Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

CTBC Financial Holding / Equity Bottom-Up

From &gt;500 lenders in Asia that we cover, <a href="https://www.smartkarma.com/entities/436" target="_blank" data-smartkarma-citation="entities:436:1">Ctbc Financial Holding (2891 TT)</a> originally caught our attention with a subpar PH Score (quantamental value-quality trend gauge). Based on a decade of back testing, shares of banks with high PH Scores (quintile 1) convincingly outperform the low scorers (quintile 5). And CTBC is borderline quintile 4-5.Further analysis shows a Group struggling on diverse fronts, with bank asset quality and funding cost pressure and with soaring claims and reducing premiums at Taiwan Life.Despite a robust top-line - supported by moderate credit growth and positive non-loan Interest Income, partly offsetting surging Funding costs- combined with benign operating cost-control, the slightly lower PT Profit was dragged down by rapidly rising Loan Loss Provisions (+164% YoY). However, Comprehensive Income paints a less favourable picture - down 79% YoY. SH. Funds fell YoY.Impaired Loans stand at 3.3x NPLs. While the Impaired portfolio eased somewhat, NPLs climbed by 14% YoY. The direction of travel is marked by gradually eroding Asset Quality coupled with reduced Liquidity and modestly deteriorating Capital Adequacy.As mentioned above, the main positive takeaway was OPEX restraint and an improved CIR. This is an important variable in our model. However, the other trends elsewhere are not supportive.<div class="content-highlight">Shares do not look cheap. Given the headline ROAE of 11.3%, P/Book stands at 1.3x: "Big Four" Chinese banks command much higher (mid-double digit) Earnings Yields than 9%. Franchise Valuation of 13% is well higher than the "Big Four" too for a similar Dividend Yield of 5.2%.</div>

From &gt;500 lenders in Asia that we cover, Ctbc Financial Holding (2891 TT) originally caught our attention with a subpar PH Score (quantamental value-quality trend gauge). Based on a decade of back testing, shares of banks with high PH Scores (quintile 1) convincingly outperform the low scorers (quintile 5). And CTBC is borderline quintile 4-5.Further analysis shows a Group struggling on diverse fronts, with bank asset quality and funding cost pressure and with soaring claims and reducing premiums at Taiwan Life.Despite a robust top-line - supported by moderate credit growth and positive non-loan Interest Income, partly offsetting surging Funding costs- combined with benign operating cost-control, the slightly lower PT Profit was dragged down by rapidly rising Loan Loss Provisions (+164% YoY). However, Comprehensive Income paints a less favourable picture - down 79% YoY. SH. Funds fell YoY.Impaired Loans stand at 3.3x NPLs. While the Impaired portfolio eased somewhat, NPLs climbed by 14% YoY. The direction of travel is marked by gradually eroding Asset Quality coupled with reduced Liquidity and modestly deteriorating Capital Adequacy.As mentioned above, the main positive takeaway was OPEX restraint and an improved CIR. This is an important variable in our model. However, the other trends elsewhere are not supportive.Shares do not look cheap. Given the headline ROAE of 11.3%, P/Book stands at 1.3x: "Big Four" Chinese banks command much higher (mid-double digit) Earnings Yields than 9%. Franchise Valuation of 13% is well higher than the "Big Four" too for a similar Dividend Yield of 5.2%.

CTBC Financial Holding: Trend Watch: Stress Cracks in Banking and Insurance