OREANDA-NEWS. Fitch Ratings has affirmed Bank of Kaohsiung's (BOK) National Long-Term Rating of 'A+(twn)' and National Short-Term Rating of 'F1+(twn)'. The Outlook is Stable. A full list of ratings is at the end of this commentary.

KEY RATING DRIVERS

NATIONAL RATINGS
The ratings reflect the high probability of support from the Kaohsiung City Government (KCG), which owns 45% of the bank, or indirectly from the sovereign (A+/Positive), which will flow through the city government, if needed. This is because Kaohsiung is the second-largest municipality in Taiwan and BOK has strong linkage to KCG. The linkage is evident from KCG's long-running and significant ownership, the city government's effective control of the bank's board and management, and the policy role that the bank carries out. BOK is the KCG's main banker and extends loans, including mortgages to low-income family and student loans, in line with the city government's policy objectives.

The Stable Outlook reflects Fitch's belief that the bank's linkage to KCG will remain strong in the near to medium term, based on KCG's ownership in the bank and the bank's important policy function.

KCG has been supporting BOK's ordinary business development and is likely to participate in the bank's rights issues in coming years to enhance capitalisation to comply with stricter Basel III requirements. Fitch expects the central government, through KCG, to extend extraordinary support to BOK when necessary. The bank is modestly capitalised with a Fitch Core Capital ratio of 7.07% at end-1H15, compared with a sector average of around 10.9%. It has weak internal capital generation due to below-average profitability, which is primarily due to moderately high exposure in low-yield policy loans.

SUBORDINATED DEBT
The bank's Basel III-compliant Tier 2 (B3T2) bonds are rated two notches below its National Long-Term Rating. This consists of zero notch for non-performance risk and two for loss severity, reflecting the limited recovery prospects for Taiwanese B3T2 notes. This compares with the typical one notch for standard B3T2 instruments. B3T2 bonds in Taiwan would hit the point of non-viability (PONV) only when the issuing entity enters government receivership. This is a point that will be less easily reached compared with the PONV used by standard B3T2, which is the point at which regulators decide 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 fulfil its financial obligations.

These aforementioned notching practices for subordinated bonds are in accordance with Fitch's criteria on rating bank regulatory capital of financial institutions.

RATING SENSITIVITIES

NATIONAL RATINGS
BOK's ratings are sensitive to changes around the perceived propensity of the Taiwanese government to support BOK. This may arise from a reduction in the policy role that BOK performs for KCG and/or change in their linkage in terms of ownership and control.

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 are as follows:

BOK
National Long-Term Rating affirmed at 'A+(twn)'; Outlook Stable
National Short-Term Rating affirmed at 'F1+(twn)'

Basel III Subordinated Debt:
National Long-Term Rating affirmed at 'A-(twn)'