(Adds CFO comments, details)
By Faith Hung
TAIPEI, July 10 (Reuters) - Cathay Financial (2882.TW), Taiwan’s top financial holding company, on Thursday said its net profit plunged in the second quarter to T$3.7 billion ($121.7 million), as beaten-down Taiwan stocks chopped out profits at its banking and insurance business.
But hopes the government will allow Cathay and other local banks to directly invest in China offered some relief for the financial sector, whose prospects are otherwise gloomy as a surge in inflation roils Taiwan and other global economies.
Cathay and some rivals including Shin Kong (2888.TW) were hit hard in June, when Taiwan's main TAIEX share index .TWII plunged 13 percent on worries that record oil prices would hurt consumer and corporate spending. The index lost 12 percent in the second quarter.
“The benchmark index dropped 1,000 points in Q2 from Q1, sending us into the red in June,” chief financial officer Grace Chen told Reuters by phone.
She added the company would focus on long-term investments for the moment, following the recent stock market sell-off. She said loan growth and margins at Cathay’s banking unit would remain flat throughout this year.
The T$3.7 billion profit was at the higher end of the T$100 million to T$4 billion profit forecast by three analysts polled by Reuters.
But it was down 65 percent from the T$10.7 billion net profit registered in the the second quarter in 2007, though an improvement on a record T$6 billion net loss in the first quarter this year.
Cathay and its peers suffered earlier in the year when many took large write-downs for assets affected by the U.S. subprime crisis.
On Wednesday, the financial regulator said Taiwan firms suffered “limited” losses of T$42.572 billion since August 2007 in investments related to U.S. subprime products. Of the total, banks took a hit of T$34.172 billion and insurance companies lost T$8.4 billion, the Financial Supervisory Commission said.
But now all eyes are on Taiwan’s ailing stock market, in which Cathay and its peers all have large investments. Taiwan stocks tumbled to 20-month closing lows this week, raising concerns they could soon extend their drop to below 7,000 points from the current 7,000-7,200 range.
Cathay and Shin Kong, parents of Taiwan’s top two insurers, have about T$2 trillion and T$1 trillion, respectively, in their overall investment portfolios.
Going forward, one of the drivers for Cathay and its peers is the expectation the Taiwan and China governments may let Taiwan banks upgrade their representative offices in China to branches, giving them access to Taiwan firms that have invested more than $100 billion on the mainland.
Taiwan banks now are allowed to invest in their Chinese counterparts only via their offshore subsidiaries. But hopes for further opening have been growing since the island’s new government approved a raft of reforms last month allowing greater investments by its financial firms in China. [ID:nTP282647]
Before the positive factor kicks in, downside risks for Cathay remain, including further subprime write-offs and poor stock market performance, said Nora Hou, an analyst of Deutsche Securities, which cut its target price on Cathay shares to T$76 from T$97 previously.
Cathay shares fell 15 percent in the June quarter, versus a 12 percent drop in the benchmark index .TWII.
On Thursday, Cathay ended up 3.6 percent, against a 0.39 percent rise in the broader market .TWII before the results were announced. (US$1=T$30.4) (Reporting by Faith Hung; Editing by Doug Young and Jonathan Hopfner)