UPDATE 1-Taiwan banking shares tumble 6 pct on Lehman woes

By Faith Hung and Rachel Lee

TAIPEI, Sept 15 (Reuters) - Taiwan's financial shares dropped 6 percent on Monday as investors worried that uncertainty surrounding the fate of Lehman Brothers could hurt investments of insurance firms such as Cathay Financial (2882.TW: Quote, Profile, Research, Stock Buzz).

The banking and insurance sub-index fell 6 percent to 786.41. It touched similar levels during a sell-off last week, but before then had not been that low since late 2003.

The drop helped to drag the main index down more than 4 percent to 6,052.45, its lowest close since November 2005, as investors fretted over the impact on the U.S. financial system should Lehman collapse.

Financial shares in Taiwan, the only major north Asian market open on Monday, were rocked by news Lehman was planning to seek bankruptcy protection after potential bidder Barclays of Britain walked away. Markets in Japan, China, Hong Kong and South Korea were closed for mid-Autumn holidays.

Turmoil in the U.S. financial system was compounded by news Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) is to buy Merrill Lynch and Co Inc (MER.N: Quote, Profile, Research, Stock Buzz). Merrill has also been hit hard by the credit crisis, stuck with much of the same kind of mortgage-related debt as Lehman, and has written down more than $40 billion over the past year [ID:nLF644127].

"Taiwan insurance firms have invested in structured products issued by Lehman on commercial properties. They would need to book losses on this part, in addition to the write-down they had made against their U.S. subprime investments," said Nora Hou, banking analyst of Deutsche Securities.

Cathay Financial (2882.TW: Quote, Profile, Research, Stock Buzz), Shin Kong Financial (2888.TW: Quote, Profile, Research, Stock Buzz) and other smaller rivals have a total of about T$8 trillion ($250 billion) under management, up to 40 percent of which can be invested overseas.

The Lehman woes come as Taiwan banking sector -- Asia's fourth-biggest -- is facing slowing loan growth, losses in Taiwan stock investments and volatile global markets.

"The yield in their local investments is quite low. Taiwan companies would not raise their overseas investments. And they would post losses for their Taiwan stocks portfolios," said Joyce Huang, an associate director of Fitch Ratings.

"Taiwan insurance firms are already struggling with inadequate capital adequacy ratios. What's happening with Lehman deepens the worries they will not be able to raise the capital they need," said an analyst at a U.S.-based research house.

Shares of Cathay Financial and Shin Kong Financial (2888.TW: Quote, Profile, Research, Stock Buzz), parents of Taiwan's two biggest insurers, went 7-percent limit down.

Chinatrust Financial (2891.TW: Quote, Profile, Research, Stock Buzz), the island's top credit card issuer, dropped 6.8 percent.

Shin Kong said last week it planned to raise US$250 million from a strategic investor to help strengthen its capital base. [ID:nTP166512]

"Market sentiment on financial shares is very poor. We just don't know when it is going to improve," said the analyst of the U.S.-based research firm, asking not to be identified. ($1=T$32.08) (Editing by Keiron Henderson)