The profitability of Taiwanese banks might remain modest next year compared with this year, as tepidly improving interest margins are offset by a slight rise in credit costs, Fitch Ratings said on Thursday.
On average, the local banking sector could achieve a return-on-assets ratio of about 0.6 percent from next year to 2019, Taipei-based analysts Jenifer Chou (周筱娟), Sophia Chen (陳怡如) and Cherry Huang (黃嬿如) said in a report.
The sector’s return-on-assets ratio stayed at between 0.5 and 0.6 percent from last year to this year, according to Fitch’s tallies.
“The slight increase in credit costs captures the incremental increase in risk appetite as banks expand into better-yielding segments,” the report said.
International Financial Reporting Standard 9 (IFRS 9) guidelines stipulate that companies must value their assets and liabilities based on their fair value or market price.
In March, the Financial Supervisory Commission issued an interpretive letter, which clarified that financial holding companies, banks and bills finance companies should keep in step with the commission’s announcement of adopting IFRS 9 measures by Jan. 1.
“We anticipate the provisioning effect from IFRS 9, which will be effective from 2018, to be limited, given that the system has strengthened general provisions as per the tightened local regulatory requirements,” the analysts said.
Taiwanese banks’ loan books are expected to perform solidly next year on a sustained low interest rate, modest unemployment rate and banks’ moderate risk appetite, the report said.
“The banks generally seek to grow by targeting SMEs [small and medium-sized enterprises] and personal loans, as well as offshore exposure to improve net interest margins,” the analysts said.
“Overseas exposure will grow from a low base and remain modest in scale; we estimate exposure to emerging ASEAN countries and China to remain at about 3 percent and 8 percent, respectively, of the system’s assets by 2019,” they added.
Meanwhile, risks associated with property-related loans, which accounted for about 35 percent of total loans during the first half of the year, are likely to increase moderately, as property prices have plateaued since early last year, the report said.
The amount of property-related loans has declined by approximately 8 percent from a peak level seen in the middle of 2014, it said.
Overall, the sector is forecast to achieve loan growth of about 3 to 4 percent next year, “supported by some of the government’s initiatives to boost consumption and investment, on top of steady exports and ongoing accommodative monetary policy,” while the loan-deposit ratio is expected to remain stable at about 73 to 74 percent, “considering the modest loan-growth prospects and abundant system liquidity,” the report said.
Fitch forecast GDP growth of 2.1 percent for next year in Taiwan, with all banks meeting the Basel III capital and liquidity requirements with little difficulty, it said.
Fitch has a stable outlook on the sector, as well as a stable outlook on Taiwanese banks, amid a low-growth — albeit improved — operating environment, the report added.
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