The Financial Supervisory Commission’s (FSC) plan to raise banks’ loan loss reserves to curb excessive price competition among domestic banks would be “credit positive” to the sector, while most lenders have sufficient funds to absorb the extra reserves, ratings agencies said yesterday.
“The regulator’s commitment to improve banks’ ability to absorb losses in a downturn, despite record-low non--performing loan [NPL] levels, is credit positive,” Sonny Hsu (徐嵩宜), vice president and senior analyst at Moody’s Investors Service, said in a statement.
FSC Banking Bureau -Director-General Kuei Hsien-nung (桂先農) told reporters last week that the agency was mulling raising loan loss reserves after introducing a 0.5 percent requirement this year, from 0 percent previously. Kuei said there was no timetable for the revision, which would aim to increase lending costs as banks have offered corporate loans at unreasonably low interest rates to the extent of neglecting default risk.
As a result of cutthroat competition, interest rates on unsecured loans for large corporations are lower than on secured loans for small and medium-sized firms and, in some cases, lenders have even allowed clients to decide the interest rates, Kuei said.
“The additional reserves would pressure banks to reduce cash dividend payouts and raise additional equity as they also need to satisfy higher capital requirements under [the new] Basel III [global -regulatory standard on bank capital adequacy and liquidity],” Hsu said, adding that higher core capitalization and increased loan loss reserves were positive developments for bank creditors.
Banks in Taiwan that have been rated by Moody’s have sufficient pre-provision profitability to absorb higher loan loss provisions to bring reserves to 1 percent of performing loans, Hsu said.
Among the banks under the agency’s coverage, Land Bank of Taiwan (土地銀行) and Chang Hwa Commercial Bank (彰化銀行) already have higher loan loss reserves than the peer average and should have the least difficulty meeting higher reserve requirements, Hsu said.
Bank of Taiwan (臺灣銀行) will suffer the greatest impact of adjusting to higher reserve requirements because its reserve level and profitability are both below the peer average, the analyst said.
Nevertheless, any increase in minimum loan loss reserves will likely be spread over a number of years, reducing the effect on banks’ profitability.
Chris Lee (李明泰), a financial analyst at Taiwan Ratings Corp (中華信評), the local arm of Standard & Poor’s, shared similar views.
“The planned additional loan loss provisions will not affect our ratings on local banks,” Lee said by telephone.
Taiwan Ratings already factors in clients’ non-performing assets when assigning rating grades, Lee said.
The nation’s top ranking banks, such as Taipei Fubon Commercial Bank (台北富邦銀行), Chinatrust Commercial Bank (中國信託商銀) and Cathay United Bank (國泰世華銀行), would meet tighter requirements unscathed and so will state-run lenders, Lee said.
Higher loan loss reserves may be difficult for small banks to meet, but will not cause systematic alarm, Lee said.
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