Moody’s Investors Service yesterday lowered its industry outlook on Taiwan’s banking system to “negative” from “stable” amid concerns over local banks’ earnings and business prospects.
In a report titled Asian Banking System Outlook: An Update, December 2008, the international ratings agency said it expected Taiwanese banks to show weakening earnings power in the near term, “as interest margins decline, credit costs rise and fee income from the sale of investment products wanes.”
The ratings change was a reflection of the bleak outlook for local banks in light of the adverse impacts the global economic slowdown would have on Taiwan’s exports, domestic consumption and domestic investment.
It also came after government statistics showed the nation’s GDP growth slowing faster than expected in recent quarters — from growth of 6.25 percent in the first quarter to 4.56 percent in the second quarter and a contraction of 1.02 percent in the third.
“As an export-driven economy, Taiwan is susceptible to the global economic slowdown,” it said.
The ratings outlook of Taiwanese banks, however, remain generally stable, the report said.
Moody’s attributed the result to local banks’ continued efforts to strengthen their capital after the financial crisis that hit the sector in the early 2000s and the massive unsecured consumer loan losses they faced in 2006.
Moreover, local banks have improved their credit risks over the past few years, Moody’s said, referring to their efforts to expand into new overseas markets, diversify their business scopes, and expand their services to include more fee-income based products.
In addition to Taiwanese banks, Moody’s cut the industry outlook for banks in Australia, Hong Kong, Mongolia, Cambodia and the Philippines to “negative” from “stable” based on its revised scenarios for global macroeconomic trends.
“While the direct impact of the current global financial crisis on banks in Asia Pacific has been comparatively limited, these changes in the industry outlook reflect expectations that gathering economic headwinds from a global recession will increasingly test the resilience and strength of banking industries in the region,” Moody’s said in the same report.
Taiwanese banks and their Asian counterparts are expected to face a more challenging operating environment “over the next 12 to 18 months,” the ratings agency said.
The most significant threats to regional banks’ creditworthiness will be a “pronounced deceleration in growth and trade” instead of “high inflation,” Moody’s said, which would in turn undercut the banks’ asset quality, profit margins and earnings through 2010.
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