Fitch Ratings said yesterday it was concerned that the nation's smaller and under-capitalized banks would pose a growing threat to the overall banking system as their financial health has deteriorated fast since last year.
Such small local banks, especially those weak in capital and liquidity as well as profitability, could therefore "make the system vulnerable to a credit cycle downturn," the international rating agency said yesterday.
Fitch's warning came at a time when the smaller lenders were sandwiched by several negative development factors, namely intensified competition from larger banking groups, continued interest margin compression and losses from the unsecured consumer lending crisis last year.
Its concern also came after the rating agency in March applied an across-the-board rating downgrade on the nation's smaller banks that are not affiliated to larger financial groups.
The rating agency said it was keeping an eye on the cash-strapped Cosmos Bank (萬泰銀行) to see how strong government support would be if it defaulted.
Cosmos, the nation's biggest cash card issuer, has NT$27.5 billion (US$832 million) worth of unamortized losses arising from previous non-performing loan sales.
The bank posted NT$5.5 billion losses in the first six months of this year, following NT$11.3 billion losses last year.
Cosmos has been losing depositors' confidence as it saw a decline of 17 percent in total deposits during the first half, outpacing the loan decrease, government statistics showed.
This "flight-to-quality" phenomenon among depositors and creditors was particularly obvious after the financial regulator made it clear that the government's financial restructuring fund (金融重建基金) no longer offered full guarantees on liabilities other than deposits once a bank fails.
To absorb its growing losses, Cosmos on Aug. 31 signed a memorandum of understanding with the SAC Private Capital Group and GE Money for its proposed recapitalization plan.
On Tuesday, Fitch downgraded Cosmos' rating due to concern that the lender may default on its debt obligations if real external support fails to materialize, while Taiwan Ratings Corp (
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