Chang Hwa Commercial Bank (彰化銀行) has struck again as its board unanimously passed a plan Friday to sell 1.4 billion in shares at a minimum price of NT$17.98 each in a domestic private placement. The planned sale of the equivalent of a 22 percent stake in the form of preferred stocks came after the state-controlled bank failed last month to locate a foreign strategic investor for its global deposit receipt (GDR) issuance because the parties could not agree on a price.
According to Chang Hwa, at least 10 financial institutions, including two foreign investors, have expressed interest in acquiring the 1.4 billion shares through private placement. Private placement refers to the sale of a big tranche of securities to a small group of investors. In such a transaction, the buyer or buyers sign an investment letter stating that the securities will not be resold for a specified period of time. In Chang Hwa's case, the sale of NT$25.17 billion (US$804 million) worth of shares is aimed at a single strategic investor with a three-year lock-up period.
The government currently owns a 22.69-percent stake in Chang Hwa, and is considering allowing a private investor to have a controlling stake in the bank. After the GDR setback last month, Chang Hwa was told by the Ministry of Finance to find a new preferred bidder for the stake within two months, as financial regulators are under increasing pressure to meet President Chen Shui-bian's (
But an international rating agency, Fitch Ratings, warned last week that the odds of achieving that goal are slim unless the government adopts a forceful approach. To be specific, Fitch said this depends on whether the government is willing to compromise on acquisition offers for the state banks -- which are often made at a substantial discount to local market prices -- by foreign or local financial institutions.
Thus, when looking at the proposed selling price of NT$17.98, one cannot help but wonder whether the private placement will work. Instead of offering a discount, this price actually represents a 2-percent premium based on the average price over the past 60 days ending on June 23 on the stock exchange. The reason why Chang Hwa failed in its GDR sale was because of low offers from the interested foreign bidders, who reportedly preferred prices ranging between NT$9 and NT$14 per share, compared with the bank's target of NT$16 to NT$17.
Chang Hwa, or the government behind it, perhaps has a good reason to be so adamant about its price as it may believe itself to be a quality bank and has bet that domestic financial institutions are willing to pay higher prices in a bid to secure a bigger market share, which is exemplified by a slew of successful deals by domestic financial institutions recently -- such as Shin Kong Financial Holding Co's (新光金控) acquisition of Mocoto Bank (誠泰銀行), Yuanta Group's (元大集團) acquisition of Fuhwa Financial Holding Co (復華金控) and Polaris Group's (寶來集團) acquisition of the Bank of Overseas Chinese (華僑銀行).
But it also deserves our attention that the pricing differences between parties simply reflect inadequate financial transparency among local banks -- including Chang Hwa. In fact, another rating agency, Moody's has warned that shaky balance sheets are another problem facing Chang Hwa in attracting potential buyers, citing the bank's capital base as being weaker than reported due to a high level of problem loans and below-adequacy-level loan loss reserves.
Unfortunately, this point was again addressed last week by Fitch, which believed the real capital adequacy of some banks in Taiwan to be weaker than the official numbers, due to the lack of adequate bank supervision. The government should hope that what Moody's and Fitch said were just warnings -- not conclusions about the banking sector.
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