Taiwanese banks would maintain stable earnings ability next year, as healthy exports and private investment would continue to drive the economy and support the banking sector amid expected rate cuts at home and in the US, Fitch Ratings said on Monday.
“We expect profitability [for the banking sector] to moderate slightly, as interest rate cuts in the US and Taiwan are to slow gains from foreign-exchange swaps and asset yields,” Fitch said in a report.
However, the rate cuts would ease borrowing costs, stimulate offshore lending momentum and reduce overall funding costs, which should alleviate pressure on net interest margins, it said.
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The key performance metrics would take place alongside Taiwan’s economic growth, which would mitigate to 2.7 percent next year, from an expected 4 percent pickup this year mainly due to the high base effect, Fitch said.
Strong exports of artificial intelligence-related products and investment activities would continue to be main growth drivers, it said.
Loan growth, which is 7.7 percent this year, is likely to stand at 5.6 percent next year, in line with GDP growth moderation, it said.
The scenario, along with rising fee income, should uphold core profitability and put banks in a good position for the international accounting rule changes, although the impact on capital should be limited, it said.
The ratings agency is looking at a modest rise in credit costs and impaired-loan ratios linked primarily to the unwinding of domestic relief loans from next year to 2026 and offshore lending.
A consistently low unemployment rate — projected at 3.3 percent for next year — and improving GDP per capita should offset potential asset-quality pressure and lend support to borrowers’ debt-servicing ability, it said.
A housing price correction could weigh on the banking sector’s profit outlook, as property loans including mortgage and construction loans constituted 37.5 percent of total domestic loans as of August, Fitch said, adding that a significant portion of loan collateral is also in real-estate properties.
House price correction is not Fitch’s base case scenario, it said.
The central bank’s tightening measures in June and September highlight the growing risks in banks’ exposure to the property market, it said.
Downward pressure on interest margins from rate cuts could strengthen banks’ risk appetite and prompt them to expand offshore lending in pursuit of higher yields, it said.
Aggressive growth in foreign borrowers across emerging markets could weaken the sector’s asset quality and core capitalization, Fitch said.
Softer economic growth among Taiwan’s major trading partners could also drag banks’ business generation prospects and deteriorate the sector given the nation’s open economy and high reliance on exports, it said.
Industry consolidation should have a positive effect on the sector, particularly in terms of earnings, profitability and capital accumulation, it said.
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