Banks in Taiwan were unlikely to benefit from an economic recovery because of an alarming leverage ratio, credit quality and an overcrowded banking industry, said Fitch Ratings.
"The main challenge for the banks arises from the large existing stock of private credit," Jonathan Lee, the rating agency's senior director of financial institutions wrote.
Private credit represented 165 per cent of the gross domestic product of Taiwan at the end of 2012, much higher than the A or AA rated peer median of 94 per cent and 119 per cent, Fitch said. "As nearly half of these loans are property related, further lending in this sector would be of questionable quality," Lee said.
While the uplifting credit-driven and property-related prospects in Taiwanese banks were unsustainable, the household debt servicing ratio, a measurement on the ability of handling debt, was at an unfavourable level of 122 per cent of disposable income, meaning that Taiwanese households were more indebted than all their regional peers except for Korea and Japan, the rating agency said.
Fitch estimated that a 2 percentage points increase in borrowing costs would raise debt-servicing from the current 38 per cent of disposable income to around 45 per cent, a level of stress close to that of Taiwan's 2005-2006 credit card crisis.
Taiwanese banks often compete for small- and medium-sized enterprises (SMEs) lending, as larger firms are able to raise their own financing, especially in the technology sector - the main driver for Taiwan's export-led economic recovery.
While the competition remained high, the benefits for Taiwanese banks amid the anticipated economic upturn would be muted by the tough market pricing in the SME sector, the rating agency said.
Fitch said an aggressive ramping-up of the Taiwanese banks' exposure to the less-developed credit market on the mainland may further weigh on their risk profiles, as more access from Taiwan companies to the mainland had been established.
"Taiwan remains an over-banked market and we do not foresee further efficiency gains any time soon as large-scale consolidation is not on the cards," Fitch said, noting the intensified competition would pressure operating margins and limit the gains from an upturn.