Bank sector woes likely to last: study

The nation's banking sector is expected to continue its lackluster performance as the credit crunch has escalated under the growing threat of bad debt, according to Credit Suisse First Boston Ltd's latest report released last week.

The Swiss brokerage maintained its underweight rating for Taiwan's banking sector.

"The cash-advance card market has entered the darkest hours of the current cycle, when the accelerating loan contraction and rising charge-offs will make the charge-off ratio increase more rapidly," said Sherry Lin (林淑娥), director of non-Japan Asia equity research at Credit Suisse First Boston, who tracks Taiwan's finance sector.

"Charge-offs" refer to accounts receivable that are unlikely to be collected and will be written off. They are categorized as a company's expenses that reduce net income.

Credit card lending also contracted slightly in December, the first time in three quarters, as banks turned more cautious after lawmakers threatened to cap the interest rate spread at 10 percent in an attempt to help bail credit and cash borrowers out of their mounting debts, Lin said.

As of the end of last year, cash card loans shrank by 3.1 percent month-on-month to NT$298 billion (US$9.3 billion), while gross charge-offs soared by 22 percent from the previous month, according to the Banking Bureau's figures.

Meanwhile, the credit card revolving credit balance slid marginally by 0.1 percent from a month earlier to NT$495 billion while charge-offs increased by 12 percent over the same period.

As the 90-day delinquency and coverage ratios remained broadly flat, new formation of bad debts continued to worsen, which could make the first quarter of this year a critical period after banks have started to reschedule loans more systematically, Lin said.

Similarly, Goldman Sachs said last month that they still expected to see lackluster macro fundamentals and little in the way of concrete catalysts in the immediate future, as consumer credit problems continue to worsen.

However, they said they would not be surprised to see a short-term rebound in banking shares to reflect investor profit-taking and the perception of relative safety following a long underperformance, Goldman Sachs analyst Martin Printz said.

Goldman Sachs gave the nation's banking sector a neutral rating. The US brokerage liked SinoPac Financial Holding Co (建華金控) for its low exposure to consumer lending and Shinkong Financial Holding Co (新光金控) for its attractive valuation and upside potential.

Financial and steel stocks led the TAIEX to advance last Friday, the first trading day after the eight-day Lunar New Year break. The financial sub-index jumped 26.42 points, or 2.97 percent, and the steel index rose 6.61 percent.

UBS Securities Ltd Taiwan branch expected bad debt to ease off in the first half of this year, which would see the banking sector returning to normal in the second half of the year, according to its latest report released last week.

An upside of 25-percent in the financial sub-index can be expected in the future on the strength of a 5-percent dividend yield, a 13-percent return on equity and 3-percent annual growth, UBS Securities head of Taiwan research Ken Chen (陳安) said.

Chen recommended Chinatrust Financial Holding Co (中信金控), Taishin Financial Holding Co (台新金控), E.Sun Financial Holding Co (玉山金控) and SinoPac Financial with target prices of NT$32.5, NT$23.6, NT$24.5 and NT$18.5, respectively.