The earthquake and the additional bad loans resulting from defunct mortgages are only the latest in a string of bad news for the sector, which has been on a constant slide since the outbreak of the Asian financial crisis.
Analysts say it won't be until significant merger and acquisition activity begins in the local market that bank shares will post any strong signs of recovery. In addition, they caution that some of the best banks were now attractively priced, having got caught up in the overall negative sentiment.
Recently, some analysts have questioned whether banks may have been oversold as a result of the uncertainties surrounding resolution of the quake mortgage problem and worries about how this would affect non-performing loan (NPL) ratios, and have argued that banks might soon rebound.
Most analysts, however, are pessimistic.
"If there is a rebound it will only be a technical one. There has been no improvement in fundamentals. In fact. I expect a continued deterioration in their share prices," said Mark Yetman, a broker at Primasia Securities and well-known television stock pundit.
Yetman can see little upside for local banks. "Even if they cut the business tax from 2 percent to zero, I wouldn't expect it to have much effect," he added. "At the moment the choice is between bad banks or worse banks."
Given that it will take many years for the banks to bring down their NPLs to acceptable levels -- and that in the meantime, profits will continue to be swallowed up in the writing off of bad loans -- analysts see merger and acquisition activity as the only prospect for revitalizing a lifeless sector.
"Banks will only perform when they begin to consolidate," said Eddy Chang, a banking analyst at Credit Suisse First Boston. "We saw this in Singapore, Malaysia and Korea. Globally, bank stocks are out of favor unless there is some kind of M&A (merger and acquisition) news."
Although Chang believes Taiwan's banks are relatively cheap by Asian standards -- trading at around 1.5 times book value -- they "are still not really cheap."
Basically, Chang says, "nothing is going on" in the sector and fundamentals are still bad. Although margins have widened and the business tax has been reduced, banks continue to suffer from disintermediation (corporations raising funds directly from the markets themselves, rather than through the banks) and excess competition in an over-crowded market.
However, analysts are not optimistic about seeing any concrete results on the merger front any time soon. "The merger process is not going to be smooth as there will have to be lay-offs for the banks to become more competitive. The banks are unwilling to take the medicine," Primasia's Yetman said.
Yetman also pointed to a lack of liquidity as a drag on bank stocks. "Taiwan is a liquidity-driven market. Ninety percent of market volume is in electronics. Without liquidity we won't see any movement in their share prices," he said.
One possible bright spot, however, is that some of the better bank stocks have been sucked down by the negative sentiment that has afflicted the entire sector. "Some good banks, like ICBC (International Commercial Bank of China) and UWCB (United World Chinese Bank) have been dramatically oversold," a broker at a foreign securities house said.
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