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Rating Action:

Moody's downgrades CTBC Financial Holding to Baa1 and affirms CTBC Bank at A2

 The document has been translated in other languages

19 Oct 2015

Hong Kong, October 19, 2015 -- Moody's Investors Service has downgraded CTBC Financial Holding Co., Ltd.'s (CTBC Financial) foreign currency issuer rating to Baa1 from A3. The rating action concludes the review for downgrade initiated on May 14, 2015, and follows the company's completion of its acquisition of 100% of Taiwan Life Insurance Co Ltd (unrated).

At the same time, Moody's has affirmed CTBC Bank Co., Ltd.'s (CTBC Bank) long term deposit ratings at A2, short-term deposit rating at P-1, counterparty risk assessment at A1(cr)/P-1(cr), and its baseline credit assessment (BCA) and adjusted BCA at baa2.

The outlook on CTBC Financial Holding is stable, and the outlook for CTBC Bank has been revised to stable from negative.

RATINGS RATIONALE

CTBC Financial Holding Co., Ltd.

CTBC Financial has historically been a bank-centric financial holding company, with its bank subsidiary CTBC Bank's assets accounting for the bulk of group assets. The company has been building up its life insurance business in recent years, acquiring the Taiwan operations of MetLife, Inc. and Manulife Financial Corporation in 2011 and 2013, respectively. Following the completion of the company's acquisition of Taiwan Life, the total assets of the company's insurance business now account for approximately 25% of group total assets, up from 12% previously.

The downgrade of CTBC Financial's issuer rating to Baa1 from A3 reflects the increased contribution from the group's insurance businesses, which have a weaker credit profile than its banking operation. Taiwan Life has modest capitalization with capital-to-asset ratio of less than 5%. It also has volatile profitability amid Taiwan's low interest rate environment, and has material high-risk assets relative to its shareholders' equity.

CTBC Financial's expected TWD12 billion equity injection into Taiwan Life will strengthen the latter's capitalization and support its expected growth. CTBC Financial plans to merge its two insurance subsidiaries in early 2016. We expect the insurance company's assets to account for a growing share of the group's total.

As CTBC Financial's acquisition of Taiwan Life is financed 100% by equity, the transaction does not lead to an increase in the company's double leverage, which should remain below 110% per Moody's calculation.

What could change the ratings -- up

CTBC Financial's issuer ratings could be upgraded if the financial profiles of its main banking and insurance subsidiaries improve, and the holding company maintains a modest double leverage.

What could change the ratings -- down

CTBC Financial's rating could be downgraded if: (1) CTBC Bank's ratings are downgraded; (2) its double leverage ratio increases to over 115% owing to debt-funded acquisitions; and/or (3) the credit profile of its insurance company deteriorates significantly, which could be a result of aggressive growth without the replenishment of capital, or significant investment losses.

CTBC Bank Co., Ltd.

The affirmation of CTBC Bank's ratings and the revision of outlook to stable reflects the bank's good performance since it acquired Tokyo Star Bank in June 2014. The bank's asset quality has been on an improving trend since mid-2014, with its impaired loan ratio falling to 1.9% at end-June 2015 from 2.7% at end-2014. Meanwhile, Tokyo Star bank's NPL ratio has fallen to 2.8% at end-June 2015 from 3.6% at end-June 2014.

Although slowing economic growth in Taiwan and declining exports will likely lead to a moderate increase in problem loans, Moody's does not expect CTBC's impaired loan ratios to increase materially in the second half of 2015 and throughout 2016.

CTBC Bank's credit growth has been modest since it acquired Tokyo Star Bank, with overall loans rising by 1% in the twelve months to June 2015. The bank's Mainland lending exposures have been declining due to lower demand for trade finance.

The bank's acquisition of the Mainland entity CITIC International Bank (China) (unrated), which is due to close by the end of 2015, will have a limited impact on the bank's profile at the outset, with the target's total assets accounting for 2% of the bank's total.

CTBC Bank's capitalization is satisfactory, with a common equity tier 1 ratio of 9.1% at end-June 2015. We expect the bank to improve its capitalization through retained earnings in the coming year, given our expectation of its relatively modest balance sheet growth. The bank's acquisition of CITIC Bank International (China) will not have an adverse impact on its capitalization as it will be financed by equity.

CTBC Bank's profitability rose modestly in the first half of 2015, excluding one-off gains from acquisition of Tokyo Star Bank, with return on average assets of 0.78%. Tokyo Star Bank's weaker profitability weighs on the bank's overall profitability.

CTBC Bank's liquidity profile remains strong, reflecting current ample liquidity conditions in Taiwan. The bank has very low reliance on wholesale funding, and has large holdings of liquid investments that can be used to repay fund outflows if needed.

What could change the ratings -- up

CTBC Bank's ratings could be upgraded if it successfully integrates its acquired entities and manages its expansion prudently. The rating could be upgraded if its tangible common equity / RWA ratio improved to above 11%, and asset quality improves with an impaired loan ratio falling below 1%.

What could change the ratings -- down

CTBC Bank's ratings could be downgraded if: (1) its profitability deteriorates with net income falling below 0.5% of tangible assets; (2) capitalization weakens, with its tangible common equity falling below 8% of risk-weighted assets; and/or (3) asset quality deteriorates, such that its impaired loan ratio exceeds 3%.

RATING METHODOLOGY

The methodologies used in these ratings were Banks published in March 2015, and Global Life Insurers published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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.

Sonny Hsu, CFA
Vice President - Senior 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 downgrades CTBC Financial Holding to Baa1 and affirms CTBC Bank at A2
No Related Data.
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