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Cathay hit by writedown from subprime exposure

Cathay Financial Holding Co's (國泰金控) stock took a hit yesterday after the company's announcement of writedowns from two subsidiaries' investments in US subprime mortgage-related instruments.

Cathay United Bank (國泰世華銀行), the banking unit of Cathay Financial, said in a filing to the Taiwan Stock Exchange early yesterday that it booked a NT$2.57 billion (US$77 million) loss last month. On Tuesday, the lender reported a pretax loss of NT$1.98 billion last month after factoring in the subprime investment writedown.

Cathay Life Insurance Co (國泰人壽), the nation's largest life insurer, meanwhile, would write off NT$596 million for the month, the filing said.

Cathay Financial said it booked the impairment loss following a quality review of its asset pool, especially after international credit ratings agencies substantially downgraded subprime residential mortgage backed securities (RMBS) and products linked to collateralized debt obligations (CDOs) earlier last month.

Shares of Cathay Financial dropped 1.55 percent to NT$70 on the Taiwan Stock Exchange yesterday, underperforming the benchmark index which rose 0.3 percent.

Despite the write-downs, Cathay Financial's prospects remain positive given the company's overseas development and sustainable profitability, SinoPac Securities Corp (永豐金證券) analyst Jesse Knutson said in a note to investors yesterday.

"Compared to the market consensus of Cathay Financial's net income ranging from NT$33 billion-NT$40 billion for 2007, we believe the potential losses and recognized losses from US subprime mortgages should have limited impact on Cathay's profitability," Knutson wrote.

On Nov. 1, Cathay Financial spokesman and chief strategy officer Lee Chang-ken (李長庚) told an investor conference that the US subprime mortgage crisis would have limited impact on the company as it had about NT$4 billion in subprime-related investments out of a pool of NT$29 billion in CDO investments.

Citigroup's equity research team also retained its positive view on Cathay Financial despite the latest impairment loss disclosure. It maintained a buy recommendation for Cathay Financial, with a low-risk rating and a 12-month target price of NT$97, Citigroup said in a report yesterday.

"Although we continue to expect further writedowns to occur, triggered either by a halt in interest payments or several notches of ratings downgrade, we maintain Cathay's share price decline already reflects a worse-case view of close to a 100 percent write-off," said the report, which was co-written by analysts Bradford Ti (鄭溫煌), Bob Leung and Janet Lu.

The Citigroup analysts said market reaction to CDO and collateralized bond obligation (CBO) losses were overdone, although such writedowns would drag down Cathay Financial's investment yield.

Still, "higher domestic interest rates, lower hedging cost and domestic equity market gains on an expected pre-election rally" are expected to stem the company's share price decline, they said.

In related news, Taiwan Ratings Corp (中華信評) yesterday lowered its rating on First Commercial Bank's (第一銀行) NT$6.6 billion in CBO 2006-2 Senior Certificates to twA-3, from twA-2 because of the continued deterioration in the US credit market.

Moody's Taiwan Corp also said yesterday it had taken ratings action on three types of beneficiary certificates issued by E.Sun Bank's (玉山銀行) 2007-1 CBO special purpose trust. About NT$8.96 billion in CBOs securities are expected to be affected by the rating review.
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