Taiwanese banks’ profitability over the next 12 months are unlikely to surprise on the upside despite the nation’s improving economy, Taiwan Ratings Corp (中華信評) said in a report released yesterday.
Moreover, the intensifying competition among local banks will further augment their difference in credit profiles in terms of asset quality and capital strength, the local arm of Standard & Poor’s Ratings Services (S&P) said.
The agency’s remark came a week after it warned that Taiwanese banks — especially smaller lenders with higher loan concentration in property-related products — would face a potential credit challenge if the market experiences a severe housing price correction after a new luxury tax went into effect on June 1.
“Taiwan’s continuing economic recovery, as well as banks’ adequate capitalization and satisfactory liquidity, support a stable outlook for the sector over the next one to two years,” Eunice Fan (范維華), director of financial institution ratings at Taiwan Ratings Corp (中華信評), said in the report.
“But operating performances are likely to remain mediocre over the next one to two years as banks face the difficult task of enhancing their revenue diversity in a saturated market,” Fan wrote.
While Taiwanese banks’ profitability is thinner than that of their regional peers, most local banks have relatively lower credit costs and reported a slight recovery in return on average assets over the past year amid a recovering economy.
Based on Taiwan Ratings' data, Taiwanese banks' return on average assets was 0.57 percent last year, up from 0.28 percent in 2009 and 0.12 percent in 2008. The nation’s GDP is expected to grow 4.5 percent this year and increase 3.5 percent next year, according to S&P's forecast.
However, the central bank’s gradual interest rate hikes on the back of continuing economic growth and rising inflationary pressure is not likely to trigger a significant rise in local banks’ profitability anytime soon, Taiwan Ratings said.
The central bank on March 31 raised its key interest rates by 0.125 percentage points for the fourth straight quarter, bringing the discount rate to 1.75 percent, the collateralized loan rate to 2.125 percent and the unsecured loan rate to 4 percent.
Economists expect the central bank to maintain its gradual pace of monetary normalization, with increases of 0.125 percentage points on June 30 and in each of the remaining quarters of the second half.
“We expect the Taiwan central bank’s policy of gradual interest rate rises to only produce a modest boost to the banking sector’s thin net interest margin over the next 12 to 24 months,” Fan said.
Including Taiwanese lenders, banks in the Asia-Pacific region are likely to remain resilient this year following a year of strong economic recovery, but they will face risks from higher inflationary pressure, S&P said in a separate report released yesterday.
S&P said the overall rating trend of Asia-Pacific banks would remain stable this year, as the region’s economic growth exceeds that in most other regions.
However, the responses of regional central banks to rising inflation are still the single biggest risk that could result in S&P downgrading the outlook for Asia-Pacific banks to negative from stable, as such policy responses could cause steep property price corrections and pressure banks’ profitability, the ratings agency said.
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