Fitch Downgrades Shin Kong Group

2009-06-17

Fitch Ratings-Taipei/Hongkong/Singapore-17 June 2009: Fitch Ratings has today downgraded ratings on Shin Kong Financial Holding Co. Ltd. (SKFH) and its subsidiaries Shin Kong Life Insurance Company Ltd. (SKL), Taiwan Shin Kong Commercial Bank (SKB) and Shin Kong Securities (SKSC). At the same time, the agency has removed the ratings from Rating Watch Negative (RWN) and assigned a Negative Outlook. The details of the rating actions are summarised at the end of the press release.
The ratings downgrades primarily reflect the group's principal operating subsidiary, SKL's much weakened capitalisation as well as SKFH's standalone increased debt gearing and reduced liquidity. In light of the parent SKFH's weakened ability to provide support, the ratings of both SKB and SKSC now mainly reflect their standalone credit profiles. SKB's ratings consider its small franchise, low profitability and adequate liquidity and capitalisation, while SKSC's ratings reflect its improved, albeit still small brokerage operations, sound liquidity and capitalisation and relatively volatile profitability.

The Negative Outlook reflects Fitch's view that the challenging economic conditions and extremely low interest rates would continue to weigh on SKL's profitability and place downward pressure on its capitalisation. Fitch is also concerned that further deterioration of SKL's or SKFH's standalone financial strength would pose a negative impact on SKB's and SKSC's franchise and capital soundness. In April 2009, SKFH agreed to sell the brokerage operations of SKSC to its 26.28%-owned securities firm, Masterlink Securities Corporation and liquidate the remaining parts of SKSC. Fitch will withdraw SKSC's ratings upon completion of the transaction in Q409.

The substantial decline of Taiwan's stock market, volatility of foreign exchange rates and deterioration of the credit quality of structured securities in 2008 have weakened most Taiwanese life insurers' (including SKL's) capital strength in 2008. Fitch expects the ongoing volatility of equity markets and foreign exchange rates to continue to pressure Taiwanese life insurers. In particular, most companies still have significant equity exposures (over two times their shareholders' equity) and large offshore investments compared with their reduced capital base. The life insurance sector's negative spread burden is also a growing concern given the low interest rate environment. Fitch notes a marginal decrease in the assumed investment return could cause a significant drop in a life insurer's embedded value due to the generally long duration of its insurance liabilities.

Due to the legacy burden of high guaranteed rates related to existing insurance policies, SKL's profitability has been heavily influenced by the rather volatile investment performance of its invested assets. Despite the TWD21bn of new capital injected by SKFH, SKL's net worth decreased almost 59% in 2008 to TWD24.8bn at end-2008 (2% of total assets) as a result of poor investment income. Fitch estimates SKL's capital level would remain low after taking into account the large potential gains on its property investment, the potential loss on the remaining structured portfolio and the likely recovery of the valuation losses on its equity investments on the back of a strong rebound of Taiwan's stock market in 2009. Following the capital injection (part of which was funded via the issuance of subordinated debts) into SKL, SKFH's liquidity and refinancing risks have also increased as it had a total of TWD19bn outstanding debt but only TWD1.1bn cash on its balance sheet at end-Q109.

SKB's profitability remained weak in 2008 with a net profit of TWD227m (ROE: 1.1%). This was due to further compression on the already low interest margins and the reduced contribution of wealth management fees, although cost tightening partly reduced the impact. Nonetheless, SKB's capitalisation and liquidity remain adequate. Its Tier 1 capital ratio was 7.1% and the statutory liquidity ratio was 13% at end-2008 (higher than the regulatory requirement of 7%). It also maintained adequate asset quality, with total problem loan exposures accounting for 1.9% of gross loans, and a loan loss reserves coverage ratio of 66% at end-2008, although credit costs may well rise over 2009-2010 amidt a challenging economic environment.

SKSC continues to improve its market presence and revenue diversification by expanding its brokerage market share. The company reported a small profit in its brokerage operation in 2008, although proprietary trading resulted in a net loss of TWD380m. Despite the relatively volatile earnings performance, SKSC still maintained a high capital adequacy ratio at 501.52% at end-2008 (well above the regulatory minimum requirement of 150%) and a satisfactory liquidity position with a current ratio of 136%.

The below details the rating actions on the following entities:

SKFH:
- Long-term Issuer Default Rating (IDR) downgraded to 'B+' from 'BBB-'; Off RWN; Outlook Negative
- Short-term IDR downgraded to 'B' from 'F3'; Off RWN
- National Long-term downgraded to 'BBB-(twn)' from 'A(twn)'; Off RWN; Outlook Negative
- National Short-term downgraded to 'F3(twn)' from 'F1(twn)'; Off RWN

SKL:
- Insurer Financial Strength (IFS) rating downgraded to 'BB+' from 'BBB+'; Off RWN; Outlook Negative
- National IFS rating downgraded to 'A-' from 'AA-(twn)'; Off RWN; Outlook Negative

SKB:
- Long-term IDR downgraded to 'BB' from 'BBB-'; Off RWN; Outlook Negative
- Short-term IDR downgraded to 'B' from 'F3'; Off RWN
- National Long-term downgraded to 'BBB+(twn)' from 'A(twn)'; Off RWN; Outlook Negative
- National Short-term downgraded to 'F2(twn)' from 'F1(twn)'; Off RWN
- Individual affirmed at 'D'
- Support downgraded to '4' from '2'; Off RWN

SKSC:
- Long-term IDR downgraded to 'BB-' from 'BBB-'; Off RWN; Outlook Negative
- Short-term IDR downgraded to 'B' from 'F3'; Off RWN
- National Long-term downgraded to 'BBB(twn)' from 'A(twn)'; Off RWN; Outlook Negative
- National Short-term downgraded to 'F3(twn)' from 'F1(twn)'; Off RWN
- Individual affirmed at 'D'
- Support downgraded to '4' from '2'; Off RWN

Contacts: Joyce Huang, Jonathan Lee, Taipei, +886 2 8175 7600.

Media Relations: Lisa Lim, Singapore, Tel: +65 6796 7214, Email: lisa.lim@fitchratings.com.

Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable.

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