It is hard to argue against domestic banks seeking better investment opportunities abroad and pressing for further easing of restrictions on overseas investments in pursuit of higher profits at a time when they are facing a difficult environment at home, as Taiwan struggles with decade-low interest rates and a lack of long-term investment opportunities.
However, government data released last week showed that Taiwanese banks last month saw their steepest monthly decline in loans issued in six years and their loan-to-deposit ratio also fell to its lowest level in five years, which is worrying. It raises questions about whether the financial regulator should continue regulatory easing — which is intended to give banks more flexibility in asset allocation to boost their profitability — or whether the government should work harder to adjust its economic policy and improve the domestic investment environment to increase investment opportunities.
No matter which political party comes to power after next month’s presidential and legislative elections, the outlook for Taiwan is grim, because the nation’s weakening economic climate and unappealing investment environment have reduced corporations’ demand for funds, encouraging people to keep money in banks, despite low interest rates.
As of the end of October, local banks’ outstanding loans totaled NT$25.28 trillion (US$770.21 billion), a decrease of NT$134 billion from September and the largest monthly decline since March 2009, the Financial Supervisory Commission (FSC) reported on Thursday.
Weak loan demand reflects corporations’ reluctance to borrow money to expand operations or invest in new projects amid an unfavorable economic environment. It also shows companies’ subsequent efforts to deleverage their balance sheets by repaying debt rather than taking on new loans.
In contrast, total deposits held at the nation’s banks increased by NT$1.46 trillion from the previous month to NT$33.97 trillion as of the end of October, according to commission data. Therefore, a record-high NT$8.69 trillion in unused liquidity — deposits minus loans — was left in banks as of the end of October. Indeed, local banks have seen excess funds surpassing NT$8 trillion since April, as they have found it difficult to lend money to enterprises and individuals.
Meanwhile, a loan-to-deposit ratio of 74.39 percent as of the end of October — the lowest in five years, during which the figure stood at between 75 and 77 percent — also indicates that banks might not earn as much as they might be able to in the wake of higher fund costs and lower interest income. In the first 10 months, Taiwanese banks posted NT$271.44 billion in pre-tax profit, down 4.5 percent from the same period last year.
Clearly, loan growth has been sluggish this year, evidenced by a decreasing demand for capital from local enterprises and fewer overseas Taiwanese businesses returning home to raise operating funds. In addition to slower growth in bank loans and domestic investment, central bank statistics also confirm a worrying scenario where the capital outflows continue because of a lack of investment tools and a series of deregulations driving more Taiwanese funds to seek returns overseas.
Central bank statistics released last month showed the nation’s financial account registered net fund outflows of US$16.15 billion last quarter, keeping the financial account in the negative zone for 21 consecutive quarters. Cumulatively, net fund outflows amounted to US$218.7 billion as of the end of September, slightly more than half of the nation’s foreign exchange reserves — at US$424.61 billion last month — and enough to build 125 Taipei 101 buildings.
If the demand for capital does not pick up in this quarter, and people still intend to keep more of their money in banks rather than investing or spending it elsewhere, there still exists the possibility of a downward revision to the government’s 1.06 percent GDP growth forecast for this year.
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