China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2022-Q2

[Operator]

[Interpreted] [indiscernible] First of all, welcome all of you to China Life, CDF first half performance review and performance. There are 6 hours of today's meeting. First of all we'll invite the CEO, Steve Bertamini to talk about the performance highlight in the first half and the ABCDE Strategy update and the treatments. And subsidiaries ABCDE updates and performance update will be talked about by the CEOs from subsidiaries [indiscernible] to ESG where we'll talk about the progress in ESG. And next there will a financial overview covered by our Chief Financial Officer, Jenny Huang. She will talk about the performance in the first half of the year. Next the CEO, representative from the subsidiaries will talk about each subsidiaries performances. The last session is Q&A. [Operator Instructions]

Now we invite Steve to talk about the performance of the company.

[Steve Bertamini, executive]

Hello, everyone. I'd like to begin by giving you a brief update of our second half financial performance. CDF delivered TWD 13.6 billion in profit, which actually increased to 16.8% as of the end of July.

We also approved our long-term funding through the Board in order to facilitate our long-term strategic development and also to further improve the financial structure of the company. We also made very good progress on our ESG initiative and there'll be a brief update on that in a few moments.

In terms of China Life, strong income of TWD 13.5 billion, and they continue to focus on their high-value strategy. Our VNB margin year-on-year improved from 25.6% to 35.9%. And also on the investment side, our pre hedging recurring yield improved by 17 basis points and new money yield from overseas has also improved over 50 basis points since the first quarter of this year.

KGI Bank had a very strong performance. Net income was up 27% year-on-year to TWD 2.9 billion. We maintained superior NIMs of 1.43% and continued strong growth in both personal loans and SME of 19% and 21%. Our consumer finance JV in China also continues to do very well, and balances grew by 64% since the end of last year.

CDIB Capital results were a bit more challenging, but in July, we saw the loss reduced by TWD 600 million. CDIB also established a foothold in Tokyo to help us develop better opportunities for start-ups between Taiwan and Japan. And also, they saw an increase in AUM up to TWD 49.2 billion.

KGI Securities had net income of TWD 2.1 billion with an ROE of 6.9%. And they also managed to maintain the leading position in ECM and DCM. We also launched our first equity ETF through KGI sites, and we have a new cooperation with Chunghwa Post in terms of co-branding and account opening.

Before I provide a brief update on our strategy, I wanted to briefly address the decrease in net worth, which has also impacted our DLR ratio. As I think you're familiar, the recent market fluctuations has had an impact on the portfolio. However, this is an industry-wide issue, which is really exacerbated by the current accounting treatment. If we were to adjust for IFRS 17, when that comes into place, we would see largely this difference eliminated. Also, most recently, we had our long-term ratings reaffirmed by Taiwan ratings, a AA- also for China Life and also Fitch, which is a new rating agency also rated us A in terms of international and also AA+ in terms of Taiwan.

So again, I want to emphasize, this is a short-term issue, which will be corrected. The long-term increase in rates is a positive for financial services industry such as ours, and we continue to manage the business in the correct and prudent way for long-term value creation.

In terms of the strategy update, I'm only going to make a few brief comments because today, you're going to hear from the presidents on respective progress in areas. The main area we've been focusing our energy on in digital is on continuing to build our partnerships and alliances for the ecosystem. We've done a lot of work to refine how we want to play, what technology we need to work with and have started discussions with multiple partners.

In terms of employer of choice, we've also made a lot of progress this first half of the year. We've seen very high activation rate in terms of our online offerings with over 80% of our employees signing up. We've also done a lot of soft skills training to our 500 staff, and we've had over 200 people at 10 leadership development courses. We also continue to enhance our employee value proposition. We recently rolled out a new employee trust program with 80% of the people signing up. We've also improved our EAP program and also most recently changed our dress code, which seems to have been very well received.

In terms of customer focus, we continue to work on NPS. During the first half of this year, we now enabled not only our website but also our mobile and call center channels. We formed dedicated teams and we're beginning to see improvements in our scores in all subsidiaries.

In terms of driving growth, we continue to work on developing machine learning models to enhance our response rates and also working with the subsidiaries to improve the customer experience. As I think you've seen, we continue to improve margins, particularly in China Life as well as the bank, and we will continue to focus on the other business units as well to see further improvements in ROE.

On the execution excellence side, there's a lot of work occurring on our IT systems. We're committed to moving to a hybrid cloud environment and are working with our teams and our partners to enable APIs. And in terms of optimizing our investment and risk appetite, we now have better tools in place that allow us not only to monitor our portfolio and investment positions across our businesses, but also to run more sophisticated scenario analysis which will enable us to make better decisions, both in terms of the short and longer-term position of our company.

I'd now like to hand over to Stephanie, who is going to give you an update on our progress in China Life.

[Stephanie Hwang, executive]

[Foreign Language] [Interpreted] And the update, in terms of accelerate digital, KGI has a collaboration with Chunghwa Post, we had a co-branding campaign with them. We have 3 account opening collaborating with Chunghwa Post, providing the customer with very best financial products as well as a streamlined process for them to sign up. We've also rent out the video conference service for trading limited adjustment. Previously, if you want to adjust your trading limits, you need to go to the branch. However, we use innovative ways and as well as leveraging technology, allowing our customers to use the application on their cellphone and they can verify via video conferencing to adjust their limits.

In terms of becoming the employer of choice, we have implemented a new expense system offering web and mobile filings and that is in accordance with the post-pandemic era's requirement, we are also living up with the experience of ESG.

In terms of customer-centric, KGI has launched the enriching your life campaign. We provided dedicated services to our customers. And we have also launched a U.S. stock buying shopping charts for the customer. And this has also shown their results in our growth. And the NPS has also dropped from 21 to 55 out of our efforts.

In terms of drive growth, we can continue to maintain our market share as #1 in ECM market. We also achieved good financing amount at above TWD 47 billion. Our innovative costs -- our innovative team continuously to provide customers with best service as well as bringing a return to our shareholders.

Now I will talk about the ESG updates for CDF, which refers to Page 13. CDF values sustainable development, and we have built up relevant management policies in accordance with the international trend. Our efforts in ESG has also been recognized by the international institutions as we are chosen as in the DJSI indexes. We have been thinking on you yielding our influence as a financial provider, we could incorporate sustainable management in our investment and financing, increasing our engagement with the customer in order to reduce climate change impacts.

And in April this year, we joined the SBTi initiative. We use science-based tools and methods to have a reduction -- carbon reduction plan face by face and to take care of the net zero transformation as well as the business development in our company. And in May this year, we have been ranked by Financial Times and Nikkei as the #9 in the Asia-Pacific Climate Leaders.

And here is a time line for our carbon reduction plan. We are the first company to commit net zero by 2025 in Taiwan. And the goal is to increase 15% of green financing -- green investment in 2023 and to reduce 25% and 50% of carbon emission in our portfolio by 2025 and 2030.

And in 2021, we have establish a very clear decarbonization strategy. We will gradually phase out the investment and financing in thermal coal mining and unconventional oil and gas industry. We also use the SBTi measures to incorporate our decarbonization efforts.

All of our subsidiaries have also incorporated ESG in their core business to implement sustainable development. For example, China Life maintained a stable investment and embedded responsible investment principles in their processes through different efforts and through the engagement with the different industry, China Life became the first enterprise in the world to receive an ISO 14097 certificates. The China Life green bond investment balance has amounted to TWD 24.5 billion.

As for KGI, KGI has continued to roll out its green financing and deposit business and the balance on green technology lending has grown 27%. As for CDIB as a professional venture and asset management, it continues to seek new energy and circular economy investment related opportunities. As for KGIS, as the leader in ECM and DCM, they also actively partake in the ESG and green relevant businesses. And the fundraising amount by June has already reached TWD 47 billion.

And now I'll hand over to Jenny Huang, our CFO, to talk about the financial overview.

[Jenny Huang, executive]

[Interpreted] Now I'll talk about the overview of our first half. Our net income is TWD 13.5 billion generated -- contributed from China Life, KGIB and CDIB and in KGIS. The chart in the lower part shows you the comparison of last year and this year's income. KGIS grew 27% and China Life grew TWD 4.4 billion. And since we now recognize China Life has a 100% all subsidiary, this number has varied.

In terms of KGIB, KGIB grew quite significantly. Therefore, CDF has recognized about TWD 600 million of investment income from KGIB. CDIB see a decline and KGIS has also seen decline due to the market volatility.

And in Page 18, it's -- our total asset is TWD 3.4 billion. And in loans, we have grown 3%. And in terms of deposits, because of the rate hike as well as the tightening of capital in the market, there has been a 4% decrease. However, in July, we are seeing the recovery in deposits. In terms of provision, it has grown 6.6%, and this amount has grown up to TWD 2.0 trillion.

In the chart in Page 19, comparing to last year, our total assets declined by 36%. Therefore, our leverage ratio has grown from 11.8% to 18.6%. In the first half, ROE is 14 -- 11.4%. In comparing to last year's whole year's ROAE is 14.1%.

Moving on to the capitalization. This chart shows the capital adequacy ratio of our subsidiaries are very stable. The capital in our subsidiary are very sufficient. The double leverage ratio has grown to 130% in the first half of the year. This is because CDF has recognized the unrealized loss from China Life. And the net worth decreased has its very particular reason as our CEO has mentioned. As for the unrealized loss, it is actually a fluctuating amount. In fact, in July, this number has gone up by TWD 10 billion. If we exclude the impact from the unrealized loss and our ratio is below 125%. And that's the financial update from me.

And now I'm on invite Stephanie Hwang, CEO of China Life to talk about their performance review.

[Stephanie Hwang, executive]

[Interpreted] Now I will talk about the first half 2022 performance. Please refer to Page 22. In terms of profitability in the first half of the year due to the Russia-Ukraine war, the pandemic and the rate hike as well as the concern for economic recession, there has been great fluctuation and correction in the markets. Therefore, in our asset valuation, we are seeing a decline. In the end of June, our net worth is 18 -- is 89.1%, However, it has gone up to TWD 100 billion by July.

The net income in first half is TWD 13.5 billion, though there has been a decrease. However, this is still a -- a month, historically speaking. The FYP of China Life is TWD 38.9 billion. There has been an 18% decrease. However, through the selling of high-value products. If we look at the FYP, the top 6 life insurance in Taiwan, are seeing a 3% growth -- decrease in average. However, China Life has seen a growth of 16%. In terms of FYP distribution channel, we are -- all of our channels are working smoothly.

In our bancassurance channel, we are able to obtain TWD 4 billion out of the bancassurance business. There has been an 81% increase compared to last year, and we are continuing to take up the works as market share in the -- in terms of market share.

And as for operational performance, although the FYP for the first half has slightly decreased, however, through the optimization of our product mix, our VNB has grown up to TWD 10.5 billion. There has been a slight increase compared to last year. As for the VNB margin, it has also grown from 25.6% to 35.9%. In terms of assets and liabilities, our investment spread has gone up to 4.79%, and our cost of liability is at 2.98%. The spread is continuously to widen. And we are also [indiscernible] the peers has the lowest cost of liability.

China Life paid great attention to ALM, asset and liability management. We continue to stabilize our income we have most of the allocation in fixed income. We also continuously to aim overseas high-yield returning overseas fixed income.

Moving on, the very state prudent structure. We are able to maintain yield. In the first half of year, our recurring year yield, it is at 3.47%. There has been a 17 bps increase. In terms of hedging structure, and hedging costs with prudent management in the first half of the year due to the interest rise in U.S. dollar, our cost of hedge has decreased by 0.5%. And our FX reserve balances have gone up to TWD 9.42 billion.

Now I'll hand over to KGIB's Amy.

[Amy Tsao, executive]

[Interpreted] Talk about our profitability of KGIB first. And in this page, you can see the first half, our annual growth is 27% compared with the same period last year. Our net income rose by 14%. It's only contributed by interest margin, but also contributed from growth. And I would also like to highlight in fee income, in the upper left chart, cover fee income grew by 5%. Even though the market was stable in the first half but starting from July, we've seen the rebound in wealth management businesses. And the first half growth contribution they come from loan and fee. We have enjoyed the annual growth by 43%. And in this page, for the spread and net interest income have been covered, I will now talk about them here of asset quality and also stable.

Please go to Page 29. In the upper part, regarding our loan, we keep the pace from last year. We would like to deepen our relationship with large operations, not only in deposits and loans. As for SME, we will also like to targeted a double-digit growth. For personal loan, we would like to further expand and also work on financial inclusion.

Even though this year's market is very challenging, but we will continue to find a balance between risk and income, and we hope we can deliver an outstanding performance in the second half.

Next, I'll hand over to CDIB.

[Unknown Executive]

[Interpreted] Please go to Page 31. From the upper left chart, due to the volatility of the asset market and the -- we suffered a loss of TWD 1.8 billion and mainly come from the unrealized loss of our investment. In July, this loss has been narrowed, but the mark-to-market value still depends on the market performance. Fortunately, the total asset quality is still better than the market average.

As for the lower right chart, the total equity jump by TWD 9.1 billion. And due to the cash upstream of TWD 8 billion through CDF.

Our asset management performance. In first half our AUM grew from TWD 47 billion to TWD 49 billion this year. In the USD, the denominated bond, and we'll focus on the team led by Taiwan and our leasing strategy included expanding investment in ESG and sustainability industries. We will continue to deepen the partnership with different industries. In the bottom half -- in the first half 2021, our investment positions remains flat. It reflects the strategy in recent years, our investment growth has mainly come from our asset management businesses.

For our bond investment is linked with our core businesses. As for the investment locations is mainly focused on Taiwanese businesses in Taiwan and Asia, that's our financial performance highlights. Now I will hand over to KGIS.

[William Fang, executive]

[Interpreted] Please go to on Page 34, the first half 2022 performance of KGS, please look at the left chart. Our net income is TWD 2.1 million compared with the same period of last year, slightly dropped. One of the reason is in 2021, we have completed the share swap of China Life, we haven't -- didn't recognize any of the income from China Life and the difference is about 7%. And secondly, due to last year, the market was very hard. And this is due to conflict in Ukraine and Russian and rate hike and the outbreak of COVID-19 in Taiwan, the market trading volume dropped and our position, I want to say so, so weak.

On the upper right, our overseas subsidiaries, that's also impacted. Their share is only accounted for 35%. Compared with the industry average, the darker green is KGIS and the lighter green is the industry average. Due to a weak market performance, the ROAE has a declining trend. And the center, our first half of 6.9% and is higher than the industry average. And the right bottom, our customer AUM is TWD 326 million and slightly dropped to 7% compared with the second quarter of last year. And it's mainly due to the balance from KGIS side.

And next page. Please look at the upper left, the 2022 net revenue is TWD 2.7 million and dropped by 46%. On the right-hand side, the net revenue mix is TWD 6.1 million and dropped by 40%. On the net revenue, is due to the volatility in the market, the net revenue decrease and [indiscernible] mentioned increased and the underwriting phase is also stable. The investment income is impacted by the market and this is dropping. And the lower charts are the comparison from -- with last year, the net revenue is impacted by the market performance. And the fee income is still outperforming the industry average, and that's all from KGIS.

Thank you for your [indiscernible]. Now we'll go to Q&A session.

[Operator]

[Operator Instructions] [Interpreted] Okay. First, we've seen the first one is Jemmy Huang from JPMorgan.

[Jemmy Huang, analyst]

[Interpreted] Yes. I have 3 questions. First, we are focused on the capital that the management talk about. If we use IFRS 17, the double leverage ratio is acceptable. So can we see like this if the double-leverage ratio exceeding the requirement from the regulator is due to the unrealized mark-to-market value from bond and RBC of China Life is still sufficient. And this will not push the company to do the fundraising. Can we interpretated like this? If the double ratio exceeding 125% is not a long-term situation. In the future, do you have any plan to lower the double leverage ratio or maybe next year, the dividend payout ratio needs to be adjusted to lower the double leverage ratio? That's my first question.

The second question is regarding China Life. Can you tell me in the unrealized losses in the second quarter is about [ TWD 70 billion ]? How many contributed from equity and how many of them are contributed from funds? And the investment income annualized is still in a growth trend, how can we interpret the profit structure? Is it due to the underwriting, you have a higher commission income or in plain is increasing to cause the profit decline?

And the last question, how should we see the NIM in bank and the recurring yield outlook in insurance? The original guidance, the NIM was above 1.4%, but the first half already exceeded number, do you have a comfort target and the recurring year was 5 to 10 basis year-on-year improvement? Do you have any adjustment? Are there any upside potential?

[Steve Bertamini, executive]

Thank you for your question. I'll go ahead and answer the only capital and then I'll ask China Life to comment on the remaining 2. In terms of our current position on DLR, as I mentioned -- we see this as a short-term issue. We don't feel pressured to raise capital at this time. We believe when we do raise capital, which, as you know, was approved by the Board, 2.5 million shares -- billion shares, we will do so.

We are continuing to actively look for opportunities that are inorganic in nature. And obviously, we also want to continue to strengthen the financial base of the company. As Jenny mentioned during her presentation, the leverage ratios in all the subsidiaries remain very strong. They all still have plenty of capital to grow. And also our long-term ratings have been reaffirmed. So we're comfortable where we are, but we will continue to monitor it closely. And both the regulator and the industry recognize that this is an issue that's really impacted by the rising interest rate trends and the market volatility.

In terms of China Life and the portfolio mix, et cetera, I'll let the China Life team answer this question.

[Stephanie Hwang, executive]

[Interpreted] I will answer the questions regarding China Life. In the first half, the [ URCG ] is about TWD 75 billion and 30% of that come from equity. And you mentioned about is it related to underwriting commission fee. Our view is it is due to [ RCC ] declining and also our profit, and that is our bond.

[Amy Tsao, executive]

[Interpreted] I'm Amy Tsao from KGIB. Regarding the main forecast in the second half, you asked that in the first half our guidance was to maintain about 1.4% and now we reached 1.43%. Looking in the future, the market situation is not clear yet, [ doesn't matter ], the interest market in the U.S. dollar or Taiwanese dollar, the U.S. dollar interest rate reverted. The short-term interest rate increased very fast, and our capital cost is under pressure.

And the pressure is, if we want to improve our NIM it will be more challenging, but we're still optimistic in the second half. And how much we can achieve about 5.4%, I cannot make any promises, but we will try our best. 1.43% will be the minimum, and we will try to improve -- asked about the recurring look guidance for China Life, we are in the opinion that compared to last year, this year, we will see these 15 bps increase.

[Operator]

[Operator Instructions] [Interpreted] Okay. Now we see [ Tina from Capital Site. ]

[Unknown Analyst]

[Interpreted] Okay. I have 2 questions [Technical Difficulty], that's the 2 questions that I have.

[Steve Bertamini, executive]

So I'll let Amy answer the first question for the bank.

[Amy Tsao, executive]

[Interpreted] To answer your question with the upheaval in the financial markets, the situation is actually not as low as -- but as I explained earlier, we have seen growth in our loans and the fees for loans. In the first half of the year, you see that actually, our '22 financial assets actually grew around from compared to last year. But if you -- if we go back, actually in last March, there has been a movement in our interest rate. So at that time, a lot of our FIs have seen a big mark-to-market loss.

And also this year, a lot of the public company and their dividend payout has actually moved ahead of the schedule. And most of the dividend payout will be done in July and August, however, this year, a lot of them are issuing their dividends earlier. I think that is the main reason of us seeing growth.

[Steve Bertamini, executive]

In terms of the dividend, as I think you're aware, financial holding companies, particularly with large financial subsidiaries are facing a similar issue in terms of the impact on net worth. I think at this stage, it's still early to make any comments on the dividend for next year. Obviously, this is subject to the AGM. It's also subject to any regulatory approvals that are required. So we'll continue to monitor this closely. Our policy hasn't changed. Obviously, we want to continue to share and distribute the dividends to our shareholders as we did last year. But it's a bit early for us to determine what the final outcome is going to be particularly given the volatility that we've seen in the markets over the last 3 to 4 months.

[Operator]

[Interpreted] Our third question is from Peggy Shih of Morgan Stanley.

[Peifan Shih, analyst]

[Interpreted] I have 2 questions. The first for China Life, the cost of liability, China Life is doing better than the peers. However, this year, the popular product is the interest-sensitive U.S. dollar caps. And since the U.S. dollar is under rise, I want to know that how will your cost of liability trend be in terms of the pricing environment?

And secondly, the question is for KGIS. Since KGIS has not recognized China Life income, in terms of brokerage fee or interest income, you have actually been impacted by the decrease of margin loan. So I want to know how is the APT and margin loan outlook from KGIS?

[Stephanie Hwang, executive]

[Interpreted] Let me answer the first question about the cost of liability of China Life. You're right because the markets, in popular product the market is interest-sensitive products. And in terms of the rates being announced, our team will factoring all the indicators to make adjustments for interest-sensitive products. But overall speaking, we believe the impact wouldn't be so big to our cost of liability.

[Unknown Executive]

[Interpreted] In terms of KGIS on the outlook for ADT, indeed, last year, our trading volume has been cut greatly. As for our outlook, our -- we believe that the adjustment will last all the way through the first half of 2023. Therefore, in terms of trading volume, we still have maintained a conservative stands.

And in terms of transaction, we are also being cautious and converse. Although we believe that in the short term, there are volatilities or recovering or rebound, however, we believe on road speaking the correction will last or the way until next quarter -- the first quarter of next year.

[Operator]

[Operator Instructions] [Interpreted] So far, we have seen questions from the media. Thank you for raising the question today, and that's the end of our -- I'm sorry. I think we see a question from our friends in the media. We will invite Mr. Sha to speak.

[Unknown Analyst]

[Technical Difficulty] [Interpreted] announcement about [indiscernible] TWD 75 billion?

[Steve Bertamini, executive]

I'll answer that question. We're in the process of obtaining regulatory approval for the interim President that we expect to have that very shortly. So as soon as that occurs, then we will make an official announcement, [ where as ] the CFO of the group for KGI Securities.

[Operator]

[Interpreted] Are there any more questions? Okay. It is officially close today's investments -- the investor conference. Later, we will upload the audio file of today's conference to the Investor Relationship section in our official website. You can download and listen to the files and if you have any more questions, you're welcome to call or e-mail us. And lastly, I want to thank you again for your participation, and I wish you a good -- Happy Moon Festival. Thank you.

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