27.07.2015, 11:16
Fitch Affirms KGI Bank's Ratings; Revises Outlook to Negative
OREANDA-NEWS. Fitch Ratings has today affirmed KGI Bank's ratings and at the same time revised the Outlook on its Long-Term Issuer Default Rating (IDR) of 'BBB' to Negative from Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS AND NATIONAL RATINGS
The Negative Outlook on KGI Bank's Long-Term IDR and Long-Term National Rating reflects Fitch's assessment that the credit strength of its sole parent - China Development Financial Holding Corporation (CDFHC) - is decreasing as KGI Bank grows in importance within the group and leverage at KGI Securities, one of the other main subsidiaries of CDFHC, increases. China Development Industrial Bank (CDIB) is the other significant subsidiary of CDFHC. Fitch views KGI Bank as having the weakest intrinsic credit profile (Viability Rating at bb+) of all group entities.
Fitch estimates that KGI Bank will expand to account for roughly 40%-45% of group equity and 65%-70% of the group's assets by end-2017 from about 34% of group's equity and 61% of the group's assets on a pro-forma basis at end-2014. As KGI Bank's size relative to the group increases, its weaker standalone profile will put pressure on the group's credit strength, unless KGI Bank materially strengthens its own credit profile.
KGI Bank expects the capital for future growth to be sourced from profit and through the planned divestment of CDIB's direct investment portfolio. The quality and liquidity of the portfolio could affect the realisation of the plan. In Fitch's opinion there could be some pressure on group capitalisation if the realisation programme were to be slower than expected and strong growth at the bank were to occur in line with its targets. Overall, CDFHC's credit profile takes into consideration its strong franchise in brokerage and principal investments and adequate capitalisation relative to its business mix. But it also factors in influence from KGI Bank, which has a modest franchise in Taiwan.
KGI Bank's IDRs are driven by institutional support from CDFHC, which at the moment is more heavily influenced by the standalone profile of KGI Securities and CDIB. In Fitch's opinion, support from CDFHC is highly likely, if needed, because the agency considers KGI Bank to be a core part of CDFHC and its commercial banking business is essential to the group's strategy of building a diversified universal banking franchise and to consolidate its funding and liquidity profile.
VIABILITY RATING (VR)
KGI Bank's VR primarily reflects its above-average risk appetite and aggressive growth target. The VR also considers the bank's modest domestic commercial banking franchise (which stems from its acquisition of Cosmos Bank) within Taiwan's fragmented and competitive banking system, although this will be enhanced by the assumption of CDIB's corporate banking assets and transfer of group capital to fund growth. Fitch estimated the Fitch Core Capital ratio was at 13% on a pro-forma basis at end-2014. This may rise further through a combination of retained profits and capital transferred from CDIB, but there is uncertainty how capital will be managed and sustained in future in light of the bank's appetite for growth and risk.
RATING SENSITIVITIES
IDRS AND NATIONAL RATINGS
KGI Bank's IDRs and National Ratings are sensitive to changes in the credit profile of CDFHC, which is largely underpinned by the strength of KGI Securities and CDIB, but increasingly influenced by KGI Bank itself. CDFHC's credit profile would be negatively affected, and thus result in a downgrade of KGI Bank's Long-Term IDR and National Long-Term Rating, if the group's capital buffer were to weaken notably and if, at the same time, KGI Bank's loans were to grow rapidly, particularly in more risky segments such as China (and other emerging markets). This rapid loan growth could lead to deteriorating asset quality at KGI Bank and material weakening of its standalone capitalisation.
Fitch would revise the Outlook on KGI Bank's Long-Term IDRs and National Long-Term Ratings to Stable if the group's asset growth tapers off to a more moderate level and the expansion strengthens the bank's intrinsic credit profile overall.
VIABILITY RATING
KGI Bank's VR already considered double-digit annual loan growth and potential increases in risk-taking in the next couple of years. An upgrade is likely with a prudent expansion that generates robust internal capital while maintaining healthy loan quality.
The rating actions are as follows:
KGI Bank:
Long-Term IDR affirmed at 'BBB'; Outlook Revised to Negative from Stable
Short-Term IDR affirmed at 'F3'
National Long-Term rating affirmed at 'A+(twn)'; Outlook Revised to Negative from Stable
National Short-Term rating affirmed at 'F1'
Viability Rating affirmed at 'bb+'
KEY RATING DRIVERS
IDRS AND NATIONAL RATINGS
The Negative Outlook on KGI Bank's Long-Term IDR and Long-Term National Rating reflects Fitch's assessment that the credit strength of its sole parent - China Development Financial Holding Corporation (CDFHC) - is decreasing as KGI Bank grows in importance within the group and leverage at KGI Securities, one of the other main subsidiaries of CDFHC, increases. China Development Industrial Bank (CDIB) is the other significant subsidiary of CDFHC. Fitch views KGI Bank as having the weakest intrinsic credit profile (Viability Rating at bb+) of all group entities.
Fitch estimates that KGI Bank will expand to account for roughly 40%-45% of group equity and 65%-70% of the group's assets by end-2017 from about 34% of group's equity and 61% of the group's assets on a pro-forma basis at end-2014. As KGI Bank's size relative to the group increases, its weaker standalone profile will put pressure on the group's credit strength, unless KGI Bank materially strengthens its own credit profile.
KGI Bank expects the capital for future growth to be sourced from profit and through the planned divestment of CDIB's direct investment portfolio. The quality and liquidity of the portfolio could affect the realisation of the plan. In Fitch's opinion there could be some pressure on group capitalisation if the realisation programme were to be slower than expected and strong growth at the bank were to occur in line with its targets. Overall, CDFHC's credit profile takes into consideration its strong franchise in brokerage and principal investments and adequate capitalisation relative to its business mix. But it also factors in influence from KGI Bank, which has a modest franchise in Taiwan.
KGI Bank's IDRs are driven by institutional support from CDFHC, which at the moment is more heavily influenced by the standalone profile of KGI Securities and CDIB. In Fitch's opinion, support from CDFHC is highly likely, if needed, because the agency considers KGI Bank to be a core part of CDFHC and its commercial banking business is essential to the group's strategy of building a diversified universal banking franchise and to consolidate its funding and liquidity profile.
VIABILITY RATING (VR)
KGI Bank's VR primarily reflects its above-average risk appetite and aggressive growth target. The VR also considers the bank's modest domestic commercial banking franchise (which stems from its acquisition of Cosmos Bank) within Taiwan's fragmented and competitive banking system, although this will be enhanced by the assumption of CDIB's corporate banking assets and transfer of group capital to fund growth. Fitch estimated the Fitch Core Capital ratio was at 13% on a pro-forma basis at end-2014. This may rise further through a combination of retained profits and capital transferred from CDIB, but there is uncertainty how capital will be managed and sustained in future in light of the bank's appetite for growth and risk.
RATING SENSITIVITIES
IDRS AND NATIONAL RATINGS
KGI Bank's IDRs and National Ratings are sensitive to changes in the credit profile of CDFHC, which is largely underpinned by the strength of KGI Securities and CDIB, but increasingly influenced by KGI Bank itself. CDFHC's credit profile would be negatively affected, and thus result in a downgrade of KGI Bank's Long-Term IDR and National Long-Term Rating, if the group's capital buffer were to weaken notably and if, at the same time, KGI Bank's loans were to grow rapidly, particularly in more risky segments such as China (and other emerging markets). This rapid loan growth could lead to deteriorating asset quality at KGI Bank and material weakening of its standalone capitalisation.
Fitch would revise the Outlook on KGI Bank's Long-Term IDRs and National Long-Term Ratings to Stable if the group's asset growth tapers off to a more moderate level and the expansion strengthens the bank's intrinsic credit profile overall.
VIABILITY RATING
KGI Bank's VR already considered double-digit annual loan growth and potential increases in risk-taking in the next couple of years. An upgrade is likely with a prudent expansion that generates robust internal capital while maintaining healthy loan quality.
The rating actions are as follows:
KGI Bank:
Long-Term IDR affirmed at 'BBB'; Outlook Revised to Negative from Stable
Short-Term IDR affirmed at 'F3'
National Long-Term rating affirmed at 'A+(twn)'; Outlook Revised to Negative from Stable
National Short-Term rating affirmed at 'F1'
Viability Rating affirmed at 'bb+'
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