Domestic banks may see their profits drop drastically next year on an expected increase in provision, because current record low bad loan levels are not sustainable, Fitch Ratings said yesterday.
Pre-tax profits for lenders are likely to fall 26.32 percent to NT$140 billion (US$4.76 billion) next year, from an estimated NT$190 billion this year, while credit losses may rise from 25 basis points to 35 basis points as more corporate borrowers experience financial stress, said Jonathan Lee (李信佳), Fitch Taiwan’s senior director on financial institutions.
The deterioration in asset quality among banks is expected to take place even though the nation’s GDP is forecast to grow 4 percent, from a low 1.5 percent increase this year, the ratings agency’s report showed.
“The record low non-performing loans cannot last forever,” Lee said. “In fact, the figures would have climbed higher, if the government had not stepped in to help some large technology firms secure debt repayment deals.”
Creditor banks led by the state-owned Bank of Taiwan (臺灣銀行) in April inked a refinancing pact with Chimei Innolux Corp (奇美電子) under which the nation’s largest flat panel producer may extend debt repayments sized at NT$240 billion by another two or three years, until 2016.
Loss-making memorychip makers Powerchip Technology Corp (力晶科技) and ProMOS Technologies Inc (茂德科技), as well as other firms, also benefit from eased debt repayment terms, in line with the government’s effort to support the industry amid the economic slowdown.
As a result, provision for potential trouble loans tends to be low, averaging 2 percent in Chimei’s case, Lee said, adding he expected the bad loan ratio to hover at about 0.6 percent this year for 38 lenders.
The reading, crucial to the health of banks’ asset quality, stood at 0.55 percent as of July 31, translating into NT$121.8 billion, Financial Supervisory Commission data showed.
Aggregate provision is estimated at NT$72 billion this year and would soar almost 80 percent next year to NT$129 billion, Lee said.
“That will take heavy toll on banks’ profitability next year,” Lee said, adding that the Financial Supervisory Commission is adding pressure by asking lenders to raise tier-1 provision from the current 0.5 percent to 1 percent over the next three years, on par with the international standard.
China’s monetary easing is diminishing room for arbitrage across the Taiwan Strait, Lee said.
Fast loan growth at offshore banking units may start to slow after reporting an increase of 20 percent for the past three years, he said.
Separately, Fitch Ratings revised its GDP growth forecast for Taiwan to 1.5 percent this year, from its previous estimate of 3.1 percent, as major trade partners including the US, China and the eurozone register weak showings. The agency expects the US to manage 2.2 percent economic growth this year and Europe to see a 0.3 percent contraction. It cut China’s GDP growth from 8 percent to 7.8 percent for this year.