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Rating Action:

Moody's reviews CTBC Financial and CTBC Bank for downgrade

 The document has been translated in other languages

04 Nov 2013

Hong Kong, November 04, 2013 -- Moody's Investors Service has placed on review for possible downgrade the long-term foreign currency A3 issuer rating of CTBC Financial Holding Co., Ltd. (CTBC FHC). In addition, Moody's has also put on review for possible downgrade the A2/P-1 local currency and foreign currency long-term/short-term deposit ratings, the Baa3 foreign currency junior subordinated debt (issued by CTBC Bank, Hong Kong Branch) rating, and the C- bank financial strength rating (mapping to a baa2 baseline credit assessment) of CTBC Bank Co., Ltd. This rating action follows CTBC FHC's announcement to acquire Tokyo Star Bank (unrated) and Taiwan Life Insurance Co. Ltd. (unrated).

On 31 October, 2013, CTBC FHC announced that its subsidiary CTBC Bank will acquire 98.16% interest in Tokyo Star for JPY52 billion (~TWD15.6 billion) in cash, which would be funded by internal resources. CTBC FHC will also acquire 100% of Taiwan Life via a share swap. Based on Taiwan Life's outstanding shares as of 2 September 2013, the share exchange ratio will be 1.44x and the actual share exchange ratio will be 1.39x after adjusting for convertible bonds. The total consideration was TWD26.6 billion based on CTBC FHC's closing share price of TWD19.7 on 27 September 2013.

After the mergers, Tokyo Star Bank will be a subsidiary of CTBC Bank, and Taiwan Life will be consolidated into CTBC Life Insurance Co., Ltd (unrated) after two years.

The deals are both subject to regulatory approvals. CTBC FHC expects to complete these transactions in the first quarter of 2014.

RATINGS RATIONALE

The decision to review the CTBC FHC group ratings reflects the fact that these two acquisitions are sizable when compared to the group's existing business. Tokyo Star and Taiwan Life represent 21.1% and 12.2% of the pro forma total group assets at the end of June 2013, respectively. We also consider that both of these entities have weak financial profiles and the acquisitions will increase the overall risk profile of the group.

The acquisition of Tokyo Star will increase geographic diversification of CTBC Bank, and CTBC FHC aims to develop a niche market of serving Japanese small and medium-enterprises to expand overseas and wealth management business. However, the weak margins characteristic of the Japanese banking sector offer little prospect that this acquisition will improve CTBC Bank's profitability . In addition, Tokyo Star has a relatively weak market position in Japan, and legacy asset quality issues. Its capitalization and asset quality have been weak, with a reported consolidated Tier 1 capital ratio of 6.34% at end-March 2013 and a NPL ratio (under Financial Revitalization Law including Category IV claims) of 4.29% at end-June 2013. Its profitability has also been weaker than its domestic peers, mainly due to high loan loss provisions.

Taiwan Life, on the other hand, has weak capitalization as measured by its capital-to-asset ratio despite its regulatory RBC ratio above 250% at end-June 2013. In addition, its profitability has been volatile on the back of a volatile equity market in Taiwan and low interest rates.

We believe that these acquisitions will create significant execution risks as the group would need to manage and integrate these acquisitions, together with the acquisition of ManuLife Taiwan branch announced in July, at the same time. These acquisitions are sizable, and involve either new geographies and non-banking business line for the group.

In the past two years, CTBC FHC has been seeking expansion through acquisitions to better compete with other Taiwanese peers, particularly in terms of supplementing life insurance and asset management arms to the group. While there are benefits to this business diversification and cross-selling opportunities for CTBC FHC, additional capital injection will likely become necessary over time to support business growth for both its banking and insurance subsidiaries.

Moody's review will focus on (1) the group's strategy to integrate these businesses; (2) business plan and strategy for Tokyo Star and Taiwan Life (as part of CTBC Life Insurance) going forward; (3) business and financial profiles of these two entities and their impact on CTBC FHC and CTBC Bank's credit profiles; (4) financial policy of the group and its major subsidiaries. Further, we will assess the potential synergy as well as operating challenges for the management of the bank and the life insurance subsidiary.

RATINGS LIST

The following ratings have been put on review for possible 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 foreign currency junior subordinated debt (issued by its Hong Kong branch) rating.

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 FHC were Global Banks published in May 2013, and Moody's Global Rating Methodology for Life Insurers published in May 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

CTBC FHC reported consolidated assets of TWD2.3 trillion, while CTBC Bank reported consolidated assets of TWD2.1 trillion at end-June 2013. Both entities are headquartered in Taipei, Taiwan.

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 reviews CTBC Financial and CTBC Bank for downgrade
No Related Data.
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