Strong public confidence in the solvency of Taiwanese state banks has resulted in false complacency among the lenders and impeded their structural reforms, Fitch Ratings said yesterday.
The international ratings agency made the comments after a stress test showed all except one state-run bank were adequately capitalized and capable of withstanding a severe increase in credit losses in the event of a global downturn.
It said a lack of innovation and competitiveness in services and product lines characterizes Bank of Taiwan (台灣銀行), Mega International Commercial Bank (兆豐國際商銀), Land Bank of Taiwan (土地銀行), Taiwan Cooperative Bank (合作金庫銀行), Hua Nan Commercial Bank (華南銀行), First Commercial Bank (第一銀行), Chang Hwa Commercial Bank (彰化銀行) and Taiwan Business Bank (台灣企銀) — in which the government holds significant stakes.
Taiwan Cooperative Bank, the subsidiary of Taiwan Cooperative Financial Holding Co (合作金控), is the most vulnerable to an external shock as its core capital ratio would fall to 4.6 percent below the international required minimum of 6.5 percent, said Jonathan Lee (李信佳), Fitch Taiwan’s senior director on financial institutions.
Five of the banks Fitch rated would be able to maintain acceptable core capital ratios of above 7 percent, Lee said.
Taiwan Cooperative Bank has announced a plan to raise NT$20 billion (US$668.76 million) in capital in the second half of the year, with NT$18 billion of the proceeds being used to strengthen its capital adequacy.
The capital increase would raise Taiwan Cooperative Bank’s core capital, placing it on a par with its state peers, Lee said.
State banks generally exhibit a modest appetite for growth and risk taking, with loan growth tracking or below GDP growth, the ratings analyst said.
“Public confidence enables state banks to obtain deposits easily, despite their relatively poor efficiency,” he said.
Promotions hinge on seniority rather than performance, an entrenched phenomenon that further discourages incentives for operation and management enhancement, Lee said.
As a result, state-run lenders have weak capitalization and modest profitability, compared with their private peers in Taiwan and in Asia, Lee said.
The stress test results indicate that the government is unlikely to be burdened by unexpected capital calls from the large state banks in the foreseeable future, Fitch said.
The ratings agency conducted the stress test based on assumed loan loss ratios from 1.24 percent to 1.41 percent, higher than the average loss ratio of 0.65 percent for the past decade.