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1、,FIGDiversified Financial ServicesEquity-TaiwanTaiwan FinancialsAnticlimax:RMB launch at year-end14 December 2012Bruce B.Warden*Analyst Taiwan Financial ServicesHSBC Securities(Taiwan)Corporation Limited,abcGlobal Research Onshore RMB business by year-end Deposits are likely to grow rapidly,butthe i
2、mpact will depend on whether theycan be put to use Focus on banks;near-term sectorpositive,but the market may loseinterest quicklyRMB to bring holiday cheer but raisesector questionsOnshore RMB by year-end.There has finally beenprogress on the ramp-up of onshore RMB deposit taking andother businesse
3、s in Taiwan.Bank of China earlier this weekwas designated the RMB clearing bank for the Taiwanmarket,and Taiwans CBC has scheduled its board meetingearlier than usual for 19 December(Wednesday).It is widelyexpected in the media and the market that they willannounce the start of RMB business at that
4、time,and weexpect the official launch by year-end.Lots of room to grow.RMB deposits in Hong Kong peakedat above 10%and are now 8.4%.We expect Taiwan to reachsimilar levels within 12-18 months,or possibly higher giventhe fact that there is a more natural flow of payments fromChina to Taiwan than to H
5、ong Kong.With Taiwan now atjust 0.37%of deposits,this leaves plenty of room to grow.This is a clear positive,but how positive depends not on thescale of RMB deposits,but whether banks will be able todeploy those funds at an adequate yield.Anticlimax keep looking ahead.The clearing scheme,+886 2 6631
6、 2868,.tw,was announced in August and the tentative start was then set,Todd Dunivant*Head of Banks Research,Asia-PacificThe Hongkong and Shanghai Banking Corporation Limited+852 2996 6599.hkView HSBC Global Research at:http:/*Employed by a non-US affiliate of HSBC Securities(USA)Inc,and is not regis
7、tered/qualified pursuant to FINRA regulationsIssuer of report:HSBC Securities(Taiwan)Corporation LimitedDisclaimer&DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix,and with theDisclaimer,which forms part of it,at 31 October,so we expect
8、 the year-end ramp-up of RMBbusiness to segue very quickly from celebration toanticlimax for investors,and we also expect the focus to turnto cross-Strait investment in the sector.Our preferred sectorpicks,which remain focused on private banks,are Chinatrust(2891 TT,OW),E.Sun(2884 TT,OW)and SinoPac(
9、2890 TT,OW);and the ongoing market rally should alsobenefit Yuanta(2885 TT,OW);however,we are concernedthat sector momentum could fade after the New Year.,FIGDiversified Financial Services14 December 2012Onshore RMB The market is anticipating the year-end launch of RMB clearing Rapid ramp-up of RMB
10、deposits could help tighten TWD liquidity The key question remains how RMB deposits can be put to work,abc,RMB hopes for year-endThe Bank of Chinas Taiwan branch this weekwas designated the sole clearing bank in Taiwanfor RMB settlements,putting Taiwan one stepcloser to the beginning of RMB deposit
11、takingand other transactions in the onshore(retail)banking market.This follows an unusual change in the schedulefor the CBCs December board meeting,which iswidely seen as a signal that it is planning toannounce the opening of onshore RMBbusinesses.The CBC will meet next Wednesday(19 December),and we
12、 expect that RMB businesswill officially begin either before year-end or inearly 2013.Hong Kong banks RMB deposits,Jan09 to present,The Hong Kong experienceWhile Hong Kong banks began accepting RMBdeposits in 2003,it was not until trade settlementand investment rules were liberalised that thegrowth
13、in RMB deposits really took off in 2010.When that happened,it took just 12-18 months forRMB deposits to jump from 1%of industrydeposits to just over 10%in 3Q11.With the perception that holding RMB is nolonger a one-way prospect,and with rate cuts inChina squeezing the onshore/offshore interest ratea
14、rbitrage opportunity,RMB deposits have sincedeclined over the past year;most recently fallingto 8.4%of Hong Kong deposits.,7006005004003002001000,R MB deposits(RM Bbn,lhs),%of total deposits(rhs),14%12%10%8%6%4%2%0%,Jan-09,Jul-09,Jan-10,Jul-10,Jan-11,Jul-11,Jan-12,Jul-12,Source:HKMA,HSBC2,FIGDiversi
15、fied Financial Services14 December 2012Taiwan banks:RMB deposits(OBU only),abc,252015,(RMBbn),RM B deposits(R M Bbn)RM B as%of total,(%of Taiwan deposits),0.400.350.300.25,0.20,1050,0.150.100.050.00,Aug-11,Sep-11,Oct-11,Nov-11,Dec-11,Jan-12,Feb-12,Mar-12,Apr-12,May-12,Jun-12,Jul-12,Aug-12,Sep-12,Oct
16、-12,Source:Central Bank of the Republic of China(Taiwan),HSBC,Taiwans expectationsBased on Hong Kongs experience,and assumingthat Taiwans regulator does not introduce someunexpected obstacles to the growth of RMBbusiness onshore,we might expect RMB depositsin Taiwan to rise to a similar level(8-10%o
17、f thetotal)within the coming 12-18 months.While Taiwan is unlikely to attract deposits frommainland depositors in the way that Hong Konghas done,Taiwan exports of intermediate andcapital goods to China drive an organic flow of(RMB)payments into Taiwan.With those trade,Data we have collected from a n
18、umber of majordomestic banks includes data for both the OBUsand the banks Hong Kong branches,so themarket share data is somewhat inexact,and onlythe best approximation possible with theincomplete available data.Nonetheless,it is clear that Mega,Chinatrust,Fubon and SinoPac have the largest RMBdeposi
19、ts.All are particularly notable because theshares implied by this data are far higher than thebanks respective shares of total assets.RMB deposits at selected major banks,flows offsetting the absence of a large mainlanddepositor,the proportion of RMB deposits inTaiwan may end up being similar to tho
20、se inHong Kong.,(RMB bn)Industry(CBC data)Mega,Classification(OBU only)(OBU&HKG),Sep-12%share ofcompaniessub-total17.96 70.77.00 27.6,Chinatrust,(OBU&HKG),6.00,23.6,RMB deposits only 0.37%nowWhile an 8-10%share of Taiwan deposits suggestsRMB deposits in Taiwan could grow to RMB420-520bn,current leve
21、ls are a small fraction of that.Total RMB deposits in the offshore banking units(OBU)of banks in Taiwan were just RMB19.3bnat the end of October.This accounted for just 0.37%of Taiwan deposits.Even with the Hong Kong,FubonSinoPacCathayHua NanE.SunTaishinFirst BankChang HwaShin KongCompanies sub-tota
22、l,(OBU&HKG)(OBU&HKG)(OBU&HKG)(OBU&HKG)(OBU&HKG)(OBU&HKG)(OBU&HKG)(OBU&HKG)(OBU&HKG)(OBU&HKG),3.402.801.541.251.001.000.930.320.1624.60,13.411.06.14.93.93.93.71.30.6100.0,deposits the total might still only be about 0.5%,Source:Central Bank of the Republic of China(Taiwan),companies,HSBC,leaving plen
23、ty of room for future growth.3,FIGDiversified Financial Services14 December 2012Taiwan banks:System-wide loan/deposit ratio,abc,140130120110100908070,Loan/deposit ratio(%),N IM,2.42.22.01.81.61.41.21.00.80.60.4,Jul-92,Jul-95,Jul-98,Jul-01,Jul-04,Jul-07,Jul-10,Source:Central Bank of the Republic of C
24、hina(Taiwan),companies,HSBC,Impact on TWD liquidityThe eternal problem in Taiwanese banking is theaccumulation of excess liquidity that has occurredover the past two decades and the resulting declinein TWD interest rates,spreads and margins.Thedecline in industry LDR is the prime example ofthe probl
25、em and potentially part of the solution.Deposits to flow from TWD into RMBIf a wave of fund flows out of TWD deposits intoin RMB deposits during 2013,we expect theTWD loan/deposit ratio to move higher,tightening up TWD liquidity and putting upward,the extent that the majority of Taiwanese banksbusin
26、ess is TWD denominated(83-84%overall),this would afford them the opportunity to re-pricemuch of their existing business,likely benefitingthe sectors underlying profitability.Re-pricing the existing businessIn fact,the linear regression of industry netinterest margins against the industry LDR(below)s
27、hows a very strong statistical correlation betweenthe two(0.7415%R-squared);and suggests thatnet interest margins should rise by nearly 8bp forevery 1%increase in the industry LDR.,pressure on TWD interest rates and spreads.ToTaiwan banks system-wide LDR versus estimated net interest margin,2.502.25
28、2.001.751.501.251.000.750.50,(NIM,%),y=0.0774x-5.3593R2=0.7415,(LDR%,78,80,82,84,86,88,90,92,94,96,98,Source:Central Bank of the Republic of China(Taiwan),companies,HSBC4,FIGDiversified Financial Services14 December 2012As we highlighted in our 28 November 2011 report(Taiwan Financial Services:The l
29、ong road back Initiating coverage),it is the potential to re-pricethe existing business that may be the most powerfuldriver of improved profitability for the sector in thepost-RMB world for Taiwanese banks.Whilespreads and margins on RMB business mayultimately be higher,the legacy TWD business willa
30、ccount for a much larger proportion of the wholefor a long time to come.As such,even smallimprovements may have a very substantial impacton overall profitability.A little bit goes a long wayIf,as the regression analysis suggests,the bankscan pick up 7-8bp on net interest margin for each1%increase in
31、 the LDR,even a 2-3%gain couldhave a dramatic impact on profitability when thesector has net interest margins barely above 1%.Caveats in the re-pricing thesisThis makes a very strong case for improved sectorprofitability,but with two major unknowns.First isthat data for the regression is from a deca
32、de wheninterest rates were almost only ever declining,soone should at least question whether margins willimprove on the way up as much as they declined onthe way down.Second,we need to consider thepossible impact of excess RMB liquidity if thosedeposits cannot easily be put to work.Reality trumps op
33、portunityRMB assets are a potential problemWhile we believe this argument is fundamentallycorrect and expect that tighter TWD liquidityshould help the banks re-price their existingbusiness and increase spreads and margins overtime,the ability to put RMB deposits to work isan important variable.We th
34、ink this is one of thekey issues that could make or break the case forcross-Strait banking.,Slightly better than the status quoIf,as in the early Hong Kong experience and in theTaiwan experience to date,the supply ofRMB-denominated assets remains limited and thebanks are unable to deploy their RMB d
35、eposits atadequate yields,excess RMB liquidity couldbecome a drag that offsets the benefits of tighterliquidity on the TWD side,either partly or entirely.The best-case scenarioAlternatively,if regulators and markets candevelop a reliable mechanism that allowsTaiwanese banks to use Taiwan-based RMBde
36、posits to fund RMB lending in China(on thebooks of the Taiwan bank),this could turn out tobe very positive.Such a solution would soak upexcess TWD liquidity and generate new growth inRMB lending.There is nothing on the table as yet,but such amechanism could take a variety of forms:These include the
37、possibility that China couldcreate a limited opening for Taiwanese banksto lend only to some borrowers,such as thedesignated“Tai-shang”companies;and Another model might be to open up a narrowgeographic market in which Taiwanese bankscan lend directly from their Taiwanbalance sheets.A programme to al
38、low Hong Kong banks to dothis in Shenzhen was announced in April 2012.The Qianhai Shenzhen-Hong Kong SpecialEconomic Zone is still just a pilot programme,and the RMB LDR for Hong Kong banks remainsat a low 15%,but this may eventually developinto a model for Taiwan to follow.The questionremains wheth
39、er things will develop quicklyenough for RMB business to boost 2013 results.That looks like a long shot from here,in our view.,abc5,110,FIGDiversified Financial Services14 December 2012Keep the focus on banks Near-term sector positive we prefer banks RMB breakthrough is long-term positive,but past e
40、xperiencesuggests a rapid anticlimax in share performance A surge in RMB deposits could weaken TWD,which would be atemporary benefit to life insurers,abc,Near-term sector positiveFocus on banksThe introduction of RMB clearing in Taiwan and thewide-spread introduction of RMB deposit tradesettlements
41、and other RMB products and servicesare clear positives for the financial sector,withbenefits for both banks and insurers.To the extentthat major developments are on the banking side,wethink the market will remain focused on the directbenefit to banks rather than insurers in the near term.Our preferr
42、ed picks are Chinatrust(2891 TT,OW),E.Sun(2884 TT,OW)and SinoPac(2890 TT,OW)among private banks.We also have OWratings on First Financial(2892 TT)in state banksand Yuanta Financial(2885 TT)in brokerage.Promise,delay,anticlimaxThe anticipated roll-out of onshore RMB depositsand other businesses is fo
43、llowing what hasbecome a fairly predictable pattern of promise,delay and anticlimax.If the final announcementcomes at the CBCs 19 December board meeting,we would expect the actual start of clearing andRMB services to be either the last week of 2012or the first week of 2013.,Taiwan financials:Relativ
44、e performance versus foreign ownership120Financials v s.TWSE relativ e performanceForeign%of market w eight100,9080,+1 st-dev,86.5Av g,80.8,-1 st-dev,75.17060,Dec-02,Dec-03,Dec-04,Dec-05,Dec-06,Dec-07,Dec-08,Dec-09,Dec-10,Dec-11,Dec-12,Source:Taiwan Stock Exchange,Taiwan Economic Journal,HSBC6,FIGDi
45、versified Financial Services14 December 2012Valuation Summary:HSBC Taiwan financials coverage,abc,Company,Ticker,Price Rating TargetTWD TWD,_ PE(X)_ _ P/B(X)_FY12e FY13e FY14e FY12e FY13e FY14e,_ Yield(%)_FY12e FY13e FY14e,_ RoE(%)_FY12e FY13e FY14e,FubonCathayE.SunYuantaMegaShin KongSinoPacChinatru
46、stFirst FHC,2881 TT2882 TT2884 TT2885 TT2886 TT2888 TT2890 TT2891 TT2892 TT,33.9531.5516.7515.3023.008.2512.6517.7518.00,UWUWOWOWNUWOWOWOW,30.0023.8120.0019.5024.635.5015.5023.9020.28,13.423.912.423.312.97.010.412.813.8,13.726.113.218.913.018.510.512.214.2,11.723.111.115.211.412.79.911.113.2,1.091.3
47、71.121.001.220.890.971.311.08,1.041.331.050.961.170.800.901.221.03,0.981.270.970.921.110.710.841.130.97,2.91.62.11.33.90.01.62.32.2,2.91.62.12.03.90.01.62.32.2,2.91.62.42.04.30.02.04.52.2,9.16.210.14.59.814.09.711.08.1,7.85.38.85.39.24.88.910.47.4,8.75.79.86.310.06.38.810.67.6,Average,14.4,15.6,13.3
48、,1.12,1.05,0.99,2.0,2.1,2.4,9.2,7.5,8.2,Source:Taiwan Stock Exchange,Companies,HSBC estimates.Price as of 13 December 2012,This would be four months from the initial clearingagreement announcement at end-August,and twomonths from the end of October,which was theearliest start date under the August a
49、greement.While the actual start of RMB services in thecoming weeks may sustain the current sector andmarket rally through year-end,we cannot help butthink that the excitement will quickly give way toanticlimax after the New Year.To the extent that the launch of RMB business isnow so widely anticipat
50、ed in the market and hasbeen since August we expect the actual launchto lead quickly to questions about the near-termcontribution and a new round of“Whats next?”as investors swiftly lose interest and turn to seekout the next big thing.On the horizonSetting aside questions about the contributionfrom
