adjusted BCA and therefore
above senior unsecured and deposit ratings, reflecting Moody's
view that its probability of default is lower than that of senior unsecured
debt and deposits. Moody's believe senior obligations represented
by the CR Assessment will be more likely preserved in order to limit contagion,
minimize losses and avoid disruption of critical functions. For
the 10 Taiwanese banks, the CR Assessment also benefits from government
support in line with Moody's support assumptions on deposits and
senior unsecured debt. This reflects Moody's view that any
support provided by governmental authorities to a bank which benefits
senior unsecured debt or deposits is very likely to benefit operating
activities and obligations reflected by the CR Assessment as well,
consistent with our belief that governments are likely to maintain such
operations as a going-concern in order to reduce contagion and
preserve a bank's critical functions.
However, in the case of Bank of Taiwan and Land Bank of Taiwan,
given their very high deposit ratings, which are aligned with the
Taiwanese government bond rating at Aa3, Moody's also assigned a
CR Assessment of Aa3 (cr)/P-1 (cr) to the two banks.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks published in
March 2015. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
LIST OF AFFECTED RATINGS
Issuer: Bank of Taiwan
.... CR Assessment assigned at Aa3(cr)/P-1(cr)
Issuer: Cathay United Bank Co., Ltd
.... Legacy subordinated debt rating affirmed
at Baa2
.... CR Assessment assigned at A1(cr)/P-1(cr)
Issuer: Chang Hwa Commercial Bank
.... BCA/Adjusted BCA upgraded to baa3 from
ba1
.... Deposit ratings upgraded to A2/P-1
from A3/P-2
.... CR Assessment assigned at A1(cr)/P-1(cr)
.... Outlook for the bank is Stable
Issuer: CTBC Bank Co., Ltd.
.... CR Assessment assigned at A1(cr)/P-1(cr)
Issuer: E.Sun Commercial Bank, Ltd.
.... CR Assessment assigned at A2(cr)/P-1(cr)
Issuer: First Commercial bank
.... BCA/Adjusted BCA upgraded to baa3 from
ba1
.... Deposit ratings upgraded to A2/P-1
from A3/P-2
.... CR Assessment assigned at A1(cr)/P-1(cr)
.... Outlook for the bank is Positive
Issuer: First Financial Holding Company, Ltd.
.... Issuer ratings upgraded to A3 from Baa1
.... Outlook for the company is Positive
Issuer: Hua Nan Commercial Bank Ltd.
.... BCA/Adjusted BCA upgraded to baa3 from
ba1
.... Deposit ratings upgraded to A2/P-1
from A3/P-2
.... CR Assessment assigned at A1(cr)/P-1(cr)
.... Outlook for the bank is Positive
Issuer: Land Bank of Taiwan
.... BCA/Adjusted BCA upgraded to ba1 from
ba2
.... Deposit rating affirmed at Aa3/P-1
.... CR Assessment assigned at Aa3(cr)/P-1(cr)
.... Outlook for the bank is Stable
Issuer: Mega International Commercial Bank Co., Ltd.
.... CR Assessment assigned at Aa3(cr)/P-1(cr)
Issuer: Taipei Fubon Commercial Bank Co Ltd
.... CR Assessment assigned at A1(cr)/P-1(cr)
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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 following information supplements Disclosure 10 ("Information
Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J)
of SEC Rule 17g-7") in the regulatory disclosures made at
the ratings tab on the issuer/entity page on www.moodys.com
for each credit rating:
Moody's was not paid for services other than determining a credit
rating in the most recently ended fiscal year by the person that paid
Moody's to determine this credit rating.
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.
Ginger Kao
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
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 concludes review on ratings of Taiwanese banks
