PREVIEW-Taiwan's Cathay Fin faces Q1 loss, outlook brighter

* What: Cathay Financial Q1 results

* When: Thursday, after the stock market close

* Likely to post a loss on U.S. subprime investments, stronger Taiwan dollar; 2008 outlook solid on closer Taiwan-China ties

By Faith Hung

TAIPEI (Reuters) - Cathay Financial (2882.TW), Taiwan's top financial holding firm, is expected to post its worst quarterly loss in two years as it takes a double hit from stronger Taiwan dollar and the U.S. subprime debt meltdown.

But Cathay's prospects for the rest of the year look more solid on hopes that the Chinese market could become a major earnings driver if ties between Taiwan and China improve.

In the shorter term, Cathay could also profit from its investments in Taiwan stocks, which have been Asia's best performers this year.

Cathay and smaller rivals have posted losses recently due to higher provisions stemming from their investments in securities hit by the U.S. subprime mortgage meltdown and ensuing global credit squeeze. A surge in foreign currency hedging costs against their overseas investments has also eaten into profits.

Shin Kong Financial (2888.TW), Fubon Financial (2881.TW) and Mega Financial (2886.TW) have struggled with similar problems.

"Cathay's first-quarter result is not going to be pretty, but it should be this year's bottom," said Kevin Yang, president of Paradigm Asset Management, which owns shares of Cathay.

Three analysts polled by Reuters expect Cathay to post a loss of T$3.0 billion ($99 million) to T$4.5 billion in the first quarter, its biggest loss since the December quarter of 2005.

That would be worse than the T$2.18 billion loss it recorded in the fourth quarter of 2007. It had a net profit of T$10 billion in the first quarter of 2007.

Cathay is scheduled to announce its results after the stock market closes on Thursday, kicking off Taiwan's earnings season.

Last month, Cathay said it had written off T$1.76 billion ($58 million) in collateralised debt obligations (CDOs) so far for the year, following T$3.27 billion in previous write-downs.

It also said it incurred currency hedging costs of T$10 billion in January and February as it was hit by a run-up in the Taiwan dollar.

But an executive said the company expected no more big surprises from the subprime crisis, and that most related industry write-offs had already been made.

Analysts polled by Reuters Estimates expect Cathay's revenue to grow 9 percent this year to nearly T$96 billion, a slowdown from last year's 28 percent growth when the industry was rebounding from a local credit crunch.

But they expect the rapid growth to resume in 2009, when revenue is forecast to jump 17 percent as new opportunities start to open up.

CHINA GROWTH

Cathay could return to profitability in the near term as it clears its bad debt provisions and as it profits from Taiwan stocks, which accounted for nearly 10 percent of its US$69 billion portfolio in the December quarter.

Defying a global rout in equities, Taiwan was the only major Asian bourse to post a gain in the first quarter, although it was only a modest 0.8 percent.

The main index , which was hovering around 8,700 points on Tuesday, is widely expected to hit the 10,000 point mark later in 2008 on investor optimism over better ties across the Taiwan straits.

The island's financial firms are expected to be among the main beneficiaries of improving business ties between Taiwan and China under Taiwan's incoming, China-friendly Nationalist Party administration.

Taiwan President-elect Ma Ying-jeou told Reuters last week he would push for the removal of curbs on China investments, including a long-time limit that allows Taiwan companies to invest only up to 40 percent of their net assets there. [nPEK67673]

"Lifting of the 40 percent cap would substantially benefit Cathay and other banks as Taiwan companies will need a lot more loans for their increasing investments in China," Yang said.

Taiwan firms, which make products from Dell notebook PCs to Nike sneakers, have invested as much as US$100 billion on the mainland since the 1980s.

Cathay and its peers could also benefit from a recent change in Taiwan government policy allowing them to invest in Chinese banks via their offshore subsidiaries. The earnings impact could be substantial in the long term but is not expected to show up until two to three years after investments are made. [nTP236356]

Taiwan's banking and insurance index .TFNI is up 20 percent this year, in large part due to anticipation of growth prospects in China.

Shares of Cathay rose 15 percent in the March quarter, beating the 0.8 percent gain in the benchmark index.

(US$1=T$30.4)

(Editing by Kim Coghill)