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Rating Action:

Moody's reviews CTBC Financial for downgrade on proposed acquisition

 The document has been translated in other languages

14 May 2015

Hong Kong, May 14, 2015 -- Moody's Investors Service, ("Moody's") has placed on review for downgrade the A3 long-term foreign currency issuer rating of CTBC Financial Holding Co., Ltd. (CTBC Financial).

This follows CTBC Financial's announcement of its second attempt to acquire 100% of Taiwan Life Insurance Co. Ltd. (unrated) via a share swap for a consideration of TWD32.3 billion, based on CTBC Financial's closing share price on 12 May 2015. CTBC Financial had previously announced in October 2013 that it planned to acquire 100% of Taiwan Life through a share swap.

Taiwan Life ranks as the 9th largest life insurer in Taiwan by total assets with a market share of about 2.7% at end-December 2014. It had consolidated assets of TWD508.3 billion and shareholders' equity of TWD16.0 billion. Based on Taiwan Life's outstanding shares as of 31 December 2014, the share exchange ratio will be 1.44x.

The deal is subject to regulatory and shareholder approvals. CTBC Financial expects to complete the transaction in October 2015 and to consolidate Taiwan Life into its subsidiary, CTBC Life Insurance Co., Ltd. (unrated), by 31 December 2015.

RATINGS RATIONALE

"The decision to review CTBC Financial's rating reflects the consideration that the Taiwan Life deal adds further negative pressure to CTBC Financial's credit profile," says Ginger Kao, a Moody's Analyst.

"Taiwan Life has weak capitalization, as measured by its capital-to-asset ratio of less than 5% in the past three years. Its high-risk assets are also significant relative to its shareholders' equity. Moreover, Taiwan Life's profitability has been volatile and under pressure due to the low interest rate environment," adds Kao.

The acquisition is not small when compared to the group's existing business. The consideration of TWD32.3 billion represents 14% of CTBC Financial's standalone shareholders' equity at 31 December 2014.

CTBC Financial's rating has been carrying a negative outlook since June 2014, which was initially and largely driven by the acquisition of Tokyo Star Bank Limited (unrated) by the group's banking subsidiary, CTBC Bank Co., Ltd. (A2 negative, baa2), completed in Q2 2014.

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

In addition, Moody's expects Tokyo Star Bank's credit cost to rise as the bank would accelerate charging off its problem loans. Finally, there is execution risk in CTBC Bank's plans to restore its capital ratios to levels similar to those before the Tokyo Star Bank acquisition.

In addition, in the past two years, CTBC Financial has expanded through acquisitions to better compete with other Taiwanese peers, particularly in terms of supplementing its life insurance and asset management divisions. While there are benefits to this business diversification and cross-selling opportunities for CTBC Financial, additional capital injections into its insurance subsidiaries will likely become necessary over time to support business growth.

After the acquisition, the life insurance business would represent about 20% of the group's total assets or shareholders' equity.

Moody's review will focus on (1) the group's strategy to develop its life insurance business; (2) the business plan of Taiwan Life (as part of CTBC Life Insurance) going forward; (3) evaluating the business and financial profiles of Taiwan Life and its impact on CTBC Financial's credit profile; (4) the financial policy of the group and its major subsidiaries, especially on future capital needs. Further, we will assess potential synergies as well as operating challenges for the management of the life insurance subsidiary.

RATINGS LIST

The following rating has been put on review for downgrade:

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

The following ratings will continue to carry a negative outlook:

CTBC Bank Co., Ltd: A2 local currency and foreign currency long-term deposit ratings

RATING METHODOLOGY

The methodologies used in this rating 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.

CTBC Financial Holding Co., Ltd. reported consolidated assets of TWD3.654 trillion at 31 December 2014. It is 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 reviews CTBC Financial for downgrade on proposed acquisition
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