Thu, Sep 30, 2010 - Page 12 News List

Benefits of extra-low credit costs in next years queried

BY KEVIN CHEN  /  STAFF REPORTER

Taiwan Ratings Corp (中華信評) said yesterday that extra-low credit costs would help sustain domestic banks’ profitability momentum for the rest of the year, but will not be of much help over the next few years.

With the central bank monitoring the buildup of excess liquidity in the banking system and the government likely to withdraw its incentive measures next year, the possibility of a rise in credit costs in the coming years is looming, said the local unit of Standard & Poor’s Ratings Service (S&P), citing one of its latest studies, “Taiwan Banks Boost First-Half Results On Low Credit Costs, But Is Growth Sustainable?”

“Low credit costs helped local banks improve their profitability in the first six months of the year, but strong domestic competition prevented more than a marginal rise in core earnings,” Taiwan Ratings credit analyst Chris Lee (李明泰) said in an e-mailed statement.

Taiwan Ratings said local banks would be unlikely to keep up their recent earnings growth because the current credit costs are “too low to be sustainable.”

“We expect credit costs to gradually rise over the next few years, but the change is unlikely to be a significant constraint on banks’ profitability in the second half of 2010,” Lee said.

Under the ratings agency’s estimate, credit costs account for just 0.21 percent of local banks’ total assets for now. The ratio is likely to rise gradually to a more sustainable range of 0.4 percent to 0.6 percent over the next one to two years, the study showed.

“However, we expect local banks’ core earnings to continue to stabilize and remain capable of absorbing a moderate increase in credit costs over the next few years,” Lee said.

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