Why Taiwan banks are amongst Asia's least profitable

Tighter margins loom in the horizon.

The article titled "Taiwan Banks Face Another Year Of Tight Margins In 2014," assesses that Taiwan banks are unlikely to be able to boost their operating margins in 2014. Some banks with limited revenue diversity and rising credit costs may even face difficulty sustaining their already weak profitability by regional standards.

"The favorable conditions supporting the sector's higher return on average assets over the past two years have ended," said Taiwan Ratings' credit analyst Yuhan Lan.

Banks' average profitability remains one of the lowest among developed markets in the Asia-Pacific, and rising credit costs, pressured interest margins, and slow growth in fee revenue limit potential improvement.

The report notes that exceptionally low credit costs were one of the main reasons supporting the sector's profitability over the past two years.

But such a low level has become unsustainable due to the susceptibility of Taiwan's export-driven economy to global economic uncertainty, and the potential deterioration of the asset quality of banks' overseas loan exposures after a period of rapid growth, particularly in China.

"Banks' efforts to expand geographically and the Taiwan government's strategy for industry consolidation could help turn around the sector's profitability but this will take time to materialize," said Ms. Lan.

Many Taiwan banks have expanded into Southeast Asia in recent years in addition to their expansion in China.

However, this development exposes banks to higher economic and credit risks than in operations on the home turf. Overseas diversification will only bear fruit if accompanied by strong underwriting controls and deep local knowledge, according to the report.