Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2020-Q1

[Operator]

Welcome everyone to Shin Kong Financial Holding Company's 2020 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, 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 2020 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; Hanwei Lin, Chief Actuary of Shin Kong Life; Isabella and Christine, members of the IR team. We are also joined by Ophelia Au Young, partner 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 and consolidated after-tax profit of TWD 6.67 billion for the first quarter 2020. Earnings per share was TWD 0.53. Consolidated shareholders' equity was TWD 149.72 billion and book value per share at the end of the first quarter was TWD 11.81. Life insurance EV per share of SKFH was TWD 23.3. EV of Shin Kong Life increased 19% year-on-year to TWD 292.7 billion in 2019, driven by an optimized product mix. V1NB grow 3% to TWD 24.9 billion.

Core business of each subsidiary remained stable in the first quarter, which will be covered later in the presentation. I would also like to highlight that the company completed a capital raising of around TWD 3.3 billion towards issuance of common shares in May. The funds will be injected to Shin Kong Life in June to strengthen its capital position. The company plans to issue preferred shares B in the second half of the year to invest in Shin Kong Life and Shin Kong Bank to support their business development.

Page 10. FYP decreased 32.2% year-on-year to TWD 20.52 billion, primarily due to adjustments in product mix. As the share of regulatory premium increased to 65.5% for the first quarter, FYPE over FYP was 35.8%. Also, foreign currency policies remain the sales focus this year. FYP of such policies amounted to TWD 14.36 billion, accounting for 70% of total FYP. With new business and lower declared rate, cost and liabilities declined to 2 basis points year-to-date to 3.95%, in line with our guidance.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first quarter 2020 was 4.41%. Breakdown of investment returns of different asset classes were: real estate, 3.3%; mortgage and corporate loans, 1.9%; policy loans, 5.5%; overseas investment, 4.6%; domestic securities, 4.7%; and cash, 0.5%.

Page 14 shows the portfolio of overseas fixed income. At the end of first quarter, overseas fixed incomes amounted to TWD 1.74 trillion. Corporate bonds accounted for the largest share, representing 47.6% of the total, followed by international bonds at 29.8%. Emerging market government bonds accounted for 21.8%. About 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds. As for overseas fixed incomes portfolio by region, North America and Europe accounted for the majority of overseas fixed income with a combined share of 59.7%.

Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of the first quarter, hedging ratio was 75.2%, including CS, NDF and the naturally-hedged foreign currency policies. CS and NDF accounted for 63% and 37%, respectively, of traditional hedges. Annualized hedging cost was 1.54%, slightly lower than the level of the first quarter 2019. Foreign currency volatility reserve was TWD 1.5 billion.

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

[Isabella Wang, executive]

Thank you, Stan. Please turn to Page 20. Shin Kong Bank delivered a stable performance for the first quarter, driven by the substantial growth in wealth management income and investment income. Pre-provision operating profit reached TWD 1.91 billion, which was 5.1% higher from a year earlier. Consolidated net income increased 12% year-on-year to TWD 1.33 billion.

Page 21. The bank's loan balance rose 1.5% year-to-date to around TWD 615 billion. Consumer lending continued an upward trend with mortgage and unsecured loans increasing 1.6% and 2.1% year-to-date, respectively. As for corporate lending, the momentum mainly came from domestic large corporate and SME loans. The loan growth target for 2020 is 6%.

Page 22. Due to fierce competition in the market and rate cuts, net interest margin and net interest spread for first quarter came down to 1.38% and 1.75%, respectively. Given the ongoing low yield environment and competitive pressure from peers, the full year figures will fall below the level of 2019.

Page 24. Wealth Management income for the first quarter increased 9.3% year-on-year to TWD 612 million, thanks to strong sales momentum in mutual funds and overseas security. The fee income from these 2 categories accounted for 61.4% of the total. In the second half of the year, Shin Kong Bank will actively attract new funds to expand its client base by promoting online marketing campaigns.

Page 25. Asset quality was stable with NPL ratio at 0.19% and coverage ratio at 663.43%. Both ratios were better than the level of 2019.

Page 27. MasterLink Securities generated a brokerage income of TWD 920 million for the first quarter, which was 45.9% higher year-on-year. Brokerage market share was 3.54%, we ranked top 6 in the industry. However, due to sharp volatility in the financial market, MasterLink Securities suffered unrealized mark-to-market losses in its prop trading business and posted a consolidated after-tax loss of TWD 350 million.

I will now turn over to Hanwei to talk about the update on EV and AV.

[Hanwei Lin, executive]

Thank you, Isabella.

Please turn to Page 29. For 2019 embedded value, the earning rate of VIF goes from 3.30% to 4.62% in 30 years for Taiwan dollar products and 4.59% to 5.09% for U.S. dollar products. The equivalent investment yield is 4.19%.

For VNB, it goes from 3.12% to 4.47% and 4.13% to 5.00% in 30 years for Taiwan dollar and U.S. dollar products, respectively. The adjusted NAV increased 30%. VIF increased 6%, and COC increased 11%. As a result, at the end of 2019, EV of Shin Kong Life increased 19% year-on-year to TWD 292.7 billion.

Although FYP was down 8% in 2019, we are able to sell more regular premium products and held products with higher margins. Therefore, V1NB increased 3% to TWD 24.9 billion, and V1NB margin increased to 21.3%. AV for 5 years of new business and 20 years of new business were TWD 390.7 billion and TWD 508.2 billion, respectively.

Page 30. Under the base case scenario, risk discount rate remains at 10.5%. We also provide a sensitivity test of investment return and the risk discount rate for your reference.

Page 31. Statutory net worth increased from TWD 69.8 billion to TWD 114.4 billion in 2019. The main impact came from the unrealized gains on financial assets, which added TWD 29 billion to statutory net worth.

Page 32. Starting from the net worth, unrealized gains on property contributed to an increase of TWD 74.8 billion in the adjusted NAV. We also added special reserves of unrealized gains on property of TWD 5.6 billion and foreign exchange volatility reserve of TWD 2.1 billion. Total adjusted NAV increased 30% to TWD 196.9 billion.

Page 33. VIF grew 6% from TWD 176.2 billion to TWD 186.4 billion in 2019. The main impact came from the new business issued, which added TWD 31 billion to VIF. Assumption changes caused a decrease of TWD 40 billion total, mainly from the change in economic assumptions.

Page 34. V1NB increased 3% from TWD 24.1 billion to TWD 24.9 billion in 2019. The improved product mix was the most important factor that helped add TWD 5.6 billion to V1NB.

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

[Operator]

[Operator Instructions] The first question is coming from Jemmy Huang of JP Morgan.

[Jemmy Huang, analyst]

Two questions from me, mainly on Shin Kong Life. First thing is, do you still have any hidden value that -- which means can you still further do property revaluation, if you want? Either from your existing portfolio perspective or from the regulatory perspective? Or everything will be -- already be pretty much mark-to-market now?

And second question is on FX reserve. I think TWD 1.5 billion at the end of first quarter is pretty much the historical low. And likely, I think in April you were down further. So just wonder, do we have any plan to do onetime injection into the FX reserve? Or there will be some risks that you may not be able to use the FX reserve sometime this year?

[Stan Lee, executive]

Thank you, Jemmy, for the questions. Let me answer your first question first, and I'll leave the second to James Yuan, the CIO. For life insurance, your question is about whether there is any more left for the mark-to-market. First of all, I have to reemphasize that what we announced at May 22 is still subjected to the approval of the insurance bureau. If they approved us to adopt the market value appraisals of the investment purposes real estate, then for the first date of January this year, what we will be able to mark-to-market to the shares equity will be in the amount of TWD 47 billion, if they allow us to adopt the new regulation.

Is there anything left? Well, as far as the mark-to-market, too, the balance sheet both to the asset or to the shares equity, this is the number for us to start the accounting rules of this year.

The followings will be subjected to the changes of discount rates. Second, the rental yield and using the DCF method, we will generate different mark-to-market value gain or losses in the following months and quarters.

But for the EV perspective, yes, there are residuals. Because now we only mark-to-market the investment purpose properties. There are still self-occupied portfolio. If we mark-to-market everything as of the end of last year and also be presented by our Chief Actuary, then the number will be approaching to TWD 75 billion. That will be the number.

And for RBCs, currently, we're still unsure of what the rules will be after the adoption of the mark-to-market. We're not 100% sure. But if we refer to the original rules, the number will be somehow different from what we recorded in the net worth, somehow different, because the methodology is different. We used to use market comparisons, DCFs, replacement cost and relying on the results of the appraisal firms to mark-to-market and recognize the unrealized gains into the RBC. And now what's been recognized in the shares equity is expected to be only by DCF. Those properties that has not generated enough yield to be legitimate to using the DCF, will be replaced. The appraisal will be replaced by the cost -- the replacement cost. And that is a simplified methodology and also give us a slightly lower number. That is why we used to know that there are TWD 55 billion or plus that can be recognized in the RBC denominator. Now you can only recognize a part of that. As far as we announced, number is TWD 47 billion into the shareholders' equity. It's still some different. But again, if we only look at the shareholder's equity, if we only look at the P&L, the TWD 47 billion will be recognized after the approval of the regulatory authorities, starting from the first date of this year.

[Honglong Yuan, executive]

Jemmy, it's James. As for the FX reserve, other than the statutory reserve increase required about TWD 300 million per month, we don't have -- right now, as of today, we don't have plan to do the onetime CapEx reserve increase.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Well, if there is no further questions, then I would like to close the meeting now.

[Operator]

Yes. Thank you, Mr. Stan Lee. And ladies and gentlemen, thank you for your 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.