September 22, 2005
Cash Cards Crash in Taiwan
Recent Chinatrust monthly earnings figures show an alarming rise related to the bank's new "Wish" cash card business, which amounts for some 3% of total loans. Delinquencies are well into double digits - very atypical for the history of this business, which was originated in Taiwan by market leader Cosmos Bank, issuer of the "George and Mary" card (a homonym for the Chinese words for "borrowing money and easy to access"). Taishin, with its "Story" card, has also been an aggressive late entrant.
Is this a sign of overall credit deterioration? Chinatrust, for one, says "No," that their cash card customers were almost entirely different from (for example) their credit card customers. This seems to imply that they went very downmarket when entering the business. An alternative theory is that the market is topping out and that at least some consumers are too levered.
Chinatrust's explanatory email after the jump:
Subject: Chinatrust Financial Holding Company - Views on the recent development in the Taiwan market
Due to the latest development happened in the local market, we would like to take this opportunity to communicate with you about our views on two specific areas.
* Update on consumer credit quality
1. Due to faster-than-expected market expansion and increasing debt servicing level among the cash card borrowers, Chinatrust Commercial Bank has observed upward trend in charge off ratios of its cash card portfolio.
The bank expects its cash card charge off ratios will continue to rise slightly for another quarter and then might observe improvement in the 1st or 2nd quarter of 2006.
2. The management has started to take some preventive measures since March 2005, we will continue to monitor the effectiveness of these actions and will continuously adjust upon that. For example, the bank has started its early collection efforts for its overdue loans from 1st day by waving the 10 days grace period used to be granted to the cardholders in the past. In addition, credit line has been capped for high-risk cardholder through increasing frequency of loan review with JCIC etc.
3. Since the cash card portfolio only represents 3% of the bank's total lending exposure (including credit card revolving balances) and the bank has slowed down its expansion in cash card business, the negative impact on the bank's earnings will be around NT$ 600 - 700 million in increase in provision charges.
4. As of credit card, the charge off ratio is still in line with the bank's expectation provided a healthy growth in the revolving balance driven by increasing customer spending rather than from new balance/customer acquisition. The credit card net charge off ratio is expected to continue to trend upward in the next few months but control at below 5 - 6% and will become normalized afterwards. As the bank has accumulated sufficient reserves over time, the projected negative impact will not go beyond NT$1 billion in 2005.
5. The bank's credit card gross write off amount jumped to NT$724 million in August was for fulfilling the "358 policy" and the bank, apart from its 150 days charge off policy, took additional write offs in order to maintain the 90 days overdue NPL ratio well below 3%.
6. Overall, the bank has a well balanced (with 45% in corporate lending v.s. 55% in retail lending) and diversified (with 20% exposure to unsecured personal lending) portfolio to ensure its earning capability will not be significantly impacted by credit cycle in any particular segment. In addition, the bank's balanced revenue stream will also ensure its earning capability remains unaffected.
7. The bank's successful track record of delivering sustained profitability and proactive risk management has proven itself as a premier banking franchise in Taiwan. Due to the above mentioned adjustments, the bank expects the growth of this year will slow down but maintains flat to low single digit growth year-on-year. Overall, the bank's profitability remains superior to the industry's average.
* Our views on recent M&A development
1. As you may know already, there's a series government related banks auctions in the market. Again, as Chinatrust's principle, we look the deal purely from shareholder value point of view, regardless the temptation of significantly increase in size. We view, as the rules of the games defined, the deals inherited with execution risk and the prices we can't afford.
2. Although we believe the incomplete process of recent deal might have negative impact on government's enthusiasm in Taiwan's financial reform. However, we expect the consolidation trend will continue but might be in different forms or schedule.
3. Market share of 10% is a long-term aspiration to Chinatrust. Even there's a deal done by our competitors, we are not obligated to follow suit.
4. Chinatrust will continue to look into all feasible alternatives with prudent measures and disciplines. Again, organic growth always comes first.
Should you have any further questions, please free to contact us.
Posted by The Banker at September 22, 2005 02:21 AM
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