The outcome of Chang Hwa Bank’s (CHB, 彰化銀行) board election on Monday could spell the end of Taishin Financial Holding Co’s (台新金控) bid to integrate the state-run lender, but it has also lifted the longstanding uncertainty over Taishin’s profitability outlook, analysts said yesterday.
Taishin Financial shares opened down by the 7 percent limit yesterday, one day after securing only three of the nine board seats in Chang Hwa Bank, despite being the largest shareholder. The stock recovered slightly to close 4.58 percent lower at NT$13.55.
After failing to retain its control over Chang Hwa Bank’s board, Taishin Financial will no longer be able to consolidate the bank as a subsidiary and it may have to recognize losses from the investment, analysts said.
The Ministry of Finance appears unwilling to honor a legacy commitment whereby the government agreed to help Taishin Financial win a majority of the board seats in Chang Hwa so it may dominate its policy decisions and operations, National Chengchi University professor of financial studies Norman Yin (殷乃平) said by telephone.
“This has cast doubt on the government’s credibility and trustworthiness even though the 2005 deal is probably less than square and aboveboard,” Yin said.
Taishin Financial bought a 22.5 percent stake in Chang Hwa Bank in 2005 with a generous offer of NT$36.57 billion (US$1.17 billion), or NT$26 per share, after financial authorities pledged to help the winning bidder gain control over the state-run bank.
The investment would translate into a loss of about NT$14 billion, based on Chang Hwa Bank’s closing price of NT$17.75 yesterday.
Taishin Financial will have to raise its stake in Chang Hwa Bank to 25 percent to consolidate the lender or liquidate its holding unless the Financial Supervisory Commission provides governance forbearance, securities houses said, expecting shares in Taishin Financial to tumble in the short run.
The conglomerate yesterday rejected a finance ministry's offer to name the president of the Chang Hwa Bank and filed a lawsuit in a district court in Taipei against the ministry. Details of the lawsuit have not been publicized, but Taishin has said previously it would take legal action to make the ministry pay for any losses.
The ministry reiterated yesterday that it is not responsible for Taishin’s accounting woes or the structural change in Chang Hwa Bank’s board.
The creation of audit committees, which have the right to strike down policy plans before they proceed to board meetings, frees the ministry from the obligations to uphold previous agreements, the ministry has said.
Only independent board directors can sit on the audit committee, apart from meeting overseeing company operations and financial proficiency.
The ministry has no choice but to accept the board election’s outcome and to try its best to guard the interest of Chang Hwa Bank shareholders, ministry officials said.
The Financial Supervisory Commission said it would discuss with Taishin how it should handle its 22.5 percent shareholding in Chang Hwa Bank in line with the requirements set in the Financial Holding Company Act (金融控股公司法).
“We will ask Taishin Financial to submit a proposal in the near future,” Banking Bureau Deputy Director-General Jean Chiu (邱淑貞) told a media briefing yesterday.
Shen Chung-hua (沈中華), a finance professor at National Taiwan University, said it is time Taishin wake up from its dream of acquiring Chang Hwa Bank, whether the company likes it or not.
“Unless Taishin Financial can produce unambiguous legal evidence to assert its rights in Chang Hwa Bank, it is not in the company’s interests to extend the board disputes every three years,” Shen said.
However, Shen also criticized the way financial authorities handled Chang Hwa Bank’s board elections, which he said ran counter to the government’s touted aim to facilitate the consolidation of local financial institutions.
Financial authorities have refused to inject new capital into state-run financial institutions and frown on external investment for fear of losing control, while encouraging them to grow in scale, Shen said.
Furthermore, policymakers are conservative in dealing with merger-and-acquisition issues, making it difficult to gain headway in building state-run financial institutions into regional players, he said.
The setback in Chang Hwa Bank’s board elections may turn out to be a blessing in disguise for Taishin Financial in the long run, as the investment has been a drag on its capitalization and an organic growth constraint, securities houses said.
UBS Securities painted the “status quo” as the worst-case scenario for Taishin Financial and suggested that the company sell its shares in Chang Hwa Bank to boost its value.
JPMorgan Securities Ltd and Primasia Securities Co said Taishin Financial should settle a longstanding uncertainty and find other acquisition targets to strengthen its profitability.
“Taishin can sell the CHB investment to share up its capital adequacy or seek better investment opportunities in local insurers or banking branches in China,” Primasia said in a note.
Additional reporting by Amy Su
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