Hong Kong, December 03, 2015 -- Moody's Investors Service has upgraded the insurance financial strength
rating (IFSR) of Cathay Life Insurance Co., Ltd to Baa1 from
Baa2, and the issuer rating of Cathay Financial Holding Co.,
Ltd to Baa2 from Baa3. The outlook for these ratings are now stable.
Also, Moody's has affirmed the local and foreign currency
long-term deposit ratings of Cathay United Bank Co.,
Ltd at A2, local and foreign currency short-term deposit
ratings at P-1, and counterparty risk assessment at A1(cr)/P-1(cr).
At the same time, Moody's has affirmed the bank's baseline
credit assessment (BCA) and adjusted BCA at baa2.
The outlook on the bank's ratings is stable.
RATINGS RATIONALE
CATHAY LIFE (Lead Analyst: Stella Ng, Assistant Vice President
- Analyst)
The upgrade of Cathay Life's IFSR reflects the structural improvement
in its profitability, solid capitalization position, as well
as its strong and sustained business profile.
Cathay Life's return on capital (ROC) has increased sharply since
2013. The annualized ROC as of the third quarter ended 30 September
2015 (Q3 2015) was above 10%. Moody's notes that Cathay
Life's ROC stood at 8.5% in 2014; a result which
was significantly higher than the average ROC of 3.0% during
2010-2014.
Its profitability ratio went up in Q3 2015, partly due to its improving
interest spread income. Its negative spread burden has improved
to a positive spread since Q2 2015. The improvement was largely
attributable to new policy sales with lower cost of liabilities,
and stable recurring investment yields.
There is evidence of a more structural improvement in profitability as
Cathay Life shifts its product focus towards more traditional life regular-premium
and investment-linked products -- which are associated
with higher value of new business margins -- from single-premium
policies, over the past few quarters.
Cathay Life's capital adequacy -- as measured by Moody's
adjusted capital to asset ratio -- stood at 5.0%
(5.5% when excluding separate account assets) at end-Q3
2015.
As for Cathay Life's risk-based capital (RBC) ratio,
the ratio improved to 295% at end-June 2015 from 287%
at end-2014, and is expected to be higher at end-September
2015. Its solvency ratio remains solid, even if an adjustment
is made for the preferential treatment by the regulator on its RBC ratio
since 1 July 2015 for the acquisition of Global Life Insurance Company
Ltd (unrated) and Singfor Life Insurance Company Ltd (unrated).
Cathay Life is the market leader by premiums in Taiwan's insurance
market, largely contributed by its strong agency force. Its
agent productivity levels are stable and good, as reflected by its
13-month and 25-month persistency ratio of 97% and
95% respectively, for the nine months ended 30 September
2015.
These strengths are partially offset by its relatively high high-risk
asset leverage when compared to global peers. Cathay Life invests
in high-risk assets -- namely real estate and equities
-- and demonstrates a single name concentration in the shareholding
of certain large Taiwanese corporates.
Its ratio of high-risk assets to adjusted shareholders' equity
was high, registering in excess of 300% at 30 September 2015.
This situation could expose Cathay Life to potential volatility in its
earnings and capitalization when stress occurs in the financial markets.
In addition, Moody's considers that Cathay Life's balance sheet
strength is highly tied to the performance of the domestic equity market.
The company registered a total unrealized losses of NTD64.9 billion
on available-for-sale assets for the first nine months in
2015, as a result of volatility in the domestic equity market.
Cathay Life also has a significant exposure to foreign bonds whose value
would be negatively affected if US dollar bond yields and/or credit spreads
widen.
Cathay Life has been active in overseas acquisitions. Since November
2014 it made acquisitions totaling about NTD26.5 billion in Conning
Holdings Corporation (unrated), Rizal Commercial Banking Corporation
(deposit rating of Baa3 with a stable outlook, baseline credit assessment
of ba1) and PT Bank Mayapada Internasional, Tbk. (unrated).
While these acquisitions have had minimal impact on Cathay Life's
financial profile, they will expose the company to foreign exchange
risk and concentration risk in its equity investment portfolio.
Further significant overseas acquisitions could introduce additional volatilities
to the insurer's profitability and capitalization profiles.
RATING DRIVERS
Cathay Life's IFSR could be upgraded if: (1) its earnings improve,
with a return on capital ratio consistently in excess of 8%;
(2) its capitalization becomes less sensitive to the performance of the
equity market, and it continues to improve its risk management;
(3) it continues to improve its profitability structurally to regular-premium
products while reducing the average cost of liabilities; and/or (4)
there is a sustained improvement in capital strength, with the ratio
of adjusted capital to total assets consistently exceeding 8%.
However, Cathay Life's IFSR could be downgraded if: (1) recent
gains in profitability are not sustained; (2) its local RBC ratio
falls below 250%; (3) there are more overseas acquisitions,
such that significantly weaken its capital strength; and/or (4) there
is a material increase in its adjusted financial leverage such that this
factor exceeds 30%, or if its holding company's financial
leverage rises significantly.
Cathay United Bank (Lead Analyst: Sonny Hsu, Vice President
- Senior Analyst)
Cathay United Bank's baa2 BCA takes into account its improving solvency
and sound liquidity profiles. The bank's A2 deposit ratings
incorporate three notches of government support, and reflects Moody's
assessment of a very high probability of support from the Taiwanese government
(Aa3 stable), given the bank's sizable market share of loans
and deposits in Taiwan and Moody's assessment of Taiwan as a high
support jurisdiction.
In line with broader industry trends, Cathay United Bank's
loan quality metrics have improved steadily, with the impaired loan
ratio falling to 1.2% at end-June 2015 from 1.8%
at end-2014 and 2.3% at end-2013. Nevertheless,
credit costs and impaired loan balances are likely to rise if current
weak macroeconomic conditions and corporate profitability persist into
2016.
Notably, the bank has more concentrated exposures to the Taiwan
real estate market than its rated local peers. Commercial real
estate loans, residential mortgages and other housing-backed
loans accounted for 40% of the bank's overall exposures at
end-June 2015. The decline in property prices and housing
transactions in Taiwan could lead to an increase in loan delinquencies,
although high level of collateralization and conservative loan-to-value
ratios should limit the extent of property-related loan losses.
Cathay United Bank's capitalization compares favorably against other
rated Taiwan peers, with the bank maintaining a tangible common
equity / risk weighted asset ratio of 10.2% at end-June
2015. Given the slowdown in the local economy and expected subdued
demand for loans, the bank is likely to moderately improve its capitalization
in the second half of 2015 and the first half of 2016.
The bank's profitability also compares favorably against its peers
in first half 2015, with a net income / tangible assets ratio of
0.98%. Sound net interest margins, good contributions
from non-interest income businesses, good operating efficiency,
and low credit costs have contributed to the bank's reasonably good
profitability. In the second half of 2015 and early 2016,
a narrowing in net interest margins due to the drop in policy interest
rate and an increase in credit costs are likely to contribute to a sequential
decline in the bank's profitability.
Moody's expect Cathay United Bank to maintain its very strong funding
and liquidity profile in 2016. The bank is largely funded by customer
deposits, and has very limited reliance on market funding.
The bank also has ample liquid assets, with large cash and interbank
placements and holdings of central bank papers. The bank's
loan-to-deposit ratio of 64% compares favorably with
local and regional bank peers.
RATING DRIVERS
Cathay United Bank's ratings could be raised if it: (1) maintains
its good asset quality metrics amid the current adverse macroeconomic
conditions; (2) reduces its loan concentration to real estate-related
sector; (3) improves its capitalization with tangible common equity
/ risk weighted asset ratio above 10.5%; and/or (4)
sustains its profitability with net income / tangible asset ratio above
0.8%
Cathay United Bank's ratings could be lowered if: (1) industry
competition intensifies, pressuring the bank's profitability;
(2) adverse macroeconomic conditions lead to a material weakening in the
bank's asset quality metrics, with impaired loans rising above
2.5% of loans; and/or (3) the bank's tangible
common equity to risk-weighted assets ratio falls below 9%
due to a sizable distribution of dividends
CATHAY FINANCIAL (Lead Analyst: Stella Ng, Assistant Vice
President - Analyst)
The upgrade of Cathay Financial's issuer rating mainly reflects the upgrade
of Cathay Life's IFSR, given Cathay Life's position
as the group's largest subsidiary as measured by assets, shareholders'
equity and net income.
The group's financial flexibility has remained stable, mainly because
of Cathay Life's improved profitability. At end-2014,
Cathay Financial's standalone financial leverage registered 14.4%
compared to 13.4% at end-2013.
Cathay Financial's double leverage ratio was at 114% at end-September
2015 (113% at end-2014); a result which was line with
Moody's expectation of below 115%.
Moody's expects Cathay Financial to manage prudently its dividend policy,
so as to maintain adequate capital at its subsidiaries, and at the
holding company level.
Liquidity at Cathay Financial and its major subsidiaries is adequate.
Cathay Financial also benefits from committed bank credit lines from major
local banks in Taiwan, and a large cash and liquid investment portfolio
at Cathay Life. These sources of liquidity can help meet any short-term,
unexpected liquidity needs.
An upgrade in the financial strength ratings of its key operating subsidiaries
-- mainly Cathay Life and Cathay United Bank --
could lead to an upgrade of Cathay Financial's issuer rating.
However, the issuer rating could be downgraded if: (1) Cathay
Life's IFSR is downgraded; (2) Cathay Financial's financial
leverage increases substantially, and registers in excess of 30%
and the company's double leverage -- including preferred
stock investments in Cathay Life -- exceed 115%;
and/or (3) there is a reduction in the diversification currently provided
by Cathay Financial's business mix of life, non-life
and banking operations.
RATINGS LIST
The following ratings have been upgraded with a stable outlook.
Cathay Life -- IFSR to Baa1 from Baa2
Cathay Financial -- issuer rating to Baa2 from Baa3
The following ratings have been affirmed with a stable outlook:
Cathay United Bank -- local and foreign currency long-term
deposit ratings of Cathay United Bank affirmed at A2, local and
foreign currency short-term deposit ratings affirmed at P-1,
counterparty risk assessment affirmed at A1(cr)/P-1(cr) and baseline
credit assessment (BCA) and adjusted BCA affirmed at baa2.
The principal methodologies used in rating Cathay Life Insurance Co.,
Ltd was Global Life Insurers published in August 2014. The principal
methodologies used in rating Cathay Financial Holding Co.,
Ltd. were Global Life Insurers published in August 2014,
Banks published in March 2015, and Global Property and Casualty
Insurers published in August 2014. The principal methodology used
in rating Cathay United Bank Co., Ltd. was Banks published
in March 2015. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
Cathay Life Insurance Co., Ltd is the largest life insurer
by premiums in Taiwan. At end-September 2015, its
total assets amounted to NTD5.1 trillion and its equity totaled
NTD332.6 billion.
Cathay Financial Holding Co., Ltd -- based
in Taiwan and listed on the Taiwan Stock Exchange -- is
one of the island's largest financial holding companies. At end-June
2015, its consolidated assets and equity totaled NTD7.1 trillion
and NTD433.1 billion, respectively.
Cathay United Bank Co., Ltd is headquartered in Taiwan and
reported total assets of NTD2.4 trillion at 30 September 2015.
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.
The below contact information is provided for information purposes only.
Please see the ratings tab of the issuer page at www.moodys.com,
for each of the ratings covered, Moody's disclosures on the
lead analyst and the Moody's legal entity that has issued the ratings.
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.
Stella Ng
Asst Vice President - 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
Sonny Hsu, CFA
Vice President - Senior Analyst
Financial Institutions Group
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 upgrades Cathay Life and Cathay Financial's ratings; outlook stable; and affirms Cathay United Bank's Ratings
