See important disclosures, including any required research certifications, beginning on page 47 Taiwan Financials What's new: Given the rising macro headwinds that we see for Taiwan in 2016, we are downgrading our sector rating to Negative from Neutral. We are also cutting our TPs for all the stocks in our universe and downgrading ratings for Fubon FHC (2881 TT, TWD39.65, Outperform [2], from Buy [1]), E.Sun FHC (2884 TT, TWD18.40, Underperform [4], from Outperform [2]) and First Financial (2892 TT, TWD14.85, Sell [5], from Underperform [4]). What's the impact: Downside risks don't appear fully priced in yet, given the ongoing share price corrections, which we see as being driven mainly by concerns about the weakening CNY, rising default risks on high- yield bonds and Taiwan’s sluggish 2016 GDP growth outlook. But compared with Daiwa’s economics forecasts, the market still looks optimistic on the Taiwan macro indicators for the year – it expects the USD:CNY rate and Taiwan’s GDP growth to settle at 6.7 by end-2016 and 2.2% YoY for 2016, respectively, vs. our forecasts of 7.5 and 1.6% YoY. We also believe that the impact of 2 likely CBC rate cuts this year, and the banks’ rising NPLs/credit costs, are not yet fully priced in. Banks are more fragile than the insurers. We expect excess liquidity conditions in the system to intensify in 2016, putting pressure on bank NIMs. Also, the depreciating CNY should continue to cap CNY deposit growth and loan growth, while leading to a greater default risk on the banks’ Treasury Market Unit (TMU) business. And lower loan recoveries and higher NPLs could drive up credit costs further. Meanwhile, fee income growth should hold up better, but it could only be a drop in the bucket. Insurers: a light in the dark. A weaker TWD:USD exchange rate and steepening yield curve as a result of the Fed’s rate hike cycle should lend some support to the insurers’ earnings. Worries about the volatile global equity market and the rising risk of defaults on high-yield bonds and the resulting impact on earnings growth are justified but priced in, in our view. What we recommend: We don’t think the time has come to revisit the sector, as we see more downside risks looming. Our EPS forecasts are now 5-20% below the street for all the stocks that we cover except for Cathay FHC (2882 TT, TWD39.95, Buy [1]), given its shorter asset duration, which will allow it to benefit more from further Fed rate hikes, its large USD position and its lower exposure to high-yield bonds. The main upside sector risks: lower-than-expected credit costs and higher-than- expected loan growth, investment returns, and policy rate. How we differ : We are more bearish than the market on the banks as a result of our below-consensus 2016 macro forecasts for Taiwan and China. 11 January 2016 Taiwan Financial Sector 2016 outlook: stay away from the banks Given the concerns about Taiwan’s increasing macro headwinds, we downgrade our rating on the sector to Negative from Neutral Compared to the Taiwan insurers, the banks are more sensitive to macro downgrades. Downside risks for banks don’t seem fully priced in Investors should keep away from the banks and take shelter in the insurers, particularly Cathay FHC, which is our top sector pick Key stock calls Source: Daiwa forecasts Christie Chien (886) 2 8758 6257 [email protected]New Prev. Cathay Financial Holdings (2882 TT) Rating Buy Buy Target 53.60 62.20 Upside p 34.2% Fubon Financial Holding (2881 TT) Rating Outperform Buy Target 44.30 61.00 Upside p 11.7% E.Sun Financial (2884 TT) Rating Underperform Outperform Target 16.40 20.80 Downside q 10.9% CTBC Financial (2891 TT) Rating Underperform Underperform Target 14.30 18.20 Downside q 10.6% First Financial (2892 TT) Rating Sell Underperform Target 11.70 15.20 Downside q 21.2%
48
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See important disclosures, including any required research certifications, beginning on page 47
Taiwan Financials
What's new: Given the rising macro headwinds that we see for Taiwan in
2016, we are downgrading our sector rating to Negative from Neutral. We
are also cutting our TPs for all the stocks in our universe and downgrading
ratings for Fubon FHC (2881 TT, TWD39.65, Outperform [2], from Buy [1]),
E.Sun FHC (2884 TT, TWD18.40, Underperform [4], from Outperform [2])
and First Financial (2892 TT, TWD14.85, Sell [5], from Underperform [4]).
What's the impact: Downside risks don't appear fully priced in yet,
given the ongoing share price corrections, which we see as being driven
mainly by concerns about the weakening CNY, rising default risks on high-
yield bonds and Taiwan’s sluggish 2016 GDP growth outlook. But
compared with Daiwa’s economics forecasts, the market still looks
optimistic on the Taiwan macro indicators for the year – it expects the
USD:CNY rate and Taiwan’s GDP growth to settle at 6.7 by end-2016 and
2.2% YoY for 2016, respectively, vs. our forecasts of 7.5 and 1.6% YoY. We
also believe that the impact of 2 likely CBC rate cuts this year, and the
banks’ rising NPLs/credit costs, are not yet fully priced in.
Banks are more fragile than the insurers. We expect excess liquidity
conditions in the system to intensify in 2016, putting pressure on bank
NIMs. Also, the depreciating CNY should continue to cap CNY deposit
growth and loan growth, while leading to a greater default risk on the
banks’ Treasury Market Unit (TMU) business. And lower loan recoveries
and higher NPLs could drive up credit costs further. Meanwhile, fee income
growth should hold up better, but it could only be a drop in the bucket.
Insurers: a light in the dark. A weaker TWD:USD exchange rate and
steepening yield curve as a result of the Fed’s rate hike cycle should lend
some support to the insurers’ earnings. Worries about the volatile global
equity market and the rising risk of defaults on high-yield bonds and the
resulting impact on earnings growth are justified but priced in, in our view.
What we recommend: We don’t think the time has come to revisit the
sector, as we see more downside risks looming. Our EPS forecasts are
now 5-20% below the street for all the stocks that we cover except for
Cathay FHC (2882 TT, TWD39.95, Buy [1]), given its shorter asset
duration, which will allow it to benefit more from further Fed rate hikes, its
large USD position and its lower exposure to high-yield bonds. The main
upside sector risks: lower-than-expected credit costs and higher-than-
expected loan growth, investment returns, and policy rate. How we differ
: We are more bearish than the market on the banks as a result of our
below-consensus 2016 macro forecasts for Taiwan and China.
11 January 2016
Taiwan Financial Sector
2016 outlook: stay away from the banks
Given the concerns about Taiwan’s increasing macro headwinds, we downgrade our rating on the sector to Negative from Neutral
Compared to the Taiwan insurers, the banks are more sensitive to macro downgrades. Downside risks for banks don’t seem fully priced in
Investors should keep away from the banks and take shelter in the insurers, particularly Cathay FHC, which is our top sector pick
The ROAEs for Taiwan’s financial holding companies
(FHCs) are likely to fall from 12.2% for 2015E to 10.5% for
2016E and pick up modestly to 11.3% for 2017E. For the
stocks under our coverage, we forecast the average ROAE
for the bank-centric FHCs to drop from 11% for 2015E to
9.6% for 2016E, while that for the insurance-centric FHCs
to fall from 14.8% for 2015E to 12.3% for 2016E. The
Central Bank of China’s (CBC) likely rate cuts, dim GDP
outlook, impact of China’s economic slowdown and CNY
depreciation, lower investment returns on the back of
volatile market conditions and rising default risks on bonds
all paint a gloomy 2016 growth outlook for the sector. The
upward trend in the USD and the Fed’s tightening cycle are
positive factors, but may not be able to offset the drags.
Source: Bloomberg, Daiwa forecasts
Valuation Taiwan Financial Sector: 12-month rolling PBR
The Taiwan FHCs are trading currently at 1.0x 12-month
rolling PBR, lower than the past-10-year average of 1.3x.
Among the stocks that we cover, Mega FHC has the lowest
absolute 12-month rolling PBR of 0.9x. Given our lower
ROE forecasts for the sector for 2016E, we are also cutting
our target PBRs for the sector. For the bank-centric FHCs,
our target PBRs come in at 0.8-1.0x, while those for the
insurance-centric FHCs are 1.3-1.5x (down from 1.0-1.3x
and 1.4-1.7x, respectively, from our previous target
forecasts).
Source: Bloomberg, Daiwa
Earnings revisions Taiwan Financial Sector: revisions to consensus 2016 net profit forecasts
The Bloomberg consensus 2016E earnings for Fubon FHC
and Cathay FHC are 16-34% higher now compared to the
beginning of 2015. On the other hand, the forecasts for
Mega and First Financial are 5.1% and 7.2% lower,
respectively, compared to the forecasts made in early-
2015. Meanwhile, the forecasts for E.Sun and CTBC have
remained fairly stable.
For the sector as a whole, consensus expectations favour
the insurance-centric FHCs over the bank-centric FHCs, in
line with our view that the insurers are likely to hold up
better than the banks given macro headwinds. For the
bank-centric FHCs, however, we see risks of further
downward forecast revisions.
Source: Bloomberg, Daiwa
7
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Fubon Cathay MegaCTBC First E.Sun
(2015/01/01=100)
3
Taiwan Financial Sector: 11 January 2016
Sector stocks: key indicators
Source: Bloomberg, Daiwa forecasts
Daiwa’s: key forecast changes for 2016 (banks and insurers)
Old forecast New forecast Reason for the change
NIM expansion 2 to 7bps -3 to 2bps The CBC is now likely to deliver 2 additional 12.5bps rate cuts in 2016, versus no rate cuts under Daiwa's previous forecasts.
Loan growth 0 to 10% -2 to 7.5% TWD loan growth could come in lower, in the range of -3% to 3% (down from 0-5%), except for E. Sun Bank, on the back of likely lacklustre GDP growth for 2016.
Deposit growth 3 to 5% 4 to 8% Many companies/individuals would rather sit on heavy cash positions than take the risk of investing amid the gloomy economic outlook. The upward trend in the USD also encourages more USD savings.
Fee income 0 to 10% 5 to 15% Lower loan growth, higher deposit growth implies that the banks will be flooded with excess savings. This could create a good environment for the banks to promote their wealth management products.
NPL ratio
After hedged investment yield
Hedging cost
0.2 to 1%
4.5%
60-90bps
0.2 to 1%
4.0-4.2%
50-60bps
We still see a risk of NPLs rising amid sluggish economic growth, despite the NPL ratio for 2015 coming in lower than expected. As such, we keep our 2016 NPL forecasts unchanged.
We revise down our investment yield forecasts on concern of more volatile market conditions and rising default risks on high-yield bonds.
Better hedging performance on the back of a weaker TWD:USD exchange rate.
Source: Daiwa’s forecasts
Taiwan Financial Sector: key assumptions and valuation changes
Beta value Cost of equity 2016E ROE Implied 2016E P/B Target price Rating Share price as of 8 Jan
Rating Target price (TWD) Rationale for making changes in rating and/or target price
New Prev. New Prev.
Cathay FHC Buy Buy 53.6 62.20 Fed’s rate hike cycle and the upward trend in the USD should continue to support Cathay FHC's earnings; reiterate Buy (1) rating.
Fubon FHC Outperform Buy 44.3 61.00 Cutting our TP and downgrading Fubon FHC to Outperform (2) over concerns in the market about its higher exposure to high-yield bonds vs. Cathay. But the recent sell-off looks overdone to us and we still like this stock on valuation grounds.
Mega FHC Hold Hold 21.00 26.67 Tighter USD liquidity in 2016 should lend some support to Mega FHC's earnings given its large exposure to USD. Accordingly, we maintain our Hold (3) rating but cut our TP on the back of Taiwan’s current gloomy macro environment.
E.Sun FHC Underperform Outperform 16.4 20.80 High earnings growth rate for E.Sun FHC is unlikely to be sustainable in 2016, amid the rising macro headwinds. Accordingly, we are downgrading the stock to Underperform (4) and cutting our TP.
CTBC FHC Underperform Underperform 14.30 18.20 CTBC FHC’s expansion plan seems inappropriate to us. We also see a lack of growth momentum for its core earnings amid the increasing macro risks. As such, we are cutting our TP and reiterate our Underperform (4) rating on the stock.
First FHC Sell Underperform 11.70 15.20 We think First FHC will not benefit at all from any of the CBC rate cuts that we see in 2016 and we see no other short-term positive catalysts for the stock. Accordingly, we downgrade the stock to Sell (5) from Underperform (4) and cut our TP.
Source: Daiwa forecasts
Share
Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg
First Financial .................................................................................................................. 41
5
Taiwan Financial Sector: 11 January 2016
Executive summary: stay away from banks
Increasing macro headwinds are a challenge
Daiwa’s economics team expects Taiwan’s GDP growth to settle, uninspiringly, at 1.6%
YoY for 2016E. The Central Bank of China (CBC) could deliver two more 12.5bps rate cuts
in 2016, and the TWD could depreciate to 34.7 against the USD by end 2016 (see
“Outlook for 2016-17: coping with hard times”, and “CBC’s second rate cut bodes ill for
Taiwan” for the further details). In this report, we discuss how the impact of current macro
conditions, including the diverging interest rate trend (ie, the Fed is likely to deliver rates
hike while the CBC is cutting the policy rate), weak GDP growth and exchange rate
environment will affect Taiwan’s financial sector.
Banks: being hit with a harsh dose of reality We expect lower loan growth for 2016 given the dimmer economic outlook. Deposit
growth, on the other hand, could hold up better as firms/individuals could prefer to hold
heavy cash positions rather than taking a risk and investing amid such a gloomy economic
outlook. The banks will be once again forced to sit on excess liquidity this year, which
undermines the efficiency of their earnings, in our view. Even worse, potential CBC rate
cuts should exacerbate the problem of excess liquidity. We were expecting the banks’
NIMs to expand by 2-7 bps, but now see this number at -3 to 2bps. On the bright side,
excess liquidity in the system should help banks promote their wealth management
products. We foresee fee income growth holding up better than we previously expected.
The banks’ NPL ratio for 2015 is likely to come in lower than we expected. However, we
have decided to keep our NPL numbers for 2016 unchanged despite a lower base for
2015, as we believe weak GDP growth for Taiwan will continue to put pressure on asset
quality. Given that the overseas branches of the Taiwan banks are mostly concentrated in
developing Asia, with just a few located in the developed markets, the banks’ asset quality
is also likely to be exposed to the economic slowdown in the emerging markets this year.
Taiwan Banks: Daiwa’s key forecast changes for 2016
Old forecast New forecast Reason for the change
NIM expansion 2 to 7bps -3 to 2bps CBC is now likely to deliver two additional 12.5bps rate cuts in 2016, versus no rate cuts under Daiwa's previous forecasts
Loan growth 0 to 10% -2 to 7.5% TWD loan growth could come in lower, in the range of -3% to 3% (down from 0-5%) on the back of likely lacklustre GDP growth for 2016
Deposit growth 3 to 5% 4 to 8% Many companies/individuals would rather sit on heavy cash positions than take the risk of investing amid the gloomy economic outlook. The USD rally trend also encourages more USD savings
Fee income 0 to 10% 5 to 15% Lower loan growth, higher deposit growth implies that the banks will be flooded with excess savings. This could create a good environment for the banks to promote their wealth management products
NPL ratio 0.2 to 1% 0.2 to 1% We still see risk of NPLs rising amid sluggish economic growth, despite the NPL ratio for 2015 now coming in lower than expected. As such, we have decided to leave our 2016 NPL forecasts unchanged
Source: Daiwa’s forecasts
Insurers: a light in the dark
The key macro trends that have benefitted the insurers, including the Fed’s rate hike cycle,
the upward trend in the USD and regulatory easing, are not affected by Taiwan’s weak
GDP outlook. Although the CBC’s potential rate cuts will push down the yield on domestic
bonds, we believe any losses could be offset by higher FX gains on the back of a weaker
TWD:USD exchange rate. The insurers could also cut their domestic bond positions and
switch to overseas assets to avoid being hit by the CBC rate cuts. We believe Cathay
should continue to do well in 2016 and reiterate our Buy (1) call on the stock. While
Fubon’s core business looks likely to remain solid in 2016, its larger risk appetite could
lead to higher volatility risks amid the increasing macro uncertainty. As such, we are
downgrading the stock from Buy (1) to Outperform (2).
Taiwan Financial Sector: FX loans as a % of total loans (as at end 3Q15)
Taiwan Financial Sector: scenario analysis: the impact of changes in the lending spread
TWDm
FX lending spread up by
10bps
TWD lending spread down by
10bps Net
impact FHC's PPOP
for 2016E
% of 2016E PPOP for the FHC
CUB 155 -987 -832 67,119 -1.2
TFB 245 -919 -674 68,483 -1.0
E.Sun 169 -827 -658 18,965 -3.5
Mega 645 -1151 -506 41,729 -1.2
First 335 -1169 -834 21,677 -3.8
CTBC 461 -1135 -674 39,579 -1.7
Source: Company, Daiwa Note: CTBC Bank had the highest foreign currency loan share of 46.6% as at end 3Q15, but
mostly comprised JPY loans from the Tokyo Star Bank it acquired in 2014, rather than USD loans.
Source: Daiwa forecasts Note: Based on the figures for end-9M15. CUB= Cathay United Bank. TFB= Taipei Fubon Bank
A lower return from NCDs
Unlike the insurers that are long-term investors, the investments made by the banks in
general are short term in nature and comprise a larger domestic proportion. One popular
investment tool for the banks are certificates of deposit (including negotiable certificates of
deposit, or so-called NCDs) issued by the CBC. As at the end of 3Q15, the outstanding
amount of these NCDs issued accounted for 11.2% of the total assets held by Taiwan’s
financial institutions. For the banks that we cover, the number is smaller, ranging from 0-
9% of total assets, as at the end of 9M15.
Given that excess liquidity has long been an embedded structural problem for Taiwan, the
interest rate on NCDs has been low. And conditions have deteriorated further on the back
of the CBC’s surprise rate cuts in September and December. The average interest rate for
91- to 180-day NCDs dropped from 55bps for August to 43 bps for November 2015.
Facing the challenge of a lower return on NCDs, a direct solution for the banks would be to
switch their investments elsewhere or simply cut their positions. However, given the excess
liquidity backdrop, in addition to the capital requirement limit on holding risker assets, the
banks may have to succumb and accept a lower return on NCDs going forward. On our
estimates, a 10bps drop in the NCD interest rate could drag earnings down by TWD0-
310m, which would be equivalent to 0-0.8% of the FHC’s 2016E PPOP, all else being
equal.
Taiwan Banks: NCDs as a % of the banks’ total assets NCD interest rate: 91 to 180-day products
Source: Companies Source: CEIC, Daiwa
46.6
40.4
22.4 21.5
17.013.6
0
5
10
15
20
25
30
35
40
45
50
CTBC Bank Mega Bank First Bank Taipei FubonBank
E.SUN Bank Cathay UnitedBank
(%)
0
1
2
3
4
5
6
7
8
9
CTBC Mega TFB CUB First E.Sun
(%)
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Nov
-10
Feb
-11
May
-11
Aug
-11
Nov
-11
Feb
-12
May
-12
Aug
-12
Nov
-12
Feb
-13
May
-13
Aug
-13
Nov
-13
Feb
-14
May
-14
Aug
-14
Nov
-14
Feb
-15
May
-15
Aug
-15
Nov
-15
(%)
Banks will earn a lower
interest rate from NCDs
as the policy rate falls
9
Taiwan Financial Sector: 11 January 2016
Insurers: benefits outweigh the risks
We think that future interest rate trends will affect the insurers in 4 main ways, namely: 1)
uninspiring returns on domestic bond investments, 2) greater returns on overseas bond
investments, 3) a moderate increase in hedging costs, and 4) a higher default risk on high-
yield bonds. We believe the benefits of a rising overseas bond yield should outweigh any
earnings downside that the insurers might face in 2016.
Gains on overseas bond yield should outweigh the downside
Based on the insurers’ investment portfolios and asset durations as at the end of 3Q15 (8.8
years for Cathay and 13 years for Fubon), we estimate that a 10bp decrease in the
domestic bond yield would result in a respective loss of TWD45m for Cathay Life and
TWD43m for Fubon Life. On the other hand, a 10bp increase in the overseas bond yield
would lead to a respective gain of TWD256m for Cathay Life and TWD101m for Fubon Life.
The Taiwan Government 10-year bond yield hit a record low of 0.98% on 24 December
2015, after the CBC announced a rate cut on 17 December. Since the bond yield has
already hit a record low level, any further downside looks limited for the domestic bond
yield, in our opinion, despite 2 more likely policy rate cuts of 12.5bps each in 2016. We
only see a 15bps decline in the domestic bond yield in 2016.
On the other hand, the current US 10-year Treasury yield of 2.3% remains far below its
past 10-year average of 3.2%, implying that there is a lot of room for the yield to go higher.
Our US chief economist, Mike Moran, expects the Fed to deliver three 25bps rate hikes in
2016. And we have factored in a 70bps increase in the US 10-year Treasury yield for 2016.
On our estimates, the net gain from this would be TWD1,721m for Cathay Life (2.5% of
Cathay FHC’s PPOP) and TWD640m for Fubon Life (0.8% of its PPOP).
Taiwan Government bond and US Treasury yields (10-year) Taiwan Insurers: investment portfolio as at end-3Q15
Cathay Life Fubon Life
TWDbn % TWDbn %
Cash & cash equivalent 86.3 1.9 172.5 6.3
Equity- domestic 352.4 7.7 213.0 7.8
Equity- international 256.3 5.6 172.0 6.3
Bond- domestic 394.0 8.6 564.3 20.5
Bond- international 2240.3 49.0 1304.0 47.5
Mortgage & secured loans 488.5 10.7 82.9 3.0
Real estate 489.1 10.7 185.7 6.8
Others 268.5 5.9 53.3 1.9
Total 4575.4 100.0 2747.7 100.0
Source: CEIC, Daiwa Source: Company, Daiwa
A rise in the interest rate would push up the insurers’ earnings, but it would also result in
mark-to-market losses on their balance sheets, as an increase in the bond yield would lead
to a drop in the bond price. While we agree that bonds categorised as available-for-sale
(AFS) are likely to record some mark-to-market losses, we note that most of the bonds that
the insurers own (60-80%) are in the held-to-maturity (HTM) category, and are not subject to
market price changes. As such, we believe that any AFS-related losses would still be
manageable for the insurers. For the insurers that we cover, Cathay Life is relatively more
insulated to the risk of having large mark-to-market losses, given that a smaller proportion of
its assets are categorised as being in the AFS category (26.5% vs. 53.2% for Fubon Life).
0
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2
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6
Dec
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-15
Taiwan government 10-yr bond yield US 10-yr treasury yield
(%)
Downside for the
domestic bond yield to
drop further should be
limited while it seems
like there is plenty of
room for the overseas
bond yield to rise
10
Taiwan Financial Sector: 11 January 2016
Taiwan insurers: AFS assets as a % of total assets
Source: Company, Daiwa
Moderate increase in hedging costs should remain manageable Having a diverging interest rate trend could also lead to a higher hedging cost, as the price
of cross currency swaps (CCS) is highly correlated to the difference between US and
Taiwan bond yields. However, we believe the risk to the insurers remains manageable at
this stage, given that the scale of the Fed’s rate hikes are likely to be small. Daiwa’s
economist Mike Moran expects the Fed funds target rate to reach 1.13% by end-2016, only
1pp higher than the current level.
The overall hedging environment still looks more benign than in the past (see the following
chart) given the build-up of FX reserves (TWD17.6bn for Cathay Life and TWD6.4bn for
Fubon Life, as at the end of 3Q15) and the ongoing rally in the USD. We expect the
hedging cost to come in at 50bps for Cathay Life and 60bps for Fubon Life in 2016.
Taiwan insurers: Hedging costs
Source: Company, Daiwa
(Note: since 2012, the Financial Supervisory Commission [FSC] has allowed the Taiwan
life insurers to build up FX reserves under liabilities to absorb 50% of their FX losses rather
than directly hitting the P&L, which gives the insurers more flexibility in managing their FX
risks and reducing their hedging cost.)
Concerns about rising default risks on high-yield bonds could be overdone
In early December 2015, before the Fed delivered its first rate hike on 17 December, the
share price for Cathay and Fubon started correcting, due mainly to concerns in the market
about their high-yield bond investment positions. These concerns are justified in our view,
as the higher US interest rate means that investors are likely to have started pulling some
money out of the emerging markets, making it harder for businesses in general in these
markets to get finance and increasing the risk of these companies defaulting on their bonds.
But we believe the risk to the insurers remains manageable, however, as high-yield bonds
account for a limited proportion of their investment portfolios. For Cathay Life, high-yield
bonds (including energy-related bonds that have a higher default risk on the back of falling oil
Cathay Financial Holdings (2882 TT): 11 January 2016
Financial summary
Key assumptions
Profit and loss (TWDm)
Change (YoY %)
Source: FactSet, Daiwa forecasts Note: Net insurance income, which equates to the retained earned premium minus retained claims payment and net changes in the insurance
reserve, is included in non-interest income. Interest income earned from investments made by the life insurance business, however, is categorised into net interest income. For a life insurer with a long operating history such as Cathay, retained claims payment and net changes in the insurance reserve usually surpass the premium collected for the year, dragging total non-interest income down to a negative number. As such, YoY changes for non-interest income are shown as “n.a.” in the table above.
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY10005, U.S.A. (1) 212 612 7000 (1) 212 612 7100
Daiwa Capital Markets America Inc. San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. (1) 415 955 8100 (1) 415 956 1935
Daiwa Capital Markets Europe Limited, London Head Office 5 King William Street, London EC4N 7AX, United Kingdom (44) 20 7597 8000 (44) 20 7597 8600
Daiwa Capital Markets Europe Limited, Frankfurt Branch Neue Mainzer Str. 1, 60311 Frankfurt/Main, Germany (49) 69 717 080 (49) 69 723 340
Daiwa Capital Markets Europe Limited, Paris Representative Office 17, rue de Surène 75008 Paris, France (33) 1 56 262 200 (33) 1 47 550 808
Daiwa Capital Markets Europe Limited, Geneva Branch 50 rue du Rhône, P.O.Box 3198, 1211 Geneva 3, Switzerland (41) 22 818 7400 (41) 22 818 7441
Daiwa Capital Markets Europe Limited, Moscow Representative Office
Daiwa (Shanghai) Corporate Strategic Advisory Co. Ltd. 44/F, Hang Seng Bank Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai China 200120 , People’s Republic of China
(86) 21 3858 2000 (86) 21 3858 2111
Daiwa Securities Co. Ltd., Bangkok Representative Office 18th Floor, M Thai Tower, All Seasons Place, 87 Wireless Road,
HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603
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47
Taiwan Financial Sector: 11 January 2016
Important Disclosures and Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Japan
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa
Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures
Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
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Australia
This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
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Thailand
This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.
The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.
United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113
United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).
Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings
Rating Percentage of total
Buy* 63.9%
Hold** 21.3%
Sell*** 14.8%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.
In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.
There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association