China Development projects big loss

China Development Financial Holding Corp (中華開發金控) scrap-ped this year's profit estimate late last week in light of news of weaker profitability in its wholly-owned China Development Industrial Bank (中華開發銀行), the nation's fourth-biggest financial service provider said.

In a statement filed with the Taiwan Stock Exchange Corp late Friday after stock markets closed, China Development Financial said it decided to lower its after-tax forecast to a NT$13.63 billion loss from the NT$10.08 billion profit it predicted in January.

The company also revised its earnings-per-share forecast to a NT$1.42 loss from the previous forecast of a gain of NT$0.89.

The revision comes after China Development Industrial Bank said on July 25 that it plans to set aside NT$16.9 billion in additional provisioning to cover losses from its investment portfolio (totaling NT$10.6 billion) and "problem" loans (totaling NT$6.3 billion).

Analysts said China Development Industrial Bank, the core member of the financial holding group, has experienced increasing difficulties in finding new investments to replace those it made in electronics companies in the late 1980s and early 1990s.

Unlike earlier investments, which offered the bank high returns, China Development Industrial Bank's investments in the late 1990s have yet to generate strong returns, Taiwan Ratings Corp (中華信評) said in a rating note to investors early last month.

"The bank's profitability has weakened since 2000, which is in line with the decline in the nation's equity market since the second half of 2000," said the local arm of Standard & Poor's. "China Development Industrial Bank's profitability is likely to decline and be more unstable over the near-to-medium term as the bank's realization of investment profit becomes increasingly volatile."

China Development Industrial Bank accounts for 70 to 80 percent of the financial holding group's total assets and more than 90 percent of its profits between 1998 and last year. The group also owns subsidiaries Grand Cathay Securities Corp (大華證券) and First Taiwan Securities Inc (菁英證券).

Grace Fang (方鳳山), acting spokesperson of China Development Financial, said the profit revision shows the company's intention of implementing better corporate governance and adopting a more prudent provisioning policy under a new management team.

In late June, China Development Financial named Diana Chen (陳敏薰) as the new chairperson of the financial holding group and Benny Hu (胡定吾) to lead the bank unit, replacing Liu Tai-ying (劉泰英) who quit both posts after being charged with misuse of funds.

"The bank unit's new management team may be seeking to take a one-time hit to profits to avoid having to incur provisioning expenses over the next few years," said Taiwan Ratings.

The profit revision by China Development Financial marked the second domestic financial firm to scrap its profit estimate in a week. On Wednesday, First Financial Holding Co (第一金控) president Ray Dawn (董瑞彬) said the company plans to write off NT$25 billion to NT$30 billion in bad loans by the year's end, and therefore revise downward its earnings target for this year.

First Financial originally had a NT$5.8 billion profit target for this year with an estimated NT$1.51 earnings-per-share. New estimates have not been released so far.

As of June, the banking sector reported a non-performing loan ratio of 8 percent, or NT$1.13 trillion, the Ministry of Finance said earlier last week. Taiwan Ratings said it estimates the figure to be 12 percent.