Fitch Ratings has revised its outlook for Taiwan’s banking sector to “deteriorating” from “neutral,” amid rising pressures on profitability and asset quality.
The change reflects growing concern that Taiwan’s export-heavy economy would face intensifying headwinds in the second half of this year and into next year, as cyclical demand cools and geopolitical uncertainty clouds the investment climate, Fitch said in a report issued on Thursday.
Fitch forecast Taiwan’s GDP growth to ease to 2.8 percent this year and slow further to 2.5 percent next year, down from 4.8 percent last year.
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“External risks will weigh heavily on bank earnings and credit performance,” Fitch said.
The agency maintained Taiwan’s operating environment score at category “A” in line with what it sees as a fundamentally resilient system. Solid macroeconomic indicators — such as a rising GDP per capita and stable unemployment — help provide a buffer against rising global uncertainty, it said.
Local banks retain ample capital and liquidity buffers, with risk-weighted asset growth broadly aligned with internal capital generation, it added.
Loan quality remains sound for now, with only a moderate rise in impaired loans expected — particularly in sectors exposed to new US tariffs. The share of such loans is expected to remain less than 10 percent of total system lending, Fitch said.
Private-sector banks are seen weathering the storm through continued loan growth and a stable stream of recurring fee income, which should partially offset rising credit costs and softening trading revenues, it said.
System liquidity remains ample in both New Taiwan dollar and US dollar terms, aided in part by reshoring activities from Taiwanese firms shifting production back from China, it added.
Fitch warned that upside potential for bank ratings is limited barring transformational mergers or formal designation as systemically important banks. On the downside, major risks include a global demand shock or a significant housing correction — both of which could undermine asset quality and earnings.
However, housing market risks appear contained for now. The central bank’s prudential tightening, such as raising reserve ratios and capping loan-to-value limits for second homes, has begun to bear fruit, it said.
Mortgage and construction lending dipped to 36.8 percent of total loans in the first quarter of this year, from 37.3 percent at the end of last year, while housing prices have softened modestly, it added.
Although Taiwan’s banking sector could eventually benefit from structural tailwinds, the fragmented nature of the market and persistent geopolitical risks are likely to cap near-term improvements, Fitch said.
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