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Mega downplays impact from subprime loans

Mega Financial Holding Co (兆豐金控) said it expected to sustain a loss of up to NT$250 million (US$7.58 million) at worst in light of its exposure to US subprime mortgages.

"The worst-case scenario for us is that we may write off a loss of around 3 percent to 5 percent of our NT$5 billion CDO [collateralized debt obligation] holdings," company spokesman Simon Dzeng (曾垂紀) said.

Mega Financial's total investment in securities linked to subprime home loans in the US is NT$150 million, Dzeng said.

The executive said there was no reason to believe that Mega Financial would have to write off the whole CDO portfolio.

Dzeng was responding to a Commercial Times report which said the company could face such a loss from its subprime mortgage exposure, accounting for 28.5 percent of its estimated net profit this year.

Growing problems in the US home lending market have led to a credit crunch globally, with several top financial institutions, including US investment house Bear Stearns, having to take substantial losses on their exposure.

Many banks and mortgage providers lent money to people with weak credit histories at the height of the US housing boom in 2005 and last year, but as interest rates have risen, a large number of those loans have gone bad.

Concern is growing that the true extent of the problem could be much worse as the mortgages were repackaged into other securities, usually CDOs, which were in turn sold to banks and investors, mostly institutions.

Meanwhile, Taiwan Ratings Corp (中華信評), a local arm of Standard & Poor's Ratings Services, said yesterday that that its ratings on three life insurers remained intact.

Ratings on Taiwan Life Insurance Co (台壽保), Cathay Life Insurance Co (國泰人壽), and Shin Kong Life Insurance Co (新光人壽) were not immediately affected by the insurers' disclosure of their exposure to US subprime mortgage-related instruments, Taiwan Ratings said in a release yesterday.

The ratings agency said it did not expect potential credit losses to materially erode the companies' capital bases, given their adequate profitability and capitalization.

Last week, Taiwan Life Insurance said it booked a US$13 million loss in the first half from writing off investments in the failed Bear Stearns High Grade Credit Strategies fund.

Media reports also said that besides Mega Financial, six other companies faced similar problems, including Shin Kong Financial Holding Co (新光金控) -- the parent company of Shin Kong Life -- whose earnings this year could be cut by a third due to its exposure.

A Shin Kong official said that any resulting loss from its exposure would be limited as it would be "insignificant against our annual income of more than NT$50 billion from fixed-income investments and capital gains."
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