The government’s New Southbound Policy is likely to encourage local banks to increase lending to emerging economies in parts of Asia other than China, which would help diversify their overseas exposure, but the increased credit risk could weaken the benefit, Fitch Ratings said.
Southbound lending might not rise strongly enough in the next few years to affect the ratings of Taiwanese banks, the international ratings agency said.
Under the government’s policy, local banks are encouraged to increase lending by between 3 percent and 7 percent per year by 2020 to Taiwanese companies based in ASEAN countries, South Asia, Australia and New Zealand.
Banks have incentive to expand southward because those economies offer higher yields and stronger earnings potential compared with the domestic market, Fitch said.
“We expect exposure to emerging Asia [excluding China] to rise to 3 percent by 2019, compared with an estimated 2.5 percent in the first half of this year,” financial credit analyst Cherry Huang (黃嬿如) said in a report on Monday.
This would imply 10 percent growth per year, a pace that is high, but not excessive in light of the low comparison base, Huang said.
Taiwanese banks’ lack of experience in those markets, along with competition from existing competitors will be a growth constraint, the analyst said, adding that unfamiliarity can also be a source of risk.
Structural macroeconomic problems, particularly the buildup of household and corporate debts, pose a threat to asset quality in countries such as Malaysia, Thailand and Vietnam, Fitch said.
Opportunities for Taiwanese banks to engage in major merger and acquisition activity are limited in the region because only a few countries are open to foreign ownership of large local banks, it said.
Significant acquisitions would add downward pressure on the ratings of Taiwanese banks, especially if the acquisition dilutes their capitalization, it said.
Meanwhile, growth in lending to ASEAN countries is unlikely to come at the expense of lending to China, as evidenced by an increase in exposure to China this year, Huang said.
Tighter lending conditions in China has spurred demand for external US dollar funding, she said.
“We expect China-related exposure to climb to 7 percent or 8 percent of Taiwan’s system assets by 2019, up from 6.8 percent in June this year,” Huang said.
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