Taiwanese banks’ overall exposure to the Chinese market might double to 13 percent of the sector’s assets by 2016, from the the 7 percent seen now, and financial regulators should step up risk supervision given the sector’s modest capitalization and profitability, the local branch of Fitch Ratings said yesterday.
Local lenders had a total exposure of US$90 billion to China as of last year, accounting for 7 percent of the industry’s assets, according to the Financial Supervisory Commission’s estimate.
The calculation fails to capture exposure in the form of short-term trade finance, investment-grade interbank placements, and loans guaranteed by qualified Taiwanese corporate headquarters, said Jonathan Lee (李信佳), Fitch’s senior analyst on financial institutions.
“The actual exposure is higher and the regulator should strengthen risk control and monitoring since it cannot stop banks from seeking expansion in China,” Lee said.
Short-term trade finance made up between 10 and 20 percent of the aggregate exposure and should help raise the exposure to 13 percent in the next two years, aided by the establishment of subsidiaries, said Cherry Huang (黃嬿如), another Taipei-based credit analyst at Fitch.
Bank SinoPac (永豐銀行) and Taipei Fubon Commercial Bank (台北富邦銀行) already own a subsidiary in China. Cathay United Bank (國泰世華), CTBC Bank (中信銀行) and state-run Mega International Commercial Bank (兆豐銀行), First Commercial Bank (第一銀行) and Hua Nan Commercial Bank (華南銀行) have all voiced plans to set up subsidiaries so they can tap the retail banking market in China.
Exposure increase would pose less of a concern if domestic banks demonstrated stronger profitability and capitalization, with return on equity (ROE) at 10 percent and return on assets (ROA) at 1 percent, for instance, Huang said.
Currently, the sector has a ROE of 7 percent to 8 percent and a ROA around of 0.4 percent, Huang said.
In comparison, banks in Hong Kong have a much higher exposure to China, at more than 30 percent, but they have a higher ROE of 12 percent to 13 percent and similar levels of capital adequacy, Huang said.
Kong Kong lenders also show better discipline, Lee said, adding that the large yuan deposits in a single Chinese lender, Bank of China’s (中國銀行) Taipei branch, also raises the issue of over-concentration but the default risk is low given its credit standing.
Taiwan’s exposure to China is based primarily on funding Taiwanese companies’ manufacturing operations, explaining the persistently high loan-to-GDP ratios, standing at 164 percent last year, Fitch observed.
“The high leverage and heavy trade reliance with China render Taiwan’s economy susceptible to any major shocks from China,” Lee said.
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