OREANDA-NEWS. Fitch Ratings has affirmed Taiwan-based Hua Nan Commercial Bank's (HNB) ratings - including its Long-Term Issuer Default Rating (IDR) - at 'BBB+', and its Viability Rating (VR) at 'bbb-'. The Outlook is Stable. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS
IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of HNB's IDRs and National Ratings is driven by its Support Rating (SR) and Support Rating Floor (SRF), which reflect the high probability of support from the state - given its systemic importance and close ties with government. This is evident in the state's long-term and controlling ownership (currently around 33%) in HNB's parent, Hua Nan Financial Holding Company, and the bank's leading franchise with the third-largest branch network and close to a 6% share of deposits in Taiwan.

VR
The VR affirmation reflects HNB's stable and moderate risk profile and strengthened capitalisation and loan-loss reserves; these will help absorb cyclically rising credit costs in a slowing economy in Taiwan and China. Fitch expects the bank to maintain its adequate capitalisation through measured credit growth commensurate with its business development and strategy. The FCC ratio had increased to 10.7% by end-2015 by Fitch estimates (end-2014: 9.9%) due to earnings retention, which is comparable with similarly rated regional peers.

Fitch expects HNB to continue to manage its offshore risk efficiently - primarily the China exposure - in line with its modest appetite for growth. China exposures had fallen to 82% of Fitch Core Capital by end-3Q15 (versus 107% at end-2014) due to weakened credit demand in China. The sector average is 100%-110%. The exposures are fairly diversified, and focus on investment-grade Chinese banks and state-owned Chinese entities that have dominant market positions in their respective industrial sectors - and are hence less vulnerable to cyclicality.

HNB has gradually enhanced revenue from fee-income generation and margin uplift in offshore lending in the last few years, and these measures have now approached the sector average. HNB's pre-tax return on assets rose to an annualised 0.72% in 9M15 (versus 0.68% in 2014), compared with the sector average of 0.75%. Fitch expects HNB's earnings to decline moderately like most of peers, as its credit costs rise from a very low level in 2015.

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS, SUPPORT RATING AND SUPPORT RATING FLOOR Changes in the Taiwan government's willingness to support HNB could lead to changes in its SR, SRF, IDRs and National Ratings. Fitch believes the state support will remain steadfast in the near to medium term.

VR
A VR upgrade could occur if HNB sustains higher profitability and a stronger risk buffer while asset quality remains satisfactory and the risk profile is not significantly raised. A VR downgrade would be likely to come from any excessive growth and/or aggressive acquisition in the region which substantially weakens HNB's risk profile.

The rating action is as follows:

HNB:
Long-Term IDR: affirmed at 'BBB+'; Outlook Stable
Short-Term IDR: affirmed at 'F2'
National Long-Term Rating: affirmed at 'AA-(twn)'; Outlook Stable
National Short-Term Rating: affirmed at 'F1+(twn)'
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB+'.