Rising risk: Taiwanese banks' asset quality to be hit by China slowdown

Banks' asset quality is most susceptible to sharp housing price correction.

Taiwanese banks face increasing risks of asset-quality deterioration amid economic headwinds, mostly from a China slowdown, says Fitch Ratings in a new report. The overall sector outlook, however, remains stable, on a generally sound monetary environment and ample system liquidity. Taiwan has only limited vulnerability to currency and liquidity risks arising from tightening monetary policy by the US Federal Reserve or sustained weak commodity prices.

"Banks' asset quality is most susceptible to a sharp housing-price correction and economic slowdown in Taiwan and China. That said, the pick-up in credit costs from a cyclical trough would be manageable because banks have reduced their industrial concentration, particularly in the more volatile technology sector, and because prudential regulations have helped limit exposure to mortgages and mainland China, which has contained systemic risk," says Fitch.

Risk buffers have continued to expand to sufficiently withstand near-term asset quality challenges. This is despite Fitch's expectation that sector return on assets will decrease to 0.5%-0.6%, mainly on normalising credit costs, while interest margin and fee income from wealth management will remain largely stable. We expect stiff competition to raise banks' risk appetite, such as through the pursuit of aggressive offshore expansion, which is a key risk to the ratings of Taiwanese banks.