Cathay Financial leaps into top 10 list

Eyeing a promising outlook and a turnaround story, Macquarie Equity Research announced last week it had included Cathay Financial Holding Co (國泰金控), the nation's biggest financial group by assets, into its top 10 picks of Asian banks for this year.

Macquarie maintained its "Outperform" rating on Cathay Financial with a target price of NT$84 (US$2.55), indicating close to a 7 percent upside compared with a closing price of NT$78.70 on the Taiwan Stock Exchange last Friday.

"We believe a number of near-term catalysts will drive up Cathay Financial's share price," Macquarie said in a research note released last week.

A positive outlook for the tech sector, which accounts for 60 percent of the local stock market, and the potential for improved cross-strait relations are expected to underpin positive sentiment towards the equity and property markets and should lead to rising asset values, where Cathay Financial has good exposure via its leading life insurance business, the Australian brokerage said.

Macquarie also noted Cathay Financial's potential to realize an extra NT$4 to NT$5 per share in unrecognized property gains by revaluing its property portfolio, estimated.

Besides the expected investment returns, the prospects for the financial industry's fundamentals appeared rosy as well.

Macquarie forecasted a 13.5 percent growth in the value of the first year premium for Cathay Life Insurance Co (國泰人壽), the nation's biggest life insurer.

Cathay Financial's banking unit is expected to deliver a sharp turnaround in profitability as its bad consumer loans ease off with provisioning costs estimated at a maximum of NT$11 billion this year, down from NT$30 billion over the past two years, the report said.

The forecast was for Cathay Financial to post earnings of NT$26.8 billion, or NT$2.99 per share, this year, compared with an estimated NT$20.5 billion, or NT$2.31 per share last year.

Meanwhile, Citigroup reasserted its buy rating on Cathay Financial last week, with a raised target price of NT$86 from NT$78.

The expected recovery in consumer banking, investment returns and a possible increase in high-yield overseas investments in insurance collectively supported the positive view on the financial holdings firm, Citigroup said.

Moody's Investors Services announced last week it had upgraded the long-term issuer rating on Cathay Financial to "A3" from "Baa1" with a stable outlook.

Moody's also upgraded the insurance financial strength rating of Cathay Life Insurance to "A1" from "A2" due to its healthy profitability, solid market franchise position and sustainable business portfolio and that of Cathay Century Insurance Co (國泰世紀產險) to "A2" from "A3" for the gradual improvement in its market position and in a intensively competitive market.

"The upgrade was prompted by the rating upgrades of its key operating subsidiaries, Cathay Life Insurance and Cathay Century Insurance," Moody's senior credit officer Jeffrey Liew (劉思淇) said.

Additionally, the rating also factors in its intention to maintain a modest financial leverage and strong capitalization in order to protect its financial health, he said.