Cathay Financial's US woes fade

Cathay Financial Holding Co Ltd (國泰金控), the nation's biggest financial service provider by assets, yesterday said the negative impact of the US subprime mortgage crisis was waning and the company must now deal with the problem of short-term impact from the volatile foreign exchange market.

This year, Cathay Financial has written off NT$1.73 billion (US$107 million) in collateralized debt obligations (CDOs), compared with NT$3.27 billion last year, Cathay Financial chief strategy officer Lee Chang-ken (李長庚) told reporters yesterday.

"The impact of the US subprime [credit crisis] is fading. We don't expect any big surprise, as most write-downs are done with," Lee said.

Cathay Financial's exposure to CDOs has declined to NT$21.63 billion, from a peak of NT$29 billion last year, Lee said. Most of its CDO holdings are not at this point downgraded by international rating agencies, he said.

Drastic appreciation of the local currency, however, poses a risk to the company's bottom line in the short term, Lee said.

A spike of the NT dollar versus the US dollar contributed to the company's NT$3.17 billion accumulated losses in the first two months of the year. To reduce the risk, Cathay Financial planned to strengthen its hedge approach via foreign exchange derivatives.

Last year, Cathay Financial's earnings hit a record high of NT$30.76 billion, or NT$3.34 per share, with the strongest growth from its life insurance unit. The insurance unit benefited from rising policy premiums. Cathay Life Insurance Co (國泰人壽) provided 76 percent of Cathay Financial's total net income last year.

But in light of the profit erosion by the strong local currency, "it will be difficult for Cathay Financial's earnings to hit another high level this year," Sherry Lin (林淑娥), director of equity research at Credit Suisse, said yesterday.

Hong Kong-based Lin, who joined the investors' conference in Taipei yesterday, said she was more cautious about the impact of the subprime credit crisis on the US economy, which would affect China, Asian exporters and financial companies.

Those challenges could drive down stocks of local financial companies in the second half of the year, although both presidential candidates have talked about relaxing the financial sector, said Lin, who offered an "outperform" rating for Cathay Financial.

Cathay Financial shares rose 2.5 percent, or NT$2, to NT$81.9 yesterday before the investors' conference. It was better than the benchmark TAIEX index, which jumped 2.25 percent.

While Cathay Financial said it had adopted hedge strategies to lower foreign exchange hedging risks -- given the recent appreciation of the NT dollar and the narrowing interest rate differential between Taiwan and the US -- it will take time before it sees the effects of its full hedge strategy, Citi Investment Research analyst Braford Ti (鄭溫煌) said in a client note.

Citigroup maintained a "buy" recommendation for Cathay Financial, with a 12-month target price of NT$92, the note said.

Separately, Cathay Financial said it was in no hurry to expand its brokerage business through mergers and acquisitions, Lee said.

"We won't make such a big move in the short term," he said.

Lee's remarks came in response to speculation that Cathay Financial was considering buying Capital Securities Corp (群益證券).

ADDITIONAL REPORTING BY KEVIN CHEN