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Fitch Ratings-Taipei/Hong Kong-14 October 2009: Fitch Ratings has today affirmed the ratings of Industrial Bank of Taiwan (IBT) and its subsidiary, IBT Securities Co., Ltd. (IBTS). At the same time, the agency has revised the Outlook on IBTS's National Long-term rating to Stable from Negative. The Outlook revision reflects IBTS's improved asset quality following a large write-down for its involvement in a defaulted reverse repo transaction in 2008, and the company's reasonable capitalisation.
IBT's Individual rating of 'C/D' reflects its adequate asset quality and capitalisation, as well as its low profitability and weakness in funding due to its limited access to retail deposits. IBT has aimed to diversify revenue and risk through acquisitions. It acquired 28% of China Bills Finance Corporation ('BBB'/Stable) in 2005-2007, and 90% of EverTrust Bank in California (US) in March 2007. These direct investments are fully deducted from its capital when calculating its standalone capital adequacy. To diversify further, IBT opened a branch in Hong Kong in April 2009 and plans to establish a presence in Vietnam and mainland China.
Loan growth was strong in 2007-2008 for IBT, but the bank became more conservative in 2009 as the economy slowed. In H109, the consolidated loan portfolio shrank by 7%, larger than the industry contraction of 2%. IBT's consolidated impaired loans remained low at 1.4% of total loans at end-H109, of which 87% were covered by loan loss reserves. Nonetheless, Fitch understands that the problematic loans excluded the restructured debts of some financially weak corporations. Should tough economic conditions continue, this could increase IBT's credit cost since only limited loan loss provisions have been provided against these exposures.
In 2008, IBT incurred a substantial net loss as large losses on a defaulted reverse repo transaction at 94% owned-IBTS weighed on profitability. However, IBT and IBTS returned to profitability with modest annualised ROE of 8.0% and 9.8%, respectively in H109. IBT's margins are relatively low due to its business focus on corporate lending and a limited deposit-taking capability, although margins did widen a bit in H109, thanks to lower funding costs and benefits from the central bank's interest rate cuts. IBT remained adequately capitalised at end-H109, with a standalone capital adequacy ratio of 14.1% (end-2008: 12.7%). Its consolidated Tier 1 and total capital adequacy ratio was 16.8% and 17.2% at end-H109, reflecting adequate capitalisation among its major subsidiaries.
IBTS's Individual rating of 'D' reflects its small brokerage franchise and its rather volatile performance in profitability and risk management. The rating also considers IBTS's improved asset quality and reasonable capital buffer. IBTS's existing National Long-term rating is mainly based on its standalone financial strength. Losses leading to a significant reduction in capital would put downward pressure on IBTS's National Long-term rating.
IBTS returned to net profit in January-August 2009 (ROE of 14%, annualised) after a large net loss in 2008 (ROE of -47%). With the balance sheet now cleaned up, Fitch expects IBTS to report reasonable profitability in 2009 due to improved trading volume on Taiwan's main stock exchange, positive proprietary trading results in the year to date, and profits from renewed warrant issuance. IBTS has maintained a comfortable capital buffer above the 150% regulatory minimum, with a capital adequacy ratio of 388% as at end-H109. The company expects to receive new capital from IBT in late 2009 to restore its capital strength and meet business expansion needs.
IBT is listed in Taiwan OTC stock market and is one of two industrial banks in the country. IBT is controlled by the Lo family, its largest shareholder with a 15% ownership interest. IBTS is a smaller full-licensed securities firm in Taiwan. IBTS has strong expertise in the niche domestic exchange-traded funds market.
The details of the ratings are as follows:
IBT: Individual rating affirmed at 'C/D' and Support rating at '5'.
IBTS: Nation Long-term rating affirmed at 'BBB+(twn)', Outlook revised to Stable from Negative, National Short-term rating affirmed at 'F2(twn)', Support rating at '3', and Individual rating at 'D'.
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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Email:
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