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.