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Rating agencies downgrade Fubon on capital concerns

Both Moody’s Investors Service and Taiwan Ratings Corp (中華信評) yesterday revised downward their ratings on Fubon Financial Holding Co (富邦金控) from “stable” to “negative” on capital adequacy concerns, one day after the nation’s second-largest financial service provider inked an agreement to acquire ING Antai Life Insurance Co (Taiwan) (安泰人壽) for US$600 million.

Moody’s changed its outlook on Fubon Financial to negative “because of the significant negative spread carried by ING Antai — a burden that stemmed from the high guarantee and long duration policies sold by ING Antai prior to 2001,” it said in a statement yesterday.

Moody’s said it believes the issue would continue to drag on the profitability and capital adequacy of the combined entity in the near to medium term amid the current low interest rate and unfavorable investment environment.

The rating agency expects Fubon Financial to take measures to ensure adequate levels of capital at Fubon Life and ING Antai, while maintaining capital strength at its other subsidiaries.

Taiwan Ratings, a local arm of Standard & Poor’s Ratings Service, expressed similar concerns, placing Fubon Financial on its CreditWatch with negative implications yesterday.

“The rating action reflects uncertainties on the group’s capitalization and ability to manage integration risks following the acquisition in light of the group’s immediate need to absorb ING Antai’s large-scale insurance book,” Taiwan Ratings said in a separate statement.

“ING Antai has a poorer credit portfolio than Fubon Life Assurance Co (富邦人壽), although its asset book is about 1.7 times that of Fubon Life,” Andy Chang (張書評), the author of the report, said by telephone yesterday.

Meanwhile, stock analysts yesterday expressed mixed views toward Fubon Financial’s prospects.

Citi Investment Research yesterday assigned a “buy/low risk” rating on Fubon Financial, predicting a target price of NT$36 after its life insurance subsidiary raised its market share from 7.1 percent to 13.9 percent to become the nation’s second-largest life insurer.

Citi estimated that Fubon Financial will have to issue about 406 million shares to give ING Antai a 5 percent stake in the company and US$356 million in tier II qualifying subordinate bonds to make up the difference from its acquiring price of US$600 million.

It fears that “dilution risks” could increase as its share price falls.

Fubon Financial yesterday continued its upward momentum to close 6.8 percent higher at NT$20.35 per share.

BNP Paribas (法銀巴黎證券), however, was not as optimistic and retained its “hold” rating yesterday, with a target price of NT$21.7 per share.

The biggest risk is ING Antai’s reserve inadequacy, which results from a material exposure to a sustained low-interest environment in Taiwan, its report said yesterday.

In related news, local media yesterday said that Fubon Financial intended to acquire Jih Sun Financial Holding Co (日盛金控) and was expected to close the deal by the end of this year.

Fubon Financial yesterday refused to comment on the rumors, while Jih Sun said it was in talks with other financial institutions to facilitate its fundraising plan, it said in its stock exchange filing yesterday.

"And there's no timetable for our fundraising plan," Jih Sun spokesman Clemas Chung (鍾芳程) said by telephone yesterday.
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