Rate Cuts And Geopolitical Tensions To Curtail Earnings And Pressure Margins

Key Takeaways

• Projected SWAP gains decline and increased credit costs may pressure net interest margins, impacting revenue and earnings.
  
• Economic uncertainties and dividend policy adjustments could signal weaker growth outlook, affecting shareholder returns and income.
  
• Strong fee income growth, effective capital allocation, robust asset quality, and scalable wealth management operations bolster potential earnings despite interest rate fluctuations.

Catalysts

Through its subsidiaries, provides various in Taiwan, Asia, the United States, and internationally.

• The forecasted reduction in SWAP gains due to the U.S. entering a rate cut cycle could impact First Financial Holding's adjusted net interest margin (NIM). A projected decline in SWAP gains from approximately NT$14.2 billion this year to around NT$12.5 billion next year is expected, potentially leading to a decrease in revenue and affecting earnings.
  
• Although the loan growth target for 2025 is around 5.5% to 6%, driven by higher-margin products like SME and foreign currency loans, there is uncertainty with the economic impact of geopolitical tensions and trade wars. This could result in slower loan book growth affecting future revenue generation.
  
• The asset quality concerns and the strategic increase in the coverage ratio may raise credit costs from 17 bps this year to a projected 19 bps next year. This increase in provisioning could pressure net margins as it might lead to higher expenses relative to income.
  
• The company's need to adjust its dividend payout to a more conservative 50% due to compliance requirements may signal to investors a weaker earnings growth outlook, potentially affecting shareholder returns and earnings per share (EPS).
  
• Wealth management fees are expected to slow down from more than 30% growth this year to a target of 16%-17% growth next year. This slowdown, coupled with potential declines in fee income, might lead to reduced revenue contributions from this segment.

First Financial Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Financial Holding's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.7% today to 33.1% in 3 years time.
• Analysts expect earnings to reach NT$23.5 billion (and earnings per share of NT$1.72) by about December 2027, down from NT$24.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.0x on those 2027 earnings, up from 15.9x today. This future PE is greater than the current PE for the TW Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.36%, as per the Simply Wall St company report.

First Financial Holding Future Earnings Per Share Growth

Risks

• First Financial Holding has recorded significant growth in fee income and SWAP gains, with a year-to-year increase in profit margins. This illustrates strong performance potential that could bolster net margins and earnings even if interest rates decline.
  
• Their successful strategy in increasing loan growth, notably in mortgage and corporate lending, shows effective capital allocation that can sustain revenue growth, especially as FX lending is predicted to grow by 12% next year.
  
• Asset quality remains intact, with an NPL ratio of 0.18% and a coverage ratio approaching 800%, diminishing financial risk and potentially stabilizing net interest income and maintaining earnings strength.
  
• Wealth management operations are scalable, with fee revenues projected to grow by 16-17%, supporting future revenue growth and enhancing earnings diversification.
  
• Strong capital adequacy and their strategic approach to maintaining and improving risk management measures, such as planning to adopt the IRB model, suggest robustness in future earnings through capital efficiency.

Valuation

• The analysts have a consensus price target of NT$27.18 for First Financial Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$31.0, and the most bearish reporting a price target of just NT$21.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$70.9 billion, earnings will come to NT$23.5 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 6.4%.
• Given the current share price of NT$27.4, the analyst's price target of NT$27.18 is 0.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.