The domestic banking sector, one of Asia’s least profitable, is expected to see a slim profit growth in the near future amid the nation’s slow economic recovery, Taiwan Ratings Corp (中華信評), a local arm of Standard & Poor’s, said in a report yesterday.
“Taiwan banks’ net interest income remained at a fairly low level in 2008 and the first half of 2009, due to fierce competition and a prevailing low interest rate environment,” said credit analyst Eunice Fan (范維華) in the report, titled Banking Industry Country Risk Assessment: Taiwan.
“We don’t expect the situation to improve for the next one to two years unless there is substantial industry consolidation and revenue source diversification,” she said.
The local banking system’s after-provision average return on average assets (ROAA) declined from 0.63 percent in 2004 — the previous peak — to last year’s 0.16 percent, Financial Supervisory Commission statistics showed.
S&P’s had earlier forecast that the local economy would contract by up to 4.5 percent this year before recovering to see between 3 percent and 3.5 percent GDP growth next year.
That would certainly make it harder for local banks to maintain loan quality and provisioning level, the report said.
“In our view, many domestic banks are likely to report marginal profit results in the next few quarters; some will even report losses and see capital erosion after absorbing incremental credit costs due to the current economic downturn,” the report said.
In a global context, the rating agency considered the domestic banking sector to be of moderate risk with good liquidity, adequate capitalization and strong government commitment to maintaining system stability in support of its overall credit strength.
On a scale of 1 to 10, with 1 being the least risky, Taiwan’s banking industry was given a country risk assessment ranking of 4 by the rating agency, outperforming those in China, India, Thailand, Indonesia, the Philippines and Vietnam.
Similarly ranked banking systems in Asia include South Korea and Malaysia, lagging behind Australia, Hong Kong, Singapore, Japan and New Zealand.
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