Standard and Poor's Ratings Services announced yesterday that it was maintaining its stable outlook on the nation's finance sector, despite concern over weakening profitability under intensive competition and spiraling problems with bad consumer debts.
"S&P maintains its stable outlook on Taiwan's financial services sector on expectations of ongoing structural improvements by major financial sub-sectors and stabilizing financial profiles," the ratings services firm said in its report titled "Taiwan Financial Services Sector Outlook 2006," which was co-released by its local arm, Taiwan Ratings Corp (中華信評), yesterday.
The credit profiles of major financial services providers have been trending up, reflecting the efforts of banks, life insurers and securities firms since 2001 and 2002 to rebuild their risk profiles, S&P said.
Despite improvements in the past few years, overall profitability in the finance sector is expected to come under severe pressure this year, owing to intensifying competition and the problems with bad debts, said Taiwan Ratings' director of financial services ratings, Susan Chu (朱素徵).
Bad debts on credit and cash-advance cards could account for up to 20 percent of this year's total card lending of NT$800 billion (US$25 billion), up from about 15 percent last year, Chu predicted.
Deteriorating asset quality is likely to continue to dent the banking sector's profitability in the near term, she added.
Pre-tax income of local banks dropped by nearly 50 percent to NT$78.6 billion last year from NT$155.4 billion in 2004 after the problems with consumer loans began to emerge and expand in the second half of last year, according to the Banking Bureau.
Nevertheless, the potentially worsening consumer credit issue is not expected to have a systemic impact on the nation's banking industry, Chu said.
A stable macroeconomic environment and adequate capitalization collectively act as a cushion against rising credit costs, she said.
Meanwhile, the consolidation drive in the banking sector is expected to lose some steam this year, because a ban on opening new branches has led to increasingly expensive acquisition prices as buyers compete for the limited number of available outlets, Chu said.
Another factor is the strained labor relations and union protests related to
the privatization of state banks, which has made potential buyers more
cautious, she said.
Not until these hurdles have been removed can the merger and acquisition
activities become more dynamic, Chu added.
The government has been pushing for the consolidation of the nation's
fragmented banking sector through incentives like tax benefits and
flexibility in branch reallocation, as well as freezing licensing of new
branches last year.
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