Tseng said last month that the problem is expected to start dwindling toward the end of the first half of this year.
The NT$20 billion in defaulted loans is likely to deal a limited blow to the banking industry, which has provisioned only NT$16 billion in reserves to cover the bad debts, Tseng said.
However, Tseng said that local banks are doing well, and with their combined pre-tax income amounting to NT$140 billion last year, they should be able to absorb the loss.
Nonetheless, more bad debts could emerge, as the number of potential debtors who borrow money to pay other debts could double to 800,000 from the commission's original estimate of 400,000 after banks moved to tighten lending in order to minimize their default risks, according to a research report released by ABN AMRO Asset Management Taiwan Ltd last month.
The tightening-up of consumer lending, which used to be the major growth driver, will drag overall lending growth down to below previous estimates of 5 percent for this year, SinoPac Securities Corp's (
The profitability of local banks could further weaken this year after plunging to about NT$130 billion in post-provision earnings last year, down from NT$155.3 billion in 2004, she warned.
Since financial groups have more capital to help themselves survive the sluggishness, small-scale and standalone banks with fewer resources are more likely to fall prey to acquisitions by their bigger rivals, rather than by the financial holding firms as the government expects, said Shirley Yang (
Mergers and acquisitions are likely to remain a theme this year, as the government has vowed to halve the number of financial holding companies by the year's end in the final phase of its second-stage financial reforms designed to consolidate the nation's fragmented banking sector.
"It is highly challenging to achieve the goal in time as planned, especially when most of the financial groups are private," said Felice Chen (陳嫦芬), vice chairman of investment banking at UBS Securities Ltd Taiwan Branch, which advised SinoPac Financial Holding Co (建華金控) on its takeover of the International Bank of Taipei (台北國際商銀) last year.
In spite of the government's master plan, 11 of the nation's 14 financial holding companies have expressed opposition to being taken over by rivals during a legislative hearing in December.
Nevertheless, the nation's financial regulator appears determined to fulfill its task through stick-and-carrot measures designed to stimulate consolidation among financial groups.
The commission is formulating a competitiveness assessment mechanism, which includes quantifiable criteria like return-on-assets (ROA) and return-on-equity (ROE) ratios, as well as qualitative requirements such as credit ratings given by international ratings firms, overseas operations, contribution to public welfare and corporate governance, FSC Chairman Kong Jaw-sheng (
Financial groups that fail to meet requirements could face penalties like the revocation of branch licenses for their banking units, according to the commission.
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