Citigroup recommends Fuhwa punt

Investors were advised to stay away from Chang Hwa Bank (彰化銀行) because of its flat profit growth and looming selling pressure on its largest shareholder, but to buy Fuhwa Financial Holding Co (復華金控), owner of Taiwan's largest brokerage, because of its brighter outlook backed by a robust local bourse, analysts said yesterday.

SinoPac Securities Corp (永豐金證券) gave a neutral rating on Chang Hwa with its target share price revised down to NT$22 from NT$25 previously, its latest report released yesterday said.

"The bank's earnings are expected to stay similar to last year's level, due to fewer bad loans being recovered," SinoPac Securities' financial analyst Chu Yu-chun (朱玉君) said.

Chang Hwa is expected to generate NT$12.25 billion (US$369 million) net profits this year, or NT$2.55 per share, compared with last year's NT$11.38 billion, or NT$2.37 per share.

Largest shareholder Taishin Financial Holding Co's (台新金控) plan to offload part of its holding is an imminent downside to the lender's share price in near future, Chu said.

Taishin Financial, which controls 25 percent of Chang Hwa and eight of the 15 seats on the board, was instructed by the regulator to dispose of a 2.5 percent stake by June 15 after it failed to meet certain financial requirements. The company has not sold any shares so far.

Chang Hwa is the nation's seventh largest lender with a 5 percent market share. Its assets quality recovered after a write-off of almost NT$60 billion in 2005 and due to its focus on corporate banking it was little affected during the consumer bad loans storm last year.

Despite its market position and the quality of its assets, a slow growth in lending balance and a low contribution of stable-margined fee income are the challenges facing the lender in its future business development, Chu said.

Meanwhile, Citigroup Global Markets recommended Fuhwa Financial, to which it gave a buy rating with a target price of NT$20 that represented an upside of 33 percent from current share price.

"We expect positive momentum for the stock to continue with our Taiwan strategist, Peter Kurz, expecting the TAIEX to trade upwards to 8,450," said Citigroup analyst Bradford Ti (鄭溫煌), who tracks the local financial sector.

The company is a good proxy for investors to enjoy the fruit of the robust local stock market following its merger with Yuanta Core Pacific Securities Co (元大京華證券) earlier this month, Ti said.

Fuhwa Financial owns the nation's largest brokerage house with a 12.5 percent market share.

Aside from market strength, Ti was expecting an improvement in the company's return on equity, predicting up to 9 percent next year compared to 5 percent to 6 percent previously.

Citigroup Global Markets Inc expects Fuhwa Financial to earn NT$6.44 billion, or NT$0.91 per share, this year, compared with a net loss of NT$3.09 billion, or negative NT$0.96 per share, last year.

Chang Hwa shares closed unchanged at NT$19.80 while Fuhwa dropped 1.33 percent to NT$14.80 on the Taiwan Stock Exchange yesterday.