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S&P says outlook for banking sector is stable

The outlook for the nation's banks is stable given the strength of the sector's financial conditions and the regulatory authority's commitment to stability, Standard and Poor's (S&P) said yesterday.

"The outlook for the Taiwan banking sector is stable," S&P analyst Susan Chu (朱素徵) said in a report, titled Asia-Pacific Banking Outlook 2006, released yesterday.

"The system's financial strength is supported by stabilizing financial profiles at most of the island's banks and the government's commitment to system stability," Chu said.

A recovery in asset quality in the sector is the chief positive factor, according to the international rating services provider.

After aggressive write-offs by individual banks in a stabilizing economic environment, the sector's bad-loan ratio shrank to 5 percent at the end of June last year, from a peak of 15 percent at the end of 2001, Chu said.

The ratio is expected to remain at a similar level this year, given that the corporate sector is expected to be stable, even though some smaller banks may be challenged by problematic assets after aggressive expansion into the new, riskier consumer banking business, she said.

In 2001, facing mounting bad loans that risked triggering a crisis, the government launched its first-stage financial reform scheme. The policy required banks to reduce the ratio of defaulted loans to 5 percent within two years, and increase capital adequacy ratios to 8 percent.

Adequate capitalization among banks, as well as the authority's more refined and effective supervisory functions, have helped support the sector's stable outlook rating, Chu said.

Nevertheless, political risk remains a concern.

"The regulatory regime appears to be changing for the better, although politics on the island may prove a stumbling block," S&P's credit analyst Ryan Tsang (曾怡景) said.

The Cabinet, led by Premier Frank Hsieh (謝長廷), is set to resign on Monday, making Hsieh the fourth premier to step down during President Chen Shui-bian's (陳水扁) six years in office.

Stiff competition among banks -- which offer highly homogeneous product lines -- and weak profitability given an average return on assets of 0.6 percent in the first half of last year, are negative factors in the sector, according to Chu.

The situation is unlikely to improve materially before there is effective market consolidation, she said.

Meanwhile, S&P also announced a stable rating on the prospects for banks in the Asia-Pacific region this year.

“Most banking systems in the Asia-Pacific region have improved their credit profiles, thanks to stable economic conditions and continuing structural improvements” despite rising oil prices and interest rates that could threaten the broader economic recovery, S&P's analyst Ping Chew (周彬) said.

“In the next few years, most banks should continue with these improvements, although the pace ... may be moderated by risks on the horizon,” Chew said.
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