Shares of state-controlled Mega Financial Holding Co (兆豐金控) became one of the hottest stocks on the local bourse yesterday after its smaller rival, the privately-owned Chinatrust Financial Holding Co (中信金控), announced its intention to buy a stake in the nation's second largest financial group amid the government's promotion of financial sector consolidation.
Mega Financial closed limit-up yesterday at NT$22.80, while Chinatrust Financial declined by 2.03 percent to NT$26.60 on the Taiwan Stock Exchange.
Boosted by the share purchase news, the financial sub-index rose by 0.86 percent in comparison to a drop of 0.53 percent in the TAIEX.
Chinatrust Financial said on Thursday that it would buy as much as a 10 percent stake in Mega Financial on the open market for about NT$27.5 billion (US$848.24 million ) within a year.
SinoPac Securities gave a "buy" rating to Mega Financial shares while revising the target price to NT$27, up from a previous figure of NT$24 for the coming months thorugh June, when the company is slated to re-select board members.
Meanwhile, Deutsche Securities was yesterday bearish about the deal and downgraded Chinatrust Financial from "hold" to "sell," with its target price cut to NT$24.2. The German brokerage also adjusted its earnings per share (EPS) for this year downward 25.4 percent to NT$1.62.
"We are neutral about the deal as the merger could bring a mix of benefits and disadvantages [to Chinatrust Financial]," Chu Yu-chun (朱玉君), a finance analyst at SinoPac Securities Corp (建華證券), said in her latest report released yesterday.
Should Chinatrust Financial take over Mega Financial, it will replace Cathay Financial Holding Co (國泰金控) as the nation's largest financial group, up from sixth, with assets amounting to NT$3.8 trillion. It will also enjoy complementary synergy in corporate finance and foreign exchange businesses if it decides to acquire Mega Financial in the future, Chu said.
Nevertheless, the acquisition will dilute the private holding company's EPS, given its expanded capitalization, and slow down the pace of its growth, in light of Mega Financial's lackluster growth in lending and profits, she warned.
Moreover, the acquisition plan could fail if Chinatrust Financial fails to receive support from Mega Financial's government shareholders, said Krista Yue (余婉文), head of research for Taiwan equities at Deutsche Securities, in a research note released yesterday.
Chinatrust Financial could also see rising operational risks in the future, as the company decided to utilize NT$30 billion in funds it raised last year on acquisition rather than disposal of bad consumer debts, Yu warned.
Minister of Finance Joseph Lyu (呂桔誠) said the government currently has no plans to dispose of its 22-percent stake in Mega Financial. Therefore, the government would remain the company's biggest shareholder, with eight seats on its 15-member board of directors, he said.
The government has vowed to consolidate the nation's fragmented banking sector and aims to halve the number of financial holding firms to seven by the year end to help create financial institutions big enough to compete with foreign rivals in the region.
"Although trading momentum on state players is set to be robust in the near term, industry re-rating cannot take place until the successful disposal of state assets that is still awaiting cooperation from politicians," BNP Paribas Securities (Taiwan) Co said yesterday.
The French brokerage retained a neutral weighting for Taiwan's financial industry.
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