OREANDA-NEWS. Fitch Ratings has affirmed Taiwan-based China Bills Finance Corporation's (CBF) ratings, including its Long-Term Issuer Default Rating (IDR) at 'BBB'. The Outlook is Stable. A full list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS - IDRs, National Ratings and VRs

The affirmation reflects CBF's established market position in the Taiwanese bills finance sector, healthy underwriting quality in the guarantee business, and adequately managed capital. The ratings also take into account sector-wide structural issues, including limited business scope, the wholesale-funded nature of the business and the industry's susceptibility to unexpected large interest-rate swings.

Despite growing credit extensions, CBF's guarantee/equity ratio remained moderate (4.0x at end-2014), and new exposures were primarily of modest risk. The company experienced no new impaired exposures in 2014, and maintained steady provision coverage. CBF's growing credit risk resulted in the decline of its Fitch core capital (FCC) ratio to around 13.4% at end-2014 from 13.8% at end-2013. Nonetheless, severe deterioration in capital is less likely, given its restrained market risk appetite and consistent focus on creditworthy corporate groups.

CBF's liquid balance sheet and diversification in bond repo counterparties indicate prudence in its liquidity management and funding stability. This effectively moderates the associated risks from its reliance on wholesale funding. Further growth in CBF's earnings is likely to be challenging in 2015, given its plan to reduce its bond portfolio and potentially rising funding costs. Return on assets was modest at annualised 0.79% at end-9M14, as a decline in recovery of bad debt offset earnings from growth in the guarantee business.

RATING SENSITIVITIES - IDRs, National Ratings and VRs

CBF's ratings have limited upside potential, capped by its reliance on wholesale funding and constrained business scope. Weakened loss absorption capacity resulting from any notable decline in its equity base and/or capitalisation is likely to put pressure on its ratings. Any compromise in underwriting discipline, possibly from excessive risk-taking in pursuit of profits, could result in negative rating actions.

Fitch believes that CBF's planned merger with its largest shareholder Industrial Bank of Taiwan (IBT) would be negative for the rating, considering IBT's weaker risk profile. As the merger has become increasingly likely within Fitch's rating horizon, any announcements on the merger details are likely to trigger an event-driven rating action.

KEY RATING DRIVERS AND SENSITIVITIES - SR and SRF

CBF's Support Rating (SR) and Support Rating Floor (SRF) reflect the limited probability of government support, if needed. The SR and SRF are potentially sensitive to changes in assumptions around the propensity or ability of the government to provide timely support to CBF. This would most likely be manifested in a change to Taiwan's sovereign rating (A+/Stable).

Established in 1978, CBF is Taiwan's third-largest bills finance company, with an 18.7% share of the guarantee market at end-2014.

The rating actions are as follows:
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+'