State-run Hua Nan Financial Holding Co (華南金控) expects profit to stall for the rest of the year, after a 20 percent increase in the first half, due to a deteriorating operating environment caused by global monetary easing and increasing risks, senior executives said yesterday.
Its main subsidiary, Hua Nan Commercial Bank (華南銀行), has exposure to US$600 million in yuan-linked target redemption forwards (TRF), a high-risk financial derivative, with unrealized losses on the part of clients standing at US$50 million as of Monday, officials said.
The bank-focused conglomerate reported NT$7.59 billion (US$232 million) in net profit for the first six months of the year, or earnings per share of NT$0.81, thanks to fee income improvement, company data showed.
However, net interest margin, a critical profitability gauge for financial institutions, stood at 1.09 percent in late June, down 2 basis points from three months earlier and flat from a year ago. It also lagged behind its guidance of an increase of 5 basis points for this year.
“It is difficult to raise interest spreads or margins, as global central banks have adopted monetary easing to support economic growth,” Hua Nan Financial president Derek Chang (張雲鵬) told an investors’ conference in Taipei.
The financial conglomerate issued the guidance on the assumption that the nation’s central bank would hike interest rates later this year, but that forecast appears unlikely to be realized with the nation’s GDP growth faring much weaker than expected.
Hua Nan Bank increased its loan book by 4 percent in the first half and aims to keep it steady in the second half, despite a dimmer outlook after the government cut its economic growth forecast for this year by more than half to 1.56 percent.
The bank would be more cautious in conducting business in light of growing risks, vice president Shih Chih-ho (石志和) said.
The bank’s net interest margin could drop further if the central bank cuts interest rates next month to stimulate business activity, Shih said.
Hua Nan Bank is also conservative in selling financial derivatives such as TRFs and could withstand drastic volatility caused by yuan depreciation.
As of Monday, the yuan’s depreciation reduced the TRF position of about a dozen clients by US$500,000, the bank said.
The exposure is limited, compared with its private-run peers, which reportedly could suffer up to US$6 billion in losses from their yuan TRF holdings, Hua Nan Bank said.
Most TRF clients bet that the Chinese currency would trade at 6.2 to 6.7 against the greenback and have either to keep up deposits to meet margin requirements or face forced liquidation, local media reports said.
Reported TRF losses dragged down financial shares by 2.28 percent yesterday, deeper than the TAIEX’s 0.44 percent decline, Taiwan Stock Exchange data showed.
Hua Nan Financial shares slid 1.58 percent to NT$15.60 yesterday, adding to a slump of 10.7 percent this year.
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