2003/12/22

Analyst

Diane Lam Claire Chang Jerry Fang Clementine Kiang

The credit card market in Taiwan has reached maturity following rapid growth in the 1990s. The credit card business is highly competitive. According to the Ministry of Finance, 68 million cards have been issued to date. Of these, 36.6 million are active. There are estimated 14.2 million eligible cardholders in Taiwan.

The volume of credit extended through credit cards, cash advances, and consumer revolving credit was NT$505 billion during the first ten months of 2003. The cardholders of five major banks account for more than 50% of the transaction volume in Taiwan's credit card market. According to the National Credit Card Center, the largest credit card issuer, Chinatrust Commercial Bank (twAA-/Stable/twA-1), has a 23% market share based on transaction volume. Banks are looking for new growth in the cash card market and are targeting a different borrower base. Cash cards are targeted at borrowers with little credit background, and carry higher interest charges than credit cards.

Rising Credit Card Transaction Volume
The growth of credit card use in Taiwan has been consistently outstripping the growth of the island's GDP according to National Statistics of Taiwan and the Bureau of Monetary Affairs (BOMA), an affiliate of the Ministry of Finance. Young consumers have been increasingly financing their spending with revolving credit obtained through credit cards. The percentage of credit card transactions to GDP has grown sharply since 1995 (see chart 1). Growth of revolving credit has outstripped growth of other kinds of traditional consumer credit such as residential mortgages (see chart 2). According to the central bank, aggregate consumer credit in Taiwan reached about NT$4.3 trillion at the end of September 2003, representing 44% of GDP. At the same time, unsecured consumer loans accounted for less than 10% of GDP.

Volume Per Card Decreasing
Banks are focusing on increasing the number of the credit cards they issue, though the volume use per card is low. Only an average of 2.5 cards of the 4.6 cards per person are active (see chart 3). Consequently, issuing banks are allying themselves with large retailers and pursuing aggressive marketing strategies. With declining volume use per card and slowing growth in the numbers of eligible cardholders, newly issued cards are likely to be issued to existing cardholders rather than prospective cardholders.

BOMA estimates that the default rate (i.e., the percentage of loans overdue by 90 days or more) on all credit cards issued by all card issuing banks in Taiwan was less than 4% at the end of August 2003. Additional data, such as data on loans overdue by 30 days or more or the level of restructured loans, are not yet available from BOMA.

Emerging Alternative-Cash Cards
Cash cards enable holders to borrow cash on an unsecured basis via ATMs. While the maximum limit on cash cards is NT$1 million, most limits are relatively low at NT$300,000-NT$600,000. Consequently, the eligibility requirements for cash cards are significantly looser than those for other types of consumer debt. Some banks even issue cash cards to prospective borrowers with no steady income. Consequently, banks require sophisticated monitoring and collection systems and comprehensive credit policies to control credit risk. Credit card application requirements are more stringent and, if cash advances are allowed, the amount of cash that can be withdrawn is usually significantly less than the amount available with cash cards. Processing fees for credit card cash advances are also generally much higher.

The cash advance business model is not new. In Japan, consumer finance companies known as shinpans operate on similar principles of easy access to credit and target customers with weak credit profiles. They can also absorb associated losses that are higher than the losses associated with other forms of consumer lending because the interest rates they charge is on average in excess of 20%.

Before launching its George & Mary Card in 1999, Cosmos Bank (twBBB-/Stable/twA-3) hired a Japanese-based consultant to gain insight on consumer finance, as well as related information technology and card management skills. As at the end of August 2003, 3.8 million cash cards had been issued by 31 banks in Taiwan with an outstanding loan amount of about NT$145.2 billion. The distribution of market share is less balanced than that of the credit card market. The three largest cash card issuing banks control more than 50% of the market as measured by outstanding volume. Of them, Cosmos Bank has the largest share (about 40%) based on cards in circulation.

Cash cards, when well managed, can be very profitable because they encourage utilization, generate high returns, and support client retention. However, the revolving credit of cash cards can mask problem loans or deterioration in a borrower's payment ability. Most issuing banks carry a minimum monthly payment as low as 2% of the total amount owed, which may lead to increased risk, higher delinquency, and losses if credit controls are insufficient to manage problem borrowers and/or the consumer lending industry collectively restricts lending, creating a liquidity squeeze for marginal borrowers.

BOMA has decided to issue rules for cash card issuers and finished drafting them at the end of November 2003. According to the rules, banks are prohibited from issuing cards to people under the age of 20. Students and/or people aged between 20 and 25 with no regular income will not be able to obtain more than two cash cards, and the limit on each of these cards is NT$20,000.

Based on Standard & Poor's experience in other more mature markets, losses from revolving cards, especially those with lower repayment rates, tend to take longer to surface. Losses often take up to 24 months to materialize. In new markets, where consumer lending is just beginning to grow and where providers are aggressively expanding their businesses, problem loans may take even longer to surface.