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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

THE ASIAWEEK FINANCIAL 500
FIXING THE BANKS

Page 2

AN ACCOUNTING


THERE ARE MANY WAYS to measure the depth of the banking industry's problems. Consider this one: The loan portfolios and the value of collateral held to cover lost loans continue to lose value. "Asset quality is deteriorating to an extraordinary extent," says Marshall of Fitch IBCA. The number of bad loans is beginning to reach frightening heights. Typically, about 2% of the loans at a healthy bank will be non-performing - defined usually as those that are not serviced for at least three months. A rate of less than 5% is considered acceptable. More than 10% is a problem; more than 20% a disaster. In Thailand the rate is reckoned to be as high as 40%. In Korea, about 30%. Malaysia's situation is better, Indonesia's worse.

"It's a real catastrophe," reckons Marshall. "Banks are seeing their capital wiped out not just once but twice or three times." In Japan, non-performing loans seem to grow despite regular attempts by banks to write them off. According to the government's new Financial Supervisory Agency, Japanese financial institutions altogether had more than $600 billion in bad loans at the end of March. The number, based on more stringent reporting standards than were previously in place, was more than double what the banks themselves had reported.

The bad loans have caught bankers out. Deborah Schuler, vice president of the Banking Group of Moody's Asia Pacific, says banks all across Asia were guilty of plowing money back into loans rather than saving their capital for a rainy day. Before the crisis in Thailand, Bangkok Bank had set aside 3% of its loan portfolio to cover losses. Other banks had saved far less. Most Thai banks have since boosted their reserves for bad loans, but the amount is still far short of what they are likely to need.

Singapore's banks were relatively cautious in this regard, but even they are having to boost loan-loss reserves to account for the increasing number of non-performing loans. Overseas Union Bank (No. 77) reported that profits dropped 28% in the first half of 1998. DBS (No. 44) reported a 50% decline in profits. Tat Lee Bank (No. 216), which has finalized its merger as a wholly owned subsidiary of Keppel Bank (No. 184), reported steep interim losses on the order of $69 million - a first for a Singapore bank. In each case, hefty provisioning for non-performing loans was largely the reason for the grim numbers.

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