First Financial, banks may gain on cleanup: analysts

Banking stocks such as First Financial Holding Co (第一金控) and Hua Nan Financial Holdings Co (華南金控) may rally this year as mergers and the completion of loan write-offs strengthen lenders' capital.

"Banks are ready for a good year," said Jerry Chen, who helps oversee US$640 million of Tai-wanese equities as research head at First Global Investment Trust Co (元大投信) in Taipei.

"Financial companies have muddled through a strenuous period when many lenders sacrificed profits to clean their books," he said.

Banks, insurers and financial companies, prodded by the government, are ditching nonpaying debtors, seeking partners and expanding into related businesses to become more competitive.

Politics may also play a part as President Chen Shui-bian (陳水扁 ) tries to boost his re-election bid by showing he has overhauled a financial system once seen as too inefficient and corrupt to lend to companies needing funds to grow.

Hua Nan, the nation's seventh-largest financial group, said on Dec. 17 it had made an informal merger proposal to First Financial, the sixth-biggest. Combining the two government-controlled companies would displace Fubon Financial Holding Co (富邦金控) as the No. 2 financial group.

Two days after Hua Nan's statement, Fubon Financial said it wants to combine with 10th-placed Sinopac Holdings Co (建華金控).

"Mergers and acquisitions among lenders are expected to intensify as the momentum is already there," Victor Kung (龔天行), Fubon's chief financial officer, said in a telephone interview last month.

"It's kind of a consensus that Taiwan's financial industry has to consolidate," he said.

Financial stocks lagged the broad market last year. The Bank and Insurance Index rose 26 percent, while the main TAIEX climbed 32 percent. That may give investors a buying opportunity as mergers attract interest and profits recover.

China Development Financial Holding Corp (中華開發金控), the No. 4 financial group, said on Jan. 9 it expects to return to the black this year with pretax profit of NT$8.3 billion (US$246 million). In August, it forecast a loss of NT$13.6 billion for last year, blaming planned loan write-offs of NT$16.9 billion.

"Financial stocks are expected to rise in the first quarter" amid speculation banks will report "remarkable" earnings after ditching bad loans, said William Fong (方偉昌), an analyst at Primasia Securities Co.

Loans on which debtors aren't making payments fell in November to 5.01 percent of banks' total lending, down from a record 8.04 percent in the first quarter of 2002 and in line with a 5 percent target set by Chen.

The financial spring-clean was part of campaign pledges that helped the Democratic Progressive Party defeat former Chinese Nationalist Party (KMT) government at the polls in 2000.

In June 2001, Chen's government set up a NT$140 billion fund to bail out bankrupt lenders. Two months later, it used the fund to take over 36 credit cooperatives burdened by bad loans.

The Financial Holding Company Act (金融控股公司法), passed in the same year, enabled lenders and insurers to merge and acquire businesses under new umbrella companies. Fourteen financial holding companies have since been formed. Banks were also offered tax incentives to merge.

At the same time, prosecutors cracked down on corruption.

The cleanup has helped financial stocks outperform during Chen's term, which included a 2.2 percent economic slump in 2001, the nation's worst on record.