Mon, Jan 23, 2006 - Page 10 News List

Shinkong foresees lower hedging costs

INTEREST RATES With the central bank expected to continue raising rates to close the gap with the US, the firm expects hedging costs for foreign investments to fall

By Amber Chung  /  STAFF REPORTER

Shinkong Financial Holding Co (新光金控), the nation's seventh largest financial group by assets, expects its hedging costs to decrease this year, once the interest-rate spread between Taiwan and the US narrows, the company said last Friday.

"We hope that hedging costs [for overseas investments] already achieved a peak level last year," Shinkong Financial spokesman Victor Hsu (許澎) told a media briefing on Friday.

To cut costs, the company plans to reduce its hedging position to 85 percent of overseas investments this year, down from 90 percent last year, and to adopt basket hedging -- diversifying its currency portfolio while reducing exposure to the US dollar, Hsu said.

Shinkong's hedging expenses tripled to NT$6 billion (US$187 million) last year from the previous year, depressing its net capital investment rate of return to 5 percent, about 20 percent less than the previous year, according to Hsu.

Insurers usually borrow money abroad so they can invest overseas without actually transferring capital out of the territory to avert possible foreign-exchange losses. But surging foreign interest rates raise the costs for insurers to borrow this money, which eats into profits from overseas investments, as the overseas loan must be matched by a deposit here in Taiwan. If the interest rate received on the deposit here is lower than the interest the firm is paying on its overseas loan, it loses money.

The US Federal Reserve has raised its funds rate 13 times since June 2004, to 4.25 percent, while Taiwan's central bank has maintained a gradual pace of rate hikes, lifting them to just 2.25 percent as of the end of last year.

Deutsche Bank predicted last week that Taiwan's central bank would continue to boost interest rates this year in a bid to narrow the widening spread with the US and to address the issue of negative real interest rates -- which occurs when the inflation rate is higher than interest rates.

Shinkong Financial reported earnings of NT$7.15 billion, or NT$1.77 per share, last year, diluted and down from NT$6.35 billion, or NT$2.23 per share, in 2004, after the financial group completed deals to take over small lender Macoto Bank (誠泰銀行) and Shinkong Investment Trust Co (新光投信) by the end of last year.

Shinkong Financial in November spent between NT$1.4 billion and NT$1.74 billion to merge with Shinkong Investment, and in October officially acquired Macoto as a wholly-owned subsidiary through a share-swap deal worth NT$20 billion.

Earnings could grow to NT$8.61 billion, or NT$2.12 per share, next year, according to forecasts from SinoPac Securities Corp (建華證券) in late November.

The first-quarter outlook for the group is bright, with NT$3.5 billion in profit expected from its real estate investment trusts product, SinoPac analyst Chu Yu-chun (朱玉君) said.

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