Operating environment, bank business outlook for Taiwan to be stable: Fitch

• By Crystal Hsu / Staff reporter

Taiwan’s GDP would expand 3.2 percent this year, from 1.3 percent last year, Fitch Ratings said yesterday, posing a stable operating environment and business outlook for domestic banks.

“We expect the operating environment to be stable this year, supported by a recovery in external demand despite weak economic growth in the US and China, Taiwan’s top two trading partners,” Fitch credit analyst Cherry Huang (黃嬿如) said yesterday.

External demand is picking up thanks to an upturn in the technology cycle, the analyst said, adding that artificial intelligence applications are boosting exports and capital expenditure at semiconductor manufacturers.

The central bank’s interest rate hike of 12.5 basis points in March would have limited impact on borrowers’ repayment ability, while low unemployment, improving GDP and moderate inflation should mitigate asset-quality deterioration despite a gradual unwinding of COVID-19-related loans, Fitch said.

The rate hike should also have a limited impact on banks’ interest margins and loan quality, it said.

Fitch does not expect further policy rate hikes, as the central bank would keep interest rates at current levels for the rest of this year, the analyst said.

Rather, the agency is looking at a rate cut of 25 basis points next year to reverse the effect of monetary tightening this year and last year, Huang said.

Against that backdrop, Fitch assigned a “stable” outlook on Taiwan’s private banks on the expectation that their credit profiles would hold steady.

The rating suggests solid business and financial performance and manageable risk profiles, although lenders are likely to see a modest increase in impaired-loan ratios, from the unwinding of pandemic-related loans and offshore lending, analyst Sophia Chen (陳怡如) said.

Core profitability should hold steady this year, supported by consistent growth in lending and fee income and moderate credit costs, Chen said.

Most banks last year reported flat or improving profitability, with low credit costs and higher trading income.

The impact linked to international accounting rule changes on capitalization next year would be modest, and system liquidity would remain ample in local currency and US dollar terms, Chen said.

Ratings upside is also limited in the absence of major improvements in the banks’ franchises, profitability and capitalization, Chen said, adding that the scenario’s chance is dim, given Taiwan’s highly fragmented and competitive banking sector.

Taiwan banks’ credit profiles depend a lot on the resilience of their property assets in light of their high exposure to the real-estate sector, Fitch added.

Residential mortgage exposures climbed 7 percent over the past five years while commercial real-estate exposure grew 9 percent, helped by reshoring activity, despite unfavorable measures to cool the market, Fitch said.

“We expect regulators to remain vigilant about property loan concentration risks,” Fitch said, calling such risks “manageable” at present.