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Announcement:

Moody's: Rise in domestic USD interbank rate in Taiwan puts pressure on banks' already thin margins

 The document has been translated in other languages

28 Mar 2014

Hong Kong, March 28, 2014 -- Moody's Investors Service says the rise in domestic USD interbank rates in Taiwan to two-year highs will increase funding costs for banks and put pressure on their profitability, against the backdrop of already thin margins by global standards.

"Nonetheless, the overall impact on the banks' credit profiles is mitigated by their limited reliance on USD wholesale funding, and the central bank's proactive efforts to supply the system with USD liquidity," says Ginger Kao, a Moody's Analyst.

"In addition, while rising USD funding costs will likely prompt the banks to curtail the pace of their USD lending growth as we believe they will prioritize their lending margins over volume growth, the banks' overall asset quality could improve marginally," adds Kao.

"Cross-broader exposures are a greater credit challenge than domestic loans in terms of underwriting, monitoring, and default recovery."

Moody's analysis is contained in its just-released report titled "Taiwanese Banks: Credit Implications of Higher USD Interbank Funding Costs," and is authored by Kao.

On the issue of added pressure on already thin margins, Moody's report points out that the overall impact on the banks' credit profiles will also be mitigated by the Taiwanese banking system's relatively low foreign-currency loan-to-deposit ratio of 73% in 2013.

"However, a key risk is whether Taiwanese banks will respond to the strong demand for USD credit by adopting measures that could weaken their funding profiles," says Kao.

"Such measures include raising competition for USD deposits by offering higher deposit rates, which in turn will increase funding costs. In addition, any increase in the banks' reliance on wholesale funding sources would add to funding volatility," adds Kao.

Moody's report says the higher USD interbank funding costs indicates tighter USD liquidity, which in turn can be attributed to three developments:

(1) Robust demand for foreign-currency loans, particularly from Mainland China;

(2) The introduction of RMB deposit products as an alternative to USD savings; and

(3) An outflow of USD funds, due to the reduction of monetary stimulus by the US Federal Reserve.

The report also says that Taiwanese banks have seen their foreign currency loan books -- which are mainly dominated by USD -- outgrowing their local currency portfolios over the past four years. In 2013, for instance, foreign loans grew 22.7% versus TWD loans, which grew 2.6%.

In addition, the system's total foreign currency lending reached TWD4.2 trillion (USD139 billion), representing 17.5% of total loans at end-2013, versus 12.0% at end-2010.

Loans originated by offshore banking units and overseas branches were the key drivers behind the increase in foreign currency lending, with borrowers being mainly Chinese enterprises or Taiwanese firms operating in Mainland China, as borrowing costs increased in China, while cross-strait restrictions were loosen, and as Taiwan's banking system experienced ample liquidity.

Subscribers can access the report at https://www.moodys.com/research/Taiwanese-Banks-Credit-Implications-of-Higher-USD-Interbank-Funding-Costs--PBC_166152

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Ginger Kao
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's: Rise in domestic USD interbank rate in Taiwan puts pressure on banks' already thin margins
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