VZCZCXRO4931
RR RUEHGH
DE RUEHIN #1549/01 1250632
ZNR UUUUU ZZH
R 050632Z MAY 06
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 0031
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
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UNCLAS SECTION 01 OF 03 TAIPEI 001549 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP 
 
USTR FOR WINTER AND WINELAND 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT: Moral Hazard Spurs Delinquent Card Debt 
 
 
Summary 
------- 
 
¶1.  Moral hazard has contributed to a sharp increase in delinquent 
credit/cash card debt in 2006.  This debt remains manageable for 
Taiwan's banking industry as a whole, but has exposed several 
foreign and Taiwan banks to significant risks.  END SUMMARY. 
 
Moral Hazard 
------------ 
 
¶2.  Media and legislative pressure has forced the Taiwan auhorities 
to adopt measures to protect consumers from debts incurred, and has 
thereby created a moral hazard (i.e., a disincentive for doing the 
right thing, in this case, paying off debt.)  Many of Taiwan's card 
debtors now expect authorities to adopt further measures to lighten 
their debt burden.  This expectation was reinforced when regulators 
required banks to waive additional interest on card debt if 
negotiations for rescheduling the debt were started before April 10. 
 The government also set strict limits on the language and methods 
that can be used by debt collectors (i.e., no threats, contact of 
family members, or "harassment").  Our banking contacts report that 
some debtors have intentionally stopped repayment on their debts 
because they are expecting future relief from an interest rate cap 
and personal bankruptcy bills now under consideration by the 
legislature. 
 
Sharp Increase in Delinquent Card Debt 
-------------------------------------- 
 
¶3.  This moral hazard has contributed to a sharp increase in 
delinquent card debt.  Non-performing loans (NPLs) for credit card 
holders in March 2006 increased 21% to NT$14.6 billion (US$449 
million) from the end of 2005, driving up the average NPL ratio for 
credit card loans from 2.4% to 3.2%.  During the same period, NPLs 
for cash card holders more than doubled from NT$5.5 billion (US$168 
million) to NT$11.8 billion (US$362 million), and the average NPL 
ratio for cash card loans shot up from 1.8% to 4.4%.  The NPL ratios 
would have been much larger if card issuers had not written-off 
substantial amounts of bad debt. 
 
Surge in Write-offs 
------------------- 
 
¶4.  Card issuers must aggressively write-off delinquent card debts 
to stay in compliance with the stricter NPL limits established in 
July 2005.  Taiwan regulators will warn or censure card issuers if 
their delinquency ratio exceeds three percent.  Regulators will 
suspend card issuance authority if the delinquency ratio exceeds 
eight percent.  Card debt-related NPLs written-off in Q1 of this 
year totaled NT$47.9 billion (US$1.5 billion), nearly four times the 
level of a year ago. 
 
Profitability Eroded 
-------------------- 
 
¶5.  The growing amount of delinquent card debt written-off 
contributed to banks losses of NT$11.6 billion (US$356 million) in 
November and of NT$43.7 billion (US$1,345 million) in December of 
¶2005.  In Q1 of 2006, Taiwan banks reported pre-tax profits of 
NT$27.3 billion (US$840 million) which, however, were down 42% from 
a year ago. 
 
 
TAIPEI 00001549  002 OF 003 
 
 
Problems Remain Manageable 
-------------------------- 
 
¶6.  For most banks, credit/cash cards are just a small part of their 
business.  Card-related NPLs in March totaled NT$26.4 billion 
(US$810 million), equal to 6.5% of Taiwan banks' total NPLs. 
Outstanding loans to card holders in March totaled 727.8 billion 
(US$23.4 billion), accounting for only 4.3% of total bank loans to 
all borrowers. 
 
¶7.  Delinquent card debts pose little threat to Taiwan's financial 
system.  Most of the problem card holders have been taken care of in 
recent rescheduling negotiations.  Of 160,000 card debtors with 
debts exceeding NT$300,000 (US$9,230), the debt of 98,000 persons 
has already been written-off.  Of the remaining 62,000 card debtors, 
80% have completed rescheduling negotiations, according to Taiwan 
regulators. 
 
Card Debt Declines 
------------------ 
 
¶8.  Five banks have now stopped issuing new credit cards and three 
banks have ceased issuing new cash cards.  In addition, banks have 
tightened their issuing standards for credit/cash cards. 
Outstanding credit card debt declined 7% from NT$495 billion (US$15 
billion) in December 2005 to NT$460 billion (US$14 billion) in March 
¶2006.  Outstanding cash card debt dropped 10.4% from NT$298 billion 
(US$9.2 billion) to NT$267 billion (US$8.2 billion). 
 
¶9.  The total value of transactions paid with credit cards dropped 
14% from NT$129.6 billion (US$4 billion) in December 2005 to 
NT$111.7 billion (US$3.4 billion) in March 2006.  Total credit 
available for cash card holders declined to a 21-month low of NT$462 
billion (US$28.4 billion) in March.  Retail sectors that rely on 
consumer loans have reported sharp declines in sales of 10-20%. 
 
Limited Exposure to Card Debt 
----------------------------- 
 
¶10.  Outstanding loans to card holders in March were only 3.7% of 
Taiwan banks' total loans and only 2.2% of their total assets. 
However, three Taiwan banks and three foreign card issuers reported 
card debt/asset ratios exceeding 10%.  For one of the three Taiwan 
banks (Cosmos Bank), its card debt/asset ratio reached 25%, but its 
NPL ratios were only 1.4% for credit card loans and 1.1% for cash 
card loans.  Among the three foreign banks, one (Standard Charter) 
reported a NPL ratio of 2.9% for credit card loans with a card 
debt/asset ratio of 16%. 
 
¶11.  Taishin and Cosmos are Taiwan's two largest cash card issuers, 
accounting for over half of the cash card market.  ChinaTrust, 
Citibank, Cathay United, and Taishin are the four largest credit 
card issuers, occupying 37% of the credit card market.  These five 
banks all report NPL ratios for card debt of below three percent. 
 
Two Small Taiwan Banks in Trouble 
--------------------------------- 
 
¶12.  Two small Taiwan banks reported very poor standings in their 
credit/cash card business.  Chinese Bank reported NPL ratios of 7.9% 
for credit card loans and 13.3% for cash card loans, with card loans 
accounting for 18% of its total loans.  Another Taiwan bank in 
trouble is Taitung Business Bank (TBB) whose NPL ratio for cash 
 
TAIPEI 00001549  003 OF 003 
 
 
cards hit 30%, the highest amount among cash card issuers.  Taiwan's 
banking regulator, the Financial Supervisory Commission (FSC) 
Banking Bureau, has put these two banks under close surveillance. 
 
YOUNG