Analysts optimistic about banks

Despite the continuing problem of non-performing consumer loans, finance stocks are expected to bottom out in the third quarter and rebound as the bad loans cycle peaks by the end of this year, Lehman Brothers said yesterday.

The finance sub-index jumped 1.97 percent, outperforming the benchmark index's rise of 0.69 percent on the Taiwan Stock Exchange yesterday.

"While we expect Taiwan's charge-off ratio to peak in the fourth quarter of this year, the third quarter would be the time to position for a multi-quarter rally," Pandora Lee (李懿玹), Lehman Brothers' analyst who tracks Taiwan's finance sector, said in her report released yesterday.

The rebound is expected to be driven by an attractive earnings recovery next year that could rise by close to 40 percent year-on-year on average, Lee said in the report.

The possible passage of a personal bankruptcy law may prolong the cycle, causing it to peak in the first quarter of next year, and in turn shift the ideal entry point to the fourth quarter of this year, the report said.

The forecast was made with reference to the precedent set in South Korea, as Lee noted that the South Korean banking sub-index bottomed out approximately a quarter before its peak in the second quarter of 2003.

The South Korean index was dogged by bad loans for about 18 months before appreciating by almost 200 percent.

Chinatrust Financial Holding Co (中信金控) and Taishin Financial Holding Co (台新金控), the nation's top two credit card issuers, could be good picks in light of their potential for earnings next year after weathering the bad loans problem, Lehman Brothers said.

Chinatrust Financial's profits for next year could soar by 111 percent to NT$18.53 billion (US$570.7 million), or NT$2.62 per share, up from this year's NT$8.78 billion, or NT$1.24 per share, according to Lehman Brothers' estimates.

Analysts said that Taishin Financial's profits could soar by 70 percent next year to NT$7.26 billion, or NT$1.26 per share, up from this year's NT$4.27 billion, or NT$0.74 per share.

Investors should buy Chinatrust Financial and Taishin Financial shares when they reach NT$21 and NT$15.8, respectively, Lee said.

Until then, Lee recommended investors stick with shares such as Mega Financial Holding Co (兆豐金控), Cathay Financial Holding Co (國泰金控), Shinkong Financial Holding Co (新光金控) and Chang Hwa Bank (彰化銀行).

Taiwan's consumer bad debt situation first set alarm bells ringing around the middle of last year after banks aggressively promoted high-yield, high-risk credit and cash cards for the past decade.

Chinatrust Financial reported earlier this week that it had made provision for NT$11.1 billion to cover defaulted loans in the first quarter of this year, and expected this expense to increase further during the current quarter.

Similarly, Fubon Financial Holding Co (富邦金控) announced at the end of last month that it had booked an extra provision of NT$5 billion and Cathay Financial said this week that it had set aside NT$9 billion.

Overall, banks in Taiwan wrote off NT$210.8 billion in bad loans and card purchases last year, up 30 percent from 2004, according to statistics provided by the Financial Supervisory Commission.

Despite Lehman Brothers' optimism, other analysts appeared less bullish. SinoPac Securities Corp (建華金控) last month suggested that investors stay away from finance stocks due to the risks posed by the proposed personal bankruptcy law and an interest rate cap.