OREANDA-NEWS. Fitch Ratings has today affirmed the Issuer Default Ratings (IDRs) on six Taiwanese bills finance companies (BFCs): International Bills Finance Corporation (IBF), China Bills Finance Corporation (CBF), Grand Bills Finance Corporation (Grand), Taching Bills Finance Corporation (Taching), Dah Chung Bills Finance Corporation (Dah Chung), and Taiwan Finance Corporation (TFC). Simultaneously, the agency has upgraded TFC's Viability Rating (VR) to 'bb+' from 'bb'.

At the same time, Fitch has affirmed the ratings of Waterland Financial Holdings (Waterland Financial) and Waterland Securities Corporation (Waterland Securities), which are derived and equalised with the ratings of IBF, the principal operating subsidiary of the group. The Outlooks are all Stable. A full list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS

IDRS AND NATIONAL RATINGS

The IDRs and National Ratings of IBF, CBF, Grand, Taching and Dah Chung are driven by their standalone credit profiles, which are reflected in their VRs. Their Stable Outlooks underline Fitch's expectation that these BFCs will maintain satisfactory capital strength and adequate liquidity relative to their growing commercial paper guarantee books and unexpected losses in their bond investments amid the low interest rate environment.

TFC's IDRs and National Ratings reflect the potential for institutional support from its largest shareholders - Mega International Commercial Bank Company Limited, IBF and Cathay United Bank - which is reflected in its Support Rating. The Stable Outlook is based on Fitch's belief that the shareholders' support is not likely to weaken in the near to medium term.

VIABILITY RATINGS

IBF and CBF have higher VRs of 'bbb', reflecting their stronger market positions in the Taiwanese bills finance sector, adequate underwriting quality in the guarantee business, and well-maintained, healthy core capitalisation. The ratings also take into account their structural weaknesses, including limited business scope, susceptibility to interest-rate volatilities, reliance on wholesale funding and higher concentration risk in credits and liquidity compared with domestic banks.

Dah Chung, Grand and Taching have VRs at 'bbb-', based on their modest franchises in guarantee and fixed-income market making and higher concentrations in guarantee exposures and repo counterparties. Their focus on creditworthy corporates and highly liquid assets as well as maintenance of sound capital buffers helps mitigate the associated risks.

The upgrade of TFC's VR to 'bb+' from 'bb' reflects its improved underlying profitability and generally sound balance-sheet strength, which Fitch expects can be sustained. TFC's lower VR of 'bb+' considers its higher growth risk than other rated BFCs and its rapid increase in guarantees to property sector in 2011-2015.

Fitch expects the BFCs' profitability to moderate in 2016 and 2017 as widened spreads may not be sustainable, given intensified industry competition and abundant liquidity in the system. All rated BFCs reported better-than-expected profitability in 2015 due to widened spreads, which were helped by lower funding costs following the central bank's rate cuts in 2H15.

The low interest-rate environment in Taiwan will likely encourage BFCs to hold more higher-yielding private-sector bonds and foreign-currency bonds. However, Fitch believes the increase in risk appetite will be moderate based on the BFCs' stated policy to maintain their regulatory capital ratios at 12%-14%. At end-2015, rated BFCs' Fitch Core Capital ratios and regulatory capital ratios were between 13% and 17% and between 13% and 16%, respectively, indicating healthy capital buffers to withstand stress.

The increase in exposures to the property sector slowed to 8% in 2015 from 16% in 2013. The exposures were mainly to leading, creditworthy corporates in the property sector. Sound provisioning and collateralisation, and the short tenor of the guarantees (one to six months) would help contain associated risks. At end-2015, property exposures amounted to 26% of the rated BFCs' total guarantee book.

WATERLAND FINANCIAL AND WATERLAND SECURITIES

Waterland Financial's ratings and Outlook are aligned with those of IBF, based on the high level of integration between the two and the modest leverage and sound standalone liquidity at the parent. Waterland Securities' rating and Outlook are aligned with Waterland Financial's, reflecting its status as a core subsidiary of the group, the obligatory support from the holding parent under Taiwan's Financial Holding Company Act and the inseparability of its risk profile from that of the group.

SUPPORT RATING AND SUPPORT RATING FLOOR

IBF's and CBF's Support Ratings (SRs) and Support Rating Floors (SRFs) reflect a significantly limited probability of government support, if needed. SRs and SRFs for Grand, Taching and Dah Chung reflect Fitch's view that state support cannot be relied upon, due to their low systemic importance. TFC's SR is driven by the expectation that its bank shareholders would provide support to the company, if needed.

RATING SENSITIVITIES

IDRS AND NATIONAL RATINGS

The IDRs and National Ratings of IBF, CBF, Grand, Taching and Dah Chung are sensitive to same factors that could change their VRs. A change in Fitch's assessment of the ability or propensity of TFC's largest shareholders to provide support is likely to result in a change in its IDRs and National Ratings.

VIABILITY RATINGS

The rated entities' VRs have limited upside due to the sector-wide structural limitations, including limited business scope, susceptibility to interest-rate volatilities, reliance on wholesale funding and higher concentration risk in credits and liquidity compared with domestic banks. Negative rating action may result from any compromises in underwriting quality, weakened capital strength arising from aggressive growth in the guarantee book or market risk, or unexpected market disruptions resulting in liquidity stress.

WATERLAND FINANCIAL AND WATERLAND SECURITIES

Waterland Financial's ratings are driven by the financial strength of its principal operating subsidiary, IBF. Any weakening of IBF's credit profile or Waterland Financial's standalone liquidity and leverage could pressure its ratings. Waterland Securities' ratings will move in tandem with the ratings of its parent, Waterland Financial.

SUPPORT RATING AND SUPPORT RATING FLOOR

The SRs and SRFs of IBF, CBF, Grand, Taching and Dah Chung are sensitive to changes in assumptions around the propensity of the government to provide timely support. TFC's SR may be downgraded if the willingness or ability of its large bank shareholders to extend support were deemed to have deteriorated.

The rating actions are as follows:

IBF:

Long-Term Issuer Default Rating (IDR) affirmed at 'BBB'; Outlook Stable

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '4'

Support Rating Floor affirmed at 'B+'

Waterland Financial:

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

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

Viability Rating affirmed at 'bbb'

Waterland Securities:

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

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

CBF:

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

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

Viability Rating affirmed at 'bbb'

Support Rating affirmed at '4'

Support Rating Floor affirmed at 'B+'

Dah Chung:

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

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Taching:

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

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

Grand:

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

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

Viability Rating affirmed at 'bbb-'

Support Rating affirmed at '5'

Support Rating Floor affirmed at 'No Floor'

TFC:

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

Short-Term IDR affirmed at 'F3'

National Long-Term Rating affirmed at 'A(twn)'; Outlook Stable

National Short-Term Rating affirmed at 'F1(twn)'

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

Support Rating affirmed at '2'