Cathay Financial incurs negative earnings growth

Cathay Financial Holding Co (國泰金控), the nation's largest financial group by assets, incurred its first negative growth in profits last year, largely as a result of a decision to boost reserves in order to address soaring consumer bad debt.

Cathay Financial posted NT$21.79 billion (US$673.07 million), or NT$2.57 per share, in earnings last year, down about 26.85 percent from NT$29.85 billion, or NT$3.7 per share, in 2004, after it decided in December last year to book an extra NT$9 billion in provision to cover consumer bad debts.

The financial holding firm expects to return to profitability in the current quarter, Cathay Financial's spokesman Lee Chang-ken (李長庚) told an investor conference yesterday.

Cathay Financial posted a net profit of NT$5.5 billion last month.

"The company's financial results are in line with our expectations," Credit Suisse (Hong Kong) Ltd analyst Sherry Lin (林淑娥) said.

Reserves increased

The decision to increase reserves last year should help to reduce the impact of defaulted loans from credit and cash card business on earnings this year, the analyst said.

Cathay Financial is one of Credit Suisse's top investment picks among Taiwan's financial players as a result of its earnings momentum this year, said Lin, who gave the financial group an "overweight" rating with a target price of NT$72.5.

Flagship unit Cathay Life Insurance Corp (國泰人壽) is expected to lodge applications for the issuance of its second batch of real estate investment trusts (REITs) at the end of this quarter at the soonest, Lee said, adding that the program is currently in its final stages.

The scale of the REITs could range between NT$7 billion and over NT$10 billion, targeting selected commercial buildings across the nation, the executive said.

Cathay Life's first batch of REITs valued at NT$13.9 billion hit the market in October last year and contributed over NT$8 billion to the nation's largest life insurer.

The momentum of Cathay Financial's insurance unit is expected to be stronger than that of its banking arm, and will continue to lead the financial group's growth this year, Lin said.

Last year, Cathay Life made up 79.7 percent of the financial group's net profits while Cathay United Bank (國泰世華銀行) accounted for only 17.3 percent, according to Cathay Financial's figures.

Consumer bad debt probably won't ease off until the third quarter of this year and the bank will maintain a conservative policy for its consumer lending business, Cathay United Spokesman Joseph Jao (饒世湛) said.

Low expectations

The bank does not expect robust growth in corporate lending, given unimpressive expected economic growth at around 3.5 percent to 4 percent this year, Jao said.

Cathay United would leverage the US$500 million fund it raised through the issuance of financial bonds last year to raise the exposure of its offshore business unit in a bid to offset the sluggishness in the domestic market, he said.

Cathay United shares closed down 0.63 percent at NT$62.70 on the Taiwan Stock Exchange yesterday.