The outlook for the nation's banking industry remains stable, while deterioration in factors such as keen price competition in the fragmented sector could lead to a downgrade, Moody's Investors Service said yesterday.
"The outlook for the credit ratings of Taiwanese banks is generally stable," Moody's said in its annual report -- Asia Banking Outlook 2006 -- that surveyed the banking systems in 15 Asian countries, released yesterday.
The financial strengths of most Taiwanese banks should remain stable as the major banks continue to benefit from the economy's steady pace of growth, and an increased weighting in non-interest incomes, the report said.
Large private banks in particular ? with their flexible operations and group resources ? have improved their new product offerings and capital management, while the small private-sector banks continue to face severe challenges in maintaining revenue growth, asset quality control and profitability, it said.
Yet, competition remains strong in every business line due to the crowded nature of the market, Moody's said.
Any meaningful reduction in system capacity will probably be slow, as the government's efforts in privatization and consolidation have stalled. There were strong protests by employees at state-owned banks last year, it added.
Factors triggering a downgrade include accelerating price competition, increased risk-taking and expensive mergers and acquisitions that have resulted in increased financial burdens in the private sector, as well as franchise erosion due to slowness of reform in the government invested sector, the ratings firm said.
On the other hand, factors like improved market share and profitability from diversified revenue sources, improved risk and capital management, consolidation of weaker players, and the introduction of new management teams after privatization could also drive a ratings upgrade of Taiwan's banking sector, Moody's added.
Meanwhile, many Asian countries have passed laws allowing the establishment of financial holding companies following the repeal of the depression era Glass-Steagall Act in the US in 1999 that originally aimed at restoring confidence in the banking system by legislating a rigid separation of banks from other financial institutions.
Taiwanese banks, encompassed within 14 financial holding companies, were found to have benefited most from utilizing the crossover financial group structure that could provide a multitude of financial services via cross selling to a captive client base. Other countries like Japan and Korea have used the structure as an acquisition vehicle, Moody's said.
Further development of financial holding firms will require an efficient capital market for them to raise funds, proper sharing of customer information, and cross-selling and effective consolidated supervision by the regulators, it added.
Meanwhile, Intermediate-term risks for Asian banks overall are balanced by
the positions of stronger banks in economies that have grown more
diversified and more productive, according to Moody's.
“These banks' risk management and supervision, unified under Basel II, are
now much more robust,” said Wei Yen (嚴序緯), Managing Director for Moody's
Financial Institutions Group in Asia.
“Regional economies are now much more open and market oriented, and
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