The profitability of Taiwanese banks might weaken this year from last year due to lower loan demand and interest spreads, with higher credit costs amid wild financial market volatility, Fitch Ratings said yesterday.
On average, the sector could achieve a return-on-asset ratio of 0.5 percent to 0.6 percent this year, compared with a range of 0.6 percent to 0.7 percent last year, Fitch Taiwan’s financial analyst Jenifer Chou (周筱娟) said.
“We believe [the sector’s] profitability peaked in 2014... Credit costs are likely to climb higher this year, while lending operations moderate from rapid growth as recorded by their branches in China,” Chou said.
Earnings contributions from overseas branches picked up quickly in recent years, accounting for 30 to 50 percent for some lenders, thanks to a credit crunch in China and a low comparison base when cross-strait banking ties began, Fitch said.
Loan demand started to ease in the second half of last year and the trend might persist this year given the economic slowdown in China and around the world, the international ratings agency said.
The economic landscape is unfavorable for credit risks, which have been ultra-low, but should begin to normalize this year, Fitch said.
Already, some local lenders have reported losses from yuan-based target redemption forwards (TRF), an investment and foreign exchange hedging tool that allows customers to bet on Chinese currency movements against the US dollar, the agency said.
Most contracts are due to mature in the first half of this year and the sharp decline in the yuan raises default risks, Fitch said.
In a worst-case scenario, with a yuan depreciation of 10 percent, TFR losses could wipe out all profits made by local banks this year, but the chance of that is slim, said Sophia Chen (陳怡如), another ratings analyst at Fitch Taiwan.
The agency was not clear about the amount of TRF exposure, which might constitute about 40 percent of overall financial derivative operations, Chen said, adding that some banks are seeking to rein in losses by turning TRFs into outstanding loans, allowing customers more time to settle debt payments.
“TRF losses appear manageable, as local banks have sufficient capital buffers,” Chen said.
Acquisition and merger attempts pose a bigger risk for local lenders, because they have weaker capitalization compared with regional peers, Fitch financial analyst Cherry Huang (黃嬿如) said.
The low interest rate environment is favorable for corporate lending, but also constrains interest income for banks, Huang said.
Net interest margin, a critical gauge of banking profits, is likely to stand at 100 basis points this year, down from 105 basis points last year, the agency said.
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