Related Market Sector:
Fitch Ratings-Taipei/Hongkong/Singapore-09 June 2009: Fitch Ratings has today taken various rating actions on four Taiwanese banks with exposure to the PEM group following the agency's assessment of the likely negative impact on their financial standing, and after a review of their latest available Q109 results. The rating actions include Outlook revisions to Negative from Stable on Bank SinoPac (BSP) and Taichung Commercial Bank's (TCB) Issuer Default Ratings (IDRs), as well as affirmation of all of Standard Chartered Bank (Taiwan) Limited's (SCBT) and Hua Nan Commercial Bank's (HNCB) ratings. The details of the ratings actions are summarised at the end of this press release.
Fitch notes that all four of the above banks have announced that they will be buying back PEM group wealth management products previously sold to their customers; the PEM group is currently being investigated by the US Securities & Exchange Commission (SEC) for fraud. Recoveries on its products remains to be seen and are difficult to determine given the complexity of the alleged PEM group fraud and opaque market values. Fitch, however, believes that the recoveries will be limited and take considerable time to achieve. As such, and for the sake of conservativeness, Fitch has assumed a nil level of recoveries in estimating the impact on the above banks. In this regard it is noted that BSP, HNCB, and TCB have respectively reported their PEM group exposure will be TWD4.8bn (8% of equity), TWD6.8bn (9%), and TWD2.3bn (15%). SCBT has not officially disclosed its exposure.
In addition to its PEM group exposure, the rating action on BSP principally reflects the bank' notably weakened internal capital generation due to sharply compressed interest margins on its mortgage-concentrated loan portfolio. Also, the consecutive losses in 2007-2008 caused by its write-downs of investments on structured investment vehicles and PEM group exposure points to weaknesses in the bank's internal control and risk management. As of 31 March 2009, BSP's Tier I CAR stood at 9.38%. A full writedown of the PEM group exposure would reduce it by around 70 basis points (refer to the press release "Fitch Revises Outlook on Taiwan's Bank SinoPac and SinoPac Financial Holdings to Negative", dated 9 June 2009 for further details on Fitch's rating actions on the SinoPac group).
While TCB faces similar challenges to other Taiwanese banks including decreased spread revenue and the ongoing economic recession, a review of TCB's latest available results indicates a notable rise in credit costs in Q109 due to the bank's higher proportion of lending to SMEs which are more vulnerable to an economic downturn. As of 31 March 2009, TCB's Tier 1 CAR stood at 7.6%. A full writedown of the PEM group exposure would reduce it by around 119 basis points. Fitch considers a further weakening in asset quality leading to deteriorations of profitability and capitalisation to have an adverse effect on TCB's ratings.
HNCB's IDRs are supported by the very high probability of government support, given its large state ownership and systematic importance to the Taiwanese banking sector. Its Individual rating takes into account its strong liquidity profile and funding capacities - both of which are important factors especially in the current environment - as well as the benefits that generally accrue with a large retail franchise. Nevertheless, Fitch expects the deterioration in the bank's asset quality and the weakening in its internal capital generation, along with the related losses arising from the repurchase of PEM notes to pressure its Individual rating. At 31 March 2009, HNCB's Tier 1 CAR stood at 6.6%. A full writedown of the PEM group exposure would reduce it by around 67 basis points.
SCBT's ratings are underpinned by the strength of its parent, Standard Chartered Bank (SCB, rated 'A+'/Stable), including its strong franchise in the Asia-Pacific region and adequate capitalisation. The Standard Chartered Group has followed a prudent capital management approach with an aim to maintain a strong capital base to support the development of its business and meet regulatory capital requirements at all times. As a wholly-owned subsidiary of SCB, Fitch expects SCB to provide SCBT with necessary capital support to offset the losses arising from the buy-back of the PEM notes and to maintain an adequate capital level. Fitch considers the damage of mis-selling the suspected fraudulent financial products to SCBT's reputation and franchise should be limited as the products were all sold by the acquired Hsinchu International Bank (HIB) prior to the integration of HIB and SCB's Taiwanese branches (renamed as SCBT) in 2007. In addition, SCBT was the first bank to pledge a full repurchase of all PEM-related products.
The rating actions are as follows:
BSP:
- Long-term foreign currency Issuer Default Rating (IDR) affirmed at 'BBB+',
- Short-term foreign currency IDR affirmed at 'F2',
- National Long-term rating affirmed at 'AA-(twn)',
- National Short-term rating affirmed at 'F1+(twn)',
- Individual revised to 'C' from 'B/C',
- Support affirmed at '3',
- Support Rating Floor affirmed at 'BB+', and
- Outlook revised to 'Negative' from 'Stable'.
TCB:
- Long-term foreign currency IDR affirmed at 'BBB-',
- Short-term foreign currency IDR affirmed at 'F3',
- National Long-term rating affirmed at 'A(twn)',
- National Short-term rating affirmed at 'F1(twn)',
- Individual affirmed at 'C/D',
- Support affirmed at '5',
- Support Rating Floor affirmed at 'NF', and
- Outlook revised to 'Negative' from 'Stable'.
HNB:
- Long-term foreign currency IDR affirmed at 'BBB+',
- Short-term foreign currency IDR affirmed at 'F2',
- National Long-term rating affirmed at 'AA-(twn)',
- National Short-term rating affirmed at 'F1(twn)',
- Individual affirmed at 'C/D',
- Support affirmed at '2',
- Support Rating Floor affirmed at 'BBB+', and
- Outlook is 'Stable'.
SCBT:
- Long-term foreign currency IDR affirmed at 'A',
- Short-term foreign currency IDR affirmed at 'F1',
- National Long-term rating affirmed at 'AA+(twn)',
- National Short-term rating affirmed at 'F1+(twn)',
- Individual affirmed at 'C/D',
- Support affirmed at '1', and
- Outlook is 'Stable'.
Contacts: Renee Tsai, Joyce Huang, Jonathan Lee, Taipei, +886 2 81757603.
Media Relations: Lisa Lim, Singapore, Tel: +65 6796 7214,
Email:
lisa.lim@fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
