Securities house urges bank auction

In light of President Chen Shui-bian's (陳水扁) vow to halve the number of state-controlled banks by year's end as part of the second stage of his financial reforms, BNP Paribas Securities Taiwan Co suggested that the Ministry of Finance should consider holding a grand auction to get rid of the state-owned shares all at once. The French securities house said that this could be the most effective way to achieve Chen's goal.

"We believe it's about time for the Ministry of Finance to embrace changes in the execution strategy [of the privatization of Taiwan's banking sector] before it's too late," Jesse Wang (王嘉樞), head of research with BNP Paribas Securities, said in a report on Taiwan's finance sector released last week.

"Our proposal is that the ministry should consider holding an auction to sell stakes in the state banks just like the auctions of 3G [third-generation] mobile phone licenses," Wang said.

Wang added that some heavyweight financial companies have urged the ministry to adopt the approach, especially after Chang Hwa Commercial Bank (彰化銀行) failed to conclude its global deposit receipt (GDR) offering earlier this month.

An auction could be a win-win scenario, as the ministry would achieve its political objectives on time, Wang said, with the ministry expected to pocket some NT$170 billion (US$5.4 million) -- equivalent to some 1.7 percent of the nation's GDP or 11.3 percent of the fiscal budget last year -- if it auctions off its stake in seven state banks, including Chang Hwa, Hwa Nan Financial Holdings Co (華南金控), and First Financial Holding Co (第一金控).

Meanwhile, the industry would become less fragmented, with the top 10 banks owning a combined market share of 76.7 percent, up from the current 61.8 percent. Investors could benefit as a better pricing environment will help ensure stronger profit sustainability, the industry watcher explained.

Despite the failure to sell Chang Hwa Bank's GDR issuance, Minister of Finance Lin Chuan (林全) said last week that they will finalize the disposal of stakes in four state-controlled banks, including its stake in Chang Hwa, it's 100 percent stake in Central Trust of China (中央信託局), and two other unnamed privatized and listed financial institutions by the year's end as scheduled.

The two banks reportedly are Farmers Bank (農民銀行), which will be acquired by Taiwan Cooperative Bank (合作金庫); and Taiwan Business Bank (台灣企銀), which will be put on sale to interested local financial institutions.

The government previously completed dumping its shares in two state financial institutions, in the sale of Taiwan Development & Trust Corp (台開信託) to Jih Sun Financial Holdings Co (日盛金控) in January, and the sale of the Bank of Overseas Chinese (華僑銀行) to Polaris Financial Group (寶來集團) in March.

An auction could expedite the privatization and consolidation process in the financial sector by creating a herd effect that would attract both local and foreign investors.

"They all understand that if they miss such a chance, they will fall significantly behind in the consolidation game for a considerable period of time," he explained.

In an attempt to strengthen the competitiveness of the nation's finance industry versus its foreign rivals, the government also wants to reduce the number of financial holding firms to seven from the current 14 by the end of next year.

In light of these ambitions, BNP Paribas recommended that investors begin rebalancing their exposure in the financial sector from consumer-centric private players to the state bank segment.

The securities house meanwhile upgraded First Financial Holding Co (第一金控) to "outperform" with a share price target of NT$31.20, saying that First Financial is the most desirable potential state bank acquisition because of its significant loan market share of 5.4 percent and its widespread network of 179 branches. Even more importantly, it has solid asset quality, with a non-performing loan ratio of 2.2 percent to date.

Other picks include Fubon Financial Holding Co (富邦金控), E.Sun Financial Holding Co (玉山金控) and Mega Financial Holding Co (兆豐金控), according to BNP Paribas.