Hua Nan may sell loans to Lehman venture

Hua Nan Commercial Bank (華南 銀行) said it may sell as much as NT$10 billion (US$289 million) of bad loans to an asset management company it plans with Lehman Brothers Holdings Inc, as it tries to clean up its balance sheet.

Hua Nan would sell a fifth of its estimated NT$50 billion of bad loans at a discount to the venture, which would try to make a profit by getting debtors to repay their loans, Hua Nan senior manager M.S. Liu said in an interview.

An agreement between the companies may be signed as early as next month, Liu said.

The state-controlled bank, like its rivals, is grappling with rising loan defaults because of a slowing economy, which the government says could shrink 0.4 percent this year, the first contraction since records began in 1952.

"NT$10 billion of bad loans does help but it's not enough," said Sophia Cheng, a banking analyst at Merrill Lynch & Co. She estimates Hua Nan's non-performing loans stand at NT$80 billion, up from NT$61 billion last year.

Goldman Sachs Group Inc and Chinatrust Commercial Bank (中國信託銀行), and Morgan Stanley Dean Witter & Co and China Development Industrial Bank (中華開發銀行) have previously held talks on setting up asset management companies to help the Taiwan lenders get rid of bad loans, and Hua Nan's talks with Lehman Brothers have been in progress for at least six months.

Lehman spokeswoman Jenny Choi declined comment on the Hua Nan negotiations, though in February she said that the two companies were having "conversations." The two companies are undecided which assets will be shifted to the AMC, Liu said, though the venture won't fund itself by selling securities backed by the bad loans, a model used in some jurisdictions, he said.

"Details have still to be worked out," Liu said. "Perhaps next month we can sign an agreement."

Yesterday, Lend Lease Corp, Australia's largest property developer, and Taishin International Bank (台新銀行) said they'll set up a venture to buy and manage bad loans held by Taiwan banks and finance companies.

Taiwan, which defines non-performing loans as those on which there have been no interest payments for three months or no principal payments for six months, said this month NT$929 billion of loans, or 6.6 percent of local banks' outstanding credits, were delinquent at the end of June.

Merrill estimates 13 percent of bank loans are bad, based on international standards, while CLSA Global Emerging Markets said the level could be as much as 15 percent in the nation's whole financial system.

Standard & Poor's said in a worst-case scenario, the cost of recapitalizing Taiwan's banks could range from 25 percent to 50 percent of GDP.

Resolution of the bad loan problem may be helped by the passage of a planned securitization law, a draft of which is being prepared by the Ministry of Finance, making it easier to sell securities backed by non-performing loans. Still, even more needs to be done, said Rachel Wu, Taipei-based banking analyst at UBS Warburg.

"The government hasn't come up with detailed regulations to force banks to sell their NPLs," Wu said.

"With such kind of pressure from regulators it would be more attractive for companies to buy NPLs," she said.