Banks in Taiwan are facing less funding pressure than their peers in the Asia-Pacific region thanks to the government’s blanket guarantee on all depositors’ savings, but they may face growing challenges in capital enhancement as the economic recession persists, Fitch Ratings Inc said yesterday.
This was particularly the case for banks in Taiwan, which Fitch yesterday said would experience an economic contraction of 5.7 percent this year, a downward adjustment from its forecast of 2.1 percent contraction on Jan. 21.
In a report issued yesterday that analyzed regional governments’ fiscal measures and support for banks, Fitch said some Taiwanese banks could also encounter an adverse spillover impact from life insurance affiliates amid increasing pressure to raise funds resulting from thin profit margins and sizeable credit losses.
As a result of the global economic downturn, analysts have warned that a worsening domestic economy meant more challenges for domestic banks’ operations amid slowing lending and narrowing interest rate spread.
Earlier this week Credit Suisse cut its ratings on both Cathay Financial Holding Co (國泰金控), which owns the nation’s largest life insurance company, and Fubon Financial Holding Co (富邦金控). Citigroup also advised its clients to offload their holdings in Cathay Financial and Shin Kong Financial Holding Co (新光金控), owner of the nation’s third-largest life insurer.
Taiwanese banks “are forecast to incur a net loss of 0.5 percent of total banking assets in 2009 due to interest margin compression on the back of extremely low interest rates, an expected jump in credit costs and anemic fee income,” Fitch said in the report.
Fitch’s 5.7 percent GDP contraction forecast for Taiwan, if it true, would be the country’s worst performance since the government started compiling statistics in 1952.
The figure would also represent the lowest among the 14 economies on Fitch’s radar screen, compared with South Korea’s 2.4 percent contraction, Hong Kong’s 4.9 percent decline and Singapore’s 5.3 percent drop. Japan’s economy will likely show a 1.7 percent contraction this year, while China will show 5.6 percent growth, the report said.
While the government has responded with a near NT$500 billion (US$14.3 billion) stimulus package to boost domestic demand, this amount represents about 3.8 percent of the nation’s GDP and is lower than South Korea’s 5.4 percent, Hong Kong’s 5.8 percent and Singapore’s 8 percent, Fitch tallies showed.
Aside from the government’s fiscal support measures, the central bank has continued slashing interest rates since September to stimulate the economy, while injecting more funds into the banking system to keep the market liquid.
Fitch, however, believes such monetary loosening efforts would “take a long time to have positive effects on demand for credit,” it said in the report.
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