Tue, Jan 11, 2000 - Page 17 News List

Rumor mill jolts China United Trust

SELL OFF The use of short-term funds for long-term investments has placed the trust firm in a financial bind

By Stanley Chou  /  STAFF REPORTER

While the TAIEX rose 2.9 percent to close above 9,000 yesterday, shares in China United Trust and Investment Corp (中聯信託, CUTIC) dropped by the maximum daily limit. So did shares in Lin San Hao (林三號). But that was it.

Over the weekend, local media had whipped up fears that another land mine share (地雷股) had been uncovered after Hung Kuo Group (宏國集團) announced its plans to downsize and raise about NT$20 billion to ease a credit crunch by selling its 80 percent stake in CUTIC. Both CUTIC and Lin San Hao are part of the conglomerate.

CUTIC's share price dropped 7 percent to NT$12, a historic low for the company. Lin San Hao dropped to NT$13.05 a share, also 7 percent limit down. But it later recovered to close at NT$13.95, down NT$0.05 for the day. Entie Bank (安泰銀行) and Union Bank (聯邦銀行), also sister companies of Hung Kuo Group, and touted as possible candidates to take over CUTIC, also fell yesterday.

But despite all the hype about the relative soundness of CUTIC, a bank run was anticipated. But it did not take place. According to a CUTIC spokesman, NT$700 million worth of time deposit contracts were prematurely settled yesterday morning. But the amount settled was within the range of a normal business day, a spokesman stressed. CUTIC had prepared NT$50 billion in preparation for possible withdrawals.

CUTIC's trust fund's balance (in time deposits) stands at NT$111.8 billion and its outstanding loans balance amounts to NT$114 billion, according to CUTIC. Meanwhile, its total credit loans to Hung Kuo Group amount to NT$4.62 billion, accounting for only 4.1 percent of CUTIC's total outstanding loans, said a company executive. Its overdue loan ratio stands at 8.8 percent, and it has a book value of NT$14.8 per share, according to CUTIC.

Central Bank of China (央行) officials also said the central bank would support CUTIC with liquidity if necessary. Minister of Finance Paul Chiu meanwhile gave the conglomerate a vote of confidence.

"The major problem Hung Kuo Group is encountering, like many other domestic companies, has been caused by the use of short-term funds as its source for its long-term investment," Chiu said. "That can create a credit crunch problem. But since most banks are agreeing [to extend their loans to the group], and its total assets are greater than its liabilities, the financial soundness of Hung Kuo Group is not in doubt."

The minister also declared five directives for the transformation of CUTIC from a trust company into a commercial bank.

First, the finance ministry (財政部) will lower the requirement for transforming the trust company into a commercial bank, from a 10 percent return on equity (ROE) over the last three years to 6 percent. According to this new requirement, CUTIC would be qualified to transform into a commercial bank in six months, said Chiu.

When asked whether this regulation was specially designed for CUTIC as a "CUTIC Article" (中聯條款), Chiu declined to comment.

Second, the priority of CUTIC's transformation (into a commercial bank) or merger with other organizations will be decided solely by CUTIC and its possible partners. The Ministry of Finance has no opinion on the issue, Chiu said.

Third, CUTIC has proposed to the Ministry of Finance that it apply for a commercial bank license before March and be transformed into a commercial bank within the next six months. The Ministry of Finance had no objection to this proposal, Chiu said.

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