Can Taiwanese banks keep a lid on overseas exposure risks?

Exposure to China has been growing since 2010.

Taiwanese banks are expected to contain their growing exposure to overseas markets particularly to China whose exposure levels have been in a gradual uptrend since 2010, according to S&P Global Ratings. 

Local banks are fiercely competing to attract RMB deposits as they pose more attractive yield spreads than settling and trading TWD. 

“We expect potential risk associated with the rising overseas exposure is manageable supported by prudent expansion strategy and adequate risk Controls,” added S&P. 

The number of outstanding loans extended and investments made by Taiwanese banks in China fell from $57.83b (NT1.73t) to $57.49b (NT1.72t) in Q1, pushing down the banking sector’s average exposure to China relative to combined net worth from 0.54 to 0.53, according to an earlier report from the Financial Supervisory Commission (FSC).

The level of exposure remained below the ratio ceiling of 1.00 set by local financial regulations, which indicates that the local banking sector does not face any pressing risks caused by exposure to China.

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However, profitability is expected to remain flat over the coming quarters amidst expectations of higher interest rates brought about by the Fed’s tightening. "[O]verall profitability to remain flat and largely constrained by keen competition and limited growth in non-interest income,” added S&P.

Here’s more from S&P:

Asset quality metrics were largely stable over the past two years. We expect banks' asset quality to remain largely unchanged in 2018-2019, given our projection of a stable credit outlook for corporate and property markets in Taiwan

Most Taiwan banks have adequate-to-strong capitalization, which is the greatest credit strength of the sector. The average regulatory tier I ratio is 11.88% as of the end of first quarter of 2018. 

We believe the sector's capitalization will remain solid in 2018- 2019 under banks' capital raising measures to meet the Basel III regulatory capital framework as well as controlled growth in risk based assets to meet higher regulatory capital requirements by 2019. 

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