Fitch Ratings yesterday maintained its stable outlook for Taiwanese banks this year, but cautioned against property-related exposure and a drastic economic slowdown in China, the nation’s largest trading partner.
A sharp downturn in the property market will hurt the banking sector because mortgage lending accounts for a substantial portion of overall loans, standing at a record high level of 41 percent at the end of last year, the ratings agency said.
The warning came one week after a bill to tax short-term property transactions cleared the legislature’s Finance Committee. The legislation could pass its second and third readings as early as this week.
“Fitch takes a positive view of a series of measures to cool the property sector,” said Jonathan Lee (李信佳), a senior director on financial institutions ratings. “The excessive housing price hikes since 2003 may not be sustainable to bolster the sector’s long-term risk-adjusted return.”
However, an abrupt downturn in the market could lead to a sharp deterioration in asset quality, Lee said.
The legislature plans to hold the second and third readings on the tax bill on Friday. The bill would impose a 10 percent levy on properties resold within two years of purchase. The rate would climb to 15 percent of trading prices if the properties are sold within one year of purchase.
“The process should be smooth and quick since there is no need for votes to settle differences,” Democratic Progressive Party Legislator Gao Jyh-peng (高志鵬) said by telephone.
Home sales plunged between 20 percent and 50 percent in different parts of the country last month after the Ministry of Finance unveiled the proposal in late February, real estate agencies said.
To ensure the banking sector’s health, the Financial Supervisory Commission last year asked all lenders to conduct a stress test in case of property price corrections and economic downturn. All banks passed the test, the regulator said in September.
However, Fitch said a moderate loan-to-value ratio underpinned the favorable test results and believed systemically significant exposures warrant a robust stress test framework.
“Important assumptions include stressed probability of default based on recent years’ record low figures or a more conservative through-the-cycle approach,” Cherry Huang (黃嬿如), another Fitch director on financial institutions ratings, told reporters.
The stress test also showed a lack of granularity in data history, risk tools to differentiate prime from non-prime exposures and loan-to-value illusions, Huang said.
Banks may be unable to recover loans from farmhouses or other properties with a very low level of marketability in times of stress, she said.
Fitch expects mortgage lending to stay flat this year after expanding 6 percent last year. The economy is expected to grow 4.5 percent this year, slowing from a 10.8 percent increase last year, the agency said.
“The banking sector will remain profitable this year” if the correction in the property market is moderate, Huang said.
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