OREANDA-NEWS. Fitch Ratings has revised the Outlook on KGI Bank's ratings to Stable from Negative, with the Long-Term Issuer Default Rating affirmed at 'BBB'. At the same time, the agency upgraded the bank's Viability Rating to 'bbb' from 'bb+'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRs, NATIONAL RATINGS and VR

The Outlook on KGI Bank's IDRs and National Ratings has been revised to Stable from Negative because China Development Financial Holding Corporation (CDFHC), which is made up of KGI Bank, KGI Securities and China Development Industrial Bank (CDIB), has managed a steady risk appetite and focused on integrating resources to strengthen future cross-selling potential. CDFHC is less likely to expand aggressively amid the increasingly challenging economic conditions. However, Fitch expects KGI Bank's growth to be higher than that of peers; the bank's loans increased by about 7% in the six months to 30 June 2016.

The Outlook revision also reflects our assessment that KGI Bank's assets quality is adequate, consisting of mostly large corporate lending and good quality bondholding. KGI Bank accounted for 61% of the group's assets and 32% of group's equity at end-2015.

The upgrade of the VR is a result of our expectation that KGI Bank's ordinary operations will benefit from the group's credit strength. KGI Bank's IDRs, National Ratings and VR reflect the credit profile of the group as a whole because the two cannot be meaningfully disentangled. KGI Bank is highly integrated with the group, they are supervised by the regulator on a consolidated basis and there is limited restriction on capital and liquidity fungibility within the group. We also believe that the group has adequate flexibility in funding and capital for both growth and loss absorption.

The ratings of the bank reflect our view of CDFHC, which has a strong securities franchise that underpins adequate fee income generation and a sufficient consolidated capitalisation. The group's credit profile has benefited from the addition of KGI Bank, which has helped the group to diversify its risk and improve its funding profile as it can now take retail deposits.

These, however, are counterbalanced by the group's moderately high appetite for growth and exposure to proprietary trading and principal investment business, as well as risks associated with its portfolio divestment plan at CDIB. Moreover, the group's profitability may be under pressure due to narrowing loan margins, the bank's lack of pricing power, and heightened global capital market volatility. Its funding profile is also weaker than higher-rated peers' mainly due to a less diversified deposit base and higher reliance on repo borrowing.

SUPPORT RATING AND SUPPORT RATING FLOOR

Fitch has also assigned a Support Rating of '5' and Support Rating Floor of 'NF' (No Floor) to KGI Bank to reflect the relatively low likelihood of sovereign support due to its small deposit franchise and modest systemic importance.

RATING SENSITIVITIES

IDRs, NATIONAL RATINGS and VR

The ratings of KGI Bank are sensitive to the credit profile of the overall group. Overly aggressive risk-taking, whether by rapid expansion of the loan book, particularly from high-risk unsecured personal loans and overseas loans (China), or deliberate ramping up the proprietary trading business at KGI Securities, and a significant increase in overall group leverage could put pressure on the ratings.

An upgrade is less likely in the near term as Fitch continues to believe that any synergy from the group's recent transformation would only be realised in the mid to long term, subject to high integration and execution risks.

SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating and Support Rating Floor are sensitive to any change in assumptions around the propensity or ability of Taiwan government to provide timely support to KGI Bank.

The full list of rating actions is as follows:

KGI Bank

Long-Term IDR affirmed at 'BBB'; Outlook Revised to Stable from Negative

Short-Term IDR affirmed at 'F3'

National Long-Term rating affirmed at 'A+(twn)'; Outlook Revised to Stable from Negative

National Short-Term rating affirmed at 'F1'

Viability Rating upgraded to 'bbb' from 'bb+'

Support Rating assigned at '5'

Support Rating Floor assigned at 'NF'