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Muted outlook for Taiwanese banks

0.6% ROAA from 2016-2018

The income capability of Taiwanese companies is probable to be small for the next two years, in the midst of the current low-interest-rate setting and absence of significant industry consolidation. S&P ratings believe that ROAA in the country’s banking sector will continue to remain flat for the next two years due to heavy competition and slow growth in non-interest income with the average return on average assets (ROAA) of only 0.6 per cent from 2016 to 2018.

“The average ROAA has improved slightly in recent years due to low credit provisions, good lending environment and better margins from overseas banks,” said the firm.

The banking industry of Taiwan has lower general profitability in comparison with its global counterparts. They noted that local lenders maintained an annual growth of one-digit loans over the five years ending in 2018.

“As companies expand their existence abroad, their development in loans abroad has moderated from the elevated point in 2010-2011. In general, the products offered are straightforward and sufficiently transparent, including in foreign economies, “the study explains.

S&P also considers Taiwan’s finance industry to be mildly volatile, fueled by its extremely divided composition and reduced income, which have adverse effects on the dynamic characteristics of the industry.

“At the beginning of 2018, only one-third of complete scheme investments were governed by the bottom three companies, with around 20 companies representing less than 2 per cent of complete scheme investments,” said the company.

S&P looked on the banking sector of Taiwan compared to Israel, Malaysia, Mexico and New Zealand, which has more than 50 per cent of the top three banks ‘ market share.

“Taiwan’s fragmented operating environment has led to rather intense competition, which, in our opinion, limits the ability of banks to price risk in their core lending activities. As of the end of 2019, the FSC would quickly be able to grant permits to several digital companies wanting Taiwan to operate, which could boost rivalry further, “S&P explains.

In spite of the previous demands by the Taiwanese regulator for fusions between state-run banks and private banks, S&P believes the industry will not experience a significant privatisation or sector consolidation in the next two years. The company also believes that non-banking financial institutions will not be able to substantially boost competition because of their limited market presence in the industry.

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