The bank’s earnings are expected to remain robust until 2012, underpinned by a gradual widening of net interest margins.
Fitch Ratings has affirmed Taiwan-based Mega International Commercial Bank Company Limited's (Mega ICBC) ratings including its Long-Term Foreign Currency Issuer Default Rating of 'A-' with Stable Outlook.
The ratings reflect Mega ICBC's improved performance in earnings and asset quality since the last rating action in November 2010. The IDRs and Viability Rating take into account its strong local franchise in foreign exchange and trade finance, satisfactory asset quality, sound liquidity and adequate capitalisation. Nonetheless, the ratings are constrained by its moderate core earnings and capital buffer relative to regional peers. Another rating weakness is the inherent risk of the bank compromising corporate governance and its risk profile in meeting its policy role to support government-sponsored industrial development.
Mega ICBC's Support Rating and Support Rating Floor highlight the extremely high probability of state support for the bank given its role in providing foreign exchange settlement, its significant 6% market share of deposits as well as government's controlling ownership.
Mega ICBC's net profits improved in 2010 and H111 post the 2008/2009 financial crisis. Fitch expects earnings to remain generally favourable in H211 and 2012, underpinned by subdued provision charges, consistent fee revenues and a gradual widening of net interest margins.
Mega ICBC's non performing loan ratio was at a historical low of 0.23% and loan loss reserve sufficiently covered 3.79x of NPLs at end-H111. To counter the risk of a sudden hike in credit costs caused by external economic shock, the bank intends to strengthen its loan loss reserve to 1% of gross loans by end-2011 from 0.89% at end-H111. Fitch views that the increase in reserves would help reduce Mega ICBC's concentration risk to the electronic component industry (such as LCD panel makers) and property-related exposures.
Mega ICBC's liquidity profile is supported by its deposit-taking franchise, strong ties with the central bank and holdings of liquid investments. Fitch, however, notes that the bank's reliance on wholesale funding increased in H111 amid stronger USD credit demand from private enterprises.
Capitalisation is deemed adequate and of high quality with a Tier 1 capital ratio of 9.13% at end-H111. The bank intends to gradually enhance its core capital through higher earnings retention.
Consistently robust profitability and enhanced core capitalisation may benefit Mega ICBC's ratings in the medium- to long-term. On the other hand, any significant increase in its exposure to the rapidly evolving Chinese market and/or aggressive asset growth would exert downward pressure on the VR.
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