Taiwanese banks struggle with muted profit outlook

ROAA from 2016-2018 stood at 0.6%.

Taiwanese banks’ earning capacity is likely to stay low for the next two years amidst the prevailing low interest rate environment and the lack of meaningful industry consolidation. With average return on average assets (ROAA) at only about 0.6% from 2016 to 2018, S&P ratings believe that ROAA in the country’s banking sector is likely to remain flattish for the next two years due to fierce competition and limited growth in non-interest income.

“This is despite the average ROAA has slightly improved over the past few years because of low credit provisions, given the benign credit environment and better margins from banks' overseas businesses,” the firm said.

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Taiwan’s banking industry has a below-average overall profitability compared to its global peers. They noted that the local lenders maintained single-digit annual loan growth in the five years ending 2018.

“Whilst banks are expanding their overseas presence, their overseas loan growth has moderated from the high level in 2010-2011. Product offerings are generally simple with adequate transparency, including those in overseas markets,” the report explained.

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S&P also regard Taiwan’s banking sector as moderately unstable, fuelled by its highly fragmented structure as well as low earnings capacity, which negatively affect the industry's competitive dynamics. 

“At the end of 2018, the top three banks controlled only a quarter of total system assets whilst about 20 banks each accounted for less than 2% of total system assets,” the firm said.

S&P viewed Taiwan’s banking industry vis-à-vis Israel, Malaysia, Mexico, and New Zealand where the market share of the top three banks is more than 50%.

“The fragmented operating environment in Taiwan has led to rather intense competition, which limits banks' ability to price for risks on their core-lending business, in our view. The FSC could soon issue licenses to several virtual banks seeking to establish operations in Taiwan starting from late 2019, which could further increase competition,” S&P explained.

Despite Taiwan’s regulator previously calling for mergers between state-run banks and private banks, S&P thinks that the industry will not see meaningful privatisation or industry consolidation over the coming two years. Moreover, the firm thinks that non-banking financial institutions will not be able to significantly heat up competition given their limited market presence in the sector.