TAIPEI: Taiwan’s high household leverage and rising debt-servicing pressures are likely to constrain economic growth and act as a headwind to further improvements in the financial profiles of Taiwanese banks, says Fitch Ratings. Risks to broader financial stability are mitigated by high household assets and strong collateralisation.
Fitch expects household debt to rise modestly to 84% of GDP in 2017-2018, extending a marked build-up from 2010 to 2016 as banks rapidly expanded working-capital loans to individuals and entrepreneurs. Taiwan’s household debt/GDP ratio is now among the highest in APAC. Household borrowing has been channelled mostly to real estate and, increasingly, to wealth-management products – areas that might not necessarily support GDP growth. Moreover, Fitch expects high and rising debt-servicing pressures to continue to constrain consumer spending over the next couple of years, despite accommodative monetary policy. Households’ interest and principal payable have risen to about 46% of disposable income, as an increasing proportion of household debt is taking the form of short-tenor working-capital loans.
We forecast GDP growth to remain muted, at 1.7% in 2017 and 2.0% in 2018, with subdued consumption spending continuing to act as a drag. A sharp correction in the property market is one potential risk that could lead to banks incurring losses on their exposure to the household sector. House prices have so far declined by 13% and 7% from their peak for Taipei City and Taiwan as a whole, respectively. Home mortgages alone account for about 57% of total household debt, with an average LTV of around 60%-70% among most banks. Risks would rise if banks compete to extend new mortgages at higher loan-to-value ratios (LTV) following the removal of various regulatory LTV caps last year. However, high household debt is unlikely to pose a threat to broad financial stability.
We estimate that household financial assets were worth 490% of GDP at end-2015, equivalent to nearly 6x household liabilities, even without taking into account households’ considerable holdings of non-financial assets, such as real estate. Potential losses to lenders are also mitigated by strong collateralisation, as a majority of household loans are secured. Taiwan’s banking sector has navigated well through a low-growth environment in recent years, with strengthened risk buffers and reduced concentrations of exposure. Rising offshore exposure and greater risk appetite may eventually put pressure on asset quality if low growth persists, but those trends are already largely factored into the banks’ viability ratings.
