An estimated increase of NT$30 billion (US$938.7 million) in bad-debt provisions for the domestic banking industry when a new accounting rule goes into effect next year may not affect most of the lenders’ credit outlooks, a ratings agency said yesterday.
However, banks that have suffered from poor credit quality in the last few years are likely to face “higher pressure on profitability and capitalization” from these additional credit provisions, Taiwan Ratings Corp (中華信評) said in a statement.
ESTIMATES
The local arm of Standard & Poor’s issued its industry assessment right after the Financial Supervisory Commission said on Thursday that local banks and insurers may have to raise about NT$30 billion and NT$97 million respectively in provisions after the revised Statement of Financial Accounting Standards No. 34 takes effect on Jan. 1.
The commission said in a statement on its Web site that its estimates were based on local banks and insurers’ balance sheets last year.
Under the new accounting rule, banks are required to include the amount of loans and receivables into the potential loss calculation. The commission stressed, however, that the additional provisions required does not mean current provisions set aside by banks are insufficient.
Taiwan Ratings said it had already factored in the potential implications of this accounting change into its assessment and the need for extra provisions for local banks was within its expectations.
“We expect the banking industry can absorb its impact,” the agency said in the statement.
“In our view, the banking system’s core earnings can absorb this and the impact on the industry’s overall capitalization will be limited,” it said.
The additional provisions of NT$30 billion are estimated to make up about 0.1 percent of the local banking system’s total assets and account for 0.16 percent of total outstanding loans as of the end of June, according to latest government figures.
NON-PERFORMING LOANS
The latest data from the commission showed that the average non-performing loan ratio for Taiwanese banks was 0.91 percent at the end of June, down 0.24 percentage points from the end of last year, while the coverage ratio — loans covered by banks’ provisions and a gauge indicating the sufficiency of bad loan reserves — climbed 22.88 points to 113.38 percent during the same period.
“We believe the incremental credit provision will provide [an] additional buffer for future credit losses and enhance the reserve coverage slightly, though not significantly if considering other substandard loans,” Taiwan Ratings said.
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