Rising Hedge Costs And Loan Risks May Reduce Future Margins In Taiwan's Financial Sector

Key Takeaways

• Strong investment outcomes and higher-margin insurance products could enhance future earnings, revenue, and net margins.
  
• Digital platform expansion and strategic asset-liability management aim to drive growth and improve net interest income.
  
• Higher hedge costs, declining dividends, and increased loan risk may reduce Fubon Financial's net margins and pressure their growth strategies.

Catalysts

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

• Fubon Financial's strong investment outcomes, particularly from equity investments and private equity, signal growth opportunities in investment income, potentially enhancing future earnings.
  
• The life insurance segment's shift to higher CSM products and increasing foreign currency policies could lead to improved margins and continued premium growth, positively affecting revenue and net margins.
  
• Taipei Fubon Bank's focus on expanding digital platform customer size and enhancing credit card franchise can drive future revenue growth, supporting earnings improvement.
  
• Planned adjustments in the bank's asset and liability portfolio show potential to mitigate NIM pressures, aiming for mid-single-digit NIM growth, enhancing net interest income.
  
• Expectations for reduced hedging costs due to an easing cycle by the Fed could improve net earnings by minimizing foreign exchange losses and associated costs.

Fubon Financial Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fubon Financial Holding's revenue will decrease by -44.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.8% today to 82.5% in 3 years time.
• Analysts expect earnings to reach NT$116.6 billion (and earnings per share of NT$8.04) by about December 2027, up from NT$115.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NT$135.8 billion in earnings, and the most bearish expecting NT$100.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.4x on those 2027 earnings, up from 10.8x today. This future PE is greater than the current PE for the TW Insurance industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 1.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.76%, as per the Simply Wall St company report.

Fubon Financial Holding Future Earnings Per Share Growth

Risks

• The increase in recurring hedge costs due to higher currency movement costs could impact net margins and reduce profitability for Fubon Financial.
  
• The decline in cash dividends this year, despite a growth-oriented allocation strategy, may lead to a reduction in recurring investment income, impacting overall earnings.
  
• The bank's retail unsecured loans show a slight increase in NPL due to the expiration of government bailout measures, which could affect asset quality and net profit margins if not managed.
  
• The potential pressure on the Net Interest Margin (NIM) due to expected interest rate cuts could limit revenue growth from interest income.
  
• The overseas real estate portfolio's need for renovation and lease expiration may maintain a zero return, affecting investment income and potentially impacting earnings.

Valuation

• The analysts have a consensus price target of NT$97.85 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 2027, revenues will be NT$141.3 billion, earnings will come to NT$116.6 billion, and it would be trading on a PE ratio of 14.4x, assuming you use a discount rate of 5.8%.
• Given the current share price of NT$91.6, the analyst's price target of NT$97.85 is 6.4% 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.