State-run banks outperformed their privately run counterparts amid worsening macroeconomic conditions in the first half of the year, and their margins are expected to remain resilient going forward, CIMB Securities Ltd said in a research note.
In the first six months of the year, state-run banks posted 2 percent year-on-year growth in profits, while major private banks saw earnings contract 9 percent, CIMB’s Taipei-based analyst Nora Hou (侯乃鳳) said in the note issued on Wednesday.
As for financial holding firms, 11 private companies saw their aggregate net profit plunge 43 percent year-on-year in the first half, while state-controlled Hua Nan Financial Holding Co (華南金控), Mega Financial Holding Co (兆豐金控), First Financial Holding Co (第一金控) and Taiwan Cooperative Financial Holding Co (合庫金控) collectively saw a 3 percent gain in earnings over the same period, Hou said.
Hou attributed state banks’ strong showing to their minimal exposure to volatile financial derivatives, such as yuan-linked target redemption forwards.
Their higher foreign exchange-related income streams from overseas lending and less reliance on noninterest income also contributed to earnings growth in the first half, she said.
State-run banks used to trail behind their peers in areas like “credit expansion, profitability, solvency and returns,” Hou said.
“However, that trend began to change in 2014, when state banks’ average returns on assets and equities started to outpace private banks,” Hou added.
Since then, state banks have reported more stable corporate loan growth, while their mortgage books have been more resilient to declines caused by a cooling real-estate market in recent years, she said.
In addition, state banks were able to maintain above-average loan-to-deposit ratios and demand deposit exposure, ensuring a smoother margin trend, she said.
However, Hou said that most state-run banks have below-average capital adequacy and Tier 1 capital ratios, as well as weaker nonperforming loan coverage.
Furthermore, growth in their loans to small and medium enterprises has also been slower than private banks, she added.
“Exposure to China remains a wild card in the second half,” Hou said, in light of bad debt write-offs by a few state-run banks in the first half.
In the first quarter, Taiwanese banks’ Chinese branches reported an aggregate net loss of NT$50 million (US$1.58 million) due to China’s slowing economy, according to CIMB’s tallies.
Hou predicted that state-run banks’ total overseas earnings contribution might decline from 41 percent last year to 34 percent this year.
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