Taiwan’s lenders may emerge unscathed from the stress test next month as overall capitalization is adequate, which should enable them to absorb potential credit losses, bank officials said yesterday.
The Financial Supervisory Commission has asked all domestic banks to conduct a stress test by Sept. 15 to ensure they can weather unexpected external blows such as a sharp economic downturn, massive defaults on home mortgage payments and other extreme scenarios.
York Lai (賴明佑), an executive vice president at Hua Nan Commercial Bank (華南銀行), said in a telephone interview that he was confident the bank would pass the test.
A UBS report on Monday said the test would affect Hua Nan Bank, Chang Hwa Commercial Bank (彰化銀行), E.Sun Commercial Bank (玉山銀行) and Ta Chong Bank (大眾銀行) the most, with their profitability likely to drop 17 percent to 22 percent next year.
Lai declined to comment on the report, but said the scenario was highly unlikely, if not impossible, given Hua Nan’s financial health.
The state-run bank has a capital ratio of 11.49 percent and Tier 1 capital ratio of 7.52 percent, higher than the international requirements of 8 percent and 4 percent respectively.
The former ratio measures the percentage of a bank’s capital against its risk-weighted assets and the latter consists largely of shareholders’ equity.
Hua Nan’s mortgage loans amounted to NT$339.3 billion, or 28.89 percent of its total loans as of June 30, Lai said.
“Most of our home mortgage clients are public school teachers and government employees who are unlikely to default on their payments,” Lai said. “In fact, our loan-to-value average is 50 percent, quite a conservative level.”
Likewise, Chang Hwa Bank said a day earlier it was optimistic the stress test would affirm its financial soundness.
Home mortgage operations also accounted for about 28 percent of its loans, and a substantial portion went to public school teachers and government employees, the bank said.
Over the past few years, it has been very uncommon for borrowers from these professions to default on loans due to their job security and stable income, Chang Hwa said.
E.Sun Bank and Ta Chong Bank could not be reached for comment.
Eunice Fan (范維華), director of financial institution ratings at Taiwan Ratings Corp (中華信評), said all domestic lenders had above-par capitalization that could help them weather extreme conditions caused by external factors.
While Fan said she was not sure whether real estate prices would drop 15 percent, a possibility banks have been asked to assess, she was upbeat the economic recovery at home and abroad would continue next year and beyond.
“The stress test is intended to reassure the industry’s health,” she said.
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