Fitch Affirms 5 Taiwan Bills Finance Companies
At the same time, Fitch has affirmed the ratings of Waterland Financial Holdings (Waterland Financial) and Waterland Securities Corporation (Waterland Securities), which are derived and equalised with the ratings of IBF, the principal operating subsidiary of the group. The Outlooks are all Stable. A full list of rating actions is provided at the end of this commentary.
KEY RATING DRIVERS
IDRS AND NATIONAL RATINGS
The IDRs and National Ratings of IBF, Grand, Taching and Dah Chung are driven by their standalone credit profiles, which are reflected in their VRs. Their Stable Outlooks underline Fitch's expectation that these BFCs will maintain satisfactory capital strength and adequate liquidity relative to their growing commercial paper guarantee books and rising interest rate risk in their bond positions.
TFC's IDRs and National Ratings reflect the potential for institutional support from its largest shareholders - Mega International Commercial Bank Company Limited (A-/Stable), IBF and Cathay United Bank - which is reflected in its Support Rating. The Stable Outlook is based on Fitch's belief that the shareholders' support is not likely to weaken in the near to medium term.
VIABILITY RATING (VR)
IBF's higher VR of 'bbb' reflect its significant franchise in guarantee and fixed-income market making, and strong capitalisation. The rating also factors in the sector's structural weaknesses, including limited business scope and susceptibility to interest-rate volatilities and reliance on wholesale funding.
The four other firms' lower VRs of 'bbb-' or 'bb' reflect their higher concentration risk in guarantee exposures and bond repo counterparties, and greater interest-rate risks than that at IBF. Their focus on creditworthy corporates and highly liquid assets and satisfactory capitalisations help mitigate the potential risks.
The rated bills finance companies have a Stable rating Outlook. Fitch, however, has a negative view on the sector's earnings prospects due to cyclically rising interest rates in 2016-2017. Repo funding costs will increase and bond positions will suffer losses as a result of rising bond yields. The losses are likely to reduce earnings rather than erode capital because their interest-rate risk exposures are moderate.
Risks associated with the sector's growing property exposures should remain manageable within the rating horizon. Property exposures rose to 25% of the sector's total guarantee book in 2014, from 22% in 2012. The growth has slowed to 11% in 2014, from 18% in 2013, reflecting the softening property market. The sector's average loan-to-value ratio in property exposures remains reasonably conservative at around 50%-60% and the guarantees are mostly of short tenors of three to six months.
Fitch expects the rated BFCs to comfortably navigate the tighter liquidity in Taiwan. Their underlying assets have high liquidity and are of reasonably good credit quality, which will limit haircuts in assets disposals during stressed times. The halving of contingent facilities from state-owned Bank of Taiwan to the sector in 2014 did not heighten the sector's liquidity risk. The government provided the facilities in 2008 to stave off liquidity shock that year, but they have never been used.
WATERLAND FINANCIAL AND WATERLAND SECURITIES
Waterland Financial's ratings and outlook are aligned with those of IBF, based on the high level of integration between the two and the modest leverage and sound standalone liquidity at the parent. Waterland Securities's rating and outlook are aligned with Waterland Financial's, reflecting its status as a core subsidiary of the group, the obligatory support from the holding parent under Taiwan's Financial Holding Company Act and the inseparability of its risk profile from that of the group.
Waterland Financial made a tender offer in June 2015 to buy 51%-75% in Cota Bank for up to USD223m (TWD6.7bn). The tender offer closes on 17 August 2015. Fitch will review the rating on Waterland Financial once the transaction is finalised, likely in August, and assess the group's evolving consolidated credit profile based on its business strategy and capital planning.
SUPPORT RATING AND SUPPORT RATING FLOOR
IBF's Support Rating (SR) and Support Rating Floor (SRF) reflect a limited probability of government support, if needed. SRs and SRFs for Grand, Taching and Dah Chung reflect Fitch's view that state support cannot be relied upon, due to their low systemic importance. TFC's SR is driven by the expectation that its bank shareholders would provide support to the company, if needed.
RATING SENSITIVITIES
IDRS AND NATIONAL RATINGS
The IDRs and National Ratings of IBF, Grand, Taching and Dah Chung are sensitive to same factors that could change their VRs. A change in Fitch's assessment of the ability or propensity of TFC's largest shareholders to provide support is likely to result in a change in its IDRs and National Ratings.
VR
The rated entities' VRs have limited upside due to the aforementioned sector-wide structural limitations. Negative rating action may result from any compromises in underwriting quality, weakened capital strength arising from aggressive growth in the guarantee book or market risk, or unexpected market disruptions resulting in liquidity stress.
The potential acquisition of Cota Bank by its holding parent, Waterland Financial, in 2015, if successful is likely to result in weaker capitalisation at IBF. However, this would bring IBF's capitalisation in line with that of its peers because its capitalisation was stronger to begin with. The acquisition may erode IBF's broader credit profile in the longer term, which may pressure its ratings.
WATERLAND FINANCIAL AND WATERLAND SECURITIES
Waterland Financial's ratings are driven by the financial strength of its principal operating subsidiary, IBF. Any weakening of IBF's credit profile, and/or Waterland Financial's standalone liquidity and leverage could pressure its ratings. The holding parent's ratings, however, may be increasingly influenced by other subsidiaries, if IBF becomes a smaller part of the group by asset size as a result of acquisitions. Waterland Securities' ratings will move in tandem with the ratings of its parent, Waterland Financial.
Waterland Financial's acquisition of Cota Bank, if finalised, will likely have negative rating impact on the company and Waterland Securities. Cota Bank's earnings and capitalisation are lower than IBF's. A clear weakening in the group's capital strength as a result of leveraged acquisitions, coupled with any execution difficulties, and/or significant decline in overall group profitability could lead to a rating downgrade.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SRs and SRFs of IBF, Grand, Taching and Dah Chung are sensitive to changes in assumptions around the propensity of the government to provide timely support. TFC's SR may be downgraded if the willingness or ability of its large bank shareholders to extend support were deemed to have deteriorated.
The rating actions are as follows:
IBF:
Long-Term Issuer Default Rating (IDR) affirmed at 'BBB'; Outlook Stable
Short-Term IDR affirmed at 'F3'
National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(twn)'
Viability Rating affirmed at 'bbb'
Support Rating affirmed at '4'
Support Rating Floor affirmed at 'B+'
Waterland Financial:
Long-Term IDR affirmed at 'BBB'; Outlook Stable
Short-Term IDR affirmed at 'F3'
National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(twn)'
Viability Rating affirmed at 'bbb'
Waterland Securities:
Long-Term IDR affirmed at 'BBB'; Outlook Stable
Short-Term IDR affirmed at 'F3'
National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(twn)'
Dah Chung:
Long-Term IDR affirmed at 'BBB-'; Outlook Stable
Short-Term IDR affirmed at 'F3'
National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(twn)'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
Taching:
Long-Term IDR affirmed at 'BBB-'; Outlook Stable
Short-Term IDR affirmed at 'F3'
National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(twn)'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
Grand:
Long-Term IDR affirmed at 'BBB-'; Outlook Stable
Short-Term IDR affirmed at 'F3'
National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(twn)'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
TFC:
Long-Term IDR affirmed at 'BBB-'; Outlook Stable
Short-Term IDR affirmed at 'F3'
National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1(twn)'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '2'
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