國泰金 / 中信金 / 富邦金 / 元大金 / Taiwan bank

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BNP Taiwan bank 銀行產業研究報告

Taiwan central bank took more aggressive measure on inflation. Not only did it hike benchmark interest rate to 3.675% but also raised the RRR by 1.25%. TW banking system will lock up estimated additional TWD200b in reserve and push upTaiwan banks’ funding cost. Margin expansion might be difficult in 2H08. Top Pick: First FHC; TP TWD39.5.

Chinatrust FHC 2891 TT: 中信金

We reduce our target price to TWD26.70. June earnings are under risk due to corporate-client defaults, for whichChinatrust should book an additional TWD1b in provision charges (40% of total exposure). We are more bearish thanconsensus as we expect that a less-favorable macro environment may increase credit costs in 2H08. Maintain HOLD.

Cathay Financial Holding Co. (2882.TW 國泰金 - TWD 66.00) 1-Overweight

We have adjusted our 12-month target price on Cathay FHC shares from NT$97.7to NT$94.7, to reflect the stock going ex-dividend today. The company today paid out a cash dividend of NT$2.5 and stock dividend of NT$0.5 per share.

Fubon Financial Holding Co. Ltd. (2881.TW 富邦金 - TWD 30.30) 2-Equal weight

We have adjusted our 12-month target price on Fubon FHC shares, from NT$35.2 to NT$33.7, to reflect the stock going ex-dividend today. The company today paid out a cash dividend of NT$1.5 per share.

Yuanta Financial Holding Company (2885.TW 元大金 ):

We believe the share price will rise in absolute terms over the next 60 days.
This is because the stock has traded off recently, making short term valuation much more compelling. The stock is oversold over worries about agency-backed MBS holdings. Potential catalysts for share price rebound is the company's announcement of a share buyback program (3.6% of outstanding shares) and renewed talk of TSE listing. We estimate that there is about a 70% to 80% or "very likely" probability for the scenario. Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario.

 

Taiwan Financials 台灣金融 產業研究報告

Sizing Up Fannie and Freddie Exposure

 

What's new — Taiwan’s financial index fell 8.5% over the past two days, following renewed concerns about exposure to Fannie Mae and Freddie Mac. The FSC held a press conference to announce total exposure of NT$538.6bn for life insurers and NT$79.4bn for banks, representing either MBS backed by FNM/FRE or bonds issued by FNM/FRE.

Exposure to debt, not equity — We surveyed financial institutions under our coverage universe; based on our preliminary findings and disclosures made to the TWSE, most of the exposures are in debt/fixed income instruments and not in FNM/FRE equity. Moreover, the bulk of this exposure is in MBS backed by FNM/FRE over bonds issued by FNM/FRE. Given the long-term nature of these assets, it not surprising that life insurers have much more sizeable exposures relative to either banks or brokers. Outside of Cathay and Shin Kong, Fubon and to a lesser degree Sinopac are also worth highlighting based on absolute exposure.

Gauging the risk of write-downs — Taiwanese regulators and companies themselves do not expect to write down these investments, and we tend to agree with this, taking into account backstop measures recently imposed by the US government. Our US analyst Bradley Ball indicated that the US administration and congress have expressed support for these GSEs and he expects that they will also be willing to provide supportive measures if necessary to boost market confidence. Also, for Taiwanese financial institutions, most if not all of these investments are classified as held-tomaturity and as such write-downs will only occur if sold at a loss or assets are deemed as impaired by accountants. 

 

Bottom-fishing ideas — With recent pullback, sector P/B valuations are now back to pre-election levels at –2 SD below mean, and we already see value at these levels. However, negative sentiment across markets globally and risk of retail long margin unwinding in Taiwan remains an overhang on valuations in the short-term. We continue to focus on bargain hunting what we consider the best franchises: Chinatrust, First, Cathay, and Yuanta are our top picks.

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GS :

Among all major banks under our coverage universe, we identify Fubon Bank HK (636.HK, Neutral), First FHC (2892.TW 第一金, Neutral), Mega FHC (2886.TW 兆豐金, Neutral) and SinoPac FHC (2890.TW 永豐金, Neutral) as fitting the criteria and might see their credit cost increase substantially in 2H2008 and into 2009, should the macro-economic headwind continue. Despite the sharp valuation correction of these banks, we suggest investors avoid these names now and wait for more clarity on the asset quality issue before re-loading up these banks.

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Cathay FHC 2882 TT 國泰金

Cathay is arguably one of the greatest overseas pioneers among Taiwan’s financial holding companies: in Vietnam, it has a 50% stake in the country’s first banking joint venture; and its insurance arm — Cathay Life — is unique among Taiwan players in its exposure to mainland China. While earnings from overseas are still small, guidance is for steady expansion.

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Cathay Financial Holdings (2882.TW) 國泰金

We believe the share price will rise in absolute terms over the next 60 days.
This is because the stock has traded off recently, making short term valuation much more compelling. The stock is oversold over worries about agency-backed MBS holdings. Potential catalysts for share price rebound are reduced worries about GSE debt subsides and bounce in Taiwan equity market.

We estimate that there is about a 70% to 80% or "very likely" probability for the scenario.

Estimated probabilities are illustrative and assigned subjectively based on our assessment of the likelihood of the scenario.

 

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T aiwan Financials : Growing corporate asset quality concerns

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Fubon Financial Holdings : Reducing EPS on Lower Market Income and More Conservative ’09 Outlook

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Yuanta FHC (2885.TW) NT$19.95
Negative News – Estimates Unchanged
Another ITC-related breach of trust charge; N/T weakness likely

 

News
According to the Jul 26 Economic Daily, chairperson of Yuanta Sec, Judy Tu (Rudy Ma’s wife), is being investigated by the Taipei District Prosecutors Office on an alleged charge of breach of trust and contravening the Securities and Exchange Act. Tu is accused of hiding a sizable loss that Yuanta ITC (Investment Trust Co.) suffered during the 2005 bond fund crisis, and approving Yuanta Sec’s purchase at NT$57/share of Yuanta ITC’s remaining shares, of which the Ma family and its affiliates held a majority. Tu and the Mas allegedly earned c.NT$1bn profit from the transaction. But Yuanta Sec claimed on Jul 27 that it had handled the bond fund crisis issue following the regulator’s guidance, incurring a NT$248mn loss, well below the investment loss represented by the stake that it held in Yuanta ITC (c. 20% stake pre-deal). According to Yuanta FHC, Yuanta ITC’s fair value was appraised in 2005 by two independent firms (Ernst & Young and ChianHe), and the transaction price of NT$57 per share was at the lower end of the suggested range (NT$57-NT$72).

Analysis
We think this is very similar to the investigation of Polaris Sec in May. We believe the impact on core business could be limited, as prosecutors have made charges only at the individual level (i.e., the chairperson) so far, not at the company level; hence, it appears to us the regulator will not penalize Yuanta FHC or its subsidiaries over these charges. We do not expect a substantial customer exodus as a result of this charge. However, in terms of corporate governance, given that the Ma family was the largest shareholder of Yuanta ITC and controlled Yuanta Sec’s board, there is an apparent conflict of interest in the transaction.

 

Implications
We expect this corporate-governance-related news to have a negative impact on Yuanta’s near-term share price performance. We await commentary from co. mgmt for more details. The stock is now trading at 1.3X 09E P/B and 14.8X P/E. Maintain Neutral; our 12m TP is unchanged.

 

Chinatrust FHC （中信金）

Second half earnings to disappoint

Event
Investors may be tempted to revisit Chinatrust FHC’s stock on the basis of the price chart and apparently strong 1H08 earnings. But this would ignore what we see as a relatively bleak 2H08 earnings outlook and lack of upside catalysts. We maintain our against consensus Underperform call.

Impact
Macquarie vs consensus. Figure 3 in this report demonstrates that the sell-side consensus regularly builds in overly optimistic earnings forecasts for Chinatrust. Our new forecasts are 12% below the consensus for 2008 and 17% below for 2009. Our call is one of just two negative ratings of the 20 analysts who cover the stock, according to Bloomberg. 

 

Strong YTD preliminary earnings due to non-operating revenues.
Chinatrust’s NT$9.3bn in preliminary 1H08 earnings appears strong, but much of this was due to non-operating revenue streams that are not set to repeat in 2H08. These earnings streams more than offset the negative ‘one-off’ losses from SIV write-downs and losses related to Everskill. This includes gains related to the Mega (2886 TT, NT$21.95, Underperform, TP: NT$19.00) stake, part of which appears set to reverse in July. 

 

2H08 operating earnings outlook is bleak. NIMs continue to tighten along with the drop in unsecured consumer loans, which is no surprise. But interest revenues and asset quality of foreign currency lending is also weakening, in our view. Trade-related forex businesses could also be poised for a slowdown. We expect wealth management fees to remain weak in 2H08, and macro concerns do not give confidence in a major increase in credit card fees.

 

Earnings revision
We cut our earnings forecasts by 18% for 2008 and 17% for 2009.

 

Price catalyst
12-month price target: NT$20.07 based on a P/BV methodology.

Catalyst: Weak operating and non-op earnings outlook in 2H08, Mega overhang, potential asset quality issues, especially at US subsidiary.

Action and recommendation
Upside catalysts lacking. We maintain our Underperform rating on Chinatrust. Assuming only a mild slowdown and moderate pick-up in credit costs over the next six months, the downside appears to be relatively limited.

However, upside catalysts are lacking given a dampened outlook for consumer sentiment. Also, we expect a hiatus in the longstanding speculation of a ‘major foreign investment bank’ taking on a minority stake.

We remain cautious on Chinatrust’s profitability relative to valuations given the weakening macro outlook for Taiwan, Inc. as well as the specific downside risks of the Mega stake and asset quality at the US subsidiary.

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Cathay Financial (2882.TW)

Cathay FHC goes ex-dividend today (July 30), paying a NT$2.5 cash dividend and a 5% stock dividend. As a result, we are making commensurate changes to our fully diluted EPS forecasts (from NT$1.25 to NT$1.19 for 2008E, and from NT$3.11 to NT$2.96 for 2009E) and adjusting our target price from NT$77 to NT$73, still maintaining our 12-month SOTP valuation basis. We maintain our Buy rating on Cathay FHC.

 

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Taiwan Financials
QFII Buying & Selling: Bearishness Peaked in July?

 

QFII ownership down to 11.6% — Foreigners remained net sellers for the 3rd consecutive month in July, with QFII ownership down to 11.6% from this year’s high of 13.2%. Since May, foreign investors have sold NT$38.3bn worth of Taiwanese financial stocks with selling accelerating to NT$21.4bn in the month of July, which is the 3rd worst monthly outflow for the sector since 2003.

Market proxies sold down the most — Given increased concerns on markets, Cathay and Yuanta were not surprisingly the top QFII sells over the past 3-months since May, followed by Chinatrust, Mega, E. Sun, CDIB, First, and Taishin. On the other hand, top QFII buys the past 3 months were Taiwan Business Bank, Taiwan Coop Bank, China Life (Taiwan), and Ta Chong Bank.

Operating environment getting tougher — Outside of a capitulation on flows, we see rising risks on sector fundamentals. With banks kicking off 2Q08 analyst briefings in August, we can expect a more cautious tone from management into 2H08, taking into account impact of tighter monetary conditions on NIM and weaker investment climate on wealth management and trading results. Concerns on SME exposure have also increased, although it might be too early to detect an actual deterioration in credit quality on this segment.

Valuations finding a bottom — With the latest pullback, value is re-emerging.
Despite overhang on sentiment and fundamentals, we could see some bottomfishing here or at least investors looking to close short positions, with sector P/B and QFII ownership back to pre-election levels. In the ST, we expect a seasonal push in earnings into 3Q08 could be a catalyst, on recognition of cash dividend income, especially if markets bounce. Longer-term, a further recovery in valuations will likely depend on progress on cross-strait initiatives.

Sector strategy: pushing the two Cs — We continue to advise bargain hunting companies with the best franchises. On this basis, we suggest looking at Cathay trading at 1x P/EV on the view that concerns on its overseas investments are overdone. We also like Chinatrust which is now trading near 5-year trough at 1.5x 1-year forward P/B, given strong domestic bank franchise.

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Chinatrust FHC 2891 TT 中信金

 

We revise TP to TWD24.54 due to ex-dividend. Chinatrust experienced softness in both interest income (down 6.9% YoY) and fee income (down 6.5%YoY) in 1H08. We are more bearish than consensus as we expect that a less-favorable macro environment will continue to weigh on Chinatrust’s core business. Maintain HOLD.

 

Softness from earnings continues
Details of Everskill’s TWD2.46b loan default
Chinatrust FHC clarified that Everskill Technology (6232TT) defaulted on its payments under loan obligations as of 25 June. According to Chinatrust management, Chinatrust FHC's total exposure to Everskill is TWD2.46b. Total loss was at TWD2.1b (85% of exposure). Chinatrust added TWD1b to June's provision charge and covered the balance TWD 1.1b through surplus general reserves. Chinatrust acquired Fujitsu’s accounts receivable from Everskill as a collateral for A/R financing and had assumed that credit risk of Fujitsu was low.(Fujitsu is the major buyer of Everskill’s PC casing) But, Fujitsu’s accounts receivable was inflated by Everskill management. Chinatrust has started legal action against Everskill management regarding possible corporate fraud event.

2Q08 earnings: 11% down q-q and 29% down y-y
Chinatrust reported 2Q08 earnings of TWD4.4b (EPS: TWD0.49), representing a decline of 11% q-q and 29% y-y decrease due to lower capital market income and higher provision expense. Several key takeaways: 1) Net interest margin dropped to 1.98% (17bps drop q-q and 10bps decrease y-y) and we expect margin pressure will continue into 2H08; 2) Excluding one-time Visa/Master card share disposal gain and Mega dividend (TWD 3.05b in total), Chinatrust could experience steeper earnings drop in 2Q08; 3) Fee income also dropped 6.5% due to weaker global capital market. To summarize, we see softness across different areas including interest income (margin decrease), fee income drop (bear market effect) and higher provision expense (Everskill’s loan default and more provision from US subsidiary).

Maintain HOLD; target price adjusted to TWD24.5
We revise our target price to TWD24.54 from TWD26.70 on Chinatrust’s TWD0.8 stock dividend and TWD0.2 cash dividend. Our TP is based on 1.5x 09E P/BV which is closer to low end of historical valuation range(1.0xP/BV - 2.2x P/BV). We maintain our neutral stand on Chinatrust fundamentals on weakening net interest margin and a less favorable macro environment. Though Chinatrust is trading close to trough valuation, we don’t foresee major changes in Taiwan consumer business in the near term.

 

Chinatrust Financial Holdings (2891.TW 中信金 研究報告 高盛)

 

Chinatrust unveiled details of its 2Q08 operating result on Aug 8. Its flagship banking subsidiary reported a 17bps qoq NIM decline and 28% qoq WM fee income contraction in 2Q08, resulting in 48% drop in qoq core PPOP (excluding NT$2.2bn VISA IPO gain & cash dividend income from Mega FHC investment). In addition to the NT$1bn it provided for the highprofiled Everskill default case, its US subsidiary bank also saw noticeable asset quality deterioration with a qoq 0.9% NPL ratio increase with only a 63% coverage ratio now. We note c. 80% of its US loan book is related to the commercial property market.

 

ML：Chinatrust (2891 中信金)

Transfer of coverage. Concerns overly punished; Buy

We cut our Chinatrust 2008-09E EPS forecasts by 12% and 9% to reflect the slower macro recovery YTD, and we cut our PO by 6% to NT$33/shr. Chinatrust’s 1H08 earnings recovery was one of the best among Taiwan banks. We remain positive on government opening policies on macro and banking reform, and believe that Chinatrust’s recent 35% share price correction overly reflected concerns on corporate loan and USA subsidiary earnings – both of which we believe are manageable.

Higher protection on corporate loans
Management indicated that its corporate loan quality is stable, but we will be watching the portfolio as it has some exposure to higher risk borrowers. We don’t expect a systematic risk on corporate loan quality and view Chinatrust’s protection on the loans as relatively adequate – loan loss reserves for corporate loans is ~NT$4bn (coverage ratio > 100% or 90bp for total corporate loans). Overseas SME loans are also protected, by either parent company guarantees or higher deposits.

 

Chinatrust USA: Rising credit losses, but unlikely to fail Chinatrust USA has made an extra provisions of US$21mn (NT$672mn) in June for its commercial property loans. We forecast this US bank will see a loss of NT$471mn in 2008E and break even in 2009E. A conservative loan-to-value ratio (57%) and a high Tier 1 CAR ratio (11%) should provide buffers for potential losses. Chinatrust parent bank should be able to fully self-support its US subsidiary’s balance sheet without external fundraising needs.

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Fubon FHC (2881.TW 富邦金)
Buy: Safe Haven with Seasonal Push in Earnings in 3Q08

Maintain Buy / Low Risk (1L) — We expect better earnings momentum into 3Q08. Although XCCB deal adds little to bottom-line, we expect it continues to enjoy a first mover premium vs. peers in entering China. We are lowering our target price to NT$36 moving to mid- from peak-cycle P/B and roll to 2009E.

Nothing exciting in 2Q08 — Net profit up 8% qoq in 2Q08, with gains in insurance offsetting weakness in brokerage. Banking profits steady, down only 2% qoq, with corporate/credit card fees making up in part for decline in wealth management. Asset quality continues to improve, but mgmt more cautious in growing SME, increasing frequency of checks and migrating towards largerscale
clients. We lower EPS by 15% in 2008E and 5-8% in 2009-10E.

Seasonal push into 3Q08 — Despite risks to NIM and wealth management into 2H08, we see profits accelerating into 3Q08 as it recognizes NT$2.6bn in cash dividend income and possibly a reversal of MTM losses on equity investments. Also, we see better contributions from Fubon Life as FX hedging expenses decline and Fubon ITC as residual impact of bond fund issue eases further.

CDO/SIV exposure — CDO/SIV write-downs slowed down to NT$120m in 2Q from NT$702m in 1Q. Net CDO/SIV exposure down to NT$10.9bn or equivalent to 7% of FHC equity, of which only NT$140m is in SIV/sub-prime CDO and the rest are in corporate CDOs.

XCCB transaction update — CBRC approval expected mid-September 2008. Both Taiwan and HK regulators have already approved the deal.

Taiwan Financials 台灣金融業研究報告
Prefer Insurers over Banks in the Short Term

Looking for ST trade opportunities? — Within the financials space, we expect short-term market trends to favor insurers over banks. While we expect insurance companies to see an immediate benefit from markets bouncing and US$ strength, we fear banks will likely face a tough operating environment.

Time to revisit insurers — We expect insurers are leveraged proxies to a recovery in markets and we see incremental improvements in earnings into 3Q08. With the recent rebound in the US$, we expect FX and hedging expenses to slow down even more significantly, and we could even see FX gains. In addition to reversing MTM losses on investments as markets bounce, we also reiterate that cash dividend income provides a seasonal push to earnings into 3Q08.

Banks are cheap, but 2H08 outlook more challenging — We expect banks to be better beneficiaries of improved cross-strait and reform, but initial indications from 2Q08 analyst briefings suggest the sector is already starting to feel headwinds on NIM as monetary tightening pressures funding cost up and on wealth management amid tighter regulatory oversight and weak investment climate.

Although we could see some relief as inflationary pressure eases into 2H08, positive impact may not reflect until 4Q08 or 1Q09 at the earliest.

Sector strategy: go for best franchises — With sector P/B valuations back to pre-election levels, we continue to see companies with the best franchises entering bargain-hunt territory. Among the insurers, we like Cathay with the stock trading at the low end of its historic range at 1.1x 1-year forward P/EV, but Shin Kong provides a higher beta play trading at 0.6x 1-year forward P/EV. We also look at Fubon, given sizeable exposure to insurance and broking. Among the banks, we still like Chinatrust, given its strong franchise and attractive valuations; however, tough operating results will be an overhang in the short term.

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HSBC：Fubon FHC (2881)
Upgrade to OW: resilient results, attractive valuations
>Strong recovery in TPFB has supported the group to report a resilient set of results for 1H08
>Management believes credit risks are under control and profits of Fubon Life are likely to rebound in 2H08
>Trimming target price to TWD34.80 from TWD35.80 but we believe the share price adjustment has been exaggerated; upgrading rating to Overweight from Neutral

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Fubon FHC

• We update our model following Fubon FHC’s 2Q08 results conference held
  on 14 August. We have moderately decreased our earnings expectations for
  2008–09 and we introduce our 2010 forecasts in this report. We maintain our
  Underperform rating given the downtrend in the credit cycle that we expect to
  emerge in 4Q08–2009.
  

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Taiwan: Financial Services

• We retain our cautious view in the sector, and suggest investors continue to
  (1) short SME-focused banks including First FHC (2892.TW, Sell, Conviction
  List) and FBHK (0636.HK, Sell), as we expect credit costs to inevitably rise
  given the asset quality cycle; (2) avoid companies associated with the bribery
  investigations given uncertainty of future business development. For L/T
  investors who can bare S/T volatility, we suggest a focus on relatively betterquality
  names including Cathay FHC (2882.TW, Buy).
  

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Cathay Financial (2882.tw 國泰金)
Earnings in Line but MTM ; Equity Losses Larger than Expected

• We have an NT$74.20 target
  price for Cathay and retain our Overweight rating. The
  core insurance business of Cathay, and the business
  that underpins the long-term value of the company,
  continues to perform in an increasingly difficult
  macroenvironment. However, the company did
  experience a negative balance sheet adjustment due to
  the weak Taiwan stock market. Ongoing market
  weakness remains a short-term risk for Cathay. Over
  the long term, we expect Taiwan’s equity market to
  recover, reversing recent losses.
  

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Taiwan Financials Valuation Pack 台灣金融業研究報告
Finding Support at Trough Levels

Top picks — We continue to suggest investors to stick to the best franchises for now. On the insurance side, Shin Kong is cheap, but we prefer Cathay from a defensive standpoint. Although Chinatrust owns the best franchise among banks, First provides safety against US sub-prime and recent regulatory scrutiny on M&A transactions. Yuanta remains a good proxy to anticipate a bounce.

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Chinatrust FHC 2891 TT 中信金
Adjusting EPS and target price due to stock dividend

Chinatrust FHC went ex-dividend today (Sep 1), paying a NT$0.2 cash dividend and 8% stock dividend. We are making commensurate changes to our fully diluted EPS forecasts (from NT$1.81 to NT$1.68 for 2008E, and from NT$1.93 to NT$1.78 for 2009E). Our 12-month target price changes to NT$24 (from NT$26), and we maintain our 12-month SOTP valuation basis. We maintain our Neutral rating on Chinatrust FHC.

Taiwan banks 台灣金融業

Mortgage/construction loans - more is not better

Event
Last week, the Executive Yuan said it plans to lift the 30% lending cap on mortgages and construction loans as part of its fiscal expansion policies. While the Financial Supervisory Commission today says it currently has no plan to change the regulation, we believe it is worth taking an overview on the banks’ exposure to the mortgage and construction loans.

 

Outlook
Stripping out construction loans, 32% of bank lending in Taiwan is made up of mortgages. It does not pay, we believe, for the banks to have such a high concentration to such a low-yielding loan segment. Credit costs may be low, but we estimate banks can generate only 4–5% ROE from mortgage lending, and this is without assuming an uptick in credit costs. 

 

A cynical mind might conclude that the mooted regulatory change is largely intended to boost property market sentiment with little thought for how this impacts the banking system. If the cap were really lifted, we believe banks would have flexibility to go beyond the 30% cap, but we would not expect a significant jump in mortgages as banks are more selective in terms of location and client base. Of course, the state banks might be forced to take up the flag of government policy, which we believe would only further dent the economics
of mortgage lending for all the banks and give us more reasons to underweight the sector.

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Taiwan financials

Over-excitement

 

Outlook
Just as we believe it was unreasonable to panic when the issues regarding Freddie/Fannie finally hit the Taiwanese headlines in July, we see no reason to be overly excited now.

We remain Underweight Taiwan financials and recommend taking profits on any further potential strength. We prefer insurers over banks given expected increasing credit costs in 4Q08 and in 2009. Cathay FHC and First FHC remain our top picks for investors who have to be in the space. We also like Shinkong for its option-like risk-reward characteristics, but we do not consider this to be a defensive name.

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LEH Bankruptcy Yet Another Cloud in the Search for a Bottom

 LEH bankruptcy another overhang — We believe LEH bankruptcy will be
another overhang on Taiwanese financials, despite historical cheap P/B
valuations. Although direct exposures appear limited, we are more concerned
on indirect impact as markets stay volatile. Moreover, counterparty and
contingent risks, particularly on WM products are still unknown at this point.
 Direct exposure appears limited — Based on a preliminary disclosure from
several companies, we think direct exposure to LEH appears manageable. The
FSC estimates total exposure by financial companies and retail investors of
NT$80bn (US$2.5bn), of which NT$40bn are in investments and trading
positions while NT$40bn are held by retail investors in the form of structured
products issued by LEH. At this point, only a few companies have given either
official or preliminary disclosure on LEH exposure and we have listed these
along with some comments on page 2 of this note and aim to update our list as
more disclosure is released.
 Counterparty and contingent risks unknown — With the exception of perhaps
Cathay, there has been little disclosure thus far on counterparty and contingent
risks, particularly on wealth management products structured by LEH and sold
via banking channels, and we anticipate more disclosure in the coming days.
Banks have always stated they act as third party distributors of these products
hence carry no liability; however outside of customer complaints, the obvious
risk is if the regulator will request them to ‘make good’ and guarantee investors
on losses related to these products.
 Indirect impact is bigger risk — We believe the indirect impact of recent
events, which has resulted in even more volatility in markets, is probably a
more significant risk vis-à-vis direct exposures. For life insurers, we are most
concerned on equity positions in the short-term, as these are mostly classified
as trading or available for sale. Although debt instruments account for a more
significant portion of investments, the bulk of these are classified as either held
to maturity or no active market. On the other hand, banks could see further
pressure on wealth management fees into 2H08 as markets remain jittery.

zakk

Taiwan: Financial Services

Detailed exposure to Lehman fallout; more impairment loss to come

Lehman fallout - TW life insurers have some exposure
Taiwan financial sub index dropped 6% on Sept 15 on concerns of the potential
fallout from Lehman Brothers (LEH), which had filed for bankruptcy (Chapter 11)
in the early morning of Sep 15, US time. Those equity / bond holders will have to
recognize marked-to-market (MTM) & impairment losses on their P&L, even if
they book those securities under the AFS (available for sales) or HTM (hold to
maturity) category.