Fubon revises its net profit downward

Fubon Financial Holding Co (富邦金控), the nation's fourth largest financial group by assets, revised downward its net profits for last year, after its banking arm set aside extra reserves to cover worse-than-expected consumer bad debts, the company announced last week.

In response to the change in overall asset quality in the consumer financial business, the subsidiary Taipei Fubon Bank (台北富邦銀行), decided to book an extra provision expense of NT$5 billion (US$154 million) in its financial report for last year, in order to strengthen its asset quality, Fubon Financial said in a filing to the Taiwan Stock Exchange late last Friday.

The move has in turn cut Fubon Financial's net profits to NT$10.64 billion, or NT$1.38 per share, down from the NT$14.32 billion, or NT$1.87 per share, that the company reported last month.

"`Moral hazard' has to some extent happened," amid the recent bubble of credit and cash card bad debt, Financial Supervisory Commission spokesman Lin Chung-cheng (林忠正) said last week -- using a term that refers to the risks to a firm caused by their customers' lack of honesty or prudence.

The average non-performing loan (NPL) ratio of the nation's credit and cash cards exceeded 3 percent in February, a level that warned of deteriorating asset quality, according to the commission's figures.

As a latecomer and smaller player in the nation's cash-card market, Taipei Fubon posted a surprisingly high NPL ratio of 4.773 percent for its cash card lending in January, the commission's figures showed.

Fubon Financial's weakening profitability may affect its dividends this year. The company may not meet its original expectation to pay out dividends similar to last year, when it issued NT$1.7 per share in cash to shareholders.

The amount of consumer bad debt, including credit and cash-card lending as well as unsecured consumer loans, is estimated to be more than NT$200 billion, according to the financial regulator.

Although a serious credit crisis is unlikely, the rising defaults on consumer loans are expected to continue to dent local banks' profitability this year, Taiwan Ratings Corp (中華信評), the local arm of Standard and Poor's Ratings Services, said last month.

The extent of that impact is not yet clear, due to uncertain factors such as lawmakers' plan to lower the interest-rate cap and a proposed consumer debt clean-up bill designed to bail out debt-ridden cardholders, analysts said.

The total net profit of 45 local banks plunged to NT$78.6 billion last year, down nearly 50 percent from NT$155.3 billion in 2004.

Fubon Financial's decision was not unique in the nation's banking sector. Larger rival Taishin Financial Holding Co (台新金控), the nation's No. 2 financial group by assets, announced in February that an extra provision expense of as much as NT$19.1 billion made by its banking unit had put the company into the red, with net losses of NT$3.3 billion last year.

Cathay Financial Holding Co (國泰金控), the nation's largest financial player, also made an extra provision expense of NT$9 billion last December to cover potentially rising bad debts, saying that the worst was yet to come.