Thu, Jan 04, 2001 - Page 17 News List

Taiwan Ratings upbeat on banks

OUTLOOK The partner of the US rating agency S&P says that bank mergers are risky, but they bode well for the long-term development of the financial sector

By Tsering Namgyal  /  STAFF REPORTER

While the latest merger between Taiwan Cooperative Bank (TCB, 合作金庫) and Chinfon Commercial Bank (慶豐銀行) is a positive long-term development, the marriage is not without short term risks, said Taiwan Ratings (中華信評), local partner of the US rating agency Standard & Poors.

Taiwan Ratings affirmed its ratings and outlook of AA-/Stable for TCB following the bank's announcement of plans to merge with Chinfon. While Taiwan lacks any concrete experience in banking industry mergers, one pundit says that even in the mature US market, merging banks has proven to be risky business.

"The rate of failure is higher than the rate of success in overseas bank mergers," said Chiang Mei-hsiang (蔣梅香), a senior bank analyst at Taiwan Ratings yesterday. "While it is a positive development in the long term, there are short term risks."

According to Chiang risks arise when institutions attempt to integrate personnel and information systems.

As for the Taiwan Cooperative Bank deal, if it's not properly negotiated the deal could sour, Chiang said.

The affirmation reflects Taiwan Ratings' "expectation that overall, TCB, which is around 10 times larger than Chinfon, should be able to maintain its financial parameters at a level consistent with its current ratings."

It also assumes that the government will keep its stake in TCB, currently at about 60 percent, above 50 percent after the merger.

The latest merger between the government-controlled TCB and the troubled Chinfon Bank is expected to trigger a wave of mergers in the domestic banking industry over the next six months, said Chen Chung-hsing (陳松興), president of Taiwan Ratings yesterday.

The merger initiative should eventually reduce the number of banks in Taiwan, which will help rationalize and alleviate the competitive pressure in a system burdened by bad banks.

"If this happens, the overall ratings of the financial institutions may rise," Chiang said.

"While the asset quality of the merged entity would probably be slightly weaker than TCB's current position, this is counterbalanced to a certain extent by the slightly stronger capitalization that would arise under the merger's share swap," a Taiwan Ratings statement said.

Quality of assets aside, the credit rating will be dependent upon how TCB, currently Taiwan's second-largest bank with an 8 percent market share, follows through with the merger.

The deal will be realized through an exchange of shares -- a ratio of which will be decided in about three months -- and is expected to be completed within a year, Taiwan Ratings said.

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