Taiwanese banks' profitability to fall in 2016 despite strong performance last year

Blame the decline in policy interest rates and a likely increase in credit costs.

Moody's-rated banks in Taiwan reported resilient performance in 2015 despite a weak economic backdrop. Banks' asset quality and profitability metrics held up, while several banks received equity injections from their parent holding companies which bolstered their capitalization. Liquidity conditions in the banking system remained ample.

For 2016, Moody's expects Taiwanese banks' problem loan ratios to deteriorate modestly as the headwinds from weak economic growth will likely persist. Lending to small- and medium-sized corporates—whose performances are more sensitive to the economic cycle—are most at risk among the banks' loan exposures.

Moody's analysis is contained in its just-released report titled "Taiwanese Banks: Resilient Performance in 2015 Despite Weak Economic Growth."

Here's more from Moody's:

Moody's expects banks' profitability to fall in 2016, given the decline in policy interest rates and a likely increase in credit costs. The central bank cut interest rates by 0.375% between September 2015 and March 2016.

The cuts will likely translate into a modest narrowing of margins in 2016. Taiwanese banks' net interest margins remain low compared with their peers in the rest of Asia.

Nevertheless, overall profits will be supported by strong non-interest income. Taiwan's rated private sector banks, which are more nimble than their state-controlled peers, derive a large share of revenues from fee and foreign exchange-related income, and they continue to focus on growing their wealth management, bancassurance, and treasury businesses.

Given the high level of household savings and low yields on domestic investments, the banks will likely maintain momentum in their non-lending businesses.

Rated banks generally reported modest loan and balance sheet growth amid weak economic growth. Moody's expects loan demand to remain subdued in 2016, allowing the banks to maintain reasonably good capitalization.

Liquidity conditions remained ample in 2015, and Moody's expects the trend to persist in 2016. The rated banks' aggregate loan-to-deposit ratios were little changed in 2015, and remained well below 100%.

Moody's point out the central bank has eased monetary policy repeatedly to provide stimulus to the local economy, and monetary conditions should remain very accommodative throughout 2016.