What’s up with Taiwan banks?27 February, 2012, 14:15. Posted by Zarathustra
Tags: Financials, Taiwan
As we all know that sell-side research tends to be optimistic, thus it is not very often that we see a lot of SELL ratings. Thus whenever there are a lot of SELLs in a report, it almost always make an interesting read.
It so happened that we do see one report coming out last week (20 February) which rated an entire sector with underweight, with all individual companies under coverage being rated as SELL.
From CLSA Taiwan banking analyst Dexter Hsu, who rated all 7 banks in the report as SELL, it leave us (who probably haven’t got much idea about Taiwan banking sector anyway) wondering what’s up with Taiwan Banks. With a housing bubble and a tech bubble that are closed to bursting, he argues that banks could take a big hit:
Banks are now in the late stages of their credit cycle. After over a decade of loose lending, Taiwan faces the prospect of a bursting housing bubble and a crisis in tech, where the companies are turning into zombies and refusing to die. Credit tightening should accelerate the seasoning process. We reiterate our SELL recommendations on all the market’s banks, especially since earnings should be front-loaded this year. For those who must be in the sector, we suggest Chinatrust for its credit-card franchise and prudent credit policy.
Easy access to credit over 2000-10 led to overinvestment in commodity-tech such as Dram, panels, LED and solar. Housing now faces poor affordability and oversupply. Property prices rose 133% over the past 10 years, but vacancies increased from 13% to 19% over the same period.
Though the timing of the bust is hard to predict, credit tightening should accelerate the seasoning process. It will not only trigger failures and financial restructuring in tech, but also pressure mortgage borrowers and property developers. Tightening will lead to increasing demand for consumer-credit and home-equity loans, while trends in the unorganised money-market rate (ie, loan sharks) and dishonoured cheques suggest signs of trouble.
Earnings should be front-loaded this year, with revenue peaking in 1H12 before credit costs start to catch up. Revenue will contract as loan-pricing competition intensifies. NIMs are set to fall as unding costs increase due to an unfavourable change in the deposit mix. Provisions will rise due to the worsening tech and property outlook, higher reserve requirements and lower recoveries.
Though the sector looks well capitalised under current regulations, it would need to raise NT$260bn (US$9bn) if it implemented IFRS 4, the new provision policy and Basel 3 today. Banks like Chang Hwa Bank, First and Taishinare under the most pressure to recapitalise.
We reiterate our SELL recommendations on all the market’s banks: consensus remains far too optimistic. Although the risk from tech lending is well known, the market has yet to appreciate the impact of credit tightening on property. For investors who need to be in the sector, we suggest Chinatrust for its credit-card franchise and prudent credit policy.