VZCZCXRO9770
RR RUEHGH
DE RUEHIN #0409/01 0470717
ZNR UUUUU ZZH
R 160717Z FEB 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4187
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3599
RUEHBJ/AMEMBASSY BEIJING 6388
RUEHUL/AMEMBASSY SEOUL 8483
RUEHGP/AMEMBASSY SINGAPORE 6824
RUEHKO/AMEMBASSY TOKYO 8513
RUEHML/AMEMBASSY MANILA 9958
RUEHJA/AMEMBASSY JAKARTA 4008
RUEHKL/AMEMBASSY KUALA LUMPUR 3689
RUEHHI/AMEMBASSY HANOI 3241
RUEHBY/AMEMBASSY CANBERRA 4460
RUEHWL/AMEMBASSY WELLINGTON 1723
RUEHHK/AMCONSUL HONG KONG 7625
RUEHGH/AMCONSUL SHANGHAI 0836
RUEHGZ/AMCONSUL GUANGZHOU 0014

UNCLAS SECTION 01 OF 02 TAIPEI 000409 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH AND STRATFORD 
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, NEW YORK FRB/MARA BOLIS AND SAN FRANCISCO FRB/TERESA 
CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Taiwan Banking Sector Update 
 
REF: (A) TAIPEI 0049, (B) 06 TAIPEI 4175 
 
SUMMARY 
------- 
 
¶1.  This report covers the 42 Taiwan banks, 28 credit coops, and 278 
Farmers/Fishermen Association (FA) credt departments which 
constitute Taiwan's banking sector.  In 2006, delinquent credit/cash 
card debt eroded profitability of Taiwan banks which, nevertheless, 
remained relatively healthy in terms of non-performing loan (NPL) 
ratio and capital adequacy (CA) ratio.  Both credit coops and FA 
credit departments were more profitable than banks in 2006, however 
FA credit departments had disturbingly high NPL ratios and low CA 
ratios.  END SUMMARY. 
 
Definition and Market Structure 
------------------------------- 
 
¶2.  Taiwan banks are licensed to do all kinds of banking services 
without restrictions on location and customers.  Both credit coops 
and FA credit departments are subject to strict limits on banking 
services they may provide (only basic services) and on customers 
served (only local members).  The basic banking services include 
taking deposits, offering loans, and foreign currency exchange. 
 
¶3.  Banks, naturally, are the backbone of Taiwan's banking sector, 
with 92% of assets and 94% of loans.  Credit coops' combined market 
share is only 2.4% of assets and 2% of loans, while FA credit 
departments have a combined market share of 5.5% of assets and 3.6% 
in loans. 
 
Credit/Cash Cards 
----------------- 
 
¶4.  Taiwan permits banks to issue credit/cash cards but does not 
allow credit coops and FA credit departments to do so.  A sharp 
increase in delinquent credit/cash card debt in 2005 and 2006 eroded 
the profitability of Taiwan banks in these two years.  Total 
delinquent credit/cash card debt charged-off shot up from NT$32 
billion (US$970 million) in 2004 to NT$71 billion (US$2.15 billion) 
in 2005 and NT$163 billion (US$4.9 billion) in 2006. 
 
¶5.  Taiwan banks' pre-tax profits, therefore, dropped from NT$155.4 
billion (US$4.7 billion) in 2004 to NT$78.6 billion (US42.4 billion) 
in 2005 and NT$31.9 billion (US$968 million) in the first 11 months 
of 2006.  Their return-on-asset (ROA) ratio slipped from 0.6% in 
2004 to 0.3% in 2005 and 0.12% in November 2006.  Their 
return-on-net worth (ROE) ratio fell from 10.3% in 2004 to 4.8% in 
2005 and 1.87% in November 2006. 
 
Low NPL Ratio, High CA Ratio 
---------------------------- 
 
¶6.  Under Taiwan's first stage of a financial reform program that 
began in 2002, Taiwan banks wrote off bad debt while maintaining 
their capital adequacy.  Banks' cut their NPLs by nearly 80%, down 
from NT$1,676.5 billion (US$50.8 billion) in early 2002 to NT$366 
billion (US$11 billion) in December 2006.  Correspondingly, Taiwan 
banks' NPL ratio dropped from nearly 12% to 2.1% while bad debt 
reserves increased from 14% to a new high of nearly 60% and the 
average CA ratio remained above 10%.  Among the 42 Taiwan banks, 36 
reported NPL ratios below the generally acceptable 5% level. 
 
Insolvent Banks 
--------------- 
 
¶7.  Three of the six banks with NPL ratios above 5% were taken over 
 
TAIPEI 00000409  002 OF 002 
 
 
by the Central Deposit Insurance Corporation (CDIC) in late 2006 
(refs A and B).  The CDIC will sell the three banks under 
receivership this year.  One of the remaining three banks reported a 
marginal NPL ratio of 5.4%.  Negotiations on the acquisition of the 
other two banks are currently under way. 
 
Credit Coops in Good Shape 
-------------------------- 
 
¶8.  The 28 credit coops have reduced their total NPLs by 90% from 
NT$50 billion (US$1.5 billion) in early 2002 to NT$6.4 billion 
(US$194 million) in November 2006.  Their average NPL ratio dropped 
from 16% to 1.8%, bad debt reserves increased to 38% in December 
2006, and average capital adequacy ratio in 2005 exceeded 12%. 
(Note.  Taiwan's Central Bank will publish the 2006 figure in June 
2007.)  Credit coops which had a combined loss of NT$1.3 billion in 
2002 reported a ROA ratio of 0.28% and a ROE ratio of 4.5%.  Of the 
28 credit coops, 26 reported NPL ratios below 4% in December 2006. 
The NPL ratios of the remaining two were 4.8% and 4.9%. 
 
Worrisome FA Credit Departments 
------------------------------- 
 
¶9.  A large number of the 278 FA credit departments have poor credit 
reputations, and are on the verge of insolvency.  Their NPLs 
declined by 60% from NT$131.4 billion (US$4 billion) in early 2002 
to NT$53.8 billion (US$1.6 billion) in December 2006, and their 
average NPL ratio also declined from nearly 20% to 8% during the 
same period.  However, over half of them (about 52%) still had NPL 
ratios above 5%.  Among the 278 FA credit departments, 101 reported 
their NPL ratios exceeding 10%, and 95 of the 101 reported bad debt 
reserves below 30% of their NPLs. 
 
COMMENT 
------- 
 
¶10.  FA credit departments have received less attention since 
regulatory authority over them was shifted from the Bureau of 
Monetary Affairs (the predecessor of the Banking Bureau in the 
Financial Supervisory Commission) to the Bureau of Agricultural 
Finance in January 2004.  Many FA credit departments now risk 
insolvency due to high NPLs and insufficient bad debt reserves.  The 
Financial Reconstruction Fund (FRF), equivalent to the RTC in the 
United States, has NT$22 billion earmarked for addressing insolvent 
FA credit departments.  However, this amount may not be sufficient 
to resolve so many problem FA credit departments. 
 
YOUNG