China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2021-Q3

[Richard Chang, executive]

[Interpreted] Dear investors, friends from the media, good afternoon. This is Richard Chang, the spokesperson of China Development Financial Holdings. Thank you for participating the third quarter's investment -- investor conference.

We will first invite Mr. Steve Bertamini, our CEO, to speak on our performance in the first (sic) [ third ] quarter in '21, and we will follow it by our CFO, Ms. Jenny Huang, to continue with the performance -- financial performance of the Holding and our subsidiaries. And lastly, we will conduct a Q&A.

And since the financial figures here hasn't been reviewed by our CPA, so the figures are for your reference only. If there is any questions regarding our explanation and presentation, you are welcome to leave your name, your company name and your questions on our system interface. We will answer them accordingly.

Now I will hand over to our President and CEO, Steve.

[Steve Bertamini, executive]

[Foreign Language] Richard. Thanks for joining everyone. I'd like to begin today by giving you a brief outline of some of the highlights during the first 9 months of the year and then briefly touch on one of the key aspects of our ABCDE strategy.

First of all, we had record performance for the first 9 months of this year, up almost 250% to TWD 30.7 billion. We continue to be on track for the acquisition of China Life, which we expect to close before the end of the year, subject to regulatory approval.

[Richard Chang, executive]

[Operator Instructions]

[Steve Bertamini, executive]

And lastly, at the CDF level, we also moved into our brand-new headquarters, which is really sustainably constructed and is another evidence of our commitment to our net zero emission strategy by 2045.

In terms of China Life, it's also been a record 9 months. Performance is up 75% year-on-year to TWD 25.5 billion. We also continued to enhance our product mix by focusing on VNB margins, which we believe are the most critical measure for insurance companies as well as the margin that we receive on VNB. And last but not least, we also managed to increase the share of VNB contribution by our bancassurance channel from 51% to 59%.

KGI Bank also had a very strong performance, first 9 months, up 25% year-on-year, and revenues were also up 7%. We saw our net interest margins increased by 17 basis points and our demand deposits grew 27% to 41%, and we also saw wealth management fee income increased by 10%. Also, our newly established joint venture in China for Consumer Finance is already expected to become profitable during year 1, and we completed a capital raising to further accelerate growth in October of this year.

CDIB Capital also contributed very strongly this year, primarily driven by the disposal of our old head office building, which generated TWD 9 billion overall and is one of the main drivers of that performance. The fundraising for both the InnoLux and Kunshan Fund were completed. And when they fund, we should be able to reach over TWD 50 billion in assets under management this year.

In terms of KGI Securities, also record performance, up 82% year-on-year to TWD 10.2 billion. We had strong performance in all businesses, and we ended up -- we maintained our #1 position in ECM and also increased our brokerage market share to a record level of 10.6%. We also saw a strong growth in AUM, up 13% year-on-year to almost TWD 350 billion.

In terms of our ABCDE strategy, I'm only going to touch on a few highlights, and I want to spend a bit more time today on digital. We're very confident our right strategy is the correct one for many reasons. The first is very clear. We have a great team in place. And we've put in a new operating system to ensure that we continuously monitor and enhance the strategy. Some of the things we did to achieve that include having annual kickoff meetings with all our senior staff as well as people across Taiwan. We conduct strategic talent reviews to ensure we have the right talent focused on the right initiatives.

We conduct competitor deep dives and look at international best practices on an ongoing basis which we use to adjust our strategy and also the execution focus as well as conducting monthly operating reviews and many other processes that we've put in place across all the businesses. Since I'm going to touch on digital in a moment, I thought I'd just touch on 1 or 2 things for each of the other elements of the strategy.

In terms of becoming an employer of choice, we've put a lot of focus recently on developing and communicating a new mission, vision and value statement. We'll expand on this in future meetings, but I thought I'd briefly touch on the 3 elements. Our mission is to become a leading financial company in Asia by leveraging innovative solution and our entrepreneurial spirit. We also are putting a lot of efforts around our 4 key values, becoming customer-centric, being seen as trustworthy, leveraging entrepreneurial spirit and being collaborative, which we think is a very big opportunity for our group. We continue to do a lot of work around customer focus in terms of designing customer experiences and delivering comprehensive financial solutions.

In terms of driving growth, a lot of efforts has gone into improving our data and analytics and improving our capital allocation in order to improve ROE and margins. And in terms of executional excellence, we continue to invest in enhancing our IT distribution and increasingly optimizing our risk and investment appetite.

I'd like to quickly now turn to give you an update on the progress we've made on digitization. As we mentioned before, we're the first company to focus on implementing a Microsoft hybrid cloud to help us accelerate our digital efforts by putting in a common technology backbone. We recently revised and revamped and launched new websites for CDF and CDIB and also formed a strategic alliance with PChome, Century 21 as well as Chunghwa Telecom to develop the fintech ecosystem. In due course, we'll be able to speak more about where we see value and things that we'd like to do together in order to create this ecosystem.

In terms of China Life, one of the big breakthroughs that they had this year is they were able to be 1 of 3 companies that was allowed to use facial recognition for people to be able to purchase insurance from home. We've also developed an artificial intelligence-driven chatbot for the agency channel and have begun to use agile work processes in order to develop a new customer app, which is currently being piloted.

KGI Bank has begun to optimize the loan approval process, which has resulted in doubling of the digital applications that we've been received this year compared to last year. They've also been leading the group in terms of implementation and usage of RPA. Also, work is underway on a new website as well as a new online banking application.

CDIB has really been working on enhancing their processes and adopting digital processes to make their work more efficient. And most importantly, our investment in many fintech companies and participation in new and emerging technologies is going to be an advantage to our group as we try to incorporate those into our various businesses.

KGI Securities has also implemented an AI-powered chatbot as well as improved their online account opening by creating 3 account openings in 1. They've also started on the RPA journey, and we believe there's also an opportunity there for us. And but not least, we've started working on developing a digital wealth tool that we can initially use outside of Taiwan and then in due course, use here in Taiwan as well.

These are just some examples of some of the work that's transpired over the last 9 months as we focus on accelerating our digital presence and becoming truly best in the market in this space. I'm very proud of the work that all our staff have done this year, not only in digital but across every area, as you saw from the exceptional record results that we achieved so far this year. And we look forward to continuing to update you on our progress on the ABCDE strategy.

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

[Jenny Huang, executive]

[Interpreted] Good afternoon. Next, I will talk about the financial performance in the third quarter. Please turn to Slide #9. CDF, the first 3 quarter's net income has reached TWD 30.7 billion and mostly comes from China Life's TWD 12.45 billion. Next, CDIB TWD 8.9 billion from the disposal of the building. KGI Security, TWD 7.8 billion. KGIB, TWD 3.5 billion. As you can see on the right, compared to the same period last year, all of our subsidiaries have grown significantly.

Next slide. If we look at the balance sheet trends, we can see the total asset compared to the same period last year, it has dropped -- increased I'm sorry, increased TWD 100 billion to reaching TWD 3.3 trillion. Most of it comes from cash which is TWD 74 billion. And China Life, because they have adjusted their investment portfolio and they have more cash to prepare for the future and some of the cash also comes from CDIB's disposal of the building and cash and cash equivalents also increased TWD 100 billion. This increase compared to the same period last year has increased 5.5%, mainly comes from China Life's liability reserve.

Next slide. In terms of accelerating recapitalization, on the right, we can see that the leverage ratio has reached 11.1% and ROAE has also reached 19.3%.

Next slide, Slide #12. This shows CDF and our subsidiary's RBC ratio are strong. And for KGI Securities, if you remember, in the second quarter, [ SVI ] reached -- dropped to 250%. Now it has reached 350%. So KGI Securities are heavily impacted by the transaction in the market.

Next, I will talk about the subsidiaries one by one. Please go to Slide #14, China Life. For China Life, as you can see on this slide, the overall income compared to last year, it has grew 75% year-on-year and the net worth has reached TWD 179 billion, increased 9% Y-o-Y, and ROE has also increased from 13% to 20%.

Going on to the next slide, insurance related performance. On the upper left corner, the first 3 quarters, the total premium income has reached TWD 164 billion. Compared to the same period last year, it has decreased 11%. For the first year premium, although the total premium decreased, but the FYP has increased 9% year-on-year, reaching TWD 67.2 billion. If we look at the industry average, which decreased 9%, China Life in this regard performed relatively well. In the upper right corner, for the investment spread, we can see our COL is 2.99%. This is the lowest compared to our competitors. And our ROI has also increased from 3.89% to 4.49%.

The lower right corner, the FYP distribution by channel, China Life has been dedicated to develop our agency channel. As you can see, if we look at agency channels, it has increased from 16% to 18%. And the lower right corner, our product mix, because of the demand for ILP products, China Life has act in response. This year, our ILP percentage has reached 21%.

Next, I will move on to KGIB. Please go to Slide #17. As you can see on the upper slide, whether it's net revenue or net income, both figures has increased. On the upper left corner, in terms of net revenue, the fee income from last Q3 to this Q3, it has increased 6%, reaching TWD 478 million, and the overall fee income wasn't affected by the pandemic. And among it the wealth management accounts for around 50%. On the lower right corner -- left corner, for the spread and net interest margin, the net interest margin has increased to 1.33% and the interest spread has also increased to 1.72%.

Going on to the next slide for loans and deposits. The loans and deposit of KGIB compared to the same period last year, it has remained the same, but KGIB continues to increase its ROI. It has been adjusting its loan mix. As you can see on the right, for large corporation loans, it has decreased to 52%. And for deposit, demand deposit's percentage has reached 41%. This is also beneficial to lower our capital cost.

Moving on to CDIB. Please go to Slide #20. CDIB's profitability is mainly contributed by the disposal of CDF Building. The lower right corner, the total equity from the TWD 37 billion in Q2 decreased to TWD 34.3 billion. In addition to the disposal of CDF Building, the Board has also passed to contribute TWD 9 billion to CDF. This also indicates the redistribution of capital within the group.

Going to Slide #21. CDIB continues to review and adjust its portfolio on the upper part of the slide. The AUM has increased from TWD 35.1 billion in 2014 (sic) [ 2017 ] to TWD 45.9 billion by the third quarter this year. And the principal investment composition has also decreased to TWD 29.6 billion this quarter. The principal investment composition has increased compared to 2020. There are some reasons. First, we drop out from the third-party funds and we invest more on our core capabilities, and the valuation of certain position has also picked up.

We thus move on to KGIS, going to Slide #23. For KGI Securities, we see a strong profit with TWD 10.2 billion in net income, among which 10% are from overseas. The ROE of KGI Securities came to 18.1%. This is same as the industry average.

Moving on to the next slide. As for the net revenue, KGI Securities has achieved more than TWD 5 billion of net revenue annually. And comparing to the last year, the net revenue contribution comes from the net brokerage commissions. So here are a summary for the operations and financials of our subsidiaries.

Now I will pass the floor to our salesperson, Richard.

[Richard Chang, executive]

[Interpreted] Thank you, Jenny. So here are the summary of the subsidiary's performance. If you have any questions regarding to CDF as well as our management, you may leave your name and your company name as well as your question on our system.

[Richard Chang, executive]

[Interpreted] The first question we have received from Steve's presentation earlier, the ABCDE strategy is very crucial to CDF. So the question is regarding how do we forge the consensus on the ABCDE strategy among our group?

[Steve Bertamini, executive]

Well, forming consensus on strategy is also something that takes quite a bit of time and effort. I think in fairness, when we first put the strategy in place, it was primarily led by the senior team in terms of understanding and key trends that were affecting financial services globally, which we talked about before. We also spent time to ensure that the strategy was something that we thought was aspirational but also achievable. What we then did is we communicated the strategy broadly at the beginning of last year. What's happened since then is that as we go through the refresh cycle that I mentioned earlier in my presentation regarding the refresh, if we've now asked for the teams to really do a bottom-up, each individual business, spending time with their leadership team, and really not only validating but suggesting ways that we can accelerate areas that we should focus more and we are in the process of consolidating all that input and then we will recommunicate this when it comes to our annual kickoff meetings again next year. There's also a session that we have in place later this year with the top leadership of the company to also discuss where we ended up in the various updates to get more feedback. So in short, this is an ongoing process where we continue to take feedback from our staff. We continue to update our progress. And this allows us to not only dynamically update it but also to constantly look at what we see happening outside. For example, even today, we had a session over 1.5 hours long with a global consulting company to update us on what's happening, for example, in work that's occurring around ecosystems around the world so that we can take that into consideration and see what adjustments we need to make on our digital strategy.

[Richard Chang, executive]

[Operator Instructions]

[Interpreted] Thank you. Next question is also to Steve about the outlook. The first one is what is your view on the challenge in Taiwan's financial market? Also, what will be your projected outlook for CDF? What's your vision for CDF?

[Steve Bertamini, executive]

Well, first of all, in terms of the outlook, quite frankly, for the country because I think you have to start there, Taiwan, as you know, has a very strong semiconductor industry, also very strong in terms of IoT. And these 2 trends alone, I think, put the country in a very strong position in terms of its value, not only locally but in the global economy. As a financial holding company, obviously, leveraging the strength of the country is very important to us. So for example, this is where our CDIB business plays a critical role. They have been very early and continue to be the top investors in this space.

We also see opportunities as many customers in Taiwan look to diversify their supply chains and for example, are following the overall direction of going south in places like Southeast Asia. So if you then think of that in terms of how this presents opportunities for CDF, they come in various areas. The first is, obviously, continuing to invest and be a key player in the industries that are continuing to grow in Taiwan are also looking to go overseas. The second big area that we see as an opportunity in Taiwan is Wealth Management. And the third big trend which we believe will become more important in Taiwan and has already happened globally is the acceleration of digital and the formation of ecosystems.

This is an area where the regulatory environment still continues to evolve and we're working actively with the regulator to also offer suggestions and ways for Taiwan and our company to participate in this very exciting journey. And as we said before, obviously, our objective is to become and remain the top 5 financial holding company in Taiwan and to achieve double-digit ROEs on a consistent basis.

[Richard Chang, executive]

[Operator Instructions]

[Interpreted] Thank you, Steve. Next question is addressed to our CFO. The KGI Bank's spread and loan growth outlook. Jenny, please.

[Jenny Huang, executive]

[Interpreted] Thank you, Richard. I think the NIM for KGIB is at 1.3%. We will maintain this ratio at above 1.3%. As for loan growth, we also focus on the loan with higher interest for -- we aim to grow 10% in the loan for SME.

[Richard Chang, executive]

[Interpreted] Next question is also addressed to Jenny. Our group double edge -- double leverage ratio, what would be the year-end outlook? And for -- as for -- what is for China Life?

[Jenny Huang, executive]

[Interpreted] On the double leverage ratio, we need to take into account the 100% shareholding of China Life. It will also be impacted by the subsidiary's performance. And by estimate, we think we can maintain 122% of double leverage ratio. That is the current estimation.

[Richard Chang, executive]

[Interpreted] I think this question has been asked before, but I think you must care about this very much. What will be the -- when will the CDF building sold price be recognized?

[Jenny Huang, executive]

[Interpreted] We have already recognized the disposal at the September and the amount is TWD billion.

[Richard Chang, executive]

[Interpreted] Next question. We had our RSU, has been approved by the FSC? We had -- CDF has its 3 indicators. How do you prioritize it?

[Jenny Huang, executive]

[Interpreted] For our restricted share, FSC has already approved it. And since this year, CDF is performing relatively well. All of our indices are ranked among 6.

[Richard Chang, executive]

[Interpreted] Next question is also -- has also been asked. What will be CDF's dividend policy? Can our CFO help us explain?

[Jenny Huang, executive]

[Interpreted] For our dividend policy, previously, our dividend has been very stable. In the future, we strive to maintain such a stable dividend payout. And our subsidiaries have been contributing their part to the holdings as well. However, since China Life will contribute most of our profits, but the dividend policy for China Life needs to go through the approval of the FSC. So we still need to look into the circumstances in terms of China Life's dividend payout.

[Richard Chang, executive]

[Interpreted] Some investor has been asking CDIB, why did they drop out of third-party funds? What is their new core business so that we can see the benefits. So Jenny, would you please take this one?

[Jenny Huang, executive]

[Interpreted] For the third-party funds -- is to increase our capital efficiency. So third-party funds, we won't use our own capital to make such investments. In the future, our focus will be on -- will be based on our strategy, will be public credit and buyouts. These will be our focuses moving forward.

[Richard Chang, executive]

[Interpreted] The next question is about cross-selling within the group. What's the current status?

[Steve Bertamini, executive]

Yes. We continue to make very good progress on cross-sell. As you know, in Taiwan, it's very important to obtain customer consent. So obviously, that's a prerequisite to us. Making offers to customers, I think, as we get better at understanding customer needs as we get better at developing tailored products to customers, this will allow us to accelerate growth in this space. We recently conducted a pilot for our high net worth customers in terms of having the businesses work together to make tailored solutions. The feedback has been very good. We've done some early work around branding and positioning. And we think this gives us a lot of confidence to begin to do better segmentation of our customer base across our various businesses.

[Richard Chang, executive]

[Operator Instructions]

[Interpreted] Next question is about the bank's reinvestment in China regarding customer finance. So I would like to pass the question to Jenny. What's our outlook for 2022?

[Jenny Huang, executive]

[Interpreted] For the Chinese company, Steve has briefly mentioned this. It was established this year and it can break even this year. And the loan book has increased. After the capital increase, the loan size will also grow in tandem. This is my brief answer. Thank you.

[Richard Chang, executive]

[Interpreted] Next question. Because our ROE goal is to reach double digits, I want to ask Steve how much time will it take for us to reach the goal, the double-digit goal?

[Steve Bertamini, executive]

First of all, we all need to recognize that 2021 has been an exceptional year. As you've seen, the whole industry has done very well. And obviously, we've been no different. And actually, I think we've done better than the industry in terms of improving this. In terms of how we measure this, as you're aware, this is one of the objectives that we have in the RSU program that we put in place. But what's really important is how we perform relative to the competition because, obviously, there are external factors that come into play. And what we're doing in terms of things we can control is ensuring that we allocate capital where we think we can get the best return, ensuring that strategically we are building on areas that we believe will give us sustained profitability with less risk, particularly as it comes in terms of market volatility. So this is something that we are very focused on achieving. It is relative to how the industry does, but I'm quite confident that we will be able to achieve our objective by 2025.

[Richard Chang, executive]

[Operator Instructions]

[Interpreted] Friends from the media, ladies and gentlemen, investors, for the questions you raised, it covers a very broad scope. And Steve and CFO have tried their best to answer your questions. I would like to once again thank you for your participation in CDF's Q3 Investor Meeting. Afterwards, you can also visit our website in the Investor Relation for the audio recording and to download our PDF file. If you have any questions, please call. After the meeting, we are happy to discuss these issues with you. And this marks the close of today's investor conference. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]

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