OREANDA-NEWS. Fitch Ratings has affirmed Taiwan-based Hua Nan Commercial Bank's (HNB) ratings, including its Long-Term Issuer Default Rating (IDR) at 'BBB+' and Viability Rating (VR) at 'bbb-'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - IDRs, National Ratings, Support Rating and Support Rating Floor
The affirmation of HNB's IDRs and National Ratings are driven by its Support Rating (SR) and Support Rating Floor (SRF), which reflect the high probability of support from the state given its systemic importance. This is evident in the state's long-term and majority ownership (currently around 23%) in HNB's parent, Hua Nan Financial Holding Company, and the bank's leading franchise with the third-largest branch network and a 5.7% share of deposits in Taiwan.

RATING SENSITIVITIES - IDRs, National Ratings, Support Rating and Support Rating Floor
The IDRs, National Ratings, SR and SRF are sensitive to any rating action on the Taiwan sovereign (A+/Stable) and/or changes in perceived propensity of the Taiwan government to provide timely support to the bank. Fitch believes the latter is a less likely scenario in the near to medium term.

KEY RATING DRIVERS - Viability Rating
The VR primarily reflects its strong domestic franchise - especially among SMEs - ordinary support from the state, as well as strengthened loan loss reserves and adequate capitalisation relative to its moderate risk profile, which includes rising appetite for China exposures. The rating also considers the bank's modest internal capital generation due to its below average, albeit improving, profitability. Fitch expects the bank to maintain below-average loan growth to sustain its moderate capitalisation.

The VR largely reflects the downside risk from the bank's continuing growth in China. HNB's China exposures grew rapidly off a low base, to around 110% of its Fitch core capital ratio at end-2014 from below 40% at end-2012. The sector average is 160%-170%. The exposures are fairly diversified and focused on investment-grade Chinese banks and relatively lower-risk state-owned Chinese entities. Fitch expects the growth to slow because of a higher base now and its relatively modest growth strategy. Significant increase in China assets could come from opening a subsidiary in the market.

RATING SENSITIVITIES - Viability Rating
Any excessive growth and/or aggressive acquisition in China, leading to weakened capitalisation and risk profile, is the most likely trigger for a VR downgrade. A VR upgrade could occur if HNB can sustain higher profitability and stronger internal capital generation in line with better-rated peers but without significantly raising risk appetite.

The rating actions are as follows:

HNB:
Long-Term IDR: affirmed at 'BBB+'; 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)'
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB+'