Credit Suisse downgraded the nation’s major financial service providers including Cathay Financial Holding Co (國泰金控) after financial stocks overreacted to unrealistic expectations that the government would sign a memorandum of understanding (MOU) with China similar to the one Hong Kong signed in 2003.
The financial index has climbed 51 percent since March 2, compared with a 35 percent gain for the benchmark TAIEX, largely because of liquidity and high expectations that Taiwan and China would sign a cross-strait MOU, Credit Suisse analyst Sarah Hung said in a report on Saturday.
However, the fundamentals remained weak and there was a potential for an increase in non-performing loans in the second half of the year, Hung said in the report.
“We believe the discussions have been optimistic and the Chinese government may not fully take on board the proposals made by Taiwan given the political reality, especially when these proposals are even better than those in the closer economic partnership agreement signed by Hong Kong and China,” Hung said.
“We believe there is a high risk of over-expectations on the degree of cross-strait financial deregulation, and the actual result could disappoint investors,” Hung said.
Taiwanese financial companies have proposed treating the financial regulator and cross-strait negotiators for the China market as quasi-citizens, which includes waiving the waiting period for exchanges between the yuan and the New Taiwan dollar, allowing varied investment approaches and relaxing investment caps on Taiwanese firms doing business in China, Hung said.
Hung said she expected Taiwan’s financial regulator next month to sign an MOU on financial oversight, but did not expect that they would reach agreement on important issues such as reciprocal investments until the second half of the year at the earliest.
“We believe the rally looks overdone from a valuation viewpoint,” Hung said.
Hung said she expected financial stocks to rise by 20 percent to 30 percent during the first half, riding on the bullish expectations on the signing of a cross-strait MOU.
“We expect all financial stocks to be affected in any market pullback, but insurers and brokers would suffer more because of a stronger stock market correlation,” she said.
Hung downgraded Chinatrust Financial Holding Co (中信金控), which owns the nation’s largest credit card issuer, Chinatrust Commercial Bank (中國信托銀行), to “neutral-weight” from overweight and cut Cathay Financial, the nation’s top financial service provider, and SinoPac Financial Holdings Co (永豐金控) to “under-weight” from “neutral-weight.”
Credit Suisse favored banks over insurance and private banks over state-controlled banks.
Chinatrust, First Financial Holding Co (第一金控) and Fubon Financial Holding Co (富邦金控) would be the most likely beneficiaries of cross-strait financial deregulation, Hung said, keeping her “neutral-weight” rating on First and Fubon unchanged.