S&P: CTBC Bank Co. Ltd. Upgraded To 'A/A-1' On Strengthened Capitalization; Outlook Stable
"The upgrade reflects our expectation that CTBC Bank will maintain strong capitalization for the coming two years," said S&P Global Ratings credit rating analyst Liang Yu. "Consequently, we have upwardly adjusted the bank's capital and earnings score to strong from adequate previously. The bank has improved its capitalization over the past 12 months with a risk-adjusted capital (RAC) ratio above 10% over the same period. The ratio was 13.5% as of June 2016."
The improved capitalization stems from the bank's good profits and earnings retained and the issuance of perpetual noncumulative hybrid tier-I debentures amounting to New Taiwan dollar (NT$) 12 billion in 2015, which we view as having intermediate equity content. CTBC Bank has also shifted its loan profile to lower-risk sectors such as mortgages and countries such as Japan and the U. S., a move that has also supported the bank's strengthening capitalization.
We expect the bank to record double-digit growth over the next few years, driven mainly by growth in its mortgage and overseas business. It remains the bank's strategy to grow organically and pursue small-scale inorganic growth when chances arise. We also factor in the minor distribution of cash dividends from the bank to support the parent CTBC Financial Holding Co. Ltd. group's overall funding needs, despite the bank's high earnings retention over the past two years. We believe CTBC Bank can generate and retain sufficient earnings to support its growth and maintain its capitalization at a strong level over the same period.
The ratings on CTBC Bank continue to reflect the bank's strong business position in Taiwan's banking sector where it has a good franchise in both retail and corporate banking, and diversified business mix and revenue sources. The bank's strong liquidity and strong capitalization provide a buffer against high growth and risks, in our view. The ratings also benefit from a degree of implicit support from the Taiwan government due to the bank's moderate systemic importance.
"The stable outlook reflects our expectation that CTBC Bank will maintain most of its key risk characteristics, including its adequate risk management and stable earnings over the next two years," said Ms. Yu. "We also expect the bank to maintain its strong business position and diversified revenue sources relative to local peers' in the highly competitive domestic market. We also assess CTBC Bank is of moderate systemic importance in Taiwan."
We could raise the rating on CTBC Bank if the bank can demonstrate a stronger track record on risk management that delivers better loss experience and earning results than its similarly rated peers.
Conversely, we could lower the ratings on CTBC Bank if the bank pursues overly aggressive expansion without adequate capital planning and risk management mechanism to manage its fast-growing business, which accordingly dilutes the bank's risk position and weakens its capitalization.