Transcript No Slide Title

Taiwan Financial IndustryChallenges and Opportunities
December 2006
Sophia Cheng >>
Research Analyst
Merrill Lynch (Taiwan)
+886 2 2376 3732
[email protected]
No part of this report may be used or reproduced or quoted in any manner whatsoever in Taiwan by the press or other persons.
Merrill Lynch 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 that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on pages 32.
Global Securities Research & Economics Group
Global Fundamental Equity Research Department
>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules.
Taiwanese banks: low valuation in the region
1.
2.
3.
Still recovering from
consumer debt
problem
Gradual profit
improvement in 2007
Need to find next
areas of growth
07 P/B (x )
5.00
How to improve?
4.50
Hang Seng Bk
4.00
3.50
Cathay
3.00
Bk of China
2.50
Follow your clients
1.50
•
Management clients’
wealth
1.00
CBA
Wex bac
ANZ
ShinKong UOB Bk of EA
SBI
Dah Sing
CL
Yuanta
Fubon DBS Chinatrust
Kooknim
Woori
Taishin SinoPac
2.00
•
NAB
ESUN
0.50
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
07E RoE (%)
Source: Merrill Lynch estimates
Refer to important disclosures on pages 32
2
GDP growth: Taiwan lags other emerging
Asian markets
Global
United States
Euro Area
Japan
Taiwan
Hong Kong
China
Philippines
Thanland
India
2005
4.7
3.2
1.5
2.7
4.0
7.3
10.2
5.6
4.5
7.5
Real GDP Growth (%)
2006
2007F
5.2
4.5
3.2
1.7
2.7
2.2
2.9
2.6
4.3
3.5
5.1
3.5
10.5
9.6
5.3
5.5
4.5
4.4
8.4
8.0
2008F
4.6
2.5
2.2
2.0
3.9
4.5
9.3
5.5
5.0
7.6
2005
3.2
3.4
2.2
(0.5)
2.3
0.9
1.8
6.6
4.5
4.0
CPI Inflation (%)
2006
2007F
3.2
3.0
3.2
1.5
2.2
2.2
0.1
0.3
0.8
1.8
2.2
3.1
1.5
2.5
6.0
5.1
4.5
2.9
5.7
5.9
2008F
3.0
1.8
2.0
0.9
2.3
3.2
2.2
5.0
2.6
6.1
Source: Merrill Lynch estimates
Refer to important disclosures on pages 32
3
106%
120%
107%
112%
111%
140%
132%
160%
140%
150%
180%
162%
Credit Penetration: Total Loans as a
Percentage of GDP (%)
75%
S Korea
77%
73%
26%
44%
17%
12%
23%
32%
34%
27%
24%
Russia
20%
Philippines
65%
23%
Romania
27%
38%
40%
53%
44%
60%
40%
57%
80%
73%
100%
DEVELOPED
EMERGING EUROPE AND SOUTH AFRICA
LATIN AMERICA
Thailand
Taiwan
Malaysia
Indonesia
India
China
Mexico
Colombia
Chile
Brazil
Argentina
Ukraine
Turkey
S Africa
Poland
Kazakhstan
Israel
Hungary
Egypt
Czech
Bulgaria
USA
UK
Japan
Germany
0%
EMERGING ASIA
Source: Central Bank Data, Merrill Lynch estimates
Note: Most data end-2005, some end 2004, some ML estimates
Refer to important disclosures on pages 32
4
169%
Deposit Penetration: Total Deposits as a
Percentage of GDP (%)
158%
180%
129%
89%
28%
27%
Colombia
Mexico
40%
69%
64%
62%
59%
30%
32%
Ukraine
27%
33%
Turkey
20%
18%
27%
24%
40%
34%
43%
Bulgaria
42%
46%
60%
USA
67%
80%
76%
100%
97%
98%
120%
114%
140%
126%
131%
160%
DEVELOPED
EMERGING EUROPE AND SOUTH AFRICA
LATIN AMERICA
Thailand
Taiwan
S Korea
Philippines
Malaysia
Indonesia
India
China
Chile
Brazil
Argentina
S Africa
Russia
Romania
Poland
Kazakhstan
Israel
Hungary
Egypt
Czech
UK
Japan
Germany
0%
EMERGING ASIA
Source: Central Bank Data, Merrill Lynch estimates
Note: Most data end-2005, some end 2004, some ML estimates
Refer to important disclosures on pages 32
5
Too much surplus liquidity
4,500
NCD Outstanding vs Deposit Ratio
NT$bn
CBC CD Outstanding (L)
4,000
%
6.00
1-year Deposit Rate (R)
5.00
3,500
3,000
4.00
2,500
3.00
2,000
1,500
2.00
1,000
1.00
500
2006/07
2006/01
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
0
Source: CBC, TEJ
Refer to important disclosures on pages 32
6
Consumer credit outgrow corporate
loans
Loan growth
2006/08
2006/01
2005/06
2004/11
2004/04
2003/09
2003/02
Total
2002/07
2001/12
2001/05
2000/10
2000/03
1999/08
Individuals
1999/01
1998/06
1997/11
1997/04
1996/09
1996/02
1995/07
1994/12
2006/09
2006/02
2005/07
2004/12
2004/05
2003/10
2003/03
2002/08
2002/01
2001/06
2000/11
2000/04
1999/09
1999/02
1998/07
1997/12
Corp Loan car Loan Unsecured personal loan Mortgage
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
1994/05
Corporate
NT$bn
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Source: Central Bank Data, Merrill Lynch estimates
Refer to important disclosures on pages 32
7
Margins remain thin
3.4
Benchmark rate gap between TW and US
12
%
%
Interest Spread (L)
New Loan Rate (R)
10.0
9.0
3.2
8.0
10
3
8
2.8
7.0
6.0
5.0
6
2.6
4
2
2.4
0
2.2
4.0
3.0
2
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
2006
2005
2004
2003
2002
2001
2000
1999
US Fed Funds Rate
1.0
3Q94
1Q95
3Q95
1Q96
3Q96
1Q97
3Q97
1Q98
3Q98
1Q99
3Q99
1Q00
Taiwan CBC Rediscount Rate
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
2.0
Source: CBC, Merrill Lynch
Refer to important disclosures on pages 32
8
Three areas to grow
•Wealth management
•Treasury products
•Overseas operations
Non-loan income to operating revenue
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
Indonesia
South Korea
Taiwan
Thailand
Philippines
India
Singapore
Malaysia
Australia
Hong Kong
0%
Source: Company reports, Merrill Lynch
Refer to important disclosures on pages 32
9
Non-loan business gaining importance
TW Bank: Net Fee/Op Revenue
20%
16%
12%
8%
4%
Refer to important disclosures on pages 32
3M06
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0%
%
Chinatrust
FEIB
Taipei Fubon
Hsinchu Bank
Cathay United
Taishin Bank
IBTAIPEI
Bank SinoPac
ICBC
TBB
C.H.B
First Bank
E.Sun Bank
1997
31%
8%
8%
8%
6%
17%
5%
10%
15%
7%
8%
9%
9%
2000
25%
13%
9%
8%
7%
24%
8%
13%
17%
7%
8%
10%
12%
2003
24%
21%
34%
13%
15%
22%
12%
15%
19%
14%
11%
12%
16%
2005
29%
29%
34%
25%
20%
20%
22%
23%
18%
20%
13%
15%
18%
10
Taiwan households hold US$1.3tn assets
Asset allocation in cash & deposit
Others, 9%
Taiwan: 41%
Bond, 1%
USA: 30%
Life insurance, 11%
Cash, 41%
Mutual/Trust fund,
7%
Stock, 31%
Source: Central Bank, CEIC
Refer to important disclosures on pages 32
11
Wealth Management & FX/Derivatives
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Trust Assets
(NT$bn)
Chinatrust
First Bank
Citibank N.A.
CTC
ICBC (Mega FHC)
Taishin Bank
Taipei Fubon Bank
Cathay United Bank
HNCB
Bank SinoPac
C.H.B
IBTAIPEI
TC Bank
E.Sun Bank
Asia Trust
2000/12
41
57
92
53
25
17
1
1
9
15
11
1
5
7
33
2002/12
96
122
152
102
91
51
17
13
26
41
22
5
19
12
31
2004/12
511
205
153
135
122
120
49
82
67
59
45
44
35
28
30
2005/12
619
226
176
157
156
138
122
120
77
61
51
66
36
38
30
Share
2000/12
6.5%
9.0%
14.7%
8.5%
4.0%
2.7%
0.2%
0.2%
1.4%
2.3%
1.8%
0.2%
0.8%
1.1%
5.3%
Share
2002/12
7.9%
10.1%
12.5%
8.4%
7.5%
4.2%
1.4%
1.1%
2.1%
3.4%
1.8%
0.4%
1.6%
1.0%
2.6%
Share
2004/12
22.3%
8.9%
6.7%
5.9%
5.3%
5.3%
2.1%
3.6%
2.9%
2.6%
2.0%
1.9%
1.5%
1.2%
1.3%
Share
2005/12
22.4%
8.2%
6.4%
5.7%
5.7%
5.0%
4.4%
4.4%
2.8%
2.2%
1.9%
2.4%
1.3%
1.4%
1.1%
Sources: Company Data, Merrill Lynch estimates
Refer to important disclosures on pages 32
12
FX – With Customers
FX-with Customers
(NT$bn)
1 Chinatrust
2 ICBC (Mega FHC)
3 HNCB
4 Taishin Bank
5 First Bank
6 C.H.B
7 Taipei Fubon Bank
8 Bank Of Taiwan
9 Taipei Fubon Bank
10 Bank SinoPac
11 E.Sun Bank
12 CTC
13 CTB
14 TBB
15 IBTAIPEI
2000
24
28
26
5
24
21
8
19
8
9
3
8
9
11
3
2002
28
29
24
17
22
17
8
16
8
15
3
7
8
8
4
2004
118
61
45
41
29
26
17
23
17
37
18
15
16
13
8
2005
152
89
51
37
32
28
30
25
30
22
26
20
18
14
11
Share
2000
4.5%
5.2%
4.9%
0.9%
4.5%
3.9%
1.6%
3.5%
1.6%
1.7%
0.5%
1.4%
1.8%
2.0%
0.6%
Share
2002
3.7%
3.9%
3.2%
2.2%
2.9%
2.3%
1.1%
2.1%
1.1%
2.0%
0.4%
0.9%
1.1%
1.1%
0.6%
Share
2004
8.6%
4.5%
3.3%
3.0%
2.1%
1.9%
1.2%
1.7%
1.2%
2.7%
1.3%
1.1%
1.2%
1.0%
0.6%
Share
2005
12.4%
7.2%
4.1%
3.0%
2.6%
2.3%
2.5%
2.1%
2.5%
1.8%
2.1%
1.6%
1.5%
1.2%
0.9%
Sources: Company Data, Merrill Lynch estimates
Refer to important disclosures on pages 32
13
OBU growing fast
NT$mn
30,000
30%
25%
25,000
20%
15%
20,000
10%
5%
15,000
0%
10,000
-5%
-10%
5,000
-15%
0
-20%
1998
1999
2000
2001
OBU pretax profit
2002
2003
2004
2005
% to banks prtax earnings
Note: OBU contribution in 2005 increased was mainly because of more
provisioning in 2005. if taking out the extra provisioning, the contribution from
OBU was < 20%
Sources: Company Data, Merrill Lynch estimates
Refer to important disclosures on pages 32
14
Taiwan corporate investing the most to
China (HK + China already 41%)
TW-China
supervision MoU
not signed
Taiwan export amounts
US$bn
200
180
160
140
120
100
80
60
40
20
USA
Refer to important disclosures on pages 32
Japan
HK
China
Korea
Europe
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
Other
15
Taiwan is the biggest FDI in Vietnam
13% of Vietnam foreign
direct investment comes
from Taiwan in 2002-Aug06
Refer to important disclosures on pages 32
16
Taiwan financial institutions landscape
Banks
Life Insurance
2005 Premium
Income NT$ bn
400
Asset Managers
Foreign competition increasing
Currently overpriced
No single company big enough to deliver
transforming transaction
Life Insurance dominated by Cathay Group
Larger banks are largely government controlled
AIG-owned
$461
591
3.4x
3.1x
350
Market Share of
AUM (1)
Mid-sized private banks likely to lead to consolidation
Remaining life insurers are small
and some are capital constrained
300
250
Total Assets
NT$ bn
141
$62
2.2x
1.9x
200
8%
6%
Reported NPLs (%)
3,000
150
1.38 2.59 0.5 2.4 2.15 1.65 1.94 1.87 2.08 2.59 2.9 2.36
$12
1.5x
50
1.04 1.34 2.68 2.6 2.38 3.23 3.42 2.51 4.86 2.38 5.76 1.21 2.98 3.21 1.76 2.31 9.61 1.48 9.69 18.8 1.79
2,500
0
2,000
$258
1.4x
$127$127
1.5x 1.4x $198
2x
1,500
$96
1.2x$591 $27
$216
3.1x
0.9x 1.4x
1,000
$91
1.3x
500
P&C Insurance
22
$132
2.0x
$4
3.2
1.6x
0.5x
$10 $24
0.9x 1.2x
$9 $3 $138
5x 0.2x 0.9x
Securities
$6
0.6x
0
P&C Insurance dominated by Fubon
Remaining P&C insurers are small
and some are capital constrained
$270
$216
1.9x
1.4x
$26 $141 $17 $15
$14
1.5x 1.6x 1.2x0.8x $44 0.7x $21 $24
1.1x
1.0x 1.6x
% of Total
(2)
Trading Volum e
of
Ta Ta
iw iwa
an
n
M Coo
eg p
La a F
HC
Hu nd
a Ba
Na nk
n
Ch Fir FH
s C
Ch i na t F
an tru HC
g st F
Hw H
a C
Ta Ca Ba
iw tha nk
an y
Bu FH
C
s
Fu Ba
b nk
Ta on F
is h H
Fa
C
rm in F
er HC
E. s Ba
S
n
Si un k
In noP FH
tl .
C
a
Bk c F
Hs o HC
in f T
c h aip
Sh u I e i
i n nt
T k l.
Un a C ong Bk
i o ho F
H
n
Bk ng C
o Ba
Fu f T nk
a
En h H iwa
Fa T
w
n
r E ie a F
as Co H
te m. C
rn
Ba
In
Ba
n
J ih tl. B k
nk
O
S a
S
f O ha u n nk
n
v e g FH
rs ha
ea i B C
s
a
Co Ch nk
s m i ne
os se
Ta
C
ic h en B
un tra ank
l
g
C Tr
Ch om us t
.
Ch i nes Ban
in e B k
a
D an
Ch B ev. k
i n ow FH
fo
n aB C
Bk Co an
of m. k
Ka B a
oh nk
si u
ng
45
$111
$65 1.2x
1.6x
Bk
2005 Direct Written
Premium NT$bn
4%
2%
0%
Ca
Fu pi t
bo al
n
FH
C
JF
AM
Na
AB ti o
na
N
Fu -A M l
h
R
Hw
O
a
FH
C
Po
l
Pr aris
ud
en
tia
l
Fi
rs
t
HS
BC
216
$270
1.4x
1.9x
100
10%
8%
6%
$4615.8 $6
3.4x0.9x 1.4x
258
$246
1.4x
1.6x
Government-related Banks
Old Private Banks
New Private Banks
FHC
4%
Increasing consolidation expected; led by
Yuanta and Fubon
$75
1.2x
$216
1.4x
$91
1.3x
$111
1.2x
$17
0.9x
$24
4.5x
$22
1.1x
$25
0.8x
$44
1.1x
$16
1.0x
2%
0
Yu
Fu a nt
bo a
Ta n F
is h HC
Si in F
no
H
Pa C
c
FH
C C
J ih ap
Su i tal
n
FH
C
Po
la
ris
Fu
K
hw GI
a
FH
Pr
C
es
ide
nt
0%
____________________
Non-classified financial institutions (e.g. China Development, Waterland FHC) not included
Figures in blue represent market cap in NT$ bn. Figures in green represent price-to- 1H06 book value ratios. Figures in grey represent FHC market cap in NT$ bn and FHC
price-to-1H06 book ratio. Figures in red represent reported NPLs (%)
Source: BOMA, Bloomberg, CBC, Taiwan Stock Exchange, SITCA. Assets and NPL ratios as of Sep 2003 and Dec 2003, respectively. Market cap data as of March 26, 2004
(1) As of January 2004
(2) Year 2005
Refer to important disclosures on pages 32
17 1
Mortgage loan market share
Mortgage Loan Share
(NT$mn)
1 Land Bank
2 Chinatrust
3 TCB Bank
4 Cathay United Bank
5 Taipei Fubon Bank
6 First Bank
7 HNCB
8 Taishin Bank
9 Bank Of Taiwan
10 Bank SinoPac
2000/12
14.9%
3.9%
11.1%
3.4%
4.5%
4.6%
4.1%
2.4%
5.5%
2.5%
2002/12
13.4%
6.2%
9.5%
3.0%
3.9%
4.7%
5.4%
4.1%
4.9%
3.3%
2004/12
11.4%
7.4%
7.0%
5.6%
2.9%
5.0%
5.1%
4.7%
4.1%
3.6%
2005/12
10.9%
7.8%
6.7%
6.1%
4.8%
4.6%
4.7%
4.6%
4.3%
4.1%
Sources: Company Data, Merrill Lynch estimates
Refer to important disclosures on pages 32
18
Taiwan vs Korea: top 5 market share
Taiwan
Land Bank
Bank Of Taiwan
Taiwan Cooperative Bank
Hua Nan Bank
Chang Hwa Bank
Top 5 market share
Loans
8%
8%
8%
6%
5%
34%
Assets
6.2%
8.9%
6.9%
5.8%
4.6%
32%
South Korea
Assets
Loans
KB
16%
21%
SFG
13%
15%
WFG
11%
14%
Hana
10%
9%
KEB
6%
6%
Top 5 marekt share
56%
65%
Source: Merrill Lynch estimates
Refer to important disclosures on pages 32
19
Private banks growing fast but still small
Loan Market Share
MoF initial plan and rules
2) Open up to foreign financial
groups
2000/12
2005/12
1997-2005 CAGR
8.2%
7.7%
7.9%
5.0%
11.2%
9.6%
7.9%
0.9%
TCB Bank
9.1%
8.2%
7.5%
2.9%
HNCB
5.5%
5.4%
5.6%
5.6%
C.H.B
5.1%
5.2%
5.0%
5.1%
First Bank
5.7%
5.7%
5.3%
4.5%
Chinatrust
2.8%
3.3%
5.1%
13.4%
TBB
5.0%
4.5%
4.3%
3.4%
2.5%
3.3%
3.9%
11.7%
2.6%
3.3%
3.6%
10.3%
Cathay United Bank
2.6%
2.9%
3.7%
20.4%
Taishin Bank
1.1%
1.3%
3.3%
7.0%
Taipei Fubon Bank
2.9%
2.6%
3.3%
4.1%
Farmers Bank
3.0%
2.4%
2.7%
3.6%
Bank Of Taiwan
Foreign interests in Taiwan
1) Reduce market share of
government-controlled bank (in
terms of assets) from 50% to
25%-30%
1997/12
Land Bank
Valuation more reasonable:
from ~2x book to ~1.4x book
Loan grwoth
ICBC
SinoPac+IBT
CTB
3.0%
2.9%
2.6%
15.7%
Government Bank
58.1%
54.9%
52.7%
4.4%
Private Bank
12.1%
13.5%
19.0%
10.4%
100.0%
100.0%
100.0%
Total
Source: TEJ, Merrill Lynch
Refer to important disclosures on pages 32
20
Government initiatives
Product competitiveness:
- how to compete with HK and Singapore
Encourage industry consolidation
- why not copy a DBS model
in Taiwan
- friendly takeover vs. hostile takeover
- transparency requirement
- who should have independent boards
- how to make privatization process better
Incentive for money and talents to stay
- tax reform
- incentive and compensation program
- friendly environment
Follow clients overseas
- Vietnam: Taiwan banks expanding
- China: indirect
Refer to important disclosures on pages 32
21
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Refer to important disclosures on pages 32
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