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Fitch revises its forecast for domestic banks’ ROE upward, remains cautious

Fitch Ratings Ltd yesterday revised upward its forecast on domestic banks, expecting a return on equity (ROE) of minus 0.14 percent this year, compared with its earlier estimate of minus 0.53 percent, although the international credit rating agency remained pessimistic about the nation’s banking sector.

“The central bank’s series of rate cuts starting in the second half of last year has driven ­industry-wide margin compression, cutting deep into banks’ already weak profitability,” senior director at Fitch’s financial institutions team, Jonathan Lee (李信佳), told at a press conference yesterday.

Moreover, Fitch estimates that a series of class action lawsuits launched by retail investors who were hit by investment losses at Lehman Brothers and Private Equity Management Group caused about NT$35 billion (US$1.06 billion) in damages, or 0.12 percent of the total assets at the banks’ wealth management businesses, Lee said.

“The prolonged weakness in the economy and the presidential administration’s short-term focus on more pressing issues will no doubt delay the government’s resolve to correct structural competitive issues within the local banking sector,” Lee said.

CONCERN

In a commentary yesterday, Fitch Ratings said Taiwan’s chronic, multi-year deleveraging process by households and corporations was a major concern for local banks’ long term profitability and viability.

Debt-to-household income dropped from 80 percent in 2005 to 70 percent last year, compared with 120 percent and 140 percent in the US and Europe respectively.

Meanwhile, the debt-to-equity ratio for corporations went from 82 percent in 1998 to 64 percent in 2005 and 59 percent last year, Fitch data showed.

“This means that the top 20 percent of the nation [the wealthiest echelon] does not need to borrow money; if they do, they invest in stocks or real estate, creating bubbles in parts of Taiwan’s equity and real-estate markets,” Lee said.

“By contrast, the bottom 20 percent of the population are simply too poor to borrow in the first place, or if they do, eventually they can’t afford to pay back. In sum, Taiwan is simply missing its middle class — the prime borrowers, the bread-and-butter customers for banks’ lending businesses,” Lee said.

The agency said it was also worried about the heavy exposure of financial institutions to the troubled dynamic random access memory manufacturers, which is valued at NT$250 billion, or 13 percent of total domestic banks’ equity.

“The banks’ already weak margins and high credit risk exposure are the two major themes plaguing the local financial services sector,” Lee said.

MERGERS

In the next two or three years, we should not expect major mergers and acquisitions for the nation’s large, branded banks, Lee said. A less significant absorption of small banks by big ones, however, would no doubt take place.

Conversely, banks with insurance arms will do the opposite. We are likely to see big insurance firms buying smaller outfits to weed out the competition because smaller rivals offer extremely low-cost policies that disrupt the insurance business,” Lee said.
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