Fitch Ratings expects Taiwan’s banking system to deliver a steady performance this year and next year, thanks to a low interest rate environment and a largely steady economy.
The international rating agency expects the nation’s economy to expand by 2.5 percent this year and 2.2 percent next year, while looking at a gradual domestic interest rate hike, its Taiwan Banks Report Card released on Thursday showed.
Taiwan’s foreign exchange reserves and the banking system’s solid foreign-currency deposit base — about 24 percent of total deposits in late last year — should be able to cushion market risks and any liquidity crunch that may arise from interest rate hikes by the US Federal Reserve, the report said.
The credit risks of Taiwanese banks’ foreign-currency exposure, about 20 percent of system assets, should not be a big issue, as they are mostly overseas operations and investment-grade bonds, it said.
Loan growth should hold steady at 4 percent this year, with lending to small and medium-sized enterprises (SMEs) and secured personal loans underpinning the increase, Fitch said.
SME loans have been growing faster than other segments for five years to where they now account for 29 percent of the system’s total loans, it said.
Demand for trade finance and capital spending should pick up amid a stable global economic expansion, while offshore lending, including loans to China, should also rise as local banks are pursuing higher yields abroad, it said.
China remains the banks’ largest offshore risk, with credit exposure to the country growing to 7 percent of system assets last year from its trough in 2016, driven primarily by large private banks, Fitch said.
The 90-day bad loan ratios for SME and offshore lending remained low at below 0.5 percent each, compared with 0.3 percent for total loans, it said, adding that it suggests a benign credit-cost environment.
Recovering housing prices after a soft correction between 2014 and 2016 should spur demand for mortgages and the low interest rates would lend a helping hand, Fitch said.
However, local-currency margins remain thin due to abundant liquidity and intense competition in the banking industry, and large banks with significant US currency loans should enjoy better margins as US dollar rates go up, it said.
Meanwhile, new accounting rules should have a limited impact as the banks have raised general provisions for the past five years as mandated by the Financial Supervisory Commission, it said.
The banking system has ample liquidity in both New Taiwan dollar and US dollar terms, so local banks would be likely to expand foreign currency loans given that the loan to deposit ratio in US dollar terms remains less than 60 percent, it said.
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