Fitch Ratings has assigned KGI Securities Co. Ltd. a National Long-Term Rating of 'AA-(twn)' and National Short-Term Rating of 'F1+(twn)'.

The Outlook is Stable. KGI Securities' ratings are based on Fitch's expectation of shareholder support from its parent, China Development Financial Holding Corporation (CDF).

Concurrently, Fitch has assigned an expected rating of 'A+(EXP)(twn)' to KGI Securities' proposed unsecured subordinated corporate bonds. The bonds are expected to have a 10-year tenor and proceeds will be used to strengthen the company's liquidity and capital position. The final rating on the bonds is contingent upon the receipt of final documents conforming to information already received.

KGI Securities is the second-largest integrated securities firm in Taiwan. It is a wholly owned subsidiary of CDF, whose main subsidiary is KGI Life Insurance Co., Ltd. (Insurer Financial Strength: A/AA+(twn)/Stable). KGI Securities' businesses include brokerage, proprietary trading, investment banking and wealth management.

Key Rating Drivers

Parental Support: KGI Securities' ratings are driven by Fitch's expectation of a high probability of shareholder support from CDF, whose credit profile is primarily based on the credit strength of KGI Life. The ratings are underpinned by CDF's obligation to provide support to the securities subsidiary, as stipulated in Taiwan's Financial Holding Company Act, while any required support would be manageable relative to the parent's ability to provide it. A default by KGI Securities would carry considerable reputational risk to the group due to the shared branding with other key group subsidiaries.

Strong Parental Linkage: KGI Securities' solid franchise in the Taiwanese brokerage sector plays a valuable role in complementing the group's financial service solutions. The parent uses KGI Securities' robust client base and resources to drive group-wide synergies, evident from increased cross-selling and shared resources, which boost operational efficiency and service quality. KGI Securities shares the same brand with its sister companies, such as KGI Life and KGI Bank Co. Ltd. There is a high level of integration with the parent group in terms of risk management, liquidity and capital planning.

Moderate Asset Quality: Fitch assesses KGI Securities' asset quality as adequate, with sound hedging and risk-management mechanisms. The company did not have credit losses from margin lending in 2020-2023. Furthermore, it maintains a moderate risk appetite in its investment book. Most of its bond holdings are in government bonds and investment-grade private-sector bonds.

Variable Earnings: KGI Securities' operating income/average equity rose to 5.1% in 2023 from 3.2% in 2022 due to better equity market turnover and investment sentiment. Fitch expects the company's return profile to remain volatile in the medium term, in line with that of peers. A global economic slowdown and sustained geopolitical tension will continue to weigh on capital-market performance in 2024, although any tapering in US interest rates could support the performance of fixed-income portfolio investments.

Healthy Liquidity: KGI Securities has demonstrated a prudent funding and liquidity profile over the past few years. It tends to rely on short-tenor funding, like most local peers, but this is offset by liquid assets that consistently exceed its short-term obligations. The majority of liquid assets are held in government and high-grade corporate bonds and its liquidity coverage ratio has been healthy, exceeding 160% for the last four years. KGI Securities has shifted part of its funding structure towards more-diversified sources, including the issuance of subordinated debt.

Adequate Capital Profile: Net tangible leverage eased to 7.7x by end-2023 from 7.9x a year earlier, reflecting an increase in shareholders' equity. The company's leverage is slightly above the average of rated peers due to its higher settlement-related assets and more significant client margin business. Nonetheless, we believe the capital position is adequate relative to balance-sheet risks in light of its established credit- and market-risk mitigation policies. Its regulatory capital-adequacy ratio of 291% also remains comfortably above minimum requirements.

RATING SENSITIVITIES

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

A deterioration in CDF's credit profile would lead to negative rating action on KGI Securities, assuming Taiwan's National Rating scale correspondence remains unchanged. Negative developments for CDF's credit profile may include a deterioration in KGI Life's credit profile, as denoted by its Insurer Financial Strength Rating and Issuer Default Rating (IDR), or an increasing exposure to subsidiaries with weaker financial profiles that could place a burden on the holding company's consolidated credit profile.

For further details on KGI Life's rating drivers and sensitivities, please see Fitch Affirms KGI Life's IFS Rating of 'A'; Outlook Stable, published 19 February 2024.

Fitch may also consider negative rating action if there is a sustained and significant reduction in CDF's liquid assets and liquidity facilities, which could adversely affect CDF's ability to support its subsidiary.

Furthermore, a reduction in CDF's inclination to back KGI Securities could also lead to negative rating action. This may be signalled by a diminishing role for KGI Securities in the group, or weakening integration, shareholding, or control. However, we do not expect these changes to occur in the near term, and would consider the reputational implications from shared branding and the holding company's regulatory support obligations in such a scenario.

Fitch will also assess KGI Securities' credit profile relative to that of domestic peers when considering negative action on the National Ratings.

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

KGI Securities' National Long-Term Rating could be upgraded in the event of an improvement in CDF's credit profile, which may be driven by an upgrade of KGI Life's IFS Rating and Long-Term IDR, or a long-term strengthening in CDF's financial structure, exemplified by a Fitch-defined double leverage ratio sustained below 120%. Fitch will also consider KGI Securities' credit profile relative to the Taiwanese national-rating universe.

There is no upside to the National Short-Term Rating as it is already at the highest point on its scale.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

KGI Securities' proposed Taiwan dollar unsecured subordinated bond is rated one notch below the issuer's National Long-Term Rating to reflect the instrument's higher loss-severity risk relative to senior unsecured obligations. Additional notching has not been applied due to a lack of going-concern loss-absorption and equity conversion features. Fitch applies the Corporate Hybrids Treatment and Notching Criteria and Corporates Recovery Ratings and Instrument Ratings Criteria to this assessment, in line with our approach for other APAC securities firms.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The expected National Long-Term Rating on the proposed subordinated bond is sensitive to changes in KGI Securities' National Long-Term Rating. Any action on KGI Securities' National Long-Term Rating would result in similar rating action on the subordinated bond.

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