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Bad loans hurting banks: analyst

Amid escalating worries about bad loans and declining profits in the nation's banking sector, an analyst warned yesterday that investors should be wary of financial institutions with soaring reserves for writing off debts.

Investors may need to exert caution when making investment in banks whose annualized charge-off ratio for credit or cash-advance card loans exceeds 10 percent, and whose cumulative provision amounts to more than NT$1 billion (US$30 million), SinoPac Securities Corp (建華證券) finance analyst Chu Yu-chun (朱玉君) said in a research note released yesterday.

With card issuance cost at around 5 percent to 6 percent, an annualized charge-off ratio exceeding 10 percent will dent banks' profitability, while a cumulative charge-off amount of NT$1 billion is almost equivalent to a small bank's annual earnings, she explained.

Based on those criteria, the analyst named a group of card issuers that should prompt caution for investors, including Taishin International Bank (台新銀行), Chinatrust Commercial Bank (中國信託銀行) and Chinese Bank (中華銀行).

Taishin International, the nation's second largest credit card issuer with 5 million cards in circulation, saw a charge-off amount of NT$2.9 billion and charge-off ratio of about 11 percent as of September.

Taiwan's largest credit card issuer, Chinatrust Commercial, which has 7 million cards in circulation, had NT$3.9 billion and 7.7 percent over the same time, according to SinoPac's figures.

Chinese Bank, Taiwan's fifth biggest cash-advance card issuer with around 262,000 cards outstanding, has spent NT$2.5 billion on charging off the bad loans, or an annualized 10.7 percent of its total lending balance, the brokerage said.

Concern over mounting bad debts generated from credit cards and cash-advance cards emerged in the middle of the year.

The nation's non-performing loan (NPL) ratio spiked up after the adoption of a new default loan definition that shortened the overdue period from 180 days to 90 days, weakening cardholders' solvency.

"The overall bad debt issue is expected to be contained at the end of this year, while its impact on certain banks may linger throughout the first quarter of next year," Chu said.

The total balance of credit and cash-advance card lending, which accounts for around 5 percent of total lending, remained minimal, she said -- particularly in light of an average NPL ratio for local banks of 2.8 percent.

However, the bad loan problem will eat into the banking sector's profitability next year, after intensive write-offs in the fourth quarter of this year.

Local banks' combined profits next year will be trimmed to NT$130 billion after the provisions, down more than 10 percent from this year's NT$155.3 billion, according to SinoPac.

Next year's lending balance growth, meanwhile, could slow to 5 percent from this year's 9 percent, after banks adopted a tightened loan policy in a bid to minimize their bad debt risk, the company said.
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