Banking and Financial Stocks Allocation Guide: Defensive Strategies and Income Opportunities in the Economic Cycle

The Taiwan stock market fluctuates around 28,000 points. Although tech stocks continue to attract attention due to the AI boom, savvy investors have already noticed that capital is quietly shifting. From the high-valuation electronics sector, funds are gradually moving toward financially solid stocks with stable cash dividend yields.

Imagine: a fixed deposit earning only 2% over a year, but holding bank stocks and financial holding companies can reliably generate cash dividends of over 5-7%, with the added chance to participate in share price recovery. The opportunity cost difference is worth serious consideration.

Why is now a critical moment for financial stocks and bank stocks?

Valuation traps and opportunities coexist

The global stock rally has been almost hijacked by electronics and AI supply chains, but after the surge, the price-to-earnings ratio (PER) has doubled to over 30 times, while profit growth has become increasingly difficult. In contrast, financial holdings and bank stocks generally maintain PERs of 10-15 times, compared to tech stocks often at 25-30 times, making them relatively more attractive. As expectations of a soft landing in the economy rise, capital naturally flows into value stocks with stable profits and dividend support.

The double-edged sword of interest rate environment

Although the Fed has entered a rate cut cycle, Taiwan’s financial holdings have already accumulated pre-tax profits exceeding NT$560 billion by November 2025, setting a record high. Looking ahead, even if interest rates remain low in 2026, as long as the economy does not fall into recession, the overall dividend-paying capacity of financial groups may surpass this year’s performance rather than weaken. Benefiting from this, bank stock prices have room for further rebound.

Defensive characteristics in the economic cycle

Capital rotation is underway—defensive stocks like Fubon Financial and Cathay Financial have recently shown clear signs of recovery. If profits and dividends remain strong next year, financial stocks are likely to perform well. Even in a mild recession, banks and financial holdings with good loan quality and high capital adequacy ratios tend to experience the smallest declines. The 2022 bear market is a prime example: the weighted index plunged over 20%, but the financial index fell less than 15%. This “attack when possible, defend when necessary” trait is especially valuable in high-level oscillation environments—tech stocks often pull back 10%, while bank stocks typically fluctuate only 3-5%, making the psychological burden much lighter.

The comprehensive landscape of financial stocks: from holdings to specialized banks

Financial stocks generally refer to stocks in banking, insurance, securities, and other financial services industries. There are about 49 listed financial stocks in Taiwan, with diverse structures.

Financial holding companies

Holdings are platforms for diversified operations, covering banks, life insurance, securities, asset management, and advisory services. Due to their broad service scope, large asset size, and stable shareholder structure, they are most favored by investors. This is a good entry point for beginners investing in bank stocks.

Pure bank stocks

Stocks issued by banks themselves (e.g., Chang Hwa Bank, Taichung Bank) mainly engage in deposit and loan activities, with relatively simple but stable operations. Their volatility is usually lower than that of financial holdings, making them suitable for long-term investors seeking steady cash flow.

Insurance stocks

Insurance companies generate revenue from premiums and investment returns, with higher sensitivity to risk than banks and securities. During interest rate shifts—rising or falling—stock prices tend to fluctuate more sharply, making them suitable for tactical positioning.

Securities stocks

Revenue mainly depends on brokerage activities, closely tied to market trading volume. When markets are active, brokerage profits soar; during downturns, they decline. These are cyclical and sensitive to economic conditions.

Fintech stocks

Companies focused on digital payments and innovative applications, including PayPal, Mastercard, etc., with strong growth potential but also higher risks.

For investors with limited capital, starting with financial ETFs (such as 0055 Yuanta Financial, 006288U Financial ETF) offers low thresholds and diversified risk. Bank stocks and financial holdings can be used together—holding financial holdings as the main allocation, with bank stocks as defensive supplements.

Selected Taiwan bank stocks and financial holdings overview

Based on the latest data and institutional forecasts for Q4 2025, here are some representative stocks with different business features:

Fubon Financial(2881): The comprehensive attack and defense of a financial holding leader

Fubon Financial’s life insurance subsidiary provides stable contributions, with rapid growth in wealth management and digital banking. Estimated EPS in 2025 is NT$4.5-5, with a PER of about 12, leaving valuation room. Active in sports sponsorships and branding, its long-term brand asset appreciation potential is significant.

Risks: Overseas expansion (Hong Kong, Southeast Asia) could be affected by geopolitical fluctuations, impacting profits.

Cathay Financial(2882): Imagination space in its international expansion

Cathay’s insurance business in Vietnam, Thailand, and other Southeast Asian markets shows significant growth, with wealth management fee income increasing 15% annually in 2025. EPS is estimated at NT$4, with a PER of 11, making valuation attractive. If interest rates stabilize in 2026, insurance profits may climb further.

Risks: Insurance stocks are sensitive to interest rate changes; rapid rate cuts could suppress investment returns.

CTBC Financial(2891): Growth story of a digital leader

CTBC’s digital transformation leads the industry, with mobile banking users growing 20% in 2025. It has moderate exposure to the Chinese market (lower than other holdings), offering broader growth space. EPS is estimated at NT$2.8, PER of 13, with future potential. If China’s economy recovers in 2026, share prices could surprise further.

Risks: Uncertainty in Chinese policies may restrict some business progress.

E.SUN Financial(2884): Steady operation, a top choice for income

E.SUN focuses on SME loans and retail banking, with net interest income increasing 10% annually in 2025. Its conservative management style attracts risk-averse investors. EPS is estimated at NT$2.5, PER of 12, making it a good long-term holding.

Risks: Business concentrated in Taiwan; if the local economy slows, growth may be hindered.

Chang Hwa Bank(2801): Low valuation opportunity among pure bank stocks

Chang Hwa Bank is a representative pure bank stock, with high capital adequacy and stable loan quality. Its wealth management business grew 12% in 2025. EPS is NT$1.5, PER of 10, making it one of the most undervalued options. Suitable for investors seeking safety margins amid financial sector rotation.

Risks: Single business model; less diversified growth compared to financial holdings.

US bank stocks and global financial giants allocation

In 2026, institutional investors are optimistic about US financial stocks, including comprehensive banks, investment banks, and insurance giants. Taiwanese investors can directly place orders via securities firms or diversify risk through financial ETFs.

Berkshire Hathaway(BRK.B): The most stable global investment holding

Led by Warren Buffett, this super-holding group owns GEICO insurance, railroads, energy, manufacturing, and more, with major holdings in Apple, American Express, and others. Essentially, it uses insurance cash flows to buy quality companies, creating wealth through compound growth. Often called “the most stable defensive asset in US stocks.”

JPMorgan Chase(JPM): Wall Street’s versatile bank

The largest US bank, covering retail banking, investment banking, wealth management, and credit cards, with over 300,000 employees and a market cap exceeding $800 billion. If capital markets remain strong in 2026, profit growth potential is high, with reasonable valuation.

Bank of America(BAC): Retail financial leader

The second-largest US bank, serving the general public with accounts, mortgages, credit cards, and wealth management. Over 68 million customers, with the largest deposit scale in the US. Its penetration in Americans’ daily financial lives is highest, with a solid moat.

Goldman Sachs(GS): Wall Street’s investment banking aristocrat

Famous for M&A, IPOs, and bond trading for large corporations. Clients are mainly corporate executives and institutional investors; retail clients are few. Profitable and called “Wall Street’s aristocratic bank.” If capital markets stay hot in 2026, Goldman Sachs will be most explosive, but with higher volatility—recommend allocating no more than 20% in portfolios and timing entries carefully.

American Express(AXP): The high-end credit card powerhouse

Top global credit card company targeting high-end clients. Revenue mainly from transaction fees rather than interest, with strong consumer spending and low economic sensitivity. Compared to traditional banks, less volatile, suitable for defensive portfolios.