Sat, Apr 16, 2016 - Page 14 News List

Analysts still conservative regarding financial sector

‘HEADWINDS CONTINUE TO BLOW’:Banks are facing increasing excess liquidity, slowing business for OBUs, lagging loan growth and heightened regulatory scrutiny

By Ted Chen  /  Staff reporters

Analysts are retaining their conservative outlook on the nation’s financial sector, after several financial companies reported steep year-on-year annual declines in earnings in the first quarter of the year.

This week, Shin Kong Financial Holding Co (新光金控) reported a net loss of NT$2.56 billion (US$79.14 million) for the first quarter of the year, China Development Financial Holding Corp (中華開發金控) saw its net income decrease by 58.8 percent year-on-year to NT$1.12 billion, while Fubon Financial Holding Co (富邦金控) reported an annual decline of 55.52 percent in net income to NT$8.91 billion.

“We maintain our negative view on the financial sector as we see headwinds continuing to blow,” Daiwa Capital Markets analyst Christie Chien (簡民惠) said in a client note on Wednesday.

Chien said the headwinds for banks include intensifying excess liquidity and slowing business for their offshore banking units (OBU).

In addition, as clients have turned risk-averse and favored heavy cash positions amid a gloomy economic outlook and volatile financial conditions, banks’ deposit growth continued to outpace loan growth in the first two months of this year, she said.

The heightened scrutiny on tax avoidance following the so-called “Panama Papers” revelations might also prompt regulators to impose more stringent supervision on OBU accounts, she said.

While concerns about banks’ exposure to yuan-linked target redemption forwards have begun to diminish, as contracts reach maturity and the yuan stabilizes, many Taiwanese banks will see their revenues dip, due to the loss of the once-popular high-margin product, Chien said.

In addition, wide swings in the yuan’s strength against the US dollar could still generate substantial losses for the banks, she said.

The Daiwa research team also said that, given the buffers banks have built up to withstand a weakened yuan at 6.8 against the US dollar, evidenced by the outcome of regulator-mandated stress tests, the Chinese currency is likely to weaken to 7.5 versus the greenback by the end of this year.

Macquarie Capital Securities Ltd is also cautious about the impact on banks from the central bank’s rate-cut cycle.

Another anticipated interest rate cut by the nation’s central bank in June will likely increase defaults for banks as lower rates jeopardize local lenders’ net interest income, rather than spurring credit demand for capital expenditure and save troubled borrowers, the brokerage said.

“The central bank has cut interest rates three times since last September and we believe the impact could kick in from the second quarter of 2016,” Taipei-based Macquarie Capital researcher Dexter Hsu (許世德) said in a note on Wednesday, citing his estimates that a rate cut of 12.5 basis points would lead to a 2-4 basis points hit on banks’ net interest income.

Hsu said further rate cuts could push depositors to seek better returns on investment products like insurance policies.

“Either way, we believe household savings will be channeled through banks and then life insurers and fund houses to overseas for better returns,” he said.

As to the impact of declining housing prices and trading volume in local real-estate sector, banks are less affected than feared, Yuanta Securities Investment Consulting Co (元大投顧) analyst Peggy Shih (施姵帆) said.

Shih based her observation on various aspects.

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