Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2019-Q1

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2019 First Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.skfh.com.tw under the Investor Relations section.

And now I would like to introduce Mr. Stan Lee, the Senior Vice President of Shin Kong Financial Holding Company. Mr. Lee, please begin.

[Stan Lee, executive]

Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2019 First Quarter Analyst Call. Before we start, I would like to introduce my colleagues who are with me today.

We are happy to have Min-Yi Huang, President of the financial holding company, to review the first quarter results with us. Also in the room are Sunny Hsu, Executive Senior Vice President of the financial holding company; James Yuan, Chief Investment Officer of Shin Kong Life; Han Wei Lin, Chief Actuary of Shin Kong Life; Isabella and Christine, members of my IR team.

We are also joined by Ophelia Au Young, Principal of Deloitte Actuarial and Insurance Solutions. Ophelia has been working closely with us over the past few months in reviewing our EV work, and she is here to help us answer any questions you may have.

The presentation we are about to go through was sent out 2 hours ago. You may also download it from our website or participate through this webcast. If you do not have the presentation, please let us know now. Your lines will be muted when we are presenting. If you are cut off, please dial back in or call Christine at (886) 968-929-230 for assistance.

Now please turn to Page 4. SKFH recorded a consolidated after-tax profit of TWD 5.54 billion for the first quarter 2019. Earnings per share was TWD 0.45. Consolidated shareholders' equity increased 20.9% year-to-date and book value per share at the end of the first quarter was TWD 14.27. Life insurance EV per share of SKFH was TWD 20.1. EV of Shin Kong Life reached TWD 246.3 billion. Total FYP for 2018 increased 14.1% year-on-year, allowing V1NB to grow 5% to TWD 24.1 billion. Core business of each subsidiary remained stable in the first quarter, which will be covered later in the presentation.

Page 10. Due to adjustment in product mix, FYP for the first quarter grew 13.2% year-on-year to TWD 30.27 billion, securing a market share of 7.8%. Shin Kong Life has adopted a value-oriented product strategy and promoted foreign currency policies and protection products to contain the hedging cost, facilitate ALM matching and grow value of new business. FYP of foreign currency policies for the first quarter grew 6.5% year-on-year to TWD 16.26 billion and sales of protection products increased 24.6% year-on-year to TWD 1.67 billion. With sufficient inflows of policy premium, annualized cost of liabilities declined 2 basis points to 4.06%, in line with our guidance.

Page 14 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first quarter 2019 reached 3.68%, thanks to one-off disposal gains of equities and bonds and higher recurring income. Breakdown of investment returns for different asset classes were real estate 3.2%; mortgage and corporate loans 1.8%; policy loans 5.6%; overseas investment 4.3%; domestic securities 2.6%; and cash 0.6%.

Page 15 presents the portfolio of overseas fixed incomes. At the end of the first quarter, overseas fixed incomes amounted to TWD 1.74 trillion. Corporate bonds accounted for the largest share, representing 45.9% of the total, followed by international bonds at 31.5%, emerging market government bond accounted for 21.6% at quarter end. You may see the chart of the overseas fixed income portfolio by region on the upper right corner. There was no significant change in the first quarter. Shin Kong Life remained focused on North America and Europe as its key investment areas.

Page 17. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of the first quarter, hedging ratio was 74.9% including CS, NDF and the naturally hedged foreign currency policies. Annualized hedging cost for the first quarter was 1.59% and foreign currency volatility reserve increased TWD 2.3 billion quarter-on-quarter to TWD 7.0 billion. Also as of the latest update, the reserve exceeded TWD 10 billion as NT dollar continue to lose ground against the U.S. dollar.

I will now hand over to Isabella, who will take you through the results of Shin Kong Bank and MasterLink Securities.

[Isabella Wang, executive]

Okay, thank you, Stan. Please turn to Page 22. Shin Kong Bank generated a pre-provision profit of TWD $1.81 billion for the first quarter, up 1.1% year-on-year. Consolidated after-tax profit was TWD 1.19 billion, at a similar level of the same period last year, excluding the one-off deferred tax benefits related to Taiwan tax reform in 2018.

Page 23. Corporate lending remained in an upward trend with a year-to-date growth rate of 3.1%. Domestic large corporate loans and overseas syndicated loans were the fastest-growing segments rising by 7% and 8.6%, respectively. Total loan balance rose 1.5% year-to-date to TWD 575.43 billion and the loan growth target for 2019 remains at 6%.

Page 24. As more deposits were retained to facilitate business growth, loan-to-deposit ratio for the first quarter decreased from 75.6% to 74.5%. Both net interest margin and net interest spread for the first quarter came down to 1.49% and 1.86%, respectively. Given the fierce competition in the loan markets, it will be challenging for the bank to maintain its net interest margin and net interest spread at the level of 2018.

Page 26. Wealth management income grew 2.9% year-on-year to TWD 560 million, thanks to a strong growth in sales momentum in bancassurance, which accounted for 55.9% of total wealth management income. For the second half of the year, Shin Kong Bank will offer deposits with preferential interest rates to attract new funds and expand its client base. On the product side, foreign currency policies and regular paid products will remain the sales focus. The growth targets for wealth management income in 2019 is double digits.

Page 27. Asset quality was stable with NPL ratio at 0.22% and coverage ratio at 599.73%. New NPL generated in the first quarter was TWD 370 million, 44.9% lower quarter-on-quarter.

Page 29. Boosted by strong growth in proprietary trading business, MasterLink Securities recorded an after-tax profit of TWD 0.48 billion, up 28% year-on-year. Brokerage market share was 3.56% with the ranking of top 6 in the industry.

Now our Chief Actuary, Han Wei, will talk about the updates on EV and AV.

[Hanwei Lin, executive]

Thank you, Isabella. Please turn to Page 31. For 2018 embedded value, the earning rate of VIF goes from 3.47% to 5.0% in 30 years for Taiwan dollar products and 4.70% to 5.60% for U.S. dollar products. The equivalent investment yield is 4.30%. For VNB, it goes from 3.34% to 5.0%; and 4.43% to 5.60% in 30 years for Taiwan dollar and U.S. dollar products, respectively.

The adjusted NAV decreased 9%, VIF increased 10% and COC increased 10%. As a result, our EV at the end of 2018 decreased 3% to TWD 246.3 billion. In 2018, there is still a significant growth of U.S. dollar products and VNB increased 5% to TWD 24.1 billion. VNB margin was 19%. AV for 5 years of new business and 20 years of new business were TWD 341 billion and TWD 454.7 billion accordingly.

Page 32. Under the base case scenario, risk discount rate is 10.5%. We also provide a sensitivity test of investment return and risk discount rate for your reference.

Page 33. Statutory net worth decreased from TWD 90.5 billion to TWD 69.8 billion in 2018. The main impact came from the unrealized gains, which reduced TWD 25.9 billion to statutory net worth.

Page 34. For adjusted NAV, the shareholder value at the end of 2018 was TWD 69.8 billion. Unrealized gains on property added TWD 71.4 billion. We also added TWD 5.64 billion of special reserves of unrealized gains on property and TWD 4.7 billion of other items, including foreign exchange volatility reserve.

Page 35. VIF grew from TWD 160.5 billion to TWD 176.2 billion in 2018. The biggest impact came from a new business issued, which added TWD 32.1 billion to VIF. Total assumption changes were minus TWD 33.1 billion.

Page 36. VNB increased from TWD 23 billion to TWD 24.1 billion in 2018. VNB margin was down due to shorter payment period, but sales volume was up 14%. Therefore, the overall VNB grew 5%.

That wraps up our result presentation. Moderator, please start the Q&A session.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Okay. If there is no question for today's presentation, I believe we have a very comprehensive discussion in Chinese session already. If you have any further questions, no matter that's regarding to the latest EV results or the operational results for the first quarter, please feel free to contact me, contact our IR team or Chief Actuary. We'll be more than happy to answer any questions you have. Moderator, if there is no question, let's close the meeting now.

[Operator]

Thank you, Mr. Lee. And we thank you for participation in Shin Kong Financial Holding Company's conference call. There will be a webcast replay within an hour. Please visit www.skfh.com.tw under the Investor Relations section. Should you have further questions, please don't hesitate to contact the IR team of SKFH by phone or by e-mail. You may now disconnect. Goodbye.