BNP Paribas names Chang Hwa Bank as a top pick

BNP Paribas Securities (Taiwan) Co yesterday rated Chang Hwa Bank (彰化銀行) a favorable financial stock pick, eyeing the state-controlled lender's stable earnings outlook and limited exposure to the consumer credit abuse issue.

"The bank represents one of the preferable plays within the banking sector," said Jesse Wang (王嘉樞), BNP Paribas Securities' head of equity research, in a report released yesterday.

Wang said Chang Hwa has a stable earnings outlook and the draft Bankruptcy Bill (破產法), to be reviewed in the upcoming legislative session beginning this Tuesday, will have a limited impact on the lender.

In addition, the bank has been delivering earnings momentum through both core revenue growth and recovery of non-performing loans.

The bank's prospects also look promising on the back of revenue injections from new business areas and a discreet credit control policy, Wang said in the report.

Chang Hwa's first-half earnings reached NT$5.16 billion (US$157 million), or NT$1.03 per share. This compares with a loss of NT$8.75 billion, or NT$1.44 per share, a year ago.

With decent asset quality among state banks, significant distribution channels and a big customer base, Chang Hwa could be an investment target in Taiwan's banking sector, Wang wrote.

In comparison, BNP Paribas in July gave Chinatrust Financial Holding Co (中信金控) a "reduce" rating, and did the same to Taishin Financial Holding Co (台新金控) last month on concern over downside risk from the bankruptcy bill.

Earlier this week, BNP Paribas maintained a "Hold" rating on Mega Financial Holding Co (兆豐金控), citing concerns over the company's decision to participate in state-controlled Taiwan Business Bank's (TBB, 台灣企銀) fundraising plan, in line with a demand from the Ministry of Finance.

Wang said the inevitable consequence would be a mounting sense of regret, with the reputation of both Mega Financial management and the government brought into jeopardy, if the company partakes in TBB's recapitalization rights issued at NT$10 or more per share.

TBB's asking price appears to be expensive, as an analysis shows that its adjusted book value stands at below NT$6 per share, Wang said.

TBB would add little value to Mega Financial, because the group, unlike private banks, does not need the lender's branch network, he said.

In addition, the lender's strength in the small and medium enterprise segment is falling in market value because customers are migrating across the Taiwan Strait, he added.

Shares of Chang Hwa closed down 0.53 percent at NT$18.60 on the Taiwan Stock Exchange yesterday, while Mega Financial rose 0.46 percent at NT$21.65 and TBB dropped 3.32 percent to NT$5.84.

Following the recent market correction, Chang Hwa shares are trading at eight times to nine times consensus earnings per share for this year.

This compares with a multiple of up to 13 times for the major private banks covered by BNP Paribas, which points to a potential upside for Chang Hwa, according to the French brokerage.