Taiwan tackles high credit card default
rate By Scott Ridley
TAIPEI -
Taiwan is facing rising credit-card and cash-card debt
and a possible default fiasco that could resemble the
one from which South Korea is just beginning to recover.
But the Taipei government is stepping in quickly to
prevent a Korea-like meltdown.
Cash cards are a
new form of short-term loans targeted at the "sub-prime"
marked. In order to gain market share in the early
stages of this new business, Taiwanese banks opted for
market expansion over cost control. The result: an
increase in bad debts. Such a thing is not unusual,
since with any new form of consumer credit comes an
initial rise in bad debts. But while in South Korea the
ratio of overdue payments on credit-card loans for 30
days or more rose to 15.4% in February, it has been
declining every month since then, and in the case of
Taiwan analysts have seen cause for concern.
In
Taiwan, with a population of 23 million, major
commercial banks such as Taishin Financial Holdings Co
(FHC), Chinatrust FHC and Fubon FHC to name a few are
the issuers of credit cards and cash cards. In an August
3 report by Swiss investment bank UBS on Taishin FHC,
analyst Jesse Wang wrote, "Concern stems from Taishin's
cash-card delinquent ratio of over 90 days." On an
annualized basis, Wang estimated that the charge-off
ratio is likely to hit 6.7% for July, when figures come
out this month. (When a loan is charged off, it means
the company has abandoned hope of recovering the loan.)
Furthermore, with this high rate, Wang expects Taishin
to concentrate on collecting overdue payments rather
than increasing issuance of new cards. This move will
inevitably cut into the growth of the card business in
Taishin, and hence its profits. UBS estimates that
Taishin has cash-card loans worth US$761 million, or a
market share of 13.9%.
Taiwan's credit-card debt
(revolving balance) is NT$452.07 billion (US$13.2
billion), according to the Taiwan Financial Supervisory
Commission. Cash-card debt is NT$193.46 billion,
according to the commission.
Cash cards in
Taiwan have emerged in the past three to five years and
are usually targeted at sub-prime customers, as opposed
to the credit-card business, according to a July 5
Taiwan Financial Sector report by European investment
bank Credit Suisse First Boston (CSFB). In June,
Taiwan's Ministry of Finance (MOF) - after seeing what
happened in Korea after largely unrestricted credit-card
growth and a huge explosion in overdue loans -
introduced new regulatory guidance on cash-card and
credit-card business in June.
Taiwan's largest
credit-card issuer, Chinatrust FHC, grew its cash-card
business so fast, according to Dutch Investment Bank
ABN-AMR in a research report dated August 6, that its
debt stood at US$387.01 million by June 30. This
surpassed ABN's original estimate of $324 million by the
end of fiscal year 2004. Chinatrust is targeting $615
million by year's end, but ABN remains conservative with
an estimate of $524 million.
The aggressive
expansion by major Taiwanese banks such as Chinatrust
into the cash-card business could be a concern for some
investors. Chinatrust reported that its charge-off rate
was 4.3% at end of June. This is much lower than Taishin
bank's reported 6.7% at the end of July. ABN, however,
estimates the rate at 6.0-6.5%. Furthermore, ABN
estimates that the charge-off rate will be only 5.5% in
2005 and 6.0% in 2006. "We expect the cash card to make
material contributions to the bank's profits from 2005,"
it said. More important, ABN upgraded Chinatrust to a
"buy" rating from a "neutral" rating, believing that the
worst news is in the stock price - meaning that the
worst news is factored into the price. Therefore, ABN is
clearly implying that it sees very low risk to
Chinatrust's balance sheet from any increase in the
cash-card business, despite it being riskier than credit
cards.
While Taiwan's banks have the charge-off
ratio under control, struggling LG Card Co, South
Korea's second-largest credit-card issue, received a
vote of confidence after US broker Merrill Lynch
announced on August 5 that it would buy $400 million of
asset-backed bonds issued by LG Card. LG Card collapsed
last year, creating great concern in Korea about rising
consumer debt and the fear of massive defaults in the
nation of 48 million. In March, the South Korean
government announced a plan to address the problem of
rising delinquencies on household debts. It is
proceeding with its plan to reschedule debt repayments
for at least 400,000 individuals, with debtors being
given reductions in loan interest and extended time to
repay their debts
South Korean households went
from being largely debt-free in 1997 to holding an
average of $27,000 in debt per household in less than
six years. Almost 4 million Koreans have defaulted on
credit-card debt and household loans, a figure
representing close to 10% of the country's population.
The effect has been more than $375 billion in household
debt.
Credit Suisse First Boston, in its report
on July 5, further stated, "We remain comfortable with
the overall consumer credit risk given reasonable
household leverage - consumer loans are around 50% of
GDP [gross domestic product] and 60% of household
disposable income." Taiwan's Finance Ministry will
continue to monitor the situation and implement measures
to restrict growth in both credit-card and cash-card
business in the future.
According to CSFB, new
MOF regulations apply to cash cards this month, from
August 1, and for credit cards from October 1. The
regulations state for both cash- and credit-card issuers
that if the non-performing-loan (NLP) rate exceeds 8%,
then "new cash-card business will be suspended and new
credit-card issuance suspended as well".
In
South Korea, LG Card had started to rationalize its
operations by disposing of some of its investments,
including a 2% stake in LG Investments, estimated to be
worth about $149 million. The fact that no Taiwanese
bank has had to resort to selling assets is a testament
to the different situations in Taipei and Seoul - Taiwan
is taking control measures early, while Korea did not
and is trying to control the damage.
These tough
regulations and in essence a proactive stance by the
Taiwan MOF will ensure that the charge-off rates for
Taiwan will not be nearly as high as those of South
Korea. The Seoul government encouraged the growth of
credit cards to boost consumer spending but paid a heavy
price in defaults; now consumer spending is flat. In
contrast, Taiwan's MOF seemed to have learned the lesson
from Korea and has adopted tough guidelines now to avert
a credit-card crisis. With oil at $45 per barrel
recently and the Taiwan stock market hovering near
record lows for the year, this could prove to be a wise
policy, since markets and economies are looking at a
tough second half of the year.
Scott
Ridley works at a Taiwan financial institution.
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