Tue, Nov 20, 2001 page18

• Lenders to sell debt to boost capital

  COVERING LOSSES A number of lenders plan to sell at least NT$45 billion of debt to raise capital to offset bad loans and take advantage of record low interest rates

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  Taiwan Business Bank (台灣企銀), E.Sun Commercial Bank (玉山銀行) and other lenders plan to sell at least NT$45 billion (US$1.3 billion) of debt, taking advantage of low interest rates to lift capital, which may be depleted by rising bad loans.

  Taiwan Business Bank plans to sell NT$20 billion of 10-year and seven-year bonds, said spokesman Lee Chun-sheng. E.Sun Commercial Bank, Taiwan's 12th-biggest lender by market value, plans to sell NT$5 billion of bonds and Makoto Bank (誠泰銀行) is selling NT$4.5 billion of 10-year subordinated debt, officials said.

  Lenders are seeking capital before more loans go bad in a nation where more than one in 10 loans are overdue or in danger of default. Still, investors may be cautious about increasing exposure to a fiercely competitive industry in an economy that shrank 4.21 percent in the third quarter from a year earlier.

  "We think it's risky" to invest in commercial banks' bonds, said Liu Hui-ling, a fund manager with CDIB & Partners Investment Holding Corp in Taiwan, which has US$300 million under management. "We need more consolidation in the industry."

  Replenishing capital

  More than 300 banks, credit cooperatives and farmer and fisherman associations compete for business in Taiwan, though almost a dozen combinations were announced in the last month between banks and other financial institutions trying to build economies of scale to ride out the recession.

  Many banks also plan to raise capital to offset bad loans or take advantage of interest rates that are at record low levels, after the central bank cut rates 11 times since December, bringing to 2.25 percent the rediscount rate charged to commercial banks for 10-day loans.

  "Now is a good time for the banks to replenish their capital base given the low interest rate environment," said Nora Hou, an analyst at CLSA Ltd in Taiwan.

  There will be more bond sales as other banks expect interest rates to drop further and lower their borrowing costs, said Rachel Wu, an executive director at UBS Warburg in Taiwan.

  In the last few months, bigger banks have also started issuing debt. First Commercial Bank (第一銀行), Taiwan's fourth-biggest lender by market value sold in September NT$10 billion of subordinated debt. Other banks include fifth-largest Hua Nan Commercial Bank (華南銀行).

  Chiao Tung Bank (交通銀行), Taiwan's seventh-largest lender by market value, just sold NT$1.75 billion of three, five and seven-year debt. It's paying 2.5 percent on the three-year notes. Taiwan Business Bank said it's selling bonds at between 3.7 percent and 3.8 percent.

  The sales are mostly of securities that can be counted towards capital the buffer banks hold in case loans go bad. The government estimates US$48 billion of loans, or 11 percent of advances, were overdue or at risk at the end of September, though Merrill Lynch & Co says as much as 14 percent of lending at publicly traded commercial and business banks is non-performing.

  Bad loans

  If banks sell debt or shares now, "they will have sufficient capital to cover [bad loan] losses which they are going to recognize," Merrill analyst Sophia Cheng said.

  Likely buyers of the bonds are other banks and insurance companies, amid a shortage of lending opportunities in Taiwan, where consumer spending, exports and the housing market are all in a slump.

  Banks are having to set aside more funds against loans to companies such as Yieh Loong Co (燁隆), an unprofitable steelmaker with debt 24 times its market value, Da-Cin Construction Co (達新工程) and Ton Yi Industrial Corp (統一實業), which in recent weeks have sought new loans or more time in which to make payments.

  Others want the funds as they prepare to lend more money to the nation's most creditworthy customers.

  "The issue has nothing to do with bad loans," said Y.Y.Chang, senior vice president at International Commercial Bank of China (中國商銀), which planned to sell NT$10 billion of subordinated debt.

  "We could use the money to extend new loans."

  Bank of Kaohsiung (高雄銀行) also said its planned NT$5 billion bond sale would be used to fund expansion of its loan book.

  Shares of the banking and insurance companies on the main TAIEX index fell 12 percent this year, compared with a 6 percent fall in the benchmark TAIEX.
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