A recent sensitivity analysis of local financial institutions showed that legislation that would slash the maximum interest rates on revolving credit would impact on Taishin Financial Holding Co (台新金控) and Chinatrust Financial Holding Co (中信金控) the most.
Taishin Financial is the parent company of Taishin International Bank (台新銀行), the nation’s third-largest credit card issuer, while Chinatrust Financial is the owner of the nation’s largest credit card issuer, Chinatrust Commercial Bank (中國信託銀行).
The analysis was conducted by Citigroup Global Markets under the assumption that effective rates on credit and cash card loans would drop to between 10 percent and 12 percent, from the current 16 percent if proposed rate cap adjustment were implemented, Citigroup said in a report on Wednesday.
The study came as lawmakers proposed lowering the ceiling on the interest rates that card issuers can charge on unsecured consumer loans from the current 20 percent to 12.5 percent to reflect the central bank’s series of rate cuts over the past few months.
Citigroup’s study showed that if the rate on revolving credit were to drop to 12 percent, Taishin would likely see a drop of NT$1.25 billion (US$37 million) in annual interest income and a decline of 27.1 percent in after-tax net profit for next year.
Under the same scenario, Chinatrust would see its interest income drop by NT$1.4 billion and a fall of 10.1 percent in after-tax net profit for next year.
If the effective rate were to drop further to 10 percent, Taishin would likely experience a plunge of 40.7 percent in after-tax net profit next year and Chinatrust would see a decline of 15.2 percent, the report said.
“We reiterate that the proposal to lower the interest rate cap on unsecured consumer loans in Taiwan brings more bad than good,” Citigroup analyst Bradford Ti (鄭溫煌) wrote in the report.
As of the end of last year, including credit extensions by credit and cash cards, Taiwan’s top five domestic card-issuing banks were Cosmos Bank (萬泰銀行), Chinatrust Commercial Bank, Taishin International Bank, E.Sun Commercial Bank (玉山銀行) and Cathay United Bank (國泰世華銀行). These banks made up about 60 percent of the card-lending market among domestic banks, or 40 percent of the overall domestic card market, the Financial Supervisory Commission’s tallies showed.
The Citigroup study showed that state-owned or controlled financial institutions like First Financial Holding Co (第一金控) and Mega Financial Holding Co (兆豐金控) would suffer the least from the rate-cap adjustment given their limited exposure to unsecured consumer loans.
Credit Suisse’ forecast last week that the move would substantially cut domestic banks’ operating profits before loan loss provisions, tightening up already weak earnings in the sector.
While credit and cash card business contributions have declined since the card debt crisis in 2005, with credit and cash cards accounting for only 1 percent to 2 percent of domestic banks’ loan exposure from 2006 to last year, the credit and cash card business still contributed about 10 percent of the sector’s pre-provision operating profits over the same period.
Credit Suisse said the legislative proposal, if implemented, would lower the domestic banking sector’s pre-provision operating profits by 2.2 percentage points a year. The adverse impact could reach 7 percentage points for banks focused on consumer banking, Credit Suisse said in a client note on Wednesday.
Taiwan Ratings Corp (中華信評), which has persistently warned about the sector’s marginal profitability owing to overbanking and low-yield products, said last month that the lawmakers’ move would force some weaker banks to leave the game altogether.
“Taiwanese banks have limited buffers to absorb additional shocks within current earnings,” Taiwan Ratings analyst Susan Chu (朱素徵) said in a statement on March 24.
Meanwhile, analysts said the most significant change after the rate-cap adjustment would be to business practices by banks in the local credit and cash card businesses.
“In addition to focusing on customers with higher credit ratings to reduce credit cost, we could see a renewed emphasis on fees, particularly annual fees and/or merchant discount fees,” Ti said.
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