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Banking Industry Country Risk Assessment Update: July 2020


Banking Industry Country Risk Assessment: Taiwan

BICRA Group4
Government SupportHighly Supportive

Major Factors

Strengths:
  • High level of stable, core customer deposits support bank funding.
  • Strong household financial position mitigates high private sector debt.
  • Stable economic growth, supported by a dynamic and entrepreneurial private sector.
Weaknesses:
  • Highly competitive operating environment with low earnings capacity.
  • High proportion of state ownership in banks leads to some distortions in the competitive landscape.

Rationale

S&P Global Ratings classifies the banking sector of Taiwan (unsolicited; AA-/Stable/A-1+) in group '4' under its Banking Industry Country Risk Assessment (BICRA). Other countries in group '4' are Ireland, Kuwait, Malaysia, New Zealand, Poland, Saudi Arabia, Slovenia, and Spain (see chart). A BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10).

Our bank criteria use our BICRA economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating only in Taiwan is 'bbb'.

Chart 1

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BICRA Overview

Economic risk for the Taiwan banking sector remains relatively low by global comparison, reflecting Taiwan's moderately stable economy and strong household net financial positions. We believe the COVID-19 pandemic will affect Taiwan's open economy with bank asset quality weakening this year. However, we believe this is manageable for Taiwan banks, given their solid capital buffers and adequate underwriting standards.

We expect domestic property prices to remain largely unchanged over the next two years with only a low risk of a sharp correction in prices over the same period, given the prevailing low interest rate and relatively benign economic environment in Taiwan. We also believe that banks' adequate underwriting risk controls on property related loans and prudent loan-to-value ratio, in conjunction with strong household balance sheets will help to moderate the sector's overall credit risk.

We see industry risk for Taiwan banks as somewhat high compared with that of peers in BICRA group 4. We believe that Taiwan's highly fragmented banking system and competitive distortions in the pricing for key products will continue to pressure the sector's earning capacity compared with global peers. Competitive distortions result from the operating strategies of state-run banks, which command about half the system's assets. Nonetheless, the high proportion of retail deposits in the system should help to maintain banks' access to funding during periods of global economic turbulence, in our view.

Economic And Industry Risk Trends

We regard Taiwan's economic risk trend as stable. Although we expect moderate economic contraction in 2020 in the face of COVID-19 pandemic, we expect a rebound of 4% to follow in 2021. Taiwan real estate prices have stabilized since 2017 and we believe the risk to the overall financial system remains manageable, aided by the regulator's close oversight on banks' credit policies. Nevertheless, economic risks facing banks in Taiwan are likely to increase if there is a significant rise in private sector debt. A significantly more prolonged or deeper economic downturn than our current forecast would also pose greater risks to the banking sector.

We also see banks' industry risks trend as stable because bank earnings are likely to remain subdued in the foreseeable future, partly due to the fragmented local market. We expect COVID-19 to bring a profit shock to banks, but no capital shock. We also forecast banks' strong core deposit base will continue to support the industry's funding profile and that funding will remain less confidence sensitive.

Economic Risk  |  3

Economic resilience: Economic growth buffeted by weak external demand

Economic structure and stability.  Taiwan is a middle-income economy by global standards. We project Taiwan's economic growth to contract 1.2% in 2020 before rebounding by 4% in 2021. This will lead to per capita GDP of US$26,100 in 2020 and trend growth, as measured by the 10-year weighted average of real GDP per capita growth, of approximately 2.2%.

Effective containment and mitigation measures, as well as a robust healthcare system, have greatly reduced the impact of the COVID-19 outbreak in Taiwan. This has helped the government avoid the stringent lockdown measures implemented in many other parts of the region, thereby enabling Taiwan's domestic economic activity to weather the COVID-19 storm better than many peers. However, weak external demand is still likely to buffet Taiwan's open economy. That's due to the collapse in tourism arrivals and a deteriorating outlook for the semiconductor industry, particularly in the second half of 2020, considering Taiwan's export-oriented economic structure.

However, under our base case assumptions for Taiwan, we believe the COVID-19 shock will be temporary. As the outbreak recedes, we expect a strong economic recovery on the back of Taiwan's dynamic and highly competitive electronics manufacturing sector. In particular, Taiwan's top semiconductor pure-play foundries have emerged as leaders in the manufacture of high-end integrated circuits. Surging demand for these technology-intensive chips, including from 5G network deployment, big data processing, analytics, and artificial intelligence, will drive investment growth and economic activity. We also expect a marginal investment benefit from the relocation of some production chains by Taiwanese manufacturers, driven by rising costs in the mainland, U.S.-China trade tensions, and incentives from the Taiwanese government in terms of tax and funding.

Macroeconomic policy flexibility.  We consider the Taiwan government has a high degree of fiscal flexibility, benefiting from high domestic savings and low interest rates that contribute to low real borrowing costs. We also assess the Taiwan government as having strong credibility in terms of monetary policy-making, resulting in low inflationary pressure and effective prevention on speculative capital inflows. The volatility of Taiwan's exchange rate is relatively low compared with other currencies in the region.

Political risk.  Cross-strait relations have cooled since the current government took office in 2016, but the negative impact on economic activities has been relatively modest. The Chinese government maintains pressure on the Taiwanese government through military exercises near the island and via diplomatic channels. Under our base case, we do not expect a material deterioration in practical relations, despite some occasional saber-rattling.

Table 1

Taiwan --Economic Resilience
--Year ended Dec. 31--
(%) 2017 2018 2019 2020f 2021f 2022f
Nominal GDP (bil. $) 590.80 608.28 611.11 617.05 650.10 678.22
Per capita GDP ($) 25,064 25,787 25,890 26,131 27,524 28,713
Real GDP growth (%) 3.3 2.7 2.7 (1.2) 4.0 2.6
Inflation (CPI) rate (%) 0.6 1.4 0.6 (0.5) (0.0) 0.5
Monetary policy steering rate (%) 1.4 1.4 1.4 0.9 1.1 1.1
One-year government borrowing rate (%) 0.4 0.6 0.6 0.4 0.4 0.4
Net general government debt as % of GDP 34.8 33.6 33.1 36.5 35.7 34.9
CPI--Consumer price inflation. f--Forecast. Source: S&P Global Ratings' Financial Institutions Ratings.
Economic imbalances: We expect stable property prices and moderate private sector credit growth to maintain the current imbalance

Private sector credit growth.  We expect the private sector's credit expansion to be moderate and manageable over the next two years, given Taiwan's GDP growth has historically been the benchmark for bank-loan expansion, albeit with a lag. Private sector credit grew by 5.7% in 2019, in tandem with somewhat strong GDP growth over the past two years. The higher growth momentum in 2019 also benefited from the Taiwan government's three incentive programs to help Taiwanese firms with operations in China to make investments in Taiwan of up to US$33 billion as of May 2020, in the wake of the ongoing U.S.-China trade dispute. However, we expect lower private sector credit expansion in the coming two to three years due to weak external demand and lower domestic economic activities amid COVID-19. We estimate the average increase in the private sector debt-to-GDP ratio to be 4.68% points for the four year period up to the end of 2020.

Real estate prices.  We expect real estate prices to remain relatively stable over the next two years, although somewhat pressured by the COVID-19 pandemic. We consider the measures implemented by Taiwanese authorities--such as regulatory restrictions on property lending, taxation, regulatory capital risk charge, and interest rate changes--aided an orderly slowdown of the domestic property market during the recent property cycle ending around 2016. In recent years, the local regulator has relaxed property lending restrictions, and the central bank lowered the policy rate by 25bps in early 2020 in the face of COVID-19. The regulator is scheduled to further relax the capital charge on mortgages in tandem with international practice in the second half of 2021. We expect the lower burden on debt payments and regulatory relaxation to support property prices over the coming two years, thereby reducing the risk of a sharp correction in the property market during the period.

Equity prices.  Taiwan's stock market performance remains subject to global market volatility. Nevertheless, Taiwan banks have maintained a low risk appetite and low exposure to the local equity market which results in a limited impact from equity price volatility on banking sector risks.

Current account and external debt position.  In our opinion, Taiwan's strong external position remains supportive of the economic environment for banks operating there. The economy's net external asset position is robust and Taiwan has historically maintained large current account surpluses of 10%-15% of GDP. We anticipate a lower current account surplus over GDP over the next two to three years with contracted global demand in the wake of COVID-19. The ratio of net external debt to GDP was negative 198% in 2019, and we expect Taiwan to remain a significant net creditor over the next three to five years.

Table 2

Taiwan --Economic Imbalances
--Year ended Dec. 31--
(%) 2017 2018 2019 2020f 2021f 2022f
Annual change in claims of resident depository institutions in the resident nongovernment sector in % points of GDP 5.1 5.2 4.1 4.4 (0.5) 2.7
Annual change in key index for national residential house prices (real) (%) 1.1 0.5 2.7 1.0 1.0 1.5
Annual change in inflation-adjusted equity prices (%) 14.5 (10.0) 22.8 (28.7) 17.7 (0.5)
Current account balance/GDP 14.1 11.6 10.5 3.9 7.8 7.3
Net external debt / GDP (%) (187.0) (194.7) (197.8) (197.9) (192.0) (188.4)
f--Forecast. N.A.--Not available. Source: S&P Global Ratings' Financial Institutions Ratings.
Credit risk in the economy: Strong household financial position mitigates somewhat high private-sector indebtedness

Private-sector debt capacity and leverage.  We expect Taiwan's private sector debt to remain above 150% of GDP over the next two years, which we consider high in the global context and in the context of a mid-range per capita GDP. Taiwan's per capita GDP was about US$25,890 in 2019.

In our view, Taiwan's very strong household financial position, which we understand is spread across a wide section of the population, partly alleviates the risks posed by the high private-sector debt. That's because we believe the high level of financial assets held by households provides a good buffer against adverse credit or economic events. Taiwan's household ratio of cash and deposits to GDP was a high 179% at the end of 2018, resulting in a very high ratio of household financial assets to GDP of 460% as of the same time. The household sector's ratio of financial assets to debt is above 5 times for the household sector.

We believe the household sector is significantly financially stronger in Taiwan than in Malaysia, which has a broadly similar level of household debt to GDP, but with different per capita income levels. The financial assets of households in Taiwan form more than 400% of the nation's GDP, compared with about 200% for Malaysia.

Lending and underwriting standards.  In our view, Taiwan banks have conservative lending and underwriting standards. Risk management tools have gradually improved in recent years and we believe these can generally fit banks' needs relative to their somewhat simple credit risk profiles. Underwriting standards for mortgage lending are generally prudent, based on a number of measures, including internal scoring, serviceability test, and collateral appraisal. The average loan-to-value ratio of mortgage loans in Taiwan is a conservative 50%-60%, and about 70% for newly extended mortgage loans.

Foreign-currency lending accounted for 17% of total lending as of the end of 2019, with about 20% of this lending China-related. The share of foreign-currency lending was stagnant over the past year, given the continuous slowdown in China's economic growth and the recent U.S.-China trade dispute. We expect the foreign-currency lending may inch downward in 2020 with a further shock from the COVID-19 pandemic. We also believe most corporate borrowers in Taiwan are naturally hedged with real business activities and somewhat immune from foreign exchange volatility. The use of securitization or off-balance sheet risk exposure is also quite low, and there is no significant concentration in cyclical or vulnerable sectors, in our opinion.

Taiwan banks' overall asset quality has remained stable over the years. The average ratio of nonperforming loans (NPLs) stood at 0.2% as of the end of 2019. The challenging operating environment under COVID-19 is pressuring domestic loan serviceability in sectors such as travel and tourism, transportation, retail, as well as for borrowers with reliance on China's economy or trade. We expect a moderate deterioration in asset quality with the NPL ratio rising to 0.4% in 2020 and credit cost (which we define as the ratio of new loan loss provisions to average customer loans) increasing by about 50bps to 76bps. We expect this to be followed by decline in the ratio to 0.3% and credit costs of 35bps in 2021 as the economy rebounds.

Payment culture and rule of law.  We believe banks operating in Taiwan benefit from an effective legal framework and adequate payment culture. Taiwan has satisfactory speed and effectiveness with regard to legal claims over loan default and collateral recovery, in our view. We consider that the personal bankruptcy law effective since 2008 does not particularly favor debtors and allows the creditors timely settlements of defaulted loans. In addition, Taiwan's courts appear quite rigorous in reviewing debtors' bankruptcy/debt relief applications.

Table 3

Taiwan--Credit Risk In The Economy
--Year ended Dec. 31--
(%) 2017 2018 2019 2020f 2021f 2022f
Claims of resident depository institutions in the resident nongovernment sector as a % of GDP 152 157 161 166 165 168
Household debt as % of GDP 75.2 77.8 79.7 81.9 81.7 83.0
Household net debt as % of GDP (381.3) (381.9) (384.3) (394.8) (393.6) (395.4)
Corporate debt as % of GDP 76.6 79.2 81.4 83.6 83.4 84.7
Real estate construction and development loans as a % of total loans 7.1 7.2 7.7 7.7 7.7 7.7
Foreign currency lending as a % of total loans 17.2 17.4 16.6 15.6 16.2 16.1
Nonperforming assets as a % of systemwide loans (year-end) 0.3 0.2 0.2 0.4 0.3 0.3
Loan loss reserves as a % of total loans 1.3 1.4 1.4 2.7 1.6 1.6
f--Forecast. Note: Non-performing assets refer to Taiwan Baking Bureau data. Source: S&P Global Ratings' Financial Institutions Ratings.

Base-Case Credit Losses

We estimate the economic fallout from COVID-19 will increase pressure on banks' asset quality, despite remaining at a manageable level. The transportation and lodging/dining industries have taken a hard knock form the virus outbreak, with these sectors accounting for 2.3% and 0.8%, respectively, of domestic loans for Taiwan banks. The wholesale and retail sector has also been negatively affected, and accounts for 5.7% of domestic loans. The commodity sector and major export sectors such as electronics manufacturers are also affected, albeit in a more minor way.

Taiwan's Financial Supervisory Commission (FSC) and central bank have taken several measures to offset the impact of COVID-19. The central bank cut its interest rate by 25bps in late March and provide NT$200 billion special refinancing facilities to small and medium enterprise (SMEs), while the FSC has asked banks to support the government's policy of providing relief measures including principal deferrals and interest reduction. We consider this moratorium mechanism could help to prevent large scale defaults. As of the end of May, the total moratorium application is less than 3% of the banks' total loans.

We expect banks in Taiwan to show rising credit losses in 2020, due to COVID-19, their linkage to China's economy, and the U.S.-China trade dispute. However, we expect banks' credit losses to decline in 2021-2022 along with a projected rebound in economic growth.

Our base-case credit loss estimates take into account the following expectations:

  • Taiwan's GDP growth to contract by 1.2% in 2020 and rebound by 4% in 2021 and 2.6% in 2022.
  • The banking sector's impaired assets ratio to increase to 2.3% in 2020, up from 1.3% as end of 2019, including foreclosed property and other substandard loans that are not included in the official NPL ratio. The banking sector's official NPL ratio was 0.2% as of 2019, which we expect to double to 0.4% in 2020. The overall asset quality metrics should ease closer to the long-term average by 2022.
  • The low interest rate and ample liquidity in the domestic banking system will persist over the next two years.
  • Banks will maintain their prudent lending and provisioning policies.
  • Real estate prices will remain stable over the next two years.

Table 4

Taiwan--Projected Credit Loss Rates* (as % of Lending)
--Year ended Dec. 31--
(%) 2019e 2020e 2021e 2022e
Corporate 0.18 0.86 0.31 0.31
Prime residential mortgages 0.05 0.17 0.09 0.09
Other unsecured 1.07 1.75 1.11 1.11
Total 0.25 0.76 0.35 0.35
e--Estimate. *Credit loss rate is calculated as write-offs divided by on-balance-sheet credit exposures. Source: S&P Global Ratings' Financial Institutions Ratings.

Industry Risk  |  5

Institutional framework: Effective supervision with adequate regulatory framework

Banking regulation and supervision.  We consider Taiwan's regulatory environment and supervision quality to be adequate with adequate frequency relative to the local banking system's business and risk characteristics. Regulations are broadly in line with international standards and continue to evolve in line with banks' increasing business and geographical diversification.

Taiwan's regulator--the Financial Supervisory Commission (FSC)--has incorporated the BASEL III accord into the regulatory framework since 2013. The FSC has strengthened the required minimum Tier-1 capital ratio to 8.5% in 2019 from 4.5% in 2013 and the bank for international settlement (BIS) capital ratio to 10.5% in 2019 from 8.0% in 2013.

Additionally, Taiwan banks were required to strengthen their minimum regulatory liquidity coverage ratio to 100% in 2019, up from 60% in 2015, and also maintain a net stable funding ratio at above 100%, again since 2019. We expect all banks in Taiwan to fully meet the requirement. The regulator also recently increased the maximum penalty for non-compliance of the banking law to New Taiwan dollar (NT$) 50 million from NT$10 million. The FSC has designated five domestic systemically important banks (D-SIBs) to enhance system stability by requiring additional capital buffers.

The FSC is the primary financial service supervisor in Taiwan and is responsible for regulating the banking, securities, and insurance sectors. Taiwan's central bank and the Central Deposit Insurance Corp. also have statutory powers to inspect financial institutions.

Regulatory track record.  We expect the FSC to conduct timely and effective regulation and supervision over the banking system through the regulator's commitment to maintain system stability. The regulator has good capabilities to identify problems at an early stage and can intervene when it detects any inherent risks. We note that the FSC took concrete actions during the period of financial market dislocation from 2008-2009, as well as actions relating to the island's booming property related lending business since 2010. The FSC has also closely monitored individual bank's China exposure on a quarterly basis since the second half of 2013 after the Chinese economy began to slow down.

In response to the outbreak of COVID-19, the FSC and central bank have taken several measures to mitigate the pandemic's impact. The central bank has cut its interest rate by 25bps in late March and provide NT$200 billion special refinancing facilities to small and medium enterprises, while the FSC has asked banks to support the government's policy of providing relief measures including principal deferrals and interest reduction. The FSC will also monitor banks' efforts to support those relief programs with incentives. This early help should significantly reduce the risk of large scale defaults.

Governance and transparency.  We assess Taiwan banks as possessing generally clear and standardized disclosure in terms of ownership structure and management compensation schemes and with adequate frequency. The accounting and auditing standards of the banking system are also adequate, in our view. Banks have gradually adopted International Financial Reporting Standards (IFRS) since 2013, though there remain some local adjustments on the application of standards. Taiwan banks are required to publish semi-annual Basel-III compliance pillar-3 reports. The FSC also requests banks with higher foreign ownership or listing status to provide English annual reports to enhance information disclosure starting from 2019. Financial institutions must report all financial account information through the common reporting standard (CRS) in June 2020 and began exchanging information with other countries since September 2020.

Competitive dynamics: Highly fragmented banking sector with market distortions resulting in low earning capacity

Risk appetite.  We assess Taiwan banks as having a moderate risk appetite and we believe the banking sector faces significant competitive pressures that impinge on banks' ability to fully price their products and services for risks taken by them. The industry's overall profitability is below average compared with that of global peers. Banks have maintained single-digit annual loan growth in the five years ending 2019 and while banks are expanding their overseas presence, their overseas loan growth has moderated from the high level in 2010-2011. Product offerings are generally simple with adequate transparency, including those in overseas markets. There is limited use of securitization and exposures in some high-risk sectors.

Industry stability.  We consider the industry as moderately unstable reflecting a highly fragmented industry structure as well as low earnings capacity, which negatively affect the industry's competitive dynamics. At the end of 2019, the top three banks controlled only a quarter of total system assets while about 20 banks each accounted for less than 2% of total system assets. The FSC has granted operating licenses to three virtual banks which are likely to open in the second half of 2020. Given their high initial set-up costs and limited scale in the early operating stage, we do not expect the advent of virtual banks to significantly change the domestic banking landscape.

By contrast, the market share of the top three banks in other BICRA 4 peers is more than 40%. The fragmented operating environment in Taiwan has led to rather intense competition, which limits banks' ability to price for risks on core-lending business, in our view.

We expect local banks' earning capacity to inch lower in the coming two years in the face of COVID-19. The average return on average assets (ROAA) was only about 0.6% in 2017-2019, compared with an average 1.5% for Malaysia over the same period. We expect Taiwan banking sector's average ROAA to slash by half in 2020 before recovering in 2021, largely constrained by rising credit costs and the low interest rate environment. This is despite the average ROAA has been stable over the past few years because of low credit provisions, given the benign credit environment and better margins from banks' overseas businesses.

Market distortions.  We believe the high proportion of state ownership in Taiwan's banking sector continues to distort the market, such as the pricing of certain lending products. This is partly driven by government-owned banks' access to cheaper funding. Such banks collectively control about half of the system's lending assets and deposits, despite a gradually decline as private banks pursue more aggressive growth. Government ownership in Taiwan's banking sector is relatively high compared with peers such as Malaysia and New Zealand, where such banks account for less than one third of total assets.

Although Taiwan's regulator has previously advocated mergers between state-run banks and between private banks, we don't expect to see meaningful privatization or industry consolidation over the coming two years. This is due to political uncertainty and limited incentives for banks to expand their domestic market share, which provides a thin margin compared to their overseas exposure. In our view, the competitive distortion from non-banking financial institutions is not significant, given their limited market presence in the financial sector.

Table 5

Taiwan--Competitive Dynamics
--Year ended Dec. 31--
(%) 2017 2018 2019 2020f 2021f 2022f
Return on equity (ROE) of domestic banks* 7.7 8.0 8.1 4.0 7.7 7.7
Systemwide return on average assets (%)* 0.57 0.60 0.62 0.28 0.53 0.53
Net operating income before loan loss provisions to systemwide loans (%)* 1.5 1.6 1.6 1.4 1.4 1.4
Market share of largest three banks (%) 24.1 23.5 23.6 23.6 23.6 23.6
Market share of government-owned and not-for-profit banks (%) 48.8 48.4 48.0 48.0 48.0 48.0
Annual growth rate of domestic assets of resident financial institutions (%) 4.0 3.7 4.1 1.0 4.0 4.0
f--Forecast. *Based on Taiwan Banking Bureau/central bank data/banks rated by S&P Global Ratings'/annual reports. Source: S&P Global Ratings' Financial Institutions Ratings.
Systemwide funding: Very low risk with a high portion of stable core deposits and a low reliance on external funding

Core customer deposits.  Taiwan's banking system continues to benefit from a high proportion of stable, core customer deposits, equivalent to about 109% of domestic customer loans in 2019. Deposits from the household and corporate sector also fund banks' significant non-lending assets. The majority of domestic banking assets comprises domestic loans (55%), followed by claims to the central bank, including reserves, deposits and negotiable certificates of deposit, (20%) and about 10% from government bond and securities investment in corporates.

We believe there is a high degree of retail-depositor confidence in the banking sector, which benefits from the system's sound stability and an effective deposit insurance scheme under the government's strong commitment to system stability. As a result, about 40% of household financial assets are in the form of bank deposits.

External funding.  Taiwan's banking sector has very low external debt, which includes debentures and funding from foreign parent banks. The sector actually holds a net external creditor position thanks to a strong core deposit base and limited overseas operations. This makes the sector's funding relatively immune to contagion risks during periods of global capital market turbulence, in our view. Nonetheless, we believe banks in general have a good capacity to access overseas debt markets when needed, in view of the sector's adequate overall financial metrics and international profile.

Domestic debt-capital markets.  We view the domestic debt capital market as moderately broad and deep. Private debt issued in Taiwan's capital market represented 22% of Taiwan's GDP in 2019. The growth of domestic debt-capital markets in 2019 by 10% compared with 2018 largely resulted from the full digitalization of commercial paper issuance. In our opinion, Taiwan has developed a reasonably active capital market for debt securities with medium-term maturities (three to five years). Overall, the domestic debt market is well developed despite the dominance of government bond issuance.

Government role.  We view the government's role in systemwide funding as strong, given its highly successful record of providing guarantees and liquidity during periods of market turmoil. The government has used a broad range of policy tools to support financial stability, including deposit guarantee and temporary liquidity support through government-run banks or Taiwan central bank's re-discount window. The central bank has a strong proven capacity to provide liquidity facilities to banks when needed. We believe the strong government role in systemwide funding will remain unchanged supported by the government's good financial capacity and high commitment to maintain market confidence. In view of the COVID-19 pandemic, the central bank has enlarged its mechanism for open market operations including the counterparties, tenor and collaterals to provide liquidity to banks to maintain system stability.

Table 6

Taiwan--Systemwide Funding
--Year ended Dec. 31--
(%) 2017 2018 2019 2020f 2021f 2022f
Systemwide domestic core customer deposits by formula* as a % of systemwide domestic loans§ 111.1 108.7 109.1 110.2 110.2 109.1
Net banking sector external debt as a % of systemwide domestic loans§ (14.5) (11.9) (14.6) (15.2) (15.2) (15.0)
Systemwide domestic loans§ as a % of systemwide domestic assets 53.6 54.4 54.8 54.8 54.8 55.4
Outstanding of bonds and CP issued domestically by the resident private sector as a % of GDP 20.3 20.6 21.9 22.5 22.5 22.6
Total consolidated assets of FIs as a % of GDP† 264.9 271.5 275.5 291.4 279.4 281.2
Total domestic assets of FIs as a % of GDP 257.0 261.2 263.8 271.0 270.2 272.0
f--Forecast. *Calculated as 100% of deposits from households plus 50% of deposits from nonfinancial enterprises (excludes deposits from governments and financial institutions, or from offshore entities). §Domestic loans extended by the banking sector to households and nonfinancial enterprises (excludes loans to governments and financial institutions, or to offshore entities). †Consolidated assets for domestic and offshore operations including consolidated subsidiaries. Source: S&P Global Ratings' Financial Institutions Ratings.

Peer BICRA Scores

Summary scores for some of the peers for Taiwan are presented in table 7. We note that the economic risk is a key strength for Taiwan relative to its peers. Taiwan's economic risk of '3' is stronger than other peers' such as Malaysia and New Zealand.

We believe that the strong net financial position of Taiwan's household sector partially offsets potential credit risk from high private sector indebtedness. Nonetheless, Taiwan's industry risk score is weaker than its peers'. Weakness in industry risk is mainly attributable to competitive dynamics, due to the banking sector's overly competitive operating structure and low earnings capacity relative to peers'. However, we believe the industry's relatively low risk in systemwide funding and its overall adequate institutional framework will continue to moderate this weakness.

Table 7

Peer BICRA Scores
Taiwan Ireland Kuwait Malaysia New Zealand Poland Saudi Arabia Slovenia Spain
BICRA group 4 4 4 4 4 4 4 4 4
Economic risk score 3 5 5 5 4 4 5 5 4
Industry risk score 5 4 4 3 4 5 3 4 4
Country classification of government support Highly supportive Supportive Highly supportive Highly supportive Uncertain Uncertain Highly supportive Uncertain Uncertain
Source: S&P Global Ratings' Financial Institutions Ratings.

Government Support

We classify the Taiwan government as highly supportive toward the island's banking system. In our opinion, the government is highly committed to maintaining system stability and market confidence and has a proven track record of timely financial support for senior creditors to the banking system. None of the deposit-taking of financial institutions has ever defaulted on a deposit liability. The government has bailed out 45 grassroots financial institutions and nine banks (including two investment and trust companies) that experienced trouble before 2007, to ensure timely payment to bank senior creditors.

Taiwan's Financial Restructuring Fund (FRF) fully covered the deposits of these banks. In late 2008, the government implemented a temporary blanket guarantee to all depositors to ensure system stability following the immense disruption to the global financial markets. The blanket guarantee covered over 90% of deposits and effectively retained market confidence with no deposit bank-run in Taiwan's banking system. The scheme expired at the end of 2010 when market confidence stabilized. The government still provides a deposit guarantee of NT$3 million per account at participating institutions, which ranks among the highest globally and demonstrates the government's commitment to system stability.

On June, 2019, Taiwan's FSC announced a list of five D-SIBs based on their size, interconnectedness, substitutability, and complexity. The regulator requires them to build an additional capital buffer. We continue to access the Taiwan government as highly supportive toward the banking system. The regulator's classification of D-SIBs only further enhances system stability and does not diminish the likelihood of potential government support, in our view. There is no explicit regulatory framework governing the resolution process and forbidding the government's bailout of troubled banks.

We expect the government to continue to have sufficient financial resources to support banks, given the central bank's good external assets and liquidity positions.

Table 8

Five Largest Financial Institutions In Taiwan By Assets
Assets (bil. US$) Systemic importance
Bank of Taiwan 170.2 High (GRE)
Taiwan Cooperative Bank Ltd. 116.4 High
CTBC Bank Co. Ltd. 115.4 Moderate
Mega International Commercial Bank Co. Ltd. 110.1 High
First Commercial Bank 102.8 Moderate
Note: Data as of 2019. Source: S&P Global Ratings' Financial Institutions Ratings; Company's financial statements.

Related Research And Criteria

Related Criteria
  • Banking Industry Country Risk Assessment Update, May 28, 2020
  • Analytical Linkages Between Sovereign And Bank Ratings, Dec. 6, 2011
  • Banks: Rating Methodology And Assumptions, Nov. 9, 2011
  • Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
  • Sovereign Rating Methodology, Dec 18, 2017
Related Research
  • S&P To Publish Economic And Industry Risk Trends For Banks, March 12,2013
  • Taiwan Banks Amply Capitalized To Weather Growing Economic Risks, February 25, 2020

This report does not constitute a rating action.

Primary Credit Analyst:Eva Chou, Taipei (8862) 8722-5822;
eva.chou@spglobal.com
Secondary Contact:YuHan Lan, Taipei (8862) 8722-5810;
yuhan.lan@spglobal.com
Sovereign Analyst:Rain Yin, Singapore (65) 6239-6342;
rain.yin@spglobal.com

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