(The following statement was released by the rating agency)
Oct 09 - Fitch Ratings has affirmed Taiwan-based Far Eastern International Bank's (FEIB) ratings, including its Long-Term Issuer Default Rating (IDR) of 'BBB-' with Stable Outlook. A full rating breakdown is provided at the end of this commentary.
The affirmation of FEIB reflects Fitch's expectation of Far Eastern Group's (FEG), the bank's majority owner, high propensity and ability to provide timely extraordinary support to the bank if necessary, and to a lesser extent, the bank's stand-alone credit profile. The bank's Viability Rating (VR) reflects adequately managed asset quality, stable liquidity, moderate core earnings and also ordinary support from FEG. The ratings also reflect the bank's weakening capitalisation.
Positive rating action may result from a significant and sustained improvement in risk-adjusted earnings and core capitalisation, although Fitch considers this unlikely in the near term. The VR may be downgraded from continued deterioration in core capitalisation and weakening asset quality due to excessive risk-taking in pursuit of growth. A weakening funding structure may also place downward pressure on the ratings. The IDRs may be downgraded from perceived weakening of group support and the bank's VR.
FEIB reported an annualised return on equity of 12.3% in H112 (2011: 10%), driven by stable core earnings and increasing debt recoveries. Fitch expects operating costs to be contained in 2013 as management slows expansion and focuses on the existing portfolio.
Loan growth slowed in H112 to 4.2% (unannualised), down from 14.3% in 2011. Asset quality remains manageable, underpinned by growing diversification across both high-risk (electronics and China) and low-risk (public sector, financial institutions and mortgages) exposures. FEIB's non-performing loan ratio remained low at 0.46% and 0.22% at end-H112 and end-2011, respectively. Its IFRS-based impaired loans were 2.3% of total loans at end-H112 and, in Fitch's view, reasonably provisioned.
FEIB's Tier 1 Capital and Fitch Core Capital (FCC) ratios compare less favourably with similar-rated peers. Both ratios have declined to 8.3% and 7.85% at end-H112 from 9% and 8.46% at end-2010 due to strong loan growth. Continued rapid growth is less likely as management seeks to enhance its core capitalisation.
Liquidity position remains stable with a high regulatory liquidity reserve ratio of 29.3% and a stable loan-to-deposit ratio of 76% at end-H112. However, FEIB has a higher reliance than peers on wholesale funding which is less stable and more costly.
FEIB is a medium-sized bank with a deposit share of 1.3% at end-H112. FEG owns around 60% of the bank and controls seven out of nine board seats. FEG is one of the largest conglomerates in Taiwan and is composed of several leading industrial and service companies across various sectors.
FEIB's rating actions: Long-Term IDR affirmed at 'BBB-'; Outlook Stable Short-Term IDR affirmed at 'F3' National Long-Term affirmed at 'A(twn)'; Outlook Stable National Short-Term affirmed at 'F1(twn)' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '4' Support Rating Floor affirmed at 'B+' Subordinated debt rating affirmed at 'A-(twn)'