Taiwan's stock market paused for breath when local finance house, Pan Asia Bank, released its grim 1998 financial results. Pan Asia is too small to affect the Taiwanese banking sector at large but investors and analysts are worried that the size of Pan Asia's losses, NT$6.2 billion ($194 million), combined with an 8% overdue loan ratio, indicate that the Taiwanese banking sector could become the next victim of the Asian downturn. A total collapse is not forecast but deterioration in the sector's overall health is on the cards.
But instead of introducing measures to shore up the domestic finance industry, Taiwan's finance ministry is coming in for criticism for policies that have exacerbated rather than eased existing weaknesses.
Policy initiatives include easing company reporting standards rather than tightening them. The government has applied pressure on banks not to sell stock into a declining Taipei stock market and similar pressure to loosen loan approval requirements for small and medium-size enterprises.
According to Brian Oak, vice-president at Moody's, the Taiwanese financial sector already suffers four major structural problems: excessive competition; a deterioration of asset quality partly due to economic slowdown; an over-speculative tendency; and a dependence on collateral-based loans instead of cashflow analysis, because of the lack of sufficient transparency in Taiwanese companies.
The deterioration in asset quality is a long-term phenomenon, says a Taipei banker. Asset weakness is compounded by the low profit margins banks achieve. Average profit margins today stand at 2.7%, while return on assets for deposit-taking institutions and the postal savings system has fallen from 1.1% in 1990 to less than 0.8% now.
Not all the measures deserve instant condemnation. The finance ministry also cut the banking reserve requirement. That should boost liquidity and allow for higher profitability. "Banks will have to use those profits to increase provisions for bad loans," says James Shih, deputy director general of the central bank.
The government has introduced other measures to improve margins, such as cutting taxes on banking operations. Meanwhile, to ensure that bad loans don't translate into banking failures, the government has introduced new capital-adequacy rules removing the old BIS-based system and introducing what analysts call a more realistic market-based calculation which includes off-balance-sheet items in risk-adjusted assets.
If these initiatives have delayed necessary long-term structural changes to Taiwan's financial sector, Shih is unrepentant. "We have to focus on the short-term situation before we can deal with long-term issues. How else could we go about dealing with the problems right now?" he asks.
Banking consolidation, the cornerstone of structural reform, is one of the government's top priorities this year in any event, he says. Rumours in Taipei suggest that the government is proposing to have the three leading commercial banks (First Commercial Bank, Chang Hwa Bank and Hua Nan Bank) merge into one bank and for 16 newly formed banks to merge into five.
"But it's difficult to see how the government is going to persuade private shareholders to relinquish their shares," says Oak. Shih says the government will offer "incentives" for mergers, but the precise details for the banking sector are yet to be decided. He admits encouraging consolidation will be difficult.
Consolidation is even more necessary among the poorly performing, numerous (over 370) credit unions and cooperatives that constitute the bottom tier of Taiwan's financial sector. "It's difficult to see how the government can convince banks to buy up these financial minnows when asset quality is often even worse than the media suggests," says one banking source.
Mergers between credit unions is more plausible. The government has already provided an incentive; it will allow the credit unions to transform themselves into banks (giving them greater business scope) if they have a minimum capital of NT$2 billion and an overdue loan ratio of under 2.5%.
In the meantime, Taiwan's banking sector is, at least, not heading for the sort of headline grabbing collapse that has plagued other Asian economies. According to the central bank, capital adequacy is good at an industry average of 11.6% as of September last year. While there is every reason to expect further deterioration, Taiwan has what the unfortunates of the Asian financial crisis did not have - time. Dominic Jones