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Announcement:

Moody's continues review for downgrade of CTBC group

 The document has been translated in other languages

23 Apr 2014

Hong Kong, April 23, 2014 -- Moody's Investors Service says that it is continuing its review for downgrade of CTBC Financial Holding Co., Ltd's A3 long-term foreign currency issuer rating, following the announcement on 21 April 2014 by Taiwan's regulator, the Financial Supervisory Commission, that it has approved the company's plan to acquire a 100% stake in Taiwan Life Insurance Co. Ltd. (unrated).

CTBC Financial expects to complete the transaction by 30 June 2014.

At the same time, Moody's is also continuing its review for downgrade of CTBC Financial's 100% owned subsidiary, CTBC Bank Co., Ltd'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 the bank's overall C- bank financial strength rating, which is equivalent to a baa2 baseline credit assessment.

While Taiwan's regulator has approved CTBC Bank's proposed acquisition of Tokyo Star Bank on 15 April 2014, the transaction is still subject to approval by Japan's financial regulator.

Moody's initiated its review of the two companies after CTBC Financial's announcement on 31 October 2013 that CTBC Financial would acquire 100% of Taiwan Life through a stock-for-stock swap of CTBC Financial's new rights issuance of the same amount, totaling TWD26.6 billion.

The announcement also revealed that CTBC Bank would acquire a 98.16% interest in Tokyo Star Bank, Ltd. (unrated) for JPY52 billion (approximately TWD15.6 billion) in cash.

RATINGS RATIONALE

"Our decision to continue the review on CTBC Financial's rating mainly reflects our ongoing assessment of the execution risks faced by CTBC Financial on the acquisition of Taiwan Life," says Ginger Kao, a Moody's analyst.

"In addition, our continued review on CTBC Bank's ratings for downgrade is based on the Japanese regulator's evaluation of whether to approve the Tokyo Star Bank deal," adds Kao.

Moody's intends to conclude its review at or just prior to the closing of the Taiwan Life transaction, or after the Japanese banking regulator has made its decision as to whether or not to approve the Tokyo Star Bank deal.

RATINGS REVIEW ON CTBC FINANCIAL

Moody's assessment of CTBC Financial's rating will depend on the pro forma consolidated business and financial profiles of the company's main subsidiaries, namely CTBC Bank, and the life insurance subsidiaries including Taiwan Life. The bank will still be the dominant part of the group's business, with its pro forma consolidated assets accounting for 78% of the group's total assets at 30 June 2013.

Based on our current assessment, Moody's expects to downgrade CTBC Financial's issuer rating by one notch if both deals are completed.

First, Taiwan Life's weak credit profile, as characterized by its weak profitability and capitalization, would result in a negative pressure on CTBC Financial's risk profile. Taiwan Life accounted for 12% of the group's pro forma total assets at 30 June 2013.

Second, the group is endeavoring to continue growing its non-banking business, namely in life insurance, and it has grown to become a decent size, close to 20% of the group's total assets. We deem the credit fundamentals of the group's non-banking subsidiaries to be weaker than that of CTBC Bank, and hence this would increase the overall risk profile of the group.

Further, the differential between CTBC Financial and CTBC Bank's ratings levels would widen, owing to our belief that government support for non-banking businesses is usually less forth-coming when compared with banking.

RATINGS REVIEW ON CTBC BANK

Moody's began its review of CTBC Bank's ratings due to concerns over its planned acquisition of Tokyo Star Bank. The latter's total bank assets represented a significant 26% of the former's pro forma total consolidated assets at 30 June 2013. Moody's review was also prompted by the fact that because Tokyo Star Bank's financial profile is weak, the proposed deal could raise CTBC Bank's overall risk profile.

Based on Moody's current assessment, we expect to confirm all of CTBC Bank's ratings if the acquisition is successful, because the impact on CTBC Bank's business and financial profile will be constrained. In addition, CTBC Bank's consolidated pro forma metrics, particularly in relation to liquidity, profitability and asset quality, should remain largely in line with those of its similarly rated Taiwanese peers.

While CTBC Bank's consolidated capital position will weaken slightly, with its pro forma Tier 1 capital falling to 9.1% from the 10.2% reported at 30 June 2013, the bank targets to strengthen and maintain its Tier 1 capital ratio in excess of 10% and its total capital adequacy ratio in excess of 11% over the next 12-18 months. Such levels would be comparable to the capital profiles of other Taiwanese banks with a baseline credit assessment of baa2.

Moody's also notes that the proposed acquisition of Tokyo Star Bank reflects a positive move by the Taiwanese bank to diversify its business, against the backdrop of intense competition in the domestic banking environment. It also provides synergies outside CTBC Bank's home market.

However, based on our current assessment Moody's expects to carry a negative outlook on all of CTBC Bank's ratings, reflecting the following challenges:

(1) Higher credit costs due to Tokyo Star Bank's higher earnings volatility and weaker asset quality, which in turn would potentially pressure CTBC Bank's consolidated profitability levels;

(2) 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

(3) Execution and integration risks for cross-border acquisitions, in particular, in a less familiar market, including the management of funding, business and asset quality risks.

RATINGS LIST

Moody's has placed the following ratings on review for downgrade:

CTBC Financial Holding Co., Ltd: A3 long-term foreign currency issuer rating;

CTBC Bank Co., Ltd: C- bank financial strength rating/baa2 standalone credit assessment; A2/P-1 local currency and foreign currency long-term/short-term deposit ratings and Baa3 (hyb) foreign currency junior subordinated debt (issued by its Hong Kong branch) rating.

RATING METHODOLOGY

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. The principal methodology used in rating CTBC Bank Co., Ltd. and CTBC Bank Co., Ltd. Hong Kong Branch was Global Banks published in May 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 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.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see Moody's Ratings Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the time horizon in which a credit rating action may be after a review or outlook action took place.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com/disclosures for disclosures on significant Moody's shareholders and on certain relationships between Moody's, its shareholders and/or rated issuers.

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.

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 continues review for downgrade of CTBC group
No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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