A move by Taiwan’s financial regulator to require the nation’s banks to increase their general provisions for non-performing loans is a “credit positive” development to the whole sector, Moody’s Investors Service said yesterday.
The ratings agency said the Financial Supervisory Commission’s recent call for comments on a new policy — asking domestic banks to raise their provisions to at least 1 percent from the current 0.5 percent of performing loans — would improve banks’ ability to absorb losses during a downturn.
“That is particularly important given that Taiwanese banks’ profitability is among the lowest of Asian peers, which makes them susceptible to significant loan defaults,” Moody’s analyst Ginger Kao (高玟君) said in a statement.
The commission last year released guidance for the higher provision to local lenders, along with a one-year grace period for them to comply, while regulators in other Asian economies, such as Hong Kong, Singapore and the Philippines, have required a minimum general provision of 1 percent in order to ensure capital adequacy.
Kao said that Taiwanese banks which have been rated by Moody’s mostly achieved the 1 percent regulatory threshold for provisions by the end of last year, except for the Bank of Taiwan (BOT, 台灣銀行).
The bank would be most pressured to improve its provisions this year and may need additional reserves of between NT$1.5 billion and NT$2 billion, or between 13 percent and 17 percent of its pre-provision income last year, she said.
In late August, Moody's issued an average "A2" long-term deposit rating on the 10 rated banks in Taiwan, which is the eighth-highest of 10 investment-grade ratings, with a stable outlook for the local banking system.
As of the end of November last year, the nation’s 39 lenders reported an average non-performing loan ratio of 0.41 percent, down from 0.43 percent the previous month.
The coverage ratio — which gauges the sufficiency of the lender’s reserves covering bad debt — increased by 11.48 percentage points to 285.72 percent over the same period, according to the commission’s data.