Problem Bank for Sale

UNCLAS SECTION 01 OF 02 TAIPEI 003444

SIPDIS

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR SCOTT KI

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/ZELIKOW AND WISNER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EINV EFIN ECON TW
SUBJECT: Problem Bank for Sale



1. Summary. Taiwan authorities will auction off another
problem bank currently in receivership at the beginning of
December, part of their on-going effort to reduce the number
of banks and thereby improve the health of Taiwan's
financial sector. However, creditor banks will not receive
payment until the legislature provides additional funding
for the financial reconstruction fund charged with
addressing problem banking institutions. Taiwan has 11
other banks and dozens of small community financial
institutions with relatively high non-performing loan ratios
that have not yet been addressed. End Summary.

Bidding Schedule, Qualifications
--------------


2. Taiwan's Central Deposit Insurance Corporation. (CDIC)
will conduct open bidding on December 9 for the Chung Shing
Bank (CSB),the last problem financial institution still
under CDIC receivership (CDIC has not yet addressed the 11
other problem banks). A CDIC official told AIT that
qualifications for bidding have been relaxed to permit both
domestic and foreign securities firms, insurance companies,
and investment institutions. (In the past, only local and
foreign financial holding companies and banks were permitted
to bid for problem banking institutions.) Interested
companies are required to register before November 4. CDIC
also requires that the winning bidder must raise CSB's
capital from the current NTD 5 billion to above NTD 10
billion within three years. If a bank wins the bid, the
bank must still meet the 8 percent capital adequacy ratio
after acquiring CSB.

Good and Bad Parts of the Bank Separated
--------------


3. Although the CDIC sold most of CSB's non-performing
loans in December 2003 and March 2004, the December sale
will also exclude some of CSB's remaining liabilities. The
excluded liabilities are time deposits, deposits of other
banks, negotiable certificates of deposit issued by CSB, and
liabilities obtained from the inter-bank market. CDIC has
obtained the creditor banks' assent to delay repayment of
the NT$64.9 billion owed to them until the Legislative Yuan
passes a bill to increase the funding for the Financial
Reconstruction Fund (FRF, similar to the U.S. RTC.)
According to an official at CDIC's Banking Institution
Disposal Department, if the additional funding bill fails to
pass before the FRF expires on July 9, 2005, the Treasury
will pay the CSB's outstanding liabilities. CSB will not be
required to pay this amount. FRF funding has come from a 2-
percent gross business receipt tax collected from financial
institutions. The CDIC sale in December will be the
remaining, relatively healthy, parts of the bank with a
positive net worth of NTD 6.4 billion. There will be no
need for any additional compensation to the winning bidder
from FRF, as was needed in the two other sales of problem
banks this year.


4. CDIC has received inquiries about the sale from several
foreign firms and seven local financial institutions
(including Cathay United Bank and ChinaTrust Commercial
Bank). Late last year, Taiwan's Bureau of Monetary Affairs
stopped issuing permits for new bank branches in an effort
to address the problem of too many banks for the size of the
market. (Taiwan has more than double the number of bank
branches per capita of other Asian markets.) This leaves
merger or acquisition as the only way to expand bank
networks. The winner of the bid for CSB will take over its
34 branches and will be allowed to open another 12 branches.
The bid winner will also be authorized to transform the CSB
trust department into a branch office and to relocate
offices as desired.
Two Earlier Sales of Problem Banks
--------------


5. The use of the financial reconstruction fund to repair
the banks books and the chance to acquire additional bank
branches proved attractive to other domestic banks. In late
May the CDIC sale of the Kaohsiung Business Bank (KBB)
attracted bids from eight local financial institutions. The
winner was the E. Sun Bank, which wanted to expand its
presence in southern Taiwan. In exchange for acquiring the
KBB's 60 banking offices, E. Sun paid NTD 3.73 billion.
This amount was the gap between the FRF's compensation of
NTD 13.37 billion and the KBB's net worth of negative NTD
17.1 billion. In July, the sale of the problem Fifth Credit
Cooperative Association of Fengshan (FCCAF) also attracted
eight bids. The winner was the ChinaTrust Commercial Bank,
which, in exchange for the FCCAF's 10 banking offices, paid
NTD 760 million, the gap between FRF's compensation of NTD
1.1 billion and the FCCAF's net worth of negative NTD 1.86
billion.

Serious Problems Remain
--------------


6. The resolution of CSB will totally exhaust the FRF
funding of NTD 140 billion. If Taiwan's legislature fails
to increase the funding, there will be no ready solution for
the other 11 problem banks and 93 problem credit departments
of farmers' associations. Financial officials estimate that
NTD 270-280 billion will be required to address these
problem institutions. Taiwan officials have said they
welcome foreign ownership of a local bank to heighten
competition in the banking sector. However, while foreign
investors are allowed to bid for CSB, the restriction on
opening new branches encourages local banks to consider
acquiring CSB in order to expand their business. This
pressure may increase the amount that domestic banks are
willing to pay for CSB.
PAAL