Bank of Taiwan -- Moody's says Taiwan's banking system outlook stable

"We expect the banks to either maintain or improve their capitalization to comply with more stringent regulatory requirements," says Sonny Hsu, a Moody's Vice President and Senior Analyst.

"However, Taiwanese bank profitability, which is among the weakest in Asia Pacific, will remain low amid intense competition and abundant liquidity, and will continue to weigh negatively on bank ratings," he adds.

Hsu was speaking at the release of a new Moody's report titled, "Banking System Outlook: Taiwan," which outlines Moody's expectation for the fundamental credit conditions of the system over the next 12 to 18 months.

According to the report, Moody's central scenario assumes that Taiwan's economy will grow by around 3.2% in 2012, compared with 4.0% in 2011, providing an accommodating backdrop for the banks. At the same time, headline inflation will likely increase from the low level of 2.0% in 2011 due to rising gasoline and electricity prices.

But, Moody's expects policy interest rates to remain little changed throughout 2012, given the weak external demand.

"We expect only modest loan growth of mid-single digits in 2012, which is in line with the pace of growth in 2011. The demand for household loans, especially mortgages, is likely to be weak amid continued sluggish property market activities," Hsu says.

Banks will aim to increase their SME and foreign lending to improve their net interest margins, while cutting back on their exposures to the troubled flat panel display and computer memory semiconductor sectors.

In Moody's stress test analysis, rated Taiwanese banks for the most part retain adequate capitalization in a cyclical economic downturn. But, they may require capital injections in the event of a local financial crisis.

"Although the rated banks for the most part have sufficient capital and impairment allowances to absorb credit losses in the stress scenarios, their weak profitability hinders the rebuilding of capital through earnings retention," Hsu says.

Moody's rates 10 commercial banks in Taiwan, which together accounted for 60% of total assets of locally incorporated banks as of 31 December 2011.

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