OREANDA-NEWS. Fitch Ratings has affirmed all the ratings for Taiwan-based CTBC Financial Holding Co., Ltd. (CTBC Holding) and its subsidiaries, including CTBC Bank Co., Ltd. (CTBC Bank), Taiwan Life Insurance Co., Ltd. (Taiwan Life) and CTBC Securities Co., Ltd. (CTBC Securities). The Outlooks on the ratings of these entities are Negative. A full list of rating action is at the end of this commentary.

CTBC Bank's Issuer Default Ratings (IDRs), Viability Rating and National Ratings are the anchor ratings for companies in the CTBC group. CTBC Holding's ratings and Fitch's Outlooks on its ratings are aligned with those of CTBC Bank.

The Negative Outlook reflects CTBC Bank's structurally diluted profitability caused by the inclusion of CTBC's subsidiary, The Tokyo Star Bank, Limited (TSB), and the risks in execution, operation and management resources as CTBC Bank expands in the region.

The rating affirmation is based on Fitch's assessment that CTBC Bank's core capitalisation will remain in line with that of similarly rated Asian peers on a like-for-like risk capital basis. Management is committed to further enhancing the bank's capitalisation through managed business growth and capital deployment within the group. This helps alleviate pressure on CTBC Bank's internal capital generation caused by lower profitability at TSB. Fitch expects CTBC Bank's Fitch Core Capital ratio, based on the advanced internal rating approach, to hold steadily at above 12% in 2017 (end-1H16: 11.7%).

CTBC Bank's integration with TSB has been steady and NPL reductions at TSB have been faster than the company projected. Yet, Fitch believes structural weakness in the Japanese economy will challenge TSB's earnings improvement, lowering CTBC Bank's profitability on a consolidated basis. Fitch forecasts CTBC Bank's ROA at around 0.7% in 2016 and 0.8% in 2017, moderately lower than its average ROA (excluding one-offs) of around 0.9% in 2011-2015. CTBC Bank reported an annualised ROA of 0.7% in 1H16.

Allegations of misconduct against CTBC group by the Special Investigation Division of the Supreme Prosecutors' Office have no immediate effect on CTBC Bank's or the group's ratings, as the agency does not expect significant damage to the group's franchise and operation. The group's businesses have been operating normally despite the investigation being made public in June 2016.

KEY RATING DRIVERS

IDRS, VIABILITY RATING AND NATIONAL RATINGS

CTBC Bank's IDRs, Viability Rating and National Ratings (applicable criteria: Global Bank Rating Criteria (July 2016) and National Scale Ratings Criteria (March 2015)) reflect its strong and stable domestic banking franchise, well-established centralised risk-management and generally healthy asset quality.

SUPPORT RATING AND SUPPORT RATING FLOOR

The affirmations of CTBC Bank's Support Rating and Support Rating Floor reflect the bank's moderate systemic importance and moderate probability of state support, if needed.

SUBSIDIARIES AND AFFILIATED COMPANIES

CTBC Holding's ratings and Fitch's Outlooks (applicable criteria: Global Bank Rating Criteria (July 2016) and National Scale Ratings Criteria (March 2015)) are based on the high level of integration between CTBC Bank and the parent's modest leverage and solid standalone liquidity. CTBC Securities' ratings and Fitch's Outlooks (applicable criteria: Global Non-Bank Financial Institutions Rating Criteria (July 2016) and National Scale Ratings Criteria (March 2015)) on its ratings are aligned with those of CTBC Holding, reflecting the holding parent's obligatory support under Taiwan's Financial Holding Company Act, the parent's strong ability to provide support due to its size and CTBC Securities' status as a core group subsidiary.

Taiwan Life's Insurer Financial Strength ratings (applicable criteria: Insurance Rating Methodology (September 2016) and National Scale Ratings Criteria (March 2015)) take into account the high possibility of capital and liquidity support from CTBC Holding, if needed. CTBC Holding will maintain Taiwan Life's regulatory risk-based capital ratio above 250% (end-1H16: 288%). Taiwan Life has established a balanced distribution network, including tied agents, bancassurance, insurance brokers and telemarketing, following the merger with CTBC Life Insurance Co., Ltd. on 1 January 2016. The insurer delivered strong 25% yoy premium growth in 1H16. Its first-year premium market share increased to 9.3%, from 7.9% in 2015 (pro-forma), ranking fourth out of 24 life insurers in Taiwan.

DEBT RATINGS

The ratings on the debt of CTBC Holding and CTBC Bank are affirmed because they are notched from the companies' Long-Term Foreign-Currency IDRs, which are on par with CTBC Bank's Viability Rating and National Long-Term Rating.

RATING SENSITIVITIES

IDRS, VIABILITY RATINGS, INSURER FINANCIAL STRENGTH RATINGS, NATIONAL RATINGS AND DEBT RATINGS

The investigation of misconduct allegations is ongoing and CTBC group's ratings could be downgraded if there are businesses sanctions or fines large enough to affect the CTBC Bank's capital or if there are significant constraints on the bank's operations.

Fitch may also take negative rating action on the group's IDRs, Viability Ratings, Insurer Financial Strength Rating and National Ratings if CTBC Bank does not maintain capitalisation levels commensurate with its regional expansion.

Fitch could revise the Outlooks to Stable from Negative if CTBC Bank further enhances its balance-sheet strength while expanding its regional franchise.

CTBC group's ratings could be affected if its insurance arm grows significantly from current levels as a proportion of total group assets. Fitch would likely need to reassess the overall strength of CTBC Holding's consolidated credit profile, taking into account the standalone strengths of both the insurance and banking arms.

Any rating action on CTBC Holding and CTBC Bank will trigger similar moves on their debt ratings.

SUPPORT RATING AND SUPPORT RATING FLOOR

CTBC Bank's Support Rating and Support Rating Floor are sensitive to changes in assumptions around the propensity or ability of the Taiwan government to provide timely support to the bank. Upgrade of Taiwan's sovereign rating (A+/Positive) will not affect CTBC Bank's Support Rating or Support Rating Floor due to its moderate systemic importance.

The rating actions are as follows:

CTBC Financial Holding Co., Ltd.

Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Negative

Short-Term Foreign-Currency IDR affirmed at 'F1'

National Long-Term Rating affirmed at 'AA+(twn)'; Outlook Negative

National Short-Term Rating affirmed at 'F1+(twn)'

Viability Rating affirmed at 'a'

Subordinated debt rating affirmed at 'A+(twn)'

CTBC Bank Co., Ltd.

Long-Term Foreign-Currency IDR affirmed at 'A'; Outlook Negative

Short-Term Foreign Currency IDR affirmed at 'F1'

National Long-Term Rating affirmed at 'AA+(twn)'; Outlook Negative

National Short-Term Rating affirmed at 'F1+(twn)'

Viability Rating affirmed at 'a'

Support Rating affirmed at '3'

Support Rating Floor affirmed at 'BB+'

Senior unsecured bonds' National Long-Term Rating affirmed at 'AA+(twn)'

Subordinated bonds' Long-Term Rating affirmed at 'A-' and National Long-Term Rating affirmed at 'AA(twn)'

Subordinated bonds' (Basel III Tier 2 capital) National Long-Term Rating affirmed at 'AA-(twn)'

Perpetual non-cumulative New Taiwan Dollar subordinated bonds' (Basel III Additional Tier 1 capital) National Long-Term Rating affirmed at 'A(twn)'

Taiwan Life Insurance Co., Ltd.

Insurer Financial Strength Rating affirmed at 'A'; Outlook Negative

National Insurer Financial Strength Rating affirmed at 'AA+(twn)'; Outlook Negative

CTBC Securities Co., Ltd.

Long-Term Foreign-Currency IDR affirmed at 'A', Outlook Negative

Short-Term Foreign-Currency IDR affirmed at 'F1'

National Long-Term Rating affirmed at 'AA+(twn)'; Outlook Negative

National Short-Term Rating affirmed at 'F1+(twn)'