The double-leverage ratios of Taiwanese financial holding companies might rise further, driven by dividend policies that are undeterred by moderating profitability, Fitch Ratings Ltd said yesterday.
The double-leverage ratings of local companies increased from 106 percent to 115 percent on average in the five years to the end of last year due to support for bank subsidiaries to meet Basel III requirements and nonbank subsidiaries to expand their business, the international ratings agency said.
Some banking conglomerates have been expanding their core nonbank businesses, such as life insurance and securities, over the past five years, Fitch said.
This is consistent with their aims of strengthening retail reach and broadening the investment products offered by their wealth management businesses, it said.
That support was provided without commensurate equity increases or dividend payment cuts, it added.
However, the changes in corporate profiles were often accompanied by higher leverage and weaker loss-absorption capacity, resulting in rating downgrades due to deteriorated risk profiles, Fitch said.
The ratings of financial holding companies are sensitive to their standalone leverage and financial flexibility, which Fitch sees as susceptible to event risks.
Event risks include major non-common equity-funded acquisitions or, in the case of Taishin Financial Holding Co (台新金控), the ultimate resolution of pending litigation, Fitch said.
Still, the rate of double-leverage increase should be moderate in the absence of large non-common equity-funded acquisitions, Fitch said, adding that the need to provide capital support to subsidiaries has declined due to strengthened capitalization at bank subsidiaries under Basel III requirements.
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