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Rating Action:

Moody's takes multiple actions on three Taiwan financial institutions

18 Jun 2009

Taipei, June 18, 2009 -- Moody's Investors Service has taken multiple rating actions on two banks and one financial holding company in Taiwan to reflect the stresses arising from the financial crisis.

The institutions are SinoPac Financial Holding Company, Hua Nan Commercial Bank, and Taiwan Cooperative Bank.

Specifically, the following rating actions were taken, as announced by Cherry Huang, a Moody's Vice President and Senior Analyst.

(1) SinoPac Financial Holding Company (SinoPac FHC): Foreign currency issuer rating is confirmed at Baa2 with negative outlook. This concludes our review for possible downgrade of SinoPac FHC's rating initiated on December 22, 2008.

(2) Hua Nan Commercial Bank: Outlook on D bank financial strength rating (BFSR), A3 local and foreign currency deposit ratings, Aa2.tw national scale deposit rating and P-1 short-term local and foreign currency deposit ratings is changed to negative from stable .

(3) Taiwan Cooperative Bank: Outlook on D BFSR, A2 local and foreign currency deposit ratings, Aa1.tw national scale deposit rating is changed to negative from stable.

Rating Actions on BFSRs

The BFSR outlook changes for both banks reflect Moody's concern that their core capital levels could be further weakened by the expected deterioration in asset quality. In determining the BFSRs, Moody's assessed each bank's capital level after incorporating expected losses from risk assets using scenario analysis. The application of a forward-looking view on the banks' capital ratios is in line with Moody's reports "Calibrating Bank Ratings in the Context of the Global Financial Crisis" and "Moody's Approach to Estimating Bank Credit Losses and their Impact on Bank Financial Strength Ratings", published in February and May respectively this year. Both are available on www.moodys.com.

In general, for Taiwanese banks, weakening earnings and rising credit costs will pressure their already moderate to weak capital adequacy levels, while capital raisings have proved challenging in a less favorable market environment.

The system NPL ratio rose to 1.63% in April 2009 from 1.54% at end-2008 and the NPL balance has yet to incorporate the restructured loans initiated by the government's debt-relief program. Credit costs are expected to continue rising, based on Moody's forecast of a 5.2% contraction for Taiwan's GDP in 2009.

The system's net interest margin came under pressure and narrowed to 1.15% in 1Q2009 from 1.84% in 3Q2008 following consecutive rate cuts by 2.375 percentage points by the central bank to 1.25% since last September. The contraction in interest margins is unlikely to reverse until 2H2009 when the re-pricing of costly time deposits will mostly occur.

Rating Action on Hua Nan Commercial Bank (HNCB)

The change of outlook to negative from stable of HNCB's BFSR reflects the bank's relatively weaker levels of capitalization and asset quality when compared to its D rated peers in Taiwan. Its NPLs are rising and grew by 12% in 1Q2009. Stress testing also considered its cash dividend policy and potential liabilities arising from sales of PEMG-related investment products.

As a result of the BFSR outlook change, the outlook on HNCB's A3 deposit rating, Aa2.tw national scale deposit rating and P-1 short-term deposit rating was changed to negative from stable.

Rating Action on Taiwan Cooperative Bank (TCB)

The change of outlook to negative from stable of TCB's BFSR also reflects the bank's relatively weaker levels of capitalization and asset quality when compared to its D rated peers in Taiwan. Its NPLs are rising and grew by 10% in 1Q2009. Stress testing also considered its cash dividend policy.

As a result of the BFSR outlook change, the outlook on TCB's A2 deposit rating and Aa1.tw national scale deposit rating was changed to negative from stable.

Rating Action on SinoPac FHC

SinoPac FHC's issuer rating was confirmed at Baa2 with negative outlook to reflect moderation in losses incurred by its two main operating subsidiaries, namely Bank SinoPac (BSP) and SinoPac Securities. Accessibility to long-term wholesale funding, including syndication and FRCP maturing in two to four years, also helped reinforce its debt servicing capability.

However, the D+ BFSR and Baa1 long-term deposit ratings of BSP continue to carry a negative outlook to incorporate the expectation of further margin compression, weakening asset quality as well as potential liabilities associated with BSP's sale of PEMG-related products.

Further, the negative outlook on SinoPac FHC's Baa2 issuer rating aligns with the negative outlook on BSP's Baa1 deposit rating with the one notch differential representing structural subordination of creditors at holding company to those at the operating company level.

PREVIOUS RATING ACTIONS & PRINCIPAL METHODOLOGIES

The last rating action on SinoPac Holdings was taken on December 22, 2008, when its Baa2 foreign currency issuer rating was placed on review for possible downgrade.

The last rating action on Hua Nan Commercial Bank was taken on Nov. 2, 2007, when Moody's affirmed its D BFSR, A3/P-1 local and foreign currency deposit ratings, and long-term/short-term Taiwan national scale deposit ratings of Aa2.tw/TW-1, as a result of a merger with its sister company - Hua Nan Bills Finance Company. The outlook for all ratings was stable.

The last rating action on Taiwan Cooperative Bank was taken on December 7, 2007, when Moody's assigned first-time ratings. Its long-term/short-term local and foreign currency deposit ratings were A2 and Prime-1 and bank financial strength rating (BFSR) was D. At the same time, Moody's Taiwan Corporation has assigned the bank national scale ratings (NSR): Aa1.tw for its long-term deposit rating and TW-1 for its short-term deposit rating. The outlook for all ratings -- global and NSR -- was stable.

The principal methodologies used in rating these issuers are the "Bank Financial Strength Ratings: Global Methodology" (February 2007), and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology (March 2007)".

The principal methodology Moody's used for rating FHCs was "Taiwanese Financial Holding Companies: Moody's Rating Approach and Outlook" (February 2003).

Moody's Taiwan Corporation used "National Scale Ratings in Taiwan" (October 2003) methodology in assigning both issuers' national scale ratings.

These can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

SinoPac Holdings, headquartered in Taipei, Taiwan, had assets of NTD1.08 trillion as of end-March 2009 on a consolidated basis.

Hua Nan Commercial Bank, headquartered in Taipei, Taiwan, had assets of NTD1.65 trillion as of end-March 2009.

Taiwan Cooperative Bank, headquartered in Taipei, Taiwan, had assets of NTD2.49 trillion as of end-March 2009.

The detailed ratings and actions are listed below:

SinoPac Group -

SinoPac FHC's foreign currency issuer rating: confirmed at Baa2 with negative outlook

Bank SinoPac:

D+ BFSR and local and foreign currency short-term deposit rating of P-2: stable outlook unchanged

Baa3 BCA (baseline credit assessment) and Baa1 local and foreign currency deposit ratings: negative outlook unchanged

Hua Nan Commercial Bank --

D BFSR, A3 local and foreign currency deposit rating, Aa2.tw national scale deposit rating and P-1 short-term local and foreign currency deposit rating: outlook changed to negative from stable

TW-1 national scale short-term deposit rating: stable outlook unchanged

Taiwan Cooperative Bank --

D BFSR, A2 local and foreign currency deposit rating, Aa1.tw national scale deposit rating: outlook changed to negative from stable

P-1 short-term local and foreign currency deposit rating and TW-1 national scale short-term deposit rating: stable outlook unchanged

Moody's Taiwan Corporation's National Scale Ratings are intended as relative measures of creditworthiness among debt issues and issuer within Taiwan, enabling market participants to better differentiate relative risks. NSRs in Taiwan are designated by the ".tw" suffix. NSRs differ from the global scale ratings, as assigned by Moody's Investors Service, in that they are not globally comparable to the full universe of Moody's-rated entities, but only with other rated entities within the same country.

Taipei
Cherry Huang, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Taiwan Corporation
Telephone: 886-2-2757-7125
Facsimile: 886-2-2757-7129

Hong Kong
Jerry Chien
Managing Director
Financial Institutions Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (852) 3551-3077

Moody's takes multiple actions on three Taiwan financial institutions
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