TAIPEI: Taiwanese banks reduced exposure to China in the past two years, which puts them in a better position to deal with contagion risks stemming from China’s debt overhang, pressure on the yuan and cooling cross-strait ties, Fitch Ratings said.
Accordion to details, exposure to China among Taiwanese banks fell to about 6.2 percent of system assets in December last year, down from a peak of 8.4 percent in 2014, the ratings agency said. This shift away from China is likely to continue and Taiwanese banks are in a better position to weather yuan volatility, Fitch said.
Sales of target redemption forwards (TRF) — a structured derivative product some investors use to hedge yuan exposure and speculate on currency movements — have dropped significantly from the 2014 peak.
“We expect TRF sales to remain subdued going forward, due to tight regulations on loose selling and speculation, as well as an uncertain outlook for the yuan,” Fitch said.
Potential losses from TRFs would be small relative to the sector’s earnings even if the yuan depreciates sharply, the agency said.
Fitch now expects the bigger risk of a Chinese shock to be indirect, likely through the repayment capability of Taiwanese borrowers.
The pivot away from China correspons with a foray into other emerging markets — Cambodia, Vietnam and the Philippines — as lenders seek to capitalize on rapid economic growth and high yields in those markets, Fitch said.
Exposure to the markets is equivalent to 2.3 percent of system assets, advancing by an annual 20 percent in the past two years.
Taiwanese authorities are pushing for further increases in line with the government’s “new southbound policy,” Fitch said.
The agency expects lending to the ASEAN to rise by 8 percent a year to 2020, faster than an annual 3 percent increase in domestic lending over the past three years.
“Aggressive expansion may help drive exposure away from China, but could create pressure of its own on loan quality given poor governance and transparency in those markets,” Fitch said.
