This year has been unfortunate for the shareholders of the nation’s listed financial companies, as a spate of negative developments has worsened already gloomy market sentiment. On one hand, rising inflation worldwide and aggressive interest rate hikes by central banks have led to a persistent wealth crunch, with the TAIEX dropping from 18,000 points early this year to about 13,000 points in recent sessions. On the other hand, the financial industry’s exposure to Russia and Credit Suisse Group AG has come under scrutiny following the Russian invasion of Ukraine in February and recent financial troubles at the Swiss lender.
Last week, the nation’s financial regulator said that it has put Credit Suisse on its watchlist and is closely monitoring sales of the bank’s financial products in Taiwan. According to the Financial Supervisory Commission, more than 70 percent of local banks have stopped selling bonds or structured notes issued by Credit Suisse, after some investors rushed to redeem financial products issued by the bank due to concern that the Swiss lender’s woes would impact global financial markets, akin to the collapse of US investment bank Lehman Brothers Holdings Inc in 2008.
However, what has hurt the domestic financial industry most this year has been the substantial payments on insurance companies’ COVID-19 pandemic insurance policies, following a severe outbreak in the first half of this year. Some insurance companies posted huge net losses in the first half, and the losses are expected to widen for the full year as still-sizable pandemic policies remain.
The nation’s 15 financial holding companies reported a combined net profit of NT$14 billion (US$439.1 million) last month, dropping by half from the previous month and down 66.37 percent from a year earlier. In the first nine months of the year, the companies’ combined net profit totaled NT$321.21 billion, down 35.66 percent year-on-year. Among them, Cathay Financial Holding Co, Shin Kong Financial Holding Co and Taishin Financial Holding Co were the worst performers, reporting profit declines of more than 50 percent year-on-year over the nine-month period.
Unlike last year, when the 15 financial holding companies generated a combined net profit of NT$580.63 billion, the highest on record, this year has ushered in a series of challenges and surprises for the firms: the sale of COVID-19 insurance policies, the US Federal Reserve’s aggressive rate hikes and increasing risks to Credit Suisse’s financial profile.
Entering the fourth quarter, market sentiment remains cautious and conservative, as there has not been an end to interest rate hikes and insurance companies still find it difficult to realize capital gains in the current investment environment.
The Credit Suisse incident might be the tip of the iceberg amid the recent wave of interest rate hikes and market volatility, as there could be problems at other financial institutions that are yet to surface. Investors must pay attention to whether other financial institutions or “zombie companies” become unsustainable.
A strong US dollar is wreaking havoc on emerging markets. With continued capital outflows and market routs, a debt crisis could be next for those economies as the threat of soaring refinancing costs and another round of liquidity woes increases.
As Taiwan’s financial institutions also have exposure to certain emerging markets, they must implement risk controls to minimize potential losses, while investors need to observe follow-up risks with an exit strategy at hand.
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