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Fitch Ratings-Taipei/Hong Kong-27 January 2010: Fitch Ratings has today affirmed all the ratings of Taiwan's Yuanta Financial Holding Co., Ltd. (YFH) and its subsidiaries, including Yuanta Securities Co., Ltd. (YS), Yuanta Securities Finance Co., Ltd. (YSF) and Yuanta Commercial Bank Co., Ltd's (YCB). The Outlook on the Long-term issuer default ratings (IDRs) and National Long-term ratings for these entities remains Stable. The rating actions follow an annual review of Yuanta Group's risk profile, and a detailed list of the rating actions can be found at the end of this commentary.
The rating affirmations reflect the group's resilient performance amid the recent financial crisis, significant geographic coverage of Asian equity markets, and its strong market position in Taiwan's securities industry. The ratings also factor in the group's adequate liquidity and sound capital positions. However, the ratings consider the group's relatively small Asia-based franchise among regional investment banks.
Despite being sensitive to capital market fluctuations, economies of scale have largely offset YS and YSF's vulnerability to these external volatilities. Moreover, earning pressures from credit costs and spread compression at YCB eased in 2009. YFH posted an annualised return on equity (ROE) of 7.25% for Q109-Q309 and 1.56% for 2008 despite abrupt market declines, generally outperforming its similar-rated peers in the local financial holding sector. Earnings outlook for YFH is stable on the back of a recovery in stock market performance from the lows seen in late 2008 and alleviating earnings pressures at YCB.
YFH aims to become a leading regional brokerage and investment bank, with a focus on Greater China and selected Southeast Asian markets. It intends to solidify its domestic footprint, by expanding its securities franchise, reviving its rather weak banking franchise, and to pursue its Greater China aspiration in the near-term. On the other hand, the group's acquisition strategy may weigh on its sound capitalisation. YFH reported sum-of-parts capital adequacy ratio (CAR) of 186% and double leverage ratio of 108% at end-Q309.
The ratings of YS reflects its leading position in Taiwan's securities market, diversified regional coverage, sound capitalisation and liquidity, as well as its relatively small franchise as compared to regional rivals. The advantage of YS' scale of operations is particularly apparent amid the recent market downturn, as it managed to post a ROE of 8.9% in 2008 and 9.49% for Q109-Q309, compared to the local industry average of -1.90% and 6.66%, respectively. The company is soundly capitalised with a CAR of 412%. However, significant de-capitalisation brought on by the company's acquisition strategy may weigh on the company's capital position.
The ratings of YSF reflect its dominance in Taiwan's securities finance market, solid capitalisation and good asset quality, as well as its high business reliance on YS. The similar ratings between YS and YSF reflect the integrated risk profile of these two entities within the group's securities franchise. YSF generally outperformed its peers amid the market downturn in 2008-2009 due to economies of scale and posted a 6.23% ROE for Q109-Q309 and 4.6% in 2008. Improved earnings in 2009 are largely attributed to the stock market rally and trading gains, while core earnings from margin lending remain positive but lackluster. The significant re-capitalisation in 2008 has increased YSF's financial flexibility and its CAR was 1462% at end-October 2009. YSF's enhanced financial flexibility and stable earnings outlook provides comfort over its ability to repay its bonds that are set to mature in the next few years.
YCB's ratings are underpinned by the group support emanating from its principal operating companies: YS and YSF. Group support is evident from a series of de-capitalisation at YS and re-capitalisation at YCB in recent years. YCB's Individual rating of 'D' takes into account its still weak, albeit improving, profitability and enhanced risk profile following re-capitalisation in 2009, and gradual clean-off of legacy problem loans. The bank posted a positive bottom line of TWD200m for the first three quarters of 2009, compared to a net loss of TWD3.2bn in 2008. Furthermore, YCB reported above-average asset quality in 2009 and restructured loans are reasonably covered by reserves. NPL ratio was at a record low of 1.08% and coverage ratio 180.25% as of October 2009.
Liquidity profile of YCB enhanced as demonstrated by a dip in loan to deposit ratio to 82% at end-September 2009 from 91.7% at end-2007, as the bank exploited YS' vast brokerage customer base and increased its market share in securities industry's settlement volume (currently at around 10%). YCB maintained fair capitalisation which provides a cushion against its acquisition of Chinfon Bank and other organic growth plan in the coming year, which will likely bring down its tier 1 ratio to roughly 8% from 9.34% at end-Q309.
YFH is a small to mid-sized financial holding group in Taiwan. Unlike its mostly bank-centric local rivals, YFH is one of the few securities-centric holding groups. The group provides diversified financial services through its wholly-owned securities (YS), securities finance (YSF), banking (YCB), investment trust, asset management and venture capital subsidiaries. YS commands a dominant 11.8% market share in local stock brokerage as of H109. YSF is the distant market leader among the four securities finance companies in Taiwan, with 19.5% market share in margin loan in October 2009. YCB has 70 branches and a small deposit market share of 1.2% in Taiwan at end-October 2009.
The ratings affirmed are as follows:
YS:
- Long-term foreign currency IDR: 'BBB+'; Stable Outlook;
- Short-term foreign currency IDR: 'F2';
- National Long-term rating: 'AA-(twn)'; Stable Outlook;
- National Short-term rating: 'F1(twn)';
- Individual: 'B/C';
- Support: '5'; and
- Support Rating Floor: 'NF'.
YSF:
- Long-term foreign currency IDR: 'BBB+'; Stable Outlook;
- Short-term foreign currency IDR; 'F2'
- National Long-term rating: 'AA-(twn)'; Stable Outlook;
- National Short-term rating: 'F1(twn)';
- Individual: 'B/C';
- Support: '5';
- Support Rating Floor: 'NF'; and
- Senior unsecured debt rating: 'AA-(twn)'
YCB
- Long-term foreign currency IDR: 'BBB'; Stable Outlook;
- Short-term foreign currency IDR: 'F3';
- National Long-term rating: 'A+(twn)'; Stable Outlook;
- National Short-term rating: 'F1(twn)';
- Individual: 'D';
- Support: '2'; and
- Support Rating Floor: 'NF'.
YFH:
- Long-term foreign currency IDR: 'BBB+'; Stable Outlook;
- Short-term foreign currency IDR; 'F2'
- National Long-term rating: 'AA-(twn)'; Stable Outlook;
- National Short-term rating; 'F1(twn)';
- Individual: 'C';
- Support: '5';
- Support Rating Floor: 'NF'; and
- Senior unsecured debt rating: 'AA-(twn)'
Applicable criteria available on Fitch's website at www.fitchratings.com: "Global Financial Institutions Rating Criteria" dated 29 December 2009, "Rating Criteria for Securities Firms", dated 30 December 2009, and "Bank Holding Companies", dated 30 December 2009.
Contacts: Cherry Huang, Sophia Chen, 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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