How the imbalance in Taiwan's housing markets threatens banks' recovery

Will credit profiles be affected?

According to Moody's, further deterioration in the external environment could threaten the analysts' recovery scenario. Their analysis suggests a strong correlation between export orders and the asset quality performance of banks. 

Therefore, a key risk to the base case scenario is weaker-than-expected recovery of external demand.

Here's more from Moody's:

Another risk is a rising imbalance in the housing market, as reflected in the broad price appreciation observed in the past year.

This development has extended beyond metropolitan Taipei, to areas such as Taoyuan and Kaohsiung. Despite recent improvements, we still assess the profitability of Taiwanese banks to be low compared to their regional peers owing to intense competition, which adds to their vulnerabilities.

Nonetheless, we expect that the banks should maintain their credit profiles despite this concern, because their capitalization and profitability levels are at multi-year highs as a result of the generally stable operating environment and tightening regulatory requirements.

Further, the system’s ample liquidity is likely to continue, given the large base of customer deposits, which have proven to be sticky and stable, and the mild growth in loans.