Fri, Sep 02, 2011 - Page 11 News List

Cathay Financial says its earnings will keep rising

IMPROVEMENT:Investors were told hedging costs, which averaged 3.5 percent earlier this year, could be maintained at below 2 percent in the fourth quarter

By Crystal Hsu  /  STAFF REPORTER

Cathay Financial Holding Co (國泰金控), the nation’s largest financial service provider by assets, said yesterday it expects earnings to improve for the rest of this year on lower foreign exchange hedging costs, which weakened profitability in the first half.

The life-insurance-centric conglomerate posted a modest net income of NT$6.6 billion (US$227.9 million) for the first six months, reversing a net loss of NT$1 billion a year earlier, as Cathay Life Insurance Co (國泰人壽) turned profitable because of rising dividend income, Cathay Financial said in a report.

That translated into NT$0.64 earnings per share, lagging behind main rivals Fubon Financial -Holding Co’s (富邦金控) NT$1.77 and Chinatrust Financial Holding Co’s (中信金控) NT$1.07 for the same period.

“Hedging costs, the biggest drag on earnings, may be kept under the range of 1.5 percent to 2 percent [of foreign investment] in the fourth quarter,” Cathay Financial president Lee Chang-ken (李長庚) told an investors conference.

As of June 30, foreign currency hedging costs averaged 3.5 percent, eroding NT$39.94 billion from foreign investment totaling NT$1.14 trillion and making up 40 percent of the overall investment portfolio, the report indicated.

Lin Chao-ting (林昭廷), an executive vice president at Cathay Life, said the insurer aims to raise foreign investment to 45 percent in the coming months after foreign equities and bonds yielded 6.4 percent and 5.9 percent returns in the first half respectively.

Cathay Life is less certain about increasing its stake in risky assets.

“There is a debate about when and how to lower our cash level,” which stood at NT$321.2 billion as of the end of June, Lin said, implying the financial market turbulence is not over yet.

The insurer, the nation’s largest by market share, reported a net income of NT$1.2 billion from January to June, reversing a net loss of NT$7.1 billion a year earlier. It reaped a 14 percent return from the local bourse and 4.9 percent yield from real-estate investment in the first half, the report said.

First-year premiums, an important gauge of insurance firms’ earning ability, fell 21.3 percent year-on-year to NT$142.2 billion because of an ongoing product adjustment, Lin said.

Cathay United Bank (國泰世華銀行), the banking arm and main source of income, saw its net profit slow to NT$6.2 billion in the first half, from NT$6.4 billion a year earlier, the report said.

Cathay Financial spokesman Alan Lee (李偉正) attributed the decline to larger deposits that dragged the net interest margin down to 1.18 percent in the second quarter from 1.2 percent three months earlier.

Shares in Cathay Financial closed up 3.92 percent at NT$38.45 yesterday, outpacing the TAIEX’s 0.21 percent gain.

Cathay Financial shares could remain weak in the near term in the absence of a strong catalyst, said Pandora Lee (李懿璇), Taipei-based executive director at UBS Investment Research.

Eric Shih (施志鴻), deputy manager at Taishin Securities Investment Advisory Co (台新投顧), was equally cautious, saying a stronger local currency would thwart the effort to curb hedging costs.

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