ANZ Bank (Taiwan) Ltd.

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1 Primary Credit Analyst: Chris M Lee, Singapore (65) ; chris.lee@standardandpoors.com Secondary Contact: Patty Wang, Taipei (8862) ; patty.wang@taiwanratings.com.tw Table Of Contents Major Rating Factors Outlook Rationale Related Criteria And Research APRIL 28,

2 SACP bbb + Support +4 + Additional Factors 0 Anchor Business Position bbb Moderate -1 GRE Support 0 Issuer Credit Rating Capital and Earnings Strong +1 Risk Position Adequate 0 Group Support +4 A+/Stable/A-1 Funding Liquidity Average Adequate 0 Sovereign Support 0 Major Rating Factors Strengths: Strong implicit support from the ANZ group. Strong capitalization supported by adequately managed risk asset growth, high quality capital, and prudent capital management. Adequate funding and liquidity backed by an active management and adequate liquidity profile. Weaknesses: Small domestic market position despite efforts to enhance brand and domestic presence. Heavy exposure to large institutional clients, despite improving diversification. APRIL 28,

3 Outlook: Stable The stable outlook on ANZ Bank (Taiwan) Ltd. (ANZ Taiwan) reflects our expectation that the bank will prudently grow its business in the coming years without negatively affecting its key credit profile. We expect the bank to uphold its stringent risk management and maintain its adequate asset quality in line with the ANZ group standard. We also believe ANZ Taiwan will continue to lower the risk concentration of its loan portfolio over the next one to two years as the bank expands. In addition, we forecast ANZ Taiwan's capitalization to remain strong and stable with a risk-adjusted capital (RAC) ratio before diversification of slightly above 10%, because of lower loan growth, controlled risk asset growth, and prudent capital management by the group in the next two to three years. Moreover, we expect the bank to remain a highly strategic member of the ANZ group and we believe that the rating on ANZ Taiwan is likely to move in tandem with the group's credit profile. We may lower the rating on ANZ Taiwan if we lowers our rating on the ANZ group. We may also lower the rating on ANZ Taiwan if the ANZ group's willingness to support the bank weakens due to the diminished importance of ANZ Taiwan. We believe the likeliness of this is low in the next two to three years. Conversely, we may raise the rating on ANZ Taiwan if the bank attains "core" group status, though we believe the likelihood of this is also low in the next two to three years. Rationale The ratings reflect ANZ Taiwan's strong capitalization and improving franchise in the local market, despite the bank's still-small market share. The ratings also factor in the implicit support from Australia and New Zealand Banking Group Ltd. (ANZ) due to the bank's "highly strategic" status to the ANZ group. Anchor: 'bbb' for banks operating mainly in Taiwan Our bank criteria use our Ratings Services Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating (ICR). The anchor for a bank operating only in Taiwan is 'bbb'. The BICRA score is informed by our evaluation of economic risk; we view Taiwan as a middle-income, moderately stable economy with a dynamic private sector and strong household net financial positions. These factors partially offset the somewhat high level of private sector indebtedness and property price growth in recent years, in our view. With regard to industry risk, we characterize Taiwan's banking sector as highly competitive and fragmented. This results in low earning capacity to cushion against potential credit costs during economic downturns. Nonetheless, very strong and stable system-wide funding partly offset these weaknesses. Table 1 ANZ Bank (Taiwan) Ltd. Key Figures (Mil. NT$) Adjusted assets 343, ,734 Customer loans (gross) 159, ,401 Adjusted common equity 23,636 21,755 APRIL 28,

4 Table 1 ANZ Bank (Taiwan) Ltd. Key Figures (cont.) Operating revenues 6,340 4,602 Noninterest expenses 5,055 3,813 Core earnings 1,391 1,308 NT$--New Taiwan dollar. Business position: Scale disadvantage despite efforts to improve domestic presence Our assessment of ANZ Taiwan's "moderate" business position is based on the bank's small, albeit improving business scale, and our view that the bank may need some time to demonstrate its franchise in the local market. ANZ Taiwan currently accounts for 0.5% of the domestic banking market in terms of total deposits. The bank has been actively expanding its domestic presence and building its brand under ANZ's Asian-expansion strategy. The mid-term strategy is to build scale and niche offerings by deepening client relationships with its growing corporate client base and explore emerging affluent and affluent retail clients. We believe that ANZ Taiwan's management has a clear strategic direction that shapes the bank's business with an identified risk appetite aligned with the ANZ group. Table 2 ANZ Bank (Taiwan) Ltd. Business Position (%) Loan market share in country of domicile Deposit market share in country of domicile Total revenues from business line (mil. NT$) 6, ,116.8 Commercial banking/total revenues from business line Retail banking/total revenues from business line N/A N/A Commercial & retail banking/total revenues from business line Trading and sales income/total revenues from business line Corporate finance/total revenues from business line Brokerage/total revenues from business line N/A N/A Insurance activities/total revenues from business line Agency services/total revenues from business line N/A N/A Payments and settlements/total revenues from business line N/A N/A Asset management/total revenues from business line Other revenues/total revenues from business line Investment banking/total revenues from business line Reported return on equity NT$--New Taiwan dollar. N/A--Not applicable. Capital and earnings: Strong capitalization based on controlled risk exposure and prudent capital management Our view of ANZ Taiwan's "strong" capital and earnings reflects our expectation that the bank's RAC ratio before diversification and concentration adjustments, based on our RAC framework, is likely to remain slightly above 10% over the next one to two years. This forecast takes into consideration the likelihood that ANZ Taiwan's loan growth will slow down to low single digits in The bank has explored a good number of large corporate and APRIL 28,

5 higher-tier commercial clients, as well as affluent and emerging affluent markets for its retail business over the past two years, which has contributed to the high growth during the period. We expect the bank will slow down its loan growth momentum in the coming few years with growth mainly on focused client groups. We also take into account ANZ Taiwan's prudent capital management and adequate earnings in the coming years to support its asset growth. We expect ANZ Taiwan to report stable core earnings benefitting from growing fee income and an improving cost-to-income ratio as system integration expenses trend down, despite the downward pressure on the bank's net interest margin. We also expect ANZ Taiwan to have another year of one-off income from provision release in This is despite the fact that the bank's earning capacity is comparatively weaker than that of regional peers, as is the case for many Taiwanese banks. We define earning capacity as pre-provision operating income (before non-recurring items) less normalized credit costs over our assessment of risk weighted assets. Table 3 ANZ Bank (Taiwan) Ltd. Capital And Earnings (%) Tier 1 capital ratio S&P RAC ratio before diversification S&P RAC ratio after diversification Adjusted common equity/total adjusted capital Double leverage N.M. N.M. Net interest income/operating revenues Fee income/operating revenues Market-sensitive income/operating revenues Noninterest expenses/operating revenues Preprovision operating income/average assets Core earnings/average managed assets N.M.--Not meaningful. Table 4 ANZ Bank (Taiwan) Ltd. RACF [Risk-Adjusted Capital Framework] Data (Mil. NT$) Exposure* Basel III Average Basel III RW (%) Standard & Poor's Average Standard & Poor's RW (%) Credit risk Government and central banks 51, ,543 3 Institutions 107,163 24, , Corporate 147, , , Retail 56,098 38, , Of which mortgage 40,527 26, , Securitization Other assets 3,157 13, , Total credit risk 365, , , Market risk Equity in the banking book , APRIL 28,

6 Table 4 ANZ Bank (Taiwan) Ltd. RACF [Risk-Adjusted Capital Framework] Data (cont.) Trading book market risk -- 14, , Total market risk -- 14, , Insurance risk Total insurance risk Operational risk Total operational risk -- 11, , (Mil. NT$) Basel III Standard & Poor's % of Standard & Poor's Diversification adjustments before diversification 243, , Total Diversification/ Concentration Adjustments -- 63, after diversification 243, , (Mil. NT$) Tier 1 capital Tier 1 ratio (%) Total adjusted capital Standard & Poor's RAC ratio (%) Capital ratio Capital ratio before adjustments 22, , Capital ratio after adjustments 22, , *Exposure at default. Securitisation Exposure includes the securitisation tranches deducted from capital in the regulatory framework. Exposure and Standard & Poor's risk-weighted assets for equity in the banking book include minority equity holdings in financial institutions. Adjustments to Tier 1 ratio are additional regulatory requirements (e.g. transitional floor or Pillar 2 add-ons). --Risk-weighted assets. RW--Risk weight. RAC--Risk-adjusted capital. NT$--New Taiwan Dollar. Sources: Company data as of Dec. 31, 2014, Standard & Poor's. Risk position: Loan diversification is likely to improve We consider ANZ Taiwan's risk position as "adequate," which reflects the bank's stringent risk management and conservative credit provisioning. We expect ANZ Taiwan to prudently manage its growth by upholding its underwriting standard in line with the ANZ group's policies. The bank has been growing rapidly over the past few years, but its asset quality remains rather satisfactory and in line with the industry average. We believe that ANZ Taiwan's risk spectrum won't divert drastically from its identified risk appetite under its growth strategy in the coming two to three years. Aside from growth and asset quality, we also anticipate ANZ Taiwan will gradually lower its above-average risk concentration on some large corporate names over the coming one to two years as the bank grows its commercial and retail businesses, as well as expands its capital base. ANZ Taiwan's risk concentration is much higher than that of its peers, given the bank's still-small size, and remained high as of the end of However, management is well aware of these risks and continues to monitor the bank's exposure with care through multiple internal risk benchmarks. Table 5 ANZ Bank (Taiwan) Ltd. Risk Position (%) Growth in customer loans 4.1 N.M. APRIL 28,

7 Table 5 ANZ Bank (Taiwan) Ltd. Risk Position (cont.) Total diversification adjustment / S&P before diversification N.M. N.M. Total managed assets/adjusted common equity (x) New loan loss provisions/average customer loans (0.3) N.M. Net charge-offs/average customer loans 0.0 N.M. Gross nonperforming assets/customer loans + other real estate owned Loan loss reserves/gross nonperforming assets 3, ,904.3 N.M.--Not meaningful. Funding and liquidity: Average funding profile with support at the group level In our view, ANZ Taiwan's funding is "average" and in line with its domestic peers'. The bank mainly attracts foreign currency deposits to support its business focus in foreign currency lending and transactional businesses. Its loan-to-deposit ratio has improved to 90% as of the end of 2014 from over 100% in 2013 given the higher growth in deposit taking from corporate with stickiness, versus its loan growth. In addition, the bank continues to benefit from cheaper funding from its parent group's centralized funding system as compared to deposit taking. ANZ Taiwan's liquidity is "adequate," in our view. The bank maintains an adequate level of cash and cash equivalent instruments (i.e., government bonds, negotiable certificate of deposits) on book, which accounted for 41% of total assets at the end of ANZ Taiwan's net cash inflow also supports the bank's liquidity, which is likely to remain unchanged, in our opinion. ANZ Taiwan's broad liquid to short-term wholesale funding is lower than the industry average as of the end of 2014, because intragroup funding comes under our definition of wholesale funding. However, we believe the ratio is still adequate. Table 6 ANZ Bank (Taiwan) Ltd. Funding And Liquidity (%) Core deposits/funding base Customer loans (net)/customer deposits Long term funding ratio Stable funding ratio Short-term wholesale funding/funding base Broad liquid assets/short-term wholesale funding (x) Net broad liquid assets/short-term customer deposits 11.4 (0.5) Short-term wholesale funding/total wholesale funding Narrow liquid assets/3-month wholesale funding (x) Support: Highly strategic to ANZ The ICR is four notches higher than the bank's standalone credit profile, reflecting the bank's 'highly strategic' status to its parent ANZ group. Growth in the Greater China region is the group's key strategic focus for Asia in the coming three to five years, and ANZ Taiwan plays a significant role in this strategy. The bank is highly integrated with the ANZ group in terms of management framework, internal policies and practices, and IT platforms, and we believe the group will continue to provide necessary financial support to ANZ Taiwan in times of need. APRIL 28,

8 Related Criteria And Research Related Criteria Group Rating Methodology, Nov. 19, 2013 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Related Research Full Analysis: Australia and New Zealand Banking Group Ltd., Dec. 19, 2014 Anchor Matrix Industry Risk Economic Risk a a a- bbb+ bbb+ bbb a a- a- bbb+ bbb bbb bbb a- a- bbb+ bbb+ bbb bbb- bbb- bb bbb+ bbb+ bbb+ bbb bbb bbb- bb+ bb bb - 5 bbb+ bbb bbb bbb bbb- bbb- bb+ bb bb- b+ 6 bbb bbb bbb- bbb- bbb- bb+ bb bb bb- b+ 7 - bbb- bbb- bb+ bb+ bb bb bb- b+ b bb+ bb bb bb bb- bb- b+ b bb bb- bb- b+ b+ b+ b b+ b+ b+ b b b- Ratings Detail (As Of April 28, 2015) ANZ Bank (Taiwan) Ltd. Counterparty Credit Rating Greater China Regional Scale Taiwan National Scale A+/Stable/A-1 cnaaa/--/cna-1+ twaaa/stable/twa-1+ Counterparty Credit Ratings History 08-Apr-2013 A+/Stable/A-1 08-Apr-2013 Greater China Regional Scale cnaaa/--/cna Apr-2013 Taiwan National Scale twaaa/stable/twa-1+ Sovereign Rating Taiwan (Republic of China) Greater China Regional Scale AA-/Stable/A-1+ cnaaa/--/cna-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. APRIL 28,

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