Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Analysis

Fubon Financial Achieves Strong Profit Growth with Promising Outlook

Fubon Financial reported a remarkable net profit of TWD 120 billion in the first nine months, a significant 79% increase year-over-year. Major subsidiaries like Fubon Life and Taipei Fubon Bank drove this success, with profits up 81% and 24% respectively. Looking ahead, the company anticipates high single-digit loan growth in 2025 and a stable credit card NPL ratio. Hedge costs for 2025 are projected between 100 to 150 basis points. The focus on health products contributed to a 17% increase in value of new business (VNB), with expectations for continued growth. Overall, Fubon maintains a strong asset foundation and profitability metrics.

Strong Performance Amidst Market Challenges

Fubon Financial reported compelling results for the third quarter of 2024, showcasing significant growth across its core subsidiaries. The net profit surged to over TWD 120 billion, reflecting a staggering 79% year-over-year increase. This remarkable performance was primarily driven by heightened investment returns and solid underwriting premiums within its life insurance segment.

Life Insurance Segment Leads the Way

Fubon Life stood out with a net profit of TWD 77.9 billion, marking it as the top player among local life insurers in Taiwan. The growth was bolstered by the sale of health products, contributing to an increase in value of new business (VNB) margins, which are expected to maintain a similar level in the coming year. VNB growth exceeding 10% indicates the company's strategic shift towards healthier product offerings.

Bank Achieves Record High Profit

Taipei Fubon Bank delivered exceptional results, achieving net profits exceeding TWD 20 billion. This performance was supported by a 9.6% increase in net interest income and nearly 40% growth in net fee income, driven mainly by an expanding credit card and wealth management franchise. Notably, the loan and deposit growth rates are projected to fall within the high single digits for 2025, reflecting current market conditions.

Investment Strategy Yields Positive Returns

Fubon Securities saw net profits rise by 48% due to strong market conditions and continued expansion of the company’s franchise. The investment portfolio performed well, with both domestic and international equities yielding over 20% annualized returns. Although recurring investment income has seen some decline, the shift toward growth-oriented investments is expected to bolster overall returns in the future.

Cost Management and Future Guidance

Looking ahead, Fubon anticipates continued pressure on net interest margins (NIM) due to potential interest rate cuts in 2025. Yet, the bank is optimistic about achieving a mid-single-digit growth in NIM through strategic adjustments. Furthermore, the hedging cost for 2025 is estimated at 100 to 150 basis points, a pivotal factor that will influence overall profit margins.

Asset Quality and Risk Management

The bank has managed to maintain a commendable asset quality, with a non-performing loan (NPL) ratio of just 0.1%. This solid performance indicates robust risk management, bolstered by substantial reserves. However, there's an expectation for stabilization of the credit card NPL ratio as the credit portfolio matures, which is crucial for maintaining strong asset quality in the coming years.

Sustainability and ESG Commitment

On the environmental, social, and governance (ESG) front, Fubon demonstrated continued commitment to sustainable practices, receiving accolades for its initiatives across various subsidiaries. This may play a favorable role in attracting socially responsible investors who are increasingly scrutinizing corporate practices.

Conclusion: A Solid Investment Prospect

Overall, Fubon Financial’s robust growth trajectory across its segments signifies a strong investment proposition. With long-term growth strategies intact, solid asset quality, and a proactive approach to market challenges, investors may find Fubon to be a compelling addition to their portfolios. As always, prudent monitoring of market conditions and company performance will be critical in evaluating future investment potential.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to Fubon Financial's Third Quarter 2024 Financial Results. [Operator Instructions] And this call is being recorded. [Operator Instructions] And now I will hand the call over to your host, Mr. Amanda Wang, IR Officer of Fubon Financial Holdings. Ms. Wang, please begin.

[Amanda Wang, executive]

Thank you, and welcome, everyone, to join Fubon's third quarter briefing. Firstly, please turn to Page 4. The overview that you can see the first 9 months, we recorded a strong result. The net profit reached over TWD 120 billion with nearly 79% year-over-year growth. And the total assets and net worth also grew along with the result. All the key driver comes from the major -- all across the major subsidiaries, including live banks, insurance and securities. In Fubon Life, the net profit of TWD 77.9 billion, that's top among the local life peers in Taiwan. While the driver behind is the strong investment results and also the underwriting premium outcome. In the meantime, the capital position remains in a strong position. In Taipei Fubon Bank Bank, the net profit of over TWD 20 billion reached another record high and also higher than full year result last year. And the driver behind mainly comes from the net interest income that grew 9.6% and also a net fee that grew nearly 40%. While the franchise from active credit cards and also cost spending continue to expand. And also the customer size from a digital platform that record over 5 million size. In Fubon Insurance, the profit is over TWD 3.4 billion in the first 9 months, while the driver behind also comes from both the underwriting and also the investment. In Fubon Securities, a net profit of over TWD 8 billion with the strong growth that comes from the market strength and also the company is franchise expansion.

In Page 5, the net profit numbers, as you can see here, we reached a strong result. And in the meantime, the first 10 months net profit continued to grow with net profit of TWD 147 billion and also EPS of $9.27.

In Page 6, the net profit from all across the major subsidiaries shows growth, that including the Life growth 81%, Taipei Fubon Bank increased 24%, Securities up 48% and Fubon Insurance earnings turnaround.

In Page 7, the scale from assets and networks continue to grow. And also the book value per share reached over $61. In ROA and ROE on an annualized basis, each also reached 1.4% and 18%, respectively.

In Page 9, on the ESG front, on back of the key major strategies, we demonstrate the achievement and also the awards from across subsidiaries.

In Page 11, we move on to Fubon Life. In Fubon Life, the underwriting results, we can see the premiums results all outperformed the industry average, with FYP growth of over 15%, renewal premium of over 7% and total premium of over 9%.

In Page 12, the composition of FYP mix, we can see we changed more toward the higher CSM product, many from the regular pay and protection type. So the regular pay overseeing increased to over half that reached 58% of the total FYP. And while the foreign currency policy is not a growth angle that reached 40% of total FYP.

In Page 13, the FYPE grew also outperformed compared to industry average. And as a result of the regular pace increase the VNB's growth of 17% is the result that you can see as well.

In Page 14, the channel's contribution by FYP and FYPE that continue to deliver a balanced strategy between bancassurance and agent, both contribute over 40% of the company's FIP. And in the meantime, the bank's contribution continued to be the highest compared to our peers. And from FYPE's perspective, we can see across all channels, deliver growth and again, shows the focus of a regular pace product strategy.

In Page 15, from an investment perspective, the spotlight this quarter -- this first 9 months is from the equity's allocation in domestic and overseas, and both record annualized return of over 20%. And that reflects the capital gains and also from private equities investment. In the meantime, we can see our deposit and cash equivalent allocation of 4.5%. That's a relatively higher, and that also shows that we continue to have room for further allocation going forward.

on Page 16 for your reference that our allocation overseas fixed income is pretty much at a stable level. In Page 17, the investment income, you can see the bottom of the two lines the table of the return before and after hedge both shows a meaningful improvement that again comes from the equity investments contribution. While the first line in the table shows the recurring investment income is a decline Y-o-Y, that mainly reflect the cash dividends, contribution is lower this year, and given our allocation strategy is more toward growth-oriented. And also that, on the other hand, is that increase from interest income and also mutual funds contribution.

In Page 18, the hedging result we can see on the upper left-hand side, the FX losses in the first -- in the third quarter of 52 basis points. That's mainly because of the weakening of the dollar in Q3. While the first 9 months we maintain to deliver positive gains of 27 basis points. And the dark color on the upper left-hand side that you can see the recurring hedge cost also shows increase in Q3. It's mainly because of the higher percentage allocated in NDF and also higher cost as a result of currency move fund, and that led to a slightly higher trend compared to the Q2. While we expect to see the currency swap, that's also the key element in the recurring hedge cost to show improvement going forward. In the lower left-hand side, the recurring return that both indicators shows a decline year-over-year, again, because of the cash dividend decrease and also because of the recurring hedging cost increase.

In Page 19, the spread between cost of liability and total investment return continue to expand. While the breakeven point between this and after hedge recurring still a negative one, mainly due to the rise of the recurring hedge cost.

In Page 20, the investment performance from unrealized balance perspective, we continue to keep unrealized gain as of end of September, and we see the level to improve as of the November level. While the equity-to-asset ratio maintained at a decent level, as you can see here, equity to assets at 11.6%.

And next, let's move on to Taipei Fubon Bank. In Page 22, the total revenue delivered strong growth of 17.6% mainly driven by the NII and also the fee. NII comes from the growth in the scale assets and also slight expansion in NIM. In fees, we see a very strong growth in first 9 months from wealth management and also the credit card. While the treasury also shows up, that's mainly from the bills investment and also the swap revenue.

In Page 23, the loan composition from retail that outweighs the composition from corporate. While the total credit of 10% YTD growth, or 11% Y-o-Y growth that slightly outperformed compared to the industry average of about close to 10%.

In corporate business in Page 24, it's mainly driven by the foreign currencies loan growth. And in the NT book, we can see that SME is more more of a spotlight and the contribution to the corporate percentage continued to improve.

In the retail business, in Page 25, the mortgage grew 12% YTD. And in the meantime, it's unsecured consumer loans also outperformed the market average growth.

In Page 26, on the deposit front, the NT's growth at 8% YTD and foreign currency also had a similar pattern, while the mix we can see deposits from time deposit growth is relatively stronger. While the utilization slightly edged up to 87.7%. And in the foreign currency, we also see some improvement YTD.

In Page 27, the interest spread in the first 9 months between loan and deposit spread fell 15 bps mainly because of the time deposit increase we just reported earlier. While the NIM slightly up 1/3, that mainly reflect in NT's loan improvement and also the structures improvement. While on a quarterly basis, both loan deposit spread and NIM up by 1 bps and that again mainly reflect the NT book's improvement.

In Page 28, the asset quality in the bank continue to outperform compared to industry average with an NPL ratio of 0.1% and coverage over 1,000%. While by business lines, we see the personal unsecured loans NPL still edge up trend up to 27 bps, which mainly due to the expiration of governments bill on measures on back of the COVID.

In Page 29, the credit card business that we continue to deliver stronger than market average growth in cards and also spending, while the monthly spending fell, mainly again due to the scale of the active cards increase. While the NPL ratio slightly edged up also reflects the same reason that we just shared with you.

In Page 30, in fee business, overall speaking, the strength comes from the wealth management fees growth of 37% year-over-year growth, and also the credit cards nearly doubled on back of the size and scale expansion.

In Page 31, in overseas branches of Taipei Fubon Bank, we see the momentum continue decently with the revenue and also the net profit both grew at over 14% year-over-year.

In Page 33, Fubon Insurance, direct written premium up by over 13%, while the net combined ratio at 85%, that continue to show improvement.

In Page 35, Fubon Securities strength in the net profit, up by 48%. That reflects the market expansion and also the company's franchise value.

In Page 37, in Fubon Bank China, we see the scale from loan and deposits grow decently in the range of about 5% to 6%. While the net interest margin expand by 24 bps that mainly reflect the purchase of Citi's China credit card receivable portfolio. While the swap revenue also contributed to the strength of the first 9 months of net profit. While the asset quality perspective, we continue to control at a decent level.

And thank you for your attention. And next, I will turn the floor to President Harn, President of Fubon Financial to host the Q&A session. Thank you.

[Operator]

[Operator Instructions] And our first question will be coming from Steven Lam, Bloomberg Intelligence.

[Steven Lam, analyst]

Congratulations on good results. And just three parts. First, on the life insurance side, could we give some color in terms of the main drivers of the VNB margin improvement? I can imagine that it's because of the share of the health product and accident. Just curious if this is just a pure mix impact or there's also a like-for-like increase in terms of margin? And what would be the VNB margin expectation for 2025? On the investment side, just a couple of quick one. I wasn't sure if you gave the guidance for hedging costs in 2025, if you have, apologies that if you can repeat that again. And then just curious on the real estate return. I think I saw 0 for 9 months, which is an improvement from the first half. I think it was down 0.8%. Just want to ask what was driving that? And any expectation for the full year on that front? And then in terms of asset allocation, I think there's a notable increase in terms of the domestic bonds allocation. So I was curious if this is a price impact or this is actually active addition on the bonds, and of course, the flip of that is, I think there is some slight decrease in terms of foreign bonds. And I would imagine the U.S. treasury yield was actually down in the third quarter. So this tells me that there's probably some active sell down. I just want to understand the dynamics is correct. And on the NIM, I think there was a good commentary in terms of 2024. You're still expecting 1 basis point. Curious if you have a guidance for 2025 and the loan growth of that? And last, if that's okay, on the credit card NPL ratio, I appreciate because of the expansion of the business, that's why it's catching up with the industry. Curious if you can comment on what you expect for next year perhaps? Do you feel that it may be sort of stabilizing? Or there's some concerns there. Thank you.

[W. Harn, executive]

Okay. Okay. On the bank side, talking about the NIM expectation for next year, I think next year is the trend on the interest rate cut. So the NIMs have some pressure, but we are going to increase our NIM through the adjustment of liability and asset portfolio. So we expect to grow maybe around mid-single digit. And loan growth for next year because there is a limitation on the mortgage loan, so the growth momentum is kind of impacted, but we expect this should be about high single-digit growth for next year. In credit card NPL, we have had the increase of new credit card holders for the past 12 to 18 months. So the vintage wise, the credit portfolio on these new cardholders that we have encountered a higher credit NPL for this year. But for next year, starting compared to this year, I think the credit NPL should be stabilized.

[Amanda Wang, executive]

Okay. The VNB growth this year is double -- over double digits. And the main driver is the sale of health products in the second quarter. And that has VNB margin increased slightly. And we expect the VNB will continue to grow next year. And the VNB margin will at a similar level.

Okay. For the hedge cost guidance of 2025, now we see a Fed entering cycle and we expect that hedging -- the hedge cost of sub cost will be gradually improved afterward. So currently, we see the overall hedging cost will be expected to be around 100 to 115 basis points for 2025. And also for this year 2024, we expect still can try to maintain within 100 basis points is for the guidance of IFS. And another question is about the real estate, about the return is 0 for this quarter. And the reason is because our overseas real estate portfolio has been affected by upcoming lease expiration and also plan renovation. So however, we expect further significant decline will be just unlikely happen because we try to just talking to some talent and spend, our contract with a lease content. And also, we believe the the renovation complete, the tenant -- the rent can be also be higher and also quality of the lease can be higher. So that's a view of our real estate and guidance. Another one is about our asset location in the third quarter. The question about the domestic that actually, we have increased some position also the appreciation of the price -- sorry, the position goes up. And foreign bond, actually, we did not sell. We are steadily increased. However, because the AUM growth for this year, YTD until the third quarter is about 4%. So the foreign bond position decreases due to the dilute of the outlook -- due to our asset allocation increase. And also another question is because the NT dollars also appreciation about 2.5% last period. So there's two factors to make our foreign bonds to a lesser and also decrease in terms of position. Here's my answers.

[Steven Lam, analyst]

That's very good. Can I just confirm one thing that I hear that the hedging cost outlook is 100 to 115 basis points or 150 basis points for 2025.

[Amanda Wang, executive]

For 2025, sorry, it's 100 to 150, sorry.

[Operator]

[Operator Instructions]

[W. Harn, executive]

On the bank side, another question is about the loan growth forecast for this year and next year. This year '24 -- loan growth and deposit growth. On this year '24, the loan growth forecast is about in the low teens digital level. And for the deposit growth, it's about in the high single-digit level. And for next year, I think I just mentioned about the limitation of the mortgage loan for next year, the loan growth and the deposit growth is in the range of high single digit.

[Amanda Wang, executive]

Okay. We estimate the new fee here is about TWD 45 billion as of third quarter this year based on current interest rate and it is on track of our target.

[Operator]

[Operator Instructions]

[Amanda Wang, executive]

Another question asked me to repeat hedge cost guidance in 2024, which is we expect our total hedging cost will be remained within 150 basis points this year.

[Operator]

[Operator Instructions]

[Amanda Wang, executive]

Okay. Thank you, ladies and gentlemen, for your participation in this call today, and welcome to contact IR team if you have further questions. Thank you.

[W. Harn, executive]

Thank you very much for your participation. Talk to you again soon.

[Operator]

Thank you, and goodbye.