Thu, May 18, 2006 - Page 12 News List

Finance stocks perform well after upgrade of sector

By Amber Chung  /  STAFF REPORTER

Finance stocks saw a robust performance yesterday after Morgan Stanley upgraded its rating of Taiwan's finance sector, citing reasonable valuation and the easing risk of consumer bad debts.

The Finance sub-index gained 1.65 percent, outperforming the TAIEX that rose by 0.67 percent on the Taiwan Stock Exchange yesterday.

The turnaround of finance stocks that had weakened over the previous two days appeared after Morgan Stanley said on Tuesday that it had re-rated its industry view of Taiwan's finance sector upward to "attractive" from an "in-line" level.

This meant that the US investment bank expected the performance of the industry coverage universe to be relatively attractive versus the broad market benchmark, the company said.

"We changed our `In-line' Industry view to `Attractive.' We are starting to see value in building a base for medium-term gains in some stocks," Morgan Stanley's finance analyst Lily Choi (蔡麗麗) said in her latest report released on Tuesday.

Taiwan's finance stocks are cheap, as the analyst said that Taiwanese banks are at the low end of regional bank valuations.

On market cap to total assets basis, Taiwan trades at 11 percent, the lowest among all regional markets. It also comes out last in regional comparison on price-to-book, where Taiwan banks trade at 1.5 times the estimates this year, she added.

The waning impact of credit and cash card defaulted loans is further positive news for the sector.

"We see the second quarter of this year as an inflection point, as consumer card charge-offs are likely to see their single-quarter peaks and to drop off substantially in subsequent quarters," Choi said.

As a result, consumer players like Taishin Financial Holding Co (台新金控) and Chinatrust Financial Holding Co (中信金控) stocks look to be attractively valued at 9 to 10 times the normalized earnings, she said.

Additionally, state banks such as Chang Hwa Bank (彰化銀行), First Financial Holding Co (第一金控) and Mega Financial Holding Co (兆豐金控) have possible gearing to macro factors, like rising interest rates, improving wealth management fees and a strengthening property market, she added.

Betting on the bright outlook, Morgan Stanley also initiated coverage of Chang Hwa with an "overweight" rating and a target price of NT$26.6.

Similarly, CLSA Ltd also included Chang Hwa into its portfolio with a "buy" rating and a target price of NT$27, in light of the lender's rising assets value, strength in corporate banking and growth potential of earnings after large write-offs.

Analysts appeared to regain their interest and confidence in Taiwan's finance sector, as they have been adjusting their industry views upwards in droves lately.

Credit Suisse (Hong Kong) Ltd, for example, upgraded Taiwan's finance sector last month, saying that the worst of the card debt problem was over, following a similar call by Lehman Brothers to divert attention onto finance stocks.

Yet a potential risk facing the banking sector could be a lack of new

driving forces to sustain future growth after they weather the card debts

storm, Credit Suisse's finance analyst Sherry Lin (林淑娥) said.

Banks have to find their differentiation and new niches to bolster their

business growth after decreasing exposure to the high-yield yet risky

consumer lending business, she said.

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