Financial stocks moved up strongly yesterday after the financial regulator on Monday said it was considering more market-opening and deregulation policies to improve the fundamentals of Taiwan’s banking system.
Yuanta Securities Corp (元大證券) said the Financial Supervisory Commission’s new policies instilled a positive sentiment in the market, which saw domestic and foreign institutional investors together sell a net US$457 million of local financial shares last month, second only to a net sale of US$727 million of foundry shares.
However, the implementation of the commission’s new policies depends on when lawmakers will ratify the cross-strait service trade pact. Yuanta expects the Legislative ratification to come late this year or early next year.
The financial and insurance sub-index on the main bourse, which reflects the general share performance in the financial sector, rose 1.31 percent, compared with an increase of 0.62 percent on the benchmark TAIEX, Taiwan Stock Exchange data showed.
Financial shares are relatively cheap because most are trading below their historic range of between 1.2 times and 1.4 times price-to-book (P/B) ratio under the sluggish macroeconomic conditions, Yuanta analyst Peggy Shih (施姵帆) said yesterday.
“Valuations should be at least 1.2 times P/B ratio, given solid fundamentals, with double-digit earnings growth in 2013-2017,” Shih said in a note.
The sector could be re-rated and trade at 1.4 times P/B ratio in the long run following the implementation of the new deregulation policies, she added.
On Monday, following a meeting with top executives of major financial holding companies, the commission said it was planning to allow domestic banks to use up to 40 percent of their net worth for Chinese market expansion, compared with the current 15 percent ceiling. In addition, the commission said the deregulation would be realized by shifting its policy stance from “positive listing” to “negative listing,” when dealing with requirements for offshore banking unit (OBU), domestic banking unit (DBU) and offshore securities unit (OSU) businesses.
Policymakers will also amend the Financial Institution Merger Act (金融機構合併法) in order to encourage financial consolidation to deal with overbanking in the domestic market, according to the commission.
Shih said the move to allow banks to invest up to 40 percent of their capital in China in the first stage and up to 40 percent of their net worth in the second stage is the most positive for Taiwanese lenders — which also suggested why investors rushed to buy into financial stocks yesterday.
“Based on 40 percent of banks’ capital, we estimate Taiwanese banks’ Chinese branches can contribute 8 percent in extra profit to Taiwan’s banking industry in 2017,” Shih said.
Yuanta said its top picks among local financial stocks included Mega Financial Holding Co (兆豐金控) and CTBC Financial Holding Co (中信金控), because the two have healthy capital positions. Mega Financial is forecast to make 8.6 percent extra profit by 2017 and CTBC Financial might receive 7.3 percent extra profit over the same period due to the planned deregulation.