Proposed rate cap drags financial shares down further

The proposed interest rate cap on credit and cash-card loans have continued to weigh on financial shares yesterday, dragging the TAIEX down by 80.33 points, or 1.27 percent, to 6249.19.

Shares of Chinatrust Financial Holding Co (中信金控) and Taishin Financial Holding Co (台新金控), parent companies of the nation's two top credit-card issuers, continued dropping limit-down and 5.2 percent to NT$25.1 and NT$17.15, respectively.

UBS Securities Ltd said the proposed bill is expected to eat into the bulk of banks' earnings and in turn depress the upside of the local stock market, once the planned restriction becomes law today.

"The planned restriction could reduce consumer banks' earnings by more than 25 percent once it takes effect," said Ken Chen (陳安), head of research at the UBS Taiwan branch.

Not only banks' earnings but their already weak long-term return on equity would come under more pressure. Moreover, foreign investors' confidence in Taiwan's regulatory environment would be impacted because of such micro-management and unpredictability, said Chen, who has received a flood of inquiries from foreign investor clients these past few days.

UBS currently holds an overweight rating of Taiwan's financial sector. Chen however shied away from confirming whether he would downgrade the rating if the proposed cap should pass the final reading in the legislature.

Fitch Ratings yesterday warned that the proposed changes to the Banking Law (銀行法) concerning consumer lending, if implemented, would likely lead to a surge in loan defaults with serious financial, social and economic consequences.

Up until now, Fitch Ratings has held the view that Taiwan was unlikely to experience a Korean-style consumer-debt crisis. However, if passed, these proposed measures make such a crisis highly likely and this will amount to an extraordinary act of self-inflicted damage by Taiwan's legislators, the company said in a statement released yesterday.

UBS predicted that the benchmark TAIEX can fluctuate between 6,300 and 6,400 points before hitting a forecasted high of 6,902 points at the end of the first quarter of next year, representing a 10 percent upside in the index plus a 5 percent dividend yield, Chen said.

However, the proposed cap on lending rates will be a downside risk, leading to a downward adjustment of the bullish forecast, he said.