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Securities firms' profits to grow, says Fitch report

Profits of the nation's securities firms are expected to further strengthen this year, backed by robust trading volumes on the local stock market, Fitch Ratings said yesterday.

The rating outlook on the securities sector remains stable this year, supported by the industry's strong capitalization, limited leverage, adequate liquidity and manageable credit risk, Fitch said.

Average daily turnover on the local bourse is expected to grow to NT$100 billion (US$3 billion) this year and in turn lift profitability of local securities companies, given that nearly 80 percent of income comes from brokerage commission fees, said Jonathan Lee (李信佳), director of financial institutions at Fitch's Taiwan branch.

Despite a sharp correction in the equity market earlier this year, the average return on equity (ROE) of local securities houses still climbed to 8 percent, Lee told a press conference yesterday, in which the British ratings agency released a report entitled Taiwan Securities Firms -- Annual Review and 2007 Outlook.

Last year, the industry registered an improved ROE of 7.8 percent, a leap from 2.3 percent in 2005, and a five-year average of 5.3 percent, driven by buoyant daily turnover on the Taiwan Stock Exchange that jumped by 26 percent to NT$97.6 billion from NT$77.2 billion the year previously, the report said.

Strong trading volumes compensated for margin erosion in the brokerage business caused by a heightened price war in the fragmented market, the report said.

Yuanta Core Pacific Securities Co (元大京華證券) remained the top local broker with a 8.9 percent market share, followed by Fubon Securities' (富邦證券) 6.1 percent and Taiwan Securities Co's (台証證券) 4.9 percent, according to Fitch's data.

Yuanta's market share is expected to jump to 11.5 percent this year after the merger with Fuhwa Securities Co (復華證券) is completed in September.

Macquarie Research said last week that they favor brokers that could benefit from robust market turnover and increased margin-lending as fundamentals and investment sentiments favor a bull market this year.

Macquarie recommended KGI Securities Corp (中信證券) with a target price of NT$15.48 for its increased market share, low brokerage commission rebates and solid overseas operations, as well as President Securities (統一證券) with a target price of NT$22.48 for its high ROE, cash dividends and possible merger and acquisition activity.

Despite the seemingly rosy outlook, the shrinking initial public offering (IPO) market in Taiwan has cast shadow on the sector's long-term growth.

The number of IPO deals and their value dropped for the fourth straight year, to 50 deals and NT$100 billion, last year, after a peak of nearly 200 deals and NT$500 billion in 2002.

"We expect a minor rebound in the market, with some small-cap high-tech firms going for a listing on the local bourse this year, after years of contraction," Lee said.

Taiwanese companies have been listing on overseas markets, such as Hong Kong and Singapore, because of the government's China-bound investment restrictions. To reverse the trend, the government has targeted attracting 90 IPO's on the Taiwan Stock Exchange within the next three years.

Conservative about the target, Lee said the market will remain weak without any notable relaxation in the investment restrictions.
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