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E.Sun Bank Ratings Affirmed and Removed from CreditWatch; Outlook Stable
RATIONALE Taiwan Ratings Corp. today affirmed its 'twA+' long-term counterparty credit rating and 'twA-2' short-term credit rating on E.Sun Commercial Bank Ltd. (E.Sun Bank), and removed the ratings from CreditWatch with negative implications, where they were placed on June 4, 2004 following the bank’s announcement that it had acquired insolvent Kaohsiung Business Bank (KBB) from the government's Financial Restructuring Fund. The outlook on the long-term rating is stable. The rating action reflects Taiwan Ratings' easing concerns about the impact of the KBB acquisition on E.Sun Bank's credit profile, supported by the bank's proposed cash injection and its relatively prudent post-acquisition management. The ratings also continue to reflect E.Sun Bank's above-average asset quality and its robust core earnings. Counterbalancing factors include the challenges the bank faces in expanding its business amid intensifying domestic competition. E.Sun Bank's capitalization has come under pressure as a result of the NT$6.1 billion worth of goodwill arising from the acquisition of KBB, which the bank officially took over on Sep. 4, 2004. Nevertheless, the bank’s proposed cash injection of NT$6 billion by the end of 2004, together with its earnings retention policy, should help restore E.Sun Bank's capitalization to an adequate level. E.Sun Bank's profitability is good. The bank's core earnings have gained significant momentum since 2003 on the back of a strong consumer banking performance. E.Sun Bank’s earnings-generating capability should help somewhat mitigate the impact of branch restructuring and other acquisition-related costs. E.Sun Bank's asset quality still compares favorably with that of its domestic peers, even after the KBB acquisition. At the end of September 2004, the bank's ratio of impaired assets (official nonperforming loans, loans under surveillance, foreclosed property, and other substandard assets), was a better-than-average 2.3%. The bank's asset quality is expected to remain satisfactory, supported by conservative policies on loan extension, loan classification, and provisioning. E.Sun Bank's strategy to further boost its market position in the market is helped by the acquisition of KBB's 60 branch licenses, which will boost the bank's number of domestic branches from its current level of 54. The bank will find it challenging to expand its client base and increase profitability to offset the higher operating costs of an enlarged banking infrastructure. As such, E.Sun Bank targets a prudent and gradual realignment of its distribution network within the next two to three years to minimize any post-acquisition integration problems that may arise. To reduce the breakeven time, management also plans to refocus the newly acquired branches on either consumer or corporate banking depending on the characteristics of the targeted customer base in their respective operating areas. OUTLOOK: STABLE The
outlook reflects the expectation that E.Sun Bank's capitalization will
be restored to an adequate level commensurate with the current ratings.
E.Sun Bank is expected to maintain its prudent business strategy in recognition
of the fact that it will take time for additional earnings from new branches
to be realized.
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