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Rating Action:

Moody's confirms CTBC group's ratings; outlook negative

 The document has been translated in other languages

18 Jun 2014

Hong Kong, June 18, 2014 -- Moody's Investors Service has confirmed all the ratings of CTBC Financial Holding Co., Ltd and CTBC Bank Co., Ltd. The ratings outlook is negative.

The affected ratings are: CTBC Financial's A3 long-term foreign currency issuer rating; CTBC Bank's A2/P-1 local currency and foreign currency long-term/short-term deposit ratings, the Baa3 (hyb) rating on the foreign currency junior subordinated debt issued by CTBC Bank Co., Ltd's Hong Kong Branch, and CTBC Bank's C- bank financial strength rating, which is equivalent to a baa2 baseline credit assessment.

These actions conclude a review initiated on 4 November 2013, following CTBC Financial's announcement on 31 October 2013 that CTBC Bank would acquire a 98.16% interest in The Tokyo Star Bank, Limited (unrated) for JPY52 billion (approximately TWD15.6 billion) in cash.

The October announcement also revealed that CTBC Financial planned to acquire 100% of Taiwan Life Insurance Co. Ltd (Taiwan Life, unrated) through a stock-for-stock swap for the consideration of TWD26.6 billion.

Moody's rating actions follow the recent failed attempt by CTBC Financial to acquire Taiwan Life, and CTBC Bank's successful acquisition of Tokyo Star Bank. CTBC Financial's planned acquisition of Taiwan Life was rejected by Taiwan Life's shareholders on 16 June 2014.

RATINGS RATIONALE

RATING RATIONALE FOR CTBC BANK

"We confirmed all of CTBC Bank's ratings based on our assessment that the bank's credit metrics following the Tokyo Star Bank deal will remain consistent with our assumptions for the ratings," says Ginger Kao, a Moody's Analyst.

"CTBC Bank funded the acquisition with its existing cash sources, as well as with a fresh capital injection of TWD15 billion from its parent," adds Kao.

While CTBC Bank's consolidated pro forma capital ratios will fall slightly by 1-2 percentage points, Moody's considers the deterioration temporary, as the bank targets to strengthen and maintain its Tier 1 capital ratio above 10% and total capital adequacy ratio in excess of 11% over the next 12-18 months. Such levels are comparable to the capital profiles of other rated Taiwanese peers with BCAs of baa2.

At 31 December 2013, CTBC Bank reported a common equity Tier 1 capital ratio of 9.01% and Tier 1 capital ratio of 9.66%.

CTBC Bank has explicitly outlined a plan to strengthen its consolidated capital position and return its common equity Tier 1 ratio and Tier 1 capital ratio to similar levels before the Tokyo Star Bank acquisition. Specifically, it is in the process of: (1) selling its head-office building and (2) issuing additional Tier 1 capital-qualified subordinated debt of TWD20 billion. Moody's estimates that such measures should help improve the bank's core and Tier 1 capital ratio to 9%-10%.

However, Moody's decision to change CTBC Bank's ratings outlook to negative considers the following challenges:

(1) Tokyo Star Bank has a weaker business profile than CTBC Bank and has a legacy of asset quality problems. While CTBC Bank plans to reorient Tokyo Star Bank to a business model that focuses on cross-border business between Japan and Greater China, this will take time and involve some execution risk;

(2) Linked to this, there is a potential drag on CTBC Bank's consolidated profitability due to its management's plan to raise Tokyo Star Bank's provisioning coverage. Tokyo Star Bank exhibits higher credit costs than CTBC Bank due to its weak asset quality. The higher credit charges result in higher earnings volatility;

(3) Limited growth opportunities from Tokyo Star Bank, against the backdrop of a mature banking market in Japan, characterized by low levels of loan growth, strong competition amongst banks and a low interest rate environment; and

(4) Execution risk in CTBC Bank's plans to restore its capital ratios.

WHAT COULD DRIVE CTBC BANK'S RATINGS DOWN/UP

CTBC Bank's ratings are unlikely to be upgraded, given the negative ratings outlook.

On the other hand, the ratings could be downgraded if the bank's: (1) consolidated profitability deteriorates relative to the risks it takes, such that net income falls below 0.8% of average risk-weighted assets; (2) consolidated capitalization weakens, with the common equity Tier 1 capital ratio staying below 8.5%; and/or (3) consolidated asset quality deteriorates, such that the impaired loan ratio exceeds 3.5%.

RATING RATIONALE FOR CTBC FINANCIAL

The confirmation of CTBC Financial's rating is in line with the confirmation of the rating of CTBC Bank, its principal banking subsidiary. Its rating is positioned one notch below that of the bank. Even after the acquisition, Moody's expects that the post-merger double leverage ratio of the holding company would be maintained below 105%, which is a healthy and relatively low level when compared to its local peers. It should be noted that CTBC Financial raised new capital of TWD20 billion through a rights issuance in April 2013 and this enabled it to inject equity into CTBC Bank to help fund the acquisition without increasing double leverage significantly.

WHAT COULD DRIVE CTBC FINANCIAL'S RATING DOWN/UP

CTBC Financial's rating is unlikely to be upgraded, given the assigned negative rating outlook.

On the other hand, its rating could be downgraded if: (1) CTBC Bank's ratings are downgraded and/or (2) it makes further acquisitions in sectors that increase its consolidated risk profile, especially if its double leverage ratio increases to more than 120%.

RATING METHODOLOGY

The principal methodology used in rating CTBC Bank Co., Ltd. was Global Banks published in May 2013. The principal methodologies used in rating CTBC Financial Holding Co., Ltd. were Global Banks published in May 2013, and Global Life Insurers published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

CTBC Financial Holding Co. reported consolidated assets of TWD2.4 trillion at end-2013, while CTBC Bank Co., Ltd reported consolidated assets of TWD2.2 trillion.

Both entities are headquartered in Taipei.

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.

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 confirms CTBC group's ratings; outlook negative
No Related Data.
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