Fitch Upgrades Taiwan Cooperative Bills Finance and Taiwan Cooperative Securities


09 Mar 2017 2:05 AM


Fitch Ratings-Taipei-09 March 2017: Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) of Taiwan Cooperative Bills Finance Corporation (TCBFC) to 'A' from 'A-'. The agency also upgraded the National Long-Term Ratings of TCBFC and Taiwan Cooperative Securities Co., Ltd. (TCS) to 'AA+(twn)' from 'AA(twn)'. The Outlook is Stable.

At the same time, Fitch affirmed TCBFC's Support Rating at '1', reflecting the extremely high probability of support from its sole parent - Taiwan Cooperative Financial Holding Co., Ltd. (TCFHC). TCS is also a wholly owned subsidiary of TCFHC. A full list of rating action is at the end of this commentary.

TCBFC's IDR upgrade reflects the increased financial flexibility the Taiwan sovereign has to support state-controlled TCFHC and in turn TCBFC. Fitch upgraded Taiwan's rating to 'AA-' from 'A+' in October 2016 due to its improved fiscal profile. The upgrade of TCBFC's and TCS's National Long-term Ratings reflects their enhanced credit strength from stronger state support, which is now more comparable with 'AA+(twn)' large private banks.

KEY RATING DRIVERS
IDRS, NATIONAL RATINGS
The ratings of TCBFC and TCS reflect the strong propensity of the state to support TCFHC, based on TCFHC's strong ties to the government and its principal bank subsidiary's, Taiwan Cooperative Bank, systemic importance in Taiwan. State and state affiliates own nearly 40% of TCFHC; the company also closely follows government policy. TCB is Taiwan's second-largest bank with a 7.3% deposit market share at end-3Q16.

The ratings also reflect a high probability of institutional support from TCFHC to TCBFC and TCS, based on TCFHC's legal obligation under the Financial Holding Act to assist subsidiaries when they fall into financial difficulty. The agency is of the view that TCFHC has a strong capacity to support TCBFC and TCS, as both subsidiaries represent a small proportion of the group's assets and any required support would be immaterial relative to the parent's ability to provide it. Both companies are also an integral part of the group due to their strong management, strategic integration and brand sharing.

TCBFC's and TCS's National Long-term Ratings are at the high end of Taiwan's national rating scale, reflecting low default risk relative to domestic peers due to strong state support, if needed.

TCBFC's earnings increased by nearly 10% yoy in 2016, due to its expanding commercial paper guarantee book and bond trading. Its Fitch Core Capital ratio was stable at 15.6% at end-2016 (2015: 15.7%); this compares with the sector average of 13.5%. Fitch expects the company to sustain its adequate capitalisation due to a modest appetite for credit risks in its guarantee book amid a slow economy and moderate market risk. Fitch expects TCBFC to contain the price risk in its bond portfolio amid a rising interest-rate cycle.

Fitch expects TCS's earnings to remain volatile. The company posted a higher return on assets of around 1.5% in 2015-2016, compared with less than 1.0% in 2014. The improvement followed favourable trading gains and, to a lesser extent, higher brokerage commissions and margin-loan interest income. Its capital adequacy ratio declined moderately to 416% at end-November 2016 (end-2015: 691%) due to investment growth and is comparable to the 300%-400% sector average. Fitch expects TCS to maintain adequate capitalisation relative to its moderate risk taking. Its stock holdings accounted for around 20% of equity at end-2016, which is at the low-end of its Fitch-rated peers.

The regulator issued a warning to TCS' on 7 March 2017 regarding its former management executives using the accounts of other people for stock trading. The warning does not affect TCS's business operation, but highlighted its less sophisticated risk controls. Fitch does not assign a standalone rating to TCS due to its high level of integration with the group. Its standalone credit strength would be weaker than its support-driven National Long-Term Rating suggests.

The Stable Outlook on TCBFC's and TCS's rating reflecting Fitch's expectation that the state will maintain its controlling ownership and strong support to the companies over the medium term.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS
The ratings of TCBFC and TCS are sensitive to changes in Taiwan's sovereign rating and group support. This includes declining sovereign support or Fitch no longer seeing the companies as core entities of the group.

A credit update on TCBFC and TCS will be available shortly at www.fitchratings.com

The rating actions are as follows:

TCBFC:
Long-Term IDR upgraded to 'A' from 'A-'; Outlook Stable
Short-Term IDR affirmed at 'F1'
National Long-Term Rating upgraded to 'AA+(twn)' from 'AA(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(twn)'
Support Rating affirmed at '1'

TCS:
National Long-Term Rating upgraded to 'AA+(twn)' from 'AA(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(twn)'

Contact:

Primary Analyst
Cherry Huang, CFA
Director
+886 2 8175 7603
Fitch Australia Pty Ltd, Taiwan Branch
Suite 1306, 13F No. 205, Dunhwa North Road
Songshan District
Taipei City, Taiwan 105

Secondary Analyst
Jenifer Chou
Director
+886 2 8175 7605

Committee Chairperson
Parson Singha
Senior Director
+66 2108 0151


Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)
National Scale Ratings Criteria (pub. 07 Mar 2017)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy


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