Morgan Stanley has said that it is optimistic about how Taiwan’s financial sector will perform this year, after last year saw the sector post its strongest profitability since the 2008 financial crisis.
In a research note, Morgan Stanley said that the local financial sector’s bottom line is likely to continue improving this year, driven by expectations that interest rates will gradually be raied to boost interest income.
After the US Federal Reserve started scaling back its monthly bond-buying program last month on the back of encouraging US economic data, there have been signs that interest rates in Taiwan and abroad are moving higher, market analysts said.
Some analysts have predicted that the central bank will launch an interest rate hike cycle later this year.
At a quarterly policymaking meeting held in late December last year, the bank left its key interest rates unchanged for the 10th quarter in a row.
Morgan Stanley said it predicts that the nation’s financial sector will benefit from a recovery in the domestic economy this year that would prompt Taiwanese exporters to secure more bank loans to finance their expansions and meet rising global demand.
Taiwanese banks are also set to see overseas lending grow this year since they have a good chance of extending loan operations in China, where fund supplies remain tight, the brokerage said.
It added that it is also upbeat about warming financial exchanges across the Taiwan Strait and said that the local financial sector’s profitability is expected to strengthen due to growing business opportunities in China.
In addition to interest income, Morgan Stanley said the local banking sector is likely to benefit from higher growth in fee income, which could rise at a high single-digit pace this year due to Taiwanese consumers’ preference for investment instruments that lock in higher returns than bank deposit interest.
Among the local finance stocks that the brokerage recommended to investors were Fubon Financial Holding Co (富邦金控) and Mega Financial Holding Co (兆豐金控).
Morgan Stanley issued a stock target price of NT$47.3 and NT$20 for Fubon Financial and Mega Financial respectively.
Last year, Fubon Financial retained the title of most profitable financial holding company among the 15 such firms listed in Taiwan by posting NT$32.69 billion (US$1.07 billion) in net profit or NT$3.31 in earnings per share (EPS), up from NT$28.98 billion or NT$3.05 EPS recorded in 2012.
It was the fifth consecutive year that Fubon Financial topped its peers in profitability.
Mega Financial posted NT$22.48 billion in net profit last year, up 4.5 percent from a year earlier. Its EPS stood at NT$1.96.
Morgan Stanley said that it is time for local investors to buck the trend of having financial stocks make up a relatively small portion of their portfolios and raise their holdings in the local sector.