After our recent bank visits, we lower our credit cost assumption to
reflect a more benign NPL cycle. The recent recovery in property prices
also gives us more comfort on asset quality outlook. We now estimate
net credit cost of 100 bp and 110 bp of loans in 2009 and 2010,
respectively, factoring in further deterioration over the next few
quarters. Separately, we lower NIM assumption for 2009 to just 1.3%
from 1.4%, after taking into account a modest recovery in 2H09.
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For life insurers, we have accounted for a substantial recovery in
equity, based on the market strength YTD and the 10% property price
appreciation per year. We maintain our 4.25% long-term investment
return assumption in our valuation for life insurance units.
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The sector has rallied 79% from its low on 3 March and is now trading
at 1.3x FY09E P/B, which is not cheap given a weak operating outlook
for the next 12-18 months. The sector has clearly priced in positive
expectations on cross-strait developments with a hope for event
catalysts in the next 6-12 months.
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As the sector has built in high expectations on cross-strait progress,
we expect a bumpy ride in the next few months, with the sector
potentially vulnerable to delays and disappointments in cross-strait
negotiations on market access and ECFA. We prefer stocks with better
valuation, strong asset quality and surplus capital on hand, and which
would be the key beneficiaries of cross-strait developments. Our top
picks in the sector are Taishin and Fubon. We maintain
UNDERPERFORM on Yuanta and Chinatrust on high valuations.