Fitch Upgrades Rating on Taiwan's Hua Nan Commercial Bank
09 Mar 2017 3:15 AM
Fitch Ratings-Taipei-09 March 2017: Fitch Ratings has upgraded Taiwan-based Hua Nan Commercial Bank's (HNB) Long-Term Issuer Default Rating (IDR) to 'A-' from 'BBB+' and its National Long-Term Rating to 'AA(twn)' from 'AA-(twn)'. The Outlook is Stable. At the same time, the agency has upgraded the bank's Viability Rating to 'bbb' from 'bbb-'. A full list of rating actions is available at the end of this commentary.
The IDR upgrade reflects the increased flexibility the Taiwan sovereign has to support state-controlled HNB, if needed. Fitch upgraded Taiwan's rating to 'AA-' from 'A+' in October 2016 due to its improved fiscal profile. The upgrade of HNB's National Long-Term Rating reflects its enhanced credit strength from stronger state support, which is now more comparable with 'AA(twn)' domestic peers.
The Viability Rating upgrade reflects HNB's strengthened risk buffer and improved earnings quality; both measures are now comparable with 'bbb' rated peers.
KEY RATING DRIVERS
IDRS AND NATIONAL RATINGS
HNB's IDRs and National Ratings reflect the strong propensity of the state to support HNB. The state has a controlling 33% stake in HNB's sole parent, Hua Nan Financial Holding Company, and the group has long-term links with the state and is of significant systemic importance. HNB is Taiwan's third-largest bank by branch numbers with a near 6% deposit market share.
HNB's National Long-Term Rating is at the high-end of the national rating scale, reflecting low default risk relative to domestic peers due to strong state support, if needed.
HNB's Viability Rating reflects its adequate capitalisation relative to its moderate risk profile and satisfactory profitability. Fitch believes the bank will continue to improve its capital profile through earnings generation and measured credit growth. The bank aims to meet higher Pillar II regulatory capital requirement by adding a 200bp buffer for offshore expansion by 2018 under Taiwan's Basel III capital regime. Its Fitch Core Capital ratio rose to around 10.8% at end-2016 (end-2014: 9.9%), which is comparable with similarly rated regional peers.
HNB has enhanced revenue from fee-income generation and to a lesser extent, margin uplift in offshore lending over the previous few years. Its profitability has now approached the sector average with a return on assets of around 0.6% in 2016 (2012: 0.4%). Fee income increased to 0.3% of earning assets in 2016, from 0.2% in 2012, following continued efforts to drive wealth management sales through its large branch network and retail customer base. Fitch expects earnings to remain stable in 2017-2018, with easing margin compression and fee income generation helping offset a modest rise in credit costs amid the slow economy in Taiwan and China.
At the same time, the bank's risk profile remains moderate. Near 20% of HNB's mortgages are extended to government employees and are low-risk. Its large exposures also mostly involve lending to government and state-owned companies and are guaranteed by the state. Exposure to China remained a modest 6% of total assets in 3Q16 in line with the government's 'New Southbound Policy' to reduce concentration risk to China and increase lending to southeast Asia countries. Fitch expects HNB to manage its offshore exposure to Asian emerging market well, due to its modest growth appetite. These exposures increased rapidly in 2015-2016 from a low base and are currently at less than 2% of total assets.
IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR Changes in Taiwan's ability and willingness to support HNB could lead to changes in its Issuer Default Ratings, National Ratings, Support Rating and Support Rating Floor. Fitch expects state support to remain steadfast in the near to medium term.
A Viability Rating downgrade would likely come from any excessive growth in high risk Asia-Pacific emerging market that substantially weakens HNB's risk profile. Prospects for an upgrade are limited, as a significant improvement in balance sheet strength is less likely in the near term.
A credit update on HNB will be available shortly at www.fitchratings.com
The rating actions are as follows:
Long-Term IDR upgraded to 'A-' from 'BBB+'; Outlook Stable
Short-Term IDR upgraded to 'F1' from 'F2'
National Long-Term Rating: upgraded to 'AA(twn)' from 'AA-(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(twn)'
Viability Rating upgraded to 'bbb' from 'bbb-'
Support Rating revised to '1' from '2'
Support Rating Floor revised to 'A-' from 'BBB+'
Cherry Huang, CFA
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Additional information is available on www.fitchratings.com
Global Bank Rating Criteria (pub. 25 Nov 2016)
National Scale Ratings Criteria (pub. 07 Mar 2017)
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