Analysts not impressed with proposed merger

"The merger is truly an incentive for slow finance shares."

Chu Yu-chun, analyst at SinoPac Securities Corp

The local bourse rose 2.08 percent yesterday in the wake of strong buying in financial stocks following the announcement by two state-controlled banks that their directors had approved a merger deal. But analysts seemed less impressed by the deal, which they said would be unlikely to have a substantial impact on the nation's crowded banking sector.

The index representing the nation's finance stocks gained 2.24 percent on the Taiwan Stock Exchange, after Taiwan Cooperative Bank (合作金庫銀行) announced on Tuesday that it had hammered out a plan to take over smaller rival Farmers Bank of China (農民銀行) through a 100-percent share swap, which is slated to be completed by May next year.

Taiwan Cooperative gained 5.58 percent to close at NT$20.80 on the Taiwan Stock Exchange yesterday, while Farmers Bank rose 2.04 percent to NT$8.00.

"The merger is truly an incentive for slow finance shares ... whose prices have been depressed by the drawn-out and controversial second-stage financial reforms," SinoPac Securities Corp's (建華證券) finance analyst Chu Yu-chun (朱玉君) said.

However, the move would only stimulate the local bourse over the short term, as the nature of the merger between the two state-run banks is not expected to have much of an impact on the banking sector as a whole of their private rivals, Chu said.

The government's planned disposal of First Financial Co (第一金控) next year, which could interest a handful of private financial holdings firms like Cathay Financial Holding Co (國泰金控), would act as a driver to further consolidate the nation's banking sector as the regulator expects, the analyst said.

In response to the deal, Taiwan Ratings Corp (中華信評) yesterday affirmed its ratings on Taiwan Cooperative with a stable long-term outlook, while upgrading Farmers Bank's outlook to positive from stable, the ratings service said in a statement.

"The outlook revision reflects the stronger credit profile of Taiwan Cooperative and our expectation that Taiwan Cooperative, as the surviving entity, will maintain a credit profile commensurate with its existing profile," the company's credit analyst Huang Chun (黃俊榮) said in the statement.

The proposed merger will turn Taiwan Cooperative into Taiwan's largest lender, with assets worth NT$2.57 trillion (US$76.4 million), giving it a market share of nearly 10 percent.

Its savings and lending would amount to NT$1.61 trillion, or 10.36 percent of the market, Taiwan Cooperative Chairman Sean Chen (陳沖) said on Tuesday.

"However, given the fiercely competitive nature of Taiwan's banking sector, the increase in market share may not automatically translate into better performance or competitiveness. Other important factors are likely to include integration synergies, strategic vision and management expertise," Taiwan Ratings said.

The takeover of the debt-ridden Farmers Bank and expanded capital stock could drag down Taiwan Cooperative's profitability next year to NT$0.20 per share from an estimated NT$2 per share, First Taisec Capital Management Inc (一銀投顧) said in a research note released yesterday.