Adoption Of IFRS 17 And Taiwan-ICS Will Erode Earnings Amid Rising Costs

Key Takeaways

• Shifts in Fubon Life's product mix and digital initiatives may impact revenue growth and compress net margins due to changes and increased costs.
  
• Regulatory changes and banking segment risks pose challenges, including potential earnings impact from standard adoption and higher non-performing loans.
  
• Strong business performance and digital transformation initiatives could drive revenue growth and market share, supported by solid financials and ESG commitments.

Catalysts

Provides various financial services in Taiwan, Asia, and internationally.

• The shift in Fubon Life's product mix towards long tenure, protection, and regular paid products could pressure revenue growth if the transition does not attract new customers or if it fails to match previous high-margin products.
  
• The digital initiatives, like the launch of the Fubon+ mobile app, may initially increase operational costs and investment spending, potentially compressing net margins during the roll-out phase.
  
• With the potential adoption of IFRS 17 and Taiwan-ICS in 2026, Fubon Financial may face significant one-time implementation costs and a requirement to adjust capital reserves, which could negatively impact earnings in the short term.
  
• Dependent revenues and earnings from foreign currency gains, particularly in a volatile market environment, may not be sustainable. A decrease in these gains could affect future investment income stability.
  
• The aggressive growth in retail loans and consumer unsecured loans in the banking segment poses a risk of increasing non-performing loans (NPLs) if economic conditions worsen, potentially negatively impacting financial performance and asset quality.

Fubon Financial Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fubon Financial Holding's revenue will decrease by 0.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.4% today to 27.2% in 3 years time.
• Analysts expect earnings to reach NT$101.0 billion (and earnings per share of NT$7.41) by about March 2028, down from NT$150.8 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 19.2x on those 2028 earnings, up from 8.1x today. This future PE is greater than the current PE for the TW Insurance industry at 9.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.88%, as per the Simply Wall St company report.

Fubon Financial Holding Future Earnings Per Share Growth

Risks

• Fubon Financial Holding has demonstrated strong business performance with record-high net profits across its subsidiaries, suggesting robust earnings potential. This strong financial performance could contradict expectations of share price decline.
  
• Fubon Life's solid market position in Taiwan, evidenced by its top ranking in various insurance metrics and high investment returns, may continue to drive revenue growth and financial strength for the company.
  
• The Taipei Fubon Bank's strategic focus on optimizing branches and enhancing digital services could lead to an increase in revenue and profit margins through improved customer experience and operational efficiency.
  
• The ongoing digital transformation and launch of new platforms, such as Fubon+ and a new digital trading platform, position Fubon to capitalize on evolving market trends, potentially boosting revenues and market share.
  
• Fubon's commitment to ESG initiatives, including substantial green finance investments, positions the company well for sustainable growth, potentially attracting more investors and enhancing long-term financial stability and earnings.

Valuation

• The analysts have a consensus price target of NT$97.475 for Fubon Financial Holding based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$372.0 billion, earnings will come to NT$101.0 billion, and it would be trading on a PE ratio of 19.2x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of NT$89.0, the analyst price target of NT$97.48 is 8.7% higher. 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.