Fri, Mar 01, 2019 page12

• Banks face possible rise in impaired-loan ratio

  OVERSEAS DRAW: Taiwan Ratings said that scarce opportunities at home in the past few years have drawn some to higher-yielding foreign-currency investments

  • By Crystal Hsu / Staff reporter
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  The impaired-loan ratio among the nation’s banks might rise this year due to slowing economic growth and a less favorable trade environment amid the US-China tariff dispute, Fitch Ratings Inc said in a report on Wednesday.

  “We anticipate a rise in the system’s bad-loan ratio to 1.2 percent this year from 1 percent at the end of September last year,” Fitch said, adding that any increase would most likely be largely due to offshore lending operations.

  The situation is unlikely to be severe, because low interest rates and ample liquidity help alleviate debt burdens, the agency said.

  In addition, regulatory loan-loss allowances over expected credit losses would mitigate an increase in credit costs amid an economic downturn, Fitch said.

  The Financial Supervisory Commission requires 1 percent of general provisioning for performing loans — except for loans to the government. The ratio is 1.5 percent for loans to China, while the property sector is an additional buffer.

  As a result, Fitch maintained a “stable” outlook for Taiwanese banks.

  The operating environment is tougher for domestic life insurers, as risks linked to foreign-currency investments could be a lingering challenge this year, Taiwan Ratings Corp (中華信評) said in a separate report last week.

  Scarce opportunities at home to match local insurers’ investment needs have led them into higher-yielding foreign-currency investments in the past few years, which has resulted in a surge in the sector’s mismatch exposure and pushed their hedging discipline into the light, Taiwan Ratings said.

  Foreign-currency investments are attractive for Taiwanese insurers seeking higher yields, as the widening gap between local and US interest rates contributes to foreign-exchange risks and costs, Taiwan Ratings credit analyst Serene Hsieh (謝雅瑛) said.

  Taiwan’s life insurers face higher foreign-exchange risks than global peers, making them more vulnerable to currency-related volatilities, Hsieh said.

  The pursuit of higher yields overseas marks a departure from past practices to minimize foreign-exchange exposure, Hsieh said. The change means risks are heightened for insurers that adopt aggressive strategies.

  Potential strategies include the pursuit of unmatched foreign-currency investment growth and lowering conventional hedging exposure through currency swaps and forward transactions, she said.

  High foreign-exchange costs could constrain insurers’ earnings performance over next few quarters, Hsieh said.

  The sector’s return on assets averaged 0.4 percent last year, lower than the agency’s forecast at 0.7 percent and down from 0.5 percent in 2017, she said.

  The high exposure and modest capital buffers raise challenges to maintaining credit profiles and could increase the risk of ratings volatility in the long term, Hsieh said.
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