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Fitch Ratings-Taipei/Hongkong/Singapore-05 August 2009: Fitch Ratings has today affirmed Taiwan's Horizon Securities Co., Ltd's (HSC) National Long-term rating at 'BBB+(twn)', National Short-term rating at 'F2(twn)', Individual rating at 'D' and Support rating at '5'. The Outlook is Stable.
HSC's ratings reflect its small franchise and less diversified revenue sources. The ratings also factor its acceptable capitalisation and its improved, albeit still relatively weak, liquidity level. The company aims to expand its fee-related income through its alliance with French Edmond De Rothschild Asset Management to exclusively sell mutual funds through HSC's newly-formed wealth management business in 2009. To extend its branch network, HSC announced the acquisition of a small broker (2% of HSC's assets) in September 2008. The acquisition is to take place at end-2009 and will increase HSC's branch network by two, to a total of 11 branches.
HSC reduced its appetite for risk and scaled back its riskier investments in late-2008 to weather the market downturn. Its total investments declined notably at end-March 2009, from their peak in March 2008. The majority of its investments are government bonds and good quality corporate bonds at end-March 2009. Market risk from its bond investments - which are of short duration - is considered manageable. Meanwhile, the dollar value change for a 100 bp shift across the yield curve suggests a limited 2.6% impact to its equity base.
HSC incurred losses in 2008 due to marked losses in proprietary trading amid the sharp market correction. However, the company made modest pre-tax profits in January to May 2009 (5M09) as the stock market recovered. Nevertheless, fees from brokerage declined on a yoy basis in 5M09, due to increased brokerage rebates but decreased retail trading flow. In Fitch's view, HSC's profit outlook remains challenging in 2009, given its concentrated revenue from trading.
That said, HSC's capital ratio was an acceptable 251% at end-2008. The results of Fitch's stress test indicate that Taiwanese securities firms can generally hold up their capital positions well in the face of more challenging market conditions (for more information please refer to the comment, "Taiwanese Securities Firms: Capital Buffer Remains Satisfactory under Stress Scenario", dated 19 March 2009). Although a heavy reliance on short-term repos remains a weakness in its funding stability, HSC has gradually reduced its repo funding in 2008 and Q109, as it downsized its investment portfolio. In addition, the risk from repo funding has been partially mitigated by the company's good-quality underlying securities.
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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