Fitch: Slipped Opportunity For Taiwan's Efforts To Restore The Health Of Its Banking Sector.

Business Editors

HONG KONG & LONDON--(BUSINESS WIRE)--June 13, 2003

Having reviewed the 2002 results of Taiwan's banks and assessed the 2003 outlook for the sector, Fitch Ratings says that it is concerned that Taiwan is letting slip the opportunity to restore the health of the weak banking sector with its failure to pass the RTC's new funding budget in the legislative session ended in early June. In an earlier comment published in April, the agency had urged no further delay in implementing the fund's package as a weak banking system poses risks to economic growth.

While recognizing efforts made to work through the sector's core problems in 2001-2002, Fitch does not consider that the sector has achieved adequate financial health, and still demonstrates a number of vulnerabilities, while continuing to be hamstrung by the legacy of its core problems i.e. high (if reduced) NPL levels, overbanking, and poor (and falling) returns. 2003-04 is shaping up as a period of lost opportunities for Taiwan's efforts to create a robust and effectively functioning banking sector. The agency anticipates little or no change in the overall financial health of the sector this year, given the still weak economic growth prospects in 2003, while the approaching presidential elections threaten further politicization (i.e. postponement) of the reform process. The RTC's new funding budget failing to be passed in the parliamentary session ended in early June is an example, that Fitch fears, may be repeated.

The proposed budget for the RTC had already been slashed by 35% to TWD680bn (or an increase of TWD540bn in its available capital funds of TWD140bn) in May from the original TWD1.05 trillion. The new monies were intended primarily to cover the bailout of insolvent banks rather than acquiring NPLs from the whole sector as originally planned. Sales of NPLs will now be executed in the market (mainly via asset management companies) and the decision of when and how much to be sold will be left to the banks' management. The change in the fund's agenda is likely to result in a slowdown in the sector's pace in dealing with its core asset quality problems.

The combination of a still tough economic environment (especially in view of the impact of SARS), ongoing margin and profitability pressures and the continuing delays in passing the already reduced RTC's new funding budget, create a difficult and challenging operating environment for domestic banks. Fitch concludes that the operating profile of the sector (though with a few notable exceptions) and therefore the ratings assigned by the agency to local banks remain under pressure. There are, however, exceptions -- a small number of banks, mostly private commercial banks that have avoided the worst of the bad debt problem and maintain adequate levels of profitability and capital.

A full copy of the comment 'Taiwanese Banks: 2002 Results and the Outlook for 2003' can be found on the agency's website, 'www.fitchratings.com' (Banks/Special Reports).