Wed, Oct 06, 1999 page17

• Quake adds US$2 billion tobanks' pile of bad loans

  FINANCIAL AFTERMATH Mortgage defaults from property destroyed in the quake region could be enough to sink some banks, analysts say

  • By Steve Hands / STAFF REPORTER
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  Some banks based in central Taiwan, already reeling from the massive increase in bad loans that followed the collapse of the early 1990s property boom, may find that the earthquake is the straw that breaks the camel's back, analysts are saying.

  Bad loans resulting from defaulted mortgages may prove to be a very large straw indeed. "Each of the six major banks -- Chang Hwa(彰化銀行) , First Commercial (第一銀行) , Hua Nan (華南銀行) , Bank of Taiwan (台灣銀行) , Land Bank (土地銀行) and the Cooperative Bank (合作金庫) -- will have at least NT$7-10 billion of bad loans resulting from buildings in the townships affected," said Eddy Chang, banking analyst at Credit Suisse First Boston. Chang also estimated the total bad loans accrued by local credit cooperatives as a result of the disaster at around NT$20 billion, which can be added to the NT$50 billion figure for the major banks. Less than 1 percent of home-owners have earthquake insurance.

  These figures are broadly in line with a report issued by Taiwan Ratings, the local subsidiary of US credit-rating agency Standard & Poor's, which said yesterday that non-performing loans (NPLs) in the banking system would be likely to rise 1 percentage point as a result of the quake, from the present level of 5 percent. An earlier S&P report, from Monday, claimed that NPLs were expected to rise to 8 percent next year, but executives of Taiwan Ratings were unavailable to comment on the possible discrepancy in the figures.

  However, banks based in Taichung itself, such as Taichung Business Bank (台中企銀), which suffered a pre-tax loss of NT$4.9 billion in 1998, are likely to be hit even worse. Not only will they suffer from defaults on mortgages to home-owners, but the region is also home to Taiwan's greatest concentration of small and medium sized enterprises, which are predicted to suffer from significant losses of orders and production, in addition to material damage. "These banks are too loose in their NPL recognition (anyway)," CSFB's Chang said. "They will probably be acquired in the next three to six months ... except that the problem is no one wants to buy them and get exposure to those bad loans," he added.

  The local credit unions, of course, are in an even worse state, as all of their lending is restricted to the locality in which they are based. "They are dead," said Chang. "Nobody will be willing to take them over, the government will have to bail them out."

  However, there is still the possibility that the Ministry of Finance may yet change its mind over asking the banks to shoulder the burden of the mortgage defaults, as the banks have made it quite clear they are upset with the MOF's stance. "The banks think it's outrageous (that they are being asked to assume these debts)," said an analyst at a foreign securities house. "This goes totally contrary to government policy of asking the banks to reduce their levels of NPLs."

  He suggested that although in principle the banks would have no choice but to assume these liabilities, in the absence of the MOF passing special measures, the government could afford to absorb the loss itself. Although the government is currently running a budget deficit, it is by no means large compared to deficits in other countries, and the special provisions in operation as a result of the declaration of the emergency decree mean it will be easier to get around budgetary limitations currently imposed.

  The analyst said that the MOF had been, as usual, exploiting the local media to sound out the various possibilities and the public's reaction to them. "They keep coming out with different schemes, like a moratorium on interest payments for five years, tax relief and so on -- they haven't made any definite proposals. They're doing the usual thing of feeding the press and seeing the reaction. In my opinion they would do better if they just said nothing for the moment."

  However, some analysts wonder whether the MOF will once again follow Japan's lead on this issue -- 16,000 householders are still paying off mortgages on homes that no longer exist after the 1995 Kobe quake.
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