Capital management holds the key to Taiwanese banks’ midterm growth strategies, with lenders with strong capital in a better position to buffer new risk exposures and thus better able to reap benefits of the economic recovery and interest rate hikes, Taiwan Ratings Corp (中華信評) said in a recent report.
The ratings firm, the local arm of Standard & Poor’s, expects the nation’s stable economic outlook and the steady rise in interest rates to modestly boost local lenders’ net interest margins this year, but not all players will see the same benefits, credit analyst Eunice Fan (范維華) said.
“We expect Taiwan’s reasonably good GDP growth forecasts for this year and next to support high single-digit growth in banks’ loan books over the same period,” Fan said. “However, banks that pursue aggressive growth strategies without supporting capital management may weaken their capitalization.”
Fan said Taiwan’s banking sector was likely to maintain adequate capitalization over the next few quarters under controlled growth scenarios, but the lenders’ capitalization may deteriorate if their capital-raising or earnings retention lagged behind asset growth or was insufficient to cushion new risks.
The new challenges include the different risk characteristics of China’s banking market, which pose new risks for Taiwanese banks as they expand into the massive market, Fan said.
Fan also expects the banks’ competitive positions to diverge further over the next few quarters, as stronger, more competitive lenders gain advantages over their weaker peers.
“We don’t expect all local banks to benefit equally from recovering investor confidence and economic activity or the potential diversification benefits offered by a gradually deregulating China market,” she said.
Banks with superior business strategies, earnings ability and risk management, as well as prudent capital policies, are better positioned to enhance their overall profile, the analyst said.
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