The FINANCIAL — Taipei/Sydney-28 August 2011: Fitch Ratings has affirmed the ratings of Taiwan's First Financial Holding Company (FFHC) and its subsidiaries, including First Commercial Bank (Taiwan) (First Bank) and First Securities Inc (First Securities).
The Outlook is Stable.
At the same time, Fitch has withdrawn all of First Securities' ratings, as these ratings are no longer considered by the agency to be relevant to the agency's coverage. A full rating breakdown can be found at the end of this commentary.
The affirmation reflects FFHC's improved performance in profits and asset quality since the agency's last rating action in September 2010. Group consolidated return on average assets increased to an annualised 0.44% (unaudited) in H111 from 0.35% in 2010 and 0.14% in 2009. This was attributed to a decline in loan provisioning and higher spread income post the global financial crisis. Fitch expects the group's financial performance to further improve moderately in 2011-2012, underpinned by sound asset quality and Taiwan's generally stable economic outlook.
The ratings of First Bank, the principal operating subsidiary which represents 97% of group assets, reflect its strong franchise in the Taiwanese banking industry, adequate asset quality and capital position and strong liquidity. The strengths are tempered by First Bank's small franchise versus international peers, thin capital buffer and structurally modest internal capital generation.
Its Support Rating of '2' and Support Rating Floor of 'BBB+' highlight Fitch's expectation of a high level of state support for the bank given its systemic importance in Taiwan. Negative pressure on First Bank's Viability Rating could arise from severe deterioration in the asset quality leading to poor earnings and weakened core capitalisation.
FFHC's ratings are mostly driven by the credit profile of First Bank. Although there has been no precedent of the government supporting the holding company, Fitch views it would benefit indirectly from any government support provided to First Bank.
First Bank's loans increased 19% in the 18 months ended 30 June 2011, much stronger than the system's 12% growth during the same period. The increase was mainly driven by loans to large and mid-sized corporations while growth in consumer loans (mainly residential mortgages) was quite moderate given the bank's cautious stance on the property market. Potential risks associated with rapid increase in loans, particularly in a downturn, are deemed by Fitch to be manageable, as most of the new loans were offered to corporates of sound credit quality.
FFHC's cash position is more than sufficient to cover its standalone short-term liabilities and interest and operating expenses, a key consideration in aligning FFHC's IDR with First Bank's. Moreover, First Bank is a major liquidity provider in Taiwan's interbank markets due to its extensive deposit-taking franchise.
FFHC has low financial leverage, with a double-leverage ratio of 103.8% (unaudited) at end-H111. Capitalisation is adequate, with a statutory sum-of-parts capital adequacy ratio of 115.1% against the regulatory minimum of 100%. To boost First Bank's core capitalisation, FFHC plans to raise TWD16bn fresh capital in Q311. Fitch estimates this would lift the bank's Tier 1 ratio above 8% from 6.8% at end-H111. While this would be moderate relative to regional peers, Fitch views it as adequate, given the bank's sound asset quality and improving core earnings.
FFHC's subordinated bonds are rated two notches below its National Long-Term rating, in line with Fitch's hybrid notching criteria. The rating of the subordinated bonds mainly reflects its loss absorption capacity through coupon and principal deferrals once FFHC's capital adequacy ratio falls below the regulatory minimum requirement of 100%.
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