China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2020-Q3

[Lily Li, executive]

Welcome to CDF's performance review for the third quarter of 2020, and I'm Lily of the IR team at CDF. I would like to remind you that CDF has not published its audited quarterly financial statement. Information disclosed in this presentation is unaudited and subject to revision upon completion of CDF's audit process.

I will take you through the earnings presentation, which is available for download on our website. Afterwards, we will be happy to take your questions. [Operator Instructions]

Today's presentation will begin with CDF's performance review, followed by performance updates of CDF subsidiaries.

Before we get started, we would like to share some good news with you. CDF's sustainability efforts have earned increasing recognition from international and domestic major sustainability surveys, which will all help raise CDF's visibility on the global stage and attract more long-term investors. CDF's participated Dow Jones Sustainability Index for the first time this year and has been selected for inclusion in the DJSI World and DJSI Emerging Markets just in November.

Okay starting on Slide 5 for a quick performance review. For the first 3 quarters of 2020, we continue to navigate the COVID-19 pandemic well, with overall operations remains solid. With profit contribution from all subsidiaries, CDF unaudited net income continued to rise to TWD 5.764 billion in the third quarter of this year, bringing net income to TWD 8.791 billion for the first 3 quarters of 2020, and China Life was still CDF's largest profit contributor.

While CDIB Capital Group was the only subsidiary posting net loss for the first 3 quarters, primarily resulting from unrealized mark-to-market valuation loss of some investments. It's worthwhile mentioning that CDIB Capital Group's quarterly profit has gradually gotten back on track, narrowing January to September net loss to TWD 953 million. Its investment valuation is expected to pick up amidst financial market recovery. The pandemic has a grip on the economy and it doesn't seem likely to loosen until vaccines are widely available. We'll keep managing through this with a sharp emphasis on our risk management.

Our third quarter result is driven by solid performance across the group despite difficult rate environment and market volatility. We expect the interest rate environment to remain at the current level for the foreseeable future due to continued impact of monetary easing across the world, which will continue to impact the margin of the banking and insurance businesses.

Regarding each subsidiary's performance, driven by its product mix enhancement strategy, China Life continues to deliver resilient net income of TWD 14.8 billion for the first 3 quarters of 2020, of which CDF recognize TWD 4.3 billion. Its cost of liabilities further declined from -- sorry, its cost of liabilities further declined to 3.07% as of the end of September.

As to KGI Bank, which continued steady growth in its core net revenue, KGI Bank recorded net income of TWD 2.913 billion for the first 3 quarters. Also with solid capital structure and sound asset quality, KGI Bank continued to optimize its loan and deposit structure to lower its funding costs and enhance yield. And KGI Bank will continue to strengthen and optimize its fee income sources.

KGI Securities maintained its profit momentum in the third quarter on improved business mix. In addition to strengthening risk management, KGI Securities will continue to grasp investment opportunities amidst COVID-19 storm. It is worth mentioning that its subsidiary, KGI SITE, had TWD 182.9 billion in AUM, up 25% on Y-o-Y basis and ranked seventh amongst peers as of the end of September.

Last but not least, CDIB Capital Group posted net loss of TWD 953 million for the first 3 quarters of 2020, primarily talking across unrealized mark-to-market valuation loss of some investments. However, as mentioned earlier, its loss in the first quarter this year has turned into gains in the second and third quarters, narrowing its cumulated unrealized mark-to-market loss to TWD 953 million for the first 3 quarters this year. Such investment valuation is expected to pick up as global capital markets recover from previous downswing.

In addition, following CDF's capital reallocation plan to increase capital efficiency, CDIB Capital Group continue to monetize its principal investments to less than 20% of CDF's net worth as of the end of this quarter.

Also, its Board has approved to launch a public tender for the CDF headquarters' building. We have been working on necessary details to carry out the plan as scheduled and anticipate to announce the details soon.

On the other hand, CDIB Capital group's private equity, AUM of TWD 439 billion as of the end of September is expected to increase with multiple forward-looking thematic funds in the pipeline in 2021.

Above all, we evaluate that the biomedicine industry will take center stage again in the post-COVID-19 era. With biomedicine-related investment in excess of TWD 10 billion, CDIB Capital Group will actively establish a cross-strait biomedicine investment ecosystem to aid Taiwanese biomedicine industry in raising international capital, cultivating tailwinds as well as integrating into the international biomedicine community. For example, we will close our NT dollar health fund II with TWD 3.1 billion in AUM in the fourth quarter this year.

The chart on Slide 6 shows all subsidiaries contributed to CDF's net income of TWD 5.764 billion in the third this year, with KGI Securities being the largest profit contributor.

While Slide 7 shows CDF's net income of TWD 8.791 billion for the 3 quarters of 2020, with CDIB Capital Group's unrealized loss being offset by steady profit contribution from other subsidiaries. And China Life being the largest profit contributor.

Page 8 summarizes CDF's sustainability efforts and its inclusion in several ESG Indices, which will all help raise CDF's visibility on the global stage.

Above all, CDF participated DJSI for the first time and has been selected for inclusion in the DJSI World and DJSI Emerging Markets just in November.

CDF's commitment to linking its core business with ESG mandate can be evidenced by how it identifies and solve the pain points arising from traditional financial services to expand financial inclusion. We have already rolled out innovative digital services in response to the rapidly changing digital trends. For example, KGI Bank took the lead in rolling out innovative financial services through open API, where it is able to establish partnership with a diversity of value-added online service providers, such as Line, Money book and Pine mobile, et cetera, creating scenarios that bring financial services into everyday life. And China Life realigns its product strategy to adapt to shifting market dynamics, the government's financial inclusion policy and aging population coupled with lower birth rates. Creating options that will hopefully meet the diverse needs of policyholders, particularly for individuals of disadvantaged communities and special needs group. KGI Securities ensures customers with disabilities, full access to basic, equal and reasonably priced financial services.

Also, innovation fund of CDIB Capital Group builds a one-stop ecosystem for start-ups with access to capital industry connections and resources required for growth, including mentorship, corporate managing events and all sorts of workshops.

KGI Securities continues to promote sustainability focused front. 2 sustainability bonds from have been well received in the market and successfully raised TWD 8 billion in the third quarter of this year. All in all, we hope to strive for a win-win situation for our shareholders and clients through our sustainability engagement.

In addition, CDF appointed Mr. Stefano Paolo Bertamini, as President and CEO of CDF, aiming to accelerate the group's long-term growth and strengthen the shareholder value. Mr. Bertamini will leverage his extensive experience to lead the group's international business development, resources integration as well as digital innovation.

Page 9 summarizes CDF's recent sustainability initiative. As FSC calls for financial institutions climate risk management to encourage a virtuous cycle for sustainable development and grasp business opportunities associated with climate changes. Climate risk management is not just a slogan. In fact, it will deliver actual benefits for decision-making and management. We observed the financial sector's pain points in climate risk assessment and decide to form an alliance with industry, academia and financial leaders such as National Taiwan University, Chunghwa Telecom and EY.

National Taiwan University has built the most trusted platform based on scientific methodology to facilitate climate risk management. While Chunghwa Telecom's cloud service will ensure efficient and sustainable operation of this platform. CDF's extensive financial and industry experience and EY's practical insight into industry practice will assist in integrating climate change risk into the current risk analysis framework to accelerate low carbon transition. And more details will be announced upon the successful model test.

Now please turn to Slide 11. China Life continues to deliver solid growth with January to September net income, up 15% on Y-o-Y basis, reaching a historic high of TWD 14.84 billion.

Please turn to Slide 12. As China Life continues to promote traditional and regular premium product to enhance new business value and long-term embedded value, regular premium traditional products accounted for 30% of FYP for the first 3 quarters of 2020, boosting VNB margin to 28%.

Now let's move on to Slide 14 for KGI Bank's net revenue. KGI Bank outperformed the market by maintaining steady growth of 9% in its core net revenue for the first 3 quarters of 2020. The chart on the left-hand side on Slide 15 show that demand deposits continued to increase by 33% on a Y-o-Y basis to reduce the funding cost primarily due to the efforts to realign the deposit structure. While the chart on the right shows that the loan growth has been moderate, mainly due to KGI Bank's strategy to optimize its loan portfolio by focusing on yield enhancement rather than growth alone. SME is the fastest-growing section and would lay the foundation for cross-selling wealth management products to increase fee income.

As a result, the chart on the left-hand side of Slide 16 show that KGI banks -- KGI Bank maintains interest spread despite rate cuts and improved NIM for the first 3 quarters of 2020 on improved deposit structure and funding allocation. While the chart on the right-hand side show that through prudent risk management, KGI Bank maintained a stable NPL ratio of 0.16% as of the end of the third quarter of 2020, much lower than the peer average of 0.24%.

As to KGI Securities, Slide 19, show that brokerage business remain KGI Securities' major income source for the first 3 quarters of 2020.

Please turn to Page 24. It's worth mentioning that its subsidiary, KGI SITE, posted AUM of TWD 182.9 billion as of the end of September, ranking seventh among its peers.

Now let's move on to Slide 26 for CDIB Group. Echoing CDF's strategy to reallocate capital to increase capital efficiency, CDIB Capital Group's principal investment continued to decline to TWD 26.9 billion as of the end of September 2020, as shown in the chart on the right-hand side.

On the other hand, our PE fund AUM of TWD 43.9 billion as of the end of September this year is expected to increase with more forward-looking thematic funds in the pipeline in 2021 to further increase AUM.

Slide 27 show that our asset management portfolio covers a wide spectrum of investment, including 4 NT denominated fund, 4 U.S. dollar-denominated fund, and 3 renminbi-denominated funds already established to focus on different regions and investment stages.

This table summarizes fund size vintage year, our shareholding of the 11 funds under our management for your quick review.

This concludes my presentation session, and now we begin the question-and-answer session.

[Operator Instructions]

As there is no further question. We thank you for your participation in our webcast conference. There will be a webcast replay within an hour. Please visit www.cdibh.com under the investment -- Investor Relations section. And if you have further questions, please do feel free to contact our IR team. You may now disconnect. Thank you again, and goodbye.