Bangkok--1 Apr--Standard & Poor's
HONG KONG (Standard & Poor's) April 1, 2016--Standard & Poor's Ratings Services said today it had affirmed its 'BBB' long-term and 'A-3' short-term issuer credit ratings on CTBC Financial Holding Co. Ltd. (CTBC FHC). The outlook on the long-term rating remains positive. We also affirmed the 'cnA+' long-term and 'cnA-1' short-term Greater China regional scale credit ratings on the holding company. At the same time, we affirmed the 'A-' long-term and 'A-2' short-term issuer credit ratings on CTBC Bank Co. Ltd. The outlook remains positive. We also affirmed the Greater China regional scale credit ratings on the bank at 'cnAA+/cnA-1'.
"The rating affirmations reflect our view that CTBC Bank's plan to acquire a 35.6% stake in Thailand-based LH Financial Group Public Co. Ltd. will not materially weaken the bank's risk-adjusted capital ratio or that of its bank-centric parent, CTBC FHC," said Standard & Poor's credit analyst Chris Lee.
On March 29, 2016, CTBC Bank announced the proposed acquisition for an estimated New Taiwan dollar (NT$) 15.4 billion, or 6.6% of CTBC Bank's shareholders' equities as of the end of 2015, to be funded by cash. The transaction is subject to regulatory approvals.
We expect CTBC Bank's post-investment risk-adjusted capital (RAC) ratio to decline to about 10% over the next two years from above 10% at the end of June 2015. Whether the bank can maintain its RAC ratio at above 10% over the next one to two years is also subject to CTBC FHC group's risk appetite for organic and inorganic growth over the same period, as well as the group's capital planning to retain earnings at the bank level or raise new capital to support CTBC Bank's growth. The growth path and changes in the bank's and group's exposures have been higher than the domestic industry average, albeit somewhat moderated by the group's diversified profile compared with that of local peers, above-average fee generation, stable earnings, and adequate track record of managing risk profiles of its acquired entities.
As the flagship company and core subsidiary of the CTBC FHC group, CTBC Bank continues to dominate the group's overall risk profile. The bank contributes 75%-80% of the group's assets and capital as of the end of 2015. We therefore believe the bank's capitalization has a dominating effect on the group's
capitalization.
"The positive outlook reflects our expectation that CTBC Bank and the CTBC FHC group are likely to maintain a RAC ratio above 10% over the next one to two years while properly managing the capital needs and risk arising from organic and inorganic growth," added Mr. Lee. "We also expect the group to maintain most of its key risk credit characteristics, including its adequate risk management and stable earnings over the same period. In addition, we expect CTBC Bank to maintain its strong business position in the highly competitive domestic market and remain a bank of moderate systemic importance in Taiwan."
We could raise the rating on CTBC Bank and consequently the rating on CTBC FHC if the bank can maintain its RAC ratio above 10% via a prudent business strategy and good earnings retention. Conversely, we could revise the rating outlook to stable if CTBC Bank or the CTBC FHC group pursues overly aggressive expansion without adequate capital planning or a risk management mechanism to manage its fast-growing business, which accordingly dilutes the risk position or weakens the capitalization of the bank and the overall group.