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Fitch Ratings-Taipei/Singapore-24 August 2009: Fitch Ratings has today affirmed Taichung Commercial Bank's (TCB) Long-term foreign currency Issuer Default Rating (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 rating at 'C/D', Support rating at '5' and Support Rating Floor at 'NF'. The Outlook remains Negative.
TCB's ratings consider its satisfactory liquidity, acceptable asset quality and adequate capitalisation, although the latter is under pressure. The Negative Outlook however, reflects the agency's concern that the bank's sizeable exposure to the Private Equity Management group (PEM) and its increased credit loan losses are likely to force it to ramp up higher provisioning, eroding its core capital. Fitch considers a further weakening in asset quality or substantially increased loan/impairment charges, leading to deterioration in profitability and capitalisation, to have an adverse impact on TCB's ratings.
Fitch notes the bank's efforts in adjusting its branch coverage and in broadening its product offerings to enhance its core profitability. In 2008/2009, TCB relocated its unprofitable branches to industrial parks and districts (where many SMEs are based). The branch relocation programme will boost TCB's market reach and productivity, in Fitch's view, as the bank will be able to make better use of its SME financing expertise.
TCB recorded a modest annualised pre-tax ROE (un-audited) of 3.2% in H109, due to a reduction in core earnings and increased credit costs amid the adverse economic environment. Fitch expects a net loss to be likely for TCB, as its constrained margins, potentially rising loan book credit losses and probable writedowns on PEM exposures to weigh on its bottomline. TCB's asset quality has weakened; nevertheless, the bank's NPL ratio remained adequate at 1.5% at end-H109 and its loan loss reserves coverage was reasonably strong at 85.6% at end-H109, thanks to the proactive provisioning in 2008 and H109 in light of the sharp economic downturn.
TCB has an acceptable capitalisation, with a Tier 1 ratio of 7.6% at end-Q109. Its exposure to and the likely writedowns on PEM, however, place significant pressure on its capital position. TCB has a satisfactory liquidity profile, supported by its well-established deposit-taking franchise in the greater Taichung area, which provides a stable funding source.
Founded in 1953, TCB is a privately-owned bank with 1.1% system-wide deposits and 6.8% market share in the greater Taichung area at end-2008. China Man-Made Fiber Corp. and its investment associate, TCB's largest shareholder, owned aggregated stakes of 22% at end-H109.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable.
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