Taiwan banks will manage the impact of COVID-19 oubtreak: Fitch

But they will experience stress from SME and personal loans.

The impact of the COVID-19 outbreak on Taiwan’s banks should remain manageable, as the fallout of the outbreak should be mitigated by measures taken by the government as well as their smaller exposure to the tourism sector, reports Fitch Ratings.

The government has announced a debt-relief programme that should help alleviate the challenges faced by borrowers in the tourism and transportation sectors. Border controls and travel restrictions within APAC will also hurt tourism, though the industry makes up only around 2% of the GDP.

Overall, banks face near-term pressures on domestic and offshore asset quality and earnings, although it should remain manageable, added Fitch.

However, financial institutions are likely to experience stress in their SME and personal loans, which make up 29% and 39% of system loans, respectively, on the back of retail and consumption activities slowing down. But Taiwan banks’ cautious appetite for risk on personal loans should limite credit losses, Fitch noted.

“SME loans are mostly collateralised with real estate, and Taiwan banks have maintained a very cautious appetite for risk on personal loans since the credit card crisis during 2005-2006. These mitigants should limit the ultimate credit losses even though delinquencies may increase as a result of stress to consumption,” the report read.

On the other hand, any disruptions in the electronics sector might weigh on Taiwanese corporates and their debt-servicing capability. The sector is estimated to make up around 10% of system loans in Taiwan, including exposure through banks’ offshore banking units.

But no significant asset-quality deterioration is expected as the corporates involved are established firms. Taiwanese corporations have also diversified their production bases from China since 2015, which reduces their reliance and concentration risk.

“The build-up in loss-absorption and other buffers in recent years and ample levels of system liquidity should support the banks' standalone credit profiles,” the note stated.

The government programme is likely to include permission for deferred repayments and new lending at preferential rates to affected sectors, mainly tourism and transportation, small businesses, and individuals. Whilst the programme may increase the state banks' near-term asset-quality risks, these should be mitigated by the limited number of affected sectors that will qualify for the programme, concluded Fitch.