The Financial Supervisory Commission (FSC) yesterday advised domestic banks to strengthen their provisions to guard against any potential impact from the US’ tapering of its quantitative-easing (QE) measures and a fragile global economic recovery.
The commission made the suggestion one day after Moody’s Investors Service maintained its stable outlook for Taiwanese banks, citing their strong liquidity, capital adequacy ratios and improving profitability.
Despite the stable outlook, “all banks should exercise caution and risk control in the face of the QE exit and a tepid global recovery,” the commission said in a statement, adding that the international ratings agency earlier downgraded its outlook for Singapore and Hong Kong banks from “stable” to “negative.”
The regulator will continue to prod local lenders to increase provisions and coverage levels so they can pursue stable growth backed by sufficient capital, the statement said.
As of June 30, the nation’s banking industry had a bad loan average of 0.44 percent, a coverage ratio of 260.83 percent and Tier 1 provision at 0.93 percent, lower than the required 1 percent, the commission said.
The sector’s capital adequacy reading stood at 12.18 percent in late March and it posted an overall pre-tax income of NT$141.1 billion (US$4.7 billion) in the first half, the commission said, sharing Moody’s views of the industry being stable in terms of operations and profitability.
The ratings agency said the outlook for Taiwan’s banking system remains stable, as Taiwan’s economy is expected to improve in the next 12 to 18 months, allowing banks to maintain their credit metrics.
“While there are some pressure points in relation to asset quality, these negative factors will be offset by the banks’ ample liquidity, adequate capital positions and improved profitability,” Moody’s analyst Ginger Kao (高玟君) said in a report.
Should these pressures increase, the Taiwanese government is very willing and capable of stepping in and providing support, Kao said.
However, Moody’s voiced concern over Taiwanese banks’ asset quality in the face of shrinking corporate profits, which last year fell to their lowest level since the global financial crisis of 2008.
About 28 percent of listed companies had interest coverage ratios of below 100 percent last year, higher than 23 percent in 2011 and 15 percent in 2010, Kao said.
A prolonged period of weak interest coverage will expose the banks to asset quality deterioration should these firms fail to recover, Kao added.
Another credit risk lies in the growing imbalance in the local property market as real-estate price increases had spread beyond Greater Taipei to Taoyuan and Greater Kaohsiung last year, Kao said.
Rising household debt levels pose another unfavorable trend that can negatively impact banks’ operating environment after the gauge climbed to 86 percent of GDP last year, the second-highest level since the global financial crisis.
“Credit risks will be contained as long as interest rates remain low amid stable employment, but vulnerability to the first driver is mounting,” Kao said.
The central bank is expected to raise interest rates next year, taking a cue from its foreign peers amid better economic data.