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Fitch Upgrades Bank of Kaohsiung to 'AA-(twn)'; Outlook Stable
March 9, 2017 / 6:54 AM / 8 months ago

Fitch Upgrades Bank of Kaohsiung to 'AA-(twn)'; Outlook Stable

(The following statement was released by the rating agency) TAIPEI, March 09 (Fitch) Fitch Ratings has upgraded Taiwan-based Bank of Kaohsiung's (BOK) National Long-Term Rating to 'AA-(twn)' from 'A+(twn)', and affirmed the National Short-Term Rating at 'F1+(twn)'. The Outlook is Stable. A full list of ratings is at the end of the press release. KEY RATING DRIVERS NATIONAL RATINGS The upgrade reflects the Taiwan sovereign's strengthened financial flexibility (see press release <a href=" ">Fitch Upgrades Taiwan to 'AA-'; Outlook Stable, dated 12 October 2016) to provide BOK extraordinary support through the bank's 45% controlling owner Kaohsiung City Government (KCG), if needed. The propensity for state support remains strong, based on Kaohsiung City as the second-largest municipality in Taiwan and BOK's close ties with KCG. The ties include KCG's long-term and significant ownership, effective control of the bank's board and management, as well as BOK's key role as KCG's banker and policy functions to support the city government's objectives. The upgrade of BOK's National Long-Term Ratings reflects its enhanced credit strength from stronger state support, which is now more comparable with 'AA-(twn)' rated private banks in Taiwan. BOK's National Long-Term Rating denotes very low default risk relative to domestic peers, based on strong state support if needed. The Stable Outlook presents Fitch's belief that the bank's ties with KCG will remain steadfast in the medium term, considering BOK's integral and long-lasting policy role as well as KCG's commitment to maintain its controlling ownership in BOK. Return on assets remained weak at below 0.3% in 2016 due to a large portfolio of low-yield policy loans and high operating costs. Fitch expects capitalisation will only just remain compliant with the Basel III minimum capital requirement due to its weak internal capital generation. BOK is modestly capitalised relative to its risk appetite and rather concentrated loan book, including above-sector property exposure. Fitch believes the central government would extend extraordinary support to BOK through KCG when necessary. We estimate the Fitch Core Capital ratio to rise to 8.7% by end-1Q17 after the completion of a rights issue in March 2017 (end-2015: 7.3%; end-2014: 6.7%, versus the sector average near 11%). SUBORDINATED DEBT The bank's B3T2 bonds are rated two notches below its National Long-Term Ratings. This consists of zero notches for non-performance risk and two for loss severity, reflecting the limited recovery prospects for Taiwanese B3T2 notes, in contrast with the typical one notch for standard B3T2 instruments. Taiwan's B3T2 bonds adopted a less easily triggered government receivership as the point of non-viability (PONV) than the standard B3T2's PONV (that is, regulatory decisions to write-off securities or inject public-sector capital). Fitch believes Taiwan's authorities would only move a bank into insolvency administration when it reaches a very low capital level, reducing the recovery prospects for B3T2 notes. The anchor rating for subordinated bonds is BOK's support-driven National Long-Term Rating, as Fitch believes that KCG and the central government have a strong interest in supporting BOK to fulfill its financial obligations. These aforementioned notching practices for subordinated bonds are in accordance with Fitch's criteria on rating the bank regulatory capital of financial institutions. RATING SENSITIVITIES NATIONAL RATINGS BOK's ratings are sensitive to any changes around the perceived propensity of the Taiwan government to support BOK. This may arise from a diluted policy role that BOK performs for KCG and/or weakened linkage between them in terms of ownership and control. At the same time, a change in Taiwan's sovereign rating could result in a corresponding impact on BOK's ratings. SUBORDINATED DEBT Any change to the BOK's National Long-Term Rating is likely to trigger a similar change in its debt ratings. The ratings on BOK are as follows: National Long-Term Rating upgraded to 'AA-(twn)' from 'A+(twn)'; Outlook Stable National Short-Term Rating affirmed at 'F1+(twn)' Basel III: ISIN TW000G103105: TWD1.3 billion, to mature on 6 August 2020, upgraded to 'A(twn)' from 'A-(twn)' ISIN TW000G103147: TWD0.15 billion, to mature on 3 December 2021, upgraded to 'A(twn)' from 'A-(twn)' ISIN TW000G103139: TWD0.65 billion, to mature on 29 October 2021, upgraded to 'A(twn)' from 'A-(twn)' ISIN TW000G103113: TWD0.7 billion, to mature on 5 September 2020, upgraded to 'A(twn)' from 'A-(twn)' ISIN TW000G103121: TWD1.2 billion, to mature on 25 March 2021, upgraded to 'A(twn)' from 'A-(twn)' Contact: Primary Analyst Cherry Huang, CFA Director +886 2 81757603 Fitch Australia Pty Ltd, Taiwan Branch Suite 1306, 13F, Tun Hwa N. Rd., Taipei Secondary Analyst Kaichung Lee Analyst +886 2 81757607 Committee Chairperson Parson Singha Senior Director +66 2108 01514 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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