China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2023-Q1

[Unknown Executive]

[Interpreted] Dear investors, media friends. This is spokesperson, [indiscernible] from CDF. Welcome all of you to CDF 2023 Q1 investor conference call. We have 4 cards for today's conference. First of all, we will invite Steve, the CEO of CDF to talk about the performance review of CDF and update in ABCDE strategies.

And next financial update, the subsidiaries performances will be covered by the Senior Vice President, Mandy Chang. And lastly, the QA session. Before we invite Steve, we have the interpretation function available on WebEx, you can select the language you need. Now, we will invite our CEO, Steve.

[Steve Bertamini, executive]

[Foreign Language] Good afternoon, everyone. I'd like to begin by giving you an update of our financial performance highlights.

During the first quarter of 2023, our net income was TWD 3.5 billion and earnings per share of TWD 0.21. CDF was ranked #4 globally and #1 in the Taiwan Dow Jones Sustainability Index for the life insurance financial sector. We also announced the elevation of KGI site as a first-year subsidiary of CDF in order to accelerate our growth in AUM. In terms of China Life, first quarter net income was TWD 321 million, which was impacted by higher hedging costs. We remain focused on high-value products and increasing our market share of regular paid policies. VNB margin increased from 25.8% to 34.4% last year. And we continue to maintain prudent investment management in a very volatile market.

Our pre-hedging recurring yield was up 25 basis points year-on-year to 3.4%. In the China Life section, we'll also give an update on embedded value. KGI Bank posted a 13% year-on-year increase during the first quarter to TWD 1.54 billion. We continue to optimize our asset mix with SME and personal loans growing 26% and 20%, respectively, year-on-year. And our consumer finance JV continues to do very well with 86% year-on-year growth for RMB 83 million profit and lending balance grew 71%. CIB Capital benefited from the investment portfolio's appreciation, and we saw first quarter net income at TWD 0.9 billion. AUM also increased to TWD 51 billion with Kunshan Taiwan Business Fund completing its first quarter -- its first closing during the first quarter.

CIB also signed an MOU with Hon Hai to jointly establish the Kai-Hong Renewable Energy Fund, which is the first green energy investment platform across both technology and financial sectors. In terms of KGI Securities, net income increased 31% during the first quarter to TWD 1.9 billion at a 13.9% ROE. Overseas contribution grew 213%, and we also saw Singapore deliver a very strong quarterly profit performance of record high. Our share in the SGX Stock right now is at 12%, up from 6% in September of last year. Our customer AUM also grew 12% and 10% quarter-on-quarter to TWD 371 billion as of the end of March. If you turn to the ABCDE strategy, today, I'm going to focus primarily on the subsidiaries. But on Page 7, I thought I would touch on just 3 of these, which I will not cover in the following section.

The first one is under the employer of choice, a lot of work occurred during the first quarter to further cascade and align our KPIs and incentives across the group. We focused on both financial and nonfinancial elements and things such as NPS, employee survey, ROE, net income, digital risk, et cetera. In terms of customer focus, a lot of work continues to happen on repositioning the brand and we now have an aligned tagline for all our subsidiaries around committed to your prosperity, and you'll see more of that as we continue to [indiscernible]. And last but not least, under execution excellence, a lot of work has gone into optimizing our investment and risk appetite.

Given the turbulence in the market, we've taken a very prudent approach and continue to very tightly manage the business in order to mitigate volatility and maintain strong capital levels across all our subsidiaries. I can then turn to China Life. I'm going to only highlight a few for each subsidiary. For China Life, under accelerated growth, we saw them being the first company to receive accessibility certification for both mobile applications and its official website. Under C, there's a new web page that was launched to make it easier for customers to understand insurance in a more user-friendly manner.

Under D, we saw the sale of high-value products increased 22% year-on-year, which contributed to 36% of our sales compared to 20% last year. And last but certainly not least, we saw our Q1 FYP market share increased to 9.4% from 8.2%, again highlighting the focus on continuing to drive high value in the insurance business.

For KGI Bank, the bank continues to expand its ecosystem cooperation with [ mail ] partners and logistics group exchange and real estate. In terms of mobile, we expect to see a major upgrade of our mobile banking application, which was recently relaunched earlier this year with over 90 new features being added this year. And in terms of execution, we continue to invest heavily on RPAs. We have almost 100 of them now. We're going to continue to expand in order to further streamline and simplify our operations.

I can take you to CDIB on Page 10. CDIB continues to explore new asset management products. You'll see in the CDIB section, we're going to talk a little bit today about private credit, just to give you a sense of how we've been developing that product. We also launched our Tokyo Innovation Hub in Shinjuku in Tokyo, which is designed to help accelerate innovation much like we do in our [indiscernible] here in Taiwan. We also completed 2 co-investment deals, deploying TWD 3.3 billion. And as I mentioned, they signed the MOU with Kai-Hong Energy, which will be a great first step to further accelerate our green energy industry investment.

On Page 11, in terms of KGI Securities, KGI Securities finally fixed our online service password recovery. As you're aware, we spent a lot of energy understanding customer needs and customer issues. When this problem was corrected, we saw a reduction in 26%. So this is just one example of us continuing to improve our services based on customer feedback. Also, we're doing much more tracking in terms of digital footprints to reduce drop-off rates, and we saw an increasing completion rates by focusing on this as well as 20%.

KGI Bank -- sorry, KGI Securities has also trained now over 500 China Life agents who have now passed a security specialist exam as a way to further expand the products and services they can offer to the customers. And on wealth management that we've discussed before, we continue to further expand the skills of our agents with now a 30% increase in people that have financial consultancy experience to provide broader products and services to our customers. I'll now turn it over to Mandy, who's going to take you through the financials.

[Unknown Executive]

[Interpreted] [indiscernible] profitability. If we move to Page 13, reviewing the CDF's performance. The net income was at TWD 3.5 billion. The EPS is TWD 0.21 and at the end of April, our total assets amounted to TWD 3.6 trillion. And if we look at the total equity because of the valuation of both stock and bond market have recovered, so our total equity has recovered back to the level of TWD 233 billion, and next is the profitability of our subsidiaries and subject to the rate hike and the costing -- the cost of hedging increased. The capital gain is -- has decreased and China Life posted TWD 0.3 billion net income and net amount of -- because of the profit coming from the overseas markets, we can see that CDIB Capital's net income grew by 12% and we also made a lot of investment in the health care industry and posted a net income of TWD 0.9 billion, and this is actually a great increase compared to last year where we were subject to great market volatility. And as for KGIB out of -- we've seen TWD 1.5 billion of net income. And the ROE of those of all of our subsidiaries have also improved.

And next page is our capitalization. As the capital markets stabilizes, our Q1 double leverage ratio has lowered to 125% and all our subsidiaries' capital ratio are also earning at a good level. And next, I'll move on to the subsidiaries versus China Life.

Please go to Slide 17. In terms of fee and income, due to the [indiscernible] rate hike, the increase of short-term rates is still affected. It still has momentum as Q1 FYP, we can Y-o-Y. The overall industry declined 39% while China Life dropped 30% and for our product strategy, we still continue to focus on restructuring our product mix for regular [indiscernible] Y-o-Y and the percentage also [indiscernible] high margin product is our focus and [indiscernible] okay, it's mainly USD policies. As you can see, on this slide, for our risk panels, China Life maintains a balanced development and for agency panel, the contribution has got up to 29%, focusing on 6 to 8 products and [indiscernible] these high-margin products.

And for FYPE, China Life continues to strengthen its overall product mix, regular [indiscernible] has taken nearly 90% and we still outperformed the industry average. And the next slide, we can see our VNB and because we continue to optimize our product mix focusing on regular pay products, that will -- despite FYPE drop, our VNB is still roughly the same Y-o-Y. And for VNB margin in Q1, it also increased Y-o-Y now standing at 34.4%. And for our spread, our [indiscernible] liability still maintain at a low level of around 3%. And the ROI this quarter -- due to increasing hedging costs, ROI is slightly lower at 2.36%. And for the persistency ratio, it remains roughly the same, and we have observed [indiscernible] the end of last year, [indiscernible] last rate of policy has stabilized.

Next slide, investment portfolio. We continue to focus on ALM. We focus on long-term investment performance. We continue to focus on foreign bonds with better yields. And for the respective returns, it is listed on this slide. And for foreign investments, the figures are pre-hedged figures.

Page 20th, our investment performance. This is pre-hedging. [indiscernible] yield from new money, we increased 25 bps Y-o-Y. On the other hand, the hedging cost because of the widening of Taiwan U.S. spread, hedging cost has increased to 2.21%. And the hedging structure will still remain stable around 70% of hedging. And on the other side is the FX [indiscernible] balance now is at TWD 9.53 billion. Now I would like to talk about our embedded value in 2022.

As can see on the slide, for economic assumptions, we consider U.S. rate hike, how it affects ROI and for entity policies, the short term impact is hedging cost. So you can see the year 1 ROI, we decreased it. We decreased the assumptions and for our USD policy, it benefited from U.S. rate hike. We have adjusted the return upward. And for discount -- risk discount rate, it maintained the same as last year at 9.5%. And for non-accounted assumption, it is listed on the slide for your reference. And this year, we continue to commission [ EY] and independent agency to review these assumptions.

Next slide, the old curve for NTD policies being reflected increasing hedging costs. We can see year 1 yield is at 2.98%, a decrease of 77 bps. And for USD policies, year 1 yield is 4.45%, decreased 1 bp from growing our assumptions of last year. And the long-term yield has increased by 22 bps. Overall, equipment yield remains at 4.22%, the same as last year.

Next slide, this is the comparison table of EV or adjusted net worth mainly -- affecting mainly due to market volatility, leading to investment asset valuations loss, which has decreased by 27.3%, and mainly due to VNB contribution, the cost of [indiscernible] has increased by 8.8%. The overall embedded value is at TWD 371.8 billion, a decline of 7.6% is converted into China Life share. EV per share is at TWD 75.6 and if converted into CDF shares, the EV per share is TWD 22.2.

Next slide. The details on adjusted net worth. It is calculated by adding equity [indiscernible] FX reserve balance and also market value of fixed income assets, the total amount is TWD 129.1 billion and for value of info, of course, this factoring of release of interest and expected profits that are changed. And overall, the figure is TWD 304.1 billion.

Next slide, VNB [indiscernible]. The main 2 factors is FYP decrease. And also the optimization of mix. This is a positive impact and overall VNB is TWD 21.3 billion.

Next slide, this is sensitivity analysis for your reference. Of our speaking, every 0.25% change in investment yield affects the value of imports by 13%.

Now I would like to move on to KGIB. As you can see on this slide, in the first quarter, it is mainly benefited from financial investment income. It grew 8% Y-o-Y. On the other hand, the income, wealth management is listed here. As you can see, there are -- A includes bond FX. So Y-o-Y it increased 32%. And for our spread and NIM, mainly due to rate hike and increasing funding cost, NIM decreased to 1.3%. However, that benefited from FX-based business and loan structure adjustment. And the spread increased by 31 bps Y-o-Y. To optimizing loan mix, we maintain a good asset quality. The Q1 end [indiscernible] Y-o-Y at 8%.

Next slide. This is loan and deposit mix. This has been Y-o-Y changes. [indiscernible] continues to optimize its loan mix focusing on growing SME and customer loan. For SME loans, it grew 26%, and customer loan grew 14%, which is mainly driven by 20% annual growth from personal credit loan. On the other side, for deposits, because of rate hikes, increase in USD rates has made time deposit more attractive to customers. And the deposit balance slightly decreased in Q1, but has returned to the level of Q4 last year by April.

Next CDIB, please go to slide number 22 -- 32. The CDIB continues to focus on asset management. This quarter, [indiscernible] Taiwan Business Fund completed its fourth round of fundraising, the total AUM reached TWD 51.1 billion. And in terms of principal investment, as you can see in the first quarter, [ Taiwan ] and Global Markets has continued to increase, mainly driven by investment drop amount and [indiscernible] growth.

Next slide. As you can see, in terms of asset management, it has strived up fee income, which is growing and on the upper right corner it shows the ROI of principal investments, which is better in response to market fluctuation when compared to Morgan Stanley World Index. In terms of business expansion starting from 2020, CDIB has started private credit business, which has stayed growing steadily year by year. And as you can see on the slide, the income distribution relatively by interest income and fee income have brought continuous and stable business income to CDIB.

Next, KGIS, Page 35, the ROE is 13.9%, which is better than the industry average. And on the right-hand side, overseas operation is also KGIS focused. The first quarter the contribution has reached 18%, which is a big increase compared to last year's 11%. And on the lower left side, for customer AUM, it has continued to grow, mainly from the [indiscernible] growth of wealth management. On the other side, for the revenue, in Q1, compared to last year, it has increased 17%. So wealth management is also the focus of KGIS.

Next slide, the net revenue, first quarter net revenue is still benefited from stabilization of capital market and proper strategy, which is at TWD 3.4 billion. As you can see in terms of the market share for various business, KGIS is still number 1 and number 2. And these are the summary of the 4 subs. Now I would like to open the floor for Q&A.

Now let's welcome institutional investors and analysts to submit your questions. So please use the function of Raise Your Hand on WebEx so that we know you want to ask a question.

[Operator]

[Interpreted] First of all, Jemmy Huang from JPMorgan, please?

[Jemmy Huang, analyst]

[Interpreted] Can you hear me?

[Operator]

[Interpreted] Yes.

[Jemmy Huang, analyst]

[Interpreted] Okay, thank you. I have few questions, first about KGIB. As I remember, previously you mentioned you expected the NIM this year to maintain at 1.39%. I'm not sure if in Q1 it was considered swap. After we considered swap impact, what is the Q1 NIM level and the guidance for 2023? Are there any changes?

And second is about China Life. A few questions, first about EV. Can you talk more about -- in the [ VIF ], what is the number in 2022? And in the slide, I've seen you adjusted down the expectations. In VNB, your return -- you adjusted upwards due to the return, what is the difference? is it due to having loss to [ VIF ] or are there other reasons?

Additionally, about RBC ratio, what is the reason in driving the hedge down quarter-on-quarter. Is it due to the [indiscernible] or valuation on your equity position? As I remember, you've already announced you're going to issue corporate bonds. What is the expected impact to RBC after you issuing the bond? And do we have to see any pressure of the RBC go further down in Q1?

[Operator]

[Interpreted] KGIB [indiscernible] by CFO from KGIB.

[Unknown Executive]

[Interpreted] Good afternoon. As for the NIM for KGIB, the 1.33 in the slide already reflected this swap impact. And this year, we expect the NIM to gradually recover. However, the funding costs, especially under the interest rate hike, the funding cost is growing faster than we expected. Therefore, the NIM recovery pace is slightly slower than we expected. So from the [indiscernible] there to now, our NIM is maintained at 1.33%. Since the funding cost is maintained at a high level, we believe this might be the end of the funding cost hike. In the future, we believe that we will recover, that's it for me.

[Operator]

[Interpreted] [indiscernible].

[Unknown Executive]

[Interpreted] I will explain our return assumption for NTD because it reflected the increase of hedging costs and future fluctuations. Therefore, for NTD policies, assumptions, we adjusted downwards. And for USD policies, because the increase [indiscernible] for USD, policy return, we adjusted upward. And the equivalent there is 4.22% this year. Last year, it was still the same figure, but really after 1 year it's 4.3% compared to 4.22%. It dropped around 8 bps. That's why [indiscernible] because there is a ruling effect, in recent years, we continue to focus on USD policies so for VNB it takes up around 78%. So impact is positive.

And for RBC, Q1, it is mainly affected by C3. Impact is quite big, but [indiscernible] valuation recently -- the recent months, the figure is [indiscernible] and after issuing bond of TWD 10 billion, our FSC can further increase to 20%.

[Operator]

[Interpreted] Peggy from Morgan Stanley. You can speak now.

[Peifan Shih, analyst]

[Interpreted] I have 3 questions. First, about [indiscernible] target and the overall premium for [indiscernible]?

And the second question, the hedging cost in Q1 increased more than this year average, your open position dropped. [indiscernible] So I would like to know in Q1, your peers increased their open positions. And what is the consideration that you have had [indiscernible].

And the third one is the China Life portfolio allocation. In Q1, you increased China Life [indiscernible]. The dividend income this year, what is your expectation? Is it going to be better than last year?

[Unknown Executive]

[Interpreted] [indiscernible] to answer the questions.

[Unknown Executive]

[Interpreted] There is still a level of uncertainty for policy sales. We are still conservative and Q1 FYP dropped 30% Y-o-Y. However, the industry average is 39%. So we outperformed the industry. In [indiscernible] strategy, we continue to focus on high margin [indiscernible] in Q1. For protection-type policy, our market share is nearly 1%, number 2 in the market. And for FSC policy, the percentage is 60% higher than industry average as well. [indiscernible] expectation this year which is the same as last year [indiscernible] will grow by 5% to 10%. For investment, for hedging ratio, our hedging strategy is stable. So different peers might have different strategy. For us, we want to maintain a stable approach in terms of hedging [indiscernible] equity. For Taiwan [indiscernible], we also remain stable and the dividend will remain the same compared to last year.

[Operator]

[Interpreted] And then you have further questions because I saw that your hand is still raised.

[Jemmy Huang, analyst]

[Interpreted] Sorry, [indiscernible].

[Operator]

[Interpreted] Are there any other institutional investors or analysts who would like to raise a question?

[ Chin Hua ] from Bloomberg, please. The floor is yours.

[Unknown Analyst]

[Interpreted] In terms of our allocation, we don't see much changes other than the changes in [indiscernible] stock? And do you have any guidance for your allocation in the future?

Next is the FX reserve, under the new system, what is the amount of costing -- cost of -- hedging costs?

Okay. Now, we will turn to Lauren for the question.

[Lauren Hsieh, executive]

[Interpreted] For our USD policies, we have more of that and therefore, we will use this for foreign bonds and [indiscernible] there is no hedging cost [indiscernible] borrower income and for other asset allocation. If we look at NTD sets, the hedging cost is quite high. Therefore, we will not turn it into foreign investment. We will focus on domestic investments, for example, on [indiscernible] in terms of asset allocation.

Second question regarding the new scheme of FX reserve [indiscernible]. In the first quarter, the hedging cost is high with the new scheme [indiscernible] drop of around 25 bps and it will be around 1.5%.

I have another question regarding the ETF we invested. What's the percentage and then how much quota we had left? Well, we use up all the quota. Thank you.

For NTD [indiscernible] there's no quota. Even if there is, we still have a big -- a long way to it. So for bond ETF, the percentage, we will maintain in a neutral level [indiscernible] in the market, we know that for single ETF [indiscernible] total assets, it will maintain at around 5% to 6%, but it is not certain. It depends on the market condition.

[Operator]

[Interpreted] I will invite Tina from Capital Investment.

[Unknown Analyst]

[Interpreted] I would like to clarify with you that in the Q1 [indiscernible] what is the income from -- generated from the swap and since -- now the swap market is still very hot, do you have any clear guidance for what you will be doing or what will be the contribution from swap to the business? And if the spread excluding the income from swap, is your spread going to be in decline or not? And this is my first question, addressed to KGIB.

And second question is also to the bank. I noticed that your loan in the first quarter has slowed and what will be your momentum to drive this business? What will be your guidance for the year 2023? And my next question is to China Life. And in Q1, you have about TWD 40 billion of unrealized loss due to valuation decrease. And what is the percentage of bond and shares in between?

[Operator]

[Interpreted] Thank you for your questions. For the question to the banks, we will have Chris to answer.

[Unknown Executive]

[Interpreted] Thank you for the question. I think the first quarter swap amount is about TWD 400 million to TWD 500 million and the [indiscernible] from the swap is actually a kind of fortune from us, especially when the spread in the U.S. dollar and Taiwan dollar has widened, and there are more and more U.S. deposits in Taiwan. In our bank as well as other peers, we believe that in the following quarters, we expect the swap market to quote down and if we reflect back [indiscernible] swap, indeed, the spread has decreased. And without swap, our NIM is at about 1.2%.

And next, on your question 2 on loan strategy. Previously, we focused more on the large operational loan with higher spread and our growth -- we have seen double-digit growth in the previous years. And this is the reason why this year, we have seen a slowdown is that large corporation listed companies, their spread has marginalized and resulting in the decrease in the loan amount. We believe that we will see an increase of 5% in our position, but in terms of our different type of loans, we do have different targets. Meaning that [indiscernible] we want to see a growth of about 10%.

[Operator]

[Interpreted] Next, we'll hand over to the CFO of China Life to answer the question.

[Unknown Executive]

[Interpreted] About 2/3 is fixed income and 1/3 is equity. Thank you.

[Operator]

[Interpreted] Next we will invite [ Shuan] from Commercial Times.

[Unknown Analyst]

I heard that for China Life this year, you will be issuing a corporate bond and are there any plans for CDF to also issue the bond, as my first question.

And next is for international market and also domestic market, in terms of the operation of securities company or other companies, are there any plans for further merger and -- M&A from the CEO?

[Operator]

[Interpreted] Okay. We will have Steve to answer the question.

[Steve Bertamini, executive]

[Interpreted] So as I think you're aware, we recently obtained a renewal of the capacity to issue further debt if required. We've been consistent in our view that we will only raise it when it's appropriate and it makes sense in the markets and as you heard a little bit earlier, we've managed to maintain very strong capital ratios and our double leverage ratio has improved. So we'll continue to monitor that closely, but there's no immediate plans at this stage.

In terms of M&A, we have been very active in terms of pursuing several opportunities, both domestic and overseas, but we're not in a stage that we can communicate anything about those.

[Operator]

[Interpreted] Any more questions from the media?

And there is no further question. I would like to thank you for your participation as well as the questions from the investors as well as the media and this ends the investor call today. Later, you will be able to find the slide and recording on our investor relation on the official website in CDF. If you have any further questions, you are welcome to call or email us. Thank you again. I wish you all good health and good life. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]