We adjust our 2010E-2012E EPS estimates by -35% to 49% to reflectdeferred tax asset adjustment, lower corporate tax rate, lower TWSEturnover assumptions and higher loan loss recovery, and also revise our12-m target prices by -25% to 11%. We now prefer private-sector bankcentricFHCs for their earnings stability. Our top pick in the sector is TaishinFHC (2887.TW, CL-Buy) for its great turnaround, consistent execution, andearnings stability. We suggest investors to avoid Fubon Bank HK (Sell),ShinKong (Sell), and First FHC (Sell).
Spread business remains challenging; further NIM expansion is pendingdepending on if/when loan yield starts to pick up. Credit tightening in Chinais contributing to higher loan growth, particularly for the SME sector. Feebasedproducts have shown robust growth in the past few quarters, butwhether this growth is sustainable largely depends on the globalinvestment momentum. Credit cost, however, has surprised us positively, asnew NPL influx is low and loan loss recovery appears strong andconsistent. Coverage ratio at most banks has reached above 80%, implyingfurther provisioning for implementation of Article 34 should be limited.
We believe earnings volatility for life insurers is likely to continue in thenear term, given the rising currency/equity market fluctuation, leading tobook value erosion risk. On our estimates, ShinKong appears morevulnerable than others. We believe the recent policy change that nowallows the inclusion of unrealized real estate gains in capital adequacycalculations could mitigate the re-cap risk. On the other hand, shouldinterest rates start to rise, Cathay would be the key beneficiary, in our view.
Securities brokers underperformed the TWSE and TWSE banking subindexby 18% and 12% ytd, despite abundant liquidity in the market (asevidenced by 19% yoy passbook savings deposit increase as of Apr 2010).
Looking forward, we believe increasing global equity market volatil