Fitch upgrades Taiwanese state-controlled banks' national short-term ratings

Revised ratings for 3 lenders due to their strong liquidity position.

Fitch Ratings on Thursday has upgraded the National Short-term ratings of three Taiwanese state-controlled banks, namely First Commercial Bank (FCB), Hua Nan Commercial Bank (HNCB) and Chang Hwa Bank (CHB) to 'F1+(twn)' from 'F1(twn)'. The rating action follows the agency's review of Taiwanese banks' liquidity profile and is in line with its criteria in the assignment of short-term ratings. At the same time, Fitch has affirmed all other ratings of FCB, HNCB and CHB. The Outlooks on the Long-term Issuer Default Ratings (IDRs) and National Long-term ratings for the three banks remain Stable, according to a Fitch Ratings report.

The upgrades mainly reflect these state-controlled banks' strong liquidity stance, underpinned by their large deposit-taking franchises, their strong ties with the state and the resultant entrenched confidence from retail depositors. FCB, HNCB and CHB each operates with a substantial liquidity buffer with their regulatory liquidity reserve ratios of 36.6%, 27.6% and 24.3%, at end-2009 respectively - well above the regulatory requirement of 7%.

The affirmation of FCB's IDR mainly reflects the bank's strong franchise in the Taiwanese banking sector and its capability to maintain a steady credit profile through the recent global financial crisis. Meanwhile, the affirmation of HNCB and CHB's IDRs is driven by the continued expected strong government support, given the state's large ownership and the significant market position of these banks.

The profitability of these state-controlled banks weakened in 2009, due mainly to severe margin compression. However, Fitch expects moderate improvement in these banks' bottom-line profitability in 2010, supported by ameliorated net interest income as net interest margin (NIM) gradually recovers from the trough in Q209, a climb in fee revenue thanks to an improvement in investment sentiments, and well-contained bad loan losses. The banks' asset quality remained sound throughout the global credit crisis, with a decline in NPL ratios and much improved loan loss reserve coverage. These state-controlled banks have also maintained reasonably steady capitalisation, commensurate with their standalone credit profile.

The detailed list of rating actions is as follows:

FCB:

• Long-term Foreign Currency IDR affirmed at 'BBB+';
• Short-term Foreign Currency IDR affirmed at 'F2';
• National Long-term rating affirmed at 'AA-(twn)';
• National Short-term rating upgraded to 'F1+(twn)' from 'F1(twn)';
• Individual rating affirmed at 'C';
• Support rating affirmed at '2'; and
• Support Rating Floor affirmed at 'BBB+'.

HNCB

• Long-term Foreign Currency IDR affirmed at 'BBB+';
• Short-term Foreign Currency IDR affirmed at 'F2';
• National Long-term rating affirmed at 'AA-(twn)';
• National Short-term rating upgraded to 'F1+(twn)' from 'F1(twn)';
• Individual rating affirmed at 'C/D';
• Support rating affirmed at '2'; and
• Support Rating Floor affirmed at 'BBB+'.

CHB

• Long-term Foreign Currency IDR affirmed at 'BBB+';
• Short-term Foreign Currency IDR affirmed at 'F2';
• National Long-term rating affirmed at 'AA-(twn)';
• National Short-term rating upgraded to 'F1+(twn)' from 'F1(twn)';
• Individual rating affirmed at 'C/D';
• Support rating affirmed at '2';
• Support Rating Floor affirmed at 'BBB+'; and
• Subordinated bonds affirmed at 'A+(twn)'.