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Financial Industry and opportunities facing Investors

Financial Industry and opportunities facing Investors. 陳欽奇 國泰金控 專員 國泰證券 經理 北科大 兼任講師. 2005/10/27. Agenda. Global financials – cycle gets tougher Financials in Asia – year of the thoroughbreds Taiwan banking sector. Source: TEJ, CSFB. Global Financials. Cycle gets tougher.

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Financial Industry and opportunities facing Investors

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  1. Financial Industryand opportunities facingInvestors 陳欽奇 國泰金控 專員 國泰證券 經理 北科大 兼任講師 2005/10/27

  2. Agenda • Global financials – cycle gets tougher • Financials in Asia – year of the thoroughbreds • Taiwan banking sector Source: TEJ, CSFB

  3. Global Financials Cycle gets tougher

  4. Global Financials – Continuing Challenges • Industry rating has declined • Key Industry Challenges • Weaker revenue growth • Specialisation vs. diversification • Efficiency • Consolidation • Capital efficiency • Markets and risk • Risk Management, Basle 2

  5. Global (G7) Banks de-rating and focused on cash G7 Banks Dividend Yield G7 Banks Forward Price-earnings G7 Banks PE Relative to market PE G7 Banks dividend yield vs. market dividend yield Source: Thomson Financial Datastream, MSCI, CSFB Analysis

  6. Asia Banks are little different Asia Banks Dividend Yield Asia Banks Forward Price-earnings Asia Banks PE Relative to market PE Asia Banks dividend yield vs. market dividend yield Source: Thomson Financial Datastream, MSCI, CSFB Analysis

  7. Asia banks – no expectations of out-performance MSCI Asia Banks PE Relative to G7 Banks Source: Thomson Financial, MSCI, Company Data, CSFB Analysis

  8. Despite sharply improved returns • Asia banks are benefiting from: • Credit recoveries • Revived loan growth • Stable market structure • Balance competitive pressures • Diversifying revenues • Consumer oriented growth ROE Projections 2004-2006 Asia Banks Source: Company Data, CSFB Analysis

  9. Trends Driving Asia’s Growth

  10. Taiwan’s FHC and Banking Stick with consolidators

  11. Number of Financial Institutions in Taiwan

  12. Taiwan FHC – from 2001/07/09 • 14 FHCs • Reorganization • M&A happened continuously… • Divestitures ? • What next… • Will Government Policy success?

  13. Taiwan banking – consolidation inevitable Hirschman Herfindahl Index – Asia Banks HHI = s1^2 + s2^2 + s3^2 + ... + sn^2 (where sn is the market share of the ith firm).  Source: Central Bank Data, CSFB Analysis

  14. Why stick with acquirers? Top 20 banks in Taiwan Ranking Reuter's code Bank/FHC name Market share • Economics favor buyer (supply exceeds demand) • Current valuation • BV(P/B) • Adjusted BV(P/ABV) • Branch Value • P/E 1 Not listed Bank of Taiwan 9.2% 2 5854.TW Taiwan Cooperative Bank 7.5% 3 2886.TW Mega FHC (ICBC + Chiao Tung Bank) 7.0% 4 Not listed Land Bank of Taiwan 6.4% 5 2892.TW First FHC 5.6% 6 2880.TW Hua Nan FHC 5.5% 7 2801.TW Chang Hwa Bank 4.9% 8 2891.TW Chinatrust FHC 4.5% 9 2881.TW Fubon FHC 4.3% 10 2834.TW Taiwan Medium Business Bank 3.9% 11 2882.TW Cathay FHC 3.5% 12 2887.TW Taishin FHC 2.4% 13 2822.TW Farmers Bank 2.0% 14 2890.TW Sinopac Holdings 1.7% 15 2808.TW International Bank of Taipei 1.5% 16 Not listed Shanghai Commercial Bank 1.5% 17 2807.TW International Bank of Taipei 1.4% 18 2884.TW E Sun FHC 1.3% 19 2847.TW Ta Chong Bank 1.2% 20 Not listed Central Trust of China 1.0%

  15. Overview of Taiwan banking sector Source: Banking Bureau of FSC, CSFB

  16. Earnings cycle recovered Loan growth • Loan growth rebounded post tech bubble and credit crunch • Consumer loan growth remains healthy • Credit Card and Cash Card? Source: FSC, CSFB

  17. Consumer loans remain growth driver Loan breakdown (as of March 05) Non-mortgage loans: 13% • Non-mortgage consumer loans grew quickly to 13% of total loans (6% at end of 1999) • Consumer loans to GDP is rising quickly • Recovery in property prices support robust mortgage growth • Banks are under-taking more risks • Fast growth in cash card loans Loan breakdown (as of Dec 1999) Non-mortgage loans: 6% Source: FSC, DGBAS, CSFB

  18. Property prices have peaked and stabilized Taiwan property price index Residential property price index • Property prices peaked in 4Q05 and were broadly flat in 1Q05 • Transaction growth tapered off to 2% YoY in 1Q05 following +23% in 2002; 9% in 2003 (SARS) and 20% in 2004 • CSFB expects property prices to stabilize in 2005 Transaction volume of residential housing Source: Sinyi Realty; Department of Interior, Taiwan

  19. Cash card market Cash card loan balance and YoY growth • Cash card loans continued to grow +40% • Taishin Bank has been the most aggressive • Loss ratio for the market is closer to 8-9% • Market will further consolidate – large players have advantage Market share of top five cash card loans providers Cash card charge off ratio* Source: FSC *180-days past due plus charge offs

  20. Credit card market Credit card revolving balance and YoY growth • Growth has moderated but maintains at 15-20% • Net charge off ratio for top players are around 3-4% • Market structure is relatively stable Market share of top five credit card players – by revolving debts Credit card delinquency ratio Source: FSC

  21. Significant Growth Opportunity

  22. Credit crunch threat becoming real…?

  23. Margin: muted rate hikes cap expansion Net interest spread at domestic banks • Interest rate hikes have been muted (37.5 bps in 4Q04) • Strong NTD delays rate hikes • Competition remains fierce • Interest spread remains low Source: FSC, CSFB

  24. Margin: muted rate hikes cap expansion Taiwan banking system loan to deposit ratio • System loan to deposit ratio has stabilize • Deposit growth has been managed down due to aggressive sale of deposit substitute products (mutual funds, investment link life policies, etc) • Loan mix changes have so far been the key margin driver Loan growth vs. deposit growth Source: FSC, CSFB

  25. Loan growth and NIM changes 1Q05 loan growth of major banks • 1Q05 loan growth • Private sector banks tend to do better • Consumer loans grew stronger than corporate loans for most banks • 1Q05 margin • Changes in NIM is mostly a function of changes in loan mix • General pressure persist to lift margin • Interest rate movement remains the key driver NIM change from 1Q05 to 2004 Source: FSC, CSFB

  26. Non interest income: fee income Net fee income as % of total income • Wealth management initiatives led to strong fee income growth (+52% in 2004) • Low interest rates helped • Growth could moderate (consumer fatigue) • Fee income growth could vary greatly among banks Source: TEJ, CSFB

  27. Earnings drivers – credit loss NPL ratios • Asset quality has normalized • Provision charge fell to 100bps of loans in 2004 • Coverage ratio for the sector remains low • Credit loss will vary greatly among banks Provision charge to gross loans NPL ratio vs. coverage ratio Source: TEJ, CSFB

  28. Consumer loans: rising credit risk Consumer loans to GDP • Consumer loans to GDP likely to reach 57% by end of 2005 • Non-mortgage consumer loans grew to 17% of GDP • CSFB estimates debts servicing could rise to 15% of disposable income in 2005 • Regulators have stepped in to preempt systemic risk • Credit loss should rise Source: DGBAS, CSFB

  29. Operating efficiency Industry expense growth and efficiency ratio • Bank has managed expense growth reasonably well • Reduction of business tax in late 90’s helped • Bank reorganization affects cost structure (rising variable cost to link to top line growth) • Cost to income ratio post a gradual downward trend Cost to income ratio comparison Source: TEJ, CSFB

  30. Goals of Taiwan’s FIs Restructure • First Stage:In 2 years,NPL Ratio<5%,BIS Ratio>8% • Second Stage: • Developing at least three financial institutions with over 10% of market shares by the end of 2005. • Halving the number of banks with government ownership from 12 to 6 by the end of 2005. • Encouraging M&As to reduce the number of FHCs from 14 to 7. • Having at least one financial institution either managed by foreign institutions or listed in overseas markets by the end of 2006.

  31. Investment options:three pillars Quality,Scope and Scale

  32. Quality • NPL Ratio : <2.5% • Coverage Ratio : >40% • Profit +

  33. Scope • Business • Bank • Insurance • Security • Others… • Revenues • Interest • Fee • Investment

  34. Scale • Market Share • Asset • Product • Branch • Acquirer or Target ?

  35. Branch Value 調整後淨值/分行家數 每分行提存前稅前淨利 每分行淨利息及淨手續費 平均值=96.44 平均值=141.28

  36. Fundamental strategic thinking • A bank is a ‘leveraged’ play on the underlying economy, therefore the key challenge is to: • Select the better performing economies • Attract the most valuable clients in our chosen economies • Aims to produce a blend of earnings from: • Developed mature-growth economies • Developing higher-growth economies (considered on a risk-adjusted basis) • Leveraging internationality provides revenue generating and cost saving opportunities • Leveraging through our local presence the increasing trade and other links between developed and developing economies

  37. Conclusion • Global financials are facing tougher cycle • Strong will get stronger regionally • Bought growth and organic growth • Taiwan banking offer growth opportunities through M&A • Investment options:three pillars

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