Cathay FHC expects Q4 slowdown

Cathay Financial Holding Co (國泰金控), the nation's largest financial group by assets, said yesterday it expects profitability to fall in the fourth quarter, due to reduced gains from investments after a lucrative July to September period.

"Profit growth usually slows down in the fourth quarter from the most profitable third quarter, when most cash dividends were acquired," Cathay Financial's chief strategic officer Lee Chang-ken (李長庚) told investors yesterday.

The executive was conservative about profitability next year, given the vague outlook for Taiwan's stock market, and cited a decline in capital gains on the local bourse to NT$6.5 billion (US$194 million) this year, from NT$10.1 billion last year.

Third quarter

Cathay Financial's third-quarter earnings more than doubled to NT$16.6 billion, from NT$7.4 billion a year ago. Profits were boosted by more than NT$8 billion in gains garnered from its real estate investment trusts (REITs) -- which were issued last month and valued at NT$14 billion -- and NT$5 billion of cash dividends.

For the first nine months of this year, the financial conglomerate reported earnings of NT$27.3 billion, or NT$3.23 per share, compared with NT$25.4 billion, or NT$3.17 per share, during the same period last year.

Cathay Financial's flagship subsidiary, Cathay Life Insurance Corp (國泰人壽), is expected to lower its hedging costs to about NT$6 billion this year, from the previously forecast NT$15 billion, after deciding earlier this year to adopt basket hedging by diversifying the number of currencies in its portfolio, Lee said.

Regulatory limits

The macro-environment is also challenging the nation's finance sector, because of factors such as Taiwan's slower pace of interest rate hikes and the 35 percent ceiling on foreign investment, which restricts local insurers from pursuing high interest-rate assets abroad, said Sherry Lin (林淑娥), director of Non-Japan Asia Equity Research at Credit Suisse First Boston Ltd.

Despite this, "Cathay Financial is a financial play enjoying a relatively stable performance" compared with rivals like Taishin Financial Holding Co (台新金控) or Chinatrust Financial Holding Co (中信金控), which are seeing growing bad loans from credit cards and cash-advance cards, Lin said.

In addition, the financial holding firm has hidden value in its property assets and bond portfolios, which are to be reappraised, and will boost the value booked in its financial reports, the analyst said.

Meanwhile, Cathay Financial urged the nation's legislature to pass proposed amendments to lift the ceiling on overseas investment to 50 percent from the current 35 percent, Lee said.

This would allow them to potentially issue new batches of REITs to raise funds and reinvest abroad in pursuit of higher yields, the executive said.

Cathay Life currently invests around 33 percent of its NT$1.73 trillion worth of assets in overseas stocks and bonds, with a yield rate of 8 percent and 6 percent, according to company figures.

Shares of Cathay Financial advanced NT$0.5 to close at NT$59 on the Taiwan Stock Exchange yesterday.