China Development Financial Holding Corp

TWSE:2883

Earnings Call Analysis

KGI Financial Reports Significant Growth in Q3 Performance

KGI Financial achieved a remarkable 66% increase in net income to TWD 29 billion, driven by thriving securities and life insurance sectors. Investment income rose 19% year-on-year, with life insurance policy sales rebounding by 43%. KGI Securities reported a 51% profit growth to TWD 8.1 billion, supported by a 39% rise in brokerage fees. The banking sector saw robust loan growth of 14% year-on-year. Looking ahead, KGI aims to maintain a double-digit growth strategy, while total fee income surged 44%. The upcoming year is poised for a stable dividend policy reflecting ongoing performance successes.

Solid Growth in Financial Performance

KGI Financial reported a compelling performance for the first nine months of the fiscal year, achieving a net income of TWD 29 billion. This marks a significant 66% increase year-over-year, primarily driven by robust contributions from its securities and life insurance sectors. The rebound in investment valuations also supported this growth, with net worth increasing to TWD 306 billion, reflecting a 16% recovery.

Life Insurance Sector on the Rise

KGI Life Insurance led the charge in profitability, reporting a profit of approximately TWD 20 billion, which is an impressive 78% growth from the previous year. This surge was largely fueled by a stable investment strategy that seized market opportunities, resulting in a 19% year-on-year increase in overall investment income. Notably, the first-year premium (FYP) rose by 43%, with sales through the agent channel increasing by 40%, signaling a revitalizing trend in insurance policy sales.

Strong Securities Performance

KGI Securities also posted strong results, with profits reaching TWD 8.1 billion for the first three quarters, a remarkable 51% increase. The return on equity (ROE) stood at 17.7%, outperforming industry averages. Key growth drivers included a 39% growth in brokerage fees and a 46% rise in investment income. The wealth management segment experienced a notable 59% growth in fee income, and client asset management expanded by 31%.

Stable Banking Operations Amid Unit Growth

In the banking segment, KGI Investment Banking (KGIB) reported profits of TWD 4.3 billion, marking a slight growth from the previous year. The focus remains on expanding asset scale while optimizing the deposit and loan structure. The net income from this segment increased by 16% year-on-year to TWD 11.9 billion, with a strong 16% growth in fee income. Loans rose by 14% and deposits by 15%, highlighting active management in scaling operations.

Investment Opportunities and Future Projections

Looking ahead, KGI Financial’s management expressed optimism. The anticipated stabilization of market conditions should further bolster profit margins. For instance, the net interest margin (NIM) is expected to remain around 1.3%. Credit costs remain stable at 20 to 25 basis points, underpinning the company’s sound risk management. The firm also plans to enhance its asset management capabilities, specifically targeting an increase in alternative investment strategies such as private equity and debt.

Dividend Policy and Guidance

KGI Financial has highlighted intentions to maintain a stable and growth-oriented dividend policy. While they previously turned their dividend into capital, future discussions will center on returning to shareholder distributions. The goal is to balance long-term sustainability with growth aspirations, and management aims to clarify the payout ratio in upcoming periods. Rates previously ranged from TWD 0.5 per share, with expectations of future increases dependent on financial performance.

Market Strategy Under Dynamic Conditions

The company reported that it is preparing for potential market fluctuations stemming from anticipated policy changes in the US under the new administration. Management indicates a cautiously optimistic outlook for the stock market due to ongoing economic growth and aims to capitalize on trading opportunities while managing risks strategically.

Earnings Call Transcript 2024-Q3

[Jenny Huang, executive]

Investors and media friends, welcome all of you to be in the third quarter investor conference of KGI Financial. I'm Jenny Huang, representing on behalf of the company. I appreciate your support and attention to our company.

In the full year and half year investor conference, our CEO and President from the subsidiaries will focus on strategies. In the first quarter and third quarter investor conference, we'll focus on the results of the business and financial results. And CFOs and actuary officers from subsidiaries will talk about the content.

And today, there are two parts. First is the business overview, and second part is the Q&A. You're welcome to use the Webex system to ask questions.

Now I hand over to the MD of our Investor Relations Management department.

[Unknown Executive]

Thank you, Jenny. I'll talk about the first 9 months performance.

Like our management talked in the previous investor conference, we have five subsidiaries: life insurance, security, banking side and capital to create more synergies.

And in Page 7, we'll talk about the financial overview of KGI Financial. The net income was TWD 29 billion compared with the same period last year, grew 66%, mainly driven by securities and life insurance. Due to the contribution and the investment valuation rebounded, our net worth recovered TWD 43 billion and reached TWD 306 billion, a recovery of 16%.

Next in Page 8. For KGIL, the profit performance is approximately TWD 20 billion, a 78% growth, mainly due to the improved investment income. In addition to the stable investment strategy, we also seized the opportunities in the market to realize capital gains. The overall investment income increased by 19% year-on-year. In Q3, we also saw the rebound in the insurance policy sales. And the overall FYP is 43%, driven by the traditional regular paid sales. And the sales agent channel also grew by 40%.

In KGIB, the profit was TWD 4.3 billion and slight growth compared with last year. That is driven by the growth in loan, but also we saw increase in provision. If we look at the PPLP, there was a 22% growth.

In terms of net income, fee income grew 44%. The contribution in the total revenue continued to rise and further optimizing the structure of net income. KGIB also obtained a business license from Hong Kong branch in October. That's the first overseas branch. We'll leverage existing presence of KGIS and CDIB in Hong Kong to provide a comprehensive financial service.

In Page 9, KGI Securities, the first 3 quarters' profit was TWD 8.1 billion, a 51% increase, ROE of 17.7%, exceeding the industry average. With the active market trading volume, the brokerage fee grew by 39% Y-o-Y, and investment income grew by 46%. Wealth management business is also a key focus for the securities development. Client asset management scale grew by 31%, and wealth management fee income grew by 59%.

In terms of CDIB, the profit was TWD 587 million, mainly affected by the valuation fluctuation in overseas investment positions. In the first 3 quarters, five new asset management business contributed TWD 14.9 billion. The total asset management reaching TWD 54.6 billion, a 26% growth.

Additionally, the supply chain green energy platform, Taiwan Energy, has committed of TWD 2.4 billion, with four project company receiving a total of TWD 310 million in investment disbursement.

In Page 10, this talks about our capitalization. The double leverage ratio of KGIF decreased further to 119% from the end of last year, and the subsidiaries maintained a stable capital adequacy ratio.

Next, the business overview of KGIL. On Page 12, the strategy still focuses on growing our agency channel increasing our premium and through prudent investment strategy to improve our returns and aligning with IFRS 17.

Page 13, you can see our premium income and channel breakdown. Starting from Q3, premium momentum began to pick up, and KGI Life also launched single-pay products in response to market demand. Total premium in Q3 increased 9% Y-o-Y. FYP increased 4% Y-o-Y.

In terms of channel distribution, agency took up 40% of FYP. Increasing agency channel share continues to be our focus moving forward.

On Page 14, for VNB, driven by premium income, VNB grew 4% Y-o-Y. VNB margin was 36.2%. And on the lower part, we can see investment spread. CLL is at 3.07%. And for investment returns due to capital gain and dividend income, the return reached 4.17%. The overall spread has improved gradually.

Page 15, investment portfolio. We maintain stable allocation. We did not make a big adjustment in the first 9 months, and the returns for each asset class is provided on this slide for your reference.

Page 16, investment performance. The hedge recurring yield was 3.8%, up slightly Y-o-Y. And due to weak in Q3, the overall hedging cost slightly increased to 1.14%. And for our hedging ratio, it is maintained at 52%. And the FX reserve is TWD 13.2 billion.

Next, KGIB, Page 18. For consumer and corporate finance, the direction is to expand its asset scale while increasing fee income and optimizing deposit and loan structure.

Page 19, our profitability. In the first 3 quarters, net revenue, TWD 11.9 billion, up 16% Y-o-Y, mainly driven by fee income, up 44%. And for wealth management, fee income grew 60%. And fee income from loans and other increased by 25% Y-o-Y. For NIM and the spread performance, it has decreased slightly. This is because of the expansion of asset scale and for NPL ratio because it was impacted by a single case, if we rule that out, the actual ratio is about 0.2%. The quality is still stable.

Page 20, our loan and deposit structure. We continue to actively expand deposit and loan scale. Loan increased 14% Y-o-Y, and we see double-digit growth for all loan products, and deposit balance also increased by 15% Y-o-Y.

Securities on Page 22. Our strategy, KGS continues to strengthen the growth of its wealth management business, both domestically and internationally. Meanwhile, we collaborate with diverse partners to expand our customer base and enhance synergy with our subsidiaries within the group.

On Page 23 is our net income. It has grown by 40% year-on-year. Our brokerage fee and investment income have both grown by 40% to 50%. And our AUM in wealth management has continued to grow. On the lower chart, it also shows that the revenue related to financial management increased by also 60% year-on-year.

On Page 24, our net income, the overseas contribution is about 14%. In terms of brokerage and underwriting, we maintain a leading position in the market.

Next, KPI side, on Page 26. Our strategy still is focusing on expanding our AUM and ETF scale. We continue to stay on top of the market trends and develop a comprehensive product line that is thematic and meets the diverse needs of our clients.

On the next page, our AUM continued to grow. And in addition to traditional institutional business, we continue to drive other business. For example, in our retail, the retail size is about TWD 280.6 billion, ranking top 10 in the industry, and the quarterly growth is 22%.

Next page is a more detailed breakdown. Our ETF assets in terms of beneficiary and growth are all doing better than the industry average.

Next is CDIB. Page 31 is our strategy. We continue to shift our focus towards an asset management model with efforts to promote services such as private equity and debt.

Turning to Page 33. Starting from this quarter, our AUM calculation has changed to by market value of the funds plus the committed investment amounts that can still be withdrawn. So the calculation basis is slightly different from the previous quarters.

On the upper chart, our portfolio this year, we have raised new funds. It has contributed about TWD 14.9 billion, therefore, driving a growth rate of 26%. On the lower chart, our principal investment position, the growth is mainly coming from disbursement and valuation growth, which has driven the fair value to about TWD 35 billion, and the year-on-year growth rate is about 3%.

And next page, our performance. We continue to focus on enhancing sustainable revenue, including fee income. We have closed several fundraisings, and the fee income for the first 3 quarters has increased by 11%. We've also begun to position and to venture into foreign currency private debt, and the overall position is about $2.7 billion. The coupon rate is about 11.5%.

And this is the performance overview, and now we'll enter our Q&A session. Now I'll hand over to our CFO.

[Operator]

First, we will invite Jemmy from JPMorgan.

[Jemmy Huang, analyst]

I have a few questions for Life. Since you have already applied the new reserve mechanism, when will you begin to apply this and adopt this? And what is your expectation on the effect? And what adjustment will you make on your hedging strategy? And since you have the new reserve mechanism, are you not going to roll over your CS position? Or you will continue to roll over your CS position as planned?

And second question also to life insurance. You mentioned Q3, you've added a new lump sum payment for NTT products. So your VNB margin quarter-on-quarter has dropped slightly. So I wonder in terms of volume and margin, how can you balance volume and margin? Including in the following years, what would be your outlook for FYP growth and margin?

And a question to bank. Can you give us your Q3 NIM? On the slide is the adjusted number. And what is the pre-adjustment number for Q3 alone? It seems like NIM and spread changes are not met. And what is the cause of such a difference? And how would you look into the following quarters changes in terms of your NIM?

In terms of credit cost, in the last quarter, you mentioned it should be 20 to 25 basis points for the whole year. But it seems like it should be revised up, but the premise is that your loans will be maintained at double digit. Or what will be the changes?

[Unknown Executive]

Okay. For Life, we'll hand over to CFO at Life.

[Unknown Executive]

I am the investment officer from KGI Life. For FX, we have applied for the new scheme. When it will be effective, it depends on the regulators' approval, and the expected outcome after using the new scheme when it is accumulated, when it is sufficient, our hedging will be more flexible. We can lower our hedging point cost. So the overall hedging cost and its impact on our profit will be limited. So it offers great flexibility for us moving forward.

And for hedging strategy, even if we apply for the new scheme, we will not lower our hedging ratio because that will increase our FX risk. It really depends on the market situation, exchange rate. We will adjust it dynamically, and we will continue to accumulate more FX reserve so that we can have a stable capitalization. This is my answer.

[Unknown Executive]

Second question, I am CFO from KGI Life. We have launched single-pay products in June. And because there is such demand in the market, so we also launched such products, and the sales is quite good as expected. The long-term goal is still sales of regular pay with high GMV and CSM. That's the same for next year. So this is my answer. Thank you.

[Unknown Executive]

As for KGIB, first, the Q3 NIM, the adjusted NIM is 1.32%. Before adjustment, it's 95 bps. Actually, in Q3, our NIM and spread are both improving. That is due to the negative carry that have been improved. For the future NIM, our full year forecast will maintain about 1.3% level, even though slightly adjusted down. But under our asset growth strategy, that's the result. Especially we have double-digit growth in loan, not only in corporate or mortgage, we both see growth. Some of the spread is better, some of the spread is less favorable, but it is part of our strategy. So we believe this is still normal.

Secondly, credit cost. In the first 3 quarters, our credit cost is about 23 bps. It is still within the 20 to 25 bps. Due to our assets continue to grow, the credit cost will maintain around the low 25 bps. If there's no special circumstances, it will be maintained at this level, and that's all.

[Operator]

Next, we'll invite Peggy from Morgan Stanley.

[Peifan Shih, analyst]

The first question, you already applied for the FX provision, the new regulation. The FX rates in the future will be 100% absorbed by the provision. What is the impact to your hedging cost? And now your hedging cost in the first 9 months is 1.14%. Next year, what is your forecast? Do you believe it will be reduced next year? That's the first question.

And second, the pre-hedging recurring yield of KGIL, the first 9 months increased 3 bps. And next year, because the interest rate is forecasted to be reduced, what is your forecast for the pre-hedging recurring yield? And you are CFO of KGIL, what is the amount of bond and stock?

And the third question, you adopt ICS 2.0 and IFRS. Do you have any figure or direction you can share the impact to your CLL and CSM release and ICS ratio? Recently or next year, what is the fund issuance plan?

And lastly, can you share us with the dividend policy next year?

[Unknown Executive]

I will answer the question regarding FX reserve. Under the new scheme, it will calculate hedging cost. It includes point cost. And for unhedged position, the [ compository ] allocation, that's 1.2%. It is fixed. And for the point cost, it is the cost that we pay for hedging, and it depends on the market condition.

And we know that the Fed will cut rate next year. So for the overall hedging cost is positive. So the cost will go down. And for the hedging ratio, if our hedging ratio is very low, the point cost will also be low. So this is why we apply for the new scheme, and future FX fluctuation will be absorbed by reserve. So it will be more stable moving forward.

For recurring yield outlook next year, although we expect that to cut rate, but fiscal deficit in the U.S. is still quite serious. Long-term rate will remain high. So yield will still be steep. This is good for Life first because it's good for our hedging. So for recurring yield next year for fixed income, it's quite positive.

And for stocks, recently, we focus on grasping market opportunity. We won't sacrifice capital gain for dividend income. So we will maintain such strategy. For recurring yield, we are still very positive, but how much will it exactly be really depends on the market condition next year.

And for URPG, for stocks, it's positive. And bonds is still negative, below 0. And for aligning with ICS, the regulator will release base 4 details. If we rule that out based on our calculation, we can successive transition to the new scheme. And for IFRS 17, CSM has been our main focus. CSM from new business can grow steadily every year. And for the net worth ratio, it depends on asset reclassification and other factors. So there is no concrete answer yet.

Regarding our dividend policy, KGF, our performance was outstanding this year. Our dividend policy will reflect the business performance. And the future subsidiaries upstream to the KGI Financial will also consider. In the future dividend policy, we will consider the long-term stability. And if possible, we will maintain a growth. That's about dividend.

[Operator]

We invite [ Xiao Yin ] from Commercial Times.

[Unknown Analyst]

I have questions for the holdings, and it's that under Trump 2.0 and his administration, what will be your financial outlook? Do you expect another round of inflation? And how would it impact your profit?

I also have a question for KGIL. On your operation in the stock market, what is your outlook for next year?

[Unknown Executive]

Since our Chief Investor is here, I'll ask the Chief Investor to talk about the financial outlook.

[Unknown Executive]

Trump 2.0 strategy, the tariff increase, tax decrease for 2025, the economic outlook is still positive. High rate environment has been pressured to the economy, so the Fed still have room to cut rates. But because of fiscal deficit, it will affect their debt issuance. For 2025, the yield curve will be steep through different policies and their impact. Inflation pressure will be apparent in the second half of next year because due to increasing productivity, the cost can be absorbed.

Basically, next year, our outlook for the stock market, we are cautiously optimistic. Because the economy is still growing, there is still opportunity next year in the stock market, so we will grasp market trend to engage in range trading. And after Trump takes office, there will be new policies, so fluctuation will be big. We will leverage these opportunities to realize gain and try to make greater profit. So this is my answer.

And for CDS outlook, we're still planning on our budget. But our CEO, Paul, has been discussing thoroughly with the business units. And he upholds the same principle, is that we set the goal and we will deliver it no matter what, no matter the challenges. So the simple answer will be that we will try our best. And as our Chief Investor said, she also reflects the overall outlook on the KGIF side. We are cautiously optimistic, but we do know that there are uncertainty in the market. We will try our best to manage our downside risk and to manage the risk possible.

[Operator]

Okay. I will ask JPMorgan again.

[Jemmy Huang, analyst]

I have two follow-up questions. Q3 swap revenue for the bank, what is the figure? And for Life, I still have a follow-up question for hedging. Your monthly contribution will likely double afterwards. If I understand correctly, under the current scheme, your CS and NDF cost is above 25%. If it is higher than your average, then the 25% can be absorbed under the new mechanism.

So what will be the changes? And if that is the case, if your hedging structure doesn't change dramatically, then your returning hedging cost in the next year actually will rise. Do I explain that correctly?

[Unknown Executive]

Let me answer first on the swap revenue bank. This year, the monthly figure is about TWD 200 million. By Q3, it's about TWD 700 million.

Regarding new scheme, indeed the 25%, it will be deleted. It's not in the new scheme. Whether the hedging cost will increase, NT depreciates. In the old scheme, it will be reflected in hedging cost. But for reserve, it is not reflected. But in the new scheme, it will be reflected in the reserve.

So if GW appreciates, the negative will also be absorbed by the reserve. So the new scheme will make us more stable against FX fluctuation. And when we have sufficient reserve, cost that can be saved will be more apparent. Looking into the new scheme, that's why we made the decision to apply for the new scheme. So this is my answer for your reference.

[Operator]

Next, let's welcome [ Yi Fu ].

[Unknown Analyst]

I have two questions. First is to KGI Life. This year and last year, have you gained the approval from the bank insurance bureau to upstream your dividend? And if so, what is the amount? And also before the new scheme, do you expect to receive any approval to upstream your dividend further?

And next question is on the KGI Financial Holdings dividend payout. You mentioned you want to keep a stable long-term dividend payout. This is quite a vague answer. Are you talking about the amount? Are you talking about the yield rate? Or what exactly did you mean?

[Unknown Executive]

Regarding cash dividend, I will respond to that. Last year, we turned it into capital, so we did not stream our dividend. Next year, it needs to be further discussed with the regulator. That's my answer. Thank you.

[Unknown Executive]

In terms of stable dividend payout, we want to be more stable in terms of the dividend payout rate and the yield rate. They both are the factors that we consider.

[Operator]

Next question, [ Yun Ching ].

[Unknown Analyst]

We have mentioned the dividend payout issue. When you say long term, before 2023, you didn't give any dividend. But before that, you gave as high as $1 per share, and your payout rate is about 40% to 70%, and you say you want to maintain growth. I don't think that really is a clear answer. So maybe you can tell us if the payout ratio will be 50%, it will go as high as to 60% to 70%.

And in terms of yield, do you expect to maintain a 4% yield rate or even higher? Please specify.

[Unknown Executive]

Okay. Thank you for the question. Certainly, in the past, our dividend consideration has to do with the dividend upstream by our subsidiaries. Therefore, I stress that we set a goal. We will try our best to achieve.

But we do have to factor in all the uncertainty because now we need to have approval for the life insurance subsidiary to upstream the dividend, and we are still on the discussion phase. Last year, we gave out TWD 0.5 per share. But this year, our profit has increased. We are discussing internally on the ratio of payout. So it is still under discussion.

[Operator]

Thank you for joining. This ends our investors conference today. Thank you.