Standard & Poor’s (S&P) said Taiwanese banks remained the least profitable in Asia, even though shares of local lenders have risen more than 45 percent this year thanks to expectations of improved cross-strait relations.
In addition to the global economic crisis, Taiwan’s banking sector suffers from a thin interest spread and average net interest margin, said a report released yesterday by Taiwan Ratings Corp (中華信評), a subsidiary of Standard & Poor’s Ratings Services.
The report comes amid growing market optimism of in the banking sector after Taiwan and China signed last month a framework agreement for financial cooperation.
The two countries are currently working on a memorandum of understanding (MOU) to cover financial supervision of the banking, brokerages and insurance sectors.
In Taipei trading, however, the main bourse’s finance and insurance sub-index has increased 45.6 percent since the beginning of the year, compared with the benchmark TAIEX’s 25.2 percent rise over the same period, Taiwan Stock Exchange data showed.
But the Taiwan Ratings report warned that local banks’ bottom lines may not see obvious improvement for the next few years because the sector remains highly competitive and fragmented.
“Inherent structural problems and worsening operating conditions will continue to restrain the domestic banking sector’s growth prospects,” Eunice Fan (范維華), an analyst with Taiwan Ratings, wrote in the report.
“The economic downturn has added pressure to banks, with a significant decline in loan demand, continuing excess liquidity and declining interest rates,” she said.
The banks are unlikely to become profit centers just because of the anticipated financial integration with China, which will be a long process, she said.
“All domestic banks will face difficult business conditions over the next several quarters. Some will only just hold on to their current thin operating margins, while others may see their capital eroded amid a prolonged economic downturn,” Fan wrote.
Last Wednesday, UBS Securities Ptd analyst Pandora Lee (李懿璇) told a Taipei financial forum that Taiwanese banks were the most fragmented in Asia because the top five banks in the nation held less than a 40 percent in market share, the local business news Web site cnYes.com reported.
The banking sector also faces problems, including a shrinking customer base in Taiwan as many manufacturers have relocated to China and a lower return on equity (ROE), the Web site reported.
Chinese banks have ROEs of 16 percent to 18 percent, while their Taiwanese counterparts have ROEs of less than 6 percent, Lee said, citing the banks’ data.
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