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Shares in Mega Financial steady despite pressure

"Since Chinatrust acquired this stake legally, we doubt the FSC [Financial Supervisory Commission] will apply the same pressure it did when it was forced to sell the initial 3.9 percent acquired via a Hong Kong holding company."

-- Bradford Ti, financial analyst

Shares of Mega Financial Holding Co (兆豐金控), the nation's third-largest financial group by assets, remained intact, despite looming selling pressure as Chinatrust Financial Holding Co (中信金控) was ordered to dispose of Mega Financial shares.

Mega Financial closed unchanged at NT$20.90 yesterday, after the financial regulator had reportedly ordered Chinatrust Financial to sell its holding in Mega Financial after the former's failed initial takeover bid for the latter.

Financial institutions are only permitted to hold stakes in rivals for the purpose of takeover bids. Chinatrust Financial currently holds a 15.6 percent stake in Mega Financial.

Shares of Chinatrust Financial closed down 0.75 percent at NT$26.50 on the Taiwan Stock Exchange yesterday.

Not expecting much immediate impact, Citigroup Global Markets retained its target price of NT$22.50 for Mega Financial.

On Thursday, Citigroup cut its target price for Mega Financial to NT$22.5 from NT$25.

"This time it is different," Bradford Ti (鄭溫煌), an analyst who tracks the nation's financial sector at the US brokerage, said in his research note released yesterday.

"Since Chinatrust acquired this stake legally, we doubt the FSC [Financial Supervisory Commission] will apply the same pressure it did when it was forced to sell the initial 3.9 percent acquired via a Hong Kong holding company," Ti said.

Even if Chinatrust is required to comply with the FSC's request, it is expected to be given much more flexibility in the timing and mode of the disposal, he added.

The regulator required Chinatrust Financial to to sell part of its 15.6 percent holding in Mega Financial by July 20, after the company was found misusing funds and conducting unlawful transactions during the process of its takeover investment in the larger rival.

The commission would ask Chinatrust Financial to elaborate at an appropriate time upon its planned handling of the remaining shareholding, FSC Spokesperson Susan Chang (張秀蓮) told reporters on Thursday.

"We would require the company to offload the rest of its stake [11.7 percent] in Mega Financial if it does not plan to proceed with its takeover investment, as financial holding firms are not allowed to make financial investments," Chang said.

Chinatrust Financial spokesman Jason Wang (王正新) said on April 30 that the company may not retain the holding, as it sensed that the government did not intend to give up control of Mega Financial in the short term.

Yet, potential losses resulting from a sell-down of its Mega investment will remain a burden on earnings and stock valuations for Chinatrust Financial, Ti said.

The analyst estimates every NT$1 decline in the Mega share price versus its cost of NT$24 to NT$25 per share would bring Chinatrust Financial an unrealized loss of NT$1.3 billion on the disposal of the remaining holding.

Citigroup Global Markets retained a sell rating and a target price of NT$26 on Chinatrust Financial, while maintaining a hold rating on Mega Financial.

The US equity research firm said its downward revision of the target price for Mega Financial resulted from concern over earnings pressure, due to mounting bad lending to the Rebar Group and a dearth of catalyst.
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