Taiwan Bank Sector: Provisioning impact from ProMOS is NOT over for some banks

Taiwan Bank Sector: Provisioning impact from ProMOS is NOT over for some banks

● While our survey suggests most banks already provided 100% for
their lending to ProMOS and 10-50% for Powerchip by end-11
(Fig 3), we note the negative impact from these loans are not yet
over and might bring more pressure on credit costs later this year.
● This is because most banks only maintain LLR/loan ratios at just
above 1%, so they will need to take extra provisions to replenish
their loan loss reserve when ProMOS loans are eventually
charged off. The only caveat is that banks could push back the
charge-off schedule and maintain a higher NPL ratio in the short
term. Further, the provisioning level for Powerchip for some banks
are still low and may increase into the year.
● Within our coverage, E. Sun and SinoPac have no exposure to
the problematic DRAM companies, and hence, will be least
affected. Conversely, Hua Nan and Chinatrust are most
vulnerable (Fig 3) if we assume eventually 75% of ProMOS
loans are charge-off and the provision level for Powerchip is all
raised to 40%.
● We currently have UNDERPERFORM on both Chinatrust and
Hua Nan and OUTPERFORM on E. Sun, Taishin and Yuanta.

Negative impact on ProMOS/ Powerchip not over yet
In 2H11, most banks have raised their reserve ratio against their loans
to ProMOS to almost 100% and Powerchip to about 40%. We believe
the move is partly to fulfill the new 1% reserve to loan requirement
rather than specifically for these risky loans. So when these loans are
eventually charged off (assume 75%), banks would need to set aside
extra provisions again in order to replenish loan loss reserve to meet
the 1% requirement. The only caveat is that banks can purposely
push back the charge-off schedule and maintain a higher NPL ratio in
the near term, though Taiwan banks have a tendency to kitchen sink
their earnings in year-end and we believe this raises the risk of a
higher credit cost in 4Q12.

At the same time, the current provisioning level for Powerchip loans
varied across banks (10-90%) with an average of about 40%. Local
press recently report (Economic Daily) that the FSC is asking banks to
raise coverage against Powerchip loans and we believe most banks
will likely raise their coverage on Powerchip loans to at least 40%.

Hua Nan and Chinatrust are most vulnerable
In Figure 3, we summarise ProMOS and Powerchip loan exposure for
banks under our coverage and calculate the potential earnings impact
if banks charge-off 75% of ProMOS loan, raise Powerchip provision to
40% while maintain 1% loan loss reserve to loan ratio. Based on this
calculation, Hua Nan and Chinatrust are most affected with 37% and
12% potential earnings impact, respectively.