China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2021-Q1

[Richard Chang, executive]

Welcome to CDF's performance review for the first quarter of 2021. This is Richard Chang, spokesman of CDF. Today's conference call will be hosted by our CEO, Mr. Steve Bertamini; and CFO, Jenny Huang.

Before we get started, I would like to remind you that CDF has not published its audited quarterly financial statement. Information disclosed in this presentation is unaudited. You may have noticed that our presentation slides have been revamped to provide more data as well.

Also [indiscernible] investor conference, which will be held [indiscernible]. We will take you through the earnings presentation, which is available for [indiscernible] on our website. Afterwards, we will be happy to take your questions. [Operator Instructions]

I would like to turn the call over to Steve.

[Steve Bertamini, executive]

So first of all, thank you very much for joining us today. I want to give you a brief update on our first quarter performance. We had a record quarter of TWD 9.8 billion, which compares to a loss during the first quarter of 2021. The Board approved a cash dividend of TWD 0.55 per share, which represents 4.07% dividend.

We also were the first company to have approved at the Board a restricted share program, which is designed to help us increase retention, help us attract new talent and also better align the interest of our company and our shareholders. This is still subject to shareholder approval and also appropriate regulatory approvals. We're also very pleased to be the first financial services holding company in Taiwan to commit to 0 carbon emissions by 2045. A few more details on this further back in the presentation.

In terms of [indiscernible], China Life had a very successful tender offer by CDF, where we increased our share to 56%. China Life also had an excellent first quarter with net income of TWD 9.8 billion, up 121% of last year, and we recognized half of that account in our books. They also further improved the cost of their liabilities and maintained a positive spread.

In terms of KGI Bank, they saw net income increased 92%, and net revenues was up 27%, and wealth management fee income increased by 20% year-on-year.

CDIB saw a strong recovery from valuations due to COVID early last year and reported TWD 1.6 billion in net income during the first quarter. They launched a Healthcare Fund II at TWD 3.1 billion, and also saw AUMs reach TWD 46.7 billion as of the end of the first quarter.

[ Kai ji zhèngquàn ] also had a very good first quarter, with net income of TWD 4.2 billion, led by momentum -- strong momentum across all business lines. Major improvement in overseas profit up to TWD 703 million, now representing almost 17% of KGI Securities' net income, and also managed to grow ECM and DCM market share from last year now up to 41.5% and 13.9%.

Before updating you on our ABCDE strategy, I want to remind you why this is so important to us. There are 5 major trends occurring globally and also in Taiwan that will impact all financial services businesses. The first is that customer experience now is a competitive advantage. This is more important than distribution and it is more important than brand.

Also, we continue to see disruption in payments. In Taiwan alone, for example, mobile payments were up 132% last year. And also fintech continues to be an area that focuses in this space in many forms, including wallets. We also expect to see new competitors and business models emerge. We see data and artificial intelligence, combined with using the cloud and robotics, as the next battleground.

When you combine data, AI and customer experience, it's a very difficult combination to beat. This is why companies such as Amazon, Google and Apple have been so successful. And of course, the regulatory environment continues to evolve. Regulators are encouraging more competition and also focusing more on privacy as well as encouraging open banking. These 5 trends are the reason that we came up with our ABCDE strategy. I will now go on this in detail. I'll just cover a few areas just to give you an update.

[Foreign Language] is obviously very important to us. We are doing a lot of work to accelerate the delivery and implementation in digital across the companies. We're moving towards a hybrid cloud environment and partnering with world-class technology and design partners.

[Foreign Language]. In this area, we believe it's very important to help our employees become more successful by giving them better training, better leadership skills and also ensuring that what we measure aligns to our strategy.

In the area of customer focus, as I mentioned, customer experience is critical, and we started already working in several areas. We've started a lot of work around benchmarking, particularly in NPS, and we're not only doing work on our brand, but also on our mission, vision and values.

The area of growth is also very important to us. We're focused on improving our ROE and our margins by utilizing capital more efficiently, leveraging cross-sell and analytics and also looking for opportunities for partnerships and alliances.

And last but not least, [Foreign Language], we're very focused on enhancing our infrastructure and maintaining our ESG leadership, which we'll talk a bit more in a moment.

Each one of these 5 has a very clear goal. Accelerate digital is about becoming best in the market. Becoming employer of choice is about having very high employee engagement. We believe that happy employees equal happy customers. In customers focus, we want to be the most recommended company for our products and services. When it comes to financial metrics, we want to exceed the industry, and we want to deliver consistently for our shareholders and our communities.

On the next slide, I briefly wanted to show you the wonderful management team that we have put together. This is a very experienced team that not only has experience in Taiwan, Asia, but also many other parts of the world. We have diverse backgrounds, and some of these are brand-new positions that didn't exist before. Some of these people will join us in July, for example, the CRO and the Chief Operating Officer.

It's also important to note that we also continue to attract and hire great local talent, and we've also begun to make some key strategic hires in some of our subsidiaries.

The following page was shared with you before, and the key area I wanted to focus on is the top right. These are both a few financial and nonfinancial metrics that are very important to us. Net Promoter Score, I mentioned before, this measures how willing our customers are to recommend our product or services. ENPS is a measure of employee engagement. ROE, you've very familiar with, and we're very committed to improving our return on equity.

Total shareholder returns is also very important, and this is, for example, one of the key metrics in the restricted share program I mentioned earlier. And the fifth box, we should be here, but we didn't include it because we're already at the top is ESG, where we want to be leaders in all five. So let's briefly spend a few moments on ESG.

As you're aware, we have been recognized for our efforts over many years, as evidenced by the recent inclusion in the Dow Jones Emerging Market index. We've also been recognized domestically. And you can see that we also have very strong ratings across the board with some of the key rating agencies, and we continue to receive recognition from third parties for our efforts.

The one on the bottom right is quite interesting. This is a partnership we formed with Taiwan University and Chunghwa Telecom and Ernst & Young. We are looking to develop a risk management model that we can then share with the industry, hopefully, by the end of this year. And last but not least, I wanted to briefly mention something on 0 emissions.

We are the first company, financial services company in Taiwan to commit to reaching net 0 emissions by 2045. This is a very aggressive goal. Most other global financial services players have committed to only 2050. We have a clear plan, and we're very committed to making strong progress in this area.

I'll now turn it over to Jenny to give you more details on our financial performance.

[Jenny Huang, executive]

Thank you, Steve. And now I'll take you through sales performance update. Slide 15. The upper chart shows that CDF reported preliminary profit of TWD 9.8 billion for the first quarter with China Life contributing the most, TWD 4.4 billion, followed by TWD 3.3 billion from KGI Securities, TWD 1.1 billion from KGI Bank and TWD 1.6 billion from CDIB Capital. Totally TWD 10.4 billion of investment income.

And the lower chart shows that most of the subsidiaries contributed more profit on quarter-on-quarter basis. In particular, China Life contributed TWD 4.5 billion more, primarily due to lower sales resulting from more provisions in the fourth quarter of 2020 as well as CDF increasing stake in China Life from about 35% to 66% since this February. The right chart shows that for particular contribution significantly more profit on year-on-year basis. Pulling off this stage indicate a solid upward momentum.

In addition, we just announced our preliminary net profit of TWD 4.88 billion for April, bringing the cumulated net profit to 12.7% and EPS of TWD 0.85 for the first 4 months of the year.

Please go to Slide 16. The chart show stable assets and liabilities. CDF's total consolidated assets as of the end of the first quarter was TWD 3.4 trillion, similar to last year-end.

Slide 17. The slide shows that with CDF continued capital reallocation and asset measure, our leverage ratio has increased to 11.6x at the end of the first quarter. You can also notice our increase in [indiscernible] momentum, now measured on a yearly or quarterly basis.

CDF's ROE has been improving and catching up with the financial holding companies here. The first quarter annualized ROE increased to 18.7%, much higher than before, primarily due to more profit contribution from China Life and KGI Securities, which I will discuss later.

Slide 18. The slide shows that CDF and its subsidiaries all have maintained solid capitalization. Finally, I will explain financial performances of all subsidiaries.

China Life. Slide 20. China Life continues to deliver solid growth with first quarter net income of TWD 9.8 billion, and EPS of TWD 2.08, up 121% on a year-on-year basis. The surge in the first quarter net profit was because China Life realized capital gain from its bond and equity provision in anticipation of rising interest rates and the equity marketing momentum. The lower left chart shows China Life ROE, mostly exceeding 10% during the past few years.

Slide 21. Let's talk about China Life's premium income. The upper left chart of this slide shows that China Life's total premium income for TWD 55.7 billion for the first quarter of the year, down slightly on a year-on-year basis, primarily due to its continued effort to optimize its product mix to enhance VNB. However, first year premium was up 63% on a year-on-year basis, primarily due to the sales momentum as well as a lower basis.

The lower left chart shows that China Life maintains multiple distribution channels with bancassurance currently being the largest. And the lower right chart shows traditional single-pay products increased to 64% of first year premium this quarter, primarily due to the rising sales momentum and market demand for foreign currency single-pay products. The upper right chart shows China Life focus on prudent asset and liability management to maintain positive spread, with cost of liabilities decreasing to 2.99%, and investment returns increasing to 4.19% for the first quarter.

Next is KGI Bank. Slide 23. The upper right chart shows KGI Bank's net income of TWD 1.1 billion for the first quarter, up 92% on a year-on-year basis, primarily due to an increase in net revenue as indicated in the upper-left chart, with 16% growth of the core interest and fee income.

In addition, with additional in trading strategies -- sorry, with adjustments in trading strategies, the COVID-related valuation loss since last March has been reducing. The lower-left chart shows the NIM of 1.34% for the first quarter, up 12 basis points on a year-on-year basis, primarily due to an increase in fully fund position in the banking book and the continued reduction in funding cost by increasing its demand deposit.

While the interest rate increased to 1.69% for the first quarter, which was the highest in the last 2 years and even 3 basis -- and even 3 basis point more than -- more than the 1.6 -- more than 1.66% before the rate cut 1 year ago. The lower-right chart shows that through prudent risk management, KGI Bank maintained solid asset quality with an NPL ratio of 0.15%, better than the peer average of 0.22%.

Slide 24. The upper left-hand chart shows the total loan portfolio of TWD 380 billion, up 5%, with SME loan growth of 29% and mortgage loan growth of 12% on a year-on-year basis. KGI Bank continues to optimize its loan and deposit mix with focus on higher-margin SME lending and further enhancement of [indiscernible]. Also despite keen competition on personal loans, KGI Bank has formed cross-industry alliances to enhance customer experiences through digital transformation.

Slide 25. The upper chart shows that the first quarter total deposit of TWD 490 billion, up 7%. Demand deposits continued to increase to 37% of the total deposits, further reducing the funding costs.

Slide 26. The upper left chart on Slide 26 show KGI Bank's fee income was flat in the first quarter. However, wealth management fee income increased by 20% on a year-on-year basis due to a surge in mutual fund fee income resulting from a booming equities market. The upper right chart shows wealth management contributed more than half of the total fee income.

Now is the CDIB Capital Group. Slide 28. The slide shows that CDIB capital has regained its profit momentum and positive net income of TWD 1.6 billion for the first quarter. Slide 29. The slide shows that CDIB capital has transformed into asset management business model with private-equity AUMs TWD 46.7 billion as of first quarter end, along with its continuing efforts to monetize legacy portfolio, CDIB Capital has upstreamed TWD 31.5 billion to CDF since 2017.

Now go to KGI Securities. Page 31. The slide shows steady growth in KGI Securities' quarterly net income to TWD 4.2 billion in the first quarter, driven by capitalizing on the market momentum with its market leadership in brokerage, underwriting and other businesses as well as the equity market turnover, exceeding TWD 400 billion in the first quarter. The lower left chart shows its first quarter ROE of 23%, higher than the industry average.

The upper right chart shows that overseas profit contribution of 17% of the first quarter, which has been higher than its peers. The lower right chart shows AUM of 323 billion for the first quarter due to KGI Securities' continued effort to promote wealth management and asset management businesses.

Now go to Slide 32. The upper-right chart shows solid growth in KGI Securities all business line, including brokerage, underwriting, interest income and investment income. In particular, with the market share exceeding 9%, brokerage business contributed over half of the profit through the year.

Slide 33. The slide shows that KGI Securities continue to top local peers in major areas of business lines. KGI Securities ranks #2 in brokerage, online trading and securities, borrowing and lending businesses and ranked #1 in equity and bond underwriting businesses, also with rapidly increasing mutual fund AUM reaching TWD 168.8 billion. KGI asset management business ranked #8 among its peers. In addition, KGI Securities has a regional presence in Hong Kong, Singapore, Indonesia and Thailand.

And this is all my presentation. Now I pass to Richard.

[Richard Chang, executive]

Yes. This concludes our presentation session. And now we begin our question-and-answer session. [Operator Instructions]

As there is no further question, we thank you for your participation in our webcast conference, and we will have the replay within the hour. So if you have any further questions, please do feel free to contact our IR team. And thank you again, and goodbye.