Taiwanese banks are expected to report better earnings this year on the modest global economic recovery, but the improvement will likely be moderate given the domestic bank sector’s chronic structural competition issues and potential elevated credit costs, Fitch Ratings Ltd said yesterday.
The rating agency said local banks should post a net profit of about NT$60 billion (US$1.87 billion) this year with return-on-assets revised upward to 0.20 percent from a previous estimate of 0.14 percent.
“Steady performance by large state-controlled banks and a very strong liquidity environment helped the Taiwanese banking system sail through the crisis relatively unscathed last year,” Jonathan Lee (李信佳), Fitch Ratings senior director of financial institutions, told a media briefing yesterday.
However, the gradual increase in market share for state-controlled banks — the result of retail consumers’ shaken confidence in private banks because of the financial crisis — could increase pressure on loan pricing and overall profitability, Lee said.
Fitch Ratings data showed that state-controlled banks accounted for about 55 percent of Taiwan’s total deposits at the end of last year, up from 52 percent in 2006.
Concerns about higher credit costs this year stemmed from the need for banks to make additional loan provision charges to prep for the new provision policy under IAS 39, which is scheduled to be effective next year, the agency said.
IAS 39 is an international financial reporting standard covering the recognition and measurement of financial instruments.
“In response to the new policy, local banks will have to make additional loan provision charges of between NT$50 billion and NT$60 billion,” Lee said.
The risk of asset quality deterioration in mortgages might also lead to higher credit costs because local housing price hikes warranted a risk of sharp correction, coupled with potential interest rate increases this year that would likely bring down property prices, the agency said.
“Asset quality in mortgages is likely to deteriorate. As we can see, housing prices have doubled in the past five years. With such a spike in prices, the neighboring houses are preparing to raise interest rates,” Lee said.
Housing prices could come under correction pressure if interest rates were raised, which would likely cause mortgage defaults that could affect the banking sector’s earnings this year, he said.
Meanwhile, given the small size of the banking sector and the long-term low interest spread of about 1 percent, Fitch said it would be necessary for local banks to expand into the Chinese market.
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