No more doom and gloom for local banks?

Over the past month, some of Taiwan's once-battered bank shares have jumped by an average of more than 40 percent from their lows, right after most analysts warned of a banking crisis on the island.

Talk about the fickle sentiment in the financial markets. The government's emergency measures have given the creaking banking system a new lease on life -- thus inspiring bargain hunting in otherwise battered financial shares.

First Commercial Bank (一銀) is now up 40 percent from its low, while Bank Sinopac (華信銀) is up 50 percent from last month's low.

"I expect banking shares to go up further," says David Wu (吳旭光), an institutional sales at National Securities Corp (建宏證券).

"Because the stock market exaggerates both the good and the bad," he said.

Indeed, Taiwan's main index, meanwhile, has jumped by 24 percent from this year's nadir -- thanks mainly to the resurgent banking shares which has benefitted from the improved scenario.

"The banking sector is a creature of confidence," says a bank analyst at a major US securities firm in Taipei, requesting anonymity. "When confidence is there, even a bank with a bad loan ratio of over 20 percent could survive for quite a long time."

A number of leading international financial publications predicted that Taiwan may get a banking crisis during the Chinese New Year -- as the bad debt-laden banking system may collapse as they fail to cope with the rising demand for cash.

The reports took their toll on the market sentiment, sending banking shares to new lows as investors ran for their money.

"The predictions were rendered untrue," said Jasmine Wu (吳惠真), an analyst at China Securities Investment Trust Corp (中華投信). "This will seriously affect the credibility of these reports."

But the improved sentiment may have to do with the speed with which the reports brought officials to address the problems in the banking system -- and force them to come out with various emergency measures.

The government has opened up the market to Asset Management Companies (AMCs) to help clean up the bad loans in the banking system and expedite mergers in the banking system.

Not all are celebrating given the gravity of the challenge at the hand of inexperienced officials.

On the surface, it seems everything is alright," says Norman Ying, a professor of banking at Chengchi University (政大). "But the problems continue to remain and the liquidity situation is very tight."

The Central Bank of China (中央銀行) has said that the bank will inject the necessary cash into the banking system as the demand for cash peaks just as local residents spend hordes of cash on New Year-related festivities.

"The Central Bank is currently maintaining a loose monetary policy," says Ying, an economist who is one of the harshest critics of the government. "They are trying to inject cash into the system."

Indeed, interest rates have remained stable. The overnight interbank rate -- which is the best benchmark of short-term liquidity -- continues to hover at a 4.63 percent, seen as a healthy level.

"We believe the liquidity situation is very stable in Tawan right now," said Wu of China Investment. "And this is helped by the resumption of confidence in the financial markets."

The outstanding cash in the economy doubles from the NT$3 trillion normal level to around NT$7 trillion during the Lunar New Year. Usually the money returns to the banking system following the festivities.