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 to support the government's initiative on urban revitalisation.

Key Rating Drivers

Support-Driven Ratings: Mega AMC's ratings are driven by Fitch's expectation of a very high probability of support from its parent, Mega FHC, in times of stress. The company's National Long-Term Rating is at the high end of the scale, reflecting very low default risk relative to other entities rated on the same scale.

Substantial Reputational Linkages: Fitch believes that shared branding, high levels of integration, and close ties between Mega AMC and Mega FHC mean that there would be a huge reputational risk to the parent of from any default at the subsidiary. Mega FHC owns 100% of Mega AMC, and controls the subsidiary's management and business direction.

Mega FHC's credit profile, and hence its ability to support Mega AMC, is underpinned by the state's controlling equity stake, the systemic importance of its core subsidiary bank, and its close ties with the central bank. Mega AMC's assets accounted for only 0.4% of Mega FHC's consolidated assets at end-1Q23, making any required support immaterial for the parent.

Support for Urban Renewal Policy: Mega AMC focuses on providing financing services to projects in urban redevelopment and refurbishment of old buildings, which accounted for 95% of its consolidated assets as of 1Q23. It supports government policies on urban regeneration and refurbishment.

Declining Leverage: Mega AMC's leverage, measured by total debt/tangible equity, decreased to 3.0x by end-1Q23 from 4.9x at end-2022, mainly because its total assets fell by 31% in 1Q23 after the completion and repayment of several large cases. As a result, the company's urban renewal financing business is only at 3.95x of equity, lower than the regulatory cap of 7x. Management expects asset growth to gradually recover into 2024, and leverage to gradually increase, but we expect Mega AMC's capitalisation to remain moderate given the current low asset base.

Stable Asset Quality: Mega AMC's asset quality remains stable with just one outstanding non-performing loan (NPL) since 2016, but the NPL ratio increase to 1.32% in 1Q23 due to the fall in loan balance. The NPL coverage ratio has been consistently over 300% since 2019. The company has established expertise in the property market, especially in debt consolidation for complex and lengthy urban renewal projects with multiple property owners.

Modest Profitability: Mega AMC's pre-tax return on average assets (pre-tax ROAA) declined to 1.8% in 2022 mainly due to higher funding cost. The ratio increased slightly to 2.1% in 1Q23, boosted by a one-off recovery from a distressed syndication loan that the company acquired during the global financial crisis. Fitch expects Mega AMC's profitability to remain stable after the interest spread bottomed out in late 2022 amid stabilising interest rate prospects and some pricing pass-through.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

The ratings on 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. Negative rating action could arise from a reduction in the state's propensity to support Mega FHC.

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, could 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. 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, may lead to a positive rating action.

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, and its internal assessment of the parent's credit profile.

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