The financial sector is facing unprecedented challenges from narrowing interest rate spreads, as Taiwan’s and China’s economic growth continues to weaken, a SinoPac Financial Holdings Co (永豐金控) official said.
To help the nation weather the economic downturn, the government has asked banks not to turn away fixed deposits of NT$3 million (US$92,635) bearing interest rates of at least 1.1 percent, SinoPac Financial chairman Ho Show-chung (何壽川) said at the company’s annual general meeting in Taipei.
Recounting a meeting with Premier Lin Chuan (林全) at a monthly meeting of the Third Wednesday Club (三 三會) business group, Ho said the government’s request poses a tremendous strain on banks, which must allocate 20 percent of their loan portfolio for the purchase of central bank-issued negotiable certificates of deposit bearing 0.5 percent interest return to maintain liquidity.
The result is a negative interest spread of about 60 to 70 basis points between the deposit rate and lending rate, Ho said, adding that the situation is worsened by a regulatory cap on the amount of mortgages that banks can extend.
“Banks are struggling with negative interest spreads each day they are open for business,” Ho said.
Bank SinoPac (永豐銀行), the company’s banking unit, saw net income in the first five months drop 22.2 percent annually to NT$3.49 billion.
CIMB Securities Ltd’s Taipei-based analyst Nora Hou (侯乃鳳) said that net interest margin would continue narrowing, leading to mid-single-digit core revenue growth for Taiwanese banks this year.
Deutsche Bank AG analyst Franco Lam (林國基) is also conservative about the financial sector’s prospects for the remainder of the year and expects no strong rerating catalysts in the second half, following an uninspiring performance so far this year.
“We expect the lack of loan deployment opportunities to continue to lead to a low loan-to-
deposit ratio and margin,” Lam said in a note dated Wednesday.
At yesterday’s meeting, shareholders approved the company’s plans to raise fresh funds of NT$15 billion to meet long-term growth requirements by issuing new shares at NT$12.5 per share, 30 percent higher than its NT$9.5 closing price yesterday, as well as a dividend distribution of NT$0.932 per share.
In related news, Bank SinoPac’s workers’ union lodged a complaint over frequent executive shuffles, with the bank changing presidents five times in the past eight years.
Each successive bank president has brought sweeping organizational restructuring that has caused the flight of more than 2,000 employees during the period, the union said.
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