Taiwan bubble set to burst

We all know that sell side research tends to be optimistic, thus it is not very often that we SELL ratings.

It so happened that one report coming out last week rated an entire sector with underweight, with all individual companies under coverage being rated as SELL.

CLSA’s Taiwan banking analyst Dexter Hsu rated all 7 banks in the report as SELL, which leave me wondering what’s up with Taiwan’s banks:

Banks are now in the late stages of their credit cycle. After over a decade of loose lending, Taiwan faces the prospect of  a bursting housing bubble and a crisis in tech, where the companies are turning into zombies and refusing to die. Credit tightening should accelerate the seasoning process. We reiterate our SELL recommendations on all the market’s banks, especially since earnings should be front-loaded this year. For those who must be in the sector, we suggest Chinatrust for its credit-card franchise and prudent credit policy.

Easy access to credit over 2000-10 led to overinvestment in commodity-tech such as Dram, panels, LED and solar. Housing now faces poor affordability and oversupply. Property prices rose 133% over the past 10 years, but vacancies increased from 13% to 19% over the same period.

Though the timing of the bust is hard to predict, credit tightening should accelerate the seasoning process. It will not only trigger failures and financial restructuring in tech, but also pressure  mortgage borrowers and property developers. Tightening will lead to increasing demand for consumer-credit and home-equity loans, while trends in the unorganised money-market rate (ie, loan sharks) and dishonoured cheques suggest signs of trouble.

Earnings should be front-loaded this year, with revenue peaking in 1H12 before credit costs start to catch up. Revenue will contract as loan-pricing competition intensifies. NIMs are set to fall as unding costs increase due to an unfavourable change in the deposit mix. Provisions will rise due to the worsening  tech and property  outlook, higher reserve requirements and lower recoveries.

Though the sector looks well capitalised under current regulations, it would need to raise NT$260bn (US$9bn) if it implemented IFRS 4, the new provision policy and Basel 3 today. Banks like Chang Hwa Bank, First and Taishinare under the most pressure to recapitalise.

We reiterate our SELL recommendations on all the market’s banks: consensus remains far too optimistic. Although the risk from tech lending is well known, the market has yet to appreciate the impact of credit tightening on property. For  investors  who need to be in the sector, we suggest Chinatrust for its credit-card franchise and prudent credit policy.

A housing bubble and a tech bubble that are close to bursting. Is there no other growth paradigm out there?

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  1. That’s interesting. China, Canada, and now Taiwan. Before that we had the US, UK, Spain Portugal, etc.

    But no bubbles in Australia according to the RBA and all the other housing sprukers. There is the global economy, and Australia which is in no way connected. Amazing!

    • look mate there is just no way a country with kangaroos can have a housing bubble, get that through your head 😛

      Please just ignore the 850k empty houses nationwide and remember: we have drastic shortages and are different!

      • dumb_non_economistMEMBER

        You guys are off your rockers! What makes us different is our water goes down the gurgler in the opposite direction to the northern hemisphere, so thus, our house prices can only go UP. It isn’t economics, it’s physics!

        • dumb_non_economistMEMBER

          Also remember, we are “down under” and as such when you go down the “gurgler” you are actually going up. The full effect of this can be viewed at the geographical south pole, where if we had our houses, prices would be skyhigh in the dirt, but still up. As Australia is roughly 32 degrees south we don’t achieve the full effect as it’s a vector quantity, is that correct maths dudes?

      • Houses that are empty but not for sale or likely to be ought not evne be considered part of the stock, or should be imputed as to say 10% for changes in circumstances over the next 12 months at most.

        Some people own houses or apartments that they use as holiday houses and are under no pressure to sell.

        For some low rents compared to the possible/likely problems with tennants means they jsut don’t want the hassle.

        For some the houses are awaiting redevelopment and are not really in a lettable condition.

        Unless there are some changes in pressures or numbers of empty houses I think they are largely (say 90%) irrelevant.

        How many of the houses which were empty 3 years ago are no longer empty? What has been the change in the ratio of empty to occupied houses?

  2. Banks are now in the late stages of their credit cycle. After over a decade of loose lending, Taiwan faces the prospect of a bursting housing bubble…

    Strange. According to the MineBot the end of the credit cycle is the cause of all problems everywhere, except in China, where there is no credit cycle, and the manic construction boom can continue forever.

    Its seems Taiwan (and Hong Kong) are different to China.

    • > and the manic construction boom can
      > continue forever.

      What about a bridge linking Australia to China? It would take quite a lot of steel to build and give employment to many Chinese construction workers and Australian miners. Once the bridge is completed the Chinese could begin building fast trains to run over it. The trains could then bring millions of Chinese tourists to the Gold Coast and Sunshine Coast giving employment to tens of thousands of young Australians which would achieve the ultimate goal of this whole exercise i.e. saving the QLD housing market.

  3. Do they have kangaroos in China? No? Oh, no, they’re doomed!

    Lucky we’re different here in Australia.