1、See the end pages of this presentation for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest
2、that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment decision.Asia Pacific Equity ResearchAug 2019Taiwan FinancialsJemmy HuangACJ.P.Morgan Securities(Taiwan)LimitedTelephone:(886)2-2725-9870Email:Leo WengJ.P.Morgan
3、Securities(Asia Pacific)LimitedTelephone:(852)2800-8511Email:Katherine LeiJ.P.Morgan Securities(Asia Pacific)LimitedTelephone:(852)2800-8552Email:2Source:Company data,Bloomberg and J.P.Morgan estimates.Valuation2-Aug19Mkt CapPTRatingP/EP/BROEDVD yieldBanksTickerPrice(NT$)US$mnNT$19E20E19E20E19E20E19
4、EE.Sun2884 TT25.25 9,357 24.0 N13.9 12.7 1.6 1.5 11.8%12.1%3.2%Mega2886 TT31.35 13,598 27.5 N14.4 13.8 1.3 1.3 9.3%9.5%5.5%Yuanta2885 TT17.05 6,355 18.6 OW9.5 8.9 0.9 0.8 9.3%9.5%5.2%First2892 TT22.95 9,031 17.4 UW15.1 14.3 1.3 1.3 9.0%9.2%4.6%Taishin2887 TT14.25 5,107 15.8 OW10.8 9.8 1.1 1.0 9.8%10
5、.6%4.2%Sinopac2890 TT12.05 4,332 11.6 N12.0 11.1 0.9 0.9 7.9%8.3%5.8%Hua Nan2880 TT21.35 7,861 14.4 UW15.3 14.8 1.3 1.3 9.0%8.8%2.9%InsurersCathay2882 TT40.10 16,068 48.0 N9.8 8.8 1.0 0.9 10.3%10.3%3.8%Fubon2881 TT42.35 13,823 54.0 OW8.2 7.3 1.0 0.9 11.9%12.0%4.7%CTBC2891 TT20.05 12,468 23.8 OW9.6 8
6、.6 1.1 1.1 12.4%12.4%6.0%Shinkong2888 TT8.87 3,469 10.0 N11.7 7.6 0.6 0.5 4.9%7.2%2.1%China Life2823 TT24.85 3,538 30.0 OW10.4 9.3 1.0 0.9 11.5%10.3%2.9%LeasingChailease5871 TT125.50 5,317 130.0OW10.8 9.5 2.3 2.0 22.8%22.3%4.2%3Banks might stay in favor,but lifers deserve more attentionLimited upsid
7、e to consensus earnings given moderating macro outlook More downside than upside on NIM due to official FED rate cuts Modest earnings growth in FY19 still achievable due to lower base in 4Q18 and without imminent asset quality risks Sequential increase in DPS and/or cash payout ratios Trading and he
8、dging performance better than feared Capital concerns on IFRS17 are overdone Shifting from regulatory tailwinds to headwinds Moderate earnings upside with attractive dividend yields Valuation largely prices in decent portfolio growth with stable asset qualityFubon/China Life/TaishinExecutive summary
9、Banks Insurance Top Picks BrokerageLeasing4Executive summaryTaiwan Banks:dividend plays to outperform on moderate earningsTaishin(2887 TT,PT:NT$15.8)Improving PPOP growth driven by WM fees and corporate banking revenue Declining credit costs from the high base in 4Q18 Sufficient capital position unl
10、ess for inorganic growth Current valuation of 1.1x P/B is undemanding given 10-11%ROE outlook and compared to an average of 1.2x at peersYuanta(2885 TT,PT:NT$18.6)Successful merger of Ta Chong Bank,over 50%group earnings from banking operations in FY19E Stable securities operations with diversificat
11、ion on revenue&geography Current valuation of 0.9x P/B is undemanding given 9-10%ROE outlookTop Picks 5PPOP Improving loan growth in line with expectationSystem loan growth in TaiwanSource:TEJ,National Statistics of Taiwan,Bloomberg and J.P.Morgan.Corporate loan growth vs Nominal GDPCorporate loan g
12、rowth in Mar 19 by industrySource:National Statistics,Bloomberg,and J.P.Morgan.Source:National Statistics of Taiwan and J.P.Morgan.Sector loan growth of 5.2%as of May 2019 was identical to 5.2%as of 4Q18 and slightly ahead of our expectation of 4-5%for FY19.Corporate loan growth has been driven by f
13、inancial,utilities,and real estate sectors,which should be driven by the recovery of macro-economic conditions Mortgage growth has decreased to 4.5%in 1Q1remains largely stable YTD supported by slightly improving property prices and transaction volume but is unlikely to be a meaningful driver for lo
14、an growth in the near futureWith better than expected GDP growth outlook(JPMe revised up to 2.2%for FY19E),we expect current momentum to stay,with upside hinged on the progress of infrastructure construction and production relocation by corporates6PPOP FCY/offshore lending remains the focusLoan grow
15、th YoY by region Source:As of Mar 19-Central Bank in Taiwan,FSC,and J.P.Morgan.FX,SME and total corporate loans,YoYLDR FX vs NTDSource:Central Bank in Taiwan,TEJ and J.P.Morgan.Source:Central Bank in Taiwan,TEJ and J.P.Morgan.Growth momentum of FCY loans remains steady at 7.2%as of 1Q19,better than
16、6.7%as of 4Q18;the key driver is overseas branches,while momentum at OBU has recovered from the low base dragged by tightening AML rules and concerns on China asset quality Growth at SME lending has been stable but lower risk appetites at banks in reflection of increasing macro uncertainties suggest
17、 limited upside surprises in the near termsDouble-digit loan decline at China branches was mainly due to conversion into subsidiary at CUBTWD LDR stays at 79-80%and digesting excess liquidity remains an issue.LDR at FCY lending remains low,although banks can drive up NIM via deploying deposits into
18、fixed-income investments and currency swaps.7Quarterly NIM migrationTAIFX and USD interbank rates in ChinaSource:Company data and J.P.Morgan estimates.Source:CEIC and J.P.Morgan.PPOP More downside than upside on NIM post official FED rate cutsNIM on average was down 2-3bps QoQ in 1Q19(except Fubon a
19、nd Mega)on both reported basis and if adjusted for swaps activities,based on our estimatesUSD denominated assets only account for 20-25%of total AIEA so the key driver for NIM remains domestic interest rate policies NIM at TWD portfolio still faces downward pressure due to remaining abundant liquidi
20、ty and pricing competition but we see limited chance for the CBC to follow FED moves in the near futureUS rate hikes since Dec 2015 has been the key driver for NIM via both lending yields and treasury operations(swaps)upon enlarging US-TW interest rate gaps.With the FED rate cuts,the cycle would be
21、reversed;Mega is most leveraged to US rates among peersNIMSource:Central Bank in Taiwan,FSC,and J.P.Morgan.3Q174Q171Q182Q183Q184Q181Q19Cathay1.20%1.22%1.24%1.26%1.27%1.22%1.22%Fubon0.99%1.00%1.06%0.97%1.05%1.00%1.10%Shinkong1.55%1.58%1.55%1.57%1.53%1.52%1.49%ESun1.35%1.34%1.35%1.36%1.36%1.36%1.36%Me
22、ga1.12%1.12%1.16%1.21%1.22%1.15%1.17%First1.24%1.24%1.22%1.21%1.17%1.15%1.08%Chinatrust1.47%1.49%1.48%1.49%1.50%1.54%1.53%Taishin1.38%1.35%1.35%1.33%1.34%1.30%1.25%Sinopac1.08%1.09%1.11%1.10%1.12%1.07%1.04%Hua Nan1.00%1.01%1.03%1.01%0.95%0.93%0.92%8PPOP NIM sensitivity to TWD and USD ratesSensitivit
23、y for every 25bps change on TWD yield curveSource:Company data and J.P.Morgan estimatesSensitivity for every 25bps change on USD yield curveSource:Company data and J.P.Morgan estimates9Increasing contribution from bancassurance feesFee income growthSource:Company data and J.P.Morgan estimatesNote:Fe
24、e income growth of Yuanta FHC was on pro forma basisSource:Bloomberg and J.P.Morgan.PPOP WM fee likely to grow in FY19 given weaker than expected FY18Fee income growth improved to 4%YoY in 1Q19 vs.2%in FY18,while WM fee only grew by 1%yoy in 1Q19.Sinopac is the best outperformer while E Sun suffered
25、 19%yoy decline due to the high base in 1Q18Lukewarm WM fee growth was mainly due to high base of 1Q18 upon more favorable market condition.Growth in bancassurance sales remained steady in most of banks we covered.Credit card consumption registered steady growth and could be supported by increasing
26、mobile payment vehicles but fee income growth may still be lower than consumption growth due to heavy promotion/marketingBanks in general are guiding for YoY growth at total/WM fees for FY19 due to the low base in 2H18,but increasing macro uncertainties would be the key swing factor.WM fee in FY17,F
27、Y18 and 3M19Source:Company data and J.P.Morgan estimates.10Asset quality No signs of meaningful asset quality deterioration or significant concentration risksEffective credit costs by individual banks(in bps)Source:Company data and J.P.Morgan estimates.Sector NPL ratio&coverage ratioSector new NPL f
28、ormation remains low Source:Company data,TEJ and J.P.Morgan.Source:CBC,FSC,and J.P.Morgan estimates.*Note:new NPL influx includes recoverySector NPL ratio and coverage ratio are 0.24%and 573%respectively as of May 2019,largely flattish compared to 4Q18.Impaired loan ratios under IFRS9 have also show
29、ing stable trend YTD by and largeContinued focuses on FCY/offshore lending could result in higher credit costs at corporate loan book in the medium term.NPL ratios at mortgages have decreased yoy as property prices have stabilized since 2H18Individual corporate defaults remain the variable for credi
30、t costs at individual banks but no major concentration risks by industry in our view Huanan/Taishin have the lowest NPL ratios while Sinopac has the lowest impaired loan ratio as of 1Q19.3Q174Q171Q182Q183Q184Q181Q19Cathay0.16%0.44%0.12%0.28%0.21%0.69%0.19%Fubon0.09%0.35%0.00%0.10%-0.01%0.12%-0.04%Sh
31、inkong0.46%0.48%0.27%0.27%0.26%0.29%0.26%E.Sun0.34%0.36%0.21%0.24%0.26%0.30%0.15%Mega0.18%0.59%0.05%0.08%0.21%0.11%0.14%First0.19%1.41%0.32%0.33%0.37%0.31%0.32%Chinatrust0.24%0.15%0.07%0.30%0.20%0.25%0.20%Taishin0.34%0.28%0.26%0.24%0.33%0.45%0.05%Sinopac0.06%0.31%-0.02%0.05%0.08%0.22%0.10%Hua Nan0.2
32、5%0.55%0.25%0.15%0.19%0.24%0.10%Sector0.21%0.49%0.15%0.20%0.21%0.30%0.15%11Asset quality Credit costs are likely to be largely flattish YoYNPL ratios by geography Reported NPL ratiosSource:Company data and J.P.Morgan.Source:FSC and J.P.Morgan.NPL coverage ratiosImpaired loan ratios under IFRS9Source
33、:Company data and J.P.Morgan.Source:Company data,and J.P.Morgan.12Asset quality NPL ratios are stable at major lending segmentsCorporate NPL ratio and balanceSME NPL ratio and balanceSource:Company data,TEJ and J.P.Morgan.Source:FSC and J.P.Morgan.Mortgage NPL ratio and balanceUnsecured personal len
34、ding NPL ratio and balanceSource:Company data,TEJ and J.P.Morgan.Source:Company data,TEJ and J.P.Morgan.13Bank CET1&Tier 1 ratios 1Q19FHC CAR 4Q18Source:Company data and J.P.Morgan Source:Company data and J.P.Morgan.FHC double-leverageratio Apr 19Debt/equity ratio 1Q19Source:Company data,TEJ and J.P
35、.Morgan.Source:Company data,TEJ and J.P.Morgan.Capital Bank CET1 ratio and FHC DLR are critical for dividends14Capital requirements for D-SIBsCET1 ratio 1Q19Source:Company data and J.P.Morgan Note:CTBC adj is the pro forma adjustments to reflect stricter capital calculation on FI related investments
36、 announced in FebSource:Banking bureau of Taiwan,J.P.Morgan estimatesTier 1 ratio 1Q19CAR 1Q19Note:CTBC adj is the pro forma adjustments to reflect stricter capital calculation on FI related investments announced in FebSource:Banking bureau of Taiwan,J.P.Morgan estimates.Note:CTBC adj is the pro for
37、ma adjustments to reflect stricter capital calculation on FI related investments announced in FebSource:Banking bureau of Taiwan,J.P.Morgan estimates.Capital Manageable impacts on D-SIB requirements for CTBC,Mega,Cathay,Fubon20192020202120222023CET1 ratio9.0%9.5%10.0%10.5%11.0%Tier1 ratio10.5%11.0%1
38、1.5%12.0%12.5%Total CAR12.5%13.0%13.5%14.0%14.5%15Capital FHCs have been leveraging on preferred equities for capital enhancementDateCompany#of shares(m)Issuing price(NT$)Total size(NT$m)Coupon ratesKey termsMar-16Fubon600.06036,0004.1%(7-year IRS of 0.885%+3.215%)Non-cumulative,non-convertible,no v
39、oting rights,perpetual but callable after 7 yearsNov-16Cathay833.36049,9983.8%(7-year IRS of 1.06%+2.74%)Non-cumulative,non-convertible,no voting rights,perpetual but callable after 7 yearsNov-16Taishin500.05025,0004.75%(7-year IRS of 1.2175%+3.5325%)Non-cumulative,non-convertible,no voting rights,p
40、erpetual but callable after 7 yearsOct-17CTBC333.36020,0003.75%(7-year IRS of 1.0825%+2.6675%)Non-cumulative,non-convertible,no voting rights,perpetual but callable after 7 yearsNov-17Fubon666.76040,0003.6%(7-year IRS of 1.17%+2.43%)Non-cumulative,non-convertible,no voting rights,perpetual but calla
41、ble after 7 yearsJun-18Cathay700.06042,0003.55%(7-year IRS of 1.1675%+2.3825%)Non-cumulative,non-convertible,no voting rights,perpetual but callable after 7 yearsSep-18Taishin300.05015,0003.8%(7-year IRS of 1.1%+2.7%)Non-cumulative,non-convertible,no voting rights,perpetual but callable after 7 year
42、sDec-18CTBC166.76010,0003.2%(7-year IRS of 0.99%+2.21%)Non-cumulative,non-convertible,no voting rights,perpetual but callable after 7 yearsJul-19Shinkong75.0TBCTBCTBCNon-cumulative,non-convertible,no voting rights,perpetual but callable after 7 yearsSource:Company data,JPMorgan.16Overseas M&As encou
43、raged by regulators Source:Company data,Bloomberg and J.P.Morgan.Announce DateTarget NameCountryDeal size(USD mn)CathayMay-17Bank of Nova Scotia BerhadMalaysia255.0Feb-15Horizon Securities Hong Kong LtdHK5.2Jan-15Bank Mayapada International Tbk PTIndonesia278.8Dec-14Rizal Commercial Banking Corp Phi
44、lippines401Nov-14Conning Holdings Corp HK240CTBCMar-16LH Financial GroupThailand488.4Dec-13Tokyo Star Bank LtdJapan538.2E.SunJan-17Union Commercial Bank PlcCambodia42.5Mar-13Union Commercial Bank PlcCambodia69.3FubonApr-18Hyundai Life Insurance Co South Korea221.4Dec-17Hyundai Life Insurance Co Sout
45、h Korea133.4May-16Fubon Bank ChinaChina322.1Jan-16China Insurance Co LtdChina67.8Jun-15CITIC Capital Holdings LtdChina228.8Jun-15Hyundai Life Insurance Co LtdSouth Korea200.2YuantaDec-17The First Securities Joint Stock CompanyVietnam15.0Apr-16KKTRADE Securities Co LtdThailand19.56Aug-15Hanshin Mutua
46、l Savings BankSouth Korea113.1Jul-15Tongyang Savings Bank IncPhilippines10.9Sep-14AmCapital Indonesia PTIndonesia6.6Feb-14Yuanta Securities Korea Co LtdSouth Korea257.1SinopacOct-15Tung Shing Holdings Company LimitedHK75.0CDFHCDec-15PT Hasta Dana Sekuritas IndonesiaIndonesia6Dec-14Alpha Global Asset
47、 Management LtdHK1Aug-14KGI Fraser Securities Pte LtdSingapore33.9May-14TG Holborn HK LtdHK1.1Nov-13Ong First Tradition Pte LtdSingapore3917Financial Development Action Plan unlikely to be a game changerSource:FSC,J.P.Morgan.18Domestic RMB businesses deposit pool has been shrinkingRMB deposits in Ta
48、iwan(RMB billion)Source:TEJ,National Statistics of Taiwan,Bloomberg and J.P.Morgan.RMB LDRDeposits in Taiwan YoYSource:Central Bank in Taiwan and J.P.Morgan.Source:TEJ,Central Bank in Taiwan,J.P.MorganTotal Rmb deposit balance amounted to RMB$268bn by May 19,representing only 3%of sector-wide deposi
49、tsDeposit pool has been declining since Dec 2017 because of declining deposit rates and concerns on Rmb depreciation amid US-China trade tensionsLDR for Rmb remains low at only 4.4%while available investment targets are still very limited and thus banks no longer offer attractive yields for deposits
50、;we do not expect any meaningful improvement on profitability/flows in the foreseeable futureMore channels/vehicles are required for the Rmb pool to further grow in Taiwan but current political environment suggests chances for any material progress could be limited19Executive summaryTaiwan Life Insu
