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Fitch Ratings-Taipei/Hong Kong-17 December 2009: Fitch Ratings has today revised the Outlook on Taiwan's Waterland Financial Holdings (WFH) and its subsidiaries International Bills Finance Corporation (IBF) and Waterland Securities Corporation (WSC) to Stable from Negative. The agency has simultaneously affirmed all their ratings. The rating actions follow an annual review of Waterland group's credit profile. A detailed list of the rating actions follows at the end of this commentary.
The Outlook revision and rating affirmations on Waterland group reflect the group's capacity to maintain solid capitalisation and liquidity, despite the large credit losses arising from IBF's asset-backed commercial paper (ABCP) underwriting position (backed by crisis-hit troubled synthetic CDOs) and the slowdown in Taiwan economy. The exposure to troubled ABCP position was entirely removed through a write-off (TWD4.3bn) in late 2008. Meanwhile, credit quality of the rest of the group's assets remained reasonably good amid the economic downturn. Total problem exposures continued to decline in 2008-9M09, and were covered by sufficient reserves and good-quality underlying collateral in real estate.
WFH positions itself as a niche financial group with core businesses in dealing fixed income securities and corporate banking. It intends to keep up its leading position in the money markets and increase the earning contribution from the equity-related operations through acquisitions. In view of the group's high reliance on wholesale funding and limited product offering, WFH is actively looking for opportunities to acquire a commercial bank in Taiwan.
After a net loss due to impaired ABCPs in 2008, WFH returned to reasonable profits in 9M09 (11% annualised return on equity) as interest rate spreads widened upon sharply reduced funding cost and increased risk premium, and a strong recovery in Taiwan's stock market. In 2010, Fitch expects the group to maintain reasonable profitability underpinned by likely continued favourable money market spreads and gradually improving productivity of WSC's brokerage operations. As a precaution to guard against potential rises in interest rates, the group gradually reduced the duration of fixed-income investments in 9M09 and actively hedges the associated interest rate risks. The group's stock holdings have increased notably amid the stock market recovery. Though the associated risk is manageable, it could raise its earning volatility.
WFH's liquidity is adequate, with cash dividend inflows from subsidiaries comfortably covering the holding company's standalone operating expenses and interest payments. Moreover, IBF's funding through bills and bond repurchase agreements (repos) is backed by high-quality fixed-income securities while repo counterparties are generally diversified. WSC also has a liquid balance sheet with a current ratio of 144% at end-H109. WFH and its subsidiaries are well-capitalised, with IBF's capital adequacy ratio (CAR) increased to 15.6% at end-H109 from 14.2% at end-H108 due to a decline in guarantee offering. Meanwhile, WSC's CAR was 283% at end-September 2009, which is higher than the regulatory minimum requirement of 150%.
Established in March 2002, WFH is the only financial group with a principal operating subsidiary in bills finance. IBF is a wholly-owned subsidiary of WFH and is the second largest bills finance company by assets (22% of the sector, including guarantees, at end-September 2009) in Taiwan. WSC had a 2.48% market share of equity brokerage in Taiwan at end-September 2009.
WFH
- Long-term foreign currency Issuer Default Rating (IDR) affirmed at 'BBB-'; Outlook revised to Stable from Negative;
- Short-term foreign currency IDR affirmed at 'F3';
- National Long-term rating affirmed at 'A(twn)'; Outlook revised to Stable from Negative;
- National Short-term rating affirmed at 'F1(twn)';
- Individual rating affirmed at 'C';
- Support affirmed at '5'; and
- Support Rating Floor affirmed at 'NF'.
IBF
- Long-term foreign currency IDR affirmed at 'BBB'; Outlook revised to Stable from Negative;
- Short-term foreign currency IDR affirmed at 'F3';
- National Long-term rating affirmed at 'A+(twn)'; Outlook revised to Stable from Negative;
- National Short-term rating affirmed at 'F1(twn)';
- Individual rating affirmed at 'C';
- Support affirmed at '4'; and
- Support Rating Floor affirmed at 'B+'.
WSC:
- Long-term foreign currency IDR affirmed at 'BBB-'; Outlook revised to Stable from Negative;
- Short-term foreign currency IDR affirmed at 'F3';
- National Long-term rating affirmed at 'A(twn)'; Outlook revised to Stable from Negative;
- National Short-term rating affirmed at 'F1(twn)';
- Individual rating affirmed at 'D'; and
- Support affirmed at '2'.
Contacts: Sophia Chen, Yu Chi Fan, Jonathan Lee, Taipei, +886 2 8175 7600.
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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