Low interest rate spread threatens banking industry: banking expert
Taipei, Dec. 25 (CNA) Taiwan’s interest rate spread, the world’s lowest at around 1 percent, is jeopardizing the profitability and operations of the banking industry, and any sudden increase in bad loans could result in bank collapses, a banking industry expert said at a seminar on the industry’s outlook Friday.
SinoPac Holdings Independent Director Sophia Cheng, a former managing director and head of research of Merrill Lynch Taiwan, said the low interest rate spread has not only undermined domestic banks’ tolerance of risk but also affected their return on equity (ROE) and share price performance.
If there is another recession, even a mild one, the possible rise in non-performing loans could bring down some domestic banks, she warned.
Taiwan’s interest rate spread of roughly 1 percent can only cover a bank’s expenses but is not enough to account for the average cost of non-performing loans over the long term, explained Cheng, who is known as the “queen analyst of the financial sector” by foreign securities houses.
The interest rate spread is the difference between the average yield banks make on loans and investments and the average rate institutions have to pay on deposits and borrowing. It accounts for the major share of banks’ income.
According to statistics from Taiwan’s central bank, the interest rate spread among local banks was 1.18 percent in 2009 Q3, compared with 2 percent in the same period in 2006.
Although the global financial crisis did not create large-scale systematic risks in Taiwan, it delivered a warning on banking industry operations, Cheng argued. If no quick action is taken to improve the situation, the local banking industry will be less able to deal with any economic crisis in the future.
She also noted that low interest rates have put huge pressure on insurance companies’ investment spread — the gap between their portfolio yield on invested assets and the interest rate credited on insurance liabilities.
Given that many countries ran up heavy debt to rescue financial markets during the crisis, there is also only limited room for governments to issue more debt in the future. So figuring out how to prevent future crises is particularly important, she added.
Despite fears over the country’s low interest rate spreads, Taiwan’s central bank on Thursday left its key interest rates unchanged as expected, noting that inflation is not a concern at the moment.
The central bank has left its key rates unchanged since Feb. 19, after having cut them by 237.5 basis points from September 2008 to try and stave off the country’s worst-ever recession. (By Yun-hsuan Cheng and Fanny Liu)
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