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