Taiwan's state banks riding on false complacency?

A study conducted by Fitch Ratings reported that the Taiwanese public's strong confidence in their state banks has hindered reforms from being pushed.

Meanwhile, the report also said that Taiwanese state banks are capable of surviving credit losses that may result from a global cyclical downturn.

Of the six Taiwanese state banks under Fitch's coverage, Taiwan Cooperative Bank is most likely to go under in case of an external shock, with its Fitch core capital ratio falling below 4% in the stress test. The other five banks, namely the Bank of Taiwan, Mega International Commercial Bank, First Commercial Bank, Hua Nan Commercial Bank and Chang Hwa Bank, are able to maintain acceptable core capital ratios above 7%. 

Here's more from Fitch Ratings:

Stress test shows most Taiwanese state banks are adequately capitalised and capable of withstanding a severe increase in credit losses that may arise from a global cyclical downturn.

In a newly published report, Fitch says the loan loss ratios applied in the stress test range from 1.24% to 1.41%, markedly higher than the average historical loss rate of 0.65% in 2002-2011. Of the six Taiwanese state banks under Fitch's coverage, Taiwan Cooperative Bank is the most vulnerable to an external shock, with its Fitch core capital ratio falling below 4% in the stress test. The other five banks are able to maintain acceptable core capital ratios above 7%.

"Based on the stress test results, the Taiwanese government is unlikely to be burdened by unexpected capital calls from the large state banks in the foreseeable future," says Jonathan Lee, Senior Director in Fitch's Financial Institutions Group.

The key parameter driving the stress test is the banks' loan loss rates, a variable influenced by each bank's growth strategy and portfolio risk profile as reflected by sector composition, single-name concentration or diversification. Fitch notes that the state banks generally exhibit a modest appetite for growth and risk taking with loan growth tracking or below GDP growth.

The report also notes that strong public confidence in the solvency of Taiwanese state banks, despite most of them having weak capitalisation relative to overall Taiwanese banking sector and modest profitability, has resulted in false complacency among banks and impeded structural reforms.

The other five banks are Bank of Taiwan, Mega International Commercial Bank, First Commercial Bank, Hua Nan Commercial Bank and Chang Hwa Bank.