Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

Taiwan seems to periodically awaken to consolidation noise and initiatives. The Banking Sector is recognised by all and sundry as ripe for rationalisation given its fragmented status. Shares of late have had a consolidation tailwind.We take a look at the Q119 results at <a href="https://www.smartkarma.com/entities/taiwan-business-bank" target="_blank" data-smartkarma-citation="entities:18958:1">Taiwan Business Bank (2834 TT)</a> , <a href="https://www.smartkarma.com/entities/taichung-commercial-bank" target="_blank" data-smartkarma-citation="entities:4703:1">Taichung Commercial Bank (2812 TT)</a> , <a href="https://www.smartkarma.com/entities/e-sun-financial-holding-co" target="_blank" data-smartkarma-citation="entities:719:1">E.Sun Financial Holding Co (2884 TT)</a> and <a href="https://www.smartkarma.com/entities/far-eastern-intl-bank" target="_blank" data-smartkarma-citation="entities:16585:1">Far Eastern Intl Bank (2845 TT)</a>.Overall, we see improvements in Liquidity, Capitalisation, Asset Quality, Profitability, and Efficiency. This explains the high PH Scores on offer. Profitability though has been boosted by sharply reduced Loan Loss Provisions as Asset Quality has improved as well as trading gains. However, the Achilles Heel has been the rampant growth of Interest Expenses on Liabilities which has outpaced Interest Income on Assets. We have seen this in China too. This partly explains the reaching for other aforementioned levers to protect the bottom-line.  We favour Taiwan Business and especially TaichungCommercialBank over E.Sun and FarEastern mainly on account of greater earnings quality. TaiwanBusiness and Taichung (especially) have a better matching of underlying Income to OPEX too.

Taiwan seems to periodically awaken to consolidation noise and initiatives. The Banking Sector is recognised by all and sundry as ripe for rationalisation given its fragmented status. Shares of late have had a consolidation tailwind.We take a look at the Q119 results at Taiwan Business Bank (2834 TT) , Taichung Commercial Bank (2812 TT) , E.Sun Financial Holding Co (2884 TT) and Far Eastern Intl Bank (2845 TT).Overall, we see improvements in Liquidity, Capitalisation, Asset Quality, Profitability, and Efficiency. This explains the high PH Scores on offer. Profitability though has been boosted by sharply reduced Loan Loss Provisions as Asset Quality has improved as well as trading gains. However, the Achilles Heel has been the rampant growth of Interest Expenses on Liabilities which has outpaced Interest Income on Assets. We have seen this in China too. This partly explains the reaching for other aforementioned levers to protect the bottom-line.  We favour Taiwan Business and especially TaichungCommercialBank over E.Sun and FarEastern mainly on account of greater earnings quality. TaiwanBusiness and Taichung (especially) have a better matching of underlying Income to OPEX too.

Taiwan Banks: Trading Thoughts on Four Names

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/18958" target="_blank" data-smartkarma-citation="entities:18958:1">Taiwan Business Bank (2834 TT)</a> ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental trends from our quantamental value-quality gauge.We would caution that the asset quality is not as crystalline as the reduced NPL ratio indicates given that rising impaired loans represent 5x NPLs. We await greater granularity from further analysis of the NPL breakdown by category. Having said that, the impaired loan ratio is still pretty low and manageable at 1.48% while Provisioning -on an upward trend- should reflect increasing non-NPL but impaired assets.Results were markedly impacted by a palpable reduction in Loan Loss Provisions which will be a response, we assume, to lower problem loans or NPLs as well as very strong recoveries (net negative charge-offs), rather than higher impaired Loans.In addition, the trend in Efficiency may not be as good as it appears to be given that OPEX expansion outpaced "Underlying Income" expansion. The latter was impacted by a sharp increase in Interest Expenses from Deposits especially, as well as a tepid Fee Income performance. While Interest Income from non-credit assets rose robustly, the core Interest Income on Loans firmed by 11.4% YoY, for a YoY gain of NT2.3bn, despite a modest decrease in the Loan portfolio in such a low margin environment. Interestingly, Loan recoveries also saw a NT2.3bn gain.Valuation is quite appealing given the tailwinds of a high PH Score. FV, P/Book, and Earnings Yield stand at 6%, 0.9x, and 10%, respectively.

Taiwan Business Bank (2834 TT) ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental trends from our quantamental value-quality gauge.We would caution that the asset quality is not as crystalline as the reduced NPL ratio indicates given that rising impaired loans represent 5x NPLs. We await greater granularity from further analysis of the NPL breakdown by category. Having said that, the impaired loan ratio is still pretty low and manageable at 1.48% while Provisioning -on an upward trend- should reflect increasing non-NPL but impaired assets.Results were markedly impacted by a palpable reduction in Loan Loss Provisions which will be a response, we assume, to lower problem loans or NPLs as well as very strong recoveries (net negative charge-offs), rather than higher impaired Loans.In addition, the trend in Efficiency may not be as good as it appears to be given that OPEX expansion outpaced "Underlying Income" expansion. The latter was impacted by a sharp increase in Interest Expenses from Deposits especially, as well as a tepid Fee Income performance. While Interest Income from non-credit assets rose robustly, the core Interest Income on Loans firmed by 11.4% YoY, for a YoY gain of NT2.3bn, despite a modest decrease in the Loan portfolio in such a low margin environment. Interestingly, Loan recoveries also saw a NT2.3bn gain.Valuation is quite appealing given the tailwinds of a high PH Score. FV, P/Book, and Earnings Yield stand at 6%, 0.9x, and 10%, respectively.

Taiwan Business Bank: Catching the Sun's Rays

Taiwan

Taiwan Business Bank provides financing services to small and medium businesses. The Bank invests in government bonds, short-term bills, corporate bonds, and financial debentures.  Taiwan Business Bank also offers services of remittance, acceptance, guarantee, foreign exchange, and letter of credit.

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Taiwan Business Bank (2834 TT)

Taiwan Banks: Trading Thoughts on Four Names

Taiwan seems to periodically awaken to consolidation noise and initiatives. The Banking Sector is recognised by all and sundry as ripe for...

Paul Hollingworth

Taiwan Business Bank: Catching the Sun's Rays

Taiwan Business Bank (2834 TT) ticks most of the boxes with a PH Score of 10. This is a top decile performance globally in terms of fundamental...

Paul Hollingworth

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