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Tough times ahead for bills finance firms, Fitch says

The operating environment for the nation's bills finance sector is likely to remain tough this year in view of an unfavorable yield curve, a contracting fixed-income investment portfolio and a shrinking guarantee business, Fitch Ratings said.

"Fitch believes that the bills finance companies' fixed-income oriented investment portfolio and unfavorable yield curve should continue to undermine the sector's earning outlook in 2007," the ratings services provider said in a report released on Wednesday.

Although domestic bills finance companies started investing in equities after the deregulation last August, the sector's equity investments remained limited because of the sector's aversion to risk, the report read.

The guarantee business is expected to continue to tail off, following a decline of 1.2 percent in the bills finance sector's aggregated guarantee book -- excluding E.Sun Bills Finance (玉山票券) and Fubon Bills Finance (富邦票券), whose businesses were merged with their banking affiliates -- to NT$443 billion (US$13.4 billion) last year, Fitch said.

The London-based ratings agency attributed the result to competition from commercial banks and the bills finance industry's move to scale down its credit risk exposure -- a trend that is expected to continue this year.

The sector's aggregate pre-tax profits plunged 38.8 percent to NT$8.8 billion last year, resulting in a drop in the return on equity to 6.9 percent, compared with 11.5 percent in 2005, Fitch's statistics showed.

Mega Bills Finance Co (兆豐票券) was the most profitable player with pre-tax earnings of NT$3.68 billion last year, followed by International Bills Finance Co (國際票券) with NT$2.13 billion and Grand Bills Finance Corp (萬通票券) with NT$980 million, the data showed.

The worst performer was Great Chinese Bills Finance Corp (力華票券), which posted a loss of NT$325 million last year. The firm was taken over by Taiwan Cooperative Bank (合作金庫銀行) and Cathay United Bank (國泰世華銀行) in the aftermath of the Rebar Asia Pacific Group (力霸亞太企業集團) scandal.

Fitch expects consolidation to continue with financial holding companies acquiring bills finance firms and merging them with the group's banking arm. The number of bills finance firms dropped to 12 last year.
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