Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Taiwan-based CTBC Financial Holding Co., Ltd. (CTBC Holding) at 'BBB+' and that of the principal subsidiary, CTBC Bank Co., Ltd., at 'A'.
Fitch has also affirmed their National Long-Term Ratings at 'AA-(twn)' and 'AA+(twn)', respectively. The Outlook on the ratings is Stable. At the same time, Fitch has upgraded CTBC Bank's Government Support Rating (GSR) to 'a' from 'a-' and Short-Term IDR to 'F1+' from 'F1'. A full list of ratings is below.
The upgrade of CTBC Bank's GSR reflects our view that the Taiwanese government's propensity to support private domestic systemically-important banks (DSIBs) such as CTBC is higher than our previous assessment considering their high interconnectedness to the whole financial system, and our expectation that the authorities would prioritise financial system stability. We also believe that the government has a strong ability to support DSIBs, and that this ability is not constrained by the presence of non-DSIB government banks in the system.
Key Rating Drivers
CTBC Bank
IDR Driven By VR and GSR: CTBC Bank's Long-Term IDR is equalised with both the Viability Rating (VR) of 'a' and the GSR of 'a'. CTBC Bank's Short-Term IDR of 'F1+' is at the higher option that maps to its Long-Term IDR. The upgrade reflects our view that government's propensity to provide support is more certain in the near term.
VR Reflects Franchise Stability: The affirmation of CTBC Bank's VR is underpinned by its strong domestic-banking franchise, diversified business model and loan mix, in addition to well-established risk controls as well as stable funding and liquidity profile. CTBC Bank's VR of 'a' is in line with its implied VR, and is among the highest for Fitch-rated banks in Taiwan. The rating is also supported by Taiwan's economic resilience throughout the Covid-19 pandemic.
Stable Operating Environment: The operating environment score of 'a' with stable outlook takes into consideration Taiwan's economic resilience alongside prudent regulatory oversight, and should support the financial sector's stability despite global challenges, which may dampen external demand for high-tech exports. Covid disruptions have eased and should have a limited impact on Taiwan's economic growth. We forecast Taiwan's economy to expand by 2.1% in 2023 and 2.5% in 2024 (2022: 2.4%).
Strong Domestic-Banking Franchise: CTBC Bank's business profile score of 'a' is above the implied 'bbb' category score, to reflect its strong franchise (in terms of market share) and diverse business model (in terms of geographic presence and strong fee income generation). The bank is the largest privately held bank in Taiwan by assets, deposits and loans, with a market share of 6%-7% in deposits and loans. It is well diversified in terms of business and loan mix as well as sources of earnings.
Modest Risk Profile: CTBC Bank's risk profile score of 'a-' takes into consideration its consistently low borrower and sector concentrations, conservative valuation and low loan-to value (LTV) ratios. The 10 largest group exposures relative to the bank's equity were low at 33% at end-9M22, compared with the local peer average of about 70%. The average LTV ratio for the bank's new mortgage loans remained stable at less than 70% and average LTV on its outstanding mortgage loans, based on market valuation, is even lower in the range of 35%-40%.
Stable Asset Quality: We expect the bank's impaired loans ratio to rise modestly in 2023, from 1.2% at end-9M22, amid moderating economic growth in light of its prudent underwriting standards. This is despite higher exposure to offshore loans compared with the peer average. Its offshore loans were 37% of total loans at end-9M22, mostly in diversified sectors, with a large portion originating from Taiwan-based borrowers. Offshore exposure to cyclical industries decreased significantly in 2021-2022.
Diversified Profitability: CTBC Bank's earnings and profitability score of 'a-' is higher than the implied 'bbb' category score, to reflect higher revenue diversification than peers. This supports CTBC Bank's higher profitability than the peer average, and we expect this to be sustained over the medium term. Net profit increased by 30% yoy in 9M22, above the sector average of about 11%, benefiting from steady loan growth, higher offshore exposure that resulted in a larger net interest margin expansion relative to local peers, and better investment income.
Sound Capitalisation: CTBC Bank's capitalisation and leverage score of 'a' is higher than its implied 'bbb' category score because of capital flexibility and ordinary support. We believe its parent, CTBC Holding, has a stronger ability than peers to access capital markets, if needed. The bank's common equity Tier 1 (CET1) ratio fell to 11.1% by end-1H22, from 11.5% at end-2021, due mainly to a cash dividend distribution to the parent in June 2022. We expect the bank to sustain a stable CET1 ratio over 2023 due to its sound profitability.
Stable Funding, Liquidity: CTBC Bank's loan/customer deposit ratio increased slightly to 71% by end-9M22, but remained below the historical level of around 75%. The bank has a favourable deposit mix with lower-cost demand deposits making up more than half of total customer deposits, which supports its stable funding and liquidity profile.
Very High Probability of Support: CTBC Bank's GSR of 'a' reflects a very high probability of Taiwanese government (AA/Stable) support, if needed, given its systemic importance as one of the six DSIBs as designated by the regulator and steadily growing systemic importance. The bank is the second largest bank and largest private DSIB in Taiwan. The six DSIBs in Taiwan make up around 37% of banking system assets, while other government and policy banks make up about 30%. This is comparable to other regional markets in APAC.
CTBC Holding
Notched Below Operating Bank: CTBC Holding's Long- Term IDR, National Long-Term Rating and VR are two notches below that of its principal subsidiary, CTBC Bank. This reflects our view that CTBC Holding's credit profile is constrained by a high common-equity double-leverage ratio (DLR) - 136% at end-9M22 - and the weaker standalone credit profile of the group's life insurance arm - Taiwan Life Insurance Co., Ltd. (Taiwan Life, Insurer Financial Strength: BBB+/Positive) - relative to CTBC Bank.
High Double-Leverage Ratio: CTBC Holding's common equity DLR increased to 136% by end-9M22, from 124% at end-2021, due mainly to cash dividend payouts and negative valuation adjustments through other comprehensive losses on Taiwan Life's investments as rates rose and equity prices dropped. We expect its common equity DLR will gradually recover over 2023-2024, underpinned by steady profit growth at CTBC Bank. We do not expect any major capital injections into its subsidiaries.
CTBC Holding's regulatory DLR, which classifies perpetual preferred shares as equity, was 124% at end-9M22, compliant with the local regulatory requirement of 125%.
Bank Holding Company: CTBC Holding has expanded its non-bank operations since 2015, mainly in life insurance, to enhance its overall competitive position in Taiwan. Nevertheless, we expect it to remain a bank-centric financial holding company, as we do not expect CTBC Holding to undertake substantial acquisitions and deviate from its bank-centric financial holding company model.
Bank as Main Operation: CTBC Bank accounted for 71% of the group's assets at end-9M22 and 90% of net income in 9M22. The bank's net worth was almost 100% of the group's equity at end-9M22, higher than 75% at end-2021, because of reduced equity value at Taiwan Life from valuation losses on investments.
Stabilising Profitability: We expect CTBC Holding's profitability to stabilise in 2023, after declining in 2022, on steady profit growth at CTBC Bank and lower Covid-related claim costs at Taiwan Life. This follows a 29% yoy decline in CTBC Holding's net profit in 9M22, despite the bank's net profit rising 30%.
Stable loan and net interest margin (NIM) expansion, and modest credit costs, should support a stable profit at CTBC Bank in 2023. NIM expansion in 9M22 was greater than that of other domestic banks, due to larger offshore and US dollar exposure, after more rapid rate increases in the US than in Taiwan.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS
Negative rating action on CTBC Bank's Long-Term IDR would only occur if the bank's VR and GSR were both downgraded. The bank's Short-Term IDR would be downgraded if its Long-Term IDR is downgraded.
VIABILITY RATINGS
Downward pressure on CTBC Bank's VR may arise if the franchise were to weaken, including the inability to maintain steady market shares in deposits and loans as well as a competitive position in product offering, and/or failure to maintain stable asset quality, profitability higher than peers and capital buffers.
CTBC Bank's VR could also be downgraded on a marked deterioration in Taiwan's operating environment and the bank's key financial metrics; for example, there would be downward rating pressure if the bank's impaired loans ratio were to increase to above 2% or its CET1 ratio were to drop below 11% for a sustained period.
Negative action on CTBC Bank's VR would most likely have a similar effect on CTBC Holding's ratings.
GOVERNMENT SUPPORT RATING
A decline in the authorities' ability and/or propensity to provide extraordinary support to CTBC Bank could affect the GSR. This could arise from negative action on Taiwan's ratings and/or a decline in Fitch's assessment of CTBC Bank's systemic importance.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
LONG-TERM IDRS AND VIABILITY RATINGS
There could be positive rating action on CTBC Bank's Long-Term IDR if either the VR or the GSR were upgraded.
A rating upgrade on CTBC Bank's VR is not probable in the medium term, as it is constrained by Taiwan's bank operating environment score (a/stable).
The relative notching between CTBC Bank and CTBC Holding could narrow if CTBC Holding significantly increases its core capitalisation relative to CTBC Bank, or if it were to reduce its common-equity DLR sustainably below 120%.
SHORT-TERM IDR
CTBC Holding's Short-Term IDR could be upgraded if its Long-Term IDR is upgraded.
CTBC Bank's Short-Term IDR is already at the top end of the scales and cannot be upgraded.
GOVERNMENT SUPPORT RATING
CTBC Bank's GSR is sensitive to the government's ability to provide extraordinary support to CTBC Bank, which may be reflected through changes in Taiwan's rating, assuming other support assumptions remain unchanged.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
SUBORDINATED DEBT
CTBC Bank's perpetual non-cumulative subordinated bonds are rated four notches below its National Long-Term Rating. The notching comprises two notches for non-performance risk, based on standard and less-easily triggered profit and capital thresholds for coupon omission and deferral, and two notches for poor recovery prospects.
CTBC Bank's Basel II- and Basel III-compliant subordinated bonds are rated two notches below the issuer's Long-Term IDR and National Long-Term Rating. This is aligned with Fitch's base case notching for Tier 2 debt because of the poor recovery prospects, and the lack of going-concern loss absorption features.
NATIONAL RATINGS
The National Long-Term Ratings of CTBC Bank and CTBC Holding are at the high end of the rating scale, reflecting very low default risk relative to domestic peers. The Stable Outlook on their National Long-Term Ratings is in line with the Outlook on their IDRs. The affirmation of the National Ratings reflects that there is no change in Fitch's view of their credit profiles relative to the rated universe of issuers based in Taiwan.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
SUBORDINATED DEBT
Any rating downgrades on CTBC Bank's Long-Term IDR and National Long-Term Rating will trigger similar action on the ratings of its Tier 2 debt. Any rating downgrades on CTBC Bank's VR will trigger similar action on the ratings of its hybrid debt (perpetual non-cumulative subordinated bonds).
NATIONAL RATINGS
A downgrade of CTBC Holding's and CTBC Bank's National Ratings would arise from a weakening in their overall credit profiles on a relative basis to the national-rating universe of issuers in the market.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
SUBORDINATED DEBT
Any rating upgrade on CTBC Bank's Long-term IDR and National Long-Term Rating will trigger similar action on the ratings of its Tier 2 debt. Any rating upgrade on CTBC Bank's VR will trigger similar action on the ratings of its hybrid debt.
NATIONAL RATINGS
Changes in Fitch's perception of CTBC Holding's and CTBC Bank's credit profile relative to the national-rating universe in Taiwan could affect their National Ratings. Strengthening in their overall credit profile on a relative basis to the national-rating universe could lead to an upgrade of their National Ratings.
VR ADJUSTMENTS
CTBC Bank's business profile score of 'a' has been assigned above the 'bbb' category implied score for the following adjustment reason: business model (positive).
CTBC Bank's earnings and profitability score of 'a-' has been assigned above the 'bbb' category implied score for the following adjustment reason: revenue diversification (positive).
CTBC Bank's capitalisation and leverage score of 'a' has been assigned above the 'bbb' category implied score for the following adjustment reason: capital flexibility and ordinary support (positive).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
CTBC Holding's IDRs, VR and National Ratings are linked to those of CTBC Bank, as the bank is CTBC Holding's main subsidiary.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
CTBC FINANCIAL HOLDING CO., LTD. 
