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STRESSful and TESTing times ahead
• Korean and Taiwanese banks are bracing for heavy provisioning
write offs, but Korean banks are ahead with shored up capital.
• While Korean banks are protected from equity dilution up to 500bp of
credit cost, Taiwanese banks may see dilution starting at 200bp.
• Korea Top Sell: Woori Finance, IBK; Taiwan Top Buy: First FHC, Top
Sell: Taishin FHC.
Korea banks: only the beginning of de-leveraging
In this note we stretch what-if scenarios for risky assets to determine the
impact to credit costs and BIS ratios. We believe we are only at the
beginning stages of a de-leveraging cycle and rising credit cost; NPL
formation and draw down of BIS will continue throughout 2009, and
through part of 2010.
At our base case assumption of a 20% default rate for riskier asset
classes (construction, real estate PF and shipbuilding RG), average
credit cost and BIS impacts are 189bp and -172bp, respectively. At 40%
default rate, credit costs rise to 363bp and BIS declines by -329bp. On
the balance sheet side, beyond 500bp of credit cost banks will have to
raise equity to maintain at least 7% tier-1 and 10% BIS ratios.
On average the market is currently pricing in 144bp of credit cost into the
shares vs the more realistic >200bp. We believe on a fundamental basis
there is more downside risk to share prices than upside. We have a
NEGATIVE view of the sector.
Taiwan banks: 400bp “unthinkable” extreme stress test
We conduct extreme stress testing related to rising credit cost from the
“unthinkable” case with 400bp for all major banks under coverage, under
our “EXTREME STRESS TESTING” of 400bps credit cost, all banks
under our coverage will require equity raising and equity dilution range
from 4% to 32% if TWD debt/preferred share issuance capacity remains
in tact. Without TWD debt/preferred market, equity dilution range will
increase to a higher range from 15% to 32%.
Our testing of 1,216 Taiwan listed companies (TWSE+OTC) revealed
that 263 listed companies fall into our defined “financially distressed”
companies with current outstanding TWD773b bank loan as of 3Q08
compared to TWD713b in the last recession in 2001. Expect more listed
companies to fall into distress in 4Q08-1Q09. Out of the TWD773b
potential doubtful loan, around TWD300b is from six Taiwan DRAM
makers and TWD200b from airliners.
The Taiwan banking sector is trading close to a historically low level due
to fundamental concerns. While we maintain our NEGATIVE sector
view, we do believe the downside from current level should be limited
consider DRAM consolidation plan announcement next week.
Contents
Korea Banks .................................................................................................................. 3
How deep will provisions go?
Stretching riskier assets to 40% default rate produces over 350bp of credit cost
Valuation: More downside risk than upside
Taiwan Banks .............................................................................................................. 24
What if “disaster NPL amount” hit Taiwan banks in 2009?
What if “debt financing” market closed for Taiwan banks? More equity raising?
Defined “financial distressed” companies via screening process
What’s delaying the recognition of NPL formation?
Individual company “extreme stress test” result
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