Thu, Mar 14, 2002 page18

• Banks vow again to shed bad debt

  UNCONVINCING PROMISE Even some local analysts say they are skeptical of efforts to prevent Taiwan's bad loans ballooning to the levels of nearby economies like China

  • BLOOMBERG
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  Taiwan's biggest banks say they are serious about mopping up US$47 billion of bad debt. Some investors say they aren't holding out much hope.

  In December 2000, as banks vowed to crack down on past-due loans, analysts said 15 percent of all bank loans were bad, about double government estimates. Now, as First Commercial Bank (第一銀行) and Chang Hwa Commercial Bank (彰化銀行) and others join the chorus, the official figure stands at 14 percent.

  "I won't invest any more in banks -- especially the state-run lenders -- until they've cleaned up their balance sheets," said Bryan Chiang, who helps manage NT$1.8 billion of equities for Invesco Taiwan Ltd (景順投信).

  Though renewed economic growth will bolster bank earnings, few lenders are likely to meet a government target to cut bad loans to 2.5 percent of all loans by June 2003. An index of the nation's banking stocks fell 10 percent during the past 12 months, a period in which the key TAIEX rose 8.5 percent.

  The government is prodding banks to merge into fewer, stronger groups, and encouraging banks to create asset management units with advisers such as Goldman Sachs Group Inc and Lehman Brothers Holdings Inc. Yet even some local bankers say they are skeptical of efforts to prevent Taiwan's bad loans ballooning to the levels of nearby economies like China, where at least a quarter of loans are overdue.

  "The target is actually impossible for many banks, though not for us," said Huang Feng-i (黃豐義), a spokesman for Chiao Tung Bank (交通銀行), about 4.4 percent of whose loans were non-performing as of December.

  Banks are trying to comply. Magnifying the effectiveness of their provisions, in the context of improved earnings, many plan to set aside as much money as they did last year for bad loans.

  First Commercial plans to set aside about NT$14 billion against bad loans this year, just shy of the US$14.7 billion it set aside last year, said President Tsai Jer-shyong (蔡哲雄). It may sell NT$62 billion of bad loans to asset management companies.

  Chang Hwa Chairman Chang Po-shin (張伯欣) said his bank will write off NT$10 billion this year and shift some loans to an asset manager.

  It wrote off NT$11.9 billion in 2001.

  Even if banks write off more bad loans, though, they must also clean up their poor lending practices that left almost one in five domestic banks unprofitable last year. Many banks also sank into trouble during a spate of overbuilding in the 1990s that left developers unable to repay loans.

  "Corporate lending has been carried on according to a pattern and a tradition in terms of mis-management, in terms of analyzing customers, in terms of managing credit portfolios, which is not up-to-date," said Jan G. Cherim, managing director and head of financial institutions at ING Groep NV, which has insurance and fund management ventures with Chang Hwa.

  Banks are trying to clean up their balance sheets before merging with insurers, brokers and trust companies under new laws allowing them to combine under holding companies.

  "Many banks have set aside money for bad loans and are cleaning up their balance sheets from last year before they form financial holding companies," said Julian Chen, who helps manage NT$1.1 billion in Taiwan stocks at National Investment Trust.

  The write-offs are starting to have an effect. Non-performing loans fell to NT$1.09 trillion at the end of December from NT$1.12 trillion three months earlier.

  Other banks planning an assault on bad loans include Taiwan Business Bank (台灣企銀), which may write off up to NT$6 billion this year, and Chiao Tung Bank, which will use the proceeds from equity investment gains and sales of subordinated debt to cap write-offs at last year's level of NT$8 billion.

  "This year's economic conditions seem to be better and we have cleared quite a significant amount of bad loans," said Perry Chang (張明田), senior vice president of Chinatrust Commercial Bank (中國信託銀行), where 2.9 percent of loans were classified as bad as of December. The lender will set aside NT$11 billion in provisions, less than last year's NT$14 billion.

  United World Chinese Bank (世華銀行) plans to set aside NT$6 billion against bad loans, while Taishin Financial Holdings Co (台新金控), which took over Dah An Commercial Bank (大安銀行) and started trading as a financial holding company in February, expects to write off about NT$19 billion of bad loans this year.

  Still, analysts warn more loans may go bad. The economy shrank 1.91 percent last year, isn't expected to expand by more than 2.29 percent this year.

  Because banks aren't setting aside enough money, "the industry's NPLs will indeed rise," said Andrew Chen, a Nomura Holdings Inc analyst in Taipei. "We are looking at a recovery in the second half. Non-performing loan ratios are a lagging indicator."
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