Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Analysis

Expect Double-Digit FYP Growth and Improved Margins

In the upcoming year, expect to see robust growth for the company, with First Year Premiums (FYP) anticipated to rise at a double-digit rate. This optimism is backed by the company's consistent push for improved product mixes, which has already led to significant enhancements in the sale of first-year and regular premium products. Consequently, the improvement in product mix is projected to lead not only to higher FYP but also to enhanced profit margins.

Net Interest Margin and Asset Quality

The company observed an improvement in their net interest margin (NIM), which reflects strong lending momentum and smart deployment of foreign currency bonds. The improvement, inclusive of swap revenue, is reported to be up by 20 basis points, reaching 1.3%. Additionally, the asset quality remains stable, surpassing industry averages due to selective provisions in domestic cases. Reinforced by the success of Costco affinity cards, the company has gained market share in the credit card sector.

Fee Income Growth and Insurance Performance

Despite a slight downturn in monthly per card spending by 2%, the company's fee income increased significantly, over 37%, mainly from wealth management fees and growth in credit card use. With wealth management contributing more than 85% of fee revenue, they anticipate the upward trend to continue, especially from the bancassurance contributions. Furthermore, international branch profitability has doubled, now accounting for more than 20% of the bank's profits. The insurance segment has also shown solid performance with direct premiums growing over 5% and underwriting profits increasing by 13%, keeping the combined ratio well under 90.

Strong Profit Growth and Positive Outlook

A remarkable net profit growth of approximately 60% year-over-year places the company second in its peer group, largely due to investment gains. The bank in China also reports a positive turn in both revenue and net profit quarter-over-quarter, with a net interest margin that narrowed to 17 basis points, now at 1.38%. For future prospects, the company indicates confidence in maintaining strong momentum and asset quality without foreseeing asset deterioration within at least the next six months.

2024 Expectations and Investment Strategy

Looking ahead to 2024, the company plans to grow First Year Premiums (FYP) by double digits and improve product mix, which they expect to result in margin improvements as well. As part of their investment strategy, they are shifting away from single premiums and focusing on regular premium products to enhance value for new business (VNB). The company has also adjusted its investment portfolio, exiting some Taiwanese equities to manage risk, and increasing its holdings in foreign bonds, particularly aiming at NT dollar-denominated international bond ETFs for Taiwan dollar liabilities to reduce hedging costs.

Hedging Costs and Foreign Exchange Impact

The company mentions a negative position against the U.S. dollar of about 22%, leading to an overall hedging cost of only 12 basis points for the year, which is seen positively against the backdrop of foreign exchange gains. In terms of hedging cost outlook, they do not foresee higher costs for the upcoming year. Their strategy has been adaptable to a strengthening NT dollar, suggesting calibrated adjustments in their hedging positions moving forward.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by, and welcome to Fubon Financial's Third Quarter 2023 Financial Results. Questions will be taken at the end of the presentation. And this call is being recorded. [Operator Instructions] And now I will hand the call over to your host, Mr. Amanda Wang, the IR Officer of Fubon Financial Holdings. Ms. Wang, please begin.

[Amanda Wang, executive]

Thank you. Welcome, everyone. Thank you for joining Fubon's first 9 months earnings results call today. And there will be 2 sessions in this call, including Fubon's performance review and followed by the Q&A host by the President, Mr. Harn and also the senior management. Please turn to Page 4.

In Fubon's first 9 months of the profit, we reached over TWD 67 billion. That including EPS, both are the top among the holding companies in Taiwan, while the asset continued to grow at over 3% and book value up by over 30%.

In Fubon Life, the profit TWD 43 billion, that make us rank top 1 among the peers in Taiwan. And there are means mainly supported by the recurring return before hedge that increase and also, the premium side. We have a top 2 market position across SYP, TP and SYP. And also on the capital position, we are continues to be solid with equity to asset ratio at over 8.5% and RBC over 50%.

In Taipei Fubon Bank, the profit reached over TWS 20 billion. That again will hit another record high. And in terms of the profit driver, the net interest margin growth of 9 bps year-on-year and also the loan growth. While the fee income grew by 37% that reflect the wealth management on the credit cards business.

In Fubon Insurance, the net loss continue to narrow down. It came down to TWD 2.4 billion of loss, while the monthly income turned positive starting from April. While the premium side, the size continue to grow by over 5% and investment return at over 4.5%.

In Fubon Maturities, the net profit is over TWD 5 billion and up by close to 60%. That mainly comes from the investment gains as the tax trend up. On the ESG side, we are honored to receive awards and certificate from both in Taiwan and also from global institutions, including by ISS, by Systematic and by Commonwealth Magazine to Fubon Financials and also a few awards to Fubon Bank.

In Page 6, in terms of the action across subsidiaries. In Fubon Life, we have continued to focus on the green investments that we reached over TWD 1.6 trillion. While in Taipei Fubon Bank, the size also reached to TWD 594 billion. And we are also the first here to public the TCFD report. And also, we have developed the AI detection technology that leads the industry.

And in Fubon Insurance, we are the first in the industry to propose a net 0 underwriting by year 50. While in securities, we also have initiatives as well. In Page 7, in terms of profitability, the net profit and EPS trend down, but still make us the top 1 among the holding companies in Taiwan.

In Page 8, across the subsidiaries, we can see that the profitability came down in Fubon Life, foreign insurance and on Bank China. Fubon Life is mainly on back of the volatility in capital markets. While P&C's loss gradually narrowed down, and Fubon Bank China, largely due to the decline in NIM and also the provisioning requirement increase.

While the performance in other subsidiaries, including in Taipei Fubon Bank, Fubon Securities and Fubon Bank Hong Kong are actually quite robust. And in Page 9, the asset size continue to grow while the book value increased by over 3% year-over-year.

And in Page 10, ROA and ROE on an annualized basis is here for your reference. If we can move on to Page 12, let's start the Fubon Life section. The premium size, FIP declined pretty much in line with the market. That is also in about 17% level. While the renewal premiums are coming down due to the payoff for the regular pay policies, and therefore, total premium declined by 8.8%. That again is similar to the industry's average.

And in Page 13, in FYP, the mix, we can see that we are pretty much moved towards the product strategy we're aiming, i.e. is to enhance our SM to prepare for the IFRS 17 and ICS adoption. So putting into a number, we can see the regular paid policy now go up to about 40% of FYP and the health accident and others also trend up to 8.9%, while the investment-linked policy came down to close to 30% of FYP.

And in Page 14, we can see the FYPE as a result grew by 39% and on back of the product mix change. And this result is largely outperformed compared to the industry's FYPE growth by about 9.7%. And on your right-hand side, we can also see the VNB grew by 5% and margin in hand to over 21%.

In Page 15, in terms of the channel contribution, internal channels continue to be the main focus, including Thai agents, Taipei Fubon Bank and other subsidiaries, together accounts for around 70% of our FYP. While our market ranking from bancassurance is a top industry, and if we look at the FYPE contribution by channel, actually, we can see across all channels, all shows growth in FYPE.

In Page 16, in the investment side, the mix largely is that we reduced the position in equity, -- domestic equity assets. That is to capture the capital gain opportunities and also to maintain sufficient cash level. And going forward, we'll continue to monitor the market carefully to adjust the asset allocation, while overseas fixed income position increased largely due to the appreciation of the U.S. dollar.

And in Page 17, the composition of the overseas income is largely similar. In Page 18, in terms of investment income. Firstly, the total investment assets, we delivered stable growth of over 4%. And in terms of the contribution, the recurring income improved by over 7%. That mainly reflect the higher interest rate environment and also the appreciation of the dollar.

While the hedge cost is high, and therefore, the decrease and the return and also, the capital gain compared to last year's high base, and then both led to the investment return at 4.33% this year.

And in Page 19, the FX gain improved to 29 -- sorry, the FSK improved quarter-over-quarter to about 292 basis points in Q3, as the U.S. dollar appreciate by about 3% above in a single quarter and YTD appreciated by over 5%. And therefore, the total first 9 months hedge cost and FX gain is about 12 basis points. That is better than our expectation.

While your lower left-hand side, the recurring return before hedge actually shows improvement to 3.66% and after hedge, because of considering CSA NDF cost and therefore, it decreased to about 2.71%. And in Page 20, the spread between investment return and cost of liability, we continue to maintain a positive spread. While the breakeven point spread with the recurring return after hedge turned slightly negative by 5 bps, it's mainly due to cost, as we just mentioned on the CS and NDF side.

In Page 21, the URCL, we can see it trend slightly up quarter-over-quarter and it reached TWD 81.6 billion of unrealized loss. When compared to the year-end last year, we still see over TWD 100 billion of recovery. And then also bring our equity to asset ratio as well as the RBC ratio improved over the same period of time.

And next, let's move on to Taipei Fubon Bank section. In Page 23, the total revenue was up by over 17%. It's driven by NII fee and treasury income. And in NII, the growth, largely due to the NIM expansion by 6 -- 9 basis points and also loan growth close to 6%. Fee income growth was also quite robust at over 37%.

While the treasury income growth, that also comes from the contribution from the bonds and FX gains. And on next page, we can see the credit expansion of 5.9%. They actually outperformed compared to the market average of about 4%. And in Page 25, the corporate loan segment grew by 5.8% and largely driven by the foreign currency assets. And in the meantime, we see the semi loans also grew by close to 10% growth.

And in the retail side, in Page 26, the mortgage continues to grow quite decently at 8.4%. Whileall the personnel loans in -- specifically in unsecured consumer loans that delivered a quite robust quarter-over-quarter growth at 8%.

And in Page 27, on the deposit side, the bank increased by over 3% of deposit base, largely driven by the NT book, specifically in the retail segment. And in foreign currency, we control the outstanding balance and also, we improved the utilization. So we can see the percentage on your lower right-hand side improved to 86%.

In Page 28, in terms of NIM spread, both metrics shows improvement quarter-over-quarter. And also on the first 9-month basis, we also see a NIM improvement. And that largely reflects the loan -- the lending momentum and also the foreign currency bonds deployment. And while if we include the swap revenue, the 9-month NIM actually also up by 20 bps and reached 1.3%.

In Page 29, the asset quality remains stable and outperformed compared to industry average. And while the quarterly provision is largely due to the GP and also a few selective cases in domestic area. And in the following page, in the credit card, we can see the active cards and cost spending shows quite high momentum and also outperform and therefore, gained market share, largely at Costco affinity cards contribution.

All monthly per card spending slightly trend down by 2%. That's largely due to the base effect that we have a higher growth in active cards while insurance payment on a per card basis are slightly trend down. In Page 81 -- sorry, 31, the fee income side, growth is over 37% and largely from the wealth management fees. And also quite significant growth from the credit card, as we make adjustments in the marketing expenses and also the expansion in card spending.

While wealth management may contribute over 85% of the fee revenue, it was up quite meaningfully at close to 30%, specifically from the bancassurance contribution and the trend we expect to continue.

In the following page, the overseas branches contribution also quite strong. The net profit has doubled, and that contributed over 20% of the bank's bottom line. And next, let's move on to Fubon Insurance. The direct recent premium grew decently at over 5%, while underwriting profit grew by 13% and the combined ratio is well below 90, we exclude the COVID-related impact.

And the following section, Fubon Security, we can see the net profit growth of close to 60% Y-o-Y. That make us a top 2 in peers, largely due to the investment gains. And while the market position across the board improved upon the merger.

And the following section is Fubon Bank China. In terms of loans and deposits, we both grow at high single digits. And the revenue and net profit turned positive quarter-over-quarter that we can see the improvement mainly on back of the net interest income and also the swap revenue. The net interest margin came down while the inclusive of the swap actually came down level narrowed down to 17 basis points and reached 1.38%.

And the trend, largely due to the market rate environment in RMB and also the adjustment in our lending portfolio, specifically on the online lending. And on the funding cost side, the U.S. dollars increase, funding cost increased. While the asset quality-wise, we continue to keep at a relatively stable level.

So this concludes the presentation. And next, we will open for the Q&A and hold by the President of the Fubon Financial Holding, Mr. Jerry Harn. Thank you for your attention.

[Operator]

And ladies and gentlemen, we are now in question-and-answer session. [Operator Instructions] Now first question is coming from Leon Qi of Daiwa.

[Leon Qi, analyst]

This is Leon Qi from Daiwa. I have 2 questions today. One on the insurance side and the other on the investments. Firstly, I do appreciate management's color is now your FYP and the improving profitability and more capital-efficient product mix. In particular, I noted that Fubon is one of the insurers who has been a pioneer in terms of selling the participating products. Would you please share with us some color in terms of the competitive landscape in participating products in the market. But we also know that one of the international insurers has also been quite aggressive in terms of participating products. So first question is on the competition in participating products.

And secondly, given -- because more recently, there has been some changes in terms of the VAT interest rate in the U.S. for 2024. And we do understand that U.S. interest rate and the interest rate spread between Taiwan dollar and U.S. dollar actually affects a lot of faucets of our investments. So I appreciate if management can help us to give some color how we should think of our investment portfolio, investment allocation strategy going into 2024. [indiscernible] for the participating insurance product.

[Unknown Executive]

Yes, Leo, thank you for your question. About participating product. Actually, Fubon Life is the first pioneer to launch the participant product in first quarter. And so far, the market actually, the competitor, maybe the potential, one of the forming companies provide participating product. So actually, we are a pioneer. So we did not see a lot of competitive in participating product.

Also, if we compare the participating product to the interest-sensitive life product. Actually, as we mentioned before, the product feature provides to the customer is actually different to the increasing product. Because actually, we provide customers more protection-oriented features. And also, because we expect the customer will pay us with longer so we can provide a higher return to the customer also because it's a sharing mechanism between the company and the shareholder -- company and the customer. So it's actually a cost win-win situation.

So another one is our company advantages. Actually, based on our past investment performance, actually, we are quite good at investment. And so we are quite confident that we -- actually, we have a more competitive advantage over other companies.

Another one is that for launch participating product, actually, we need a lot of education to the sales channel. So we did a lot of work this year. So I think we can hope -- we hope that we can have a more diversified portfolio to -- in the future to adopting the future challenge. Yes.

[W. Harn, executive]

Quite a few of our competitors are now evaluating the possibility to follow our lead to launch participating products in the market. But we would like to emphasize that the 1 important competitive edge for us that is our investment track records.

As you probably know, we continue to maintain much higher than the industry peers in our investment performance, and that is the, I think, the key competitive edge for us to continue to sell and compete our potential competitor in this landscape.

Okay. Do you want to share any color on our investment strategy or thoughts based on...

[Patty Wang, analyst]

Yes, the strategy in case the interest rate comes down. .

[Amanda Wang, executive]

Thank you. Let me say in our early session, and I will repeat again in terms of our asset allocation, we have a sufficient cash on hand. Current is about TWD 270 billion, and we retain the possibility to rebalance our portfolio in the future. Then also talking about the rate. And we expect the interest rate we'll harbor at a relative high range and like who shop rise should be slimmed. So we will see market opportunity to invest primarily in dominant ETF to enhance yield and also reduce our regular hedge cost.

And about some market, we think about that as the tightening circle approach to the end, we were looking for opportunity to invest stacked upside potential. About the investment.

[W. Harn, executive]

I trust that you appreciate that the market is very volatile. So we may change our investment strategy according to the market conditions. Okay. Any other questions, please? .

[Operator]

Next, we'll have Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

Just 3 questions from me. First one is for the COVID reinsurance claim. Could I just reconfirm according to the accounting requirement, you still need to set aside 100% provision by -- if you cannot get back all the receivable in 2 years.

[W. Harn, executive]

No, there's no requirement.

[Jemmy Huang, analyst]

Okay. So in terms of the accounting practice that you mentioned, you need to set aside TWD 600 million to TWD 700 million in fourth quarter. What would be the like additional provision required in 2024 if you still cannot get back a majority of the receivable. I think that's the first question.

[W. Harn, executive]

Sorry. Okay. Okay. Let me answer this one, okay? It's 25% of the receivable.

[Jemmy Huang, analyst]

By 2024?

[W. Harn, executive]

If we did not collect our receivable in 2 years, and that is our internal. I mean in order to maintain our accounting book integrity, not because of the regulator's requirement. It's purely internal accounting discipline. So that is 25% of the arm of the receivable in 2 years' time, okay?

[Jemmy Huang, analyst]

I see. And second question is on the investment income related to the investment property. I think according to your disclosure, there was other games and losses of around TWD 3.1 billion in the first 9 months compared to, I think, losses over the past 3 years. Just trying to figure out where the volatility come from for this part of games and losses related to investment property apart from the rental income.

And I guess the final question will be with your expectation for interest rate to stay higher for longer, how do we consider the credit risks for both our banking and also the life insurance operations? And how should we expect you or have you had done any adjustment in terms of the investment and also the lending risk management?

[Unknown Executive]

So about -- you just mentioned about the income, about the valuation of our property. Actually, it's because this year, we have a computation of our 825 building, which coupled with about more than TWD 2 billion increase in valuation. It's because the building complication.

And also, we have some just increasing rent. Rental is due to the low vacancy rate, so which led to also some increase in real estate valuation. So it's from both combined integrators.

[W. Harn, executive]

Interest rate hike has been this situation, especially in this year, especially on U.S. dollar. But you can see the Chinese companies, they tend to lean on the local currency to avoid such kind of high cost, interest cost. But for those foreign companies of the borrowers, I think they will adjust their balance sheet in various currency. But at least for this year, we don't see there's a credit cost hike because of the interest rate cost increase.

So if you say for next year, if the interest rate hikes, it will go down. And this affect directly to this kind of credit risk. We don't -- I don't think there's a significant relationship.

Look, we have done a stress test based on this higher interest rate internally. So the -- we have been watching the portfolio quite closely. And based on the condition of thinking book at the moment, we do not foresee in the near future i.e., maybe 6 months, we don't see a deterioration in terms of our overall asset qualities.

[Operator]

[Operator Instructions] Next, we'll have Steven Lam of Bloomberg Intelligence.

[Steven Lam, analyst]

Two questions here. One is on your new business value creation. I was just curious, what is your expectation? I think in the Chinese session, you mentioned about you gave some comments on NBV and FYP. I was just curious, would you say most of the NBV increase is coming from margin? Or it's a pretty good mix of volume and margin?

I'm asking that because I think in the first 9 months of this year, clearly, from an FYP standpoint, your margin expanded quite nicely. But then on the FYPE standpoint, I think there's some deterioration. Now I know this is probably from math, but I just want to get a sort of overview in terms of your margin expectation.

It sounds like from the product that you're selling, say, more participating or some more protection, it should be trending up. I just want to verify that at least for the next couple of quarters.

And then secondly, on the investment side. My main question would be, I think you made some comments about you've exited some Taiwanese equities to control risk. And at the same time, you probably loaded up some more foreign bonds. Could you sort of explain to us in what kind of foreign bonds you have been more sort of constructive about? And were those sort of did you put -- put hedged on those one or you're willing to take some unhedged position? And if you can give some guidance in the coming months or quarters on the same investment class, that would be great.

[W. Harn, executive]

Thank you for your question. For 2024 outlook, actually, in our Chinese session, we mentioned about that we -- actually, we will continue our momentum this year. So FYP will grow at double digit.

And as for the margin, actually, we're hoping that we -- our product mix will improve this year based on our trend now. But actually, we -- in this year, we already improved a lot of the FYPE and regular premium selling. So we are hoping that product mix will improve next year. And so in that way, actually, the margin will improve at the same time.

And the second question is about you mentioned that VNB divided by FYP, the ratio. It's because when you sell in the more single premium, actually, the VNB divided by FYP will improve. This is because when you calculate the FYP for the single premium, especially were much flat by 0.1%, 0.1. So it was -- it will much rise by 10x.

So in third quarter, actually, we reduced our selling in single premium. So that's why you see that our VNB divided by FYP, it seems like the material a little bit. But it's not -- it's just because our -- we are shipped into a regular premium product.

And third question is about the VNB margin. I think both product-wise, in this quarter, we are selling more -- compared to last quarter, we're selling more, some more saving-oriented products. So that's why you see a little bit deteriorating in margin. Yes. Thank you.

[Amanda Wang, executive]

And also about our bond investment. We're pretty sure that, say, if for the NTD-dominate policy, then actually, we just buy NTD dominate ETF to staff for just regular or just see hedge cost. And for the U.S. policy, it's because the IFRS risk have been taken by our policyholder. That means, actually, for the policy, U.S. dollar policy will not need to hedge. And in later case, we just buy some just straightforward into this position. Yes, that's my answer.

[Steven Lam, analyst]

Okay. Can I have a follow-up on that one? .

[Amanda Wang, executive]

Sure.

[Steven Lam, analyst]

Yes, yes. So the reason why I asked this is because it seems like, of course, from Slide 19, there's a good illustration in terms of before hedge and after hedge, right? Now based on your last comment in terms of, say, well, I'm buying -- I'm using the NT dollar-denominated international bond ETF for my Taiwan dollar liability. So that means...

[Amanda Wang, executive]

Exactly.

[Steven Lam, analyst]

Yes, right, right. So you can save a lot of hedging costs there. And then, yes, for foreign policies, obviously, you match it with foreign bonds, so that's fine. So I'm curious, but the implied sort of hedging cost, right, versus last year has widened quite a bit. So that tells me that in that process, you're still being hurt by some of the higher hedging costs.

Of course, you have other FX gains that you can collect in the past few quarters. So I guess I'm just trying to take a step back and see what is the outlook for next year? I think you also mentioned you don't expect to hire an overall hedging cost situation next year, right? Is it around 50 to 100 basis points or something like that?

[Amanda Wang, executive]

No, I'm talking about the range, actually, this year forecast, not for next year. And also...

[Steven Lam, analyst]

Not for next year.

[Amanda Wang, executive]

yes. And also the reason you just -- for your question, I would say it because think about maybe we pay out on the CS hedge cost maybe, say, okay, see from yeat-to-date, maybe we pay total about 100 basis points as a whole. But however, because new Taiwan dollar depreciate against the U.S. dollar, maybe just today, still a 5% or 4%, that mega have a huge FX gain on this negative position. And also, as you can see on our Page 19, that we have a negative position against U.S. dollar about 22% until the third quarter.

That means it makes our, as a whole, our average total expenditure is actually -- not that -- maybe we need a total fee -- sorry, as a whole, we just only paid 20 -- just 12 basis points per gate as a whole for this year, our total expenditures. So actually, -- but looking forward, I would say because the NT-dollar right now is tenably stronger than in recent past couple of days. So our hedge strategy also will adjust accordingly that we also have already closed some just NT -- sorry, U.S. negative position and also use the NTF to hedge at the current stage.

[Steven Lam, analyst]

Right. And would you say that, I think in the last few months, most of the fixed income strategy was you go for the shorter end, try to stay away from the longer end to capture the very attractive 5% or 4%, 5% short-term rate. Of course, for life insurance, you probably don't too much for a short end. But I'm just curious, is that -- does that still make sense? And is it just U.S. Treasury? Or you're willing to take a bit more credit risk in that respect? Yes.

[W. Harn, executive]

I think we'll adjust our hedging positions according to our views to the markets. We are currently of the view that the NT dollar will probably on the short term on the stronger side, then we will adjust maybe we'll increase our hedging position a little bit. But number one, the hedging cost, I mean, will continue to maintain at current level for probably we don't know, probably another 6 months.

But as to the ForEx gain, based on our hedge position, we will adjust according to market condition, and that's hard to predict.

[Steven Lam, analyst]

Right, right. But within the U.S., like would you say it's still the U.S. Treasury or you... .

[W. Harn, executive]

No, we are primarily invest in the corporate or financial institutions bonds of investment grade.

[Steven Lam, analyst]

Yes, that's interesting because from your Slide 17, on a quarter-on-quarter basis, it seems like there's a bit more in the European allocation, and then the North American one sort of shrink a little bit. I don't know if it's like market movement or something like that, yes.

[W. Harn, executive]

Yes. But we will adjust that the according to market conditions, the -- but our primary investments are in the U.S. markets for the U.S. corporate and the U.S. financial institution. We may adjust -- I mean, low quarter-by-quarter, but it's not much anyway.

[Operator]

[Operator Instructions]

[W. Harn, executive]

Are we having more additional questions from the guests?

[Operator]

Maybe let me ask ine more time. [Operator Instructions] Okay. Then there appears to be no further questions at this point. We thank you very much for all your questions. That will be the end of the Q&A session. And then now I hand the call back to the President Harn. Thank you.

[W. Harn, executive]

Okay. Thank you very much for your participation. If you have any further questions, you're most welcome to connect our IR people. We will provide as much information as we could. Thank you very much for your participation today. Thank you.