Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Transcript 2021-Q3

[Operator]

Thank you for standing by, and welcome to Fubon Financial's Third Quarter 2021 Financial Results. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time.

Now I will hand the call over to your host, Ms. Amanda Wang, Investor Relations Officer of Fubon Financial Holdings. You may begin.

[Amanda Wang, executive]

Okay. Welcome. Thank you for joining Fubon Financial's conference call today. And there will be two sessions in the call, including the first 9 months operation performance and followed by the Q&A session host by the President, Mr. Harn, and the management team.

So firstly, please turn to Page 4 of the presentation slide. Fubon's net profit for 9 months grew by over 90% to TWD 130 billion, and the EPS also reached a level high than the financial holding company's peers. The net worth assets both reached a record high.

Behind that, the main growth driver comes from Fubon Life as its investment performance improved on capital gain and also hedge cost improvement. In terms of the premium, we ranked top 2 across key metrics.

And in Taipei Fubon Bank is loan growth of over 13%. And behind that, one of the key drivers is SME loans. They increased by over 20%. And in Taipei Fubon Bank this quarter, we recognized TWD 1.2 billion of gains from Nutmeg. That is under other comprehensive income of fintech companies. And the credit card business, we also saw a double-digit Y-o-Y growth to expand our customer base.

In Page 5, Fubon Insurance, our net profit growth, that was up by over 50%, also mainly due to the investment return. And meanwhile, its size, scale grow continuously with a market -- premium market share of over 25%.

In Fubon Securities, its net profit reached over TWD 5.8 billion and up by over 97%. It's attributable to the market turnover increase and also the brokerage market share at over 6.2%.

In terms of the ESG achievement, it's our honor to continuously being the constituent of DJSI World Index and, also, the Emerging Market Index. And in terms of the actions, we take across our subsidiaries to build a low-carbon business model. In Taipei Fubon Bank, we have a first case of green credit certified by a third-party institution. And in Fubon Life, it's the first time we published a Corporate Sustainability Report and also the Institutional Investor Stewardship Report. In terms of the green policies we did in Fubon Insurance, it exceeded over TWD 800 million.

Okay. If we turn to Page 6, it's an update of the fundraising and merger timelines. As you may know, end of October, we already completed the issuance of the fundraising. And also, we went through the EGM's approval for the merger between the two holding companies. And next, we are prepared for the submission for regulatory's approval, and we still expect the merger's completion for the two holding companies by first quarter next year and followed by the merger of the two company's subsidiaries that we also aim to complete by end of next year.

In Page 7, the net profit strength, as we just highlighted earlier, and it continues into October, which we have a year-to-October net profit of over TWD 135 billion, and EPS reached TWD 11.81. That also reflects our new share issuance from the fundraising we mentioned earlier.

In Page 8, the net profit growth across subsidiaries. And you can see from the right-hand side that the profit contribution from Fubon Life reached 73%.

In Page 9, the total assets of the holding company reached over TWD 10 trillion and up by over 13%. The net worth also increased by over 28% related to our book value per common share basis of TWD 68 per share, any further go up to TWD 68.84 as of October.

In Page 10, the ROA and ROE of the holding company as a result of -- or along with earnings growth.

And next, let's move on to Page 12 regarding Fubon Life. The total premium declined, mainly reflects the renewal premiums coming down by 24.9% because of the pay-up of some policies with a shorter payment period. And over speaking, our premium's performance continue to rank top 2 in the market.

And Page 13, first year premiums increased by over 23% Q3 versus Q2. That's mainly on back of the postpandemic recovery. While accumulated first year premiums growth rate is only 2.8%, the growth area mainly comes from the investment-linked and interest-sensitive annuity, while the traditional life policy came down.

In Page 14, FYPE came down as a result of the product mix and VNB as well, while the quarter-over-quarter performance, we continue to see 6% from FYPE and also about 2.8% growth from VNB.

In Page 15, the FYP's contribution from the bancassurance remains our key channel. That's a total of 62.5%. And in FYPE, we can see the main contributor comes from tied agents and also Taipei Fubon Bank.

In Page 16, the investment asset in Fubon Life were up by 4.2% year-to-date. And the portfolio mix mainly reflects higher -- slightly higher cash position in Q3 that reflects the market volatility, and we will gradually deploy into overseas fixed income and also our domestic efforts.

In Page 17, in terms of overseas fixed income, we continue to deploy into investment-grade corporate bonds, mainly in North America.

In Page 18, in terms of the investment income, the return from the bottom of this table shows that both before- and after-hedge basis, which shows a sequential improvement. That reflects the capital gain and also the hedge cost improvement. While the recurring investment income is a decrease, going forward, we will focus on the asset deployment to enhance the yield.

In Page 19, on the upper left-hand side, recurring hedging cost shows the improvement in Q3 down to 14% -- 14 basis points, sorry, and cumulatively, 22 basis points, while on the lower left-hand side, we can see the return before- and after-hedge basis is a decline. That mainly reflects the Taiwan dollars appreciation and also the realized gains action.

In Page 20, the spread for possible liability versus investment returns, also the breakeven point versus recurring return after hedge, actually, both show improvement and spread widening. For the cost of liabilities versus investment return, we reached 253 basis points again, positive spread, and also the breakeven point spread is about 50 basis points.

In Page 21, the unrealized balance in Fubon Life steadily came down quarter-over-quarter. That's mainly due to the realized gain and, to a lesser extent, is mark-to-market effects while the balance starts to show recovery in October and also year-to-date.

In Page 23, let's move on to Taipei Fubon Bank. The revenues -- total revenue quarter-over-quarter shows improvement of over 14% growth, primarily driven by the fee income's recovery that grows by over 20%. Meanwhile, the net interest income also shows a decent growth. Ultimately, Q3 is flattish to slightly down of 0.7%, mainly reflects the pandemic impact in the first half and, therefore, a decline in fee income as well as the credit card campaign.

In Page 24, let's take a look at the loan growth. The bank grew by 13.8%, compared to the industry averages outperformed, which the market grew at about 6.4%.

And by business line on Page 25, the corporate lending growth, mainly driven by its NT dollar loan business, especially from SME's segment, that is a growth of over 22% while the foreign currency lending, it also shows a recovery of a positive growth compared to last quarter's performance was a contraction.

In Page 26, the retail business line, mortgage also delivered over 10% growth. And while the personal unsecured loans, we see the personal credit of over 27% is a key growth driver.

In Page 27, the deposit side of the bank, we can see here is growth of over 15%. Our blended average for NT and foreign currency, and they outperformed the market growth of 9%. For the LDR, the NT dollar LDR shows sequential growth, while the foreign currency's deployment came down primarily due to the foreign currency deposit, the growth was higher.

In Page 28, the net interest spread came down by 1 bp, and net interest margin came down by 3 bps, mainly reflect the deposit growth from the foreign currency side.

Okay. And also in Page 29, the asset quality overseas remains stable as you can see NPL and comp ratio here.

And a further look into by business line in Page 30, we can see across corporate and retail line, the asset quality remains stable while, on the right-hand side, we can see the credit cost increase quarter-over-quarter. That many reflect the general provision along with the loan growth.

In Page 31, in credit card business, the active cards and also the card spending both shows over 11% growth. That reflect our strategy to expand our customer base. While the per card spending on monthly basis, we remain the highest among the top 5 card issuers.

In Page 32, the fee income was down by 14.8% on the left-hand side. That was a result of the wealth management fee income and also the credit card marketing expenses increase. On the right-hand side, we can see the further details of the wealth management fees computation. While it's up from a quarter-over-quarter basis of over 26% on back of the recovery from the pandemic and, therefore, the sales volume and also yield enhancement.

In Page 33, overseas branches performance of the bank came down year-over-year. That mainly reflects a more cautious underwriting policy and also the rate cut effect and, therefore, can lead to this lower contribution.

In Page 35, let's move on to Fubon Insurance. It has a direct written premium growth of 14.6%, largely driven by the personal line increase of over 20%, and out of which, a COVID-related policy was one of the new growth contributors. It was around TWD 4 billion year-to-September and covered about half, slightly over half of the market volume. And along with the growth, a lot of market share -- continuously being the market #1 and, also, the underwriting result shows improvement. As you can see, the combined ratio reached 89.6%.

In Page 37, in Fubon Securities, the profit and also revenue both show a strong growth, and that's on back of the very high market turnover of nearly TWD 500 billion year-to-September and, also, our market share, again, in brokerage business.

And last section in Page 39, regarding Fubon Bank China, the volume-wise growth of over 18% in loan and 12% in assets, that's beneficiary from the capital raising of CNY 1 billion that we completed in June.

And in Page 40, from a P&L perspective, the net interest margin increased by 43 bps on back of the funding and also loan structure improvement. Quarter net profit are largely flattish, mainly because of the rising swap costs and also lower treasury income this year. Well, the asset quality-wise, it remains stable. And you can see from the lower left-hand side, its NPL ratio continued to show improvement as well as the coverage ratio.

Okay. And finally, in Page 41. Here, we prepared QR code surveys and urge for your participation, or alternatively, you are welcome to contact our team to share with your feedback. Okay.

And next, I'll pass the mic to -- over to Mr. -- Over to Ms. Wang, and she will host the Q&A session for you today. Thank you.

[Wang Wei, executive]

Hi, everyone. This is Sofia Wang, and President Harn is going to join us shortly. So right now, I'm the acting temporary. So right now, we would like to take your questions. Thanks.

[Operator]

[Operator Instructions] Our first question over the phone will be from the line of Steven.

[Steven Lam, analyst]

Just a couple of questions here. On the life side, if I'm not mistaken, I think in the Chinese section, we sort of talked about that the company expects a recovery or resuming growth in 2022. I was just curious, what about in fourth quarter? Is that sort of happening already from your point of view? And what would be the main driver of that other than base effect? Is it more on the volume side or from both volume and margin? So that's on the life insurance.

On the bank, could we sort of get an expectation in terms of your loan growth and NIM outlook in the near term in the fourth quarter or the first quarter of next year? I'm thinking for the fee income. Of course, we see some decent recovery, sequential growth in the third quarter. What will be the driver of fee income going forward, say, in the next 3 to 6 months? Can I assume that those would come from, say, continuous strength in insurance sales, mutual fund sales as well as some credit card recovery?

[Wang Wei, executive]

Okay. Regarding to your first question, we do have a stronger momentum on the insurance sales. So we would like to have Tsailing to answer this question further.

[Tsailing Chao, executive]

In the fourth quarter, as we know, the whole market is still focused on single premium investment unit-linked type of product. So we don't see any change in the last quarter. But for next year, we will push more on the [ aging ] fee channel and try to change the product mix, focus more on the high-margin products.

[Wang Wei, executive]

Okay. Regarding to the questions on numbers, the banks and fee income and the [ other ] numbers, we would like to have President Roman to answer the question.

[Yao Hui Cheng, executive]

Okay. Let me start with your question about NIM. The NIM up to September this year was 1.06%, which is 2 basis points lower than the number in 2020 mainly because of our corporate bond investment because of the interest rate reduction in the global market. But this 2-basis-point NIM reduction still not affected our net income revenue. Our total NII growth for the first 3 quarters increased by 7% mainly because of our total loan portfolio increase by 14% in the first 3 quarters contributed by the SME lending increase by 22% and the personal unsecured lending portfolio increase by 28% and foreign currency-denominated content fund investment portfolio increase by 23%.

And regarding the fee, the first 3 quarters, the wealth management fee reduced by 11%, even though the sales volume increased by 16%. That is because of the first -- the first half of the year, Taiwan market impacted by the COVID-19, and we proactively implement almost 50% our sales working from home. And we also encouraged customers come to us through the online channel rather than the branch channel.

So we sold quite conservative, straightforward product to the customers. Even the sales volume increased by double digits, but the fee revenue also impacted by in that regard. However, in the fourth -- in the third quarter this year, our wealth management sales increased by 20% compared to the second quarter, and fee revenue from the wealth management increased by 26% compared to second quarter. Overall, for the whole year, our wealth management fee can maintain the same level compared to the last year.

And regarding the credit card, we see very strong momentum, online transaction, many in the credit card market in the first quarter this year, thanks to the pandemic, and people tend to consume through the online channels. So we provide some of the benefits to our cardholders.

Then our credit card issuance increased quite substantially in the first 3 quarters. Even though the fee revenue, if you conduct -- calculate the credit card on a standalone basis dropped, the cross-sell from the credit card customer in online wealth management as well as personal unsecured lending, which also contributed more than TWD 1 billion cross-sell revenue for the bank. So net-net, we are still satisfactory with the momentum of our credit card business, including the cross-sell revenues.

[Operator]

Our next question will be from the line of Jemmy Huang.

[Jemmy Huang, analyst]

I have three questions from me. First one, in terms of net interest margin, I didn't really hear clearly like in terms of full year guidance for this year. Are we still targeting flat year-on-year for the whole year or we probably will stay at somewhere around 1.06% for the whole year?

And then second question is on dividend policy. Just trying to understand, I think when we announced the acquisition of JihSun, we can see some synergies from the capital position parts. Trying to understand whether -- after the completion of the consolidation in the first quarter next year, for this kind of capital efficiency, will that provide any more flexibility to our dividend policy? And how would we materialize that?

And then the final question will be on your life insurance operation in Korea. I think Korea is going to adopt IFRS 17 in the beginning of 2023. Just trying to understand whether you have any plan to inject more capital into the subsidiary in the coming 12 months or so.

[Yao Hui Cheng, executive]

Okay. As I mentioned earlier, the first 3 quarters, our net interest margin revenue improved by 7%. And then we see this 7% revenue growth can maintain all the way up to the year-end. The total year indication for the net interest margin revenue remained at 7% growth.

[Wang Wei, executive]

Okay. Regarding to the dividend policy, and you have asked whether we are going to be affected by the acquisition of [indiscernible]. And we don't think there will be any impact on the acquisition of JihSun Holding Company on our equity -- capital or dividend payout condition.

[Tsailing Chao, executive]

Regarding the capital requirement on Fubon Hyundai Life in Korea, we have just reinjected the capital about USD 400 million earlier this year, and that amount should be substantial for the IFRS 17 in place. So we -- so far, we don't see any need to inject further capital in the next 12 months.

[Operator]

We do have another question from the line of Steven.

[Steven Lam, analyst]

So I just want to follow up with a few questions on the investment side. I guess, if I may, I can start with some confirmation of numbers. You disclosed the returns by asset classes, say, overseas bonds or domestic bonds and things like that. I know this is not a perfect comparison, but if we were going to look, say, the first 9 months versus the first 6 months, I guess what's clear is that the overseas returns have come down a little bit for that comparison, and the domestic portfolio has gone up.

So I just want to understand what's driving that. And within the overseas, I believe both equities and bonds went down. Are those just simply because of the market fluctuations? Or is there is something else inside it? And to double check, if I'm not mistaken, your bond ETFs are disclosed within the domestic bond classification, not domestic stocks, correct? So that's sort of part 1.

And then part 2, the question on investment is we're sort of halfway through more than average with 4Q right now. So in terms of, say, investment gains or trading gains for the remaining of the quarter, are we still fairly optimistic, say, compared to in the third quarter?

And then the third part is on your view on Taiwanese stocks. I think in the Chinese call, you mentioned that you're quite optimistic. So I just wanted to double check that. And you did say you expect higher dividend income from Taiwanese stocks in 2022. So can I just confirm, is that coming from just organic growth of cash dividends or you're thinking about higher allocation in Taiwanese stocks, so hence, your dividend income would increase as well?

[Wang Wei, executive]

Okay. Thank you. Please answer the question.

[Unknown Executive]

Okay. I'll be taking your questions. It's quite a long list. So I did not catch it all, sorry, but I can just try to answer some. I already remember that the first one is about our optimistic view on the stock market from a -- I think the answer is concerned. [indiscernible] it's actually a dividend we expect to higher than this year because you are right. Also we will be -- we'll have a higher location on domestic stock market and also maybe some offshore market, and it's because the allocation will increase.

And also, it's not our position because we think the corporate earnings, we said, overall, will be higher compared this full year for the whole industry, I mean, all Taiwan markets. So that means we also expect our dividend cash payout will be also higher. So these will be two drivers to increase our -- forecast our cash dividend.

And also -- sorry, would you repeat your question that I haven't answered?

[Steven Lam, analyst]

Sure. Yes. The first part was mainly about, I think, if you compare your investment return by the breakdown, say, overseas versus domestic, it seems that if I compare the first 9 months versus the first half, there has been a decrease in the overseas portfolio, while there's an increase in domestic portfolio.

I can imagine for domestic, it could be because of cash dividends. But just wondering what's happening with the overseas portfolio. And within the overseas portfolio, that downtrend is pretty consistent in both bonds and equities. So I just want to see, if I'm not mistaken, like from a quarter-on-quarter but let's say, June versus September, I think the bond yield and stock market sort of like went up and down. So it was kind of flattish in the third quarter. So I was just curious, were there anything specific that was causing that or simply is because of the base effect?

[Unknown Executive]

Okay. I got you. And domestically, we do. In terms of short bonds, yes. I think the decrease of the allocation is not quite broad. It's because, actually, we sell some provision, but we also increased on provision. I guess what you see is because you see that the exposure is based on market values. So sometimes it will be reflected on the bond price change.

So I think in terms of offshore bond, we did not have so much position change at that time. But in terms of the mass offshore equity, yes, we continue decrease. And almost we can say we could see some exposure, especially in China, because we have some concern on the economic situation. So we decreased our offshore equity during -- maybe from this year, we keep downsizing in that part. And it's because I think is the question about the asset allocation.

[Unknown Executive]

Let me add on some comments. Yes. I think for the 9 months return for domestic equity, that actually also reflects the cash dividend income for the first 6 months. You mentioned earlier that include a much lesser component from that cash dividend income. So when we do annualize return on these slides, that will show this kind of sequential increase, if you make such comparison. I think that's one of the key drivers here.

[Steven Lam, analyst]

I see. But similarly, the overseas bonds return went down to, say, 5.07% versus 5.74% in the first 6 months?

[Unknown Executive]

Yes.

[Steven Lam, analyst]

That's just because the denominator grew, right?

[Unknown Executive]

Well, that's one thing. And also, the overseas fixed income for [indiscernible] we are more aggressive in the first half but not so much action in the third quarter. So when we do the annualized basis, return that will show some result like this.

[Steven Lam, analyst]

Okay. Okay. That's great. Sorry, if I could just squeeze one thing quickly. You may not have this offhand, but everybody is thinking about further increase in bond yields and rate hikes. So is there like a sort of sensitivity figures that you could share? Say, for every 25 basis points in bond yield, what would that impact your, say, group net profit or new business value as it stands right now, yes? Just for reference, I know it won't be late.

[Unknown Executive]

Well, it's a highly sensitive to all sorts of assumptions to come up with this calculation. So I think it's only based on a very hypothetical basis, that is we assume a few key assumptions in time that our very ballpark calculation will be somewhere about TWD 800 million for every 25 bps rate increase in life portfolio.

[Steven Lam, analyst]

TWD 800 million increase?

[Unknown Executive]

NT, yes. Again, we have to emphasize that under quite a few assumptions is a hypothetical basis.

[Steven Lam, analyst]

Sure. Sure. And sorry, and that TWD 800 million is for the -- just for life profit or is for the group net profit?

[Unknown Executive]

For the life, for life NII. Yes.

[Steven Lam, analyst]

Life NII. Okay, okay.

[Unknown Executive]

And if you also curious about the mark-to-market impact on the URCG, let's disclose in all the reports that you can reference from there.

[Operator]

We do have another question from the line of Jemmy Huang.

[Jemmy Huang, analyst]

Just one more question from me is that I think when you are guiding that next year, your FYP, you will try to ship back to the traditional policies. And should we expect the breakeven point to increase on a year-on-year basis as a result?

[Unknown Executive]

So far, we don't expect the breakeven rate will change substantially. We expect it will keep the current level.

[Jemmy Huang, analyst]

I see. But in theory, if you are selling more traditional policies, supposedly, you will incur higher first year loans, right?

[Unknown Executive]

Yes. But we -- but the cost of liability will not change too much next year. So if the costs stay level, then the breakeven should not change too much.

[Operator]

And we no longer have any questions on queue. Speakers, please proceed.

[Unknown Executive]

Operator, can we confirm again? Is there any questions on the queue?

[Operator]

We no longer have any questions on queue, ma'am. Please proceed.

[Wang Wei, executive]

Okay. In that case, then we will thank you for your participation for this call today. And if there is any further questions, please feel free to contact the IR team. Thank you, operator, please end the call.

[Operator]

Absolutely. And that concludes today's conference call. Thank you, everyone, for participating. You may now disconnect.