Taiwanese banks are expected to outperform insurers next year, as their earnings are less susceptible to the impacts of recent monetary policy changes, analysts said.
The central bank on Thursday lowered policy interest rates by 12.5 basis points for the second time in three months, just a day after the US Federal Reserve announced that it was hiking rates by 25 basis points.
Credit Suisse AG listed E.Sun Financial Holding Co (玉山金控) as its top long play for next year, and life insurance-heavy Fubon Financial Holding Co (富邦金控) as its top short play.
It is upbeat on E.Sun Financial’s strong fee income earnings, which are expected to sustain a growth momentum at two to three times of its peers, on the back of its wealth management unit.
E.Sun Financial’s earnings should also be boosted by declining operating expenses, a Credit Suisse report said.
With its tier 1 ratio above 9 percent and group leverage ratio among the lowest in the sector, E.Sun’s capital position can support growth for the next two to three years, the report said.
A Tier 1 capital ratio measures a bank’s financial strength based on the sum of its core equity capital and total risk-weighted assets.
The report said that earnings by Fubon Life Insurance Co (富邦人壽), the primary life insurance subsidiary of Fubon Financial, would be very vulnerable to a rise in US interest rates.
The positioning of Fubon Life’s investment portfolio and products have mostly been geared toward sustained low interest rates. As a result, its investment book value fell by NT$74 billion (US$2.23 billion at current exchange rates) in the six month period ending in the third quarter because of market-to-market losses.
This caused the double leverage ratio of the holding company sequentially to rise by 8 percent to 121 percent in the third quarter.
Industry watchers have said the lower the double leverage reading, the better a company’s capital strength, as it indicates the firm’s lower risk in financing assets with debt and other liabilities.
Yuanta Securities Investment Consulting Co (元大投顧) analyst Peggy Shih (施姵帆) named E.Sun Financial as her firm’s top pick in a report published on Thursday.
She cited its large fee income contribution, which is estimated at about 35 percent of total net revenue.
Following the central bank’s two rate cuts this year, Shih is expecting Taiwan’s 10-year bond yield to fall 50 basis points from a high of 1.65 percent in the first half to 1.17 percent, which would strain domestic insurers’ recurring income yields.
Domestic insurers usually allocate up to 40 percent of assets to domestic bonds, cash and mortgage loans, which are susceptible to central bank moves, she said.
“Insurers might suffer up to a 5 percent decrease in their earnings-per-share performance next year as a result of the rate cut, and their liability reserve is also likely to increase, given lower discount rates from now on,” Shih said.
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