The asset quality of Taiwan’s companies and households remains stable, meaning limited risk for the domestic financial sector even if the US Federal Reserve raises interest rates later this year, the central bank and analysts said in their latest reports.
Taiwan will be less prone to financial turmoil once the Fed ends its quantitative easing (QE), which may drive global funds to the US and upset financial stability in emerging economies, the central bank said in its Financial Stability Report, released on Friday.
The annual report, which covers economic and financial conditions for the whole of last year to the first four months of this year, identifies US interest-rate hikes, global economic slowdown and oil price rebounds as major risks that may rattle financial markets around the world moving forward.
“The more fragile the economy, the more vulnerable its foreign exchange and stock markets are to global fund movements,” the central bank said, adding that the rate hikes may affect economic activity as well.
Apart from the Fed, other central banks such as the European Central Bank and the Bank of Japan have implemented QE to boost their economies, but their practices have raised increasing criticism from emerging economies, with Reserve Bank of India Governor Raghuram Rajan recently warning that competitive monetary easing poses a serious risk to sustainable global growth.
In a speech in New York on May 19, Rajan questioned the prolonged use of unconventional monetary policies to boost growth on concerns that it may create risks in the financial industry once such policies come to an end.
However, Taiwan would withstand the volatility unharmed, thanks to its stable economic growth, solid current-account surplus and ample foreign exchange reserves, the central bank said in the report.
The Fed reached similar conclusions in a report last year that found Taiwan the least susceptible to its QE tapering.
JPMorgan Securities Ltd also said that Taiwan is relatively immune from capital outflow upon US interest rate normalization and reckons that asset quality is not an immediate risk for Taiwan’s financial sector.
However, the US brokerage said in a clients’ note on Monday that already-low credit costs have made it more difficult for the sector to grow earnings.
“While there remain muted catalysts for loan growth and net interest margin expansion to drive [the sector’s] pre-provision operating profit for 2015,” JPMorgan analysts Jemmy Huang (黃聖翔) and Josh Klaczek said in the note.
At the end of last year, the sector’s average capital adequacy ratio, core tier 1 capital ratio and common equity tier 1 ratio were 12.3 percent, 9.6 percent and 9.4 percent, respectively, all higher than 2013.
However, JPMorgan said the Taiwanese financial sector’s capital position remains weaker on a regional basis.
That explains why several banks have recently adopted various capital enhancement measures — including rights issues, additional tier-1 issues, private placement and share swaps — to fund growth and prepare for future mergers and acquisitions, the brokerage said.
Additional reporting by Kevin Chen
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