Taiwan banks show stable asset quality

Fitch sees a favourable outlook for Taiwanese banks in the next 2 years.

Fitch Rating's stable outlook on the operating environment (OE) score of Taiwanese banks reflects expectations of favourable economic conditions supporting stable asset-quality performance in the next two years. 

Regulatory measures implemented since 2020, including increased risk weights for certain property loans and loan-to-value caps, have helped mitigate risks associated with property-related lending, which has moderated in recent years.

Whilst, overseas exposures of Taiwan-based banks have remained stable over the past five years, the geographic mix has shifted notably, with increased assets in the US and decreased exposure to mainland China. 

However, overseas exposures do not currently influence OE assessments, as exposures from developed markets counterbalance those from emerging markets.

Additionally, forecasts indicate a rise in Taiwan’s GDP per capita to over $35,000 by 2025, which could elevate the implied OE category score.

The recent merger between Fubon Financial Holding Co. and Jih Sun Financial Holdings in 2022-2023, whilst significant, is not expected to materially impact the sector's highly fragmented nature. 

Larger mergers involving state-controlled banks are deemed less likely in the near future due to potential political hurdles and labour resistance.

Fitch emphasises that significant increases in emerging market exposure could exert pressure on OE assessments in the future. However, this scenario is not the base case.

Despite these challenges, Fitch acknowledges the resilience of Taiwan's banking sector and expects continued stability in asset-quality performance supported by regulatory oversight and precautionary measures.