Taiwanese banks would reap little benefit from the nation’s economic pickup, while increasing property-related loans would impact the sector’s asset quality, Fitch Ratings said yesterday.
That is because the banks’ risk profiles remain crippled by high private leverage, excess capacity in real estate and dull prospects for domestic small and medium-sized enterprises (SME), the global ratings agency said in a statement.
Moreover, banks continue operating in a tough environment in which severe market fragmentation and flattened operating margins have limited the upside gains from an anticipated economic upturn, the agency said.
In Taipei, the main bourse’s finance and insurance sub-index dropped 0.28 percent on Wednesday owing to concerns about the outcome of the two-day policymaking meeting of the US Federal Reserve.
The sub-index has risen 3.92 percent so far this month and 15.7 percent since the beginning of the year, compared with the benchmark TAIEX’s 3.91 percent and 6.62 percent increases over the same period, Taiwan Stock Exchange data showed.
“The main challenge for the banks arises from the large existing stock of private credit. At 165 percent of GDP at end-2012, this was higher than the ‘A’ or ‘AA’ rated peer medians of 94 percent and 119 percent respectively,” Fitch said in the statement. “As nearly one-half of these loans are property related, further lending in this sector would be of questionable quality.”
The agency highlighted “two adverse trends” amid credit-driven and property-related booms — the persistent increases in house prices and mortgage debt.
Fitch said Taiwan’s mortgage debt has accounted for nearly 80 percent of total property loans, sounding an alarm that the nation’s household debt has become vulnerable to a shift in interest rates.
"At 122 percent of disposable income, Taiwanese households are now more indebted than in all their regional peers except for [South] Korea and Japan," the agency said.
While most economists expect the central bank to stay put at its upcoming quarterly policymaking meeting on Sept. 26 and then in December due to slow economic growth, Fitch said an interest rate increase of 200 basis points would raise Taiwan’s household debt-to-income ratio to 45 percent from 38 percent.
In addition, the government’s failure to bring down house prices would only work to sustain household debt at high levels, the agency said.
Another challenge for Taiwanese banks is the lack of high-margin lending opportunities in the corporate sector, especially technology firms, forcing them to compete in an SME sector with lackluster margins, it added.