Taipei: Fitch Ratings has upgraded the outlook for Taiwan's banking sector to "neutral" from "deteriorating," citing a recent tariff agreement with the United States.

According to Focus Taiwan, the trade deal has reduced uncertainty in Taiwan's macroeconomic environment, which is expected to ease pressure on banks' loan quality and stabilize financial performance. On Jan. 15, the U.S. agreed to lower tariffs on Taiwanese goods from 20 percent to 15 percent, without stacking them on existing most-favored-nation (MFN) rates, placing Taiwan on an equal footing with major competitors such as Japan, South Korea, and the European Union.

The deal also grants Taiwan-made semiconductors and related products the most favorable treatment under Section 232 of the Trade Expansion Act. Under the agreement, Taiwanese semiconductor, electronics manufacturing service (EMS), AI, and energy companies will invest US$250 billion in the United States based on their own plans, while the Taiwanese government will provide US$250 billion in credit guarantees to facilitate the investments.

Fitch stated that US tariff-related risks to Taiwan's GDP growth have subsided following the trade agreement, offering relief for Taiwan's export-oriented economy. The agency expects more stable economic conditions to reinforce Taiwan's bank operating environment, with sector asset quality and profitability likely to be stronger than previously forecast.

Fitch anticipates the Taiwanese banking sector to maintain an impaired loan ratio below 1 percent, compared with the 1.2 percent previously forecast. The ratio is estimated to stand at 0.7-0.8 percent in 2025. The rating agency also expects the banking sector's operating profit-to-risk-weighted-assets ratio to remain stable at about 1.5 percent in 2026, exceeding its earlier forecast of 1.2 percent, supported by stronger lending income and fees as well as lower credit costs.

Fitch forecasts the sector to report loan growth in the high single digits in 2026, an upgrade from its previous estimate of about 5 percent, driven by increased overseas investment and corporate credit demand. Market sentiment is also expected to improve, supporting wealth management fees and the sector's overall bottom line, the agency added.