World Economy

Taiwan Banks Face New Challenges

Taiwan Banks Face New Challenges
Taiwan Banks Face New Challenges

In an environment where interest rates have been trending lower, Taiwan’s banking sector is expected to face more challenges and see its profitability weaken in 2016, according to Taiwan Ratings, a local partner of US-based Standard & Poor’s.

To boost the local economy, the central bank cut its key interest rates twice late last year, which is expected to exacerbate pressure on the banking sector’s interest spreads this year and hurt its bottom line, the ratings agency said, CNA reported.

In 2015, Taiwan’s economy grew only 0.75% from a year earlier, compared with a year-on-year increase of 3.92% recorded in 2014, after contracting 0.80% and 0.52% in the third and fourth quarters, respectively.

The economic weakness prompted the local central bank to lower interest rates starting from the third quarter of last year with the discount rate at 1.62%.

In addition to the unfavorably low interest rates, Taiwan Ratings said that the local banking sector has been also affected by rising competition and higher credit costs.

“Taiwan’s tepid economic growth and a rise in credit costs away from recent lows could further temper the sector’s narrow profit margins over the next 12 months,” Taiwan Ratings’ credit analyst Eva Chou said in a statement.

“That’s despite a modest improvement in the sector’s earnings over the past five years under a favorable credit environment and higher interest spreads from banks’ overseas expansion,” Chu said.

Taiwan Ratings said that a plunge in Taiwan’s exports in 2015 had made the local economic fundamentals even worse and added pressure on the local banking sector. Amid falling global demand, Taiwan’s exports for 2015 fell 10.6% to $280.48 billion, and outbound sales for January continued to fall, down 13% year-on-year, to $22.2 billion.

The ratings agency said that Taiwan’s banks have faced other challenges from tightening financial regulation, low market sentiment, and volatility in the local real estate market.

It added the local banking sector’s large credit exposure to China also served as a possible negative factor for its earnings. China is the largest debtor to Taiwan’s banks.

Despite the challenges Taiwan’s banks have encountered, “we consider banks in general to have adequate capitalization and abundant liquidity for the next 12 months,” Chou said.

“This supports our view of a stable credit outlook for Taiwan’s banking sector over the same period,” the analyst added. Taiwan Ratings said that outlook for the local banking sector remains stable.