Taiwan's banking system leverage will hit a record 173% of nominal GDP by end-2020, up from 163% last year, Fitch Ratings says in a new report, as it forecasts a sharp economic slowdown amid the coronavirus pandemic. This is expected to rise further, although at a more moderate pace, to around 180% in 2021 as the economy recovers and manufacturing activity revives.

The ratings agency says its negative outlook for the banks’ operating environment reflects mainly downside risks from the Covid-19 crisis, but this is mitigated by adequate regulatory oversight and increased bank buffers. According to Fitch, the estimated 10 percentage point increase in the private credit/GDP ratio this year is based on its forecast  that Taiwan's nominal GDP will contract by 0.1% while private credit will rise by 6%.

It says private credit growth will be driven mainly by debt relief lending (mostly to small and medium-scale enterprises), corporate drawdowns to preserve liquidity, and residential mortgages. It excludes investments in domestic stock and bond exchange traded funds from its calculation of private credit as these are held mainly by life insurers. Including these investments, the ratio would be around 195% in 2020 and 203% in 2021.

Fitch expects a stable domestic housing market due to increasing owner-occupied demand, reshoring activities from Taiwanese corporates,  and low interest rates. While private credit/GDP looks high among developed countries in Asia Pacific, it says Taiwan has a strong household net worth, about eight times nominal GDP at end-2018, higher than that for Japan, Korea and Singapore.

“We do not expect the rise in system leverage to result in an increase in risk appetite for most rated Taiwanese banks, but downside risks could emerge in the operating environment, should the economic recovery face further delay beyond 2020 due to a prolonged pandemic, which could affect our assessment of the banks' viability ratings,” the ratings agency says.