Despite a reduced impact, the approved personal bankruptcy law would result in soaring losses to the already weak banking sector, with leading consumer lenders likely to book extra losses exceeding NT$10 billion (US$301.8 million) each, an analyst warned.
"We expect the loss ratio to jump to 70 percent at the end of this year from a previous estimate of 50 percent after the law is passed, in comparison with a 30 percent loss of outstanding restructured loans one year earlier," Chu Yu-chun (朱玉君), an analyst at SinoPac Securities Co (永豐金證券), said in a report released last week.
As of the end of last year, up to 220,000 debtors with debts totalling NT$330 billion entered the government-initiated debt negotiation scheme for better repayment terms with banks.
Earlier this month, the legislature passed the Consumer Debt Clearance Regulations (消費者債務清理條例), the first legislation of this kind in Taiwan, allowing borrowers in unsecured debt of less than NT$12 million to go to court to negotiate a repayment plan and method for rehabilitation, while those unable to pay back obligations can apply for bankruptcy.
The financial regulator estimated approximately 50,000 debtors who did not enter the restructured loans program would take advantage of the new mechanism.
Yet, the new regulations could lead to an increasing risk of moral hazard, as borrowers who usually repay regularly under the existing program could start to default on their debts, in the hope of further relaxations or legal mechanisms -- such as bankruptcy -- allowing them to get away without paying, Chu said.
The negative effect will surface later this year, she said.
Consumer lending-focused banks, such as Chinatrust Commercial Bank (
This means that Chinatrust and Taishin, the nation's top two credit card issuers, would see additional losses of NT$12 billion to NT$13 billion this year.
The two banks each have NT$30 billion of restructured loans, which makes up approximately half of their credit and cash card outstanding lending portfolios, SinoPac Securities data showed.
Despite the removal of controversial clauses which exempted debtors under rehabilitation from repaying the principle and only forced them to pay interest on their housing mortgage, risks can still extend to the sector, Chu said.
The effect will start to show next year, as debtors might not be able to pay back their mortgage after entering the rehabilitation scheme. Banks could consequently incur 2 percent to 4 percent losses even after auctioning off the pledged properties to recover the bad debts, she said.
Accordingly, SinoPac Securities suggested that investors avoid consumer banking-oriented stocks, like Chinatrust, Taishin, and Cosmos Bank (萬泰銀行), the nation's biggest cash card issuer, starting at the end of the third quarter.
Another market watcher, however, said she expected the nation's banking sector would successfully rid itself of the distress caused by the industry-wide consumer bad loans storm by the end of this year.
The industry as a whole should return to profits this year after the amount of charge-off peaked in the past two years, said Fiona Uang (
The combined profits are estimated at NT$100 billion this year, up from a
loss of NT$6.74 billion last year, as the amount of charge-off could be back
to the 2004 level of over NT$150 billion, down from around NT$200 billion
last year, she said.
Investment picks included Cathay Financial Holding Co (國泰金控) and Shin
Kong Financial Holding Co (新光金控), owners of the nation's top-two life
insurers enjoying steady profits, as well as Chinatrust, which has a leading
competitive edge in the consumer banking area, she said.
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