Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Transcript 2020-Q3

[Operator]

Thank you for standing by, and welcome to the Fubon Financial's first 9 months of 2020 financial results. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point.

Now I'll turn the meeting over to Amanda Wang. You may now begin.

[Amanda Wang, executive]

Thank you. Welcome, everyone. Thank you for joining the call today. I'm Amanda Wang from Fubon's Investor Relations.

Next, I will walk you through the key highlights of Fubon's first 9 months results, followed by a Q&A from the management.

Please turn to Page 4 of the presentation. Fubon Financial made a net profit of TWD 68.2 billion for the first 9 months. That represents 27% growth year-over-year in spite of the COVID-19 pandemic.

The key highlights. Firstly, in Taipei Fubon Bank, we continue to deliver balance sheet adjustment, and the asset quality remained benign. We grow the investment type of -- in wealth management offering. And also, we have the highest growth among peers in terms of active credit cards. That helped us to offset the negative impact from the rate cut impact and also a slower bancassurance.

In Fubon Life, we ranked top 2 along with the transformation in product mix in the investment side. That is the spotlight of the earning growth in the first 9 months. The recurring return and the total return both delivered a better result compared to the same period last year. While in the cost of liability, the improvement is over 20 bps year-over-year.

In Fubon Insurance, we keep our top position with a market share of 24.7%, while the underwriting results continue to improve.

In Fubon Securities, the brokerage revenue is the beneficiary of the strong market turnover in Taiwan. They're up by more than 50%, and that led to a very strong revenue growth as well as bottom line growth.

In Page 5, the overall net profit that reached TWD 68.2 billion, that translate into over TWD 6 per share and top-ranked among the market peers. And a further update for you is that in the first 10 months, that reached TWD 74.6 billion and EPS that reached TWD 7 per share. And again, that stood at the top position among peers.

In Page 6, in terms of the earnings by subsidiaries, Fubon Life and the P&C shows the growth and the key earnings contribution from the insurance subsidiaries that, therefore, contribute over 60%. The banking stock together also accounts for another 24% of the group earnings.

In Page 7, in terms of the asset growth, that reached TWD 8.9 trillion with a growth rate of 8.6%, while the book value also reached a record high of over TWD 659 billion.

In Page 8, along with the earnings growth, the ROA reached 1.04%, and ROE reached over 14%. And to be -- as a reminder, this is on an annualized basis.

In Page 9, since Fubon's investment in Xiamen Bank back in '08, the growth has been quite strong over the past years. As you can see, the asset grew over 15x since then, and the profitability also grew along the way, while the capital and asset quality continue to improve. As you may aware, that Xiamen Bank is successfully listed in Shanghai's stock market in October. In the long run, it continue to be a meaningful strategic investment for Fubon.

Let's move on to Taipei Fubon Bank in Page 11. The revenue declined by 3.8%. That reflects a software syndication market and also the insurance product mix change. The core earnings from NII remained on the growth track of over 10%.

In Page 12, in terms of the credit growth, the bank delivered 8% compared to the market growth of about 5%. And from the right-hand side, you can see that we continue to focus on the structural adjustment. The retail lending has gradually increased, and we are moving toward to a more balanced portfolio between retail and corporate credit.

In Page 13, the corporate banking book from both NT and foreign currency loan grows, driven by Taiwanese corporate clients, while the NT dollar book is relatively stronger with growth rate of 16.8%. For the SME sector, that is also another key area for us. That also delivered a 16% growth.

In Page 14, the retail credit. Mortgage grew at 8.4%. That is slightly ahead of the market average of about 7%. While the consumer -- other consumer credit grew at a slightly higher pace -- path, that's primarily driven by the personal unsecured loans.

In Page 15, from the deposit side, the demand deposit ratio, that improved quite meaningfully, especially in the foreign currency book. For the volume growth from the NT and foreign currency book, above [ 29% ]. And from the right-hand side, we can see the structural improvement over the past 3 years, also consistently to increase in terms of the demand deposit growth through both the retail and also corporate clients.

In Page 16, in terms of loan to deposit, the NT book has improved to 87.3%. While in the foreign currency book, the ratio declined, mainly reflect a higher deposit growth. While if we top up the investment asset on the foreign currency LDR, it will reach 64% or 72% on an average basis.

In Page 17, in terms of interest rate spread and margin, the loan/deposit spread was down by 6 basis points, mainly due to a rate cut impact. While the NIM, that shows a better result of down by 3 bps at 1.08%. That mainly reflects the effort in our asset liability mix adjustment and also our treasury activities. And we aim to keep the rate cut impact on net interest margin. We've seen 2 to 3 basis points for the full year. That will be slightly better than our expectation a quarter ago, which we expect at 4 to 6 basis points down.

In Page 18, in terms of asset quality, the NPL ratio and coverage ratio are both stable and outperformed the market average.

Page 19. In terms of the fee income, for the whole bank, the decline is about 2.9%. That mainly reflect a softer syndication business as a result of COVID-19's impact and also wealth management business from the insurance. From the right-hand side, we can see that for insurance is the main drag for wealth management fees, a decline of 4%. While other than that, the rest of the investment-type products' sales fees remain at a decent growth momentum.

In Page 20, the revenues of Taipei Fubon Bank from overseas branches, that is Hong Kong, Singapore and Vietnam, altogether, that's down by 24%. That mainly reflect the Hong Kong branches' softer top line performance. While in Vietnam and Singapore, we see the loan and deposits continue to grow. And given the slow momentum in Hong Kong branch and also in Singapore's special provision earlier this year, and therefore, the profit contribution came down to 11% of the whole bank.

And next, in Page 22, we move on to Fubon Life. The total premium was down by 6 -- 9.6% mainly due to a softer FYP. However, we see the renewal premium steadily grow at over 10%.

In Page 23, FYP down by 44.6%. That reflects the product focus moving more toward regular-paid policies and as well as the impact from COVID-19 and also the regulators -- new regulation on product offerings. And the product mix that we can see, the investment-linked now accounts for over 27%. And also the higher-margin type of products, including the health and accident policy, they go up to 8% of the FYP.

So in Page 24, with a focus on the regular-paid product, FYPE declined actually much milder at 17.2%. On the right-hand side, the VNB also trend down by 16% down compared to the FYP. And therefore, you can see the margin improved to over 20%.

In Page 25, in terms of the contribution by business channels, the FYP's impact is actually more drastic to bancassurance. But as we can see, the contribution from Taipei Fubon Bank is relatively more stable compared to external banking channels. That reflects the value of the cross-sell synergy. While on the right-hand side, the internal channels, including Taipei Fubon Bank and agency channel, now is at 16 -- 60.8%. That is higher than the level a year ago at 56%.

In Page 26, on the investment side, the overall asset outstanding reached TWD 4.2 trillion. That is a 6.9% growth year-over-year.

In terms of the asset allocation, the percentage in domestic assets increase in Q3 mainly reflect, number one, a higher cash position to avoid the market uncertainty at that time; and number two is a slightly higher allocation into properties, mainly into Taipei market and also the market value increase in domestic equity.

And from the fixed income side, it actually slightly came down mainly due to the adjustment in the international bonds acquisition. And another thing to highlight is for the mortgage, we made an announcement that stopped writing the new mortgage in Q3. That's mainly to better manage our asset liability while the customers' rights remain intact.

In Page 27, in terms of the overseas fixed income asset portfolio, we continue to overweight into the investment-grade type of corporate credit and financial bonds.

While the -- in Page 28, the investment yield, on an annualized basis, they reached 4.51% post hedge and 5.13% before hedge. And both results, that marked a record high compared to the past 3 years. And the contribution, as you can see in this table, come from the dividend income, capital gains and also a lower hedge cost.

In Page 29, the overall hedge cost was down as a result of the recurring hedging costs improved from the narrow interest rate spread. And we expect to manage the overall hedge costs at below 100 bps for the full year. And meanwhile, as the NT dollar appreciation, we prepare with FX reserves, and that is at around TWD 9.4 billion as of September. And that will be a buffer for us to manage the hedge activities.

And also in Page 29, in your lower left-hand side, the recurring return before hedge trend down mainly reflect the lower market rate and also the NT dollar's appreciation. While in the post-hedge recurring return, that shows improvement to 3.23%, and that reflects a better recurring hedge cost.

In Page 30, in terms of cost of liability, it's improved by 23 basis points and as the new policy carry a lower cost. And that also help us to bring down the breakeven point to 2.79%. So if we compare the breakeven point, 2.79% versus the recurring return or the cost of liability versus the total return, that both indicators shows a positive spread.

In Page 31, the mark-to-market unrealized value further trend up by end of Q3. The outstanding unrealized gain is TWD 78.9 billion. That is about 60% comes from fixed income and about 40% from equity.

In Page 33, let's move on to Fubon Insurance. We delivered a premium growth of 7.8% year-over-year growth and gained market share to reach 24.7%, while the underwriting performance has continued outstanding at around 90%. And you can see that we slightly improved to 91.2% compared to the level 1 year ago.

In Page 35, in Fubon Securities, we benefit from the strong market turnover in Taiwan and increased our brokerage market share. And you can also see that the top line and bottom line are both improved along the way. While in the longer term, we focus on the wealth management business and further diversify the product offering. So the most recent achievement is that you can see the sub-brokerage business achieved a market share of slightly over 10%.

In Page 37, in Fubon Bank (China), the balance sheet item, you can see that the loan and deposit both delivered strong growth on back of our strategy of prioritize the deposit growth.

In Page 38, and therefore, we can see the net profit increased along with the asset growth, mainly driven by the net interest income. And while the net interest margin also shows 4 bps improvement, mainly due to the asset liabilities mix improvement.

On the asset quality side, it remains at a benign level, while the NPL ratio improved to 0.93%. So on back of the growth strategy, the capital loan bank plan to inject capital of RMB 1 billion is expected to complete by early next year. And with the branch network of 27 now, that includes most recently a newly opened one in [ Info ], we plan to have addition of 1 to 2 branches every year is our goal.

So this is the end of the briefing. Thank you for your attention. And next, we would like to open the floor for Q&A and host by the President of Fubon Financial Holdings, Mr. Jerry Harn. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Jemmy.

[Jemmy Huang, analyst]

There are 3 questions from me. First one is for Fubon Life, for the 22 basis point decline on the pre-hedging recurring yield, could you give us some colors in terms of how much of the decline is due to lower new money yields? And then how much is due to the realization of the trading gains? Just try to figure out what is the downward pressure into 2021, whether we would expect a smaller decline on the pre-hedging recurring yield or a bigger decline compared to this year.

Second question is in terms of the capital position, I think the President previously mentioned that if the Taipei Fubon Bank has sufficient capital position, there is possibility that the earnings payout or the upstream earnings to the financial holding level could be increased. Given your BIS ratio is over 14% and CET1 ratio is over 12%, would you consider current label is sufficient? Or internally, you are still targeting higher ratios? And then also, what is the potential impacts on the bank's stand-alone CET1 ratio after your capital injection into Fubon Bank (China)?

And the final question is, could you also give us some color in terms of the operating condition at Fubon Bank (Hong Kong) in the third quarter compare -- how the sequential trend compared with the first half this year?

[W. Harn, executive]

Okay. Do you want to answer the yield?

[Unknown Executive]

And now I first answer your question about the pre-hedge recurring yield drop of about 22 basis points. Then the breakdown, it will be roughly, for the new Taiwan dollar appreciation and also the decline in the bond yield, each contributed about 7 basis points to the decrease. So now it's total 14.

And another one is about the -- because we reallocate our stock from, say, those dividend driver stock and reallocate to potential -- I mean we have some asset potential stock, which is the growth stock then. It also, because of rebalance then, the stock dividend decreased by contributing about 5 basis points. And the other sale, a minor contribution from real estate or property. Then it's the first question about the drop about 20 basis points.

And the second one is about the recurring yield. And we now talk about the 2020 first. And on the full year basis, the guidance of better after-hedge recurring yield than the 2019 has not changed. And although the pre-hedge recurring yield remained lower compared to a year before, but average hedge will be likely to be higher due to the significant improve in the hedge cost.

And about the outlook about 2021. And as we can see that COVID-19 outbreak is not likely to subside in the short term and lower interest rate environment is likely to persist and continue to weigh out our recurring yield in this year. And however, the hedge cost is still expected to be further improved. And just we mentioned we can hedge it under, say, maybe 100 basis points. So that will compensate the decline in the recurring yield. Then as a result, overall after-hedge recurring yield, we should be able to remain at the same level as this year.

[Operator]

Should we proceed to the next question?

[Amanda Wang, executive]

Hold on, operator, the management will reply the second question. Thank you.

[Unknown Executive]

On the forecast of the stand-alone CAR ratio, we have 15.8% on the estimation of CAR. And to the capital injection to China -- to Fubon China.

[W. Harn, executive]

Okay. The capital injection into Fubon China will not affect our Taipei Fubon Bank's CAR ratio a lot. We're also applying to the financial commission...

[Amanda Wang, executive]

The FIC.

[W. Harn, executive]

FIC to apply the LTV method to measure the capital equity -- to measure the capital requirement for our mortgage portfolio. And if approved, that would probably increase our CAR ratio by roughly around 1.5%. So based on all these statistics -- but we are still in the process of fine-tuning all this number. But based on current forecast, the Taipei Fubon Bank's capital is more than enough at current moment, okay? So we are expecting the Taipei Fubon Bank could probably dividend up more than we originally planned.

[Amanda Wang, executive]

Fubon Bank (Hong Kong), yes, I think for Fubon Bank (Hong Kong), well, typically, we don't disclose on a quarterly basis, but on a half year basis. So I think the general comment is that the third quarter is slightly better than the first half. That reflect in the net interest income, the trend is trending better.

[W. Harn, executive]

Okay?

[Jemmy Huang, analyst]

Yes. That's clear.

[Operator]

[Operator Instructions] Our next question comes from Chung Hsu.

[Chung Hsu, analyst]

This is Chung Hsu from Crédit Suisse. I have 3 questions. My first question is on the bank's net interest margin. I think in earlier Chinese session, management revised up full year 2020's net interest margin guidance. Just want to get more color that -- I understand that your LDR increased in 2020, and also your loan mix shift helped to offset some of the margin pressure. So I just want to get a sense or better color that if we just look at loan spread or look at the competitiveness gap within Taiwan lending market, how has been -- what would have been your net interest margin if we remove those effects -- those 2 effects on LDR and also shift in loan mix? And when we look at your net interest margin for 2021, would those factors still be mitigating factors? That's my first question.

My second question is, I also want to clarify, on the Chinese session, whether management said that you would be prepared to increase your total equity allocation to 17% of portfolio, and that is domestic equity and international equity, to compensate for a lower market rate and also more narrow credit spread on the fixed income market.

My last question is a follow-up to Fubon Bank (China) capital injection. I understand you have a TWD 10 billion, correct me if I'm wrong, capital injection planned for Fubon Bank (China). Can I get more color on your longer-term capital plan for this subsidiary? I understand that this subsidiary is growing quite quickly and probably going to need more capital support going forward.

[W. Harn, executive]

Okay. The net interest margin outlook.

[Unknown Executive]

Okay. Firstly, on the question of bank's NIM, current level is around 1.08%, and this after adjustment our loan portfolio and also our deposit portfolio. And I think although the rate cuts situation will remain, but I think toward this adjustment, we -- our guidance on the sustainability of the NIM of this level is still the same. I think we will continue to maintain this NIM level in our forecast.

[Chung Hsu, analyst]

Yes. Can I just ask if your guidance for net interest margin at this level in 2021, is that based on the assumption that your loan growth is going to maintain a similar growth pace as in 2020?

[W. Harn, executive]

No. Our loan growth, it's -- well, guidance is probably mid-single digit.

[Chung Hsu, analyst]

Mid-single digit.

[W. Harn, executive]

With the margin impact.

[Unknown Executive]

I would like to clarify on the 70% of equity exposure, which is [indiscernible] basis. So also that account for the price appreciation. So it's not a cost expectation.

[Chung Hsu, analyst]

Right. It's currently 15.7%. Okay, go ahead.

[W. Harn, executive]

Excuse me?

[Chung Hsu, analyst]

Yes. I said it's currently 15.7% allocation if we add domestic equity and international equity. I just want to make sure if I didn't hear it wrong, that you raise it -- you may be willing to raise it to 17% to offset?

[W. Harn, executive]

True.

[Chung Hsu, analyst]

Okay. Okay. Got it.

[Unknown Executive]

Okay. On Fubon Bank (China) capital position, our plan or our expectation on Fubon Bank (China) is to -- after this capital injection, we are expecting the Fubon Bank (China) to improve its ROE to -- in 3 years -- in 2, 3 years, we can improve it up to around 10% ROE. And we do not expect the -- any capital increase requirement from Fubon Bank (China) in the next 2, 3 years.

[Operator]

[Operator Instructions] There are no questions, and you may continue.

[Amanda Wang, executive]

Operator, yes, do we have further questions from the line?

[Operator]

Yes, Ma'am. There's actually one that popped up. Let me just get the name of the participant, okay? Our next question comes from Steven Lam.

[Steven Lam, analyst]

Yes, I just want -- I realized that you mentioned earlier that the cash for your life insurance investment topic, so the cash position went up before the election, and you have probably deployed some of the cash after September. So what would you say -- what should we expect the sort of asset mix by end of this year, for example? And what would be your take? If you sum up the views on the vaccine development plus Biden, whether it's blue wave or not, because that's still up in the air, so how would you sort of tick those expectation and reflect those on your investment outlook per se, let's say, for the first quarter or first half of 2021? That would be a question on investment.

And actually, specifically, I want to hear your view on your U.S. corporate bond market, investment-grade corporate bond appetite. Are you willing to take more, increase more investment in those? So that's the investment side.

And then just quickly on the life insurance side, just the underlying. I realize there's some guidance on the VNB and then some on FYP next year. So just on the product mix, nice increase in the share of the health insurance and accident insurance. Could we get some color on what was driving that? Was it because there is some change in terms of product design or just general customer demand or actually agents are better in terms of selling that? And can we also expect similar trends at least to continue maybe early part of next year so that we can have like a nice increase in margin, just what you had so far in the first 9 months?

[W. Harn, executive]

Okay. We'll have Lo Wei to brief you our view, our macro view on economics first.

[Wei Lo, executive]

First off, we think Biden [ take care an active ] treasury. Second, the financial market welcomes this appointment because the U.S. government has here for the dollar, and thus all the future is much more clear. And according to the epidemic, we believe that even include the vaccine and the medicine development issue is much faster than our expected. The global economic will be much better next year. But we were -- it will depend on when the global advance economy will get the first indication. If you can reach the first quarter, then the global economy will start recovering in the second quarter. Then the situation is slower, then the global recovery will start at the end of the -- in the second half of the year.

Then if we refer to the financial market, we believe as soon as the Americans start recovery and the bond yield will increase slightly and even much better. However, the stock market will perform much better because right now, it depends on the stock -- the tax part. If the vendor and [ semi ] is under control, other sector will have a chance to reform.

[Steven Lam, analyst]

Yes, I see. So -- yes, so can I take it as in terms of your stock allocation, like you also agree that there's a certain switch into cyclicals and/or even back to some value starts and high dividend starts, so you can kind of recoup some of the loss in dividends per se for next year? Does that make sense to you?

[Wei Lo, executive]

Yes, correct.

[W. Harn, executive]

And on corporate bonds, yes, corporate bonds.

[Unknown Executive]

Oh, corporate bond, okay. I would say, actually, the corporate bond, we'll still keep it neutral. And in terms of advertise, I don't think that we will have a big change. It's because we still have to measure our asset liability management issues. So I think as long as the yield can be -- just fall into our targeted range, then it will be the first priority. Then also, we will consider about the diversification. So it's really hard to say that we -- what will be our reference in terms of industry or even in terms of the country. But I think the credit issue would be the key to maintain our portfolio still at around, say, maybe a single A on average rating. It will be the key.

[W. Harn, executive]

Position with the cash?

[Unknown Executive]

Oh, cash position. Okay. I would just mention that we have decreased our -- the cash position now below, say, TWD 200 billion currently. And eventually, as we just mentioned, we are quite cautiously confident about our stock market, no matter offshore or onshore. So that we have gradually stepped down -- stepped up our investment in equity position. So part of the cash flow are growing, too. And also, we buy some bonds and has some recent yield peak that we increased some. So I think, basically, we still will see the opportunity for profit taking when bond yield becomes volatile. And also, we will reach a relative low point when we will buy the bond yield when U.S. rebounds.

[W. Harn, executive]

Okay. Product strategy?

[Amanda Wang, executive]

For the FYP guidance next year, we expect high single-digit growth. And VNB growth, it was -- we expect to strike for the single-digit growth.

So talk about the product mix, we think the product mix would be really similar to this year. And for the health product, we have very good sales this year with -- some of the reasons are from the COVID-19 because the health cautious for the public and also for the company strategy to strive for more sales, higher VNB products. So health product is one of the product that is encouraged by our agents to sell to the customers.

So when we look at the next year product mix outlook, we still focus on the rate of the pay and high VNB margin products. So since the FYP grew by high single digits, so we also expect the premium for each product group will be increased. So it's quite balanced. So the VNB margin will be also similar to this year per our expectation. Thank you.

[W. Harn, executive]

Okay?

[Steven Lam, analyst]

I see. Sorry, just a quick follow-up. So for health insurance, is there anything specific in terms of -- are we talking about like critical illness or medical products that are selling well? And just finally, for -- what's the outlook for, say, investment-linked product for 2021?

[Amanda Wang, executive]

Currently, the popular product -- popular health product in the market will be the medical insurance product. So we think this is the very basic demand for the customers. So mostly, we think the health product would be pretty similar this year and next year.

[Steven Lam, analyst]

Okay. I see. And the investment-linked product?

[Amanda Wang, executive]

Yes. Investment-linked is also one of the key products for our company. We have very good sales investment-linked product this year, mainly due to the very promising stock market performance this year. So for our customers, generally speaking, when the stock market is good, then the investment-linked product generally will be sold better. So next year, we also have the investment-linked product, and it also contributes quite a big portion for the company. But the expectation of the mix is also similar to this year.

[W. Harn, executive]

Any more questions?

[Operator]

Speakers, at this time, there are no further questions, and you may continue.

[Amanda Wang, executive]

Okay. So if there is no further questions, then I will thank you for all joining the call today, and we'll end the session here. And we welcome, if you have any further follow-up questions, please feel free to contact the IR team in Fubon. Thank you, and have a good day.

[W. Harn, executive]

Thank you.

[Operator]

And that concludes today's call. Thank you all for joining. You may now disconnect.