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Finance, insurance stocks rally on positive outlook

On hopes of a better industry environment, finance and insurance stocks rallied 20.62 percent in the first quarter and 26.49 percent so far this year, compared to the benchmark TAIEX’s 1.06 percent and 4.57 percent rise during the same period respectively, stock exchange tallies showed.

This sector was favored by investors on the back of the release of improved monthly earnings at some major banks and news that China’s banking regulator welcomed Taiwanese lenders setting up operations in China, analysts said.

“The sector has rallied and outperformed in the first quarter of 2008,” Sophia Cheng (程淑芬), managing director of equity research at Merrill Lynch’s Taiwan branch, wrote in a client note on Saturday.

Cheng said that Chinatrust Financial Holding Co (中信金控) among others had been impressive as the owner of the nation’s biggest credit card issuer reported an unexpected 91 percent rise year-on-year to NT$4.93 billion (US$162.7 million) in net profit in the first quarter.

Chinatrust Financial is likely to fare well in the coming quarters as the company announced last week it would fully write off its US$45 million structured investment vehicle (SIV) exposure, which may help remove an overhang from US subprime mortgage-related investment, she said.

Citi Investment Research analyst Braford Ti (鄭溫煌) said Chinatrust Financial looked to emerge as a clear winner in the sector in the first quarter. He raised his target price to NT$34 from NT$30.

Chinatrust Financial shares have risen 36.23 percent so far this year to close at NT$31.4 on Friday.

Also noteworthy was First Financial Holding Co (第一金控), which posted a 16.5 percent rise year-on-year in first-quarter net profit to NT$3.44 billion, Ti said in a client note released on Friday.

He said First Financial had largely avoided investment problems in unsecured consumer loans and particularly those in the collateralized debt obligation (CDO) or SIV investments that most of its local peers are facing.

Shares of First Financial have risen 50.94 percent since the beginning of this year to close at NT$36.15 on Friday.

Fubon Financial Holding Co (富邦金控), which has gained government green light to invest in China’s Xiamen City Commercial Bank (廈門市商銀), appeared to gain further support after China Banking Regulatory Commission announced on Thursday that it would, under the Closer Economic Partnership Arrangement, accept Taiwanese banks’ applications to set up operations in China.

Fubon Financial share prices have climbed 20.66 percent this year and closed at NT$34.75 on Friday. Cheng said China’s new policy would further benefit Fubon as it and Shanghai Commercial & Savings Bank (上海商銀) are at present the only banks that are qualified to apply for investment in China under the CEPA terms.

Still, negative factors such as an increasingly competitive environment, exposure to US subprime mortgage-related products and global market volatility are expected to continue to generate challenges for the finance and insurance sector, analysts said.

Cathay Financial Holding Co (國泰金控) and Shin Kong Financial Holding Co (新光金控) are expected to continue facing pressure in the quarters ahead, they said.

Because of higher foreign exchange losses and hedging costs on overseas investments, Cathay Financial last week posted a loss of NT$6.04 billion for the first quarter, a decline of 160.4 percent year-on-year, while Shin Kong Financial reported a loss of NT$7.02 billion, or 195.4 percent lower than the same period of last year.

Shares of Cathay Financial have grown 16.42 percent this year to NT$78.7 on Friday, while Shin Kong Financial's stocks have climbed 10.32 percent to NT$24.6.

Based on the sector's preliminary results for the first quarter, Ti said Citigroup would continue favoring banks than non-banks. Furthermore, with a relatively higher valuation in this sector compared to that in its Asian peers, share prices may pull back in the near term whenever negative news occur, but that would just offer another buying opportunities to investors, he added..

"Despite tough fundamentals, we remain positive on Taiwanese financials on continued inflows as foreigners narrow their underweight positions and on expectations of secular change,” Ti wrote in the note.
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