OREANDA-NEWS. Fitch Ratings has placed most of the ratings of Taiwan-based Yuanta group, including Yuanta Financial Holding Co., Ltd. (YFHC) and its subsidiaries - Yuanta Securities Co., Ltd. (YS) and Yuanta Commercial Bank Co., Ltd. (YCB) - on Rating Watch Negative (RWN). A full list of rating actions is at the end of this rating action commentary.

The RWN follows the announcement that YFHC is to acquire all the shares of Ta Chong Bank (Ta Chong) in a transaction valued at TWD56.6bn. Ta Chong's shareholders will receive TWD8.15 in cash and the equivalent of TWD8.15 in YFHC's shares for each Ta Chong share. The transaction value includes YFHC's purchase of Ta Chong's existing European convertible bonds, which are to be converted to common shares.

The transaction remains subject to the approval of both companies' boards, and shareholders and the regulator. The share swap is scheduled to take place around 1Q16. Ta Chong will initially be a subsidiary under YFHC and subsequently merged with YCB.

Although there is scope to enhance the group's banking franchise and synergies, Fitch expects the group's financial flexibility to be weakened by the transaction, which is likely to be financed through a mix of capital from YS, and debt and share issuance at YFHC. Yuanta group management says that YFHC's double leverage ratio could rise to about 115%-120% from 106% at end-June 2015 following the acquisition, and its sum-of-parts capitalisation will fall to about 115%-120% from 130% at end July-2015. Fitch expects the group to buttress its balance-sheet strength in the long-term by pursuing more moderate growth and sustaining sound earnings generation.

KEY RATING DRIVERS

IDRS AND NATIONAL RATINGS

The changing structure of the group leads Fitch to believe that it will be appropriate to assess the group's ratings on a consolidated basis. The RWN reflects the likely deterioration in Yuanta group's credit profile after the acquisition due to an expected increase in group leverage and a larger - but financially weaker - commercial banking operation. Fitch views Ta Chong as having a weaker credit profile than Yuanta group. We estimate that a merged YCB and Ta Chong would account for about 40%-45% of the group's equity and 65%-70% of the group's assets, compared with 28% and 54% respectively at end-2014.

YS' IDRs and National Ratings are placed on RWN to reflect YS' reduced capital strength after it upstreams capital to YFHC and decreased capacity to support the expanded banking operation. YCB's IDRs and National Ratings are placed on RWN to reflect the ratings action on its parent, YFHC, because YCB is a core and integral part of the group and YFHC is obliged by law to provide support to the bank if needed. YCB's ratings are driven by the consolidated group profile, which is stronger than YCB's standalone profile.

DEBT RATINGS

The ratings on the senior unsecured bonds issued by YFHC and YCB are also placed on RWN because they are notched from the companies' Long-Term IDRs and National Long-Term Ratings.

VIABILITY RATING (VR)

YCB's VR is affirmed at 'bb+' as Fitch sees the merger of Ta Chong into YCB may enhance YCB's franchise by expanding the customer base and product/service platform, and create cost synergies. However, these positive effects are likely to be felt only 12 months or more after the merger. In the absence of details about when and how the merger will be effected, Fitch believes it is too early to take any immediate action on the VR.

RATING SENSITIVITIES

IDRS AND NATIONAL RATINGS

Fitch expects completion of the transaction to lead to a downgrade of the Long-Term IDRs and National Ratings of YFHC, YS and YCB by one notch. However, the ultimate rating level will depend on further clarity about the overall business strategy and capital plan of the group once the transaction is complete. At that time, the Short-Term IDRs and National Short-Term Ratings can also be assessed. The short-term ratings are likely to be affirmed if the downgrade in the long-term ratings is limited to one notch, and if Fitch assesses that liquidity (including fungibility across the group) is not materially changed. Fitch may take further negative rating action should there be further pressure on the long-term ratings stemming from the group's future capital and growth strategy.

VIABILITY RATING (VR)

Fitch will consider upgrading YCB's VR should the benefits of consolidation outlined above materialise or become more obvious. The VR is unlikely to be upgraded, however, if the merger does not materialise, the merger benefits are less than previously thought, or the bank's post-merger risk appetite rises and asset quality worsens. The agency sees little risk of a downgrade in the near term.

DEBT RATINGS

Any rating action on the ratings of YFHC and YCB will trigger a similar move on their debt ratings.

The rating actions are as follows:

YS:
Long-Term Foreign Currency IDR at 'BBB+'; placed on RWN
Short-Term Foreign Currency IDR at 'F2'; placed on RWN
National Long-Term Rating at 'AA-(twn)'; placed on RWN
National Short-Term Rating at 'F1+(twn)'; placed on RWN

YCB:
Long-Term Foreign Currency IDR at 'BBB+'; placed on RWN
Short-Term Foreign Currency IDR at 'F2'; placed on RWN
National Long-Term Rating at 'AA-(twn)'; placed on RWN
National Short-Term Rating at 'F1+(twn)'; placed on RWN
Viability Rating affirmed at 'bb+'
Senior unsecured debt at 'AA-(twn)'; placed on RWN

YFHC:
Long-Term Foreign Currency IDR at 'BBB+'; placed on RWN
Short-Term Foreign Currency IDR at 'F2'; placed on RWN
National Long-Term Rating at 'AA-(twn)'; placed on RWN
National Short-Term Rating at 'F1+(twn)'; placed on RWN
Senior unsecured debt at 'AA-(twn)'; placed on RWN.