The bills finance industry is expected to face more challenges this year with earnings prospects remaining grim, according to a report released by Fitch Ratings yesterday.
However, the agency described the sector's outlook as "stable," citing its good capitalization, improving asset quality and a gradually deregulated market enabling further revenue diversification.
Last year, the bills finance sector reported a 9 percent decline in aggregate pre-tax profits due to a combination of interest margin compression, lackluster demand for money-market funding services and strong cross-sector competition by commercial banks awash in liquidity.
On average, the bills finance industry's pre-tax return on equity fell from 11.4 percent in 2004 to 9.4 percent last year.
Fitch observed that bills finance companies last year traded in bonds and bills more aggressively, hoping to build up trading volume to offset the decrease in margins. The industry's income from trading bills and bonds rose 52 percent last year.
Forecasting a bumpy road ahead for the sector, the agency wrote that the gap in spreads "will likely remain tight as the central bank is likely to tighten monetary policy and the demand for funding remains weak due to slow corporate capital investments."
Yields on the nation's 10-year government bonds have started to bounce back from rock bottom. The upward trend in long-term interest rates could be a big threat to the sector's profitability this year, Fitch said.
"In a scenario analysis, Fitch calculates that the sector would suffer a one-off NT$16 billion (US$502.8 million) investment loss on a 100-basis-point rise in long bond yields," the report read.
The estimated loss is huge but manageable for the sector, Fitch said, as it amounts to about 11 percent of the sector's aggregate net worth that the agency estimated for the end of the year.
Stephen Tsai (
Rising short-term rates and the adoption of new accounting rules -- the Statements of Financial Accounting Standards No. 34 -- are two major headaches for bills finance operators, he said.
How hard the industry would be hit depends on the extent of the interest rate hikes, he added.
The central bank has raised rates by one percentage point since September 2004. Industry insiders believe that the monetary policymaker would likely raise rates again at the board of directors' meeting next month, as domestic rates remain low and inflation risks still exist.
To withstand the potential impact of higher interest rates, Tsai said the company would adjust its investment portfolio by increasing floating holdings and decreasing fixed parts.
In response to Fitch's warning, the Financial Supervisory Commission (FSC) said that the upward trend in interest rates could put pressure on bills companies' profitability.
"Despite the pressure on profits, the industry's fundamentals remain healthy," said Chen Shu (
Chen urged bills finance firmspaniesto diversify and expand their business scope into other areas, including investments in foreign currency-denominated bonds and brokering or underwriting of fixed-income products, like corporate and financial bonds.
The banking bureau is also in discussion with the commission's Securities and Futures Bureau on the possibility of allowing bills finance firms to underwrite equities, he added.
Despite a difficult operating environment, Fitch said the sector still has room to maneuver if companies could add new investments to lower the average costs of their holdings given that their bond holdings are generally not high.
At the end of last year, the sector's bond holdings totaled NT$641 billion, amounting to 4.7 times of their aggregate equity.
additional reporting by Amber Chung
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