September 22, 2005
Advancing to the Rear
New Taiwan Business Bank chairman Michael Chang said that he plans to restructure the bank without any layoffs: "We are not afraid of having a lot of people. We're only afraid that people aren't being used efficiently."
He also disavowed any merger plans for the near-term:
"The mission that the government gave me was not a merger and I told them mergers are not my strong suit," Chang said. "I have no pressure from the government to merge by a certain time. Once we do things right, if people have faith, they are welcome to buy our stocks on the open market."
Presumably, if people don't have faith in this probably unworkable plan, they are free to short -- anyone have borrow in TBB?
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.
September 20, 2005
The Sad State of Taiwan Business Bank
It seems like the government may have decided to jettison TBB before they thought to ask if anyone wanted it: the auction being conducted failed when no bidder (even with heavy government incentive) would meet the minimum asking price. Even so, the bank was forced to endure a taste of union power when it underwent a strike by some 2,500 of its 4,000 employees. This may not have queered the auction, but certainly contributed to the resignation of TBB Chair Herman Chung, soon to be replaced by Polaris exec Michael Chang.
In our last entry, we questioned why any bidder would guarantee the employees the three year no-fire contracts they want, or even the two-year guarantee they have been offered. TBB is fundamentally unprofitable and loaded down with bad debts; its major asset being its branch network.
Having seen the carnage inflicted on Taishin's share price for making its insane above-market purchase of Chang Hwa Bank shares from the government, it is even less surprising that high bidder E.Sun was still far away from the government's reserve price.
The Taiwanese government needs to get serious about exercising some strong management discipline at TBB, forcing it to meet performance standards or to be dismembered and sold in pieces with maximum ensuing job losses. In its current state the bank is a drain on the economy, as well as on healthy private banks, and the farce of an auction with no takers casts a pall over the entire financial sector.
September 07, 2005
Taiwan Business Bank Prepares for Strike
Taiwan Business Bank is bracing for a strike set to begin tomorrow, with estimates that some 4000 of its workers will walk off the job to protest plans to privatize the bank, which they feel (almost certainly correctly) will lead to staff cuts. Union leaders are demanding a 3-year guarantee of jobs, while the government is reportedly ready to offer only a 2-year guarantee.
The degree of overstaffing at TBB can be roughly estimated from the fact that some 600 seconded workers from other state banks are expected to keep operations running fairly normally while their 4000 proletariat brethren man the picket lines.