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1、,30.70,3.2,1,Index,56,FlashnoteFIGDiversified Financial ServicesEquity TaiwanUnderweight,Fubon FHC(2881 TT)UW:Provision overhang to year end,abcGlobal Research,Target price(TWD),30.00,YTD earnings led by Taipei Fubon Bank,though Fubon Life,Share price(TWD)Forecast dividend yield(%)Potential return(%
2、)Note:Potential return equals the percentagedifference between the current share price andthe target price,plus the forecast dividend yield,better than expected Earnings up 5%in 2012e;book value up 7.5-7.8%Underweight maintained,though target price up to TWD30,PerformanceAbsolute(%)Relative(%),1M-3.
3、62.7,3M3.63.8,12M-4.90.3,(from TWD26.67),implying 1%potential return,TAIWAN WEIGHTED INDEX,Fubon discussed YTD results,limited 2013 guidance and a number of other issues at its,RICBloombergMarket cap(USDm)Market cap(TWDm)Free float(%),2881.TW2881 TT10,037293,604,3Q analyst meeting on Monday,5 Novemb
4、er.As reported,YTD earnings were down17%,though on a recurring basis,earnings were down only about 5%.Management highlights.Management highlighted a 22%jump in net equity onunrealised gains,provision pressures,limited guidance and a marginally positive 2013based on a more positive global macro outlo
5、ok.Provision pressure.Management estimates provisions needed to meet regulatoryrequirements are TWD4bn,somewhat higher than our TWD2.5-3.0bn estimate(10 August,6 November 2012Bruce B.Warden*Analyst Taiwan Financial ServicesHSBC Securities(Taiwan)Corp.Ltd.+886 2 6631.twTodd Dunivant*Head of Banks Res
6、earch,Asia-PacificThe Hongkong and Shanghai BankingCorporation Limited+852 2996.hkView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,and is notregistered/qualified pursuant to FINRAregulations,2012 minor revisions post 2Q12 conference call).The scale is a sm
7、all disappointment and thetiming remains uncertain,though some impact is certain by year end.Forecast revisions.We are raising our 2012e earnings by 5%to TWD24.15bn and 2013eby 1%because of higher Fubon Life earnings(disposals)offset by a lower contributionfrom banking,as a result of higher provisio
8、ns.Unrealised gains at Fubon Life push bookvalue up by 7.5-7.8%.Underweight maintained.We maintain our Underweight rating and raise our SOTP-based target price from TWD26.67 to TWD30,implying a 1%potential return,includinga 3.2%yield.Our target price continues to include a 15%discount to our SOTP fa
9、ir value(TWD35.49)because of macro risks to life insurers interest rates,currencies,equities in addition to some acquisition uncertainty for Fubon specifically.Earnings momentum isalso likely to be a share price negative in the near term.,Issuer of report:,HSBC Securities(Taiwan)CorporationLimited,F
10、ubon Financial-Valuation snapshot,Disclaimer&DisclosuresThis report must be readwith the disclosures and,Year to Dec12/2011a12/2012e12/2013e12/2014e,P/BV(x)1.240.990.940.89,EPS(TWD)3.202.532.472.91,EPS grth(%)53.4(21.0)(2.4)17.6,PE(x)9.612.112.410.6,Div yld(%)3.13.33.33.3,the analyst certifications
11、inthe Disclosure appendix,and with the Disclaimer,which forms part of it,Source:Taiwan Stock Exchange,Company,HSBC estimates,(-,Fubon FHC(2881 TT)Diversified Financial Services6 November 20123Q12 resultsFubon reported YTD net profit of TWD22.8bn,down 27%YoY on a reported basis and consistent withpre
12、viously reported results.On a recurring basis,the result was down about 5%YoY.The decline waslargely due to lower earnings from Fubon Life(down 15%YTD)and Securities(down 66%YTD),withsome offset from Taipei Fubon Bank(up 39%YTD).Group net profit of TWD11.8bn for 3Q12 was clearly the near-term peak i
13、n earnings.High dividendincome in 3Q12 will give way to higher provisions and lower all around earnings in 4Q12.Fubon Financial-Net profit by subsidiary,abc,(TWDm)Taipei Fubon BankFubon InsuranceFubon LifeFubon SecuritiesNet other effectsFubon Financial,3Q111,9658533,3051,3336,61514,071,4Q111,271318
14、(732)(176)(1,644)(963),1Q123,9148261,1384924946,864,2Q123,25571843959(375)4,096,3Q123,6169477,598424(738)11,847,Q/Q(%)11.131.91,630.8618.6NA189.2,Y/Y(%)84.011.0129.9(68.2)NA(15.8),YTD1210,7852,4919,175975(619)22,807,Y/Y(%)38.6(9.7)(15.3)(65.5)NA(27.6),Source:Company data.Forecast revisionsWe are rai
15、sing our 2012e earnings by 5%to TWD24.15bn and the 2013e by 1%due to higher Fubon Lifeearnings offset by a lower contribution from banking.Our 2012e Fubon Life forecast is up about TWD1.7bn(20%to TWD9.8bn)based on the higher thanexpected YTD disposals gains.Declining FYP also leads to reduced sellin
16、g expenses and an 8%increase in 2013/14e Fubon Life earnings.Offsetting that are reduced 2012/13 bank forecasts.We increase 2012e provisions from the previousTWD1.6bn assumption to TWD2.1bn.This takes into account low YTD provisionsTWD765m net recoveries)against TWD2.75bn in likely year-end provisio
17、ns.We also addTWD1.25bn in provisions to the 2013 forecast to complete the TWD4bn total.Fubon Financial-Summary forecast revisions,FY09,FY10,FY11,FY12E,FY13E,FY14E,Net profit(TWDm)EPS(TWD)BVPS(TWD),19,9382.1022.17,19,9052.0923.06,30,5433.2024.67,24,1542.5331.12,23,5252.4732.59,27,6742.9134.50,Change
18、(%),Net profitEPSBVPS,-,-,-,4.94.97.8,1.11.17.5,4.24.27.5,Source:Company,HSBC.Upside and downside risksThere two larger risks to our forecasts as we look to year end are provisions and disposal gains:On the downside,Fubon may elect to increase the provision from the TWD2.75bn we have assumedto the f
19、ull TWD4bn for 2012e.2,Fubon FHC(2881 TT)Diversified Financial Services,abc,6 November 2012 On the upside,it might also expense only the TWD1.5bn related to IFRS compliance if the regulatorallows banks to put the reserves through equity instead of through the income statement.This soundslike a long-
20、shot.Another upside risk is if management elects to take more disposal gains at Fubon Life to manage 4Qearnings up a bit higher.Topics highlighted on the callGroup CEO Victor Kung highlighted a few issues on the call:Unrealised gainsHe first highlighted the impact of reclassifying hold-to-maturity a
21、ssets into available-for-sale and theaddition impact of market movements on unrealised gains in the equity accounts.Unrealised gainsjumped by TWD41.6bn in the quarter,pushing group equity up 22%QoQ to TWD295bn.Provision requirementsNext was the scale and potential impact of higher Taiwan and IFRS re
22、quirements for loan loss reserves.The total needed provision is TWD4bn,including TWD1.5bn for IFRS that should be expensed in 4Q,and then TWD2.5bn for the general reserve requirement that is as yet uncertain.As at Chinatrust,management is hoping that these reserves can be shifted from an equity acco
23、unt withoutimpact the income statement.If that is not possible,Mr.Kung indicated that the company would eitherexpense the total amount in 2012e or split it across 2012e and 2013e.2013 guidanceThough it is too early for detailed guidance,management offered some thoughts on the 2013e outlook:Fubon exp
24、ects the global macro environment to be better in 2013 than 2012,assuming Europehandles its debt problems better and the US does not go over the fiscal cliff;NIM pressure at the bank should moderate;possibly allowing for some recovery;Credit costs continue to look benign,though recoveries may slow i
25、n 2013e,and While FYP are expected to decline quite sharply,management believesM&A strategiesManagement would not respond specifically to questions about the potential 100%acquisition of ChinasFirst Sino Bank,other than to say that the previously stated China/acquisition strategy is progressing.On a
26、n important related point though,Mr.Kung explained that the regulators latest interpretation of thecross-Strait investment rules would allow an FHC to invest up to the SUM of 10%of FHC equity plus15%of bank equity in China.This is contrary to the previous understanding(most everyones)that thelimit w
27、as the higher of 10%of FHC equity or 15%of bank equity.The upshot is that Fubon,within those regulatory bounds,could invest up to TWD38-39bn in Chinawithout being forced to expand its equity base further.This would put the prospective TWD30bn pricetag reported by the media within the“budget”,from a
28、regulatory perspective.3,Fubon FHC(2881 TT)Diversified Financial Services6 November 2012Taipei Fubon BankTaipei Fubon Bank has been the strongest component of the group year to date.Pre-provision profit wasup 28%YTD with revenues up 16%YTD against operating expenses growth of just 4%.With negativene
29、t credit costs(ie net recoveries),pretax and net profit jumped 37%and 39%YoY respectively.Revenue growth has been led by net interest gains,including 4bps of margin expansion attributed tohigher yields on USD lending in 3Q(higher than government lending).The biggest driver has been the increase in“O
30、ther”income,which includes the treasury(TMU)andtrading contributions.The TMU contribution was up about 60%YTD at TWD 1.6bn.Taipei Fubon Bank-Income statement,abc,(TWDm)Interest incomeInterest expenseNet interest incomeNet fee incomeOther incomeOperating revenueSG&A expensePPOPProvisionPre-tax profit
31、Net income,3Q116,1842,6203,5651,9449426,4513,3883,0631,0842,1471,965,4Q116,1772,5723,6032,0808976,5814,0012,5808571,3101,271,1Q126,6152,8943,7211,9091,7427,3723,3144,058(457)4,5213,914,2Q126,7593,0143,7252,3311,1437,2183,4663,752(184)3,9583,255,3Q126,8972,9683,8951,8841,6847,4433,5343,909(124)4,0803
32、,616,Q/Q(%)2.0(1.5)4.6(19.2)47.33.12.04.2NA3.111.1,Y/Y(%)11.513.39.3(3.1)78.815.44.327.6NA90.084.0,YTD-1220,2718,87611,3416,1244,56922,03310,31411,719(765)12,55910,785,Y/Y(%)16.826.69.71.073.515.74.328.1NA36.638.6,Source:Company data.Taipei Fubon Bank-Fee income,(TWDbn)Corporate&otherCredit cardsWea
33、lth managementTotal,3Q110.430.161.361.95,4Q110.350.211.502.06,1Q120.840.181.372.38,2Q12(0.04)0.191.731.87,3Q120.240.191.451.89,Q/Q(%)NA3.2(16.0)0.7,Y/Y(%)(44.4)19.17.0(3.4),YTD-121.030.564.556.14,Y/Y(%)(22.9)0.98.00.6,Source:Company data.Taipei Fubon Bank-Summary balance sheet,(TWDbn)LoansTotal asse
34、tsDepositsTotal liabilitiesTotal equity,3Q11937.61,490.61,169.11,400.290.4,4Q11963.21,504.91,182.71,412.892.1,1Q121,020.91,605.41,285.11,509.995.5,2Q121,042.01,611.91,265.61,512.599.4,3Q121,043.61,617.01,260.41,513.3103.6,Q/Q(%)0.20.3(0.4)0.14.2,Y/Y(%)11.38.57.88.114.7,Source:Company data.4,Fubon FH
35、C(2881 TT)Diversified Financial Services6 November 2012Taipei Fubon Bank-Lending summary,abc,(TWDbn)Gross lendingTotal lendingConsumerMortgagesUnsecuredCredit cardsOther consumerCorporateGovernmentOthers,4Q11963.2971.6364.1314.915.18.425.7446.0153.18.4,1Q121,020.91,028.8362.9314.315.67.925.1444.8212
36、.68.5,2Q121,042.01,049.9373.6322.916.67.926.2452.5215.48.4,3Q121,043.61,051.3382.8331.317.97.725.9463.4196.78.4,Q/Q(%)0.20.12.52.67.8(1.5)(1.1)2.4(8.7)-,Y/Y(%)11.311.17.26.729.7(8.5)6.14.543.6(1.2),Mix(%)NA100.036.431.51.70.72.544.118.70.8,Source:Company,HSBC.Fubon LifeFubon Life has enjoyed a 6%YTD
37、 increase in net revenues as investment income jumped 17%toTWD51bn against a 67%increase in underwriting losses to TWD13.7bn.Underwriting losses came withthe higher reserve costs associated with the 40%jump in total premiums.Pretax and net profit fell by 15-16%YTD because 6%revenue growth was more t
38、han offset by a 17%jump in commissions andexpenses,again highlighting the costs associated with rapid growth.FYP and premium outlookThough first year premiums(FYP)were up 33%YTD,first year premiums dropped 33%QoQ in 3Q withthe introduction of lower reserving rates on shorter-term policies,making the
39、m less attractive toconsumers.This resulted in a sharp drop in those shorter term policies,particularly single-premiumpolicies.Similar cuts to reserve rates for foreign currency denominated policies will hit in 1Q12,whichmay mean a further decline.Though FYP may be as much as 20-25%lower in 2013e,th
40、e product mix should shift to more regularpremium(recurring vs.single premium)policies,which are higher margin by nature.Lower FYP maymoderate new business/underwriting drag,while the focus on higher margin products should help keep upthe value of new business.Fubon Life-First year premiums,(TWDm),3
41、Q11,4Q11,1Q12,2Q12,3Q12,QoQ(%),YoY(%),YTD-12,YoY(%),Total FYP,59,126 59,814,72,848,86,089,57,463,(33.3),(2.8),216,400,32.7,Investment-linked,382,126,146,172,764,343.8,100.1,1,082,(61.0),Interest-sensitive annuityTraditionalOthers,9,290 6,15648,199 52,1571,256 1,376,4,73566,6561,311,3,53080,8381,550,
42、4,07050,9451,684,15.3(37.0)8.6,(56.2)5.734.0,12,335198,4394,544,(41.3)46.521.2,FYP mix(%),Investment-linkedInterest-sensitive annuityTraditionalOthers,0.615.781.52.1,0.210.387.22.3,0.26.591.51.8,0.24.193.91.8,1.37.188.72.9,0.55.791.72.1,Source:Company data.5,-,Fubon FHC(2881 TT)Diversified Financial
43、 Services6 November 2012Fubon Life-Income statement,abc,(TWDm),3Q11,4Q11,1Q12,2Q12,3Q12,QoQ(%),YoY(%),YTD-12,YoY(%),Revenues:,FYP*Total premiums*Fee incomePremiums&feesClaims and benefitsPolicy reservesOther reservesClaims&reservesNet underwritingInvestment income,59.089.50.690.140.451.41.092.9(2.8)
44、15.1,59.798.70.599.239.660.70.7101.0(1.7)11.0,72.8109.50.5110.032.081.50.6114.1(4.1)13.4,86.0117.00.6117.734.487.50.5122.4(4.7)15.3,57.492.20.692.824.972.10.797.7(4.9)22.6,(33.3)(21.2)(1.0)(21.1)(27.7)(17.6)44.1(20.2)NA47.7,(2.7)3.011.63.0(38.5)40.3(27.0)5.2NA49.1,216.2318.71.8320.591.3241.11.9334.2
45、(13.7)51.3,33.140.016.139.9(31.7)136.640.8NA17.3,Profit&loss:,Operating revenueNet commissionsOperating expensesComms&expensesOperating profitNet non-operatingPre-tax profitTaxNet income,12.45.23.28.44.00.04.00.73.3,9.25.93.59.3(0.1)(0.2)(0.2)0.5(0.7),9.34.83.58.31.00.11.1(0.1)1.1,10.66.13.910.00.50
46、.10.60.20.4,17.75.93.69.58.20.18.30.77.6,67.8(3.4)(8.0)(5.2)1,439.4(11.7)1,204.4254.31,630.8,43.112.912.912.9107.2160.0107.71.3129.9,37.616.811.027.89.70.310.00.89.2,5.816.118.216.9(16.9)139.8(15.4)(16.5)(15.3),Source:Company data.Fubon Life-Investment portfolio,(TWDbn),4Q11,1Q12,2Q12,3Q12 Q/Q(TWDbn
47、),Y/Y(TWDbn),Mix(%),Cash&equivalentsDomestic fixed incomeOverseas fixed incomeDomestic equityOverseas equityMortgagesPolicy loansReal estateTotal investments,176.9542.6547.3139.614.533.545.873.01,573.2,177.2564.1598.5159.123.133.645.474.01,674.9,178.2585.8635.9170.126.834.446.176.31,753.6,145.5607.6
48、744.5191.431.335.246.784.41,886.6,(32.7)21.8108.621.34.50.80.68.1133.0,(23.4)82.4208.255.417.92.20.720.3363.6,7.732.239.510.11.71.92.54.5100.0,Source:Company data.Negative spread issuesManagement reported closing the negative spread in 3Q12 with declining liability costs(4.08%)and ahigher investment
49、 return(4.16%),but because the 3Q number is so skewed by dividends the numbers arenot meaningful.More important are the potential impact of reduced first year premiums that are likely to result from lessattractive policy terms(for policyholders).Management said it expects the decline in liability co
50、sts tostop or slow significantly.This is important because unless global macro conditions turn dramaticallybetter,interest rates are stuck at these low levels,which suggests asset yields will continue to fall,whichmay result in a widening gap.Target price raised to TWD30;Underweight maintainedWe mai
