Banking stocks such as First Financial Holding Co (
"Banks are ready for a good year," said Jerry Chen, who helps oversee US$640 million of Tai-wanese equities as research head at First Global Investment Trust Co (元大投信) in Taipei.
"Financial companies have muddled through a strenuous period when many lenders sacrificed profits to clean their books," he said.
Banks, insurers and financial companies, prodded by the government, are ditching nonpaying debtors, seeking partners and expanding into related businesses to become more competitive.
Politics may also play a part as President Chen Shui-bian (
Hua Nan, the nation's seventh-largest financial group, said on Dec. 17 it had made an informal merger proposal to First Financial, the sixth-biggest. Combining the two government-controlled companies would displace Fubon Financial Holding Co (
Two days after Hua Nan's statement, Fubon Financial said it wants to combine with 10th-placed Sinopac Holdings Co (
"Mergers and acquisitions among lenders are expected to intensify as the momentum is already there," Victor Kung (龔天行), Fubon's chief financial officer, said in a telephone interview last month.
"It's kind of a consensus that Taiwan's financial industry has to consolidate," he said.
Financial stocks lagged the broad market last year. The Bank and Insurance Index rose 26 percent, while the main TAIEX climbed 32 percent. That may give investors a buying opportunity as mergers attract interest and profits recover.
China Development Financial Holding Corp (中華開發金控), the No. 4 financial group, said on Jan. 9 it expects to return to the black this year with pretax profit of NT$8.3 billion (US$246 million). In August, it forecast a loss of NT$13.6 billion for last year, blaming planned loan write-offs of NT$16.9 billion.
"Financial stocks are expected to rise in the first quarter" amid speculation banks will report "remarkable" earnings after ditching bad loans, said William Fong (
Loans on which debtors aren't making payments fell in November to 5.01 percent of banks' total lending, down from a record 8.04 percent in the first quarter of 2002 and in line with a 5 percent target set by Chen.
The financial spring-clean was part of campaign pledges that helped the Democratic Progressive Party defeat former Chinese Nationalist Party (KMT) government at the polls in 2000.
In June 2001, Chen's government set up a NT$140 billion fund to bail out bankrupt lenders. Two months later, it used the fund to take over 36 credit cooperatives burdened by bad loans.
The Financial Holding Company Act (
At the same time, prosecutors cracked down on corruption.
The cleanup has helped financial stocks outperform during Chen's term, which included a 2.2 percent economic slump in 2001, the nation's worst on record.
Cathay Financial Holding Co (
The company, chiefly a life insurer, bought United World Chinese Commercial Bank (
Fubon Financial, also an insurer, meanwhile took over TaipeiBank (台北銀行) in an NT$80.3 billion all-share offer.
Other financial groups are also seeking partners. China Development's chairwoman, Diana Chen(陳敏薰), told reporters in September she expected to be in merger or acquisition talks by year-end and had "many candidates in mind." Hua Nan Financial told the Taiwan Stock Exchange last month that merging with First Financial was "just one" idea it's considering.
Fubon Financial said last month it had written to Sinopac Holdings expressing interest in a merger. Sinopac has declined to comment on the approach.
The government, as the controlling shareholder of Hua Nan, First Financial and Mega Financial Holding Co (兆豐金控), is well placed to direct the pace of consolidation. Some fund managers say it may try to speed up mergers to win votes.
"Financial stocks are likely to outperform ahead of the election as Chen seeks to show results from his financial- industry reforms," said Tracy Chen, who oversees US$73 million of assets at Prudential Securities Investment (保誠投信).
The outlook may change if President Chen loses KMT Chairman Lien Chan (連戰). While the KMT pushed for bank mergers when in power, a change of government scare investors.
"If Chen loses, there would be changes of top government officials and top management at the state-owned lenders," said Mei Chiang (蔣梅香), director of financial institutions ratings at Taiwan Ratings Corp (中華信評), 50 percent-owned by Standard & Poor's.
"There would be changes in the pace or stages of financial reforms," Chiang said.
Still, reducing Taiwan's tally of about 50 local banks is seen as key to boosting profits.
"Fewer and stronger market players are expected to enhance the industry's loan quality and improve the bottom line," Chiang said.
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