Taiwanese bank profitability should rise over the medium term due to widening margins and a cyclical improvement in the economy, Fitch Ratings Ltd said in a report yesterday.
Larger banks, such as Cathay United Bank (國泰世華銀行), state-run Mega International Commercial Bank (兆豐國際商銀) and First Commercial Bank (第一銀行), are likely to be the primary beneficiaries of margin uplift, owing to their greater exposure to China and better deployment of their yuan deposit bases, the ratings agency said.
However, the sustainability of higher profitability has yet to be established and there is the potential for increased risk-taking as some Taiwanese banks rapidly build Chinese exposures, Fitch said.
First-half earnings data released last month have confirmed strong growth in the sector, with pretax profit rising by 27 percent year-on-year, compared with a 6 percent increase during the same period last year, Fitch said.
As a result, the agency has raised its profitability forecasts for the Taiwanese banking sector, with the average return on assets to grow to 0.66 percent this year and next year, from 0.4 percent at present.
Strong growth in banks’ offshore exposures — including yuan deposit placements and foreign-currency loans — was the principle factor driving the boost in margins and, by extension, accelerating profit growth, Fitch said.
Offshore lending has been a major source of growth for several large Taiwanese banks and has outstripped the growth of local lending over the past several years, the agency said.
Offshore lending grew at a compound annual growth rate of 25 percent between 2010 and the first quarter of this year, compared with a modest 6 percent pickup for overall bank lending, Fitch said.
“This lending has the potential to improve Taiwanese bank margins, but aggressive extension of Chinese exposures could change bank risk appetites and lead to additional risk taking,” Fitch said.
The agency expects offshore exposures to remain high relative to overall loan growth over the next few years.
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