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Chinatrust Financial expects profit

"Despite the possible earnings recovery, the company's profitability remains less than ideal."

Shirley Yang, Invesco Taiwan fund manager

Chinatrust Financial Holding Co (中信金控), owner of the nation's biggest credit card issuer, expects to return to profitability this quarter, after turning in a record deficit last year on provisions to cover bad consumer loans, the company said yesterday.

"We expect profitability to return to normal levels in the first quarter [after the credit abuse storm subsides,]" Chinatrust Financial spokesman Jason Wang (王正新) told a media briefing.

Annual profits are expected to rebound to the 2005 level, Wang said, when the financial group generated earnings of NT$16 billion (US$485 million).

The provisional expenses set aside to cover potential bad debts could drop significantly to around NT$14.6 billion, he said.

Chinatrust Financial posted a record loss of NT$10.17 billion, or negative NT$1.43 per share, as a result of a having to set aside a reserve of NT$48.14 billion to cover the fast deteriorating assets in credit and cash cards as well as unsecured consumer lending.

The high reserve policy helped to reduce the bad loan ratio to 1.66 percent at the end of last year, while boosting the coverage ratio used to gauge the sufficiency of bad loan reserve to 133 percent, the company said.

The company's optimism did not impress market watchers.

"Despite the possible earnings recovery, the company's profitability remains less than ideal," said Shirley Yang (楊慶祺), a fund manager who oversees a NT$1.2 billion portfolio and tracks the financial industry at Invesco Taiwan Ltd (景順投信).

Even with a similar amount of earnings, the company's profitability per share this year will be diluted compared with that in 2005, given that is capitalization has risen to NT$80 billion from NT$70 billion two years ago, Yang said.

Chinatrust Financial's book value also fell to NT$14, down from about NT$18 over the same time period, Yang said.

She suggested investors take a wait-and-see attitude.

Chinatrust Financial currently has restructured credit and cash card debts amounting to NT$35.63 billion that could see an estimated loss ratio of 39 percent this year.

If the loss ratio can be maintained below 40 percent this year, there will be no risk of having to book more provisional expenses in the future, the company said.

Looking ahead, "the narrow net interest margin will continue to worsen this year, considering the fierce price war in the competitive financial market," Wang said.

Chinatrust Financial has seen its net interest margin weaken to 2.37 percent in the fourth quarter of last year, compared with 2.98 percent in the same period a year earlier.

Wang said the company will focus more on its wealth management business to boost its fee income and overseas business -- if the Financial Supervisory Commission regulator allows it. The company has a higher interest margin on those businesses than in Taiwan's market.

The company hoped to raise its non-interest income to 55 percent of its profits in the next three years, up from some 45 percent, Wang said.

Chinatrust Financial shares closed down 0.72 percent at NT$27.65 on the Taiwan Stock Exchange yesterday.
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