China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2023-Q2

[Unknown Executive]

[Interpreted] Media friends, good afternoon. [indiscernible]. Welcome all of you to [indiscernible] 2023 Q2 investor conference call. And today, there are 4 parts of the agenda. So we will invite our CEO, Steve to introduce the performance review of the holding company. Steve will also introduce the ABCDE strategic update of the [indiscernible] and the subsidiaries. And next financial overview, our CFO Jenny Huang will update the financials of the CDF. In terms of the performance of each subsidiary, the CEO will talk about them. And the last part is QA.

I invite Steve to take platform. You can select translation option in the WebEx. Steve, the stage is yours.

[Steve Bertamini, executive]

[Foreign Language] Thank you, everyone, for joining us today. Today, I'd like to give you an update on our H1 highlights. For first half net income, we had TWD 10.1 billion and earnings per share of TWD 0.61 and net worth was also up TWD 35 billion from year-end 2022. CDF, China Life, KGI Bank and KGI Securities, all published TCFD reports to strengthen climate governance and showcase results. As you might be familiar with, TCFD stands for task force on climate-related financial disclosures. This reviews risk assessment, capital allocation and strategic planning.

Also very recently, we held our first Generative AI Hackathon with over 200 participants proposing innovative financial solutions. We had 27 teams meeting over 2 days. We also work with some of our key industry partners such as Microsoft and Google, and this is really a great example of fostering 1 of our 4 values, which is entrepreneurial spirit. Our team is focused on AI applications, which will help enhance productivity and improving customer experience. We're very excited by the results, and we look forward to doing more of these in the future.

Also, we finally did the spin-off of KGI site from security, so now it's a full subsidiary of CDF. I also briefly wanted to address China exposure, because I know there's been a lot of questions on financial holding companies. As of June of this year, our total exposure in China was TWD 132 billion, which is 3.6% of our total assets of TWD 3.6 trillion. This number is down over TWD 54 billion or 30% since 2021. And our exposure in real estate, which is the main area that people have been focused on is less than TWD 8 billion, which is actually less than 0.0215%. CDF and the subsidiaries also do not have any direct investment or lending relationship with Evergrande, Country Garden or [indiscernible] Group.

In terms of China Life, our first half net income was TWD 4.9 billion. We focused on continuing to grow our high-value products and increase share of regular paid policies. VNB margin was also up to 34.3% from 27.1% during the same period last year. The team maintains prudent investment management in this volatile market and managed to improve our prehedging yield by 19 basis points to 3.66%.

In terms of KGI Bank, our first half net income was TWD 3 billion with an annualized ROE of 9.5%. SME and personal loans, which have been a key area of focus, continued to grow at 25% and 25% (sic) [ 21% ] year-on-year, respectively. Our retail banking AUM was up 13%. Also, our consumer finance joint venture in China continues to perform extremely well, was up 291% and the Board approved a further ownership increase from 36.2% to 37.6%, which we expect to occur later this year.

CDIB Capital during the first half delivered TWD 1.6 billion in net income and an annualized ROE of 11.2%. They continue to deliver resilient returns in this market with an ROI of 8.4%. The team also signed an MOU with Soochow Life for co-funding and insurance management -- to set up a co-funding and insurance management company.

KGI Securities had a very strong first half, delivering TWD 3.7 billion in net income, which is 73% year-on-year. We also saw a very strong overseas contribution up over 6x, primarily driven by Singapore at a 13.6% ROE. We maintained our #1 position in ECM and DCM, and our brokerage market share increased from 10.4% to 11%. KGI securities also grew AUM by 18%. Also wanted to add that during the first 8 months of this year, our staff contributed over 70,000 hours of volunteer work, which is similar -- it's above 90% of what we did during all of 2022.

If you turn the page, I'd like to briefly give you an update on our ABCDE strategy. I'm only going to touch on a few examples from each subsidiary. Some of the key areas that we'll cover is continue to digitize our customer journeys, empowering our staff to simplify processes, continue to install and embed Net Promoter Score, repositioning our brand, continue to leverage cross-sell and analytics to accelerate growth as well as continuing to grow our AUM.

We've been very focused on enhancing productivity and maintaining our ESG leadership. So we quickly turn to the next page regarding China Life. One of the key examples on the digital front is they continue to add functionality to our customer app. Over 100 functions have been added. And we're seeing continued increase in automated services, almost doubling from 8% to 15%.

Also, we've seen increased use of robotics, RPAs and process automation with 25 of those put in place. I'm sure you also read that we decided to rebrand China Life into KGI Life, and that's been approved by the Board and also by the Insurance Bureau. And in terms of continuing to build on our ESG initiatives. You can see once again that China Life continues to do a great job. We've had 5 consecutive years of winning the treating customers fairly award.

Moving to KGI Bank. Also on the digital front, continued work on enhancing our onboarding experience by launching a multi-service application where multiple accounts can be opened at the same time. We continue to add functionality with 42 new features added, which further helped to improve our NPS score. And the bank has been leading on RPAs. They launched a further 13. At a group level now, we have over 200 RPAs that have been implemented primarily to improved productivity.

In terms of CDIB Capital, they continue to focus on nurturing ecosystems in many strategic industries in Taiwan, particularly semiconductor, smart manufacturing and sustainability. They're also actively exploring some new asset management products, including private credits and Corporate Ventures.

We saw a kickoff of fundraising with Innolux, targeting TWD 3.3 billion, and the team continues to stay very focused on sustainability and to further strengthen our offerings in that space.

KGI Securities continues to enhance their application. And you can see in terms of trading strategies now, the recommendations have increased from 135 to 250. They've been very focused on growing our high net worth part of the business with over 11 seminars failed as well as issuing a tax guide to help in terms of family wealth planning and transfer. They've been working closely with China Life, and we've now trained over 800 agents who have passed the securities exam, and we're doing some innovative work by launching a KGI video channel, which launched in August and has been very well received.

I'll now turn it over to Jenny to give you an update on our financials.

[Jenny Huang, executive]

Thank you, Steve. [Foreign Language] [Interpreted] We'll talk about our profitability. Please refer to Page 13 on the slides. The first half of our net income is TWD 10.1 billion, ROE is 9%, excluding China Life, KGIB, KGIS and CDIB's performance has grown significantly. Our consolidated asset has grown up to TWD 3.6 trillion, and our first half of CI has recovered to above TWD 25 billion and our total equity has recovered from TWD 209 billion to [indiscernible], up 16% -- up 17%.

And next page, on the upper left, China Life's net income is TWD 4.9 billion, ROE is 8.2%. This one is because of the increase of hedging costs, the new money yield has amounted to 5.5% and bringing up the recurring income yield, and this has been upward 19 bps. And because of the market fluctuation, China Life's product mix continue to optimize. China Life's BNB and BNB margin has performed stably.

At the lower left is KGIB, KGIB's first half, net income is TWD 3 billion, ROE is 9.5%. In terms of loan and deposits as well as wealth management fee income and the investment on the SuYin KGI Consumer Finance have all grown significantly.

And next is on CDIB Capital. Because of the return of the valuation, our first half income increased to TWD 1.6 billion and ROE is 11.2%. Our performance is considered stable comparing to our peers. KGIS' net income is TWD 3.7 billion. ROE is 13.6%, grew quite significantly comparing to last year. Our brokerage income, our fee income as well as the overseas subsidiaries performance from quite significantly comparing to last year.

And next page. Here, we can look at the capitalization of our group, our double leverage ratio in CDF has lowered to 123% meeting the regulators threshold. If we look at other subsidiaries capitalization, we believe our capital position remains quite strong. And this is the financial update.

Now I'll hand over to Stephanie for China Life.

[Stephanie Hwang, executive]

[Interpreted] Please go to Page 17. First half of the year, the total premium reached TWD 82 billion and FYP reached TWD 30 billion. We -- there is a decline in China Life and the overall industry. We focus on value contribution. Therefore, if we exclude ILP, our FYP only slightly decreased 2%. And this is far lower than the 15% decline in the industry.

And in the first half of the year of -- our FYPE reached TWD 13.7 billion ranking #3 in the industry. In response to the transition of IFRS 17 and ICS, China Life has continued to enhance our product mix. First, we focus on the sales of protection products, because it will generate higher CFM conducive to the transition. The FYP proportion of protection product among traditional product has increased from 28% at the end of last year to 38%. The market share has increased from 10% at the end of last year to 12%. The industry ranking has increased from #4 to #2.

Second, China Life focuses on the sales of traditional foreign currency policies, because foreign currency policies have higher profits, it is also beneficial to asset and liability management benefits to our ALM due to currency matching. In the first half of the year, the FYP of traditional foreign currency policy was TWD 15.8 billion, accounting for nearly 60% of the FYP of all traditional products, a 15% market share. And in terms of sales distribution, we continue to maintain a balanced approach among multiple channels. Bank channel continues to see results in product transformation, market share of high-value products with a payment period of 6 years or above, maintains #1 in the market.

Next, please go to Page 18. In the first half of the year, our VNB reached TWD 10.3 billion, close to last year's TWD 10.5. The VNB margin increased from 27.1% to 34.3% year-on-year. In the second half of the year, China Life's product strategy will continue to focus on the sales of protection and foreign currency policies with the goal of reaching our annual target with their value contribution. In terms of assets and liabilities, the stable positive spread is maintained. In the first half, our ROI reached 3.1%, COL was 3.01%, as COL continues to be the lowest among large life insurers.

Next, Page 19. Match asset liability, China Life focuses on the performance of long-term recurring income together with the south of foreign currency policies, which is our focus. We grasp opportunities during rate hike and continue to invest foreign bonds with better yields. So the percentage has gone up to nearly 70%, of which among domestic bonds, the ETF accounts for around 4.3%. And for our China investment, in the past 2 years, we have continued to reduce our investment position in China, as of the end of June, only accounts for 3.6% of disposable fund, which has significantly dropped compared to 6.1% at the end of 2021.

Next slide. Through prudent asset allocation, we maintained a stable recurring growth, reflecting the increase in yield from new money the annual prehedging yield was 3.66%, an increase of 19 bps year-on-year. Thanks to TWD depreciation in Q2 and the flexible hedging operation, our hedging cost, 1.69% has been better compared to last quarter. And our balance of FX reserve increased to TWD 11.5 billion and to strengthen our capital, we have issued TWD 10 billion sub-debt and the fundraising was successfully completed in June. As of now, China Life's RBC has increased to over 330%. This is China Life's part.

Now I will pass the mic to [indiscernible]. Thank you.

[Unknown Executive]

I will talk about the profitability, the positive trend of KGIB. In terms of profitability, in the first half, our net revenue is TWD 6.9 billion and the spread infers from 1.88% to 2.07% in the first half 2023. The net revenue, which evolved [indiscernible] net revenue is TWD 6.9 billion and fee income -- net fee income increased to 3%. The swap increase is due to the wealth management business growth and annual growth is 34%.

And in 2023 first half, the spread benefiting from the credit asset adjustments and interest high compared with the same period last year, increased 27 bps compared with the end of 2022 increased 19 bps. In the first half 2023 NIM, even due to the FX, cost increase is maintained at 1.33%. We dedicated to maintain the stable of our asset quality, the NPL ratio is 0.19%.

In terms of the loan and deposit trends, we continue to strength our structure of loan, SME and consumer loans continue to maintain double-digit annual growth and the total growth of the loan at 15% and CASA ratio recovered to 41%. In terms of loan structure, we adjusted the asset quality, our business focus is SME and PO. And the [indiscernible] of the 2 business, SME increased to 25% on our consumer loan growth of 15%. The annual growth of PO is 21%. And the CASA growth is 16%, that is due to the U.S. dollar interest rate increase, and we absorb more [indiscernible] deposit and term deposit and our deposit structure is also in a good shape.

With that, I hand over to Melanie Nan for CDIB Capital.

[Yi-Chun Nan, executive]

[Interpreted] Good afternoon, everyone. I will introduce the performance review in the first half of 2023. We'll look at Page 25. CDIB Capital continue to focus on asset management business. And we seek for innovation, we maintain a steady revenue due to Kunshan Taiwan business fund completed the first one closing. The AUM is TWD 51 billion. In terms in the AUM, they are 50% denominated in USD and 26% in NTD in terms of the principal investment and that total is TWD 33 billion and overseas and Taiwan accounting for 60% and China accounted for 40%. In the first half, the [indiscernible] is due to the valuation increase of the previous investment.

In Page 26 in terms of fee income. On the top left, compared with the same period last year, first half in '23 is slightly decreased. That is due to some part of the fund enters into disposal period and the fee income released according to the contractual terms. And after closing in the second half, it will be increased.

On the top right, in terms of return on investment, compared with the same period last year. Last year, it was negative 4.6%, increase to 8.4% this year. And is slightly lower than the MSCI World Index. That is due to part of our investment is in funds and the valuation will not be volatile. If we compare with other peers, our rate of investment is 30%, which is higher than the MSCI World index. In the second part of the table, that indicates our new business private credits and the total revenue increased to TWD 155 million and the fee income versus 40%, the average coupon rate is 11.8%. That is our update on CDIB.

Next is William Fang from KGIS.

[William Fang, executive]

[Interpreted] Good afternoon, everyone. I will introduce our first half 2023 overall profitability. On the top left, that is the comparison between KGIS and the industry average, the darker line is KGIS and the lighter line is industry average. In the first half this year, our ROAE is 13.6% and outperformed the industry average. In terms of the portfolio, the net income composition is TWD 3.7 billion, and overseas subsidiaries contribute 15.3% accounting for TWD 540 million. And KGI Singapore performed really well and continue to get record revenue.

And equity business also rated #1 in the Singapore market. And the bottom left, the AUM growth 18%. Wealth management and asset management businesses, both increased. On the right bottom, we can see wealth management revenue. In the first half this year, the revenue compared with the same period last year increased drastically. We will continue to plan and develop security-related wealth management business.

Please go to the next page. On the left side, that is our net revenue. In the first half of this year, KGIS grabbed opportunity of [indiscernible]. The net revenue increased obviously and the brokerage commission income also maintained the momentum that obsessed the impact from the rate hike. And compared with the same period last year, we increased 18% to TWD 7.2 billion. On the right side, that is our market position in Taiwan. In the first half, our brokerage market share maintained stable position, compared with last year, we increased slightly for other businesses, equity or bond underwriting, we maintained the #1 discipline in the market.

Next, go back. I will hand the call back to [indiscernible].

[Unknown Executive]

[Interpreted] Thank you for the sharing from the subsidiaries. We will invite [indiscernible] investors and professional investors to raise the questions. [Operator Instructions]

[Unknown Executive]

[Interpreted] First I invite Jemmy from JPMorgan.

[Jemmy Huang, analyst]

[Interpreted] I have 3 questions. First, Steve mentioned that your exposure in China is about TWD 132 billion. My question is that for KGIB, because I heard from China Life, China Life accounts for 3.6% of exposure and the rest of the TWD 132 billion for the bank. So among the 3.6% of China Life does include the investment on CCB. And in addition to that, what are your investment targets? Can you share with us?

And next, regarding KGIB, are the main exposure focused on loan credit and are there any targets that is about Chinese corporate or noncorporate exposure.

And next is on the net interest margin. The quarter-on-quarter growth seems to be flat. I remember in Q1, you mentioned swap revenue is about TWD 400 million to TWD 500 million. So I wonder what is the Q2 composition for that and how can we -- looking to the second half of the year, including and excluding this swap, what is the trend of your NIM. And my third question has to do with China Life. I'm not sure if I heard correctly. When we talk about protection products, places about 38% of your FYP. I wonder in terms of our regular definition, the VNB margin for protection products, based on the main products that we're selling, what is the VNB margin. And in the second half of the year, well, we also are focusing on the same products.

And next, is the FX reserve for China Life has not already touched the regulatory limits. If it does, then I think your hedging cost, you said your target is 1.5%. And would it impact your hedging cost prediction. And what is your realized loss? I think there is about TWD 3.5 billion or TWD 3.6 billion. And what is the percentage of equity and bond, respectively.

[Unknown Executive]

[Interpreted] okay. Thank you, Jemmy. You asked a question about holdings and life and the bank. We will have [indiscernible]. In terms of the bank, we will first have the CEO of the bank to answer the question.

[Steve Bertamini, executive]

To answer your question, our exposure in China by the end of June, our exposure in terms of loans and investment in total is about 51% of our total net worth which is about TWD 31.2 billion. And that includes our investment in SuYin KGI and our loan balance is about TWD 26.1 billion accounts for 43% of our total net worth. We've also acted about percentage actually, 1/3 of them are Taiwanese Corporations based in China. And the other 1/3 of them are bank securities and leasing companies with good credits. And the other 1/3 is some of the Chinese enterprises. 90% of them are larger fund investment targets. So we believe our risk is managed quite well. And that's all for the bank.

Okay. And then for China Life, we will have [indiscernible] investors to answer.

[Lauren Hsieh, executive]

[Interpreted] I am Lauren, I will respond regarding China exposure at [ 30.6% ] includes CCB Life. In addition to CCB Life, other financial investments are fixed income, mainly 70% are A grade bonds. Most of them are SLB supported by the nation, whether it's National Bank or National Operation. Our China exposure are stable, relatively speaking. Second, for our FX reserve, the upper limits. In the past, the voluntary contribution is limited, we haven't reached the upper limit yet. But now there is a small gap. If we reach the gap and TWD continue to depreciate, 1.5% hedging class, I think it will be beneficial. And it can be even lower than 1.5%.

Next, I want to welcome our CFO, Jenny, to respond to other questions. Regarding the valuation loss, 2/3 are financial tools evaluation. [indiscernible], the protection-type products, it includes health, injury and life insurance product with protection. Now our VNB margin is around 50% to 60%. In the second half, we will continue our product strategy, focusing on high-value regular-pay products and foreign currency products.

[Unknown Executive]

[Interpreted] I will have CFO of the bank to answer the rest of the question.

[Jenny Huang, executive]

You mentioned our main guidance. I think the rate hike has come to pause and demand deposit -- our time deposit ratio has increased. So cost of funds has been increasing rapidly in terms of the 1.33% NIM, we believe we can maintain at this target. And you've also asked about the FX swap percentage, I think it's still consistent with the figure from the first half -- first quarter.

[Unknown Executive]

[Interpreted] are there any other investor who would like to ask the questions?

[Operator Instructions] Now we'll invite Capital Investments, Tina.

[Unknown Analyst]

[Interpreted] I have 3 questions. First, addressing to China Life, what is your hedging COL expectation, because for the first year, this figure has increased, so I wonder what will be your guidance for your cost of liabilities.

And my second question is for bank. About your fee income, because I see that your fee income main contribution is coming from loan management, so what is your guidance in terms of equity work funds or any other investments plan and what will be your overall guidance for wealth management.

And I would also like to ask about your loan, because for the first half, your loan didn't really grow much. Will you be focusing on growing loan balance or you will be focusing on the FX transaction for business? And that's my questions.

[Unknown Executive]

[Interpreted] Tina, thank you for your question. You have asked questions for both China Life and KGIB,and we'll have the [indiscernible] for China Life to answer the question.

[Unknown Executive]

[Interpreted] Tina, you talked about COL slightly increased. This is because of results of foreign currency policy, which accounts for up to close to 70%. And the cost of liability is higher for foreign currency policies. Our expectation is around an increase of 5 to 7 bps, we will control it below 3.05%. And this level is also quite low compared to other life insurers.

And there are 2 questions for bank. One is fee income, one is loan. I will pass the mic to CFO.

[Jenny Huang, executive]

In terms of the fee income, just as you said, our main contribution is coming from wealth management. Our momentum for wealth management, we want to maintain it and the over year wealth management fee income can be consistent with the first half. And in terms of loan, although our total loan size didn't increase, but regarding to some of the high spread products, such as SME loan or personal loan, they have actually grown quite significantly. And our second half trend and guidance will be consistent. And our full year loan growth will be low single digit.

[Unknown Executive]

[Interpreted] [Operator Instructions] If there are no further questions from you, we will now move on to the time for questions for media. [Operator Instructions] We will invite Ms. Shah from Financial Times.

[Unknown Analyst]

[Interpreted] Okay. I want to ask about the exposure of China. Can you share with us the exposure amount of each subsidiaries or is the total exposure is TWD 132 billion and for China Life for bank and for other subsidiary, what is their percentage?

[Unknown Executive]

[Interpreted] The overall exposure of China, I think we will had this question to our CFO.

[Jenny Huang, executive]

Our overall exposure for China is TWD 132 billion. China Life accounts for about TWD 80 billion. And as mentioned, it includes our investment in CCB Life, KGIB is TWD 32 billion, and KGIS about TWD 10 billion, and CDIB is TWD 900 million.

[Unknown Executive]

[Interpreted] I will invite Ms. [indiscernible] from Bloomberg.

[Unknown Analyst]

[Interpreted] For Q1 to Q2, the investment allocation didn't really change much. I think the change is mainly on the domestic bond or -- what is your current view and your guidance for domestic bond investment.

[Unknown Executive]

[Interpreted] I think you are asking the question for China Life. We will have our Chief Investor to answer.

[Lauren Hsieh, executive]

[Interpreted] Our asset allocation adjustment most increase comes from foreign bond denominated [indiscernible]. We put it -- categorized it as domestic bond and the yield is higher, but -- and it doesn't need hedging. Therefore, we increased the investment. And for the second half of the year, everyone is now paying attention to [indiscernible] and the times remaining. Now the rate is at its peak -- close to its peak. In terms of investment bond offers opportunities -- so our investment strategy will increase our recurring yield. So that moving forward, we can have stable recurring income.

[Unknown Executive]

[Interpreted] [indiscernible] Magazine.

[Unknown Analyst]

[Interpreted] In terms of your China exposure, are there any further guidance in terms of your investment in China? Will we be increasing or decreasing your exposure?

[Unknown Executive]

[Interpreted] Maybe you can repeat your question again because you were [indiscernible]. I think our CEO can answer your question.

[Steve Bertamini, executive]

China exposure, as you've seen, we have reduced it by about 30% from 2021 levels. We don't expect any further material reduction. We think we're in a good place. If it is, it will be a relatively small -- but we don't expect any increase.

[Unknown Executive]

[Interpreted] There are no further questions. I would like to thank you for your participation and your questions. And this ends our investor call today. And later, you'll be able to find the video recording and the slides in our Investor Relations session. If you have any other further question, you can call or email us. And I would like to first give you early heads of saying Happy Moon Festival to everyone.

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