Fitch Ratings has affirmed Mega Asset Management Co., Ltd.'s (Mega AMC) National Long-Term Rating of 'AA+(twn)' and National Short-Term Rating of 'F1+(twn)'.

The Outlook is Stable.

Mega AMC is a wholly owned subsidiary of Taiwan-based Mega Financial Holding Co., Ltd. (Mega FHC). The company provides financing services for urban redevelopment projects and the refurbishment of old buildings as part of the government's initiative on urban revitalisation.

Key Rating Drivers

Mega AMC's ratings are driven by Fitch's expectation of a very high probability of support from its parent, Mega FHC. Fitch believes a default of Mega AMC will undermine the parent's reputation significantly due to their shared branding and the subsidiary's policy role in supporting the government's urban renewal initiative. Fitch also considers Mega AMC's small size relative to Mega FHC's total assets, making any required support immaterial for the parent to provide. Mega AMC's total assets accounted for only 0.3% of Mega FHC's consolidated assets as of 1Q22.

Fitch's assessment of Mega FHC is underpinned by the state's controlling equity stake, the significant systemic importance of its core subsidiary bank, and its strong ties with the central bank. The Taiwanese government and state affiliates have a 23.8% controlling stake in Mega FHC, based on the top-10 shareholders. Mega FHC's principal operating subsidiary - Mega International Commercial Bank Co., Ltd. - plays important policy roles as a foreign-exchange settlement bank for the central bank and as Taiwan's sole US dollar clearing bank.

Mega AMC has undergone a strategic shift in alignment with the government's changing policy priorities. The company was originally set up in 2003 with a policy objective to resolve the banking system's problem loans, but this role diminished as the asset quality of Taiwan's banking system improved over time. Mega AMC has subsequently followed the government's guidance to transform into a financing provider to support the government's initiative to facilitate urban regeneration and the refurbishment of old buildings since 2015.

Mega AMC's leverage - measured by debt to tangible equity - increased slightly to 4.2x by end-1Q22 from 4.1x at end-2021. We do not expect the company's growth in its urban renewal financing business to weaken its capitalisation due to the regulatory cap on asset management companies' financing business at below 7.0x of equity. The company's asset quality has remained stable with the non-performing ratio maintained at around 1% and loan loss allowances/non-performing loans consistently over 300% in recent years.

The Stable Outlook reflects our assumption that the parent's ability and propensity to support Mega AMC will remain unchanged for the next year.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The ratings of Mega AMC are sensitive to changes in Fitch's assessment of Mega FHC's credit profile, which is linked to Taiwan's Long-Term Issuer Default Rating (AA/Stable) and the likelihood of government support for Mega FHC. A negative rating action could arise from a reduction in the state's propensity to support Mega FHC, which will in turn affect Mega AMC's rating.

Any signs of weakening linkages between Mega FHC and Mega AMC or any weakening in Mega AMC's role in supporting government initiatives for urban regeneration and refurbishment of old buildings, or changes in shared branding, would also trigger a rating downgrade.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Mega AMC's ratings are linked to the credit profile of Mega FHC. A rating upgrade would depend on an improvement in Mega FHC's credit profile compared with that of domestic peers, which would likely be linked to an increase in the propensity of the Taiwanese government to provide support to Mega FHC.

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.

Public Ratings with Credit Linkage to other ratings

Mega AMC's ratings are driven by Fitch's expectation of a very high probability of support from its parent Mega FHC.

RATING ACTIONS

Entity / Debt

Rating

Prior

Mega Asset Management Co., Ltd.

Natl LT

AA+(twn)

Affirmed

AA+(twn)

Natl ST

F1+(twn)

Affirmed

F1+(twn)

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Additional information is available on www.fitchratings.com

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