A nearly five-year bull run in global equities markets provided a lifeline for beleaguered Taiwanese financial enterprises, allowing them to eke out razor-thin profits as they have recovered from the consumer debt crisis sparked by rash issuance of both credit and debit cards. Thanks to a drastically reduced consumer credit problem, massive growth in asset management businesses and red-hot global capital markets, profitability was broadly up across Taiwan's financial sector last year over the previous year.

According to this year's CommonWealth Magazine survey of Taiwan's top 100 financial enterprises, total operating revenue for the top 100 was nearly NT$5 trillion, up a scant 4.7 percent over the previous year, yet average profitability rose from 2.1 percent to 4 percent.

Cathay Life Insurance Co., Ltd. was last year's "profitability king," earning NT$23.4 billion in after-tax profit.

"A substantial portion of Cathay Life's profit last year derived from return on investments," concedes Lee Chang-kung, chief strategist for Cathay Financial Holdings.

Securities Sector the Big Winner

Directly reaping the benefits of robust securities markets, insurance companies and securities firms last year posted gains in operating revenue of 25.1 percent and 42.5 percent, respectively. Average profitability at securities firms rose to more than 24 percent – six times that for the financial sector as a whole – making them the big winners.

"If Taiwan's stock market is doing well, then our three core businesses – brokering, underwriting and proprietary trading – follow suit," Fred Pai, a vice president at Polaris Financial Group, says with a smile.

As China increases the intensity of its macro-control policies, Taiwanese firms doing business there have turned to the offshore banking units of Taiwanese banks for financing. Additionally, the roughly 50 percent growth in revenue from asset management fees enabled the two main drivers of banking-sector profitability – corporate banking and consumer banking – to post substantial gains.

The Cross-Strait Showdown

The financial industry is one based upon credit and fraught with risk, where the winners are those who make the fewest mistakes. For 2008, some progress on lifting restrictions on cross-strait financial-sector business activities can be expected. For financial enterprises, the opportunity to cast off the shackles is nigh, yet in the uncharted waters of the China market, where the risks and challenges are even greater, how the showdown there plays out will determine the future of Taiwan's financial industry.

Prospects for '08: A Bear for Insurance

The insurance industry showed spectacular performance last year. Financial holding companies, for which insurance constitutes the bulk of business, posted eye-popping gains. But with the ongoing sub-prime mortgage crisis in the U.S., enormous foreign exchange losses from a surging New Taiwan dollar and under-performing global financial markets, all of last year's gains have been spat back into the market. Cathay Life, with the highest level of working capital at NT$2 trillion, lost NT$6.04 billion in the first quarter. Shin Kong Life also posted a first-quarter loss.

"This is going to be a relatively tough year for the insurance industry," admits Cathay Financial Holdings president Tsu-pei Chen.

A Bull for Banks and Securities

Benefiting from the potential lifting of restrictions on cross-strait financial-sector business, as well as rising Central Bank interest rates which has caused widening gross earnings margins for banks, and growth in overseas lending by offshore banking units, Chinatrust Financial Holdings CEO James Chen confidently asserts: "Financial holding groups centered on banking will perform better this year."

The one thing to remember, however, is the Consumer Debt Clearance Statute, which takes force on April 11. SinoPac Holdings estimates that there remains another NT$50 billion in non-performing debt to be written off across the banking industry. This will continue to cause anxiety among bankers this year.

"At worst, however, banks will clear up their consumer credit issues in a year or two and investor confidence will recover. On top of that is the increased pace of cross-strait opening. There is still a lot of upside to financial shares," SinoPac Holdings senior analyst Lee Fang-guo says optimistically.

Moreover, financial markets are "cold overseas, hot domestically" this year, and market sentiment has been high since the presidential election, with shares posting record highs as the Taiwan market becomes the lone global performer. The frenzied market activity and expanding transaction volumes will mean increased operating revenue and improved profits at securities companies. For securities companies, it looks to be a very good year, indeed.

Translated from the Chinese by Brian Kennedy

About the Survey

This year, in response to changes in the guidelines for financial statements by holding companies and banks, CommonWealth Magazine's Top 100 Financial Enterprises survey has been divided into two parts. The first section ranks Taiwan's 14 financial holding companies, using net income as the benchmark.

The second section ranks all other financial-sector firms, including banks, insurance companies, securities firms and other financial institutions, based on operating revenue. Operating revenue figures for banks was derived either from questionnaires filled out by individual banks, in which their net income figures were converted back into operating revenue, or from information publicly available on the Taiwan Stock Exchange's Market Observation Post System.

Chinese Version: 挺過風暴　決戰中國