Sat, Aug 17, 2002 page10

• Goldman Sachs mixed on banks

  REPORT While the investment bank said Taiwan's banking sector still presents good profit and growth opportunities, it warned about the nation's NPL woes

  • By Joyce Huang / STAFF REPORTER
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  Investment bank Goldman Sachs yesterday released its analysis of Taiwan's banks, concluding that the banking sector still presents good profit and growth opportunities in the medium term.

  But with the non-performing loan (NPL) ratio calculated as high as 17.5 percent, the report added that the recapitalization costs of cleaning up troubled banks should be about 11 percent of the nation's gross domestic product (GDP) or NT$1.1 trillion (US$32.7 billion).

  Of that amount, the state banks have the biggest portion.

  "NPL problems are concentrated in the state sector. Many private banks are actually overcapitalized and can afford to clean up their balance sheets on their own," the report summarized, recommending stock investors buy into stronger private banks with a consumer focus and good management.

  Since the analysis showed that an economic upturn would have only a mildly positive impact on the writing off of bad loans, the nation's NPL and structural problems require government-led action, especially for the state-run banks, the report said.

  Despite the fact that Taiwan is still in the early phases of bank restructuring, Goldman Sachs, nevertheless, gave credit to the Ministry of Finance's (MOF) policy orientation, including a tightening of loan classification standards, significant NPL reduction efforts by banks, forced restructuring of grass-root financial institutions, the establishment of asset management companies (AMCs) with accompanying asset resolution measures and the passage of legislation on bank mergers and acquisitions.

  The Goldman Sachs report did state that the speed of the government's implementation was too slow and expressed its dissatisfaction by giving the MOF a score of three on a one to ten scale in the report -- 10 being the best.

  "If the authorities move quickly, we would see a different banking environment within two to three years ... [But] the legislature is now the key hurdle," the report said, reiterating that private banks will strongly outperform their state-owned counterparts.

  Citing its international experience, Goldman Sachs came up with a road map highlighting eight key steps for Taiwan to recover its financial health.

  They are: loss recognition and writedowns; the exit of insolvent banks; fiscal recapitalization; asset disposal and workout; bank consolidation; increased supervision; privatization; and more foreign competition.

  In response to the report, PFP legislator Thomas Lee (李桐豪) agreed that the nation's clean-up costs stand at NT$1 trillion, and said "it has become a point of common agreement."

  Lee, however, added that the bank's estimation of the NPL ratio was "a little bit exaggerated. Fifteen percent of the NPL ratio is more like it."

  Lee also disagreed with Goldman Sachs in calling into question the legislature's efficiency in facilitating the passage of laws. He said that some legislators may need to be educated about why the Financial Restructuring Fund (金融重建基金) should be increased so dramatically -- from NT$140 billion to nearly NT$1 trillion. But it is more important that the MOF proposes a well-planned scheme to use the fund, he added.

  Huang Da-yeh (黃達業), a banking professor at National Taiwan University (NTU), yesterday detailed the possible use of the fund. He said that, in the medium term, if the NPL ratio is to be reduced to 5 percent and the capital adequacy ratio is to be raised to 8 percent within the next two years, at least NT$950 billion will be needed from the fund.

  However, in the longer term, Huang said that if the NPL ratio was further cut to a healthy 1 percent, and the capital adequacy ratio boosted to 12 percent by 2006, a total of NT$2 trillion would be required. The figure may actually decline if the economy picks up better than expected, he said.

  Another economics professor at NTU, Hsu Chen-min (許振明), however, yesterday expressed concern over the nation's budget. He said that it would be "highly difficult" for the legislature to approve of such a big increase to the fund, given the current government deficit.

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