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Sep.02, 2010
Event: 2Q10 result
Primasia Comment
Sinopac FHC released its second quarter results yesterday, with net income amounting to NT$816mn, down 16.7% QoQ. EPS came in at NT$0.12, mainly on a one-time disposal loss in deferred tax assets of NT$387mn. Net interest income and fee income were up slightly by 0.9% and 0.5% QoQ, respectively, while its provisioning expense rose to NT$1.4bn (included both domestic and overseas arms), up 12.5% QoQ. Net income for 1H10 totaled NT$1.8bn with EPS at NT$0.26, in line with market expectations.
Regarding its banking arm performance, loan growth is up 6.7% YTD, with the growth rate outperforming most domestic banks. Stronger momentum was seen in corporate lending, with large corporate loans (i.e. all non-SME loans) and SME loans up by 12.4% and 9.0% YTD, respectively. Loan-to-deposit ratio remained high at 80% compared to peer averages, while NIM increased slightly from 1.24% in 1Q10 to 1.29% in 2Q10 on increasing loan exposure in SME and non-tech industries with better lending margins. Fee income rose 2.6% QoQ, mainly on recoveries in wealth management product sales and its card business. Asset quality continued to improved, with NPL and coverage ratios ending at 0.63% and 103.15%, respectively, as of June 2010.
We see the company’s overseas assets as the major earnings drag on Sinopac FHC, as increasing losses were seen at its Far East National Bank (FENB) and its branch in Los Angeles, with accumulated net loss collectively at US$28.3mn (or NT$906mn). Sinopac guides an expected net loss at FENB for FYE10 may amount to US$40mn-$45mn (NT$1.3bn-$1.4bn), while the pace of asset deterioration/losses remains in line with the company’s previous estimate. As of 1H10, NPL and coverage ratios at FENB remained at disappointing levels of 16.45% and 34.72%, respectively.
Sluggish earnings performance has also been seen at Sinopac’s Hong Kong operations and at Sinopac Securities (Asia). 1H10 profits at its H.K. branch were down significantly by 87.8% YoY, amounting to US$1.5mn (NT$48mn) compared to US$12mn (NT$394mn) in 1H09, mainly due to recognition of NPLs from PEM Group-related lending. Its securities arm also incurred net losses of US$2.7mn (NT$86mn), compared to a gain of US$1.9mn (NT$58mn) in 1H09, mainly attributed to poor trading result due to weak equity market performance in 2Q10.
We hold a generally neutral view on Sinopac FHC’s short-term outlook as we believe its U.S. subsidiary remains the major downside risk and earnings drag. The counter is currently trading at 0.9x PB, near the middle of its historical PB range. Valuation-wise we believe it is fairly priced, but given the uncertainly in its overseas assets we suggest investors stay on the sidelines at present.
Source: Primasia Investment Consultancy Co., Ltd.
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Aug. 30, 2010
Cross-strait deregulation opens new era for banks
- Cross-strait financial deregulation provides new opportunities. We believe cross-strait deregulation will benefit Taiwanese banks and FHCs in two ways. First, it will provide new growth opportunities for such firms given that Taiwan’s market is saturated while there is a more favorable lending environment in China (average spread is 3.1% compared to only 1.2% in Taiwan). Secondly, business alliances through cross-equity investment and possible M&A activity may provide a share price re-rating theme for the domestic financial sector as a whole, where Taiwan financials are trading at 1.2x PB, compared to 2.3x PB among their counterparts in China.
- ECFA to favor banks; equity investment the next step. The signing of an Economic Cooperation Framework Agreement (ECFA) with China on June 29 paved the way towards more favorable market access to Taiwanese banks, compared to Closer Economic Partnership Arrangement (CEPA) and WTO guidelines, by allowing them to extend RMB lending to Taiwanese firms in China after just one year of branch operation while proven profitable. The duration required to apply for branch upgrade has also been shortened from two years of representative office establishment to one year, a condition in line with CEPA rules. While the next round of cross-strait talks is expected to be held within the next six months, we believe the relaxation of investment restrictions will be the next topic for negotiations. Any further developments regarding possible business alliances and cross-equity investment may trigger a new round of re-rating for Taiwan financials, in our view.
- Fundamental recovery well under way. We see the current macro-environment as providing good earnings turnaround opportunities for Taiwan financials, mainly on the back of the sector’s well maintained asset quality which is at a historically low credit cost level, and steady loan growth and fee income recovery attributed to a revival in the economy and equity markets. The unexpected re-discount rate hike of 12.5 bps by the CBC on June 25 has initiated a new interest rate up-cycle, in our view, which may benefit NIM among banks and enhance asset returns while narrowing the duration mismatch gap for insurers. We believe that in the preliminary stage of the rate hike banks stand to benefit more than insurers, while FX risk is still regarded as the swing factor for insurers. With that said, a strong earnings recovery may lead to enhancement among Taiwanese banks’ ROE (1H10 annualized ROE at 9.1% compared to 4.5% in FY09) while providing strong fundamentals to further push up Taiwan financials’ PB valuation (currently at 1.2x PB, compared to average of 1.3x PB since FY01).
- Banks preferred over insurers; watch for election rally in 2H10. In general, we stand overweight on Taiwan financial sector as a whole, while prefer banks over insurers as we continue to see banks leading an earnings recovery moving into 2H10, while cross-strait deregulation also favors banks. Within the banking sector we prefer state-owned banks to private banks, given their consistent earnings performance while spearheading China banking deployment progress. We favor Mega FHC (2886 TT/NR/NT$19.70) and Taiwan Cooperative Bank (5854 TT/NR/NT$19.85), given their robust earnings outlook, faster China deployment progress and undemanding valuations (both are trading at 1.0x PB compared to peers’ average of 1.2X PB). We also hold a long-term positive view on First FHC (2892 TT/NR/NT$18.45), as we see its prudent credit lending policies and good earnings capability may prove it to be a long-term survivor. While we hold a neutral view on domestic insurers’ outlooks, however, we like Fubon FHC (2881 TT/NR/NT$37.25), given its robust earnings capability, its “double engine” business model (banks and insurance), and flexible China deployment strategy. We also suggest investors watch for an election rally in 2H10, as Taiwan’s financial index typically reacts positively to election events.
Source: Primasia Investment Consultancy Co., Ltd.
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| TAIEX |
7720.82 |
| Electronics Index |
301.04 |
| Financials Index |
863.69 |
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