Taiwanese financial holding companies got off to a strong start this year with combined net profits in the first quarter expanding 33.56 percent from a year ago, yet the results provided some cause for concern as they were boosted by a number of one-off gains.
The 15 publicly-listed financial holding firms reported NT$58.72 billion (US$1.96 billion) in net profits for the first three months of the year, up from NT$43.96 billion the previous year, and reaching their best quarterly level in nearly a decade.
In the first quarter of the year, Fubon Financial Holding Co (富邦金控) led its peers by reporting the highest earnings of NT$10.03 billion (or NT$1.05 per share). Shin Kong Financial Holding Co (新光金控) finished the quarter as runner-up with earnings of NT$7.65 billion (NT$0.88 per share), followed by Cathay Financial Holding Co (國泰金控) with earnings of NT$6.93 billion (NT$0.64 per share), the companies’ data showed.
Analysts said the latest data underlined a gradual improvement in the sector, with both banks and insurers continuing to report strong earnings in the quarter, despite the lackluster performance of brokerages caused by weak stock market turnover.
“Bank results remained steady, supported by a recovery in corporate banking, wealth management fees and better trading results,” Citigroup Global Markets analyst Bradford Ti (鄭溫煌) said in a note on Wednesday.
“Insurance results were also strong, driven by better markets, reduced new business strains and one-off gains on property disposal,” Ti added.
Ti said that in the first-quarter growth momentum had built in financial shares and he expected further inflows to appear in the sector on the back of a recovery in loan growth, rising fee incomes, progress on cross-strait financial exchanges and a gradual increase in interest rates through next year.
However, HSBC Securities (Taiwan) Corp said the first-quarter results relied too heavily on life insurers’ non-recurring gains, arguing that Shin Kong Financial, for instance, would have faced difficulty to break-even on its bottom line in the quarter had it not received contributions from disposals of property.
Last quarter, Shin Kong Life Insurance contributed more than 80 percent of its parent company’s net profit, at NT$6.3 billion, but that figure included NT$7.4 billion from property disposal gains and investment losses.
“The property disposal gains only highlights the fact that the life business is losing money without these one-off gains,” HSBC analyst Bruce Warden said in a report on Thursday.
Apart from Shin Kong, Fubon Financial saw profits of NT$2.1 billion in the quarter from Fubon Life Insurance Co’s (富邦人壽) selling overseas fixed-income investments and domestic equities, while Cathay Financial took advantage of an NT$2.5 billion contribution from Cathay Life Insurance Co’s (國泰人壽) unrealized gains in real-estate investments as allowed by new accounting rules, company data showed.
Apparently concerned by the issue of non-recurring gains, HSBC decided not to re-rate the sector upward and maintained that most financial holding companies would likely see “relatively modest” growth in loans of between 5 percent and 6 percent this year.
The company forecast “limited expansion” in margins of between just 0.03 percent and 0.05 percent.
“While there is clearly upside potential, we are not making any revisions to forecasts at this juncture,” Warden said in the report.
Shares in the financial sector have risen 5.83 percent on the local bourse since the beginning of this year, outranking the broader market’s 1.59 percent increase, which analysts attributed to a run of positive news such as onshore Chinese yuan business being introduced in February, and new agreements being reached by cross-strait financial regulators earlier this month.
However, financial shares might be in line for a pullback or correction before the summer, following the next round of cross-strait talks on the Economic Cooperation Framework Agreement (ECFA) to ratify access for brokers, and expanded access and cross-strait holdings for banks, SinoPac Securities Investment Service Co (永豐投顧) said in a note on Friday.
Currently, financial shares are trading at about 1.16 times their book value and this ratio is likely to increase to 1.4 times by the end of the year or early next year if there are breakthroughs on cross-strait shareholdings in banks, interest rate normalization and steady progress in their China operations, SinoPac Securities said.
Prior to that, analysts said investors should refocus on the sector’s business fundamentals, such as revenue growth and underlying profitability.
“Neither of which is altogether impressive or likely to drive valuations higher in the immediate near term,” Warden said.