Analysts see end to 10-year decline in financial sector

Rosy earning reports in the third quarter show that the nation's financial sector is gradually emerging from a 10-year recession, analysts said yesterday.

"Beginning from the fourth quarter, the financial sector is expected to outperform electronics shares on the TAIEX," said James Yeh (葉雲龍), a senior fund manager at HSBC Asset Management Taiwan.

Yeh's optimism was based on the fact that top financial holding companies including Cathay Financial Holdings Co (國泰金控) and Fubon Financial Holding Co (富邦金控) reported better-than-expected profits last week.

Cathay Financial said it had already met 99.5 percent of its profit target for this year with NT$20.9 billion in after-tax earnings, while Fubon reported its third-quarter profits rose to NT$3.87 billion, up from NT$3.53 billion, or 9.6 percent, a year earlier.

Mega Financial Holding Co (兆豐金控), the nation's third-largest financial company by market value, also raised its annual profit forecast by 21 percent to NT$18.1 billion after cutting costs and winning more business.

On Friday, Fubon Financial closed up 0.56 percent to NT$35.8, Cathay Financial edged up 0.9 percent to NT$56, while Mega Financial ended 0.48 percent higher at NT$21.

Yeh said financial shares' uptrend will last at least until early next year, while some market watchers are more optimistic, saying that some blue-chip financial shares may see a 10 percent rise in the near future.

But William Fong (方偉昌), an analyst with Primasia Securities, said financial shares may stabilize in the near term since "shares of most well performing private financial institutions have reflected their fair value."

Shares of some underperforming state-run banks, however, will benefit slightly from the bullish market, Fong added.

However, if the legislature eventually gives its approval to the size of Financial Restructuring Fund (金融重建基金) to help accelerate the nation's financial reforms by the end of the year, "shares in the financial sector may further skyrocket by 10 to 15 percent," Fong said.

The government has vowed to lower the nation's bad-loan ratio to below 5 percent within two years after the bill is passed.

As of June, the nation's bad-loan ratio stood at 7.97 percent, or NT$1.13 trillion in bad debts, according to statistics provided by the central bank.

Both Yeh and Fong said that the financial sector's recovery is as solid as those in the stock market and property market. In light of improving economic fundamentals, the financial sector has begun to experience growth in lending since the second quarter this year and reasonable profit spreads, which Yeh expected to stabilize before the first half of next year.

Foreign investors, who used to put stock in electronics shares, are estimated to have invested more than NT$100 billion in financial shares over the past two months. The most-recommended financial shares include Cathay, Fubon and Mega. Under-valued Taishin Financial Holdings Co (台新金控) and Chinatrust Financial Holding Co (中信金控) are also worth buying, analysts said.

The banking sector's efforts to resolve bad loans while improving loan-loss coverage and credit-risk controls helped lift its rating to "stable" from "negative" by both Standard & Poor's and its local arm, Taiwan Ratings Corp (中華信評), in September.

But Mei Chiang (蔣梅香), director of Taiwan Ratings' financial service department, said that the company holds a neutral view toward the future performance of financial holding companies, whose synergies she said have yet to show.