Related Market Sector:
Fitch Ratings-Taipei/Hong Kong-02 March 2010: Fitch Ratings has said today, in a just published Special Report, that the agency expects Taiwanese banks to benefit from the modest global economic recovery and generate slightly better earnings in 2010 (forecast 0.20% return-on-assets (ROA) vs. 0.14% estimated in 2009). However, the improvement will likely be moderate given the sector's chronic structural competition issues, as well as a potential for elevated credit costs.
Steady performance by large state-controlled banks and a very strong liquidity environment helped the Taiwanese banking system sail through the crisis relatively unscathed in 2009. Nonetheless, structural overhangs, brought on by severe market fragmentation as a result of high level of government ownership and low profitability, persist. In addition, the gradual increase in market share for state-controlled banks, thanks to the shaken confidence of retail consumers in private banks amid the financial crisis, could further increase the pressure on the sector's loan pricing and overall profitability. The aggregate market share for state-controlled banks was around 55% of Taiwan's total deposits at end-2009, up from 52% at end-2006.
Concerns over potentially higher credit costs in 2010 mainly stem from the need for Taiwanese banks to make additional loan provision charges in preparation for the new provision policy under accounting rule 34 (equivalent to IAS 39), which is scheduled to be effective from 2011. The risk of asset quality deterioration in mortgages may also lead to higher credit costs; The spike in local housing price - more than 10% CAGR in the recent cycle from the trough in Q203 - warrants a risk of sharp correction. Combined with potential interest rate increases in 2010, as a fall in property prices is likely, this could affect Taiwanese banks' mortgage quality. That said, the non-performing loan (NPL) formation rates for mortgages were low at about 0.2%-0.3% (of average mortgage lending) in 2009, which is considered healthy.
Liquidity is one of the few areas in which Taiwanese banks compare favourably in the region. The offer of a blanket guarantee programme by the Taiwanese government is scheduled to end in December 2010, although further assistance may be necessary for weaker private sector banks, should liquidity and funding challenges re-emerge. Meanwhile, Taiwanese banks' capital position remains steady - the key factor supporting the sector's stable outlook in 2010. Downward pressure on the banks' ratings would most likely arise from notably weaker core capitalisation, which is a scenario not anticipated in 2010.
The report, entitled "Taiwanese Banks: Annual Review and Outlook" is available at Fitch's website, www.fitchratings.com.
Applicable criteria available on Fitch's website at www.fitchratings.com: "Global Financial Institutions Rating Criteria", dated 29 December 2009.
Contacts: Sophia Chen, Jonathan Lee, Cherry Huang, Joyce Huang, Taipei, +886 2 8175 7600.
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Email:
karen.cho@fitchratings.com.
Additional information is available at www.fitchratings.com.
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