Cathay Financial, Taiwan's top financial holding firm, posted a forecast-beating three-fold rise in quarterly profit on Tuesday thanks to strong local stock returns and better net interest margins.
Prospects for Cathay Financial, parent of Taiwan's No.1 life insurer, and local rivals are picking up as the potential downside from the U.S. subprime mortgage crisis should be limited and Taiwan stocks are expected to climb further in the fourth quarter, analysts said.
Cathay announced on Aug. 24 that it had about T$3.3 billion
($102 million) in exposure to the slumping U.S. subprime mortgage market, but said at the time that it had not yet incurred any losses on the investments.
It was not expected to announce any additional subprime exposure, analysts said. Financial stocks, led by Cathay, will likely perform through Q4. Market consensus is that the main index will hit the 10,000-point mark, benefiting financial shares, said Andrew Wang, who manages T$10 billion for Prudential Financial.
Wang said he was considering buying Cathay and other financial shares.
Cathay reported a net profit of T$12.26 billion (US$376 million) for its third quarter through September, according to Reuters' calculations based on the company's nine-month profit of T$32.86 billion. The result topped the T$10.2 billion median forecast of five analysts polled by Reuters, and compared with profits of T$4.09 billion a year earlier and T$10.54 billion in the second quarter.
Cathay's insurance arm, with T$2 trillion in client assets to invest, reaped robust investment gains.
Cathay had said it bought Taiwan stocks when the broader market hit a recent low of 7,987.61 points in August. The main index has staged a 21 percent rally since then, closing at 9,639.83 on Tuesday.
Cathay will likely benefit further from its stock portfolio, as the fourth quarter is typically the best-performing season in Taiwan, helped by stronger demand in the run-up to the Christmas shopping season.
Net interest margins for Taiwan's banking sector, Asia's fourth-largest, have improved steadily after the central bank raised interest rates gradually since late 2004.
In the latest move, Taiwan's central bank last month raised interest rates for the 13th straight time to a six-year high, as it aimed to fend off inflation and attract fund inflows.
Further rate increases are expected.
Banks have improved their interest margins because many have raised lending rates in line with the central bank's hikes, while raising interest rates for depositors at a much slower pace.
Cathay's smaller rival Fubon Financial, which owns Fubon Bank, had said its net profit from January to August soared 182 percent to T$13.5 billion compared with a year earlier.
But some analysts warned there could still be risks ahead for Cathay and its rivals if the U.S. credit market worsens.
Federal Reserve Board Governor Kevin Warsh said on Friday that credit markets were on the mend after August's turmoil, but some sectors remained sickly and the Fed was wary of a fallout hurting economic growth.
Cathay is controlled by the Tsai family, one of Taiwan's three wealthiest families. Investor concerns over Taiwan's consumer credit crisis have eased since the crisis peaked in late 2006 and banks had already made heavy provisions against possible bad debts, analysts said.
Shares of Cathay ended 1.18 percent lower on Tuesday, lagging a 0.8 percent fall for Taiwan's benchmark index. In the July-September quarter, Cathay's stock inched up 0.6 percent, lagging a 6.7 percent rise in the main index, as worries about the global credit crunch weighed on shares of financial companies.