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Edited Transcript of 2891.TW earnings conference call or presentation 23-Aug-22 9:00am GMT

Q2 2022 CTBC Financial Holding Co Ltd Earnings Call Taipei Aug 23, 2022 (Thomson StreetEvents) -- Edited Transcript of CTBC Financial Holding Co Ltd earnings conference call or presentation Tuesday, August 23, 2022 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Pai-Hung Yeh Taiwan Life Insurance Co., Ltd. - SVP, Strategy Officer & Operation Group Head * Ya-Ling Chiu CTBC Financial Holding Co., Ltd. - CFO, Head of Financial Management Department & Executive VP ================================================================================ Conference Call Participants ================================================================================ * Gurpreet Singh Sahi Goldman Sachs Group, Inc., Research Division - Equity Analyst * S. Huang JPMorgan Chase & Co, Research Division - Financial Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome, everyone, to CTBC Financial Holding Company's 2022 Second Quarter Earnings Conference Call. (Operator Instructions) And today's host will be Ms. Ya-Ling Chiu, the CFO and Spokesperson of CTBC Financial Holding Company; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Company. And the presentation will begin now. -------------------------------------------------------------------------------- Ya-Ling Chiu, CTBC Financial Holding Co., Ltd. - CFO, Head of Financial Management Department & Executive VP [2] -------------------------------------------------------------------------------- Thank you, everyone, for joining CTBC's Second Quarter 2022 Earnings Call. Please turn to Page 4 on financial highlights. Despite fluctuations in capital markets, CTBC Holding continued to deliver stable financial results in first half with ROE at 13.3%, reflecting resilient underlying core business. CTBC Bank observed solid growth momentum in its core business with increases in net interest income, supported by strong lending growth and wider net interest margin. Asset quality remained stable with benign credit costs at 21 basis points in first half. Taiwan Life's after-tax profit declined due to moderated investment gains and claim costs related to COVID policy that benefited from hedging gains. Taiwan Life continued to focus on protection type and foreign currency policies. Page 5 on profitability. Holdings first half net income was TWD 24.3 billion. EPS was TWD 1.19. Group ROE was 13.3% and ROA was 0.69%. Page 6 on capital ratio. We remain well capitalized with group CAR at 125%; Life RBC ratio at 312%; and Bank's CAR at 14.3%; CET1 ratio at 11.1%. Page 7 on profit breakdown by entities. In Q2, Bank net profit reached TWD 8.8 billion, up 18% Q-o-Q, supported by growth in net interest income and trading gains. Life made a loss of TWD 373 million due to lower investment income impacted by volatility in capital markets and claim costs related to COVID policies. Holdings consolidated net profit was TWD 8 billion, down 51% Q-o-Q. In first half, Bank net profit reached TWD 16.2 billion, up 9% Y-o-Y, driven by increases in net interest income and improved operating efficiency. Life profit was TWD 8.8 billion, down 47% Y-o-Y, mostly due to lower investment income on (inaudible). Holding's reported net profit was TWD 24.3 billion, down 27% Y-o-Y. From the table on the right, Bank and Life contributed 67% and 36% to Holding's first half profit, respectively. Page 8 on the net profit movement. In the chart above, operating revenue was up 2% Q-o-Q as growth in net interest income and trading gains were offset by lower fee income. Provisions were up 81% Q-o-Q, mostly due to higher 1% general provision against normal loans. The expense was down 15% Q-o-Q on lower ESOP valuation. As for Life, 2Q pretax profit declined 97% Q-o-Q, mostly due to moderated investment gains and claim costs related to COVID policies. On the bottom, operating revenue was up 6% Y-o-Y. Thus loan growth and widened net interest margin underpinned increase in net interest income. The trading gains by securities and venture capital subsidiaries decreased amid volatile capital markets. Provisions were up 34% Y-o-Y, mostly due to impact from LH. Credit costs remained benign at 21 basis points. Expense was down 1% Y-o-Y. Life pretax profit was down 36% Y-o-Y on lower investment income. Holdings pretax profit reached TWD 33.7 billion, down 10% Y-o-Y. Overall, Holdings net income reached TWD 24.3 billion, down 27% Y-o-Y. Page 9 on revenue breakdown excluding Life. Total revenue was up 2% Q-o-Q and 6% Y-o-Y. Net interest income was up 11% Q-o-Q, as net interest margin widened due to rising loan-to-deposit ratio, changes in loan mix and rate hikes. Net interest income was up 21% Y-o-Y, as loans and marketable securities grew and net interest margin widened due to changes in loan mix and higher yields on marketable securities benefiting from rate hikes. Fee income was down 23% Q-o-Q due to lower wealth management fees in addition to seasonally high base of lottery fees in 1Q. Fee income was down 4% Y-o-Y as volatility in capital markets, wealth management fees lower, the corporate credit card lottery and investment trust fees increased. Combined derivative FX and trading gains was up 12% Q-o-Q driven by higher trading income from FX-related products. Combined derivative FX and trading gains was down 34% Y-o-Y due to lower trading income as securities and venture capital subsidiaries. Long-term investment and other income increased Q-o-Q due to higher lottery rebates to MOF in 1Q and was down 63% Y-o-Y as the bank no longer booked long-term investment income from LH after consolidating the entity. Page 11 on bank's loan breakdown. Total lending with credit card revolving was up 1% Q-o-Q and 11% Y-o-Y. NT dollar corporate loan was up 1% Q-o-Q and Y-o-Y. If excluding government loans, NT dollar corporate loan was up 7% Q-o-Q and 12% Y-o-Y, driven by higher investment demand and working capital needs. Foreign currency loan was flat Q-o-Q and up 18% Y-o-Y. Excluding FX, foreign currency loan was up 21% Y-o-Y. Mortgage was up 4% Q-o-Q and 11% Y-o-Y, supported by stable property market and our participation in lending to civil servants. Other loans were up 1% Q-o-Q and 6% Y-o-Y mostly on growth in unsecured consumer loans as we continue to expand our customer base. Page 12 on foreign currency loan breakdown. Foreign currency loan accounted for 38% of total lending. Overseas subsidiaries accounted for 58% of foreign currency loans with TSB and LH being to larger subsidiaries. Overseas branches accounted for 30%; OBU plus DBU was 12%. Looking at the foreign currency loan breakdown by region, Japan accounted for 31%; Southeast Asia, 28%; Greater China, 15%; and North America was 14%. Overseas subsidiary loan was up 24% Y-o-Y. Excluding FX, overseas subsidiary loan was up 32%, driven by the consolidation of LH and solid business momentum at U.S., Indonesia and Philippines subsidiaries reporting double-digit loan growth. Overseas branch loan was up 11% Y-o-Y. Excluding FX, Overseas branch loan was up 8% as China, Hong Kong, New York and India branches observed double-digit growth. OBU plus DBU was up 13% Y-o-Y. Excluding FX, OBU plus DBU loan was up 5%, driven by growth in trade finance and syndicated loans. Page 13 on bank deposit mix. Total deposits reached TWD 4.3 trillion, up 4% Q-o-Q and 11% Y-o-Y. On the right, total NT dollar deposits were up 3% Q-o-Q and 8% Y-o-Y. NT dollar savings accounted for 63%. Total foreign currency deposits were up 4% Q-o-Q and 15% Y-o-Y. Foreign currency savings accounted for 57%. Page 14 on loan-to-deposit ratio. Overall, LDR was 72.5%. NT dollar LDR was 78.4%. Foreign currency LDR was 64.5%. Page 15 on NIM and spread. In 2Q, foreign currency spread was 2.53%, up 12 basis points Q-o-Q due to rate hikes and changes in loan mix. NT Dollar spread was 1.69%, up 12 basis points Q-o-Q, driven by loan growth and rate hikes. Overall spread was 2.0%, up 12 basis points Q-o-Q. In addition, rate hikes led higher yields for marketable securities. 2Q NIM was up 10 basis points Q-o-Q at 1.57%. Excluding impact from LH, NIM was 1.53%, up 10 basis points Q-o-Q. Page 16 on fee breakdown. Total fees were down 24% Q-o-Q and 4% Y-o-Y. Wealth management fee was down 20% Q-o-Q and Y-o-Y. The fluctuations in capital markets impacted customer demand and caused sales of bancassurance and mutual funds to weaken. Credit card fee was down 4% Q-o-Q as consumptions were affected by the increased number of COVID cases in the second quarter. Credit card fee was up 8% Y-o-Y due to recover consumption supported by expanded customer base and business ecosystems and further penetration of mobile payments. Retail business was flat Q-o-Q and up 12% Y-o-Y due to increases in ATM and loan-related fees. Corporate business fee was down 2% Q-o-Q on lower syndicated loan fees, and up 29% Y-o-Y driven by syndicated loan, private banking and trust fees. Overseas subsidiaries fee was down 1% Q-o-Q as corporate and retail-related fees decreased at TSB and up 10% Y-o-Y, mostly due to the consolidation of LH. Lottery fee was down 64% Q-on-Q due to seasonal Chinese New Year effect in 1Q and up 8% Y-o-Y. Page 17 on wealth management fee. For wealth management fee breakdown in 2Q, Bancassurance contributed, 62%; mutual fund, 24%; custodian and trust, 4%; and others, 10% to total wealth management fees. Page 18 on cost/income ratio. Bank operating revenue improved, while operating expense was down 16% Q-o-Q mostly due to decreased ESOP valuations, leading to a lower cost/income ratio of 50.2% in 2Q. In first half, cost/income ratio was 55.4%, lower compared to the same period last year. Mostly due to 10% growth in operating revenue and decreased ESOP valuation. Page 19 on asset quality. NPL ratio was 0.51%, and NPL coverage ratio was 321%. Excluding impact from LH, NPL ratio was 0.37% and NPL coverage ratio was 384%. 3Q credit cost was 26 basis points, up 11 basis points Q-o-Q and higher general provisions amid loan growth. First half credit cost was 21 basis points, up 3 basis points Y-o-Y from the same period last year, mostly due to impact from LH. Excluding impact from LH, first half credit cost would be 14 basis points. Moving on to Life business. Page 21 on total premium and first year premium. Total premiums were TWD 31.8 billion in 2Q, down 25% Q-o-Q. First half total premiums were TWD 74.4 billion, down 25% Y-o-Y. FYPs were TWD 13.3 billion in 2Q, down 41% Q-o-Q of sales of single-pay interest-sensitive policies and investment-linked products declined. First half FYPs were $35.7 billion, down 33% Y-o-Y plus volatile capital markets affected sales of investment-linked products and customers turn to interest-sensitive policies that captured rate hike trends. FYP market share was 7.8%, ranked #5 in the industry. Page 22 on FYP breakdown by products and channels. On the left is the product breakdown. Investment-linked products accounted for 18%; interest sensitive policies, 78%; health and PA 4%; and traditional 1% of FYPs. On the right. In terms of channels, 51% of FYPs came from CTBC Bank, 34% from external banks, 9% from tied agents and 6% from insurance brokers and others. Page 23 on FYP breakdown by type of payment and currencies. On the left, single-pay products accounted for 47% and regular paid products accounted for 36% of FYP. On the right, investment-linked products accounted for 18% foreign currency policy, 72%; and NT dollar policy 11% of FYPs. Page 24 on FYPE. First half FYPE was TWD 9.2 billion. On the right is the FYPE mix for your reference. Page 25 on investment asset mix. Total investment assets reached TWD 2 trillion. Taiwan Life took suitable opportunities to increase overseas fixed income and equities positions and lower its cash holdings. In terms of portfolio breakdown, cash accounted for 4.9%; domestic fixed income, 9.8%; overseas fixed income, 59.7%; equities, 10%; mortgage, 1.9%; policy loans, 1.3%; real estate, 4.5%; and mutual funds, 7.9%. Pre-hedge returns for each type of investment assets are as follows: cash, 0.24%; domestic fixed income, 2.04%; overseas fixed income, 4.28%; equities, 1.48%. As the return includes investment laws at P&C subsidiary, mortgage 2.16%; policy loans, 4.7%; real estate, 0.56% as part of the real estate project construction work is underway. And the return for mutual fund is 7.91%. Page 26 on investment yield, cost of liability and breakeven point. In first half, Taiwan Life still maintains positive investment spread, with impact from P&C, overall investment yield after hedge was 3.83% and recurring yield before hedge was 2.73%. If excluding impact from P&C, overall investment yield after hedge was 4.26% and recurring yield before hedge was 3.17%. Cost of liability marginally increased 1 basis point Y-o-Y to 3.07%. Breakeven point continued to improve at 2.66%. Page 27 on hedging mix. On the left, 43% of overseas investment assets were foreign currency policies; 35% were fully hedged; 10% were OCI position; and 12% were unhedged. On the right, FX reserve amounted to TWD 9.5 billion as of 2Q. NT dollar depreciation resulted hedging gains of 25 basis points in the first half. Overall, hedging costs declined 180 basis points Y-o-Y from the same period last year. Next session is the ESG highlights for your reference. That concludes the presentation. -------------------------------------------------------------------------------- Pai-Hung Yeh, Taiwan Life Insurance Co., Ltd. - SVP, Strategy Officer & Operation Group Head [3] -------------------------------------------------------------------------------- Good afternoon, everyone. This is Pai-Hung Yeh. Before we start the Q&A section, let me give you a quick update on the full year's outlook of our guidance for each driver. For loan growth, we expect double-digit growth for the whole year because year to July, the loan growth for NT dollar loan was 12% and for foreign currency loan was 8% for the first 7 months, which annualized to double-digit growth. So we believe the momentum for the first 7 months will continue to the second half of this year. And for NIM, the guidance is 1.56% to 1.57% for the whole year, given the assumption of U.S. rate will increase 325 basis points. And for NT dollar interest rate will increase 62.5 basis points for the whole year. And for fee income, we expect low single-digit growth given the weak wealth management fee and the strong credit card fees in corporate and other banking fees. For credit cost, we expect 20 to 25 basis points, including the provision for the relief program in LH. And for cost-income ratio, our target is 57% for the whole year. And the outlook on Life side, for the recurring yield, we expect 3.27%, 3.27% for the recurring yield. And for cost of liability, we expect 3.11%, 3.11%, and for hedging costs, it's 33 basis points, 33 basis points for the whole year. Now we can start the Q&A session. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question is coming from Gurpreet Sahi of Goldman Sachs. -------------------------------------------------------------------------------- Gurpreet Singh Sahi, Goldman Sachs Group, Inc., Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- So my question is regarding the margin for next year. So if the margin is roughly 1.57 for this year because interest rates have settled at a high level, how much of repricing benefit can we expect on the asset side? And likewise, how much will be pushed on to depositors so that margin can increase next year. So that's the first one. And then on second, regarding the loan growth, can I ask which areas will the loan growth be focused on during the second half of this year? -------------------------------------------------------------------------------- Pai-Hung Yeh, Taiwan Life Insurance Co., Ltd. - SVP, Strategy Officer & Operation Group Head [3] -------------------------------------------------------------------------------- Regarding the first question, it's about the margin for the next year. We expect net interest margin for the next year, it will be around 1.7% after the U.S. rate hike and the NTD interest rate increase fully reflected. And the second question is the loan growth. The loan growth momentum was coming from 4 products or areas. First one is mortgage. And second one is unsecured loan. The third one is the loan from North America area. And the fourth one is from Greater China, including China and Hong Kong. This is the momentum for the first half. And for the second half, we believe the momentum will continue, given the market open up. And also for the mortgage, we have the authorization to underwrite the mortgage for the government employees. So this is the incremental sales volume or mortgage volume to us. -------------------------------------------------------------------------------- Gurpreet Singh Sahi, Goldman Sachs Group, Inc., Research Division - Equity Analyst [4] -------------------------------------------------------------------------------- Can I follow up on the Life side? Any more COVID-related provisions? And how are we seeing those kind of reserves on the insurance balance sheet? -------------------------------------------------------------------------------- Unidentified Company Representative, [5] -------------------------------------------------------------------------------- For COVID policies, we have recognized TWD 4.3 billion loss in our P&L. And the assumption behind that is 15%, 15% come from compound case ratio. And I give you some sensitivity if the compound case ratio is 20% and then the recognized need to be recognized, it's TWD 6 billion. That is TWD 1.7 billion more need to recognize in the second half year. And as the ratio is 25% then 7.5 billion loss need recognized. That is 3.2 billion loans need to be recognized in the second half of the year. According to our observation, for our compound case, as of the mid of August, we observed that our compound case ratio is 15.5%, but -- which is lower than the -- we observed that the compound case ratio is 16.1% for the Taiwan at the end of June. So to be optimistic have the possibility to low the Taiwan compound case ratio, but they need to more observation. So currently, we haven't decided that number yet. But as the sensitivity case, I give you maybe between -- to TWD 1.7 billion to TWD 4.0 billion. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- (Operator Instructions) And next, we'll have Jemmy Huang of JPMorgan. -------------------------------------------------------------------------------- S. Huang, JPMorgan Chase & Co, Research Division - Financial Analyst [7] -------------------------------------------------------------------------------- Just one from me is on loan growth, you mentioned you are seeing decent demand from the Greater China region. I think most investors are actually quite cautious on China exposure currently. And then I think you also got some exposure to the defaulted corporate cases in the past as well. So nowadays, when you are looking for the decent loan growth momentum in Hong Kong, China, is there any difference in terms of the way you are -- in terms of the customer base or in terms of the type of lending you are doing compared to a couple of years ago so that we do not really need to worry about any potential asset quality issues in the coming years. -------------------------------------------------------------------------------- Pai-Hung Yeh, Taiwan Life Insurance Co., Ltd. - SVP, Strategy Officer & Operation Group Head [8] -------------------------------------------------------------------------------- Yes, the product structure is different from a couple of years ago. Right now, I think we are quite balanced in terms of Taiwan is corporate and Chinese corporate. And also, we will be focusing -- put it this way, we want to diversify the client base. So before a couple of years ago, we did some big stay on corporate -- big corporates. And so that's why we have some bad debt in the past and the impact is quite big. But now we will focus more on middle class and middle-class corporates. And also, we try to balance some export and domestic consumptions, Taiwanese and Chinese. And to secure our loans then we also ask for some deposit or some sales like trading business. We want to bundle something that we can -- we are able to know how our customers' business is going. So then we will know in advance that if there's anything happens to our customers. So for example, after the lockdown of Shanghai, we review all the customers, all the active customer to see if their business have been impacted by the lockdown. But it turned out that so far there's no big concern to us. But actually, there are some early warning cases that might be impacted, but we closely monitor those clients, those cases so far. So I think China is still the second biggest economy and very big domestic market. So if you want to grow in the future in the long term, we still need to develop the business in China. Hopefully this answered your question. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- (Operator Instructions) Okay. Then there appears to be no further questions at this point. We thank you very much for all your questions, and that will be the end of the conference. Ladies and gentlemen, we thank you for your participation in CTBC Financial Holding Co.'s Conference Call. You may now disconnect. Goodbye.