The introduction of meltdown control mechanisms by China’s stock exchanges, Brexit, the election of Donald J. Trump as U.S. president…these and other events spooked the world’s stock exchanges in 2016, causing investors and financial industry executives to break out in a cold sweat.

It was a year marked by a succession of black swan events disrupting markets and cramping annual profits across Taiwan’s financial industry. According to 2017 CommonWealth’s Top 2000 survey, nearly one-half of Taiwan’s top 100 financial institutions endured a drop in revenue last year, nine more than the previous year.

Banks making the list saw profits fall over 2015 by 3.4 percent, with even greater shortfalls in both the life insurance and securities industries, at 11 percent each. In short, it was a dark year for the financial industry, as shown by a net profit after tax of NT$268.97 billion across the top 16 holding companies for a year-on-year reduction of over 10 percent.

Market swings throughout the year hit the securities industry particularly hard.

Looming Obstacle #1:

Continued Securities Retrenchment

Jerry S. Lin, deputy director of the Taiwan Academy of Banking and Finance, notes that global political instability resulted in diminished trading volume across the world’s major bourses. However, in comparison to exchanges in New York, Tokyo, London and Seoul, Taiwan’s stock exchange market trading volume over the year of US$513.5 billion was especially low, dropping by 18 percent.

Beset by the sluggish trading volume, the once-bustling trading floor of the Taiwan Stock Exchange became a ghost town as securities merchants tightened their belts, merged offices, and laid off staff. According to a survey by Taiwan Ratings, the number of securities companies in Taiwan dropped by six percent last year.

Although the Taipei Stock Exchange recovered nicely in the first quarter, a report prepared by Taiwan Ratings cautions that, while last year foreign investment accounted for 30 percent of the trading volume on the Taiwan Stock Exchange, local securities firms are at a competitive disadvantage when handling the demands of overseas investors. Consequently, over the long term this ultimately compromises securities brokerage market share of local securities firms and their income from transaction fees.

Market swings are hurting the life insurance industry as well.

CommonWealth’s survey revealed that average profits across the life insurance industry are down by around 10 percent year-on-year. Hsien-Nung Kuei, chairman of the Taiwan Insurance Institute, cites diminished investment performance by the industry, saying, “Return on assets was down in 2016 by 0.1 percent, which in terms of 20 trillion in insurance industry capital amounts to a shortfall of NT$20 billion.”

Looming Obstacle #2: Forex Risk

Ratings agencies cite foreign exchange risk as the most worrisome issue concerning the insurance industry. Taiwan Ratings vice president of financial service ratings, Serene Hsieh, notes that the U.S. dollar and Asian currency volatility around the 2016 U.S. presidential election raised the cost of life insurance industry hedges compared to 2015, which ate away return on investment (ROI). “High-yield insurance policies, a low-interest environment, plus high hedging costs pose operational challenges to Taiwan’s insurance industry,” says Kuei, adding that lacking long-term investment assets in Taiwan, the country’s life insurers are now compelled to invest their money overseas.

Not only is the NT dollar affected, but Renminbi forex losses also impact bank profits. Statistics from the Financial Supervisory Commission indicate that forex losses among China-based branches of Taiwanese banks reached approximately NT$1.7 billion in the first 11 months of last year.

Yen Kuei-tien, former COO of the Bank of Taiwan’s Shanghai branch, explains that banks’ financial reports must reassess capital each year. A U.S. dollar sum equivalent to one billion Rmb transmitted to China at the time resulted in forex losses last year when the Renminbi fell by six percent against the greenback.

Looming Obstacle #3:

Increased Non-performing Loans by Taiwanese Banks

It is worth noting that trouble signs have emerged in recent years concerning loan quality, historically a point of pride among domestic banks. Jerry Lin relates that bad debts rose by NT$10.8 billion last year among domestic banks as the ratio of non-performing loans reached a three-year high. Major events included TingHsin Dental Supply’s fraudulent loans of NT$3.7 billion and TransAsia Airways’ sudden announcement of its closure, catching syndicated loan lending banks by surprise. Chinese company Forest Textile’s loan default went on the books for participating Taiwanese lending banks in the first half of 2016 as bad debt, further stressing local banks’ lending capacity.

Generally speaking, 2016 was a trying year for the financial industry, squeezing its room for growth. Looking ahead to this year, the market is looking bullish under an apparent global economic recovery, and quick action by the U.S. to raise interest rates accompanied by increased worldwide interest rates can be expected to boost financial industry profits.

Nevertheless, increased fluctuation of the NT dollar exchange rate over last year casts a cloud over the rosy outlook ahead, as insurance industry forex losses in the first quarter reached NT$35.8 billion.

Other structural issues, such as securities brokerage fee price competition, diminished quality bank loans, and increased compliance costs, are also expected to linger throughout the year.

Translated from the Chinese by David Toman

Financial Holding Company Performance

Taiwan’s Top 10 Financial Institutions--Shareholders’ Equity

Taiwan’s Top 10 Financial Institutions--Net Profit After Tax

Taiwan’s Top 10 Financial Institutions--Profit Margin