Taiwanese banks' leverage hits record-high as economy plunges

The hike will carry over until 2021.

The Taiwanese banking sector’s leverage will reach a record of around 173% of nominal GDP amidst a steep downturn this year and marginally higher credit growth, according to a Fitch Ratings report.

The rise will gradually carry over until 2021 to around 180% due to the economic recovery and reshoring of manufacturing, analysts Sophia Chen and Cherry Huang said. The 10pp estimated increase in private credit/GDP ratio this year based on the forecast that the country’s nominal GDP will shrink by 0.1% and private credit to hike by 6%.

“We do not expect Taiwan’s rising leverage to result in a meaningful increase in risk appetite for most rated Taiwanese banks, but a rise in risk appetite without commensurate increases in buffers will be credit negative to banks’ viability ratings,” the report said.

The negative outlook on the banks' operating environment of ‘a’ reflects mainly downside risks from the pandemic. The rise in system leverage from 2017 is mitigated by adequate regulatory oversight and increased bank buffers. Notably, a high portion of incremental credit over 2017-2019 was for SMEs and households, and was usually secured by real estate as collateral.