Fitch Affirms Taiwan's E. Sun Securities at 'AA-(twn)'
KEY RATING DRIVERS
ESS's ratings and Outlook remain tied to the risk profile of the group, which is mainly driven by that of ESB. Fitch views ESS as a core subsidiary of ESFHC and ESFHC is legally obliged to assist ESS when it falls into financial difficulty. ESS remains highly integrated with the group in brand sharing, liquidity, capital planning and risk management. Its brokerage franchise will continue to grow through cross-selling to ESB's larger customer base.
ESFHC remains a bank-centric holding company, with ESB accounting for over 90% of group earnings. ESB has been consolidating its market positions in SME lending and fee - based credit card and wealth management businesses in recent years. The strengthening franchise would help to mitigate the slowdown in economic growth and the growing pressure on profitability. Return on assets improved to 0.83% annualised in 1H16 (versus 0.72% in 2015) due to stronger fee income generation and lower credit costs, and remained above the sector average of 0.65%.
ESB's asset quality has been well managed, with impaired loan ratio remaining low at 0.6% at end 1H16. Fitch expects the bank's prudent underwriting standards and seasoned experience in SME lending to help maintain asset quality. Fitch expects the bank to maintain adequate capitalisation against its risk profile. Its consolidated Fitch Core Capital ratio was around 10.3% at end 1H16, after adjusting for higher capital charges for mortgages in Taiwan, and is comparable to that of similarly rated regional peers.
ESS' ratings are sensitive to changes in the risk profile of ESFHC and ultimately ESB. Downgrade drivers will most likely come from significant deterioration in ESB's risk profile, as a result of excessive risk-taking in more challenging economic conditions, locally or in the region. Ratings upside is limited as significant improvement in ESB's balance-sheet strength is less likely in the near term.