Taishin Financial Holding Co (台新金控) will be strongly capitalized after it sells its brokerage unit to KGI Securities Co (凱基證券) for NT$29 billion (US$880 million) no later than the fourth quarter of this year, company executives said yesterday.
The company plans to use the capital injection to deepen its banking footprint in both the domestic and Asian markets, including China, by forging strategic partnerships, Taishin Financial chief operations officer Greg Gibb told an investors’ conference.
The company also plans to seek mergers and acquisitions opportunities to strengthen its asset management and insurance businesses, he added.
Taishin Financial’s board of directors signed a letter of intent late on Thursday night to sell its brokerage arm, Taishin Securities Co (台証證券), to KGI Securities, according to a stock exchange filing issued yesterday.
The sale of Taishin Securities will boost Taishin Financial’s cash reserve from NT$16 billion to NT$44 billion for a capital adequacy ratio of 150 percent — probably the sector’s third-highest, from the current 113 percent, Gibb said.
Concentrating its resources on banking, Taishin Financial will further inject up to NT$12 billion into its banking unit, Taishin International Bank (台新銀行), whose bank for international settlements (BIS) ratio and tier-1 capital ratio will then jump to 12.7 percent and 9.2 percent respectively, from 10.5 percent and 7.1 percent, he said.
The cash will leave Taishin Financial “well-prepared” if the asset quality of its corporate loans were to deteriorate in the second half of this year as a result of worsening economic fundamentals, Gibb said.
However, the company may call off its capital-raising plan in the third quarter pending final board approval, he added.
“We believe the move is a step in the right direction, allowing Taishin to shore up its capital base and focus on its core banking business amid difficult times and risks to its Chang Hwa investment,” Bradford Ti (鄭溫煌), an analyst with Citigroup Global Markets, said in a research note yesterday.
Taishin Financial holds a 22.5 percent stake in state-owned Chang Hwa Bank (彰化銀行) and is its largest shareholder after Taishin won a bid for 1.4 million preferred shares in 2005.
But the deal has since come under heavy criticism from other shareholders and bank employees, with some lawmakers even demanding that Chang Hwa repurchase shares from Taishin.
Citigroup said whether Taishin Financial needed to raise more capital hinged on what its plans are for the Chang Hwa investment.
“If Taishin intends to dispose of its 22.5 percent stake in Chang Hwa, it would have to recognize losses of NT$18 billion based on current valuations,” Ti wrote in the note.
“On the other hand, a merger with Chang Hwa would probably necessitate a capital infusion, assuming it intends to grow its banking business more aggressively, given a total capital adequacy ratio of 10 percent and tier 1 of 7 percent at Chang Hwa,” Ti wrote.
The merger of KGI Securities and Taishin Securities would boost KGI Securities’ market share to 8.2 percent from 3.7 percent, making it the nation’s second-largest brokerage house after Yuanta Securities Co (元大證券), which had a 12.1 percent market share as of the first quarter of this year. It would be followed by Fubon Securities Co (富邦證券) at 6.1 percent.
Ti said the KGI-Taishin deal was likely to make Yuanta Securities and Fubon Securities more aggressive in looking for potential acquisition targets to increase both business scope and market competitiveness.
“Thus far, both companies have shown restraint in overpaying for deals,” he said.
Another analyst agreed with Ti’s breakdown of the implications for the domestic brokerage industry.
“Consolidation will be an inevitable trend” in the local brokerage sector, Polaris Securities (寶來證券) vice chairman Huang Chi-yuan (黃齊元) said at a seminar in Taipei yesterday.
“Most companies should aim for a 10 percent market share to survive,” Huang said.
At yesterday’s investor conference, Gibb said Taishin Financial was planning to acquire a small securities company before closing the deal with KGI.
This would allow it to carve out the right to operate businesses such as underwriting, securities investment trust and proprietary trading for its current corporate clients, he said.
The company is also evaluating its planned joint venture with Aegon Life Insurance (Taiwan) Inc (全球人壽), which has liquidated its local operations, and plans to finalize a decision in the second half on whether it would pursue the deal or seek other insurance partners, Gibb said.
Taishin Financial posted NT$777 million in after-tax earnings for the first quarter of this year, or NT$0.07 per share, after suffering NT$5.2 billion in losses last year, the company said yesterday.
Looking ahead, Spike Wu (吳清文), general manager of the company’s retail banking group, said Taishin Financial expected to see stable earnings after interest spreads improve with better fee incomes in coming quarters given better investment sentiment and rising turnover from the local stock market.
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