Taiwan’s plan to implement the final Basel III reforms in January next year would have a very limited impact on local banks’ capitalization and asset growth, since no banks are using the Internal Rating-Based (IRB) approach in calculating credit risk, Fitch Ratings said in a report on Thursday.
The final Basel III reforms include revised credit risk approaches, a standardized operational risk approach, a credit valuation adjustment framework, leverage ratio revisions and an aggregate output floor.
“As such, the output floor under Basel III would have no impact on banks using the standardized approach for calculating credit risk,” the agency said, adding that it does not expect large deviations in the banks’ capital calculation given that Taiwan’s risk weights are conservative compared with peers.
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The new capital rules are to lower the average common equity Tier 1 ratio by less than 20 basis points, it said.
Fitch said it is looking at stable core profitability, solid profit retention and moderate growth in risk-weighted assets to sustain capitalization.
The banks in Taiwan are well-positioned to adopt the new capital rules, including the higher capital surcharge (minimum Tier ratio of 11.0 percent) for domestic systemically important banks (D-SIB) by the end of next year, it said.
Taiwan’s six DSIBs have already met or are on track to meet the minimum regulatory capital ratio.
Banks with assets of more than NT$2.5 trillion (US$78.31 billion) may seek approval to use the more complicated IRB approach, with full implementation likely by 2026, Fitch said.
The IRB approach allows banks to model their own inputs for calculating risk-weighted assets from credit exposures to retail, corporate, financial institutions and sovereign borrowers, subject to supervisory approval.
IRB adoptions would be limited initially to DSIBs and that their operating profit/risk-weighted assets and Tier 1 ratios would improve modestly as they leverage on the capital uplift to expand their lending capacity, Fitch said.
However, their financial metrics would remain below those of regional peers in developed markets, in light of persistent competition and thin margins in Taiwan’s highly fragmented banking sector, it said.
Taiwan’s bank capital regime would remain more conservative relative to global practices, although risk-weight calculations post-IRB adoption should narrow relative to regional peers, it added.
Taiwan excludes property revaluation and other comprehensive income valuation gains from Tier 1 capital and imposes higher risk weights for select property exposures to contain concentration risk, Fitch said, adding that the sector’s non-performing loan ratio has stayed at very low levels for the past decade.
However, excessive growth in pursuit of yield overseas and high dividend payouts could pressure the banks’ viability ratings, Fitch said.
Still, the country’s stable operating environment would help sustain the banks’ financial metrics regardless of Basel III implementation, it added.
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