Fitch: Taiwanese banks to see modest improvements in 2010

Fitch Ratings expects Taiwanese banks to generate slightly better earnings in 2010 as they benefit from the modest global economic recovery.

The agency believes the improvement will likely to be moderate taking into consideration the sector's chronic structural competition issues and the potential for elevated credit costs.

Although steady performance by large state-controlled banks and a very strong liquidity environment helped the Taiwanese banking system duting the crisis, Fitch says structural overhangs persist due to severe market fragmentation as a result of high level of government ownership and low profitability.

The agency adds the gradual increase in market share for state-controlled banks could further increase the pressure on the sector's loan pricing and overall profitability, with retail consumer confidence dwindling during the past financial crisis.

Fitch says there are also concerns over potentially higher credit costs in 2010 arising from the need for Taiwanese banks to make additional loan provision charges as they prepare for the new provision policy under accounting rule 34 (equivalent to IAS 39), set to be effective from 2011.

"The risk of asset quality deterioration in mortgages may also lead to higher credit costs; The spike in local housing price - more than 10% CAGR in the recent cycle from the trough in Q203 - warrants a risk of sharp correction. Combined with potential interest rate increases in 2010, as a fall in property prices is likely, this could affect Taiwanese banks' mortgage quality. That said, the non-performing loan (NPL) formation rates for mortgages were low at about 0.2%-0.3% (of average mortgage lending) in 2009, which is considered healthy," according to the agency.

The Fitch report adds, "Liquidity is one of the few areas in which Taiwanese banks compare favourably in the region. The offer of a blanket guarantee programme by the Taiwanese government is scheduled to end in December 2010, although further assistance may be necessary for weaker private sector banks, should liquidity and funding challenges re-emerge. Meanwhile, Taiwanese banks' capital position remains steady - the key factor supporting the sector's stable outlook in 2010."