Taiwanese banks' impaired loans may rise 2.5%

Weaker profitability will inhibit capital momentum.

The pandemic is doing its damage on Taiwanese banks’ earnings and capitalisation, with impaired loans possibly rising to 2-2.5% especially for banks heavily exposed to vulnerable sectors, reports Fitch Ratings.

Feeble profitability limits capital gain and those with relatively higher risk are unguarded against asset quality decay. Even if state banks remain stable due to continued sovereign support, their intrinsic credit profiles are still vulnerable to greater near-term pressure because of their larger policy roles.

Exposure to emerging Asian markets can also drag the sector down as these sectors combined accounted for around 20% of total loans. Residential housing secured exposures will still dominate loan books, but a stable housing market will bolster their credit profiles alongside a higher demand from reshoring and secure employment.

Sector-side revenue pitfalls from narrowing interest margins are evident, both in Taiwan and US dollars, the report said. Other challenges include nimble growth in fee income from wealth management and bancassurance due to reduced customer activity and appetite, as well as expectations of a significant rise in credit costs.

On the bright side, funding and liquidity for all rated banks are still robust on the bank of the country’s adequate system liquidity in terms of both Taiwan and US dollars.

Other banks are expected to maintain secure capitalisation that will correspond to perceived risk appetite and rating levels. The regulator's planned cuts in risk weights for secured residential-housing loan exposures, which may be implemented by June 2021, will bear insignificant effect capitalisation as Taiwan already has a historically higher risk weight for residential-housing loans relative to other developed markets. Most rated banks will gain a 1-2 pp gain in their reported capital ratios from the regulatory relaxation, the report said.