Global monetary tightening is weighing on the performance of capital markets and squeezing profitability for Taiwan’s securities sector, whose earnings in the first half tumbled 68 percent from a year earlier, Fitch Ratings said yesterday.
The international ratings agency attributed the profit decline to reduced trading flows and unfavorable capital market activity linked to inflation, interest rate hikes, geopolitical military conflicts and economic uncertainty.
Fitch Ratings nonetheless stood by its rating of “stable outlook” for local securities firms, saying their solid capital structure provides sufficient rating headroom, despite profitability pressure in the near term.
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That is because business profiles are a top influencing factor on their standalone credit profiles, especially with increasing sector concentration, Fitch said.
For instance, Yuanta Securities Co (元大證券) and Capital Securities Corp (群益金鼎證券) have higher business profile scores given their strong competitive positions in Taiwan, diversified earnings sources and more sophisticated risk management, it said.
“We believe Taiwanese securities firms’ strong capital position — given stringent regulatory capital requirements — will reduce the impact of weakened profitability and increased credit risks arising from higher capital market volatility,” it said.
“Capital strength — net tangible leverage — remains stable,” with most securities firms maintaining leverage ratios that correspond to a “BBB” category,” the ratings firm said.
Fitch said it expects the funding and liquidity profiles of rated securities firms to remain largely stable, with sufficient credit lines and adequate contingency plans, despite a heavy reliance on wholesale funding.
Heavy dependence on wholesale funding is inherent to securities firms due to the nature of their business, it said, adding that the sound liquidity system in Taiwan reduces the risk.
Furthermore, most companies have sufficient contingent funding facilities to cover potential shortfalls, it said.
That said, sudden external shocks from geopolitical conflicts would adversely affect the operating environment and securities firms’ profitability and capital positions, and could lead to rating downgrades, Fitch said.
However, that is not the ratings agency’s base-case scenario. Rather, Fitch expects Taiwan’s monetary tightening cycle to be less striking than other regional peers as medium-term inflation is well anchored.
“We expect mild upward pressure on funding costs, which should be manageable for the sector,” Fitch said.
The central bank is due to review its policy stance on Sept. 22 and on Dec. 15, with most analysts predicting moderate hikes of 12.5 to 25 basis points.
Additionally, the Financial Supervisory Commission has continued to provide more regulatory openings for securities brokers, such as in trust products, Fitch said.
More regulatory openings would support the sector’s product diversification in the long term, especially in wealth management, it said.
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