Bank sales could boost markets

A month-long rally in Taiwan financial stocks may accelerate as the nation's banks attract overseas buyers and reduce bad loans.

The London-based Standard Chartered Plc bank, which earns two-thirds of its profit in Asia, on Sept. 29 offered US$1.2 billion for Hsinchu International Bank (新竹商銀). It became the first company from abroad to buy control of a bank in Taiwan, where the government is pushing for financial company mergers.

"This is the beginning, and if more global lenders are interested in buying banks in Taiwan, the sector will certainly extend gains," said Jerry Chen, the Taipei-based head of funds management at First Global Investment Trust Co (元大投信). "Lenders have drastically improved their credit quality, paving the way for a better profit outlook."

President Chen Shui-bian's (陳水扁) government is selling its shares in financial institutions to encourage overseas investment and local mergers in the industry. Approximately 45 banks and more than 300 credit associations compete for US$700 billion of assets in Taiwan. The government is also prodding banks to clean up bad loans after a lending binge in the 1990s.

An index that keeps track of the performance of 40 Taiwan financial stocks has surged 9.8 percent since the beginning of last month, after falling 0.6 percent in the first eight months of the year and slumping 15 percent last year.

The benchmark TAIEX is up 6 percent since Aug. 31.

Far Eastern International Bank (遠東商銀) has gained 48 percent in the past month and Chinatrust Financial Holding Co (中信金控) has climbed 12 percent.

Even after their recent surge, Taiwan's banks remain cheap relative to other Asian banks. Stocks in Taiwan's financial index sell on average for 1.5 times book value, or net assets, according to data compiled by Bloomberg, below the average of 2.1 for the 219 members in the regional finance index.

"Taiwan banks' valuations are attractive," said Sean Darby, head of Asian strategy at Nomura Holdings Inc in Hong Kong. "They are about a third cheaper" than regional peers.

Standard Chartered offered NT$24.50 a share for Hsinchu International, Taiwan's seventh-largest private-sector bank, 31 percent more than the stock's Sept. 29 close. The shares have jumped 30 percent since then.

"Standard Chartered's bid demonstrates that Taiwanese banks are overlooked and undervalued," said Murphy Huang, who helps manage US$2.3 billion at PCA Securities Investment Trust Co in Taipei. "This is a wake up call for stock investors."

Bank of Overseas Chinese (華僑銀行), which has 55 branches in Taiwan, said on Oct. 3 it is in talks to sell a stake to a foreign company, while Ta Chong Bank Ltd (大眾銀行) is also reportedly in talks with overseas investors. Shares of Ta Chong added 2.9 percent yesterday to NT$10.55.

Standard Chartered's move puts "pressure on global players to likewise move forward in their acquisition plans," said Matthew Smith, a Taipei-based bank analyst at Macquarie Securities.

"We are ready for marriage," Thomas Chou (周添財), senior vice president at Far Eastern, said in an interview on Oct. 5. "We are in talks with overseas buyers and don't rule out selling a majority stake with management control, or even the bank entirely."