Taiwanese banks' profitability to recover modestly in 2017

Loan demand will also pick up to mid-single-digit growth.

Moody's Investors Service says that the financial metrics of its rated Taiwanese banks will strengthen in 2017 from 2016, specifically in the areas of profitability and asset quality, while capitalisation should stay stable and liquidity remain ample.

Loan growth for the banks will also likely pick up moderately from the subdued pace evident in 2016.

"Steady economic growth and accommodative monetary conditions should underpin a benign operating environment for the banks, leading to improved asset quality metrics and low credit costs," says Sonny Hsu, a Moody's Vice President and Senior Credit Officer.

"Profitability -- after falling in 2016 -- should recover modestly in 2017 on a slight widening in net interest margins. While we expect the banks' margins to remain broadly stable on Taiwan dollar-denominated assets, those on US dollar assets should widen as the US Federal Reserve raises policy interest rates," says Hsu.

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The banks will also see their fee income boosted by continued wealth management and insurance sales, and stronger syndicated loans and trade finance flows. Meanwhile, Moody's expects the banks to maintain tight control over operating expenses.

Moody's also expects loan demand to pick up to mid-single-digit growth in 2017, up from 2.9% in 2016, as the economic recovery in Taiwan becomes more entrenched.

With asset quality, the lagging impact of weak economic growth in Taiwan in 2016 will continue to weigh modestly on the banks' asset performance in the first half of 2017, but asset quality metrics should start to improve from the second half of 2017.

Moody's expects the banks to maintain stable capitalisation in 2017 as the pick-up in loan growth should match their return on equity minus dividend payouts. Meanwhile, the banks' liquidity profiles will -- continuing the trend in recent years -- stay ample.

Looking back on 2016, the financial performance of Moody's-rated Taiwanese banks remained sound, despite subdued economic growth in Taiwan, weak corporate earnings and customer losses from currency-related derivative transactions.

Profitability declined modestly in 2016, as the aggregate return on average assets eased to 0.58% from 0.64% in 2015, driven by a slight narrowing in margins and a modest uptick in credit costs.

The banks also mostly reported slower loan and balance sheet growth in 2016, with year-on-year aggregate total asset growth falling to 2.7% from 6.4% in 2015, reflecting in turn a brief growth lull in Taiwan's economic growth from 2H 2015 to 1H2016.

During 2016, the banks' asset quality was resilient, and their capitalisation improved on modest loan and overall asset growth.