New mergers led by state-controlled banks will help the banking sector solve its “over-banking” problem and further enhance profitability, Moody’s Investors Service said yesterday.
However, the government may not launch any meaningful mergers before the presidential election next year, Moody’s said.
“The current banking sector has the structural problem of over-banking that makes companies compete excessively, further declining their pricing on products and influencing down their profits,” Sally Yim (嚴溢敏), a Moody’s vice president and senior analyst for financial institutions in the Asia-Pacific region, said in Taipei.
The appropriate consolidation could solve this problem, Yim said, adding that there was a case to be made for state-controlled banks with higher market shares taking over smaller state banks to create better synergies.
Mergers led by three major financial holding companies in Taiwan — Cathay Financial Holdings Co (國泰金控), Chinatrust Financial Holding Co (中信金控) and Fubon Financial Holding Co (富邦金控) — help as well, but may not make meaningful changes to the banking sector’s structure, Yim said.
Other than the slow pace of consolidation that makes the profitability of local banks consistently weaker compared with their peers, the high single-borrower concentration would be the other main concern, according to the ratings agency’s report.
For example, ProMOS Technologies Inc’s (茂德科技) debt problems may increase the risk exposure to its bank creditors and lead to fluctuations in their earnings, Yim said. However, this year’s relative high spread may offset the negative impact from ProMOS Technologies, she said.
Moody’s maintained its “stable” industry outlook on Taiwan’s banking system amid good asset quality, earnings diversification from wealth management products, strong liquidity and limited reliance on wholesale funding, as well as high probability of government support.
Yim said small and medium-sizedenterprise (SME) lending would retain its growing pace to become the banking sector’s major driver for this year, as state-owned banks continue to lend support to these enterprises amid the government’s supporting strategy.
As for the nation’s insurance sector, Moody’s offered a “stable” outlook on the non-life insurance sector, but gave a “negative” outlook on the life insurance sector amid structural problems resulting for differences in interest rate.
“Since life insurance companies sold a lot of insurance policies at a high interest rate — 8 to 9 percent — in the 1990s, it is difficult for them to solve the structural problem of losses from the differences in interest rates in the short term, compared with current interest rates of about 2 percent,” Yim said.
Despite the central bank’s gradual rate hikes over the past year, Yim expects the problem will not be solved until 2020 at the earliest.
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