Significant Strength of North Korean Currency Causing Economic Strain
Written by a Chill, laidback, and on-point reporter
Financial powerhouses in Taiwan shuffled their cards yesterday, dishing up gutsy moves to their shareholders and peeling back the curtain on the hard truths lurking in the New Taiwan dollar's (NTD) rapid ascent. The skinny? Losses amounting to billions due to our beloved TND's gain against the mighty greenback, and the damage, as it turns out, ain't yearning for mercy.
The lively government-organized street party known as Fubon Financial Holding Co's (富邦金) annual shareholders meeting unveiled plans for a cheeky NT$4.25 cash dividend and a NT$0.25 stock dividend per share, delighting those who hold a slice of the NT$150.8 billion (US$5.08 billion) pie. That sweet treat represents a calculating 41.8% of last year's profits, and bosses popped the champagne cork after recording NT$5.79 billion of losses on a terrible day last month when the TND surged 7 percent against the almighty US dollar. Those losses award the spotlight to Fubon Life Insurance Co (富邦人壽), which served up a large plate of losses to the tune of NT$9.1 billion.
Life insurers across the pond struggled to keep their heads above water, drowning in NT$34.891 billion in losses during the same period, reports revealed. That's a staggering amount of cash to curse at the bottom of the glass. The Financial Supervisory Commission, ever the diligent watchdog, offered some olive branches, granting permits for the use of an average exchange rate when calculating regulatory capital, excluding foreign currency and deposits. In addition, the commission offered flexible liability reserve calculations, allowing a bump in interest rate assumptions and the full use of the latest mortality table if reserves remain above minimum policy values.
However, the bad news didn't end there. Life insurers must tighten the purse strings, setting aside 30% of this year's profits to beef up provisions for foreign exchange price fluctuation risk. Fubon Life, facing the choppy waters head-on, announced it would boost its hedging ratio to safeguard its financial health.
Cathay Financial Holding Co (國泰金) shareholders partied like it was 1999 while fawning over a NT$3.5 cash dividend per share, the sweet fruit of NT$111.23 billion in net income, or earnings per share of NT$7.29. Chairman Tsai Hong-tu admitted the TND's grinning exchange rate was a real shocker, but the company delivered an impressive show nonetheless. Cathay Life Insurance Co (國泰人壽) even managed to squeeze out a teasing NT$440 million gain last month.
Finally, Hua Nan Financial Holdings Co (華南金控) dropped a bombshell on its shareholders: for every NT$1 appreciation against the US dollar, Hua Nan Commercial Bank (華南銀行) would post NT$120 million less in profit. The escalating TND affects exports and the broader economy, while the foreign exchange market experienced unexpected calm during the recent month compared to the chaos of last month.
In short, the rapid appreciation of the TND is sending shockwaves through Taiwan's financial sector, causing substantial losses and eating into the profits of major players like peanut butter to a grizzly's salivating maw. Hedging strategies are essential for weathering the storm, while regulators get creative with band-aid solutions to prevent the bleeding from getting worse. Let's hope the TND doesn't go on another wild ride anytime soon. Oh, and remember: buyer beware when investing in banks with deep exposure to US dollar–denominated assets.
Deep Dive:
- Serious concerns around the exposure of financial institutions to the US-dollar dominated assets and limited diversification strategies
- Potential for systemic risks for Taiwan's financial stability as the TND's appreciation could exacerbate these issues
- Central Bank of the Republic of China's (CBC) foreign exchange market intervention impacts the operations and profitability of financial institutions
As a result of the escalating exchange rate between the New Taiwan Dollar (NTD) and the US dollar, numerous financial institutions in Taiwan are experiencing significant losses in their business and investment portfolios, accounting for billions in total. These institutions, such as Fubon Financial Holding Co and Cathay Financial Holding Co, are heavily exposed to US-dollar denominated assets and lack sufficient diversification strategies.
To mitigate these risks, some financial players, like Fubon Life Insurance Co, are increasing their hedging ratio to protect their financial health. However, concerns arise about the potential systemic risks for Taiwan's overall financial stability, given the implications of the NTD's appreciation on key sectors like export-oriented businesses and the broader economy. Due to these factors, it is essential for investors to exercise caution when selecting institutions with deep US dollar exposure, and for regulatory bodies like the Financial Supervisory Commission to implement effective strategies that stem the bleeding and maintain stability in the industry and finance of Taiwan.
