Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2022-Q1

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2022 First Quarter Earnings Conference Call. [Operator Instructions] Webcast replay will be available within an hour at conference is finished. Please visit www.skfh.com.tw under the Investor Relations section.

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 Shin Kong Financial Holding 2022 first quarter analyst call. Before we start, I would like to introduce my colleagues who are with me today. Here in the meeting room are Hanwei Lin, Chief Actuary of Shin Kong Life; [indiscernible] Head of the Investment team of Shin Kong Life; Isabella and Christine, members of the IR team. We are also joined by Fiona Lin, principle of Deloitte Actuarial and Insurance Solutions. Fiona has been working closely with us over the past few months in reviewing our EV work, and she's 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 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 style back in or call Christine at (886) 968-929-230 for assistance.

Now please turn to Page 4. SKFS recorded a consolidated after-tax profit of TWD 3.48 billion for the first quarter 2022. Earnings per share was TWD 0.24. Consolidated shareholders' equity amounted to TWD 246.9 billion, and book value per share at the end of the first quarter was TWD 16.99.

Life insurance EV per share of SKFH was TWD 24.3. EV of Shin Kong Life increased 10% year-on-year to TWD 341.2 billion in 2021. V1NB was TWD 18.2 billion and VNB (sic) [ V1NB ] margin increased to 34%, 6% higher than the year before. More details on core business of each subsidiary will be covered later in the presentation. I would also like to share that the company completed a capital raising of around USD 400 million through issuance of GDR in April. The funds have been injected into Shin Kong Life and Shin Kong Bank in June to enhance their capital position and support their business strategies.

Page 10. Boosted by strong sales momentum in foreign currency policies, FYP for the first quarter grew 68.8% year-on-year to TWD 18.56 billion, securing a market share of 6.8%. Shin Kong Life has adopted a value-oriented product strategy and promoted foreign currency policies and protection products for stable interest spread, better asset liability matching and CSM. FYP of foreign currencies increased 84.4% year-on-year to TWD 15.68 billion, accounting for 84.5% of total FYP. Sales of health insurance grew 12.5% year-on-year due to stronger demand from clients. FYPE reached TWD 4.83 billion, and FYPE over FYP was 26%, beating the industry average. As the cost abilities it decreased 1 basis point quarter-on-quarter to 3.72%.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first quarter was 3.84% due to lower realized capital gains and mid-market volatility. Breakdown of investment returns of different asset classes were: Real Estate, 2%; Mortgage & Corporate Loans, 1.7%; Policy Loans, 5.2%; Overseas Investments, 4.3%; Domestic Securities, 3.1%; and Cash 0.2%.

Page 14 shows the portfolio of overseas fixed incomes. At the end of March, overseas fixed incomes topped TWD 2.1 trillion. In the first quarter, the funds were mainly deployed investment-grade corporate bonds. As a result, corporate bonds accounted for the largest share, representing 48.9% of the total, followed by international bonds at 26.5%. Government bonds accounted for 24.3%. Over 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds.

You may also have a look at the chart of overseas fixed incomes portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed incomes, showing a combined share of 61.8%.

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 81.5%, including CS, NDF and naturally hedged foreign currency policies. CS and NDF accounted for roughly half and half in terms of traditional hedges. Driven by U.S. dollar appreciation and effective hedging strategy, annualized hedging gain for the first quarter was 0.06%. The balance of foreign currency volatility reserve was TWD 11.5 billion at quarter end. Full year hedging cost is targeted below 150 basis points.

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 managed to deliver stable results for the first quarter. Net interest income grew 12% year-on-year to TWD 3.35 billion with continued loan growth. Net income increased 1.3% year-on-year to TWD 907 million. Shin Kong Bank generated a consolidated net income of TWD 1.42 billion despite lower investment income due to volatile market conditions.

Page 21. The bank's loan balance grew 1.4% year-to-date to TWD 730 billion at quarter end. Consumer lending grew 2.1% year-to-date representing the largest share of the loan book. Mortgage and other consumer loans increased 1.2% and 7.9% year-to-date, respectively.

Page 22. Net interest margin increased 3 basis points quarter-on-quarter to 1.25% on the back of rising interest rates. Net interest rate came down to 1.65%. We expect to see net interest margin and net interest spread improve as rate hikes come into play.

Page 24. Wealth management income was down by 1.2% year-on-year to TWD 666 million mainly due to the decline in the income from mutual funds as clients became conservative in their investment decisions. However, bancassurance income grew 65.8% year-on-year and partially offset the decline in fee income from investment products.

Page 25. Asset quality was benign with NPL ratio at 0.14% and coverage ratio at 959.3%. Both ratios were better than the industry average.

Page 27. MasterLink Securities generated brokerage income of TWD 1.37 billion for the first quarter, which was down by 4.6% year-on-year due to lower daily turnover in the stock market. Its proprietary trading business suffered a weak quarter due to choppy market conditions. Consolidated after-tax loss was TWD 124 million for the first quarter.

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

[Hanwei Lin, executive]

Thank you, Isabella. Please turn to Page 29. For 2021 embedded value, the earning rate of VIF goes from 3% to 4.77% in 30 years for NT dollar products and 3.79% to 5.22% for U.S. dollar products. The equivalent investment yield is 4.02%. For VNB, it goes from 2.82% to 4.73% and 3.97% to 5.07% in 30 years for NT dollar and U.S. dollar products, respectively. The adjusted NAV increased 6%. VIF increased 22% and COC increased 25%. As a result, at the end of 2021, EV of Shin Kong Life increased 10% year-on-year to TWD 341.2 billion.

In 2021, Shin Kong Life adopted a value-driven strategy and focused on foreign currency policies, protection products and health insurance policies. VNB (sic) [ V1NB ] margin increased from 27.8% to 34.4%, and VNB (sic) [ V1NB ] decreased just 9.8% to TWD 18.2 billion. AV for 5 years of new business and 20 years of new business were TWD 415.7 billion and TWD 521.1 billion, respectively.

Page 30. Under the base case scenario, risk discount rate was 9.5%. We also provide the sensitivity test of investment return and risk discount rate for your reference.

Page 31 shows the detailed breakdown of adjusted NAV. Shin Kong Life adjust NAV at the end of 2020 was TWD 208.1 billion. Profits in 2021 contributed an increase of TWD 12.6 billion, while unrealized gains on financial assets caused a decrease of TWD 3.6 billion in the adjusted NAV. Other adjustments are TWD 3.8 billion. Therefore, Shin Kong Life adjusted NAV at the end of 2021 reached TWD 220.8 billion.

Page 32. VIF grew from TWD 192.5 billion to TWD 234 billion in 2021. Demand contribution came from new business issued which added TWD 20.7 billion to VIF.

Page 33. VNB (sic) [ V1NB ] decreased 9.8% year-on-year from TWD 20.1 billion to TWD 18.2 billion in 2021. The decline in the premium from new business deducted TWD 5.5 billion from VNB (sic)

[ V1NB ] as the proportion of high-value products increased over the year. The improved product mix was a positive impact that added TWD 1.7 billion to VNB (sic) [ V1NB]. The economic assumptions change also added TWD 1.9 billion to VNB (sic) [ V1NB ].

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

[Operator]

[Operator Instructions] Our first question is coming from Jennifer of Nason Life.

[Unknown Analyst]

I have 1 question on embedded value. Your cost of capital included TWD 23 billion year-on-year. What's the impact of [indiscernible] interest rate risk.

[Hanwei Lin, executive]

I think amount TWD 23 billion increase, about TWD 21 billion from [indiscernible] increase.

[Stan Lee, executive]

Jennifer, is that clear? Out of TWD 23 billion, Hanwei said that TWD 21 billion is driven by the adjustment of C3 risk factor.

[Operator]

[Operator Instructions] And next, we have Jemmy Huang of JPMorgan for questions.

[Jemmy Huang, analyst]

Just 1 question for Shin Kong Bank. Is that -- for the trading gains in the first quarter, I think you mentioned it was partially affected by lower bond trading gains. Just trying to check whether that's also due to the rise in market yields. And then should we assume the second quarter, the situation will still be relatively unfavorable given the further increase in market yields on that front? And then if there is anything you could do to mitigate that kind of adverse impacts.

[Hanwei Lin, executive]

Thank you, Jemmy, for the question. Yes, as I mentioned in the Chinese session, the year-on-year decrease from the investment gains basically because of the relatively rare opportunities for us to dispose bonds with enough gains. Would that be the same in the second quarter? I think for disposal, the difficulty is still there, right? Well, we don't have significant exposure to the PL fund position though. So we don't have to worry too much about the mark-to-market loss, even without disposal, right? So I think here's the same rationale that if rates remain at this level or even slightly higher, to realize the gains will be equally difficult compared to what we had in the first quarter.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Moderator, if there's no questions, then let's close the meeting now.

[Operator]

Thank you, Stan. Ladies and gentlemen, we thank you very much 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.