Fitch Ratings has affirmed Taiwan-based Horizon Securities Co., Ltd.'s (HSC) National Long-Term Rating of 'BBB(twn)'.
The Outlook is Stable. Fitch has also affirmed the National Short-Term Rating of 'F3(twn)'.
Key Rating Drivers
Market-Dependent Business Profile: HSC's ratings reflect its modest franchise and cyclical business model, which is heavily dependent on market-driven brokerage and proprietary trading. Despite efforts to diversify into securities-backed lending and wealth management services, we do not expect significant changes in HSC's revenue composition. Against this, HSC's adequate capital and liquidity buffers mitigate balance-sheet risks from capital market fluctuations.
Stable Operating Environment: We anticipate that Taiwan's steady economic growth prospects and prudent regulatory oversight will sustain stable operating conditions for the financial sector, 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 stock-market average daily turnover surging by 51% in 9M24. This was nonetheless offset by a decline in corporate bond issuance amid higher domestic financing costs. Equity market activity should moderate in 2025, but continued economic growth and expansion outside of China should bolster Taiwanese corporate financing demand in 2025.
Volatile Earnings: We expect HSC's profitability to remain more volatile compared with rated industry peers, due to its meaningful reliance on proprietary trading. HSC's profitability recovered in 1H24, helped by improved trading income. Annualised operating income/average equity reached 9.7%, up from -0.2% in 2023, which was affected by hedging losses, despite a strong equity market backdrop.
Moderate Leverage Balances Risks: We view HSC's capital position as a positive factor in balancing its business risks, despite the firm's small absolute size. HSC's net adjusted leverage rose to 3.2x in 1H24, from 2.7x at end-2023, driven by higher settlement-related assets, as market turnover increased amid strong equity market performance. Nonetheless, we believe the leverage ratio remains moderate relative to peers. HSC's regulatory capital adequacy ratio of approximately 344% at end-1H24 was well above the regulatory minimum requirement of 150%, providing a buffer against market volatility.
Liquidity Mitigates Funding Risk: HSC, like its industry peers, is exposed to funding market volatility due to its dependence on wholesale funding and short-term repos to finance its bond investments. These risks are partially mitigated by maintaining adequate underlying collateral for its repo transactions, primarily in government and corporate bonds with sufficient credit quality.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
HSC's ratings would face downward pressure if intense market competition leads to a sustained deterioration in its market position, or if its business growth starts to stretch its capitalisation, funding or liquidity buffers.
The ratings are sensitive to an increased appetite for risk, in particular, higher balance-sheet exposure to market risk from its investment portfolio or greater revenue sensitivity from trading activities. Operational or risk-management lapses that lead to large unexpected losses and pressure the capital position would also be credit negative.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade is less likely in light of HSC's modest franchise. Still, significantly improved business diversity and earnings quality - such as a higher earnings contribution from segments with more stable and recurring income streams - may be positive for the ratings.
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.
(C) 2024 Electronic News Publishing, source ENP Newswire