With lingering interest margin contraction pressure and disadvantageous government restrictions, profitability in the local banking sector will improve this year, but remains weak in comparison with regional peers and its own past record, Fitch Ratings Ltd said yesterday.
Despite an improvement in profits from last year, "there is still a long way [for Taiwan's banking industry] to go back to normal," Jonathan Lee (李信佳), director of financial institutions at Fitch Ratings' Taipei branch, told a media briefing for its release of a report on Taiwan's banking sector yesterday.
Fitch expected overall return-on-equity (ROE) to rise to 4 percent to 5 percent this year from minus 0.41 percentage points last year. It also forecast the loss ratio of credit and cash card lending would drop to around 15 percent this year.
The nation's banking sector had produced an ROE of 8 percent to 10 percent from 2003 to 2005 before encountering the consumer debt problem last year. Taiwan's ROE performance compares with Hong Kong's 10 percent and China's 5 percent.
Last year, negative rating actions largely outnumbered positive ones after factoring in increasingly tougher liquidity conditions, particularly on small banks, rising funding costs amid an inverted yield curve, continued cutthroat price wars and lingering adverse effects from mounting defaulted unsecured loans.
The local banking sector has written off NT$230 billion (US$7.02 billion) in defaulted loans, or 1.35 percent of the net income, which ate into the bulk of the 1.5 percent net interest margin, Lee said.
Write-offs could decrease to between NT$150 billion and NT$200 billion this year as the bad consumer loan storm eases off, Lee said.
As banks move to develop wealth management businesses, the competitive advantage is mostly restricted to large, branded banks, like Taipei Fubon bank (台北富邦銀行) and Chinatrust Commercial Bank (中國信託商銀), the analyst said.
Small lenders would need fund injection as soon as possible or could be weeded out from the market next year, Lee said.
Foreign rivals are in aggressive expansion mode in the local market through acquisition, and Fitch said this has changed the competition structure for local banks.
Foreign banks like Standard Chartered Bank and Citibank can offer integrated services through their platform in Hong Kong and China, while local banks have one hand tied behind their back.
Government restrictions that ban Taiwanese lenders from expanding in China have put them in an adverse position to compete with multinational rivals, Lee said.