Asia Pacific/Taiwan Equity Research Multi Line Insurance (Insurance) Rating (from Neutral) OUTPERFORM* Price (10 Aug 12, NT$) 30.60 Target price (NT$) (from 32.38) 38.00¹ Upside/downside (%) 24.2 Mkt cap (NT$ mn) 291,074 (US$ 9,724) Number of shares (mn) 9,512.22 Free float (%) 50.0 52-week price range 40.3-26.4 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. Share price performance Research Analysts Chung Hsu, CFA 8862 2715 6362 chung.hsu@credit-suisse.com Michelle Chou, CFA 886 2 2715 6363 michelle.chou@credit-suisse.com 60 Price (LHS) Rebased Rel (RHS) 50 40 30 20 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 140 120 100 80 The price relative chart measures performance against the TAIWAN SE WEIGHTED INDEX which closed at 7441.12 on 10/08/12 On 10/08/12 the spot exchange rate was NT$29.93/US$1 Performance Over 1M 3M 12M Absolute (%) 4.1 7.5-23.0 Relative (%) 1.6 6.9-19.4 (2881.TW / 2881 TT) UPGRADE RATING Upgrade on stronger 2H earnings momentum Upgrade to OUTPERFORM: We upgrade Fubon FHC to OUTPERFORM from Neutral and raise our target price to NT$38 (from NT$32.38) after raising FY12E by 6% to account for a stronger earnings momentum in 2H12. We expect to see consensus earnings upgrade after the analyst meeting (10 Aug) and our current FY12E is 20% above consensus. Stronger 2H12 earnings momentum: We expect Fubon FHC s 2H12 profit to see a strong rebound driven by the life unit s (1) NT$7-8 bn cash dividend income and; (2) a product mix shift that will reduce the new business strain on P&L. The company reported an NT$11 bn profit in 1H12 on a strong bank profit (NT$7.2bn) while Fubon Life lagged (NT$1.6bn) largely due to a new business strain as a result of strong FYP sales. We also expect a much easier earnings comparison into 4Q (in addition to a seasonally strong 3Q) as Fubon has spread its losses from the Sports Lottery business across the four quarters instead of a year-end write-down in the previous two years. New strategic initiatives to provide sources of LT growth: Management is looking into a few strategic initiatives and most notably: (1) Xiamen Bank to look into possible acquisition of other city banks in China; (2) Fubon FHC to take a controlling stake in a bank in China; and (3) Introduce a strategic investor into Fubon Bank HK to facilitate Fubon s China bank initiatives. Valuation: Fubon s share has lagged both TAIEX and the banking index by 17% and 5% in the past one year, largely due to concerns for overseas fixed income exposure and weaker 1H12 earnings. Fubon has actively reduced its Europe exposure in the past year and the rebound in earnings momentum in 2H12 will likely reverse its underperformance. Valuation is near the trough of the historical range and is trading at 1.2x FY12E P/B, 1.0x P/EV and 10x P/E. Financial and valuation metrics Year 12/11A 12/12E 12/13E 12/14E Pre-prov Op profit (NT$ mn) 36,675.0 33,565.7 43,763.9 49,832.4 Pre -tax profit (NT$ mn) 35,808.9 32,287.4 40,377.6 45,725.1 Net attributable profit (NT$ mn) 30,542.8 28,112.0 34,960.4 39,370.9 EPS (CS adj.) (NT$) 3.48 3.03 3.67 4.13 Change from previous EPS (%) n.a. 6.3-0.0 0 Consensus EPS (NT$) n.a. 2.60 2.86 3.23 EPS growth (%) 45.7-12.8 21.0 12.6 P/E (x) 8.8 10.1 8.3 7.4 Dividend yield (%) 3.2 4.0 3.2 5.4 CS adj. BVPS (NT$) 21.8 26.6 29.2 32.4 P/B (x) 1.40 1.15 1.05 0.95 ROE (%) 14.8 12.5 13.2 13.4 ROA (%) 0.91 0.77 0.81 0.83 Tier 1 Ratio (%) 9.3 9.5 9.3 9.3 Source: Company data, Thomson Reuters, Credit Suisse estimates. DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access
Focus table and charts Figure 1: Negative credit cost on continuous recoveries (NT$ mn) Provision expense 2,000 1,500 1,000 500 0 (500) Figure 2: Fubon s first year premium equivalent (FYPE) (NT$ mn) Health, Accidents and others Traditional Life 25,000 Investment-Linked Interest Sensitive Annuity Interest Sensitive Life 20,000 15,000 10,000 5,000 (1,000) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Figure 3: Fubon FHC s P/EV valuation band (x) Fubon P/EV 1.7 +2 std 1.5 +1 std 1.3 average 1.1 0.9-1 std 0.7-2 std 0.5 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Figure 4: Fubon s QFII ownership is near the trough (%) 36 33 30 27 24 21 18 1/4/2010 7/4/2010 1/4/2011 7/4/2011 1/4/2012 7/4/2012 Fubon's QFII ownership Source: Company data, TEJ, and Credit Suisse Figure 5: Fubon FHC s sum-of-the-parts valuation (NT$ mn) Dec-12 Net worth 89,927 VIF 45,083 Cost of solvency (3,372) Embedded value 131,638 VNB 7,383 Multiple 7.5 New business value 55,273 Appraisal value 186,911 Other business 174,660 Taipei Fubon Bank 116,446 Fubon P&C 25,597 Fubon Securities 32,618 Group value 361,572 Shares on issue 9,524 Valuation per share (NT$) 38.0 estimates (2881.TW / 2881 TT) 2
Upgrade to OUTPERFORM We upgrade Fubon FHC to OUTPERFORM and raise our target price to NT$38 (from NT$32.38) to account for a stronger earnings momentum in 2H12. We estimate Fubon FHC s 2H12 profit to see more than 50% HoH growth due to a significant rebound in its life insurance business. We also expect a much easier earnings comparison in 4Q12 (in addition to the seasonally strong 3Q on cash dividend income) as Fubon has spread out its loss booking on the Sports Lottery business across the four quarters instead of a oneoff write-down in 4Q in the previous two years. Shifting overseas fixed income to AFS from HTM Fubon management is considering shifting its overseas fixed income portfolio from HTM to AFS so that it could more proactively manage its Europe fixed income investments. More specifically, the assets under AFS can be disposed while there are many restrictions for the company to sell assets classified under HTM. This suggests Fubon management is turning more proactive in managing its overseas fixed income exposure and it has been reducing its overall Europe fixed income weighting in the portfolio (Figure 6). The shift in the entire fixed income asset from HTM to AFS will result in another NT$25 bn increase in unrealized gains to be reflected in the shareholder s equity account (vs NT$112 bn reported in 2Q). Figure 6: Overseas fixed income by region 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Eurozone Non-eurozone Europe US Asia Other 3.1 4.5 6.2 10.4 16.7 19.6 39.9 13.6 33 37.4 13.5 38.8 11.5 27.9 23.9 1H11 2011 1H12 Figure 7: European fixed income by country Netherlands 11% United Kingdom 21% Switzerland 10% Spain 9% Exploring new strategic initiatives to drive LT growth Management has also noted a number of new strategic initiatives to drive long-term growth for the company. Specifically, Fubon Bank HK is looking to bring in a strategic bank partner that could provide faster access to China s banking market in addition to its current investment in Xiamen Bank. Furthermore, Xiamen Bank is also looking for possible M&A target in other city banks in China, and Fubon FHC may look to take a controlling stake in a bank in China. Valuation Fubon s share has lagged both TAIEX and the banking index by 17% and 5% in the past one year, largely due to a weaker 1H12 earnings and concerns over its overseas fixed income exposure. Fubon has actively reduced its Europe exposure in the past year and a rebound in earnings momentum in 2H12 will likely reverse the stock s underperformance. Valuation is near the trough of its historical range and is trading at 1.2x FY12E P/B, 1.0x P/EV and 10.1x P/E. Other Europe 2% Germany 22% France 25% (2881.TW / 2881 TT) 3
Figure 8: Fubon P/EV Figure 9: Fubon P/B (x) 1.7 +2 std Fubon P/EV (x) 2.7 Fubon P/B 1.5 1.3 1.1 +1 std average 2.1 1.5 average +2 std +1 std 0.9-1 std 0.7-2 std 0.5 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 estimates Figure 10: Fubon s relative performance vs TAIEX in the last year 105% 100% 95% 90% 85% 80% 75% 70% Fubon relative performance (vs TAIEX) Research 0.9-1 std -2 std 0.3 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 estimates Figure 11: Fubon s QFII ownership (%) 36 33 30 27 24 21 18 1/4/2010 7/4/2010 1/4/2011 7/4/2011 1/4/2012 7/4/2012 Fubon's QFII ownership Research (2881.TW / 2881 TT) 4
2Q12 results Fubon delivered a net profit of NT$4.1 bn in 2Q12 and a 2H12 profit of NT$11 bn (NT$1.21 EPS), which accounted for 40% of our estimates for the full year. In July, Fubon FHC reported a NT$7 bn profit and this brings 7M12 profits to NT$18 bn, or 66% and 77% of CS and consensus estimates, respectively. The bank s subsidiary maintains a healthy earning momentum with a sequential wealth management growth offsetting lower capital market-related income. The life insurance unit, however, reported smaller profit owing to higher new business acquisition cost, though hedging cost is well contained (77 bp) with improved investment return of 3.63% (vs 3.52% in 1Q12). Figure 12: Fubon FHC and major subsidiaries quarterly profits (NT$ mn) 2Q11 3Q11 4Q11 1Q12 2Q12 QoQ YoY Taipei Fubon Bank 3,114 1,965 1,272 3,914 3,255-17% 5% Fubon Life 1,037 5,566 (733) 1,138 439-61% -58% Fubon Insurance 996 744 318 826 687-17% -23% Fubon Securities 858 1,334 (160) 492 66-87% -92% FHC adjustments (1,075) 6,723 (1,659) 495 (351) -171% n.m Fubon FHC 4,930 16,331 (962) 6,864 4,096-40% -17% Research Taipei Fubon Bank Taipei Fubon Bank reported 2Q12 profit of NT$3.3 bn (-17% QoQ and +5% YoY). Core profit improvement was mainly driven by a better-than-expected loan growth (8% YTD) and a strong fee income growth (+22% QoQ and 7% YoY). NIM dropped by 4 bp due to a shift to lower yield government loans and the continuing weak loan pricing backdrop. Similar to other banks, the net credit cost remains negative at NT$184 mn (vs negative NT$457 mn in 1Q12). Figure 13: Taipei Fubon Bank (TFB) quarterly P&L (NT$ mn) 2Q11 3Q11 4Q11 1Q12 2Q12 QoQ YoY Net interest income 3,509 3,565 3,604 3,721 3,745 1% 7% Non-interest income 3,154 2,886 2,976 3,652 3,472-5% 10% Fee income -net 2,168 1,944 2,080 1,909 2,330 22% 7% Trading & others 986 942 897 1,743 1,142-34% 16% Operating income 6,663 6,451 6,580 7,373 7,217-2% 8% Operating expenses (3,293) (3,388) (4,001) (3,314) (3,466) 5% 5% PPOP 3,370 3,063 2,580 4,059 3,750-8% 11% Provisions 422 (1,084) (857) 457 184-60% -56% Pre-tax profits 3,793 2,148 1,310 4,521 3,958-12% 4% Net profits 3,113 1,965 1,272 3,914 3,255-17% 5% Research Figure 14: Taipei Fubon Bank (TFB) key ratios (%) 2Q11 3Q11 4Q11 1Q12 2Q12 Loan growth (yoy) 5.2 8.5 11.5 11.1 14.1 Quarterly NIM 0.99 0.99 1.01 1.02 0.98 Accum. NIM 0.97 0.97 0.99 1.02 1.00 Loan-to-deposit ratio (LDR) 79.9 80.8 82.0 79.8 82.7 Cost-to-income ratio (CIR) 49.4 52.5 60.8 45.0 48.0 Fee income growth (yoy) 21.6 2.0-6.0-2.2 7.5 NPL ratio 0.22 0.26 0.26 0.24 0.21 NPL coverage ratio 272.2 300.5 355.5 340.0 398.5 Credit cost (annualised) -18.3 46.5 35.8-18.3-7.1 Research (2881.TW / 2881 TT) 5
NIM dropped despite increasing LDR The bank s NIM dropped by 4 bp to 0.98% in 2Q12 and reflects a combination of higher competition amid the over-liquidity condition in the market, as well as a lower domestic loan yield with shift to government loans. Management lowered their margin guidance for the full year to 1% (vs 2011 s 0.99%) from their previous guidance of 3-5 bp NIM improvement. Figure 15: Net interest margin trend (%) 1.4 1.2 1.0 0.8 0.6 1.1 0.9 0.9 0.9 1.0 Quarterly NIM 0.9 0.93 0.93 0.96 0.98 0.99 1.01 1.02 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Robust fee income on strong bancassurance fee 0.98 Figure 16: Overview of interest yields (%) 2.5 2.0 1.5 1.0 0.5-2.34 1.33 1.01 1.92 1.16 1.18 0.76 Loan rate (incl. credit cards) Loan deposit spread Deposit rate 1.83 1.77 1.76 1.76 1.80 1.83 1.87 1.93 0.65 2.03 2.09 2.05 2.05 1.25 1.30 1.29 1.28 1.31 1.32 1.32 1.35 1.37 1.32 1.32 0.52 0.46 0.48 0.52 0.52 0.55 0.61 0.68 0.72 0.73 0.73 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 The most notable strength in the quarter came from the fee income (+22% QoQ and 7% YoY). In particular, the wealth management fee income was strong (+26% QoQ and 13% YoY), mostly driven by a robust bancassurance sales (+67% QoQ and 89% YoY). Corporate banking and credit card fee also improved QoQ. Yet, we expect bancassurance fee to weaken into 2H, given the government has prohibited the short-duration endowment product sales. Hence, we expect the bancassurance fee income to slow in 2H relative to 1H. Figure 17: Taipei Fubon Bank (TFB) quarterly fee income breakdown (NT$mn) 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 QoQ YoY Wealth management 1,408 1,602 1,436 1,575 1,446 1,818 26% 13% Corporate banking 374 379 362 267 291 332 14% -12% Credit card 184 206 162 212 177 187 6% -9% Total net fee 1,952 2,168 1,953 2,054 1,914 2,337 22% 7% Loan growth driven by government loans Loan growth is robust at 8% YTD, mostly helped by a 41% YTD increase in the government loans. Excluding that, there is still a 2% loan growth. Particularly, there is a small pick up in unsecured personal loan (+10% YTD) and mortgage loan (+3% YTD). Management maintain their mid-to-high single digit loan growth, while we think the loan mix will remain conservative and won t change materially in 2H12. Figure 18: Taipei Fubon Bank (TFB) quarterly loan breakdown (NT$ bn) 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 QoQ YoY Corporate 379.1 384.9 399.3 424.0 427.4 443.5 446.0 444.8 452.5 2% 6% Mortgages 292.0 296.0 304.6 310.7 311.7 310.4 314.9 314.3 322.9 3% 4% Credit card 10.1 9.9 9.7 8.8 8.5 8.5 8.4 8.5 8.4-1% -1% Unsecured personal 9.4 9.9 10.7 11.0 12.5 13.8 15.1 15.6 16.6 6% 33% Secured personal 23.7 22.9 24.5 23.8 25.0 24.4 25.7 25.1 26.2 4% 5% Government 151.7 142.6 121.9 142.4 127.6 137.0 153.1 212.6 215.4 1% 69% Total loan 866.2 866.4 870.7 920.9 912.6 937.6 963.2 1,020.9 1,042.1 2% 14% (2881.TW / 2881 TT) 6
Overhang on the 1% general reserve rule Asset quality remains stable and NPL ratio further declined to 0.21% with a coverage ratio of 399%, or a reserve-to-loan ratio of 84 bp, which reflects its more conservative loan mix of 21% government loans. In 2Q12, the bank continued to report a negative credit cost (or net recovery) of NT$184 mn, while it is reduced from -NT$457 mn in the prior quarter. However, there has been a discussion on possible regulatory change for 1% (from 0.5%) general provision requirement, which we estimate would impact Fubon by ~NT$3 bn after taking into account its larger government loans. Management indicated that it is most likely not for implementation this year. Figure 19: Stable asset quality 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 NPL ratio (%) NPL coverage ratio (%) 450 400 350 300 250 200 150 100 50 0 Figure 20: Negative credit cost on continuous recoveries (NT$ mn) Provision expense 2,000 1,500 1,000 500 0 (500) (1,000) 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Fubon Life Fubon Life reported a modest profit of NT$439 mn in 2Q12 and this is attributed to a higher new business acquisition cost, especially with the strong sales in short-term endowment products. The insurer reported a slightly better investment income on lower hedging cost and better capital gains from its investment portfolio. Earnings, however, should stage a strong rebound in 3Q, driven by a NT$7 bn cash dividend income. Figure 21: Fubon Life key ratios 2Q11 3Q11 4Q11 1Q12 2Q12 Claims and benefits ratio 68.3% 45.2% 40.1% 29.3% 29.4% Expense ratio 4.0% 3.6% 3.5% 3.2% 3.3% Persistency ratio - 13 month 94.6% 94.7% 95.4% 96.2% 96.5% ROAA 0.30% 1.50% -0.20% 0.30% 0.10% ROAE 4.1% 22.0% -2.9% 4.4% 1.6% Total investment return 3.82% 4.09% 3.80% 3.52% 3.68% Asset/equity 14.9 15.7 16.2 16.2 16.3 Figure 22: Fubon Life quarterly P&L (NT$ mn) 2Q11 3Q11 4Q11 1Q12 2Q12 QoQ YoY First year premiums (FYP) 50,524 59,009 59,684 72,782 86,029 18% 70% Total earned premiums 76,914 89,544 98,715 109,454 117,028 7% 52% Total investment income 11,835 17,329 10,983 13,440 15,292 14% 29% Total operating income 89,276 107,430 110,228 123,434 132,950 8% 49% Claims and benefits (52,535) (40,444) (39,623) (32,028) (34,369) 7% -35% Net commission expenses (5,079) (5,232) (5,859) (4,823) (6,115) 27% 20% Net provision in reserves (26,940) (51,418) (60,702) (81,484) (87,513) 7% 225% Total operating expenses (88,080) (101,211) (110,294) (122,440) (132,417) 8% 50% Pre-tax profits 1,226 6,255 (243) 1,058 635-40% -48% Net profits 1,037 5,566 (733) 1,138 439-61% -58% (2881.TW / 2881 TT) 7
FYP increased 69% YoY with significant product mix change in 2H 2Q12 FYP grew by 69% YoY (FYPE growth of 38% YoY) boosted by a strong short-term endowment product sales before the adjustment on the assumed interest rate in July. With the change of assumed interest rate and the mortality table in July, management indicated that the insurance product mix will change significantly and focus more on the regular pay interest sensitive products in 2H12. With the reduced short-term endowment product sales, Fubon Life s provision and commission expense pressure will be reduced significantly in 2H12 and will help to support the earnings growth into 2H. Figure 23: Quarterly FYP breakdown (NT$ mn) Traditional life Interest-sensitive annuity Interest-sensitive life Investment link 120,000 Health, Accident and others 100,000 Figure 24: Fubon s FYPE (NT$ mn) Health, Accidents and others 25,000 Investment-Linked Interest Sensitive Life 20,000 Traditional Life Interest Sensitive Annuity 80,000 60,000 40,000 20,000 15,000 10,000 5,000 0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 More asset shift to overseas fixed income - 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Fubon Life s investment portfolio grew 4.7% QoQ and 19.5% YoY. The most notable portfolio allocation increase is in the overseas fixed income and domestic equity, which Fubon increased the allocation from 35.7% and 9.5% in 1Q12 to 36.3% and 9.7% in 2Q12, respectively. The key overseas fixed income addition was largely focused in Asia while reducing positions in the Eurozone. Given the current low interest rate environment, management indicated that the current new overseas fixed income investment yield is lowered to 4.5-5% from 5-5.5% six months ago. Yet, management remain positive on the overall investment return in 2012 and expect a 5-10 bp yield enhancement from the 3.8% over the past year. Figure 25: Fubon Life s quarterly investment allocation and investment return by category (NT$ mn) 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Cash and deposits 113,500 94,600 103,300 130,000 110,900 168,900 176,900 177,200 178,200 Domestic bonds 524,800 517,800 529,200 533,200 535,200 525,200 542,600 564,100 585,800 Domestic equity 102,500 133,900 143,100 130,000 155,900 136,000 139,600 159,100 170,100 Mortgages 35,200 33,700 32,800 32,700 32,900 33,000 33,500 33,600 34,400 Policy loans 45,100 45,000 45,400 46,000 45,900 46,000 45,800 45,400 46,100 Real estate 59,600 59,900 60,000 60,900 63,200 64,100 73,000 74,000 76,300 Overseas - bonds 375,100 452,100 454,900 495,400 511,300 536,300 547,300 598,500 635,900 Overseas - equity 5,700 6,300 10,800 11,100 12,400 13,400 14,500 23,100 26,800 Total investments 1,261,600 1,343,300 1,379,500 1,439,300 1,467,600 1,523,000 1,573,200 1,674,900 1,753,600 Investment yield 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Cash and deposits 0.31% 0.37% 0.41% 0.60% 0.70% 0.72% 0.78% 0.92% 0.91% Domestic bonds 2.38% 2.46% 2.53% 2.54% 2.50% 2.54% 2.53% 2.38% 2.49% Domestic equity 8.31% 12.03% 11.00% 16.00% 13.10% 11.37% 8.67% 4.94% 4.40% Mortgages 2.37% 2.37% 2.38% 2.43% 2.50% 2.47% 2.46% 2.40% 2.40% Policy loans 5.08% 5.09% 5.19% 5.10% 5.10% 5.13% 5.09% 5.09% 4.90% Real estate 3.41% 3.26% 3.20% 3.10% 0.70% 3.29% 3.16% 3.51% 3.61% Overseas - bonds 5.46% 5.16% 4.50% 4.62% 4.30% 4.85% 4.81% 5.03% 5.33% Overseas - equity 7.37% 5.27% 4.00% 12.7% 6.70% 2.48% 1.65% 2.28% 3.20% Total investments 3.85% 4.16% 3.94% 4.22% 3.82% 4.09% 3.80% 3.52% 3.63% (2881.TW / 2881 TT) 8
Fubon P&C Insurance Fubon Insurance reported a profit of NT$687 mn in 2Q12. Its combined ratio declined to 89.6% in 2Q12 from 92.9% in the prior quarter. The direct written premium increased 14% YoY, mostly driven by stronger auto premiums, which was a result of a better cross-sales efforts between the P&C unit and the life insurance unit. The unit is expected to receive another NT$518 mn cash dividend income in 2H12 (versus NT$99 mn in 1H12), so the earnings should be better-supported to achieve our full-year estimate of NT$2.5 bn. Figure 26: Fubon P&C quarterly P&L (NT$ mn) 2Q11 3Q11 4Q11 1Q12 2Q12 QoQ YoY Gross written premiums 6,507 5,681 6,343 7,056 7,425 5% 14% Net written premiums 4,649 4,370 4,639 5,015 4,951-1% 6% Net earned premiums 4,379 4,577 4,514 4,702 4,697 0% 7% Net claims (2,329) (2,352) (2,886) (2,737) (2,558) -7% 10% Underwriting and opex (1,670) (1,655) (1,913) (1,737) (1,739) 0% 4% Underwriting profits 365 255 (168) 257 406 58% 11% Investment income 493 942 263 486 367-24% -26% Pre-tax profits 1,000 951 487 940 853-9% -15% Net profits 887 853 318 826 687-17% -23% Figure 27: Direct written premium breakdown Auto Fire Marine Engineering Health and injury Others 6,000 731 604 628 660 26 650 835 494 532 609 5,000 614 600 797 562 281 237 621 334 672 707 616 495 350 710 805 490 4,000 507 205 224 460 2131 494 210 201 497 520 1247 1503 471 1005 906 1143 3,000 1018 821 643 659 2,000 2686 2538 2603 2707 2835 2762 2739 2998 3151 2998 1,000-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Fubon Securities Figure 28: Net combine ratio (%) Net claim ratio Net expense ratio 100 80 60 41.2 37.6 35.1 43.2 35.6 38.2 37.9 34.6 35.1 35.9 40 63.9 53.6 56.1 46.9 52.7 56.0 53.2 55.3 58.2 20 54.5-1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 Figure 29: Fubon Securities quarterly P&L (NT$ mn) 2Q11 3Q11 4Q11 1Q12 2Q12 QoQ YoY Brokerage commissions 928 1,043 746 911 623-32% -33% Net interest income 367 315 286 258 245-5% -33% Fee income 62 71 83 50 78 56% 26% Net principal transactions 551 693 (43) 54 55 2% -90% Net financial products gains (7) (177) 39 211 54-74% -871% Total operating income 1,907 1,950 1,119 1,489 1,060-29% -44% Operating expenses (1,230) (1,304) (1,328) (1,142) (1,111) -3% -10% Pre-tax profits 906 1,375 (188) 558 62-89% -93% Net profits 858 1,334 (160) 492 66-87% -92% (2881.TW / 2881 TT) 9
Appendix: financial summary Figure 30: Fubon FHC per share data Year-end 31 Dec (NT$ mn) 2010 2011 2012E 2013E 2014E EPS (NT$) 2.39 3.48 3.03 3.67 4.13 DPS (NT$) 1.03 0.99 1.21 0.99 1.65 BVPS (NT$) 25.4 25.9 26.6 29.2 32.4 EV (NT$) 29.1 29.9 29.9 31.9 0.0 ROAE 9.3% 13.5% 11.5% 13.2% 13.4% ROAA 0.6% 0.9% 0.8% 0.8% 0.8% estimates Figure 31: Fubon FHC P&L Year-end 31 Dec (NT$ mn) 2010 2011 2012E 2013E 2014E Banking operating profits 7,905 10,687 13,189 12,706 14,601 Life insurance operating profits 6,310 11,637 11,087 18,270 22,227 P&C operating profits 3,103 3,670 3,353 2,919 2,772 Securities operating profits 2,043 1,694 1,108 1,390 859 Other operating profits 3,787 8,120 3,550 5,092 5,267 Pre-tax profits 23,147 35,809 32,287 40,378 45,725 Net attributable profits 19,905 30,543 28,112 34,960 39,371 estimates Figure 32: Fubon FHC balance sheet Year-end 31 Dec (NT$ mn) 2010 2011 2012E 2013E 2014E Cash + interbank 244,673 229,906 455,990 526,792 615,902 Marketable securities 1,594,022 1,662,738 1,350,106 1,494,402 1,634,574 Net loans 1,064,090 1,046,601 1,321,027 1,436,644 1,533,746 Total assets 3,450,747 3,231,235 4,094,789 4,526,132 4,946,028 Deposits 1,321,737 1,269,769 1,536,078 1,664,124 1,775,324 Reserves 1,393,790 1,260,410 1,683,780 1,932,080 2,190,561 Total liabilities 3,228,474 3,030,250 3,841,199 4,248,327 4,637,791 Common stock 85,584 85,455 95,237 95,237 95,237 Shareholder's equity 222,273 200,985 253,590 277,806 308,237 Liabilities & shareholders equity 3,450,747 3,231,235 4,094,789 4,526,132 4,946,028 estimates Figure 33: Fubon Life Key ratios and forecasts 2010 2011 2012E 2013E 2014E FYP growth 51% -28% 4% 6% 6% Assets growth 21% 11% 14% 14% 12% Investment fund growth 23% 13% 15% 14% 13% Expense ratio 6.7% 10.1% 7.9% 8.0% 8.1% Investment yield 4.59% 3.71% 3.85% 4.00% 3.94% estimates (2881.TW / 2881 TT) 10
Figure 34: Fubon Life P&L Year-end 31 Dec (NT$ mn) 2010 2011 2012E 2013E 2014E Direct written premiums 415,373 325,020 336,581 351,852 367,987 Total investment profits 84,386 43,015 66,573 79,486 88,904 Claims, surrender & policyholder div. -155,947-173,108-129,584-137,222-145,355 Net change in insurance reserves -272,006-164,602-236,894-248,697-260,102 Operating expenses -27,865-32,769-26,590-28,148-29,807 Operating profit 6,310 11,637 11,087 18,270 22,227 Non-operating profit 273-69 0 350 350 Pre-tax profit 6,583 11,569 11,087 18,620 22,577 Attributable profit 6,626 10,104 10,453 16,864 20,162 estimates Figure 35: Fubon Life balance sheet Year-end 31 Dec (NT$ mn)) 2010 2011 2012E 2013E 2014E Current assets 374,433 1,001,721 1,129,383 1,297,102 1,471,316 Net loans 78,268 79,270 144,190 164,951 185,956 Funds and investments 993,160 551,238 610,118 691,607 769,782 Total assets 1,616,223 1,791,374 2,050,793 2,329,117 2,611,283 Reserves 1,323,746 1,408,664 1,645,558 1,894,255 2,154,357 Total liabilities 1,514,798 1,689,514 1,941,533 2,206,219 2,474,655 Common stock 17,123 21,123 21,123 21,123 21,123 Total equity 101,425 101,859 109,260 122,898 136,628 Total liabilities & equity 1,616,223 1,791,374 2,050,793 2,329,117 2,611,283 estimates Figure 36: TPE Fubon Bank key ratios Year-end 31 Dec (NT$ mn)) 2010 2011 2012E 2013E 2014E Loan growth 3.1% 11.5% 5.3% 8.1% 5.7% NII growth 4.9% 14.2% 7.0% 15.0% 15.1% Fee income growth 54.5% 11.4% 7.0% 6.0% 5.0% Net interest margin (NIM) 0.94% 0.96% 1.00% 1.08% 1.16% Loan to deposit ratio (LDR) 73% 81% 79% 79% 79% Cost to income ratio (CIR) 60% 55% 49% 47% 44% NPL ratio 0.32% 0.25% 0.17% 0.26% 0.42% NPL coverage ratio 198% 353% 466% 351% 251% Credit cost (bps) 12 10 13 32 36 estimates Figure 37: TPE Fubon Bank P&L Year-end 31 Dec (NT$ mn) 2010 2011 2012E 2013E 2014E Net interest income (NII) 12,210 13,944 14,922 17,157 19,745 Fee income - net 7,310 8,144 8,714 9,237 9,699 Non-interest income 10,372 11,500 13,714 13,387 13,849 Operating income 22,582 25,444 28,636 30,544 33,594 Operating expenses -13,628-13,891-14,168-14,452-14,885 Pre-provision profit 8,954 11,553 14,468 16,092 18,709 Provision charges -1,049-866 -1,278-3,386-4,107 Pre-tax profit 7,905 10,687 13,189 12,706 14,601 Net attributable profit 7,277 9,236 11,287 10,912 12,485 estimates (2881.TW / 2881 TT) 11
Companies Mentioned (Price as of 10 Aug 12) (2881.TW, NT$30.60, OUTPERFORM, TP NT$38.00) Disclosure Appendix Important Global Disclosures Chung Hsu, CFA & Michelle Chou, CFA each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for 2881.TW 2881.TW Closing Target Price Price Initiation/ 47 46 Date (NT$) (NT$) Rating Assumption 45 45 44 14-Aug-09 29.028 37.7 43 42 1-Oct-09 33.745 41.5 42 42 40 40 3-Nov-09 34.698 43.5 40 38 38 13-Jan-10 35.196 45 37 37 36 7-May-10 32.883 46 36 34 9-Jun-10 31.205 37.2 N 32 5-Nov-10 36.954 38 N 10-Mar-11 36.192 40 27-Apr-11 39.716 41.5 NT$ 27 25-May-11 39.145 43 12-Aug-11 41.145 45 14-Sep-11 35.3 40 Closing Price Target Price Initiation/Assumption Rating 9-Nov-11 33.55 39.5 21-Nov-11 30.85 36 O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered 2-Feb-12 34.2 35.5 26-May-12 28.65 34 The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts stock ratings are defined as follows: Outperform (O): The stock s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29 th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts coverage universe weightings are distinct from analysts stock ratings and are based on the expected performance of an analyst s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. (2881.TW / 2881 TT) 12
Credit Suisse s distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy* 46% (58% banking clients) Neutral/Hold* 41% (55% banking clients) Underperform/Sell* 10% (48% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (2881.TW) Method: Our 12-month target price of NT$38 for is based on sum-of-the-parts valuation: 1.1x price/book value (PBV) for Taipei Fubon Bank, 7.3x implied new business multiplier for Fubon Life, 1.0x PBV for Fubon Insurance, and 1.0x PBV for Fubon Securities. Risks: Our 12-month target price of NT$38 for is sensitive to interest rate outlook and overall investment performance. Credit cost assumption moving into the next two years is also sensitive to our forward earnings forecast. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (2881.TW) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (2881.TW) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (2881.TW) within the past 12 months. 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Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan-based analysts on non-taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. To the extent this is a report authored in whole or in part by a non-u.s. analyst and is made available in the U.S., the following are important disclosures regarding any non-u.s. analyst contributors: The non-u.s. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-u.s. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Chung Hsu, CFA, non-u.s. analyst, is a research analyst employed by Credit Suisse AG, Taipei Securities Branch. Michelle Chou, CFA, non-u.s. analyst, is a research analyst employed by Credit Suisse AG, Taipei Securities Branch. (2881.TW / 2881 TT) 13
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