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Fitch Ratings-Taipei/Hong Kong/Singapore-28 September 2007: Fitch Ratings has today affirmed the ratings of Taishin Financial Holdings Company (TFHC) and its subsidiaries Taishin International Bank (TIB), Taiwan Securities Co., Ltd (TSC) and Chang Hwa Bank (CHB). At the same time, Fitch has downgraded the Individual Rating of Taishin Bills Finance Corporation (TBF) to 'C/D' from 'C' and affirmed the rest of its ratings. The outstanding debt issues of TFHC and its subsidiaries are also affirmed. The ratings are as follows:
- TFHC: Long-term foreign currency Issuer Default Rating (IDR) at 'BBB-' (BBB minus), Short-term foreign currency IDR at 'F3', National Long-term rating at 'A(twn)', National Short-term rating at 'F1(twn)', Individual at 'C', Support '5' and subordinated debt rating at 'A-(twn)' (A minus(twn)). The Outlook is Stable.
- TIB: Long-term foreign currency IDR at 'BBB', Short-term foreign currency IDR at 'F3', National Long-term rating at 'A+(twn)', National Short-term rating at 'F1(twn)', Individual at 'C', Support at '3' and Support Rating Floor at 'BB+'. The Outlook is Stable.
- TSC: Long-term foreign currency IDR at 'BBB-' (BBB minus); Short-term foreign currency IDR at 'F3', National Long-term rating at 'A(twn)', National Short-term rating at 'F1(twn)', Individual at 'C/D' and Support at '3'. The Outlook is Stable.
- TBF: Long-term foreign currency IDR at 'BBB-' (BBB minus); Short-term foreign currency IDR at 'F3', National Long-term rating at 'A(twn)', National Short-term rating at 'F1(twn)', Individual downgraded to 'C/D' from 'C', Support at '3' and senior unsecured debt rating at 'A (twn)'. The Outlook is Stable.
- CHB: Long-term foreign currency IDR at 'BBB+', Short-term foreign currency IDR at 'F2', National Long-term rating at 'AA-(twn)' (AA minus(twn)), National Short-term rating at 'F1(twn)', Individual at 'C/D', Support at '2' and Support Rating Floor at 'BBB+'.
TFHC reported return on average earnings (RoAE) of -18.8% (minus 18.8%), excluding minority interests in 2006, as large provision expenses and losses on NPL sales at TIB, its wholly-owned bank subsidiary, weighed on its profitability. Satisfactory profitability at CHB, of which TFHC owns 22.5% and retains management control, counterbalanced TIB's losses. The holding company swung to a profit with RoAE of 8.7% excluding minority interests in H107 as provision expenses declined versus 2006, while strong fee and trading income growth offset its lower net interest income. Higher brokerage and derivatives trading income from TSC in H107 also contributed to the group's profitability. TBF's profitability declined in 2006 and H107 as rising yields on fixed income securities increased funding costs, the flattish yield curve, and subdued issuance of commercial paper all contributed to lower profits.
The gross loan portfolio for the group grew negligibly in 2006 and H107. A large reduction in TIB's unsecured consumer lending portfolio was offset by rises in corporate and mortgage lending during the period. TBF's guarantee/equity ratio at end-H107 is at roughly half the industry average of 3.2x. As of end-H107, TBF has total commitment to provide liquidity support worth TWD13.9bn to the asset-backed commercial paper (ABCP) vehicles it has underwritten. The ABCP's asset pools comprises non-mortgage related fixed income securities with investment grade weighted average ratings. Meanwhile, CHB increased SME and home improvement loans and reduced lending to large corporates, the government and public entities.
The group's impaired loans increased to 2.1% at end-H107 from 1.2% of overall loans at end-2005, largely due to a deterioration in the asset quality of TIB's unsecured consumer lending portfolio. Fitch considers TIB's NPL reserve coverage ratio of 71.9% at end-H107 inadequate given the high level of new NPL formation in its unsecured consumer lending portfolio. Meanwhile, TSC, TBF and CHB maintained satisfactory loan quality with adequate NPL reserve coverage. TIB has no exposures to US subprime mortgage securities and other structured credit products, while CHB's exposure is negligible.
TFHC and its subsidiaries enjoy a good liquidity profile. Fresh equity injection into TIB by TFHC in late 2006 and H107 boosted the bank's capital position following large losses in 2006. However, the capital injections led to high double leverage for the holding company. Meanwhile, TSC, TBF and CHB maintained satisfactory capital adequacy.
TFHC and CHB have each appointed advisors to assist them in their planned business combination. TFHC's acquisition and eventual integration of CHB would result in an enlarged bank with 8% of total banking system assets and increase the likelihood of state support in times of stress due to its greater systemic importance. However, due to their distinct culture and the sensitivities of CHB's labour union, the integration of the two banks ( in terms of staffing and organisation structure) will likely occur in multiple phases over several years.
TFHC was established in 2002 and wholly owns TIB, TSC, and TBF. TFHC obtained control of CHB's board in October 2005. TFHC ranked second among 14 financial holding companies in Taiwan in terms of assets and eighth in terms of equity excluding minority interests at end-H107.
Contacts: Jonathan Lee, Taipei, +886 2 2514 7164; Sonny Hsu, Hong Kong, +852 2263 9595; David Marshall, Hong Kong, +852 2263 9911.
Media Relations: Lisa Lim, Singapore, Tel: +65 6238 7301.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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