Taiwan’s banking sector can withstand moderate price corrections in real-estate prices given their capital adequacy ratios and conservative mortgage operations, Taiwan Ratings Corp (中華信評), the local arm of Standard & Poor’s, said yesterday.
“We believe the local banking system has enough capitalization to buffer against a moderate stress scenario, or a 200 percent correction in house prices and interest rate hikes of between 100 to 150 basis points,” credit analyst Eunice Fan (范維華) said in a report.
The bad loan ratio among 39 domestic banks dropped to 0.35 percent in late February, while the coverage ratio rose to 352.08 percent, suggesting continued improvement in their asset quality, the Financial Supervisory Commission said on its Web site.
However, smaller banks with weaker capitalization could experience greater pressure once interest rates begin to rebound, Fan said.
A majority of local and foreign analysts expect the central bank to keep interest rates unchanged this year, allowing the nation’s export-oriented economy more time to regain a solid footing.
Taiwan Ratings came to the observation after factoring in Taiwan’s medium-to-high household debt level compared with peers in the Asia-Pacific region and increasing housing unaffordability in recent years.
Home prices are 15 times that of average household incomes in Taipei, making them the highest in the world, according to a survey by the Ministry of the Interior’s Construction and Planning Agency last week.
Soaring home prices drove Premier Jiang Yi-huah (江宜樺) to comment on Sunday that even his two sons could not afford to buy a house in Taipei and the home price-to-income ratio should drop to 10 to be reasonable.
Taipei Deputy Mayor Chang Chin-oh (張金鶚) and Minister of Finance Chang Sheng-ford (張盛和) are scheduled to meet this week to discuss raising the housing tax on residential properties not lived in by their owners in a bid to dampen speculation and investors’ appetite for hoarding homes, local media reported last week.
Fan said Taiwan’s strong net household financial position could provide a buffer against adverse credit or economic conditions.
Externally, the US’ gradual tapering of its quantitative-easing program is fostering a gradual rebound in global interest rates, which could soften property demand and put pressure on house prices in Taiwan, Fan said.
This could weaken the debt-payment ability of mortgage owners and increase stress on banks with lackluster earnings ability and inadequate capitalization, she said.
However, cautious lending and tightened regulations in recent years should help most banks manage the risks related to potential property price corrections, she added.
State-run lenders have maintained home loans at 55 percent to 60 percent of property values and refrained from expanding mortgage operations to support the government’s effort to cool the property market, she said.