Where is the stress and real risk on Taiwan's banking system? 70% drop in bank's net worth with 8% loan migration to NPL. How should we view this.

Taiwan's banking system has been stable in the past years, as shown in my previous analysis. That said, a system that has been so stable, should still have risks.

I've analyzed the different assets of the Taiwan Banks. My thesis statement is that the system is most vulnerable to a significant decline in equity capital markets, as opposed to increase in rates.

Above is my rough notes.

As noted, default risk on mortgages and SME has a direct relationship with the performance of the equity capital markets. There is also a small spillover effect to credit cards market, though the exposure is relatively small for credit cards. For mortgages, I note that there is a significant risk on the portfolio primarily given relatively low income of the working population relative to housing prices. While GDP per capital may look high, the variance between the minimum wage and the the GDP per capita is 1.87x. To put into perspective, a minimum wage earner will need to work three jobs all day (8 hour shift) to reach the GDP per capita shown. Further, this is distorted by data on all population. If we use as a % of active laborers, then, this variance goes up to 4.9x.

The Taiwan Bank's exposure can be divided into 30% mortgage, 30% SMEs, 30% Top Tier local bank's exposure and 10% overseas.

As a base case, assuming 2% of loans are migrated as special mention loans, I expect a 17% drop in net worth. The peak NPL in the last 20 years is about 8%. Assuming the same scenario happens, we expect 70% drop in net worth.

This is actually positive news; it means that the banking system is well capitalized and can withstand significant shock in the system. Furthermore, considering the magnitude of stress, it's unlikely given current positive confidence and strength of economy.

In summary, things to watch out for in terms of Risk:

1. Stock Market
2. Mortgage loan acquisition
3. Digital Currency/Virtual Token Market
4. Economic performance - and more importantly, confidence.
5. SMEs

Which banks have the concentration exposure in these vulnerable sectors: