In an environment where interest rates have been trending lower, Taiwan’s banking sector is expected to face more challenges and see its profitability weaken this year, according to Taiwan Ratings Corp (中華信評), a local partner of US-based Standard & Poor’s Financial Services LLP.
To boost the economy, the central bank cut key interest rates twice late last year, which is expected to exacerbate pressure on the banking sector’s interest spreads this year and hurt its bottom line, the ratings agency said.
Last year, Taiwan’s economy grew only 0.75 percent from a year earlier, compared with a year-on-year increase of 3.92 percent in 2014, after contracting 0.80 percent and 0.52 percent in the third and fourth quarters respectively.
Economic weakness prompted the central bank to lower interest rates starting from the third quarter of last year, with the discount rate at 1.625 percent.
In addition to the unfavorably low interest rates, Taiwan Ratings said that the banking sector has also been affected by rising competition and higher credit costs.
“Taiwan’s tepid economic growth and a rise in credit costs from recent lows could further squeeze the sector’s narrow profit margins over the next 12 months,” Taiwan Ratings credit analyst Eva Chou (周怡華) said in a statement.
“That is despite a modest improvement in the sector’s earnings over the past five years under a favorable credit environment and higher interest spreads from banks’ overseas expansions,” Chou said.
Taiwan Ratings said that a plunge in Taiwan’s exports last year had worsened economic fundamentals and increased pressure on the banking sector. Amid falling global demand, Taiwan’s exports fell 10.6 percent to US$280.48 billion last year and outbound sales for last month continued to fall, down by 13 percent year-on-year to US$22.2 billion.
The agency said that Taiwanese banks have faced other challenges from tightening financial regulations, low market sentiment and volatility in the real-estate market.
It said that the banking sector’s exposure to China also negatively affected earnings.
Despite the challenges encountered by Taiwanese lenders, “we consider banks in general to have adequate capitalization and abundant liquidity for the next 12 months,” Chou said.
“This supports our view of a stable credit outlook for Taiwan’s banking sector,” the analyst added.
Taiwan Ratings said that the outlook for the banking sector remains stable.
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