Fitch Ratings has affirmed Taiwan Cooperative Bills Finance Corporation's (TCBFC) Long-Term Issuer Default Rating (IDR) at 'A+' and National Long-Term Rating at 'AA+(twn)'.

The Outlook is Stable. At the same time, Fitch has affirmed TCBFC's Short-Term IDR at 'F1+'.

Key Rating Drivers

Ratings Reflect Extraordinary Support: TCBFC's ratings reflect Fitch's expectation of a very high probability of extraordinary support from the government (AA/Stable) for its parent, Taiwan Cooperative Financial Holding Company (TCFHC), which we expect to flow through to TCBFC, if required. We believe prospects for shareholder support are strong due to TCBFC's small size relative to the group and the extremely high reputational risk to TCFHC if the subsidiary were to default.

The state (including affiliates) owns around 34% of TCFHC, based on disclosure of the company's 10 largest shareholders. TCFHC's principal subsidiary, Taiwan Cooperative Bank (TCB), carries out important policy roles such as the provision of funding to credit cooperatives and debt-relief measures to those affected such as by the Covid-19 pandemic. TCB is also a domestic systemically important bank in Taiwan, with a 7% deposit market share at end-1H23.

High National Rating Scale: TCBFC's National Long-Term Rating is at the high end of the national rating scale, reflecting very low default risk relative to its domestic peers due to the strong likelihood of support from TCFHC and, ultimately, the state. The Stable Outlook is in line with the Outlook on its IDR.

High Integration with Group: TCBFC, TCFHC and TCB are highly integrated in risk management and business strategy. TCB and TCBFC collaborate in syndication, with TCB providing long-term lending while TCBFC provides short-term commercial paper guarantees. The group also works together to support government policies - for example, they are focused increasingly on green energy financing. The group aims to further broaden the synergy between TCB and TCBFC. TCBFC has acquired some of TCB's corporate customers as repo counterparties, and diversified its funding sources during 2023.

Asset-Quality Risk Manageable: Fitch expects TCBFC's adequate collateral coverage to mitigate ultimate credit losses amid economic slowdown. Its impaired-guarantee ratio rose to 2.5% by end-2022 (end-2021: below 0.1%) due to default of one property exposure, which the company expects to fully recover in 2023-2024 through foreclosing property collaterals.

Its guarantee book is extended mainly to investment companies (37% of total guarantees at end-1H23) and the property sector (25%), which typically have sufficient collateralisation backed by listed stocks and property. We expect modest growth in its guarantee book over 2023, and the company will remain focused on investment companies and the property sector.

Profitability to Stabilise: We expect TCBFC's operating profit/risk-weighted assets (OP/RWA) ratio to fall towards 0.4% in 2023 (2022: 0.7%) due to elevated repo funding costs arising from rate hikes. The ratio, however, should recover moderately in 2024 as its repo funding cost stabilises and asset yields improve upon reinvestment and repricing of CP guarantees, alongside stronger growth in the guarantee book as the economy recovers.

Stable Capitalisation: We expect TCBFC to maintain its capital-adequacy ratio (CAR) at above 13% through managing its RWA growth. Its CAR was stable at 13.5% at end-1H23 (end-2022: 13.4%) and Tier 1 ratio at 13.4% (13.4%). RWA grew by 2.5% half-on-half by end-June 2023, primarily from boosting its fixed-income investments.

Group Liquidity Support: TCBFC, like its peers, is heavily reliant on wholesale funding through repurchase agreements. The liquidity back-up facility from TCB, and the high credit quality and liquidity of its fixed-income holdings, coupled with ample system liquidity in Taiwan, help to mitigate the associated funding and liquidity risks.

Rating Sensitivities

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

TCBFC's IDRs and Shareholder Support Rating (SSR) would be pressured as a result of a downgrade of Taiwan's sovereign rating, or if Fitch perceives that the state's propensity to support TCFHC will decrease, most likely as a result of TCB's reduced policy role or decline in systemic importance. A downgrade of TCBFC's National Long-Term Rating could also arise if its credit profile weakens relative to the Taiwan-based rated entities within the national ratings universe.

TCBFC's Short-Term IDR would be downgraded to 'F1' if its Long-Term IDR is downgraded to 'A-' or below.

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

An upgrade of TCBFC's IDRs and SSR may occur if Taiwan's sovereign rating is upgraded, or upon evidence of much stronger government linkage such as a notable increase in state ownership in TCFHC to over 50%, together with more significant policy roles than currently mandated by the government. An upgrade of TCBFC's National Long-Term Rating would result from a strengthening of its credit profile relative to other Taiwan-based rated entities within the national ratings universe.

The Short-Term IDR is already at the highest rating level of 'F1+', and therefore has no upside.

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.

Public Ratings with Credit Linkage to other ratings

TCBFC's ratings are linked to Taiwan's Long-Term IDR.

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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