Fitch Ratings yesterday said Taiwanese banks’ profitability is likely to fall this year after a flat performance last year as continued economic contraction begins to take its toll on asset quality.
In addition, impaired loans as a percentage of gross loans are expected to rise to 1.4 percent by the end of this year, compared with 1.2 percent last year, the ratings agency said in a report.
The aggregate net income of the nation’s 13 financial holding companies in the first four months fell 41.65 percent annually to NT$113.85 billion (US$3.48 billion).
Amid the downturn, bank earnings would be affected by less favorable loan pricing, margins and yields on government bonds, following three rounds of interest rate cuts by the central bank since September last year, Fitch said.
Credit demand in the corporate sector remained weak, leading to virtually stalled loan growth in the first quarter, the agency said, while non-performing loans 90 days overdue rose 10 percent during the period.
Key asset quality risks faced by banks this year include loans to small and medium-sized enterprises (SME), real estate and mortgages, while risk concentrations to China have diminished this year as banks cut exposure to Taiwanese and Chinese firms operating across the Strait as economic growth decelerates on both sides, the report said.
Although SMEs and consumer lending are expected to rise for the rest of this year, the gains would not be enough to offset the effect of soft credit demand from large companies, which also heightens the risk of a prolonged period of subdued economic growth, if not contraction, the report said.
However, our outlook for the banking sector is stable, supported by ample liquidity in the system, stable unemployment at about 4 percent, and our expectations that China will avoid a sharp intensification of the slowdown in nominal GDP growth seen in 2015,” Fitch said.
While low interest rates have crimped margins for banks, ample liquidity helped ease borrowers' debt-servicing costs, the ratings agency said, adding that banks have improved loss absorption capacity due to tougher provision requirements.
In addition, unemployment and consumption in Taiwan has remained stable, it added.
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