China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2022-Q3

[Unknown Executive]

[Interpreted] [indiscernible] to join third quarter performance review Of CDF in 2022. There will be 4 parts of today's conference. First of all we will invite the CEO of CDF, Steve Bertamini to explain their performance highlights. He will also cover the strategy update of our ABCDE strategy. And next, we will invite the CFO, Jenny Huang, to introduce the financial overview of CDF. As for the subsidiaries [indiscernible] will brief their performance overview of each subsidiary. And the last part is QA and the QA arrangement is the same as the last investment -- investor conference for corporate investors and professional analysts to ask questions first, then the media clients can ask questions. Before I invite our CEO to say a few words, please select the language for interpretation if you require.

[Steve Bertamini, executive]

[Foreign Language] Good afternoon, everyone. I'd like to begin by giving you a brief update of our third quarter financial performance. Our month -- our 9-month results were TWD 20.3 billion, ranking us #4 among the financial holding companies. If you exclude the one-off building sale last year, we're down only 10% year-on-year. We also launched our Employee Trust Shareholding Plan in October, and we completed the first phase of our green power procurement by purchasing 5 million kilowatts of green energy for the next 5 years.

In terms of China Life, China Life delivered TWD 18.2 billion in net income. They continue to remain focused on our VNB margin strategy, which increased to 36.8%, up from 27% during the same period last year. And also, the investment returns reached 4.65%, up 16 basis points year-on-year.

In terms of KGI Bank, net income was up 30% to TWD 4.7 billion. They also continued to maintain a superior NIM of 1.42% and both SME and personal loan growth -- personal loans grew by 23% year-on-year. We continue to see very strong results from our Consumer Finance joint venture, which delivered RMB 86.7 million in profit during the first 9 months and the balance sheet and the lending has grown by almost 100%.

CDIB Capital managed to reduce our loss to TWD 0.59 billion. They also completed 2 new fundraisings for TWD 1.35 billion and continue to draw down on our green investments by TWD 0.5 billion during the first 9 months of 2022. KGI Securities delivered net income of TWD 2.7 billion, while maintaining their leading ECM and DCM position. They're also the first to launch digital video signaling services -- digital video signing services in Taiwan and the first to launch an EFT IPO online subscription service.

I'd like to make a few comments regarding our strategy. First of all, we continue to see solid progress in every aspect of our strategy. What I'll do today is just highlight a few examples in each 1 of our subsidiaries. You can turn to Page 8 on China Life. Channel Life continues to make progress on their facial recognition, and we received approval from the regulator to launch this across all channels. We've also added more than 70 functions to our customer app, which resulting in an increase in usage of 25%. We saw strong results in the employee survey, up 16% year-on-year, and our NPS moved to the top 5; as mentioned previously, China Life continues to focusing on high-value segment sales and saw a big increase last year compared to -- this year compared to last year. We continue to focus on our agency channel, both in terms of productivity and adding staff.

In terms of KGI Bank, also continuing to make strong progress. We launched our 14th ecosystem partner with Q Taxi and also a 24/7 Smart Customer Service online platform. Our customer -- sorry, our employee survey results also improved from 65% to 71%, and we launched Workday, which is a platform that all our subsidiaries have launched together in order to provide much better services to our staff. We saw a very high migration to the new mobile app. Over 95% of the customers have migrated, and we've now rolled out NPS across all 4 channels. We continue to use data-driven marketing and analytics to reactivate dormant accounts and improve response rates, and we saw green financing grow 31% year-on-year.

In terms of CDIB Capital, they continue to do work in all our key sectors, having completed 12 deals. We've also seen many processes improved by staff, 77 during the last 9 months. They continue to refer many opportunities to the business, which can be either in securities or at the bank as well as China Life. We established a foothold in Tokyo, in order to help build start-ups and ecosystems, both between Taiwan and Japan. And as you're aware, the upstream TWD 8 billion this year from the sale of our building last year.

In terms of green finance, we also saw almost TWD 0.5 billion reinvestment in energy vehicle deployment.

KGI Securities continue to make good progress in terms of building digital ecosystems as well. They're co-branding now at Chunghwa Post and also introduced life chat to online account openings. We continue to enhance our customer service experience, and we continue to also work on increasing our reach in terms of online customers. You can see that in terms of line, we've now reached 1.2 million followers. KGI Securities also continues to make progress on green financing up to TWD 70 billion, which is up 115% on last year.

I'll now turn it over to Jenny to give you some updates on our financial results.

[Jenny Huang, executive]

[Interpreted] Thank you, Steve. So I'll introduce the financial overview, please go to Page 13. 9 months, the profit is TWD 22 billion and China Life contributed TWD 16 billion, accounted for 71% of the total net income KGI Bank is TWD 4.2 billion (sic) [ TWD 4.6 billion ] , account or 22%. CDIB posted a loss of TWD 592 million due to the volatility in the capital market and the mark-to-market impact to investment positions, but our valuation is still better than the peers.

KGIS contributed 2.4% (sic) [ TWD 2.4 billion ] accounted for 11%. And year-on-year comparison between the first and second and the bottom table. Last year, our net income was TWD 30 billion and including TWD 8 billion disposal of the old building. And first 9 months income was TWD 22 billion last year. And even though this year, our net income dropped year-on-year, we can still see the year-on-year difference.

China Life increased TWD 3.7 billion income due to [ CDF ] recognize 100% of China Life contribution last year, we only recognized 56% and KGIB increased TWD 1.1 billion compared with last year. And this year, spread and loan balance both grew the relevant income have both [ declined ] compared with last year and CDIB post a loss and KGIS dropped TWD 5 billion compared with the same period last year, the trading volume dropped 36% in the daily trading volume in the market due to the turmoil in the capital markets, the investment position performance was also impacted.

Now please go to Page 14. I'll briefly introduce our asset and liability. The consolidated asset is TWD 3.6 trillion and the 7% growth year-on-year, and discount and loan [ grew ] 7% and loan and deposits increased 11%, and the reserve increased 8%.

Please go to Page 15. This is our leverage ratio on the top right. So the leverage ratio from 11.8x climb to 21.5x this year. This is due to CDF recognized China Life obviously our unrealized loss and force their net worth dropped. It was a 42% drop. So the leverage ratio increase. The 9 months ROAE was 11.8%.

Let's go to Page 16. In this table, we can see our capital adequacy ratio of our subsidiary exceeding the minimum threshold of the regulatory requirement. KGIB are drop from 15% last year to 12.7%. That is due to the network decrease. However, KGIB is actively adjusting the capital allocation. There's no issue of insufficient capital.

I would like to highlight the double leverage ratio in CDF as end of September was 134%. As you all know, we have announced asset reclassification of China Life. After the reclassification, our network increased to TWD 30 billion. If we consider the reclassification, our double leverage ratio will reduce to 128%. [indiscernible] have part of the asset hasn't been reclassified, and we still see OCI losses, and this double leverage ratio is still slightly higher than the legal regulatory required 125%. However, it will further reduce in the future. And due to the IFRS 17 hasn't been adopted by the regulator, our reliability haven't been mark-to-market, after we adopt IFRS 17, we expect to see the net worth to increase and as the report from the financial aspect.

I'll talk about the operation in Q3. Please go to Page 18. Since years are affected by very high capital market fluctuation and the pandemic, the overall life insurance industries and the profitability and [ Premium ] momentum has been impacted, through ALM China Life has cash new money investment opportunities and continue to focused on high-value products. China Life net income in the first 9 months was TWD 18.2 billion, and the ROE is 19.62%, EPS is TWD 3.69, affected by a hike in market fluctuation the net worth at the end of September was TWD 70 billion. And due to asset reclassification using October 1, as a day of a reclassification, our equity will increase over TWD 30 billion.

Next page. Affected by market environment, the overall industry FYP drop was 20%. China Life also saw 80% drop of because we focus on high-value products. As you can see regular pay has accounted for 39% of our FYP, an increase close to 30% Y-o-Y and FYPE designing increase of 17%, and our 6 paid products has also increased to 82%.

Now for distribution channel. China Life, maintain a balanced approach, and we continue to focus on the number of agents. For agency channel percentage is pretty much the same compared to last year. However, because of our focus on high-value product, the sales of 6-plus paid products nearly about Y-o-Y.

Page 20. You can see our overall operation because we continue to focus on regular-pay and high-value products for VNB. We increased 2%, reaching TWD 16.1 billion, on the other side, VNB margin of traditional product has increased to 36.8% Y-o-Y, and for the spread, the first 9 months, our ROI is 4.65%, and our COL maintained a low level, 2.98%. So the investment spread was wider Y-o-Y.

Next slide. This is our investment portfolio. Because of the market volatility, we continue to maintain a stable ALM at the same time, we grasp investment opportunities during rate hike and continue to invest in quality foreign bonds and the ROI of various assets or deposits and short-term investment 0.35%, domestic bond 3.47% domestic stock 15.71%, secure loan 3.21%, policy loan 5.24%, real estate 2.18%, foreign currency deposit 0.39%, foreign bonds 4.16%, foreign stocks 2%, overall ROI 4.65%.

Next slide. This is our investment performance, recurring yield plays a very important role in the first 9-month reached 3.75%, 13 bps increase and for hedging, we still maintain a stable strategy. We -- the hedging ratio is around 70% and because of USD appreciation, the hedging cost was negative 0.18% and for FX, our FX reserve balance has accumulated to TWD 16.53 billion.

Next, Page 24, KGIB. Due to rate hike and high volatility in the market, KGIB saw a stable growth in its overall business including the cumulative net revenue for the first 9 months was TWD 10.3 billion. Cumulative net income was TWD 4.74 billion and annual grade growth of 30%. And because of rate hike, as you can see in the bottom the spread continued to increase since Q2 and Q3 reached 1.91% and the average of the first 9 months was 1.83%. In Q3 NIM was 1.42%, a slight drop from the previous quarter, mainly due to the increase of cost -- of the cost of deposit in response to rate hike and cumulative NIM in the first 9 months was 1.42% same as our expectations. Through prudent and continue its stable growth of various businesses. We have maintained a stable asset quality through prudent credit risk asset.

Next side. The total loan balance was TWD 408 billion in Q3, a 10% increase year-on-year. And we continue to optimize our mix. SME loans grew 23%, personal loan grew by 15%. These 2 are still the key. The annual target is still at 15% to 20%. And for the deposit mix, at Q3, it increased 9% Y-o-Y. And because of rate hike, and volatile financial market and also tight funds. The growth rate of time deposit is high. So the CASA ratio has dropped slightly this year.

Next, CDIB. Due to volatile markets and driven by our unrealized mark-to-market from market fluctuation and net loss in the first 9 months was around TWD 0.6 billion, and Q3 income is around TWD 1 billion, mainly came from the listing of some of this investment and the conclusion of a M&A and stable business operation increasing their valuation. In addition, the biomedical stock also performed well in Q3, driving gains from related investments. And for the equity, it rebounded to TWD 28.5 billion in Q3, a decrease compared to last year. It is because of the TWD 8 billion cash difference upstream to CDF and the net loss of TWD 600 million in the first quarter. And because of strong USD and FX gain, it also has a positive impact on it's net worth.

Next Slide 28. Including asset management and principal investments, it has increased for the third quarter. The cumulative fund commitment was TWD 51 billion, and there are new investments, including a second round of committed investment from existing fund and the [indiscernible] fund, which is expected to start operation in Q4. And for direct investment, despite the impact of investment position valuation driven by new investment in overall market value in the first 3 quarters still increased by TWD 1.5 billion. Taiwan is still the key of this all investment in Q3 position increases in China and international markets, mainly due to investment drawdown and valuation increases for investment in Taiwan new investments were appropriate in the first 3 quarters.

Next, KGIS. Stock market this year was very volatile, the transaction volume decrease. Therefore, net income compared to the same period of last year drop. And there are 2 other main reasons. First, because it does not recognize trail and analyze profits, therefore, the biggest drop and also another factor, the transaction volume and the performance of its business. We start up Q3 to adjustment of investment position, they have reduced great risk exposure. Therefore, the figure was low, and the ROE is also relatively low. And we can look at the AUM for growth management is still maintained stable so going up. And because of KGI SITE due to the drop of valuation, it has a drop of around 7%.

Page 31. KGIS net revenue, brokerage commission and underwriting has dropped around 45%. And because of the market, as you can see on this slide, the first 9 months the main contribution is still brokerage commissions. These are the operations of our subsidiaries. Thank you. Thank you for your elaboration.

[Unknown Executive]

[Interpreted] Now it's time for our Q&A. Now first inviting institutional investor and analyst to raise their question. [Operator Instructions] First one we invite Jemmy Huang from JPMorgan to ask a question.

[Jemmy Huang, analyst]

[Interpreted] I have 3 questions. First is for China Life, can you share with us your RBC ratio drop comparing to last quarter? What is the reason of such a decrease in your -- declining your RBC? And what will be your internal control indicator is it still 250%? And also for your bond reclassification, what is your nominal balance and what is the scale of your reclassification? And after the reclassification, what is the proportion of your booking under OCI and AC?

And the second question has to do with KGIB. The reason of a quarter-on-quarter drop decline is because of your funding cost. And if we look at your NIM trend and movement as said less likely for us to see an increase? Or do we have any metrics to do margin enhancement? And as for fee income, I remember that KGIB is 1 of the few banks in Taiwan who can grow fee income, I believe this is coming from your loan fee increase. So I was wondering in the previous 4 -- or 9 months, what is your momentum in the wealth management business?

And lastly is the double leverage ratio for CDF. My question is that in addition to the impact from the capital markets, after the reclassification, are there any other measures for us to -- or for you to enhance your leverage ratio? Or is your DLR only subject to the market conditions.

[Unknown Executive]

[Interpreted] Thank you, Jemmy, for your question. You have raised 3 questions for our China Life and KGIB as well as CDF. I will first advice our Chief Actuaries from China Life to answer the question.

[Unknown Executive]

[Interpreted] Jemmy. Regarding the RBC issue as you know, the volatility in the financial market remains high from Q2 to now. Now the equity market is very turbulent RBC is actually calculated on a 6-month average basis. So because of that, the number reflected is at around TWD 31 billion. We still aim to maintain the RBC at above 250%. And next, I will ask our CFO to explain the reclassification issue.

[Unknown Executive]

[Interpreted] Okay. Thank you. In the slides earlier before, we made the reclassification, the net worth is about TWD 70 billion. And after reclassification, it increased by TWD 30 billion. So our net worth ratio has increased to -- decrease from 4.4% to 3.1%. And previously, before reclassification, the AC is about TWD 9 billion. And after the [ 80 ] percentage increased from 90% to 95% after reclassification.

Next we'll advise for CDF. Earlier, you mentioned the NIM movement in the early of the year, we have a guidance compared to last year, there will be a 10 bps growth in our NIM. The goal this year is to have a 10 bps growth. We also expect that the NIM growth will slow down. This is because the cost of funding will gradually be reflected in the future growth of the NIM. So that's the answer to your first question.

And as for the fee of the bank, certainly, we have seen a slight growth in our fee coming majorly from loan fee. On a year-on-year loan fee grew 35% year-on-year, and the wealth management fee dropped 23%. And the wealth management-related business has actually been impacted by the market momentum in the relevant wealth management product mix, we are also progressively positioning us in that regard. Okay. The last question is on CDF. We will ask Steve to answer.

[Steve Bertamini, executive]

Yes. Thanks for your question. In terms of DLR, a couple of important comments to make. The first is that, obviously, the impact that we've seen this year is due to the change in OCI, which results in a decrease in net worth, which, as we all know, is market-driven and, to some extent, temporary. Once market recovers, that will improve. Having said that, it's also important to highlight a few other points. The first is that every subsidiary remains very well capitalized.

As you also know, when we purchased the China Life, we also did that all without raising any funds externally. We mentioned before that during the last AGM, we have received approval to raise up to 2.5 billion shares. Now we plan on doing that, obviously, before the next AGM. And this is really subject to what we see in terms of what's happening in the market. Our M&A pipeline and also regarding further strengthening our financial balance sheet. So it's a combination of items. But again, OCI is the main impact and we do have, obviously, other options available, which, as we said before, we want to tie to potential opportunities that we have been working on for some time.

[Unknown Executive]

Okay. Next will ask Peggy, analyst from Morgan Stanley to raise her question.

[Peifan Shih, analyst]

[indiscernible]

[Unknown Executive]

[Interpreted] From your question there are 2 major parts. First has to do with China Life. So we will ask China Life's CFO to explain.

[Unknown Executive]

[Interpreted] Thank you for your question. Actually, we are tracking this number on a monthly basis. So half of our [indiscernible] is actually half and half for equity and bonds. And your second question will be answered by Steve.

[Steve Bertamini, executive]

Thanks for your question. In terms of the dividend, again, a couple of comments. As you're aware, last year, we paid TWD 1, which was a 43% payout, which was above our peers. This year, our OCI losses are making that more challenging. The final decision ultimately on the dividend will be subject to the Board of Directors, our capital needs and also regulator guidance. So at this time, that's the best information we can provide you.

[Unknown Executive]

[Interpreted] [Operator Instructions] As [ Ms. Shah ] from Economics [indiscernible] to ask the question.

[Unknown Analyst]

[Interpreted] Okay. My question that earlier, you -- actually the previous speaker also asked about the dividend. I want to check with you because you have already passed your financial statement for Q3 by your Board. I would like to ask what is your current number for OCI? And what will be your earnings on distributed by Q3. And for example, your peer, your -- for example, such as [ Cafe ] and Fubon, they will consider the capital surplus using that to pay out the dividend or do you have any similar plan?

[Unknown Executive]

[Interpreted] We will ask CEO Steve to answer.

[Steve Bertamini, executive]

Yes. As you're aware, there's been some recent comments for the regulator -- from the regulator regarding use of the capital account. So we're going to wait further guidance from the regulator before determining if that's anything that we should look at.

[Unknown Executive]

[Interpreted] Any other questions? [indiscernible]

[Unknown Analyst]

[Interpreted] Can you hear me now?

[Unknown Executive]

[Interpreted] Yes.

[Unknown Analyst]

[indiscernible]

[Unknown Executive]

[Interpreted] You raised the question for both CDF and China Life. For China Life will again will ask our [ Chief Investor Head ] to answer the question.

[Unknown Executive]

[Interpreted] Actually under rate hike China Life is try to increase the recurring yield by investment and our recurring yield actually increased about 10% comparing to last year. And in the next year, according to our estimate since the rate hike is already at its peak. So the rate hike will not be as stressed as this year. So the actual number will still have to wait until next year after we actually [ medium ] investment. And your second question, I will ask our CFO to answer.

[Unknown Executive]

[Interpreted] Because our Q3 financial statements is not has been published yet according to the regulation. So I cannot reveal too much information in that regard.

[Unknown Executive]

[Interpreted] Okay. Are there any other questions?

[Unknown Analyst]

[Interpreted] First you have already announced the material information of your financial statement. I wonder, is it possible for you to disclose that figure because we have been asking this question repeatedly regarding the undistributed earnings as well as the OCI figure. What will be your total retained earnings? Is it possible to disclose that?

[Unknown Executive]

[Interpreted] Let me supplement. If we look into the second half years, H1 statement, our distributable earnings is still negative, and it still depends on the performance in Q3 and Q4 so that we can have a final results. That's it from our side.

[Unknown Executive]

[Interpreted] Now I don't see questions from the media. And I would like to thank you for the participation and questions today. This ends our investor call today. And later you will be able to find in our investors -- investor section for today's recording as well as the material for the meeting. If you have any further questions, you'll come to call and email us. And at the end, I would like to thank you all again, and wish you all a great and beautiful day. Thank you.

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