The earnings momentum of Taiwanese banks has tapered off this year due to China’s slowing economy and yuan devaluation, CIMB Securities Ltd said on Tuesday.
Overseas earnings, which drive 35 percent of local banks’ pretax profits, might not see a hefty increase this year as in previous years, as banks have turned cautious about their lending operations in China, Malaysia-based CIMB said in a report.
Offshore banking units (OBUs) have become a particularly important earnings driver since 2011, when authorities allowed them to operate yuan business in the wake of improved cross-strait relations, the report said. Many lenders have also benefited from the yuan’s appreciation.
The cautious sentiment is reflected in the 8 percent contraction in yuan lending for the first eight months of the year and a 2 percent decline in foreign currency-based loans, the report said.
OBUs generate about 65 to 75 percent of banks’ overseas earnings, or up to 25 percent of their total profits, the report said.
As of last month, 13 Taiwanese banks had set up 52 outlets in China.
“We expect the conservative sentiment to persist given uncertainties over the global economy and the slowdown in China,” CIMB analyst Nora Hou (侯乃鳳) said in the report.
Overseas earnings’ contribution rose to 42 percent of the sector’s total pretax profit in the first quarter of last year, Hou said.
Taiwanese regulators have introduced measures to rein in underlying risks, bringing down the sector’s exposure to 62 percent of total net worth, from a peak of 69 percent in the third quarter of last year, the report said.
With the Democratic Progressive Party widely expected to win the Jan. 16 presidential election, the pace of cross-strait exchanges might slow and local banks’ overseas expansion might lose steam, CIMB said, while taking a neutral stance on local financial shares.
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