China Development Financial Holding Corp

TWSE:2883

Earnings Call Transcript 2020-Q4

[Richard Chang, executive]

Ladies and gentlemen, welcome to our first investor conference between 2021. This is also the first time our CEO, Mr. Stefano Paolo Bertamini, attend an investor conference since he was onboarded last October. Today, he will report CDF's performance and major achievements in 2020 and explain to you the 5-year strategy plan for the group and the business focus of our 4 major subsidiaries.

Following, our CFO will review 2020 financial results and the key indicators. I will summarize CDF's 2020 progress in ESG and our further efforts in 2021. Afterwards, I will invite the President of our 4 major subsidiary report to you their 2020 financial results and the key performance indicators.

After that, we will open for the Q&A. Let's start. Please, the floor is yours.

[Steve Bertamini, executive]

Thank you, Richard. [Foreign Language] Good afternoon, everyone, and good morning. Thank you very much for joining our call. As Richard alluded, I'm going to cover 2 things today. First is I'll highlight some of the key achievements of the group during 2020, and I'll spend a few minutes talking about our new ABCDE strategy.

In terms of 2020, CDF delivered net income of TWD 12.5 billion, driven by strong performance by KGI Securities and China Life. We're also recognized by Dow Jones both world and emerging market indices for our leadership and our continued efforts in sustainability, and you'll hear a few moments about our new strategy which is designed to accelerate our growth, digitization and asset allocation.

In terms of China Life, we launched a tender offer last year and successfully completed it in February of this year, increasing our holdings to 56%. China Life delivered record net income of TWD 15.5 billion last year, up 14% year-on-year. And they also issued TWD 14 billion in perpetual bonds to further strengthen our capital base. KGI Bank also had a very good performance given the difficult environment. Net income was TWD 4.2 billion, up 17% year-on-year. Both deposits and loan growth were 44% and 9%, respectively, both above the industry and they maintained a very low NPL ratio of 0.16%.

CDIB Capital had a net loss of TWD 1.1 billion from unrealized investments from COVID-related companies that we hold. They launched a TWD 3.1 billion health care fund designed to leverage the talent from Taiwan and the Greater China region, and our AUM increased to almost TWD 47 billion as of the end of 2020.

KGI Securities reduced record net income of TWD 8.7 billion up 44% year-on-year. Overseas profits also increased to 47%, which now represent 20% of the net income of KGI. And asset management revenue, a key focus area for us also increased 27% year-on-year. Overall, a very good performance by the group. Before I jump into the ABCDE strategy, I want to spend just a few moments setting the context. I think as most of you know, there are some key global trends occurring in financial services, but also applied to us in Taiwan.

The first is that customer experience is a new competitive advantage. Historically, it was things such as a distribution or product, but now it's all about customer experience. Also, we're seeing new competitors and business models beginning to emerge, which are impacting existing players. We've seen disruption in innovation occurring in the payment space. Both data and AI are resulting in mass personalization of both products and services.

We've seen regulators encouraging competition and also increasing their focus on customer protection, and of course, everyone is adapting to the new ways of working, as we've seen in agile.

With that backdrop, we worked as a team to put together our ABCDE strategy. A stands for accelerate digital. As you heard a few moments ago, this is really a key priority for literally every business. We're focused on building partnerships and alliances so that we can have competitive ecosystems. We will be diverting resources to really help us digitize our customer journeys. Our efforts will increasingly focus on designing for mobile-first, and we want to lead in innovation. Our goal is to be best in the market.

In terms of becoming employer of choice, this is critical. Our strong belief is that if we have happy employees, we'll have happy customers. While it sounds basic, there's a lot of work to be done in that space. We conducted an employee survey late last year, and we got a lot of feedback from our staff. One area of focus for us is to substantially expand our leadership and development training programs. We're also redesigning our KPIs and incentives to ensure that they align with our new ABCDE strategy. We're working on enhancing our employee value proposition, and there's a lot of opportunities to empower our staff to simplify our processes. Our goal is to have higher employee engagement.

In terms of customer focus, I'm sure some of you are familiar with the concept of Net Promoter Score. This is something that has been proven across industry, across geographies over multiple decades, that companies with high Net Promoter Score consistently outperformed the competition. We'll be asking our customers one simple question: how likely are they to recommend our product or service to a friend or colleague. They give us a 9 or 10, we consider them promoters. You should definitely do business with us. 1 to 6, these guys aren't very good. You should take your business elsewhere. And people that give us a 7 or 8 are neutral.

The way that we compute Net Promoter Score is we subtract the promoters from the detractors, and that's our Net Promoter Score. Our goal is not so much what the score is day 1, but how we improve that over time and how do we close the gap to the competition that eventually, we are the most recommended company across all our products.

In terms of driving growth, several key initiatives underway. We want to do a much better job of leveraging the data that we have across the group by using analytics and obviously leveraging the efforts of our teams. We believe there'll be opportunities for us to pursue acquisitions and joint ventures. We'd like to expand our presence outside of Taiwan. And the key metric that we want to all work towards is improving our OE and our margins, and our goal is to exceed the industry.

In terms of execution excellence, we also have some work to do in this area. We'll be investing to enhance our IT infrastructure, expanding our distribution network, optimizing our risk appetite and maintaining our lead in ESG. We've also made some recent hires to further strengthen our team. Many of these individuals bring international and global experience. We have, for example, now for the first time a Chief Digital Officer. We also have a Group Chief Marketing Officer. We have a Chief Data and Analytics Officer. We've hired a new CIO, among several key hires, and the majority of them of the people that we'll hire will end up also being able to speak Mandarin.

In terms of our focus areas by business, I thought I'd spend a few moments highlighting some key initiatives through 2025 and for our four business units. You'll notice that they all have 2 common themes: first is digital transformation, the second is capital balance sheet optimization.

In the case of China Life, we believe there's an opportunity for us to double the contribution from the agency business. As those of you that know insurance, you'll recognize that agency is really the channel where we can put the full product suite through and we -- and therefore, tend to have much better margins. We're also interested in using analytics and creating new products to further expand our margins. We believe there's also an opportunity for us to expand internationally.

In terms of KGI Bank, one of the key sources of focus for us will be to create fintech partnerships in both the e-commerce and payment space. We will be focusing more efforts on growing our wealth management capabilities and increasing our AUM and also expanding our presence outside of Taiwan.

For KGI Securities, as you know, we have the #2 position. We not only want to defend but grow our market share. We want to strengthen and broaden our regional footprint. Today, we operate in Hong Kong, Singapore, Thailand as well as Indonesia, and we'd like to expand our business in Singapore, beef up our operations in Hong Kong and also expand into the Greater Bay Area.

And KGI Securities also has an opportunity to expand their distribution channels and do more cross-selling. And in terms of CDIB Capital Group, we want to scale up our AUM. We definitely want to focus on improving our ROI, and one of the ways we're going to do that is to accelerate the monetization of our legacy assets and portfolios.

We're very confident in our strategy. We'll position CDF for both sustained growth and success.

I'll now turn it over to Jenny to take you through our financial results.

[Jenny Huang, executive]

Thank you, Steve. This is Jenny Huang, CFO of CDF, and I will take you through a quick performance update. Slide 8 shows that CDF net income for the fourth quarter 2020 was TWD 3.8 billion, representing about 30% of the full year net income. KGI Securities was the largest contributor for TWD 3 billion, primarily due to a 50% year-on-year increase in its brokerage commission income.

In contrast, China Life posted minor negative contribution to CDF in Q4, primarily due to the additional foreign exchange reserves in response to a strong NT dollar against the U.S. dollar as well as more reserve requirements for traditionally booming year-end insurance sales.

However, China Life's 2020 net income still hit a record high of TWD 15.5 billion. Slide 9 shows CDF net income of TWD 12.5 billion for 2020, except for CDIB Capital Group loss, other subsidiaries like KGI Securities, KGI Bank and the China Life, each contributed TWD 7.2 billion, TWD 4.1 billion and TWD 4.3 billion, respectively in 2020, up 60%, 19% and 16% on a year-on-year basis, indicating a solid upward movement -- momentum.

Also, the Slide 10 summarize our recapitalization efforts. The upper left chart shows our assets have been enlarged to around 4x and to total asset size of TWD 3.4 trillion on a consolidated basis through acquisition of KGI Securities in 2013, KGI bank in 2014 and investment in China Life in 2017. And with asset to equity leverage ratio increased to over 10x.

As you can see, gradual capital reallocation from lower leverage CDIB Capital Group to higher leverage, China Life and KGI Bank to enhance capital efficiency in the upper right chart. Currently, roughly 31% of capital was allocated to China Life and KGI Bank each, followed by 23% to KGI Securities and 16% to CDIB Capital Group. And the lower right chart shows that CDF ROE, although still lag behind peers average, but has been improving for the past few years.

And the last slide, more importantly, it shows that CDF and its subsidiaries all have maintained strong capitalization level, despite several capital reduction upstream from the subsidiary to CDF and the further acquisition of China Life, we can still maintain a very strong capitalization level, and this is all my presentation.

Now I would like to turn the call over to our spokesman, Richard.

[Richard Chang, executive]

Thank you. Page 12 illustrates our ESG major advancement and recognition in 2020. Just as Steve mentioned earlier, we are honored to be included in both the DJSI Dow Jones Sustainability Index, World Index and the Emerging Markets Index. In addition to that, we are also ranked in the top 5% of Taiwan Stock Exchange listed companies for the Corporate Governance Evaluation Awards. And most important, we strive to make sustainability as an important element of our core value.

We will implant the ESG method and the spirits into our workflow, product design and the employees' behaviors. This is why Steve put maintain ESG leadership as one of the cornerstone action goes in the ABCDE strategy map. This year, we will continue to implement systems and the action plan for the climate change adaption and responsible finance and promoting the momentums of employee volunteer activities. We aim to treat -- to create impact and achieve the common goods to the society.

Thank you. And I will turn to the China Life, Chairman Hwang.

[Stephanie Hwang, executive]

Thank you. Hello, this is Stephanie Hwang, President of China Life. Now I will brief China Life's key performance. Page 14, please. China Life's long-term core strategy of asset liability management and concentration on risk management have led to stable profitability.

In 2020, our full year net income reached TWD 15.5 billion, up 14% year-on-year. China Life has enhanced the company's overall investment return by effective asset allocation and aim to maintain stable RBC ratio for the long term. China Life highly values the solid capital levels and the maintain stable network to asset ratio when delivering profit.

In 2020, net worth increased significantly to TWD 179.7 billion, driven by increase in unrealized gain in stocks and bonds. Net worth to asset ratio arrived at 8.41% higher than the historical levels due to upsurge in network and the recognition of TWD 4 billion in additional borrowing exchange reserve.

China Life's ROE in 2020 was lower than historical levels. But excluding the additional foreign exchange reserve of TWD 4 billion, ROE in 2020 would have stayed around 12%.

Next page, the agency channel in China Life mentors to market high-value products. We have launched the first stage transformation plan for the agency channel in 2018 to achieve team building and the productivity increase by talent training and digital transformation.

According to Life Insurance Association, the number of China Life agents reached 13,400 people, ranked fifth place in the life insurance industry as of September 2020.

We will continue to facilitate transformation for agency channel via digitalization. For instance, creation of an AI-powered [ stock ] coach has proven effective to assist agent reporting. Meantime, we have set up an end-to-end digital platform, optimizing the insurance process from marketing, insurance applications and clients. We aim to double the value contribution from agency channel in 2025.

Concerning our products drive enhancement of product mix, such as the increasing sales of our longer year life insurance policies and foreign currency-denominated insurance policies, have effectively driven VNB margin to increase year by year. China Life's VNB margin advanced to 26% in 2020. That's all for China Life. Thank you.

Now please turn to KGI Bank, Amy.

[Amy Tsao, executive]

Thank you. This is Amy from the KGI Bank. When we're looking about the Page 17, I would -- first of all, I would like to say that 2020 definitely is a good year for Taiwan banking institution. Quite a lot of banking institution actually outperformed their previous year. But to the banking -- commercial banking industry, last year definitely is not as good as other banking institution. Overall, the banking industry has been declined.

But among that, KGI Bank, I think that I'm happy to share with all the investors is like we are able to deliver relative stable pretax income. So among this page, you will see that quite a few percentage number has been circled, and among them, are minus 2% following the catch up [indiscernible]. But in order to catch -- to reach this minus 2%, actually, this is the -- this is probably the best among the industry, which means that we are still able to maintain the same pretax income compared with the 2019.

If you're looking about the upper right-hand side, the post-tax income for the KGI Bank 2020, we are able to deliver TWD 4.2 billion of pretax -- post-tax income, which is probably that quite good compared with 2019. That is partially contribute by some of the deferred tax credit that we are able to carry. And this year, we were not going to have same kind of benefit, which means that we're going to need to commit ourselves to be present or even better in order to achieve the same commitment.

Looking about the left -- upper left-hand side, you will see some of the numbers from the net revenue. Among them, the net interest income as well as that -- plus the net fee income compared with 2019, we are able to achieve a 10% growth. Low interest rate environment definitely is challenging for the commercial banking. So if you looking about the left bottom down chart for 2020, we are delivered the overall spread of 1.57% of the trade.

And for the net interest margins that we delivered 1.19%. Compared with 2019, we are able to bottom-up plus 8 basis point improvement. So for the last year, definitely, a lot of people worry after the COVID -- after so many out loans to the consumer retail, a lot of our bank deals to the SME business or enterprise, then how is our quality of the -- our assets.

So in the 2020, we are able to deliver even better NPL ratio, which is at 0.16%, is 1 basis point even better than the 2019.

If we -- looking about Page 18. So among that, we will be able to deliver relative better than the industry. That is because as of -- for the last year, we have continually rolled out our cost of funds, including our demand deposit ratio. Compared with 2019, we are able to fund 44% of the growth. I think that continually that for this year, this is one that we'll continue more [ without ] the bond.

And if you're looking about the right-hand side, that is our loan mix. So for this year, we are definitely not going to move very fast for our loan growth. Relatively that we are looking for a very moderate loan growth. But among the components that definitely that SME loan and consumer loan is the one that we would like to focus, and we would like to change the components of our loan balance.

So last year, we are able to grow our SME loan from the TWD 29 billion to TWD 39 billion, which represents a 31% of the growth. And this year, definitely, that will be the key focus for the KGI Bank.

Lastly, please turn now to the Page 19. So loan and other income related fee income, which is the amount that all the income is the one that we [indiscernible], we have the 32% of the growth for the loan and related fee income. So when you're looking about at page -- the previous page that Steve mentioned about what is the most important focus area for the KGI Bank. Definitely we have ABCDE strategy. And among that, I think, starting from last year, the capital allocation optimization, which is the goal we are going to continue moving toward now, and this is from the KGI Bank.

So let me just hand over to William.

[William Ho, executive]

Thank you, Amy. This is William Ho, the President of CDIB. I will take you through to the next 3 pages. As our CEO did mention that our business focus is to grow AUM and to optimize the capital efficiency. In fact, we have been doing that as our core strategy in the last 5 years. We have been shifting our investment from our balance sheet money to asset management or AUM, and the good thing about that is it can bring us a steady stream of management fees from AUM and also the performance-based carry interest.

Since we launched the first fund -- creative fund in 2013, we have been reducing our principal investment exposure and at the same time, increased our AUM investments over the same period. If you look at the chart on Page 21, the right-hand side, you can see that our principal investment reduced from TWD 48 billion to TWD 27 billion. So it's a reduction of 43%. As over the same period, we increased our AUM investment from TWD 34 billion to TWD 46.8 billion, is a decrease of 36%. And I want to highlight that out of this TWD 48 billion, you can see that half of that is international. And as we are launching more funds -- U.S. dollar funds and also international funds, our international presence will increase as well.

Next page, please turn to. As I said in the last page, we are reducing our principal investment as that actually allows us to up more money to the CDF Group and help them to more efficient to use the capital. So over the 5 years, we have up streamed this TWD 31.5 billion to growth. I also want to highlight that on the left-hand side chart, you can see that the equal reduction of investments from listed investments and also unlisted investment. So both reduced by about TWD 10 billion. So it means that we have been doing both reduction at the same time. Going forward, we will put more effort on the unlisted investment part.

Next page, Page 23, so this shows our footprint on the funds that we manage. So right now, we have investment funds that we manage, different color shows different currency and different geography. So these funds are managed through our 3 offices from Taiwan, Hong Kong and New York. And our exposures will be in Taiwan, China, Asia and global as well.

I think we are very unique in the sense that we have full spectrum of investment. So we have different fund sizes -- deal sizes, we invest from USD 0.5 million to USD 50 million. And we have different currencies and we have different emphasis on different sectors. So we do from early-stage VCs to a health care, to AI and also to some timeless companies in China. And going forward, we will launch more funds. As you can see in the light blue circles, we are launching some upcoming funds intelligence partners, private credit and leverage buyout.

All this will be in larger-sized funds, especially [indiscernible] and Leverage Bio, this will be in multiple USD 100 million size.

Now I'd like to pass to William Fang to introduce KGI Securities.

[William Fang, executive]

Thank you. Good afternoon, everyone. This is William Fang of KGI Securities. I would like to report to you the performance of 2020 and also a few initiatives for this year.

If you look at the Slide #25, that you can see, I think with the monetary stimulus after COVID-19 and the impact on Taiwan was relatively small, even Taiwan has kept the pandemic well under control. In addition, the launch of the continuous trading system in March 2020, and a strong demand for semiconductor, coupled with transfer order effect in second half have driven Taiwan index to over 14,700 points.

At the end of December, a record high was more than 22.8% growth in the year. And also the average daily transaction value has gone up quite a lot. Led by the booming Thailand stock market, KGI Securities used the 9% market share to drive significant growth in net income. So if you see the top 2 charts in Page 25, that both our net income and also the ROE, all increased significantly and also outperformed the industry average.

We look at -- underneath the 2 charts shows the client asset, both in asset management and also the wealth management. For asset management, KGI asset management focused on high ESG-rated investment portfolios, launched the first global ESG high-yield bond fund on market and emerging Asia, bond fund.

For our wealth management, our gross revenue has gone up by 25%.

So if we turn to the next page. This page shows the well balanced performance of all business lines in KGI Securities comparing to previous year. Then also about the bottom line -- at the bottom is the industry average. I think for all business lines that we all outperformed the industry average.

If we go to the next page, I think this shows one of the key initiatives for us for this year is to further strengthen the digital platform of KGI Securities. We then launched One KGI, which is the consolidated online platform, redesigned a customer-centric low-touch One KGI attract more younger generation investors.

The next slide shows the well -- of the good performance from our overseas operation. For this year's focus, we basically -- we intensified cross-regional wealth management synergy. The second is to increase the market reach of regional fixed income. That's all my report. I will turn it to Richard.

[Richard Chang, executive]

Thank you, William. Attachment are the financial details for your reference. So now we are open for your questions. [Operator Instructions].

Okay. If there is no further questions, name, thank you very much, and we will see you next time.

[Steve Bertamini, executive]

Thank you. [Foreign Language]

[Amy Tsao, executive]

[Foreign Language]

[William Fang, executive]

Thank you.