BNP Paribas Securities (Taiwan) Co said it has downgraded Chinatrust Financial Holding Co (中信金控) shares and slashed a whopping two-thirds of earnings forecast for the company this year, citing its poor corporate governance and weak profitability prospects.
The French brokerage slashed its earnings forecasts for Chinatrust Financial by 64.7 percent to NT$2.43 billion (US$74.2 million) this year, or 0.33 per share, and by 12.8 percent to NT$14.47 billion next year, or NT$1.94 per share.
BNP Paribas is the first brokerage to downgrade Chinatrust Financial after the nation's fourth-largest financial group by assets was punished by the Financial Supervisory Commission (FSC) last week for its controversial investment in larger rival Mega Financial Holding Co (兆豐金控).
The brokerage lowered its rating on Chinatrust Financial to "Reduce" from "Hold" and cut back the targeted share price NT$21.60, down from NT$28.60 previously, according to its report released late on Friday.
Shares of Chinatrust Financial dropped 3.16 percent to NT$24.5 on the Taiwan Stock Exchange on Friday, while Mega Financial fell 1.93 percent to NT$22.85.
The move is "to reflect our disappointment with the company's corporate governance in acquiring Mega Financial Holding Co," Jesse Wang (
With so much controversy, it is unlikely to sustain the valuation premium the firm had in the past, Wang said.
The FSC has meted out a series of high-profile rulings on Chinatrust Financial and its banking arm in recent weeks, which led to the resignation of Jeffrey Koo Jr (辜仲諒), chairman of Chinatrust Commercial Bank (中國信託商銀), last week and foresaw an even more bumpy road ahead in its takeover bid of Mega Financial.
In the report, BNP Paribas cited other evidence of the financial holding firm's weak corporate governance that contributed to the downgrade decision.
First, Chinatrust Financial paid a compensation of NT$54 million to each board member, or 3.4 percent of its net profit last year in total compensation to all board directors, compared with the industry average of 0.7 percent, when the company's market capitalization had once collapsed by nearly 25 percent due to rising consumer default risk, Wang said.
"We do not attempt to argue that directors should not be paid but we believe that shareholders at least deserve a comparable level of corporate governance quality," he said in the report.
Secondly, Chinatrust Financial is lagging behind in Taiwan's financial industry in introducing independent board directors, which appears to be especially ironic, considering that Chinatrust is over half-owned by financial investors, the highest proportion in Taiwan's financial sector, Wang said.
According to the brokerage, the substantial cutback in the company's earning forecast is to reflect a higher annual provision expense estimated of NT$34 billion, up from the previous projection of NT$32 billion, to cover potential bad debts, and slower core earnings growth in both net interest income and fee income as a result of shrinking high-yield lending and the impact of restructured loans.
For the first half of this year, Chinatrust Financial posted a net loss of NT$2.25 billion, or NT$0.44 per share. It earned NT$16.12 billion, or NT$2.2 per share, in net profits last year.
By comparison, Taiwan Ratings Corp (
"We remained comfortable about its fine tuned management, as we do not expect the company to make changes in its strategy or operations after Jeffrey Koo Jr departure from the chairmanship of flagship unit Chinatrust Commercial Bank," Taiwan Ratings' analyst Chun Huang (
The ratings firm gave Chinatrust Financial twAA and twA-1 in February for its long-term and short-term credit ratings respectively, with a stable outlook.
The financial regulator's decision to suspend the financial group's expansion and fundraising plans would not pose any imminent impact as the capital-rich company need not raise money by the year's end, Huang said.
Also, the company can absorb the bad debts loss by using its profits alone without incurring any risk of shrinking capital, which in turn supports its existing credit ratings, he added.
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