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Cablegate: Business Scandal Drives Up Taiwan's Npl Ratio

VZCZCXRO8539
RR RUEHGH
DE RUEHIN #0726 0880855
ZNR UUUUU ZZH
R 290855Z MAR 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 4674
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3635
RUEHBJ/AMEMBASSY BEIJING 6547
RUEHUL/AMEMBASSY SEOUL 8552
RUEHGP/AMEMBASSY SINGAPORE 6860
RUEHKO/AMEMBASSY TOKYO 8604
RUEHML/AMEMBASSY MANILA 9985
RUEHJA/AMEMBASSY JAKARTA 4028
RUEHKL/AMEMBASSY KUALA LUMPUR 3712
RUEHHI/AMEMBASSY HANOI 3261
RUEHBY/AMEMBASSY CANBERRA 4488
RUEHWL/AMEMBASSY WELLINGTON 1747
RUEHHK/AMCONSUL HONG KONG 7791
RUEHGH/AMCONSUL SHANGHAI 0928
RUEHGZ/AMCONSUL GUANGZHOU 0102

UNCLAS TAIPEI 000726

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: Business Scandal Drives Up Taiwan's NPL Ratio

REF: (A) TAIPEI 0049, (B) TAIPEI 0063

1. SUMMARY. A business scandal in January (reftels) drove up
Taiwan's non-performing loan (NPL) ratio in February, but the ratio
remained well below 2.5% and will probably level off or even decline
as consumer debt delinquencies are fading and Taiwan banks can
easily absorb the bad debt arising from the scandal. END SUMMARY.

NPL Ratios Increase
-------------------

2. Taiwan banks' non-performing loans (NPL) in February increased
5% from January to NT$413 billion (US$12.5 billion). Meanwhile,
their average NPL ratio rose from 2.28% to 2.38%.

Main Cause: Business Scandal
----------------------------

3. Exposure of China Rebar Pacific Group (CRPG) Chairman Wang
You-theng's embezzlement of huge sums caused runs on Chinese Bank
(where Wang You-theng was Chairman) and failure of several
CRPG-affiliated companies (reftels). The scandal prompted Chinese
Bank's NPLs to increase in February 2007 by 25% or NT$3 billion
(US$91 million), far more than increases reported by any other
banks. In February 2007, Chinese Bank also reported an increase of
NT$169 million (US$5 million) in delinquent credit card debt, which
accounted for 86% of the banking sector's total increase in credit
card bad debt. Chinese Bank's NPL ratio in February increased to
13.4% from 10% in January.

Minor Cause: Some Marginal Cash Card Holders Fail
--------------------------------------------- ----

4. Some of last year's delinquent card debtors failed to honor
their rescheduling agreements this year and delinquent cash card
debt in February increased by 23% or NT$2.4 billion (US$73 million)
from January to NT$12.9 billion (US$392 million). The delinquent
cash card debt ratio rose from 6.2% to 7.7% in the same period.
(Overall delinquent credit card debt grew by only 2.5% during the
period, mainly due to more prudent credit card issuance policies.)

COMMENT
-------

5. Taiwan's banking sector can easily control the impact of the
scandal. The Central Deposit Insurance Corporation (CDIC) has put
Chinese Bank to receivership and will sell the bank via open bidding
late this year. Other banks have successfully kept their NPL ratios
below 2.5% either by putting up additional NPL reserves or simply
writing off the new NPLs.

6. The increase in cash card bad debt is probably short-lived and
will be followed by leveling-off or a decline in the near future as
consumer debt delinquencies are fading. For example, Taishin
International Bank (TIB, the largest cash card issuer in Q1 last
year) stopped issuing new cash cards in May 2006. Since then, TIB's
outstanding cash card loans have dropped 30% to NT$49 billion
(US$1.5 billion). For the entire banking sector, cash card loans
were below two percent of total loan portfolio, against which the
average NPL ratio was only 2.38% in February.

WANG

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