Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Transcript 2018-Q3

[Operator]

Thank you for standing by, and welcome to Fubon First 9 Months of 2018 Financial Results. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time.

I'll hand the call over to your host, Amanda Wang, IR Officer of Fubon Financial Holding. You may begin.

[Amanda Wang, executive]

Okay. Hello, everyone. Welcome to joining Fubon's third quarter investor conference call today. This is Amanda Wang, the IR Officer. In this call, we prepared to update you Fubon's third quarter results and followed by Q&A after the presentation. Your questions will be answered by our management team.

So firstly, I will turn the mic to Christine Fung from the IR team.

[Christine Fung, executive]

Thank you. Please turn to Page 4 of the presentation. Fubon financial made a net profit of TWD 50.321 billion in the first 9 months, which represents 13.7% growth year-over-year.

In Taipei Fubon Bank, net interest income steadily grew along with long and lasting momentum. Wealth management fee income resumes growth, driven by insurance momentum.

In terms of the business development, Taipei Fubon Bank made strategic alliance with LINE Pay in September together with other third-party payment companies collaboration. Fubon aims to create payment ecosystem.

In Fubon Life, on the investment front, total investment return increased and hedging costs improved in the first 9 months. On underwriting front, cost of liability continues improving, and we see FYP and FYPE continue to outperform among the top 3 positions.

Fubon Hyundai Life became Fubon Life subsidiary in the third quarter with shareholding of 62%.

In Fubon Insurance, we keep our top line position across personal lines and commercial lines, outstanding combined ratio of 87.9% and investment performance lead to 27% earnings growth in the first 9 months.

Fubon Securities showed 27% profit growth in the first 9 months, along with core revenue increase.

In the following page, 13.7% profit growth lead to EPS of TWD 4.77, which is #1 in the market. We have announced cumulative earnings for the first 9 months, which reached TWD 52.5 billion earnings translated into TWD 4.98 per share to standing a top position among peers.

In Page 6, each subsidiary delivered more than 10% earnings growth. And in terms of our earnings contribution, Fubon Life remained the main contributor of 55.9% followed by 27.1% from Taipei Fubon bank.

In Page 7, the overall asset size reached TWD 7.6 trillion, up 12.5% year-on-year.

In shareholders equity, we see 9.3% growth, mainly driven by earnings contribution and preferred share issuance.

As a result of earnings growth, you can see ROA and ROE on an annualized basis improved to 0.92% and 13.25%, respectively.

Please turn to Page 10, the next section regarding Taipei Fubon Bank. We see revenue line growth of 8% year-on-year in the first 9 months with contributions from net interest income and treasury-related gains.

In the following page, fee income performance, which was affected by credit card campaign and soft syndication market in Asia. The main contributor of wealth management fee still maintained steady growth because of sound insurance sales, and we see the good momentum to insurance.

In Page 12, the loan growth of Taipei Fubon Bank, which was 6.9%, was up compared to the market growth of 4.6%. Our focused areas such as foreign currency loan, SME, unsecured personal loans and comm equity all showed decent growth for more than 10%.

The next page, in the corporate lending business. Taiwan dollar reflects the SME segment, which continue to extend, while FX loan growth of nearly 16%, which was primarily driven by the overseas branch's strong growth.

In Page 14, regarding the net interest margin. The number improved 3 basis points to 1.03% in the first 9 months, mainly due to foreign currency loans and investment side of our portfolio.

Loan-to-deposit spread improved quarter-over-quarter along with our foreign currency loan-to-deposit ratio increase. As a result the cap of loan-to-deposit spread in the first 9 months versus same period last year narrowed to 1 basis point. We expect the margin to continue improving with loan mix and foreign investment asset structure adjustment.

In page 15, in terms of the deposit. We see better mix in Taiwan dollar book with the cost of ratio increasing to 55.4% and the LDR improving to 85.5%.

In foreign currency, we continued to increase loans and investment asset to enhance the return. If we combine the loan and the investment, the level will be nearly 67% of foreign currency deposit. That is 13 percentage increase compared to same period last year.

As for the asset quality, which remains quite stable, we continue to deliver very strong level compared to the industry.

In September, the bank completed the LINE Pay investment of 19.99%. The strategic move allows Fubon and LINE Pay to promote payment solution across banks, which is expected to increase bank's fee income and create marketing opportunities from fixed data analytics.

Fubon will also jointly promote LINE Points program with LINE Pay to enhance customers' loyalty and user experience.

Move on to the next section regarding Fubon Life. Total premium growth of 4%, driven by the FYP and renewal premium. That make us #2 in the market.

In Page 20, the FYP performance, which showed 3.3% growth, was largely driven by around 60% growth in investment-linked policy. That is from market demand, also on closed sale contributions from Taipei Fubon Bank.

In Page 21, regarding FYPE and VNB. This showed the decline, mainly because market demand is shifting toward investment-linked policy and short-term payments policy.

In terms of the channel on Page 22, our contributions from tied agents and Taipei Fubon Bank increased in FYP and FYPE growth. Our strategy is to continue enhance agents productively and increase contributions from internal channels.

On the investment front in Page 23, here you can see that total investment income growth of nearly 12% compared to investment asset growth of 8.5%. And therefore, the investment return improved to 4.1% and the improvement comes from the recurring income and ForEx performance.

In Page 24, the investment asset growth at 8.5% while you can see the asset allocation pretty much similar to previous quarter. While we have a slightly increase in the cash position, in response to market volatility, and we don't expect many changes in the following quarters.

In Page 25, the asset allocation of overseas fixed income largely in the investment-grade corporate bonds and financial bonds and remains largely in North America. We continue enhance the diversification in terms of the sector and region.

In Page 26, the hedging cost in the first 9 months was 1.78%, an improvement compared to same period last year, with the improvement coming from much lower FX losses. We experienced slightly higher recurring hedging cost in the first 9 months due to widening interest spreads between Taiwan and U.S. We maintain full year hedging cost guidance of still 160 basis points.

On the right-hand side, you can see our hedging mix, which continues to -- we conduct a more conservative way of higher hedging ratio in currency swap and also in foreign currency policy, which help us will control the FX rate.

The recurring return performance on pre-hedged level maintained flattish in the first 9 months while our extra hedge basis, the return decline mainly reflected higher hedging cost of the currency swap.

In Page 27, the cost of liability is 6 basis point year-on-year, and now we are standing at 3.67%, in line with 5 to 10 basis point decline full year guidance. The breakeven point of 2.76%, that is an improvement compared to last year, which largely is because of COL improvement and also the first year strain improvement.

In Page 28, regarding unrealized future gains, you can see the unrealized balance of FVOCI and FVTPL moved down to TWD 1.9 billion losses, which largely because of profit realization in the third quarter. And another element regarding unrealized portion is forming the amortized cost basis, which unrealized base -- unrealized balance has little change in the third quarter, reflecting that interest rate movement is not quite significant.

Fubon Life increased stake holdings in Fubon Hyundai Life to 62% in September, which is now Fubon Life subsidiary, as we see the investment and underwriting growth opportunities in Korea market.

The company turned profitable in the first 9 months and plan to collaborate with Hyundai Motor Group to grow attention and telemarketing business going forward. With Fubon support, the company will continue to adjust investment mix, channel diversification is another key strategy the company aim to [indiscernible] inflation.

The next section regarding Fubon Insurance, Page 31. It delivered 6.5% year-on-year growth in premium with leading market share of 27 -- of 23.9%.

And in terms of the net combined ratio, we delivered 87.9%. The better performance compared to last year reflects our prudent control in underwriting policy.

In Page 33, Fubon Securities. You can see on the upper right-hand side, we keep our market position across all major core revenue, including brokerage, interest income and fee income, all show growth, which lead to 27% growth in net profit. The stronger management of our ETF business continued to deliver a very strong growth of 56%, and now we are #2 in the market.

The final section regarding Fubon bank (China) in Page 35. The deposit base balance has already recovered to similar level a year ago, which was also helped by better liquidity environment. The selective area, especially SME and retail loan growth, commercial loans showed 3.5% growth year-over-year.

In Page 36, this nice net interest income growth. Our provisioning profit showed positive growth of 4.6% while the total -- the net profit was affected by general provision loan growth.

For net interest margin, on the right-hand side, you can see the improvement in the past 12 months that reflects our efforts in the loan mix assessment. And asset quality remains at a very stable level, which the NPL ratio is 1.47%.

The bank just opened a new branch in [indiscernible], although it's been our franchise to 25 branches. With the extensive network, we hope to provide more customers with high-quality and refined financial services.

I'll stop my presentation here. Thank you.

[Amanda Wang, executive]

Thank you, Christine. So now we would like to open the floor for Q&A. Operator, could you please take questions with the investor's name and the company name? Thank you.

[Operator]

[Operator Instructions] We have one question on queue. Let me just get the name. One moment. Our first question coming from the line of Anthony Lam.

[Anthony Lam, analyst]

Is it me?

[Amanda Wang, executive]

Yes, it's you.

[Anthony Lam, analyst]

Oh, Anthony here, yes, yes. Yes, just a follow-up from the Chinese assets. I think after going through the presentation in more detail, and I think I also caught Christine's comment about expectation of hedging cost, the 1.5%. I think previously, we're talking about anywhere between 1% and 1.5%. So is it likely that we'll probably fall toward the higher side of this 1% to 1.5% range, I think, for the foreseeable future? And in terms of FX hedging strategy, we maintain this high level of hedging ratio going forward in the foreseeable future. So I mean -- so that's probably tied to the hedging cost view. So that's the follow-up question.

[Christine Fung, executive]

As far as the hedging, of course, we will say we tried to manage the numbers throughout 100 basis -- 150 basis point this year -- it's currently -- and with the actual result subject to the market. And the follow-up hedge ratio, I will say that we still kind of keep on the market, so we take the most counterstrategy that -- which still maintain a relative high hedge ratio and not much change regionally.

[Operator]

At this time, there are no questions over the phone. [Operator Instructions] We have one question on queue, but did not record the name. Let me just get the name. Speakers, one moment. Our next question coming from the line of Yafei.

[Yafei Tian, analyst]

It's Yafei from Citigroup. I have two questions, if I may. The first one is just to clarify the main point on the Chinese core. Could you help us to understand a little bit more the headline reported name? Does that include swap costs or not -- or swap income, rather? And then what is this -- the name excluding swaps? I was a little bit confused about these 2 names and how that really impact the net interest income line. If you could give us more explanation around that, that will be super helpful. The second one is around Fubon's China strategy or regional strategy overall. I know that management mentioned that hopefully there would be -- that the Xiamen Bank restructuring would be concluded by end of the year. And then also it looks like we are expanding in China through all these different branches. I was just wondering how do you see Fubon developing in China going forward strategically and how is that going to impact your thinking given the current slowdown in China macro. Those are the 2 questions.

[Unknown Executive]

Okay. Referring to the Page 14, as you can see, the Taipei Fubon Bank at September year 2018, the number we put to the NIM means the standard definition of the net interest margin, which is 1.03% at the end of September. And then the 1.28% is loan to deposit spread, which included the interest income and the interest expense between our loan yield and deposit is 1.28%. If you actually -- if we put the NIM considering our swap return, so the NIM including our swap return will be 1.26% at the end of September.

[Amanda Wang, executive]

So Yafei, if I may add a few point. The swap revenue typically is record in other income, if you break down the P&L, okay? But in fact, the swaps revenue more or less is also linked to our deposit-taking strategy. So that's why we have shared with you how we add back swap revenue for other income into the net interest margin calculation, then it will be 1.26%. I hope that's clear.

[Yafei Tian, analyst]

Okay. Okay, that's clear. If I may just to clarify that. If we were to add back the swap income Q-on-Q, NIM would have increased 8 bps Q-on-Q, right, in one quarter?

[Amanda Wang, executive]

Q-on-Q, including swap, it's flattish. It's actually 1.26%. Q3 versus Q2, also 1.26%. But to the increase -- Q-on-Q increase, I believe that reflect no swap, pure NIM data.

[Yafei Tian, analyst]

Okay. So plus 8 bps is no swap. The reported NIM would be plus 8 bps Q-on-Q.

[Unknown Executive]

Yes. Without swap, the NIM increased by 8 basis point in the third quarter and the loan-to-deposit spread also increased by 8 basis point in that way.

[Yafei Tian, analyst]

Yes, that's very clear.

[Amanda Wang, executive]

And regarding the Fubon Bank (China) strategy, if I may start firstly, I think the Xiamen Bank for the group is more of a financial investment angle, plus the Fubon Bank (China) would be our primary vehicle to execute the banking strategy from Fubon group's perspective. And you mentioned about the current economic slowdown. Yes, indeed, we also understand the local situation has been under higher monitor status for time being. Although we believe that we see a lot of low-hanging fruit opportunities for us to develop such as further collaboration between Taipei Fubon Bank and Fubon Bank (China) to capture the Taiwanese business opportunity from both the retail and also the corporate side. And we believe that more of new from the economic turbulence. Okay. And that's my first input. So we have some team member calling from China. If you have any further thoughts, please feel free to add.

[Christine Fung, executive]

[Foreign Language]

[Yafei Tian, analyst]

Okay. So on the Fubon (China), do you mind breaking down what percentage of customers would be like Taiwanese corporates or retail customers? And what percentage will be actually onshore mainland customers?

[Amanda Wang, executive]

In fact, we just start the retail business not long ago, okay? So from our deposit and lending activity, I have to say, in terms of the deposit activity, especially in -- from Chinese corporate contribution, Chinese corporate contribution to the total corporate pool is roughly 70%. That's the main contributor from deposit side. While from the lending side, we have primarily still contribute by the local Chinese customers.

[Yafei Tian, analyst]

So by -- so if it's Mainland Chinese customers, is that the large corps? Or is that the smaller companies? Because in China at the moment, it seems to be from asset quality perspective. There has been some risks related to the smaller corporate segment, and there's also potential risks related to lending to China unsecured customers.

[Amanda Wang, executive]

As you see, our continued disclosure the asset quality at this point has been -- continued to be very stable. We are talking about NPL of below 1.5% and high coverage. So actually there was threat. Our customer profile is more of high-quality, large corporate, government-related customers. While we are trying to add in our -- the medium-sized business, that's a newly initiative.

[Operator]

Our next question comes from the line of Steven Lam.

[Steven Lam, analyst]

I have a couple of ones. So I'll start with the bank. I know there has been some discussion about the quarterly trend and with or without the swap. So can I just [ ask for some ]? Hello? Can I just ask for some data points, like could you just state what's your first quarter NIM, second quarter NIM, third quarter NIM? Because I think historically, you show that on a 3-month basis. But now, it's more like on a year-to-date basis. So I just want to get some figures on that. The second one on the bank is I'm not sure if I'm looking at the numbers correctly, but it seems like there's some quarter-on-quarter decline on the domestic loans. So -- and mainly it's because coming off from the corporate segment, and I see that there is decent expansion SME mortgages and whatnot. But I think specifically, both the NT dollar and the non-NT dollar quarter-on-quarter as in June to September have shown some decline. So I just want to clarify on that. And may I ask what's the reason behind it? And then -- so on the Life Insurance side, I would like to get some color on your thoughts on how to develop the Hyundai Life business now that you're the majority stakeholder? And from my understanding, the environment in Korea, it's -- it feels quite challenging for the large players. There have been some concerns or in terms of higher loss ratios from indemnity or sort of quasi cancer claims-related pressure. I'm not so sure if Hyundai has experienced the same things, but maybe you can provide some color in terms of, say, the product strategy in over the next 6 to 12 months. What would those be?

[Unknown Executive]

Okay. Let me answer the -- your question regarding the NIM. I can share with you our quarter loan numbers from first quarter to third quarter. The NIM including swap in the first quarter is 1.25%. Second quarter is 1.26%. Third quarter is also 1.26%. The loan-to-deposit spread in first quarter alone is 1.27%. And second quarter is 1.24%. And third quarter is 1.32%. So it's actually the NIM and the loan-to-deposit spread has remained healthy. And actually your question about the total loan, at the end of third quarter, the total loan outstanding in third quarter increased 6.9% year-on-year, with -- if I break down the number, the foreign currency lending increased by 16% year-on-year. SME loan increased by 12% year-on-year. And then credit card outstanding year-on-year is a negative 4.7%. The amount total outstanding remain actually unchanged at TWD 5 billion, which is not a bigger number. Consumer finance increased by 11.4%. Mortgage loan increased by 7.2%. Corporate lending increased by 6.6%. Government lending increased by 2.7%, come out with that 6.9% at the end of the third quarter year-on-year.

[Amanda Wang, executive]

Okay. And if I may add a point, I think your question also related to why quarter-over-quarter the NT dollar lending declined. That actually reflect our pricing discipline that -- for a special large corporate may have refinance purpose or repayment. We will always review. And that's -- as a result, we see the third quarter in there in this large corporate NT dollars repayment.

[Unknown Executive]

And I think it is because of the seasonal -- also part of the seasonal impact, because third quarter is normally that the corporate lending have a seasonal impact. But at the end of this year, the corporate lending outstanding will come back to at least the second quarter level.

[Steven Lam, analyst]

Oh, I see. Okay. That's clear. Just on the NIM, it's very helpful that you included the swap gains. But what about the figures without the swap? And may I just ask a very simple question, what's causing the swap income? Is it because of the interest rate environments have changed? Or how did you guys make money on the swaps? If you can illustrate some simple example, that will be great.

[Unknown Executive]

Okay. If -- without the swap income, the standard definition of NIM, first quarter is 1.6 -- 1.06%. And second quarter, we reduced to 0.97%. The third quarter increased by 8 basis points back to 1.05%. So at the end of this year, this NIM will remain above 1%. And back to the swap, because the interest swap point between U.S. dollar and the NT dollar is a big swap point, so we can make money out of that because we have a very decent U.S. dollar deposit source.

[Steven Lam, analyst]

Oh, I see. So you're providing liquidity for the dollar or U.S. dollar deposit?

[Unknown Executive]

Yes. Lending. And also part of the U.S. dollar deposit from this source, we can -- in the first quarter -- first half of the year, we can swap into NT dollar and make money out of NT dollar short-term investment.

[Steven Lam, analyst]

Okay. I see.

[Christine Fung, executive]

You are correct that the Korean insurance market are facing critical challenge this year. However, for Hyundai Life, because it's relatively small, the in-force portfolio of the average cost of liability is lower than the peers. And also, we don't have the problem on cancer policy. And for the next few years, we will try to focus our pension business and telemarketing business. On those 2 area, we can get support from our Hyundai group. So we will expect the business will start growing. And in the meantime, we also try to reenter bancassurance channel. So in the next few years, we kind of feel comfortable that we'll start generate profits.

[Operator]

Thank you. At this time, there are no questions over the phone. Speaker, you may proceed.

[Amanda Wang, executive]

Okay. Operator, if we have no further questions, then I would like to thank all participants for joining the call today. And if you have any further questions, please feel free to contact. The IR team will stand by here for you. Thank you.

[Operator]

Thank you. That concludes today's conference. Thank you all for joining. You may now disconnect.