Taiwan in financial crisis? Bank on it

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Wednesday, December 6th, 2000

Taiwan in financial crisis? Bank on it

FINANCIAL FALLOUT: With the stock market way down and the economy slowing, Taiwan may finally have to face up to its long-ignored banking problem By Mark Landler

NY TIMES NEWS SERVICE TAIPEI For the last three years, Taiwan has been the little engine that could. While the Asian economic crisis whipsawed the stock markets and currencies of its neighbors, Taiwan chugged along with a single-minded goal of becoming the technology lodestar of East Asia.

But suddenly, Taiwan seems to have gone off the rails. A triple whammy of political upheaval, slackening demand for its high-tech exports and a potential banking crisis has rattled the country.

Of all these demons, the mounting woes of Taiwan's banks may be the most immediate danger. The percentage of nonperforming loans -- those not likely to be repaid -- has risen to an official 5.36 percent of total loans.

Salomon Smith Barney puts the figure for publicly listed banks at more than 6 percent, and analysts said the actual number may be 10 percent or 15 percent, since officials use a narrow definition of bad loans and does not take into account the even more troubled small-town credit unions.

"We're at a point where the banking problem is coming to a head," said Peter Kurz, the chairman of an investment advisory company here. "The tough times may force Taiwan to tackle bank reform."

By Asian standards, a nonperforming loan ratio of 15 percent is not horrifying. In the depths of the economic crisis, Indonesia's banks had to write off as much as 70 percent of their loans. But like its humbled neighbors, Taiwan has had to face up to deep flaws in its financial system.

"We have one simple problem: too many banks in a very congested country," said Jeffrey Koo (辜仲諒), the chairman of Chinatrust Commercial Bank (中信銀), one of Taiwan's healthiest private banks.

Koo said the industry's problems would be eased by a law, passed by the Taiwan legislature last week, that facilitates mergers of troubled banks. The law also opens the door to foreign ownership of local banks, and sets up a framework for investors to buy distressed assets from them.

But Koo also serves as an ambassador at large for Taiwan, so his analysis may be overly diplomatic. Several other bankers and analysts said the industry's problems could get worse before they get better, particularly if the country's political turbulence does not settle down.

While few people are predicting panicky bank runs like the ones that paralyzed Indonesia, a banking crisis could hobble, or even reverse, Taiwan's economy. It would also unnerve the rest of Asia, which is on the mend, but still fragile, after the meltdown of 1997-98.

Taiwan has been on a roller coaster since Chen Shui-bian (陳水扁) swept the KMT out of power last March.

The opposition has threatened a recall vote against Chen, a prospect that while unlikely, symbolizes the poisonous political atmosphere here.

"Initially, business people welcomed the new president," said Thomas Y. Tsao, the president of Prudential Securities Investment Trust Co in Taipei. "But over time, they became worried that he was pursuing an ideological agenda."

Surprisingly, it was not relations with China, but Chen's decision to shelve the nuclear plant, that fanned the current angst. Taipei's stock exchange plummeted to more than 35 percent below its level in January.

"The nuclear power plant was promoted for so many years that when Chen scrapped it, it was viewed as an antibusiness move," said Richard M. Tsai, the vice chairman of Fubon Group (富邦), an insurance and banking conglomerate.

The market jitters have rippled through the banks because many companies pledged shares as collateral for loans.

The other main form of collateral, real estate, has been in the doldrums for several years. As both property and share prices languish, nervous banks are calling in loans.

The Bank of Overseas Chinese (華僑) is a good example. The oldest private bank in Taiwan, it built up a solid franchise serving Chinese family-owned companies here and elsewhere in Asia. But some of those customers are now bankrupt, and the bank is carrying US$600 million in nonperforming loans.

That is 10 percent of its total portfolio, which makes the Bank of Overseas Chinese one of Taiwan's sickliest big banks.

Linin Day, the chief executive, said the bank could write off its nonperforming loans over 15 years and survive.

He has cut operating costs by moving the bank's headquarters from central Taipei to a drab suburb. But Day acknowledged that if the stock market tumbles further, all bets were off.

"If we don't respond properly, we will have a crisis," said Day, who used to be a state banking regulator.

The short-term solution for Taiwan's problem is to consolidate the banking industry. The number of banks here exploded from 16 in 1990 to 52 last year after the government liberalized the industry. And that does not take into account 350 rural credit unions for farmers and fishermen.

Most analysts say Taiwan needs only a dozen or so banks, some of which are likely to be owned by foreign banks. Citigroup acquired 15 percent of the Fubon Group in July, while HSBC is on the acquisition trail here.

While the foreigners trawl for whales, the minnows are rushing to swallow each other. Ta Chong Bank Ltd, a midsize private bank, is typical.

With net assets of less than US$600 million and a nonperforming loan ratio of 4.9 percent, Ta Chong is getting by.

But Henry Lin, the president, said he was looking for merger partners. His goal is to boost Ta Chong's net assets to US$2 billion.

As in other Asian countries, the government here must also find a way to dispose of all those bad loans, estimated by Salomon Smith Barney to total anywhere from US$45 billion to US$60 billion.

Already, some prominent foreigners are carrying shovels into the Augean stables of Taiwan's banks.

Former vice president Dan Quayle was in Taipei last week to drum up business on behalf of Cerberus Capital Management, an investment firm that wants to set up a local asset management fund.

Beyond the clean-up job, analysts said Taiwan must change its credit culture. Like elsewhere in Asia, banks here are opaque institutions, which lend to dubious, often politically connected, clients.

"There was no sense of risk or collateral," Kurz said. "This problem has been in the making for several years."

In that regard, Chen's election might have a salutary effect. The new president has pledged to fight corruption and introduce transparency to Taiwan's institutions. After a half-century of KMT rule, the country's political and business elite were often locked in an unholy alliance.

However successful Chen is, he faces numerous hurdles over which he has little control. One is the quickening pace of Taiwanese companies moving operations to China.

People here reacted with alarm two weeks ago when Winston Wang (王文洋), the son of Taiwan's leading industrialist, Wang Yung-ching (王永慶), announced plans to build a US$1.63 billion computer-chip plant in Shanghai.

So far, Chen has resisted demands to lift restrictions on the size of Taiwanese investments in China. But analysts said that the flow of capital and talent to the mainland could not be corked.

"Business people will always find a loophole to get out of Taiwan," said Tsao of Prudential. "Taiwan is gradually losing its blood."

The bleeding will worsen if Taiwan loses its overseas markets for semiconductors and other computer components.

Demand for chips and personal computers has ebbed in the last few months, prompting analysts to downgrade their recommendations on some of Taiwan's flagship technology companies.

In the last two years, Taiwan has weathered earthquakes, typhoons, plane crashes, and periodic growls from its restive neighbor, China. But it is the confluence of economic clouds that has finally unhinged Taiwan.

As Kurz puts it, "We've had something of a perfect storm."


-- Martin Thompson (mthom1927@aol.com), December 06, 2000

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