What could spur a slight improvement in Taiwanese banks' profitability?

An expected economic recovery will be a boon for banks.

Moody's Investors Service says that its stable outlook for Taiwan's banking system is underpinned by its expectation that an ongoing economic recovery will lead to a favourable operating environment, resulting in sound asset quality and a slight improvement in profitability.

"Taiwan's economy has rebounded from a yearlong recession that started in the second half of 2015, and we expect sustained growth in exports will drive real GDP growth of 2.1% in 2017 and 2.0% in 2018," says Sonny Hsu, a Moody's Vice President and Senior Credit Officer.

Moody's conclusions are contained in its just-released "Banking System Outlook -- Taiwan: Ongoing economic recovery and expected sound asset quality support stable outlook". The outlook expresses Moody's expectations of how the creditworthiness of banks in this system will evolve over the next 12-18 months.

Here's more from Moody's:

Moody's outlook assesses five key factors: operating environment (stable); asset risk and capital (stable); profitability and efficiency (stable); funding and liquidity (stable); and government support (stable).

"We expect the banks' problem loan ratios to remain broadly stable, with corporate borrowers maintaining sound financials and retail loans supported by stable labor market conditions," says Hsu.

Banks' capitalization, which has been strengthening on the back of slow asset growth, will improve at a more gradual pace, given expected faster loan growth, says Moody's.

Funding and liquidity profiles should remain sound. Taiwanese banks are predominantly funded by customers deposits, and the rated banks reported a low loan-to- eposit ratio of 74% at the end of March 2017. Liquidity conditions will also remain ample in Taiwan as the central banks maintains its accommodative monetary policy.

The banks' profitability should remain stable or improve slightly. Margins on banks' domestic currency-denominated assets will remain low due to ample domestic liquidity, intense competition, and modest demand for loans. Credit costs should remain stable or ease modestly amid the economic recovery. Banks will continue to focus on growing fee-based income from wealth management and credit card services.

Finally, government support will remain strong. The Taiwanese government did not allow any bank creditors or depositors to bear losses in the aftermath of the Asian Financial Crisis, and it has ample fiscal capacity to support banks, if needed.