July 16, 2012 / 7:18 AM / 5 years ago

TEXT-Fitch affirms Tai Fung Bank at 'BBB+'; outlook stable

(The following statement was released by the rating agency)

July 16 - Fitch Ratings has affirmed Macau-based Tai Fung Bank's (TFB) ratings, including its Long-Term Issuer Default Rating (IDR) at 'BBB+'. The Outlook is Stable. A full list of rating actions is provided below.

TFB's IDRs reflect a high propensity of support from its 50.3% shareholder Bank of China (BoC, 'A'/Stable). TFB's integration with BoC has strengthened, although this is limited and mainly related to the former placing excess RMB liquidity with BoC and participating in syndicated loans arranged by the parent. Fitch also believes that TFB has certain strategic importance to BoC with its established market position and customer base as the oldest bank in Macau. However, significant minority interests, plus BoC having its own branch in Macau and not sharing its name with TFB, constrain the latter's Support rating at '2'.

TFB's Viability Rating reflects the bank's small size, with assets of USD6bn (0.3% of BoC's assets) at end-2011, its loan concentration in property-related lending and Macau's small, volatile and undiversified economy. These weaknesses are partially offset by the bank's adequate collateral coverage, capital and operational support from BoC.

The bank's Viability Rating will come under pressure when revaluation gains and collateral values shrink, most likely following property market contraction. Further increases in loan concentration are also likely to trigger a negative rating action.

Any changes in BoC's ratings or its propensity to support will affect TFB's IDRs. Fitch considers it possible that the planned alignment of TFB's risk management function with that of its parent, once implemented, could have a positive impact on TFB's IDRs.

Revaluation gains on its own premises inflated the bank's capital by a substantial 24% and caused its Fitch Core Capital (FCC) ratio to increase to 15.4% in 2011 from 12.8% in 2010. This was despite a 19% increase in risk-weighted assets. Even if these revaluation gains were to disappear under Fitch's stress scenario, the agency estimates that the bank's FCC ratio would remain comparable with that of similarly rated peers. Nevertheless, the agency expects TFB to maintain stronger-than-average capital given the volatile environment it operates in.

TFB's loan book is strongly biased towards domestic residential mortgages (30% of total loans at end-2011) and real estate loans (13%) in Hong Kong and China. But impaired loans remained limited to 0.07% of total loans at end-2011. Reserve coverage of 1.3% of total loans at end-2011 and moderate loan-to-value ratio (up to 65% on average) should mitigate losses.

TFB is the third-largest bank in Macau with a deposit market share of 10% at end-2011.

The rating actions of TFB are as follows:

- Long-Term IDR affirmed at 'BBB+'; Outlook Stable

- Short-Term IDR affirmed at 'F2'

- Viability Rating affirmed at 'bbb-'

- Support Rating affirmed at '2'

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