Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by, and welcome to Fubon Financial's First Quarter 2023 Financial Results. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time.

And now I will hand the call over to your host, Ms. Amanda Wang, the IR Officer of Fubon Financial Holdings. Ms. Wang, please begin.

[Amanda Wang, executive]

Thank you, everyone. Welcome to join Fubon's first quarter results briefing.

Please turn to Page 4. Okay. In April, the company announced a cash dividend of $1.50 and stock dividend of $0.50, which represents a total payout ratio of over 56%. And including company's net profit in first quarter, it is $ 14 billion and EPS of $1.13. Both are actually the top of our financial holding. And total assets of over $10 trillion, that shows continuous growth, while book value per share at $49.80.

In Fubon Life, the net profit reached over $7.25 billion, and net profit ranked top among life insurers in Taiwan. In terms of the underwriting performance, we ranked top 2 in terms of FYP, TP and FYPE. For the investment side, the return of 3.32% mainly supported by the recurring income, while the capital's perspective remain solid with equity to asset ratio at about 8.3% and RBC nearly at 300%.

In Page 5. In Taipei Fubon Bank, the net profit reached $6.91 billion. That if we exclude the onetime bargain purchase gain that's booked last year, the earnings actually was up by 60% Y-o-Y. And all of the earning drivers, we see the fee income growth is a bright spot for this quarter, the Y-o-Y growth of over 17% mainly on back of the wealth management growth and also our credit card business. And we see the new card issuance this quarter has been quite strong at over 0.8 million of new card issuance and out of which, over 80% from the COSTCO co-branded cards.

And we completed the merger with Jih Sun Bank on April 1. That will push our numbers of branches the top among private banks.

And in Fubon Insurance, the net loss in first quarter is $4.25 billion. While if we exclude the impact from COVID-related policies, the net profit will be about $0.97 billion. And in April, we see a net profit turn positive to $380 million in April. In terms of the premium, it grew by over 10% in first quarter, while the market share, that we remain as the market leader. And on the investment front, we remain at stable performance at 5.89%. While the capital position, that we complete the capital injection of $16 billion in May, and the RBC ratio exceed the legal requirement.

In Fubon Securities, the net profit is $1.53 billion in Q1, which is doubled year-over-year mainly from the investment gains due to the TAIEX Taiwan stock market trend up. And here, we also completed the merger of Jih Sun Securities, which would help to support the growth in market position.

And in Page 6. In the ESG perspective, it is our honor that we are top 5% rank in ESG score from S&P yearbook from DJSI. And in terms of the results that is delivered in our business lines that you can see across Life, Bank, Insurance and Securities, we each deliver this country's actions in support of the low-carbon strategy.

And in Page 7. The net profit of $14 billion and EPS of $1.13 in this page that -- which is for your reference.

And in the following page, we can see the decline of nearly 70% Y-o-Y largely from: one is the Fubon Life, that's mainly due to a more volatile capital market and, therefore, a lower capital gain; and secondly, from the Fubon Insurance because of COVID-related policies claim. While we see the performance in the Bank -- the Fubon Bank and Fubon Securities actually is quite robust, while we also see the first 4 months of profit performance for the holding company let us reach at over $21.8 billion. And the Y-o-Y decline now is about 64%.

And in Page 9. In terms of the assets, we see a continuous growth, while the book value is mainly up and down due to the market volatility. From last year-end until the first quarter, we see the asset value result is upwards win and also asset reclassification. And that pushed up our net worth. And also the book value per share, as we can, see by last year-end, it's at $37.9; and by this quarter end, up to $49.8 per common share.

And in Page 10, ROA and ROE data points for your reference.

And next, in Page 12. For Fubon Life, the premiums, a decline of over 23% comes from, one, is the renewal premium, which is due to the paid-up of some regular-paid policies. And also FYP declined. But compared to the industry's level, Fubon's performance is still relatively better.

In Page 13. If we further break down the FYP, the company's strategies is quite delivered in our focus of the regular-paid products, which we can see the traditional life contribution increased to 39% of the total FYP. And health, accidents and others now reached over 8% of total FYP. And while the decline in investment-linked policy mainly because of the volatile capital market, and that led to FYP's decline.

On the following page, we can see the FYPE actually increased by over 20% on back of this regular-paid policies increase. And that's a strong outperformance compared to industry's performance of FYPE decline. And as a result, we can also see Fubon Life's VNB growth of nearly 30% Y-o-Y. And also, VNB margin reached over 25%.

In Page 15. In terms of the distribution channels, internal channels are our focus, which contribute over 70%, including tied agents, Taipei Fubon Bank and also other cross-sell channels.

And in Bank, bancassurance still is a strength of Fubon Life, which we are top ranked in the industry. And also, we can see the bancassurance through external bank's contribution in FYP also increased up to 22.6%.

In Page 16. From investment perspective, the portfolio-wise, we see the cash position is still relatively at a higher level of over 4%. That will help us to see some market opportunities going forward. While the increase you can see mainly in the domestic equity position may reflect, one, is the rebound of the stock market, and second is the increase in our equity allocation.

Foreign fixed income slide in Page 17. The mix is pretty much stable.

In Page 18. From the investment income perspective, our recurring return shows a more meaningful improvement of 13.2% Y-o-Y. That reflect a higher interest income. While the total investment income trend down mainly because of the capital markets by 30 and also a higher base in Q1 last year in capital gains, while the FX-related cost is also high this quarter.

So in the following page, we further elaborate more on the hedging perspective. Firstly, on the recurring hedging costs, including currency swap and NDF, this part is still at a high level due to the interest rate spread still wide. And therefore, the recurring hedge cost is at 141 basis points this quarter. And while the FX gain and loss, this portion shows quite meaningful improvement mainly because of the exchange rate was more of a range-bound level, and it came down to 47 bps this quarter. And therefore, the recurring return before hedge actually increased up to 3.08% on back of a higher market rate, while the after-hedge basis declined down to 2.17%.

And in Page 20. The overall investment return came down, as we just mentioned, capital gains reduction. While the spread, if we compare cost of liability versus the total investment return, we continue to keep at a positive zone of 20 bps. While the breakeven point also shows improvement by about 14 basis points year-over-year mainly on back of the product mix adjustment as we see the investment-linked policy reduced, and therefore, the first-year strength is lower, while the recurring return after hedge decreased because of higher hedge cost.

In Page 21. The unrealized balance, we see meaningful improvement quarter-over-quarter largely because of the market recovery in both equity and also fixed income. And we also have the financial asset reclassification starting from this year.

Okay. So the net worth, if we use last year-end of $270 billion as a base, actually, it grew up by about 50% Y-o-Y. In spite of -- sorry, YTD. In spite of, we can see the Y-o-Y still book value declined.

The equity-to-asset ratio was 8.3%. And again, if we compare to the year-end last year, which is about 5.7%, which also shows improvement and also the RBC of around 300% by the quarter end.

And in Page 23, in Taipei Fubon Bank's revenue mix. Firstly, the NII growth of 2.7% Y-o-Y mainly on back of the deposit and loan structure improvement and the fee growth of over 17% largely from wealth management. And from the treasury income, the growth mainly come from the valuation increase in financial assets and FX gains and while other income decreased largely because of the high base effect last year. And the total revenue was up by 10.5% Y-o-Y or 39% if we exclude that onetime gain last year.

In Page 24. In terms of the loan mix, bank grew by 4.4% from a total book perspective, while the retail loans grew at 5.7%, faster than the corporate loan of 3%.

And in Page 25. If we further break down the corporate loans components, the key growth driver comes from the foreign currency loan of over 7%, while the NTD loan is more flattish at 0.9% Y-o-Y. And SME also grew by over 7%.

In Page 26. The mortgage growth of 7%, that's outperformed the market average. And the personal unsecured loan was down, largely reflect the adjustment in the customer segment and also the repayment from the top-tier customers as the market interest rate is higher.

And in Page 27. In terms of the deposit and LDR, the bank's total deposits is 6.1% growth Y-o-Y mainly from the NT dollar growth, which is 8.7% growth; and to a lesser degree, from foreign currency of 1.6%. And we focus on the growth of the retail deposits. While the CASA ratio, both NTD and USD, came down, that reflects the customers' preference for time deposits under this higher rate environment. For the LDR, in foreign currency, here we see some improvement. And in the meantime is that we also improved in our SWAP revenue.

And in Page 26. The NIM and the spread both shows improvement quarter-over-quarter, up by 2 bps in NIM and 4 bps in spreads on back of the foreign currencies loan growth. While the spreads on a Y-o-Y perspective, it came down, largely flat. The funding cost was higher, especially from USD. However, if we include the SWAP revenue, which will see a full picture of the NIM's performance, that is 1.29% in this quarter. That is up by 25 bps if we compare it to the same quarter last year.

And in asset quality, overall speaking, it's a stable one. While in Page 30, we can see the improvement in corporate loans NPL largely due to the write-off in the first quarter.

In Page 31. In credit card business, in terms of active card size and also card spending, we show growth of -- in the range of about 20% or plus and continue to gain market share, while the per-card spending, especially from general consumption, shows improvement and. Asset quality here also shows a stable trend.

And in Page 32. In terms of fee income, it grew by over 17%, while wealth management delivered over 18% growth, mainly come from insurance, structured product and also fixed income bonds. For overall AUM, also grew by about 8%.

In Page 33. The overseas branches' performance continue to be robust. We see the revenue growth and also net profit growth both doubled year-over-year.

And in Fubon Insurance, the premium growth continues, while the COVID-related policy that we put aside, over $2.3 billion of reserves that -- we expect that should be sufficient to cover the following related claims. For the underwriting profit, it actually grew by -- it also doubled or more than doubled. That's mainly come from the growth in the commercial lines, including the fire and engineering. And the net combined ratio, if we exclude the COVID-related policy, shows further improvement to -- down to 87.7% in Q1.

And in Page 37. In Fubon Securities, the net profit also shows a very strong growth. While on a pro forma basis, if we combine Jih Sun's results, it's actually up by 26%. Or if we exclude the onetime HR-related expenses, that grew by 63%.

In Page 39. In Fubon Bank (China), we -- if we take a reduction strategy in balance sheet and also adjust the lending strategy mainly on back of the current economic development, further the margin came down, that reflect the asset adjustment, reduction in online loans and also the increase from the U.S. dollar deposit costs.

So here, we also take advantage of the SWAP revenue contribution. So if we include this factor, the NIM will be 1.49%, which is flat Y-o-Y. The NPL ratio shows a slight upward tick. But overall speaking, we aim for stable asset quality.

Okay. And next, we'll have [ Grace Chiu ] from Fubon Life to brief regarding the embedded value.

[Unknown Executive]

Thank you, Amanda. I will report the 2022 embedded value results. Same as past practice, the results have been reviewed by Deloitte Consulting on a full-scale basis.

Now please turn to Page 41, value creation summary for Fubon Life. For in-force value creation, the embedded value shows a negative growth on a year-on-year basis. It is much explained by the lower adjusted net worth due to the market turmoil at 2022 year-end. The 2022 value of in-force after cost of capital stands at $383.1 billion, around 1% higher than 2021. The result remains a steady growth as the value of new business continues to contribute value creation.

New sales value creation, there is still headwind from the combined effect of COVID-19 pandemic and market fluctuation for the insurance industry in year 2022. The first-year premium is decreased by 16% year-on-year for Fubon, while it was a 26% decrease for the overall industry compared to previous year. With the drive to sell more traditional regular-paid products, both VNB margin and FYPE divided by FYP ratio improved. The 2022 VNB is $16.6 billion with VNB margin of 15.6%.

Fubon Life continues the momentum in 2023 and delivers the first quarter VNB Y-on-Y growth near 30%. And the VNB margin reached a record high at 25.5% as COVID-19 fades away. The embedded value per share and appraisal value per share of Fubon Holding Company are $64.4 and $77.8, respectively.

Page 42, movement analysis for adjusted net worth. This page shows the net worth movement between 2021 and 2022 and how it is adjusted for the embedded value calculation. The 2022 statutory net worth is $270.9 billion or a 54.8% decrease from the previous year, mainly reflects a positive impact of $65.5 billion earnings contribution, a minus $381.3 billion financial asset depreciation and a negative $12.5 billion for dividend remitted to Fubon Financial Holding and some reporting currency impact of NTD depreciation.

The adjustment made to calculate adjusted net worth are similar to previous years: firstly, at the special reserve, that could be treated as available capital from the regulator's perspective; secondly, remove the unrealized capital loss, URCL, of fixed income assets from the accounting book to align with the book yield return assumptions used for VIF calculation; lastly, at the unused real estate appreciation, which was not recognized in accounting book.

Page 43, movement analysis for value of in-force before cost of capital. The expected earnings and required return explains how this roll over 1 year. The $35.1 billion earning is transferred to the net worth, and the unwinding of 9% discount rate contributes $49.5 billion. The data change is a negative impact due to policyholder behavior as adversely to original expectations. This year impact is mainly from higher surrender also widely observed in the industry.

The economic assumption impact of $24.5 billion consists of 2 parts. The investment return assumptions are updated to reflect the rising interest rates, which accounts for a 2.3% impact. Another part is the U.S. dollar appreciation contributes for -- from the U.S. dollar policies converted to reporting currency, NT dollar. Negative impact of $35.2 billion from noneconomic assumption is due to the assumption changes made to reflect less-favorable actual experience on lapse and morbidity. High morbidity resulted from customers back to hospital for medical treatments after COVID-19. Higher lapse observed during the economic downturn and fed rates increased in 2022.

The value of new business before cost of capital contributed additional $18.6 billion. The 2022 VIF before CoC reached $571.0 billion, grew 1% compared to last year.

Page 44, movement analysis for value of new business. On the same basis, VNB reduced by 13.8% with the negative impact for sales volume reduction and positive impact from improved product mix. The economic assumption change impact is $1.4 billion, reflect a higher new money rate and a minor negative impact from noneconomic assumptions.

Page 45. The economic assumptions are summarized here for your easy reference.

Page 46, VIF return -- portfolio return. This page shows the portfolio return applied in the value of in-force. The ultimate assumption remains at the same level as long-term view has not changed. Rising interest rate environment has 2 implications on return, higher new money rate and higher hedge cost. The higher new money rate would lift the overall return in early years. For NT dollar policies, the initial return is lower due to the higher hedge cost.

Page 47, VNB portfolio return. Overall speaking, the VNB return is slightly higher for both NT dollar and U.S. dollar policies with rising interest rate environment. For NTD policies, the step-up return trend with the impact from hedge cost is similar to the return for value in-force.

Page 48, discount rate. The methodology is the same as previous practice. The parameters show here resulted the equivalent RDR is less than 9%. It has decided to use the discount rate of 9%, same as last year, for value calculation.

Page 49, cost of capital. We follow the latest RBC regulation and determine the cost of capital at 200% RBC level.

Page 50 and 51, the sensitivity summary for portfolio return and RDR are shown here to -- for the assumption drive changes to different value matrix.

Now I pass the call over to [ Fiona ] from Deloitte Consulting. Thank you.

[Unknown Attendee]

Thank you, [ Grace ]. Hello. Good afternoon, everyone. We are honored to have been engaged by Fubon Life again for the review of this year's embedded value and VNB.

Similar to previous years, the scope of the VNB review will increase with another review for the assumptions applied by Fubon Life in this valuation as well as the overall EV and VNB results. A high-level review, they're at actuarial model and policy data used by Fubon Life in this valuation. And a review of the calculation methodology for the cost of capital, adjusted net worth and the value of in-force movement analysis.

With respect to the risk discount assumption applied by Fubon Life, the assumption with the Asian methodology has been kept consistent using the CAPM approach. Similar to the previous years, Fubon Life has designed 4 data points, including a risk discount rate based on the current risk free rate, long-term risk free rate as well as the in-force and new business equivalent, RDR. Risk for RDR lie between 7.61% and 9.53%. Based on these results, Fubon Life has maintained a consistent discount rate of 9% for both in-force and new business.

With respect to the investment return assumption, Fubon Life has adopted a consistent duration methodology. The initial risk free rate for both NTD and U.S. dollar has been updated based on market valuation while keeping the long-term level of the same as last year. The investment return assumption for all asset classes has been [ quite regularly ] updated to report the company's latest sales asset mix and the investment strategy. Based on our review, we found the overall investment return assumption lies within a reasonable range.

Deloitte Consulting has also reviewed all noneconomic assumptions applied by Fubon Life. All assumptions have been updated to reflect the company's latest experience in arriving at a reasonable range. Through a review of the movement analysis for the value of in-force and VNB, we found the overall EV and VNB results for this year to lie within a reasonable range.

This is the Deloitte Consulting briefing on our review of Fubon Life EV results. Detailed guidance can be found in the [ reports ] issued by Deloitte Consulting. Thank you.

[W. Harn, executive]

Okay. Good afternoon to everyone. Shall we start the Q&A session?

[Operator]

[Operator Instructions] And our first question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

I have 3 questions. First one is on hedging cost. You do show in the presentation that currency swap and NDF has risen to around 141 basis points in the first quarter. And you guided it might go further up in the coming quarters. So how high do you think it could be? Should we assume you might reach like 180 basis points or 200 basis points in second quarter or third quarter?

And the second question is on RBC ratios. It dropped below 300% in the first quarter. Is that due to the higher interest rate risks under the RBC calculation or any other reasons? And if that's due to the interest rate risk, what's the impact in percentage point in the first quarter?

And final question is on the COVID reinsurance claims. I think you did mention in the Chinese session that you have reinsurance contracts with 4 reinsurers. Could we check whether all the 4 reinsurers all have issues regarding the home care and also hospitalization issues or just handover? And when you mentioned less than 10% of the claims have issues, so should we assume the maximum losses will, therefore, be the worst-case scenario is roughly around $25 billion reinsurance claims times, let's say, high single digit or mid-single digit of that will be the potential losses in the worst-case scenario?

[W. Harn, executive]

Okay. I'll comment on the reinsurance part. Okay. I mean, as we said previously, we're still conducting the discussion and examination process with the 4 insurers. Some of them actually has completed the examination, so we have been repaid on the portions that we should receive. And others are still under opinion exchange period. Our claim on the reinsurer is close to TWD 20 billion now, okay, less than TWD 20 billion but close to. We are not -- each insurer has different topic with us to discuss, okay? Not all of them are focusing on the same issues and questions, okay?

So what we said is those issue may be under further discussions are below 10% of the claim, okay? Now that the -- we are not saying that cover all the issues we are in discussion, okay? That's our -- that's the estimate from our part, okay? I don't know what -- honestly, I don't know what is the worst scenario, and it's not fair for me to comment on something that I'm not aware of, okay? But we think the portions that will be under, I would say, more or extensive discussion is below 10% of our claim, and that is our best estimate, okay? I don't know whether that answers your question, but I just want to be clear on this topic to avoid any misunderstanding.

[Jemmy Huang, analyst]

Yes, that's very clear.

[W. Harn, executive]

Okay. Hedging and RBC.

[Unknown Executive]

Okay. I will answer the RBC question. The RBC slightly less than 300% at the end of first quarter, this is due to the short-term market movement. The RBC is now well above 300% recently. After reflecting the interest rate risk, the new percentage -- the new parameters has already been reflected.

[Jemmy Huang, analyst]

So what's the impact on RBC ratios in terms of the increase in the interest rate risk?

[Unknown Executive]

It's less than 10%.

[W. Harn, executive]

Hedging costs, how high?

[Unknown Executive]

It's really hard to say how high it will be right now. But however, as we just mentioned in the earlier session that higher currency costs should be -- persist. We think it will be an improvement will be subject to when will the fed cut its rate policy. So -- and also, as you know, that [ for a country ] actually that all may require short term, and basically, it will roll over on a monthly basis. So that means that once Fed starts to cut interest rates, then our hedge costs should be -- just decrease or maybe just reflect immediately. That's my answer.

[Operator]

[Operator Instructions] Next question is from Alex Ye of UBS.

[Xiaoxiong Ye, analyst]

Can I ask a question on the NIM outlook? So in the Chinese section, it is mentioned that the expectation is for the adjusted NIM to see some kind of 15 basis points of expansion. Can you confirm that on what basis is that referring to? Do you think we're referring to a full year [indiscernible] or just a quarterly basis?

And also, given that include the SWAP revenue, and you also comment that the SWAP revenue for the full year will probably range from $3 billion to $4 billion compared to $1.7 billion in Q1. So that sort of imply the run rate -- quarterly run rate of SWAP revenue is going to decline in the coming quarters. But how does these 2 comments cut it out? For example, your adjusted NIM will continue to expand, but your SWAP revenue is going to soften. So just wondering what's the driver for further expansion to the adjusted NIM.

[Unknown Executive]

Yes, this 10 to 15 basis point increase on the full year adjusted NIM is on a full year basis, not on a quarter-on-quarter basis. And that you mentioned that the first quarter SWAP revenue is $1.7 billion, and that will reflect the 6 basis point increase on the adjusted NIM on a Q-on-Q basis. But if it -- compared to the first quarter last year, the SWAP revenue is very small. So when I said the full year SWAP revenue forecast is $3 billion to $4 billion, that will translate to about 10 to 15 -- maybe on the higher side of 15 basis points, but we make it more conservative, saying in the 10 to 15 basis points.

[W. Harn, executive]

Okay. Maybe I can add a little bit. It all comes down to how we used our U.S. dollar deposits, okay, if we can use our deposit further on our lending and investment, and there will be less excess U.S. dollar that we could use for SWAP. So that is the balancing board in between the interest rate revenue vis-a-vis the SWAP revenue, okay?

So a low yearly forecast doesn't mean that we were expecting an overall revenue decrease. Instead, it would increase the NIM, okay, on the other side of the business. So I mean we have -- maybe we have better usage of our U.S. dollar deposit for lending and investment rather than for swap transactions.

[Xiaoxiong Ye, analyst]

Okay. So can I just follow up a bit? Firstly, if we just look at on a quarterly basis, so your Q1 adjusted NIM is 1.29%. So do you expect this to be sort of approaching the peak for this rate cycle?

And second, the deposit cost is probably going to continue to go down in the coming quarters. So how much longer sort of this lagging impact of deposit costs do you expect it to the last? And how much lower the cost ratio do we expect that to trend down to?

[Unknown Executive]

When we look on the loan portfolio-wise, we will continue to build up the foreign currency loan asset. So on that part, we will increase the NIM automatically. On the financial market transaction, so we are expecting the Taiwan versus U.S. dollar interest rate gap will not be as high as this first quarter, but it will be narrowed down. So we expect some more income on the SWAP transactions. So all in all, they will translate to the, what I'd say, about a 10 to 15 basis point increase on adjusted NIM, both from the SWAP side and also on the commercial banking mobile business.

[W. Harn, executive]

But we don't expect the foreign currency cost-out ratio would trend down further. It will probably remain at this level for a while if the U.S. dollar interest rate does not hike further.

[Operator]

[Operator Instructions]

[W. Harn, executive]

Okay. If there's no further question received, I think we'll call this meeting off for the day. Last call.

[Operator]

[Operator Instructions]

[W. Harn, executive]

Okay. Operator, I don't think we are receiving new questions now, so shall we just call the day off?

[Operator]

Yes, of course. Thank you, President Harn.

[W. Harn, executive]

Yes. Okay. Thank you very much for all your participation again. Once again, if you have any further questions that you would like to ask, please feel free to contact our Investor Relations colleagues. Thank you and good day.