Taiwan’s First Commercial Bank boasts sound asset quality but property risks abound

It should be able to mitigate these risks with its conservative LTV ratio and solid economic conditions.

Taiwan’s First Commercial Bank is expected to maintain a “robust” financial profile and moderate profitability over the next 12-18 months, on the back of sound asset quality from its SME loan portfolio.

However, the bank faces asset risk associated from its property portfolio both local and overseas. This is mitigated by its conservative loan-to-value (LTV) ratios, a broadly stable housing market in Taiwan, and a solid job market.

Moody's also expects the asset risk of the bank's overseas commercial real estate exposure to be manageable, noting that such exposure accounts for an insignificant proportion of the bank's gross loans.

“Lending is largely collateralized, with conservative LTV ratios. First Commercial Bank has ample loan loss reserves that comprised 269% of stage 3 loans as of end 2023, which provide a buffer against unexpected increases in impaired loans,” Moody’s Ratings said in its latest ratings report on the bank.

Capitalization is expected to remain sound, supported by the bank’s moderate loan growth and sound internal capital generation.

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First Commercial Bank is also expected to maintain a prudent cash dividend policy in compliance with local capital requirements. The bank's tangible common equity (TCE)/risk-weighted assets (RWA) increased to 10.8% as of end-2023, from 10.3% as of end-2022, Moody’s Ratings noted.

Overall, First Commercial Bank will maintain moderate profitability in 2024, with net interest income to benefit from solid mid-single digit loan growth in 2024. 

“However, its net interest margin will stay flat or contract slightly because the upward potential for loan pricing will be limited, whilst funding costs will remain elevated for most of 2024,” Moody’s Ratings said.

The bank will likely maintain the good performance of its wealth management business that supports its fee income. Moody's expects the bank's swap gains to decrease gradually in 2024 as the rate differential between US dollar and New Taiwan dollar narrows. 

The bank's credit costs will stay low given the expected strong asset quality, it added.