Despite its strong market position and good liquidity, Taiwan Coop-erative Bank (TCB, 合作金庫銀行) saw its profitability drop below the average level among local lenders, a credit measurer said yesterday.
After merging with Farmers Bank of China (農民銀行) last May, Taiwan Cooperative became the nation's largest commercial bank. But the bank presented a below-average operating performance partly due to its government-related policy role, the Taiwan Ratings Corp (中華信評) said in a report released yesterday.
The bank controls approximately 10 percent of the nation's loans, or approximately NT$1.7 trillion (US$51.6 billion), and 9 percent of the nation's deposit markets. Both were up from pre-merger levels of about 8 percent, said Taiwan Ratings, the local arm of Standard and Poor's.
But the bank only reported an average ratio of return on asset (ROA) of 0.3 percent over the 21 months ending last September, Taiwan Ratings said.
The ratings agency attributed the lender's poor profitability to its policy role serving community-level financial institutions as well as some low yield government and corporate lending.
Forty-three percent owned by the government, Taiwan Cooperative has long served a key banking role for other community-level financial institutions -- including credit cooperatives and the credit departments of farmer and fishermen associations.
While over the medium term the government has decided to transfer most of Taiwan Cooperative's agriculture-related role to Agricultural Bank of Taiwan (
The ratings agency's report said that low-yield government and corporate lending were also to blame for Taiwan Cooperative's below-average profitability.
Deposits from the community-level institutions bearing high funding costs accounted for 19 percent of the bank's total deposits as of last September. But the figures were expected to drop to 5 percent to 10 percent in two to three years, Taiwan Ratings said.
The bank previously said it had endeavored to adjust its business profile by reducing low-yield policy loans and deposits and enhancing non-interest income activities. Its management has also made efforts over the past two to three years to adjust its credit portfolio.
But Taiwan Ratings said benefits were expected to be limited because of intense domestic competition. It will take some time to determine the effectiveness of the bank's ability to manage the quality of new loans through market cycles, it added.
Taiwan Ratings affirmed its `twAA' long-term and `tw-A-1' short-term counterparty credit ratings for Taiwan Cooperative, with a stable outlook.
"The ratings on Taiwan Cooperative reflect its strong position in Taiwan's banking sector, its established franchise, good liquidity and a degree of implicit government support given its government-related policy role," Taiwan Ratings wrote.
The bank's ratings could be lifted if it consistently improves its profitability while sustaining stable asset quality, it said.
Nevertheless, the bank's ratings could come under pressure if it were to engage in overly aggressive expansion that has a detrimental effect on its earnings profile and/or asset quality, the agency said.
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