Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by, and welcome to Fubon Financial's Third Quarter 2022 Financial Results. [Operator Instructions]. This call is now 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, the IR Officer of Fubon Financial Holdings. Ms. Wang, please begin.

[Amanda Wang, executive]

Welcome, everyone. Thank you for joining Fubon's third quarter results call today. There will be 2 sessions in this call, including Fubon's performance review and followed by the Q&A hosted by President, Mr. Harn and the senior management team. Firstly, please turn to Page 4 of the presentation. Fubon Financial reported net profit and EPS for a top position among holding company peers in the third quarter. And we have the asset level achieved over TWD 10.7 trillion and with a net worth of over TWD 550 billion.

And in November, we completed the merger between Fubon and Jih Sun. And therefore, the numbers of customers, that reached slightly over 13 million, that is over 58% of the total population in Taiwan. And we expect that we'll further the synergies going forward.

In Fubon Life, the net profit and net worth both ranked top 1 among life insurance peers for the first 9 months in spite of the macro headwinds. In terms of the premium performance, we ranked top up 2. The investment front, the return reached 5.55% in face of the volatile market. And we see outperformance in FX management. While the equity to asset ratio remained at about 5% and RBC well above 300%.

In Taipei Fubon Bank, the net profit, that reached TWD 18.7 billion, that is up by 29% and ranked top 3 among bank peers. We see our Wealth Management AuM continued to grow nicely, that is about 11% up. And including a stronger growth momentum from our overseas Wealth Management business, that's growth of over 30%. On the ESG front, our green investment financing grow -- outperformed the overall portfolio, that's about 27% growth. And the high carbon investment, on the other hand, that, we see a decrease of about 20%.

In Fubon Insurance, the net profit continued to be impacted by the COVID-related policy. And if we exclude that impact, the net profit will be around TWD 4.35 billion. And the cumulative total retention loss was about TWD 30 billion, and we will update you on the October progress later on. And other underlying business in Fubon Insurance remains solid with a premium growth of about 6.7% and the investment return, that reached over 6%.

In Fubon Securities, it also is impacted by a more volatile capital market and the market turnover is down by 36%. While we expect the potential synergies going forward will further enhance our market position. And on the ESG front, Fubon has been advocate for sustainability initiatives. Including we joined RE100 in September, which we were committed to have a fully apply for renewable energy consumption in our operation in -- by year 2040.

And also, we -- our SBTi grant approval total Fubon's carbon reduction goals and the growth of coverage of over 50% -- about 50% of our investment and financing portfolio in such a level is among the top, among financial institutions in Asia.

And in decarbonization by subsidiaries, as we listed here, including in Taipei Fubon Bank, we collaborate with the Taipei City Government for the electrical bus financing project. In Asset Management, we launched ESG thematic ETF. In life and securities, we also made progress, and we listed it here for your reference.

And next page pretty much echo what we just talked about regarding the net profit and EPS and with the longer-term data point for your reference.

Page 7, the profit by subsidiaries, as we can see, the banking side, including the 3 subs, together deliver a net profit growth of about 28%. While on the other hand is that life insurance and securities net profit fell year-over-year.

In Page 8, the total assets continued to grow decently at 5.6%, while the net worth decreased and book value per share as a result came to TWD 36.8.

And in Page 9, the ROA and ROE movement that pretty much echos the earnings fluctuation and also growth in assets, while the absolute level remained well performed.

Okay. Let's move on to Fubon Life's operation. Starting from Page 11. The composition of the total premium firstly is the first year premium, it came down by 9%, which if we compare to the industry average of about 20% decline, Fubon is pretty much well sustained. The second part of the total premium is the renewal premium. It came down mainly due to the paid-up of the regular pay policies.

In Page 12, the breakdown of the first year premium. As you can see here, the investment-linked and traditional life products both continue to grow, while the overall level came down mainly due to the interest-sensitive annuity and also the impact from the pandemic and more volatile capital markets.

In Page 13, the FYPE progress is largely flattish compared to industry wide is about 2.4% decline. And the VNB slightly also come down at 10%, which is at a similar path as the FYPE. So VNB margin pretty much remain at a stable level.

In Page 14, in terms of the contribution by channels, the internal ones is our key contributors. And we can see over 80% of FYP including Taipei Fubon Bank, tied agents and also our internal cross-sell efforts that contribute to these internal channels contribution.

And the FYP growth is about 20.9% year-over-year. That is outperformed compared to industry's tied agent is a decline of 11.6%. And Taipei Fubon Bank's progress in FYP, which is about 8.6% down year-over-year. While industry-wide from the bank's channel actually is a further bigger degree of a decline of 28% down.

And in Page 15, on the investment side. The portfolio allocation, we can see here is the cash position increased and the portfolio adjustment mainly reflect in domestic equity position, that came down mainly reflect the position adjustment and also the impact of the market -- mark-to-market.

In Page 16, in the overseas fixed income portfolio, we continue to focus on investment-grade corporate and financial bonds. While by geography, North America remains our key focus. And in the meantime, we decreased exposure in emerging markets.

In Page 17, the investment contribution, we pretty much focus on the recurring income, and we can see a 17% growth year-over-year. That reflects a higher interest rate market, appreciation of the dollar and also higher cash dividend contribution. While the FX gain increased, that's mainly driven by our operation management under the dollar appreciation environment. And that also led us to investment return of 5.55% annualized basis in the first 9 months.

In Page 18, on your upper left-hand side, the hedging cost we can see continue to be a very strong one, which is 79 basis point that reflects gradual increase of the recurring hedging costs and the result of the appreciation in dollar. On the right-hand side, unhedged position, slightly increased to 18% on back of the dollar's appreciation. And on your lower left-hand side, the recurring return, both before and after hedge basis, that both shows improvement.

In Page 19, in terms of the spread, the positive spread continue to deliver, which we can see the cost of liabilities continued to improve year-over-year. And the spread between breakeven point and recurring return further widened from 50 bps to 59 bps in first 9 months.

In Page 20, our investment performance from unrealized balance is a very tough one. We see it further come down, mainly due to the market volatility. But in the meantime, we still keep our asset to equity ratio at 5%, well above the regulatory requirement. And also RBC is also above 300%.

In Page 22, let's move on to Taipei Fubon Bank. The top line revenue growth of 15.5%, mainly driven by the net interest income growth. While the fee income decreased by around 10%, comes from, one, is wealth management; and second is higher marketing expenses for credit card. Treasury income grow and also other income grow, that reflects our onetime gain recognition and also equity investment performance. And the revenue and also the net profit in Taipei Fubon Bank first 9 months both hit historical record highs.

In Page 23, loan composition. The retail portfolio grew at 11%, faster than the corporate credit of 3.9%.

And Page 24, the corporate credit, largely driven by the dollar loans, while the foreign currency loan book has declined 6%, that mainly reflects a lower exposure to Mainland China and also clients' repayment. While the SME exposure, we continue to deliver growth.

In Page, 25, on the retail side, the mortgage grew decently at over 12%, while unsecured loan grows slower than before, that's mainly due to slower customers' funding demand.

And Page 26. From the deposit side, the overall deposit growth of 12.5% are largely driven by foreign currency deposit of 17% and also NT dollar growth at 9%. The LDR in NT bond pretty much stable, while the foreign currency trend down mainly due to a faster growth in deposits than loans while we adjust the lending strategy.

In Page 27, the loan and deposit rates separately, if we look at the lower left-hand side, we can see its improvement. While the NIM and loan-to-deposit spread, constant year-over-year, while it's down quarter-over-quarter. That mainly reflects a decrease in foreign currency's LDR. As we see in previous page, the foreign currency LDR was 22.7% in Q3 compared to 26% in Q2. And going forward, we continue to focus on the portfolio adjustment and we aim to further expand the net interest margin by adjustment in the asset liability structure.

In the following 2 pages, the asset quality performance is pretty stable.

And in Page 30, the credit card performance, here, we can see the number of cards and also the spending both outperformed the market, so the market share continued to enhance. And we can see our numbers of active card grows actually is double digit compared to the market growth at single-digit growth.

In Page 31, the fee performance was down, as we just briefed. Specifically on Wealth Management, we see the sales of the mutual fund indeed dropped, mainly due to capital markets' conservativism. While the insurance and also structured products, actually, we see some recovery of growth. And on quarter-over-quarter basis, we see some growth of about 4%. And the overall AuM from customer size continues to grow at about 11%.

In Page 32, the net profit increased by 66% in overseas branches. The rate hike and also a lower provision both helped. And also, we can see the top line, as a result, grow by over 26%.

In Page 33, the consolidation with Jih Sun banks aim to complete by Q2 next year. The potential synergies, we hope to come from higher numbers of branch coverage nationwide and the SME and wealth management business. In terms of the bank branches, we'll become the top among private banks and top 5 among all banks.

Okay. And next, on Fubon Insurance, let's move on to Page 35. The direct written premiums grow decently at 6.7% first 9 months. And the market share, that, we reached over 25% with a top 1 market position. And the business is going on smoothly. Excluding the loss from the COVID-related policy, the underwriting profit grew by over 20%.

And some update on the COVID-related policies. The total numbers of policy cases is about 1.67 million as of October. There is a decrease compared to September at 1.69 million. And we see the infection rate in Taiwan increased quite meaningfully in September as the BA.5 outbreak. So as a result, we see the claimed cases during September and October actually accounts for about half of the total claim cases for the first 10 months. And going forward, we aim to reflect the P&L impact from the COVID policy in year '22 as much as we can. And we aim to have a minimal impact from this product line in '23. And regarding the capital position, it's about -- it's above the regulatory requirement as RBC is around 280% as of September.

In light of this pandemic, we review our business and make a few initiatives, specifically in risk control. Firstly, we established real-time risk control mechanism to monitor different risk factors across all product lines. And secondly, we view -- online platform is actually more important than ever, and will be the primary channel for our new product launch going forward for better management and control. And meanwhile, we review the risk profile of our product offerings, and we also gradually to adjust product structures as well as our reinsurance arrangement.

And in Page 37, in securities business update, it's pretty much impacted by slower market turnover that is down by 36%. And the net profit or the revenue both trend down in Fubon and Jih Sun. And going forward, we expect potential synergies to further enhance our market position, which we can see in the following page. On a combined basis, on the brokerage margin loans, sub-brokerage business will be all ranked solid top 3 position.

And next in Page 40. Fubon Bank China's balance sheet in loans are pretty much stable, while the NIM came down by about 3 bps, mainly because of a rate cut impact for our RMB assets. And we continue to deliver the asset liability structure adjustment that led to the NII's growth of over 8%, while the net profit is slightly up by 1%, mainly due to the provisioning cost increase. And overall speaking, we aim to maintain a stable asset quality. And as we can see, as of September, the indicator NPL ratio and coverage remain at a decent level.

And before we move on to the Q&A session, we would like to also invite you to provide your feedback on Fubon's Analyst Meeting through the QR code in Page 41 to share with us your comment. It will be much appreciated.

And next, we would like to open for Q&A and host by the President of Fubon Financial Holding, Mr. Jerry Harn. Thank you for your attention.

[W. Harn, executive]

Good afternoon. Okay. Any questions?

[Operator]

[Operator Instructions] And our first question is coming from Yafei Tian of Citigroup.

[Yafei Tian, analyst]

I have some bank-related questions to start with. First, is that we saw that the FX currency loan dropped quite a bit Q-on-Q. So just wanted to check what's driven that? Which region is behind that decline? And is this also one of the reasons behind the net interest margin decline in the quarter? Second question is that if you could offer more updated net interest margin guidance for 4Q as well as for next year, that will be super helpful.

And then the next question on bank again, is the credit card business, right? I understand there's quite a lot of credit card expenses that reduce the credit card fee income. But can you give us a little bit flavor what the competitive dynamic like in Taiwan in the card business? And does Fubon intend to keep that rebates to customers, and hence, the credit card fee income line would remain at low level?

On the P&C business side, I have one question. In the Mandarin call, you mentioned as of October, the infection rate is about 35%. So you can -- you are assuming maybe 45% to 50% of infection rate by April next year, for next year. So is it according to the sensitivity possibly there would be another NT$ 10 billion or so of losses to come in the next quarter or 2?

[W. Harn, executive]

Yes. I think Amanda will answer the COVID-19's question first and then followed by Taipei Fubon Bank.

[Amanda Wang, executive]

Okay. Thanks, Yafei. I think we do share with the market about the infection rate assessment of 45% to 50% by mid of next year. And whether the loans will come up to TWD 10 billion or so, I think, is still subject to internal assessment. We share with you, I think, a 1% increase that led to TWD 1 billion loss led indeed is our current estimate. So I think we'll leave that to the market estimate because I think there's actually, other than infection rate, they are also other factors we need to take into consideration. So it's a dynamic progress, but I think we respect the market estimate.

[W. Harn, executive]

Yes. Okay. On Bank.

[Yao Hui Cheng, executive]

On the NIM issue, the bank NIM decreased by 4 basis points in third quarter. I think you are right that it's highly connected with our foreign currency loan growth did not happen in the third quarter. So this break down our NIM so called by 4 basis points.

We see that the NT dollar loan-to-deposit spread improved 2 basis points in third quarter. Foreign currency was 47 basis points on 3 quarters. But however, our U.S. dollar loan did not grow on the third quarter. But U.S. dollar deposits have a lot of growth. So that damaged our NIM improvement.

So yes, our loan-to-deposit ratio on U.S. dollar is the key. And you see our U.S. dollar loan growth did not happen in the third quarter, it's mainly driven by the area of what it means, Taiwanese. Because in Taiwanese clients, they have the choice to draw down loan on NT dollar versus U.S. dollar. But now they tend to draw down in NT dollar due to a more cheaper cost of interest. But the growth is mainly from our offshore branches expressed in Singapore and Hong Kong. So going forward, on the NIM improvement, we will make more focus on loan growth in our offshore branches.

[W. Harn, executive]

I think we'll try to realign our asset liability currency match.

[Yao Hui Cheng, executive]

And the NIM guidance because we are in the process of adjusting the loan-to-deposit culture on the balance sheet. So I think the current fourth quarter, it should be about remain the same as in the third quarter, but we will see improvement on the first half of next year while we are adjusting the loan-to-deposit structure in the foreign currency and U.S. dollar.

And on the credit card fees, yes, the current dynamic is credit card is competing on the rebate scheme and Taipei Fubon is one of them, but we are issuing the J Card Momo Card in these 2 years, which offer very advantage benefits ranges terms on the rebate structure. But that's the cost of gaining more customer -- new customer base.

But somehow, we think the rebate structure will be adjusted from next year. We will adjust our rebate scheme versus the cost of customer gaming. So I think from next year, while credit card fee structure will have some adjustments that to enforce our fee income from the credit card spending, the plan for the next year's credit card strategy.

[W. Harn, executive]

We're still in the process of revisiting our credit card business strategies now. And the -- I think we can provide you with more detailed guidance in our next analyst meeting. But we are in the process of reviewing that, focusing on the efficiency of all these expenditure and potential cross-sell opportunities.

[Yafei Tian, analyst]

Can I follow up on that P&C question, just to really take management brain about the booking, the timing of the potential losses. Would you take a relatively conservative view for this year and then hence, the MTD book, the P&C losses for this year, so that next year there will be quite limited P&C-related claims and losses?

[W. Harn, executive]

Correct. That's the way we will handle.

[Operator]

[Operator Instructions] Next, we'll have Jaime Huang of JPMorgan for questions.

[Jemmy Huang, analyst]

I have two questions. First one is on your loan growth. I think Amanda mentioned, it's because of partially the customer repayment and also you are derisking the China exposure. And therefore, we see your loan growth momentum also trend down. But I think up to second quarter, you are still guiding for 12% year-on-year loan growth. So just trying to understand what is the sudden change on this loan growth strategy given I think the underlying credit risk in China is not something new. So what really happened in the third quarter to drive the changes? That's the first question.

Second one is post your consolidation of Jih Sun Financial, try to understand at the group-wide level how much excess capital you could leverage from this consolidation. And then is there a plan to leave the excess capital at both the banking and also the securities operation or potentially you could actually leverage such capital to enhance the insurance operations?

[W. Harn, executive]

Okay. I will answer the -- on the optimization of capital structures. As you probably know, Jih Sun Financial Holdings, although in terms of size it's one of the smallest holding company in Taiwan, but they have pretty -- I mean, among the highest capital adequacy ratios for all the financial holding company in Taiwan. And therefore, according to our estimate, there are certain rule for capital reallocations from financial holding's perspective.

Therefore, we will, in the process of consolidation, will optimize the assets capital from the holdings perspective. And more specifics due to the size difference, there's probably not much capital optimizations that we can leverage from the banking operations' consolidation, whereas we will probably have more capital adjustment during the consolidation of the 2 security companies. We're still in the process how we can use -- the -- we are still in the discussion with the regulators on the amounts of optimizations and the usage of those assets capital. Once we have a more clear answer from the regulator, we will advise then. Okay. On the loan growth forecast adjustment.

[Yao Hui Cheng, executive]

Yes. On the bank's loan growth in the third quarter, yes, there's 2 parts. On the foreign currency loan, this decrease on the third quarter, but the increase is on the NT dollar loan. And the situation is coming from, as I mentioned earlier, the major local corporation in Taiwan. They have the luxury to choose the borrowing currency between NT dollar and foreign currency. But in third quarter, because of U.S. dollar interest rate hike, they tend to draw down the NT dollar and repay the U.S. dollar loan portion. So we said it's coming in the second quarter. However, on the offshore branches side, there's still an increase of foreign currency loan. So it's mainly coming from the OBU and DBU local corporates. And China exposure is not something new, but the uncertainty is getting higher. So this also happened in our Hong Kong branches. The loan growth is getting slowing now.

[W. Harn, executive]

We're also trying to take a much closer look on our China exposure. We're trying to manage the growth until we have a clear picture on the prospect of the China economy.

[Jemmy Huang, analyst]

I see. So can I say for the whole year of this year, we probably will see loan growth stay at something around high single digit for 2022?

[W. Harn, executive]

Correct.

[Operator]

[Operator Instructions] The next question, Yafei Tian of Citigroup. Yafei, we cannot hear you.

[Yafei Tian, analyst]

I'm sorry, I was on mute. Sorry. Another question around capital, if I may. I was -- in the Mandarin call, you also mentioned that at the financial holding company level, there's probably around TWD 110 billion of capital that can be used for dividend distribution. And if we were to also look at other capital metrics, whether that's double leverage or the bank level or insurance company capital metrics, it seems that Fubon is quite comfortable at the moment compared to many other financial holding companies. So just wanted to understand, under what circumstance would Fubon consider to further strengthen that capital position, which I mean today is already wrong. So just what other thinking process involved? What are the capital requirements going ahead? So for instance, recapitalize the P&C business, are those some of the considerations?

[W. Harn, executive]

Not at the moment. I think at the moment, we are reasonably comfortable about our capital adequacy level. And the -- as I said just now, at the moment, we don't have any capital increase plan. And as to how we would consider to increase our capital further, well, if we have another attractive investment opportunity, which is big enough like Jih Sun Financial Holding. Unfortunately, the financial market keep tumbling. Unfortunately, if that still happens, certainly, we will be affected and we have to consider at that time. But I'm not -- I'm hoping that the market will stabilize.

Did that answer your question?

[Yafei Tian, analyst]

Yes. Yes. I think that's super helpful. If I may push you a little bit more on another question. On Page 11 of your slide, you show the FYP as well as the renewal premium. It's been a number of years that we have seen a sequential decline in this line item, right? So clearly, it has been quite challenging in recent years to sell new policies in the interest rate environment. But it seems that into next year, it might still be quite challenging given that the yield curve is actually inverted, right? So how do you think about the implications to liquidity as well as your -- to your new available cash for investments given that downward trend in renewal premium?

[Amanda Wang, executive]

Actually, the renewal premium will keep at current level next year. The reducing mainly because prior few years, we sold many to pay and pay product, and they are mature. So we make the renewal premium drop a lot this year. But next year, we'll slow down and the new premium will keep at the current level.

[W. Harn, executive]

We don't think -- as we said, we don't expect the renewable premium will further decline next years. But obviously, we will probably be affected by this surrender of policy, insurance policy. But at the moment, it's still at a manageable level.

And as to the liquidity issues, as you know that, you may notice we have increased our cash positions, either for handling the surrender of insurance policy or for further investment opportunity. We have -- no matter what, we have increased our position to keep us safe in that regard.

[Operator]

[Operator Instructions] Go ahead, please, Mr. Harn.

[W. Harn, executive]

If we don't have any further questions, shall we just close the meeting.

[Amanda Wang, executive]

Please review again if there is any question on the line. Thank you.

[Operator]

Thank you. Okay. Then there appears to be no further questions at this point. And we thank you for all your questions. That will be the end of the Q&A session.

And now I hand the call over to President, Harn. Thank you.

[W. Harn, executive]

Okay. Thank you very much for your participation during this very difficult timing of the year. But we still, we welcome all your questions. You may direct your questions to our IR Head, Amanda, and we will answer as much as we can. Thank you very much for your participation again. Thank you. Have a nice weekend.