Hwatai Bank recovery seen in 2 years

Hwatai Bank is expected to generate pre-loan profits in two years with less credit costs and breakeven bottom-line.

Indicating a stabilising profitability compared with its net loss in the first half of 2009 and full-year 2008, Taiwan Ratings Corp. revised its outlook on the long-term rating on Hwatai Bank to stable from negative. At the same time they affirmed the 'twBBB+' long-term counterparty credit rating and 'twA-2' short-term rating on the bank.

The turnaround in profitability follows a gradual recovery in the general economy, a more stabilised operating environment, and a moderate domestic real estate market where Hwatai Bank's business is concentrated, but with a good track record.

Moreover, the outlook revision also reflects that the bank has adequately adjusted its deposit mix to reduce funding costs and adjusted its loan portfolio by diversifying into higher-margin mortgage business while controlling its lower-margin corporate loan business.

At the end of September 2009, the bank's annualised net interest margin had recovered to 0.85 percent with positive annualised pre-LLP return on averaged assets of 0.24 percent compared to 0.6 percent and negative 0.1 percent, respectively, in the first quarter of 2009.

Taiwan Ratings Corp. expects Hwatai Bank to generate sufficient profitability to cover potential credit costs over the next two years, supported by the recovery in the bank's fee income and trading gains, as well as its lowered operating expenses. At the same time, the bank's capitalisation is likely to remain adequate to serve as a comfortable buffer against unexpected losses.

The ratings continue to reflect Hwatai Bank's adequate capitalisation and moderate asset quality. Counterbalancing factors include the bank's marginal profitability, modest competitive position, and mediocre liquidity profile.