The level of corporate and household debt in Taiwan remains manageable, despite an income shock amid the COVID-19 pandemic and mounting stress in global financial markets, DBS Bank Ltd (星展銀行) said in a report last week.
The Singapore-based bank published its report as part of its latest assessment of the potential credit risks in Taiwan and South Korea.
The analysis said that South Korea’s corporate and household sectors, especially small and medium-sized enterprises (SMEs) in the service industry, are highly leveraged and should be particularly vulnerable.
In Taiwan, the corporate debt situation is not particularly worrisome, DBS said, adding that banks’ loans to the corporate sector increased 4.8 percent year-on-year last year, slowing from an increase of 5.6 percent in 2018, while SME loans also grew at a slower pace of 5.6 percent last year, compared with a rise of 6.4 percent the previous year.
Given healthy debt-to-asset ratios and strong interest coverage ratios for listed companies, the overall debt repayment capacity of Taiwanese firms is relatively well positioned, it said.
“The overall debt repayment capacity of Taiwanese companies is strong, if compared with South Korean counterparts. Admittedly, it cannot be ruled out that credit risks in certain SMEs and sectors will rise substantially due to the COVID-19-related economic slump,” DBS economist Ma Tieying (馬鐵英) wrote in the report
Household debt expansion is a greater source of concern for Taiwan than corporate debt as incomes decline, but the household sector’s strong savings position should be a buffer, the report said.
Consumer loans last year rose 4.8 percent year-on-year, accelerating from a rise of 4.2 percent in 2018, while housing loans quickened to 5.4 percent growth last year from 4.8 percent a year earlier, it said.
The ratios of household debt to nominal GDP and household borrowings to disposable income were also at record levels, the report said, citing central bank statistics.
The household debt-to-asset ratio remained low and stable, while liquid assets, such as currency and deposits, accounted for as much as 40 percent of households’ total assets, it said.
“By and large, Taiwan’s indebted household sector is susceptible to the job losses and income declines caused by COVID-19. That said, its strong savings position should help to cushion the impact of income shocks and mitigate the risk of debt defaults,” Ma wrote.
Meanwhile, Taiwanese financial institutions’ asset quality has remained favorable, the report said, citing data that showed Taiwanese banks’ average non-performing loan ratio was a mere 0.2 percent last year, while it was even lower among credit cooperatives at 0.1 percent.
Total capital adequacy ratio among banks, which measures their financial strength against risks, improved to 14.07 percent at the end of last year, the second-highest on record after the 14.18 percent registered in 2017, Financial Supervisory Commission statistics showed.
“The pressure from potential credit defaults should be manageable for Taiwanese financial institutions as a whole,” Ma wrote.
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