Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Taiwan-based SinoPac Financial Holdings Company Limited (SPH) and the principal subsidiary, Bank SinoPac (BSP), at 'BBB+', their National Long-Term Ratings at 'AA-(twn)' and their Viability Ratings (VRs) at 'bbb+'.

Fitch has also affirmed the Long-Term IDR of BSP's wholly owned Nanjing-based subsidiary, Bank SinoPac (China) Ltd. (BSP (China)), at 'BBB+'. The Outlooks on the Long-Term IDRs are Stable.

Key Rating Drivers

BSP

Stable Credit Profile: BSP's Long-Term IDR is driven by its VR, which is in line with the implied rating. Its ratings and the Stable Outlook reflect Fitch's expectation that the bank will have a consistent risk profile and maintain adequate loss-absorption buffers amid a stable operating environment.

Stable Operating Environment: The operating environment score of 'a' with stable outlook takes into consideration Taiwan's economic recovery and Fitch's expectation of stable interest rates. These, together with sustained low unemployment and improving GDP per capita, support the banking sector's business performance, although the score also takes into account the high level of competition in the sector. We forecast the economy to expand by 2.8% in 2024 and 2.6% in 2025 (2023E: 1%), supported by improving external demand for Taiwan's exports.

Moderate Risk Profile: BSP's risk profile score of 'bbb+' reflects its moderate risk profile, underpinned by its large residential secured loans portfolio, low borrower and sector concentration, and modest mainland China exposure. We expect residential secured loans, which generally have moderate loan-to-value ratios, to continue to dominate the loan book (end-1H23: 42% of total loans). The bank's 10 largest borrowers accounted for 34% of equity at end-3Q23, compared with the Fitch-rated peer average of around 70%.

Asset-Quality Risk Manageable: We expect a modest rise in BSP's impaired-loan ratio in 2023 (0.4% at end-3Q23), mostly from relief lending and offshore exposures. The relief lending limit was around 7% of its total loans at end-3Q23, but we expect the actual amount to be much lower. BSP has a moderate loan/value ratio for its mortgage loans (end-1H23: 42% of total loans), and its focus on owner-occupied mortgages also supports their credit quality. We expect BSP to remain selective in its offshore lending or mainland China exposures.

Stable Underlying Profitability: We expect growth in BSP's reported profitability in 2023 to be due primarily to higher foreign-exchange (FX) swap income. We forecast its underlying profit, excluding FX swap income, to remain broadly stable with operating profit/risk-weighted assets (OP/RWA) improving slightly to 1.3% in 2023 (2022: 1.2%). In 2024, we expect the bank's FX swap income to fall from the high base in 2023, but this should be partly offset by stronger offshore lending income, as well as steady growth in lending and fees, supporting stable core profit.

Sustained Capitalisation: We forecast BSP's common equity Tier 1 (CET1) ratio to be sustained at slightly above 11%, based on stable profitability and prudent RWA growth. Its CET1 ratio increased to 10.7% by end-1H23 from 9.4% at end-2022, boosted by a capital injection of TWD10 billion from SPH (around 70bp lift to CET1 ratio) and profit retention (around 60bp).

Sound Liquidity Profile: We believe Taiwan's ample system liquidity, along with BSP's moderate growth and digital transformation, will help sustain the bank's sound funding and liquidity profile. BSP's loan/deposit ratio remained healthy at 73% at end-3Q23, despite rising from 68% at end-2022. In addition to the sound local-currency liquidity, foreign-currency deposits also remained sufficient to fund offshore lending, with a low loan/deposit ratio for US dollars of below 50%.

SPH

Ratings Aligned with Bank Subsidiary: SPH's ratings and Outlook are aligned with those of the principal subsidiary, BSP. Fitch expects SPH to remain a bank-centric company and maintain a moderate common-equity double-leverage ratio (DLR) in the absence of major acquisitions. BSP makes up around 90% of SPH's assets and contributes over 80% of group profit. The two are highly integrated in terms of risk management, business strategy and branding.

The rating impact on SPH in the case of any large-scale acquisition would depend on the funding structure, the group's financial flexibility reflected through DLR and capitalisation, and our assessment of the synergies that may arise from the transaction.

Steady Growth: We expect Taiwan's stable bank operating environment to underpin steady credit growth at BSP. Sustainable finance will remain the bank's growth focus in Taiwan - BSP is the largest lender in solar energy financing. We expect offshore lending to grow from a low base, primarily in regions outside of mainland China in the near term in light of slowing growth in the mainland. We expect the bank to remain selective in its offshore lending and focus on large Taiwan-based companies with regional operations, such as in south-east Asia.

Stable Core Profitability: We expect steady growth in SPH's core profitability, supported by Taiwan's stable operating environment. The holding parent's net profit increased by 22% yoy in 9M23, driven by higher foreign-exchange swap income at BSP and stock trading gains at SinoPac Securities Corporation (SPS, BBB+/Stable), SPH's second-largest subsidiary. Excluding the foreign-exchange swap income, BSP's underlying profit was stable.

Stable Leverage: Fitch expects SPH's common-equity DLR to stay below 120%, based on stable core profitability and easing capital pressure from stock and bond valuation losses at BSP, as well as SPS's adequate capitalisation. SPS's capital adequacy ratio has been adequate at above 300% for the past two years (end-2023: 338%).

SPH maintained a stable common-equity DLR of 114% at end-3Q23 (end-2022: 113%) despite the absence of dividends from BSP. This was primarily due to a TWD11.25 billion rights issue in 1Q23, of which TWD10 billion was injected into BSP to offset the pressure on its capitalisation from bond valuation losses in 2022. Some losses were subsequently reversed in 2023, and further reversals are possible in 2024 as interest rates peak.

Adequate Liquidity: Fitch estimates that dividend income from BSP would be sufficient to cover the holding company's dividend payout and small operating and interest expenses. We expect BSP to resume dividend payments to its parent in 2024. SPH's reliance on dividends from its subsidiaries as its primary liquidity source is partially mitigated by the parent's moderate leverage. Its overall funding and liquidity profile is also supported by stable core profitability, and hence dividends, at BSP. BSP did not declare any dividends for 2023, as its core capitalisation fell in 2022 from bond valuation losses.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Long-Term IDRs and VRs

BSP

BSP's ratings could be downgraded if its risk or growth appetite rises significantly, leading to severe deterioration in asset quality, profitability and capitalisation. The ratings could also face pressure if the impaired-loan ratio rises markedly to close to 3%, the OP/RWA ratio weakens towards 0.8% or the reported CET1 ratio falls on a sustained basis to significantly below 11%.

SPH

A downgrade of BSP's VR could trigger a similar move on SPH's ratings. In addition, a sustained increase in SPH's common-equity DLR - for example, from large-scale acquisitions - to above 120% may also lead to a rating downgrade for SPH.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Long-Term IDRs and VRs

BSP

An upgrade appears unlikely in the medium term, in light of BSP's moderate franchise and financial performance. However, the rating may be upgraded on substantial and sustained improvements in its profitability and capitalisation, for example, if its OP/RWA ratio were to rise to above 2% (end-1H23: four-year average of 1.2%), or if the reported CET1 ratio were to rise above 14% (end-1H23: 10.7%).

SPH

An upgrade of BSP's VR could trigger a similar move on SPH's ratings.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Short-Term IDR

BSP's and SPH's Short-Term IDR of 'F2' is at the baseline option, which maps to their Long-Term IDR, as BSP's funding and liquidity score of 'a-' does not meet the minimum 'a' funding and liquidity score to achieve a higher rating.

National Ratings

The National Long-Term Ratings of BSP and SPH are at the high end of the rating scale, reflecting very low default risk relative to domestic peers. The Stable Outlooks on its National Ratings are in line with the Outlook on its Long-Term IDRs. The affirmation of the National Ratings indicates that there is no change in Fitch's view of its credit profiles relative to the rated universe of issuers based in Taiwan.

BSP's Government Support Rating (GSR) of 'bbb-' reflects a high probability of government support, if needed, considering its moderate systemic importance with deposit market share of around 3.7% in a highly fragmented banking system.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

The Short-Term IDRs of BSP and SPH would be downgraded if BSP's VR is downgraded and its funding and liquidity score is lowered to below 'bbb+'.

Changes in Fitch's perception of BSP's credit profiles relative to the national rating universe in Taiwan could affect its National Ratings. A downgrade of BSP's National Ratings would arise from a weakening in its overall credit profiles on a relative basis to the national rating universe.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

The Short-Term IDR of SPH could be upgraded if BSP's Short-Term IDR is upgraded. BSP's Short-Term IDR could be upgraded if its funding and liquidity score is revised to 'a' or above, although we view this as unlikely because of its moderate franchise.

Strengthening in BSP's overall credit profile on a relative basis to the national rating universe could lead to an upgrade of its National Ratings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The GSR could be downgraded if Fitch believes BSP's perceived importance to the banking system has weakened.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of BSP's GSR appears unlikely, as we expect the bank's systemic importance to remain moderate in the near term.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

The 'bbb+' Shareholder Support Rating (SSR) of BSP (China) is equalised with the parent bank's VR, and reflects our view of a high probability of extraordinary support from BSP, if needed. Fitch regards the mainland Chinese subsidiary as an integral part of the parent's cross-strait financial platform, which also includes BSP and its Hong Kong branch. BSP (China) provides the group's core products and services to its customers within the Greater China region. Fitch does not assign a VR to BSP (China) due to a lack of a significant standalone franchise in China independent of the group.

BSP (China)'s Long-Term IDR is driven by the bank's SSR. BSP (China)'s Short-Term IDR is equalised with the parent's rating.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

BSP (China)'s ratings will move in tandem with the ratings of its parent, BSP. BSP (China)'s rating would be downgraded if BSP is downgraded, which would reflect the parent's reduced ability to support the subsidiary. Alternatively, there could be ratings downside if the perceived linkage between the subsidiary and its parent and/or its role in the group were to weaken significantly. This may be evident from a significant reduction in the group's shareholding and/or control of BSP (China).

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Any upgrade of the parent's ratings is likely to lead to a similar move on BSP (China), assuming assumptions on support propensity are unchanged.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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