Financial institutions in Taiwan can absorb expansion risk in China

14 November 2013   Category: News, Asia, Taiwan   By Asia Asset Management

Narrowing profit margins and intense competition at home are likely to drive more Taiwanese financial institutions to expand in neighbouring China. But growth is likely to remain prudent for the next few years with limited profit contribution and manageable risks. That's according to an article, titled "Taiwan's Financial Institutions Can Manage The Risk Of Further Growth In China", that Taiwan Ratings Corp published on November 13 on Standard & Poor's Ratings Services' global credit portal. Taiwan Ratings is the Taipei-based subsidiary of Standard & Poor's.

Limited growth opportunities in Taiwan's financial sector have driven many of the island's financial companies to diversify away from their core business base through new opportunities in China. Softening political and trade barriers have supported this trend, as well as the migration of many corporate clients into China.

"We believe most financial service sectors in Taiwan will remain quite active in pursuing new business opportunities in China over the next two-to-three years, despite the different speed of deregulation in each service sector," said Taiwan Ratings' Credit Analyst Eunice Fan. "We also expect the island's financial institutions to maintain cautious growth with manageable risk in China over the same period."

Taiwan's financial institutions typically adopt prudent growth strategies on new geographic or business areas, which should prevent an aggressive shift in risk profiles in the medium term.

"We expect financial institutions' growing exposure in China to have an overall neutral rating impact over the next two-to-three years," added Ms. Fan. "Negative rating changes are likely to be limited and would likely result from weakening capitalisation or asset quality because of overly aggressive expansion strategies without the support of adequate capital buffers or risk controls."

The report also looks at how potential volatility in China's GDP growth is unlikely to have a significant impact on players' individual creditworthiness over the next one to two years because the financial institutions' China exposure still represents a small portion of the sector's overall asset base.