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Fitch Ratings-Sydney/Taipei-18 January 2012: Fitch Ratings has placed Taiwan Cooperative Bank's (TCB) Viability Rating (VR) on Rating Watch Negative (RWN). It has also affirmed its Long-Term Issuer Default Rating (IDR) of 'A-' with Stable Outlook. A full rating breakdown is provided at the end of this comment.
The RWN reflects TCB's weakened capital position to withstand potential asset quality deterioration, given its large exposure to weak technology sectors such as dynamic random access memory (DRAM) and thin-film-transistor liquid crystal display (TFT-LCD). TCB's exposure to these sectors could increase if the bank is called upon by the government to fulfill its implicit policy role to extend support to these strategically important technology sectors. This will worsen the bank's credit profile and may lead to negative action on its VR.
Fitch, however, notes TCB's access to ordinary government support in terms of liquidity and capital as well as its strong domestic franchise. The agency will resolve the RWN pending successful completion of the planned rights issue in H112, as well as the bank's ability to maintain capitalisation commensurate with its future risk profile, in view of its group restructuring.
Fitch expects TCB's strong loan growth in 2011 and its group reorganisation to reduce its already modest Tier-1 capital ratio to about 6.4% at end-Q112 from 7.1% at end-2010. The new holding company Taiwan Cooperative Financial Holding Company (TCFHC) plans to raise TWD21bn in H112 and use most of the proceeds to bolster TCB's capital position. Failure of capital injection into TCB will hamper its growth plan and ability to absorb any unexpected shock from a global economic slowdown and could therefore result in negative rating action on the VR.
TCB's IDRs as well as its National Ratings are based on Fitch's belief of an extremely high likelihood of government support for the bank. This is based on its dominant state ownership and systemic importance arising from its significant size and policy role as the bank for grassroot credit cooperatives. Fitch views the potential for an upgrade is limited as the bank is at the highest Support Rating of '1'. A downgrade is possible if the government's propensity and/or ability to support diminishes.
TCB's profitability has improved moderately in 2011, driven by an expanded loan book, modestly higher interest margins as well as a benign credit cycle in 2010-2011. Prospects for 2012 are, however, challenged by the rising risk of specific provisioning and the need to strengthen its general reserve buffer.
TCB's perpetual cumulative bond remains on RWN and is rated two notches below its National Long-Term rating, in line with Fitch's current rating criteria and notching practice for such performing securities. Any change in Fitch's appraisal of the loss-bearing features of such instruments could impact the ratings.
TCB is the second-largest bank in Taiwan and held a sizable deposit market share of about 8.2% as at end-Q311. It has an extensive branch network, with 295 domestic branches and six overseas units. TCB is now the main operating subsidiary of TCFHC.
A Credit Update on TCB will be available shortly on www.fitchratings.com.
The rating actions are as follows:
TCB:
Long-Term IDR: affirmed at 'A-'; Outlook Stable
Short-Term IDR: affirmed at 'F2'
National Long-Term rating: affirmed at 'AA(twn)'; Outlook Stable
National Short-Term rating: affirmed at 'F1+(twn)'
Individual Rating: affirmed at 'C/D'
Viability Rating: 'bbb-'; placed on RWN
Support Rating: affirmed at '1'
Support Rating Floor: affirmed at 'A-'
Subordinated bonds affirmed at 'AA-(twn)'
Perpetual cumulative bonds 'BBB+(twn)' remain on RWN
Contacts:
Primary Analyst
Jenifer Chou
Associate Director
+886 2 81757605
Fitch Ratings Limited, Taiwan Branch
Suite 1306, 13F, Tun Hwa N. Rd., Taipei
Secondary Analyst
Cherry Huang
Director
+886 2 81757603
Committee Chairperson
John Miles
Senior Director
+61 2 8256 0344
Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935,
Email:
wailun.wan@fitchratings.com.
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.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 16 August 2011, and 'National Ratings Criteria ', dated 19 January 2011, and 'Rating Bank Regulatory Capital and Similar Securities', dated 15 December 2011, are available at www.fitchratings.com.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
National Ratings Criteria
Rating Bank Regulatory Capital and Similar Securities
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