Fitch Ratings has affirmed Taiwan-based Capital Securities Corporation's Long-Term Issuer Default Rating at 'BBB-' and its National Long-Term Rating at 'A(twn)'.
The Outlook is Stable. Fitch has also affirmed the National Short-Term Rating at 'F1(twn)'.
Key Rating Drivers
Established Securities Franchise: Capital Securities' ratings are driven by its stable and well-established stockbroking franchise in Taiwan, along with an adequate capital profile. The company is the largest independent full-service securities firm in Taiwan, with a 3.5%-4.0% share of domestic brokerage turnover in the last few years and strong positions in underwriting, warrant issuance, and futures and options brokerage. However, its reliance on volatile capital-market activities limits its ratings relative to larger and more diversified financial holding companies in Taiwan.
Stable Operating Environment: Fitch anticipates that Taiwan's steady economic growth prospects and prudent regulatory oversight will sustain stable operating conditions for the securities industry, despite global economic headwinds and market volatility.
Strong investor interest in the technology sector has boosted equity market activity in 2024, with robust equity financing demand and the stock market's average daily turnover surging by 51% in the first nine months of 2024 compared with all of 2023. This was nonetheless offset by a decline in corporate bond issuance amid higher domestic financing costs. Equity market activity should moderate in the coming year, but continued domestic economic growth and companies' expansion outside of China should bolster Taiwanese corporate financing demand in 2025.
Improved but Variable Profitability: Fitch expects Capital Securities' return profile to remain volatile in the medium term, similar to its peers, due to its reliance on transaction-related and trading income. Capital Securities' earnings improved in 1H24, with annualised operating profit/average equity rising to 8.3% from 7.0% in 2023, as robust equity market turnover boosted brokerage-related and trading profit.
Earnings in 2025 are likely to moderate as domestic equity market turnover eases from record levels in 2024. However, US and domestic interest rate cuts could bolster the performance of its fixed-income portfolio.
Rising Leverage: Capital Securities' net tangible leverage increased to 8.2x by end-1H24 from 6.1x at end-2023, driven by higher trade settlement and financing receivables, and expanded investment positions. Notwithstanding this, we expect local regulatory capital requirements and the company's strict collateral maintenance ratios and risk limits to ensure it has adequate capital to withstand potential market shocks.
Short-Term Wholesale Funding Reliance: Capital Securities is exposed to funding market volatility due to its reliance on short-term wholesale funding, including the use of repos to finance its bond investments. That said, the company manages liquidity risks in its repo financing by maintaining adequate collateral, primarily in government, financial institution, and high-quality corporate bonds.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Capital Securities' ratings could face downward pressure if intense market competition leads to a sustained deterioration in its market position, and if an increased risk appetite leaves its capital position more vulnerable to capital market volatility, such that net adjusted leverage exceeds 10x, or if its funding or liquidity buffers are materially affected.
Indications of an increased risk appetite would include higher balance-sheet exposure to market risk from trading activities. Additionally, operational or risk-management lapses that result in unexpected substantial losses and pressure the capital position would be credit negative.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Improved business diversity and earnings quality - such as increased contribution from relatively stable, recurring income streams - would be positive for the ratings. A stronger market position in stock brokerage, approaching those of the top-three industry participants, together with better profitability due to efficiencies of scale, would also be credit positive.
ADJUSTMENTS
The funding, liquidity and coverage score has been assigned below the implied score due to the following adjustment reason: funding flexibility (negative).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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