Taiwan banks face risks from property downturn

The improving financials may be more cyclical than structural, said Fitch.

Fitch says around 90% of the banks' Issuer Default Ratings are on Stable Outlook, while rating actions during 2010 were largely positive. Taiwanese banks generally demonstrated resilient credit profiles despite challenging economic conditions and increased capital market volatilities.

"The excessive housing price rises since 2003 may not be sustainable to bolster the sector's long-run risk-adjusted return," says Jonathan Lee, Senior Director in Fitch's Financial Institution group. "Coupled with potential rate hikes to contain inflationary pressures, an abrupt downturn in the property market could lead to a sharp deterioration in asset quality as, at 41% at end-2010, real estate-related lending represents a substantial portion of banks' total loans." In this context, Fitch takes a positive view of the recent tightening measures by Taiwan's various government administrations to avert potential systemic stress when the cycle reverses.

Fitch also points out that the ongoing liberalisation of cross-strait banking between Taiwan and China, whilst a potential long-term growth catalyst for the domestic banking sector, is not expected to immediately affect any ratings. In the near- to medium-term, any rating implications for Taiwanese banks in connection with China are more likely to be negative rather than positive, as potential long-term benefits may be outweighed by risks involved such as that of a China credit bubble.