Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2023-Q1

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2023 First Quarter Earnings Conference Call. [Operator Instructions] And 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 Ms. Isabella Wang, IR team from Shin Kong Financial Holding Company. Ms. Wang, please begin.

[Isabella Wang, executive]

Good afternoon, ladies and gentlemen. Welcome again for joining Shin Kong Financial Holding 2023 First Quarter Analyst Call. Before we get started, please allow me to introduce the management who are with us today. So here in the meeting room are [ Judi Ling ], CFO and Spokesperson of Shin Kong Financial Holding; [ Viki Lu ] Senior Vice President of Shin Kong Financial Holdings; [ Steven Wang ] Deputy Chief Investment Officer; [ Stacy Chen ] Senior Vice President; [ Yang Xing Tang ], Vice President of Shin Kong Life; Christine, member of our IR team. We are also joined by Fiona Lin, Principal of Deloitte's Actuarial and insurance solutions. Fiona 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 download it from our website or participate through webcast. 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. Due to exchange rate fluctuations, Shin Kong Financial Holding recorded a consolidated after-tax loss of TWD 9.03 billion for the first quarter 2023, consolidated shareholders' equity rebounded 6.2% quarter-on-quarter to TWD 225.29 billion, and value per share at the end of the first quarter was TWD 14.25. Life insurance EV per share of Shin Kong Financial Holding was TWD 23.7, the embedded value of Shin Kong Life increased 8% year-on-year to TWD 367.6 billion in 2022. VIF and VNB grew 16% and 10% year-on-year, respectively. More details on each subsidiary will be covered later on in the presentation.

Page 10. Due to product mix adjustments, first year premium for the first quarter decreased 47% year-on-year to TWD 9.8 billion, securing a market share of 6%. Shin Kong Life's continued product strategy aims to offer foreign currency policies and value-focused products, which create stable interest spreads, better asset liability matching and CSM. The sales of foreign currency policies was TWD 5.9 billion, accounting for 59.6% of total first year premium. FYPE reached TWD 4 billion and FYPE over FYP was 40.9%, beating the industry average.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Total investment topped TWD 3.4 trillion at the end of the first quarter. Annualized investment return for the first quarter was 1.88% due to less realized capital gains and higher hedging costs. The breakdown of investment returns for different asset classes were: real estate, 2.4%; mortgage and corporate loans, 2.8%; policy loans, 5.2%; overseas investments, 1.6%; domestic securities, 2.2%; and cash, 1.7%.

Page 14 shows the portfolio of overseas fixed incomes. At the end of the first quarter, overseas fixed income position was around TWD 2.3 trillion, the funds were mainly deployed in investment-grade corporate bonds. As a result, corporate bonds accounted for the largest share, representing 48.8% of the total followed by international bonds at 26.2% and government bonds at 24.6%. Over 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds. As for the bond portfolio by region, North America and Europe remains the company's investment focus, showing a combined share of around 63%.

Page 16. The pie chart on the left-hand side shows the mixed hedging make. At the end of the first quarter, hedging ratio was 79.2%, including CS, NDF and naturally hedged foreign currency policies. CS and NDF accounted for 54% and 46%, respectively, of the traditional hedges. Hedging cost was 239 basis points in the first quarter due to the appreciation of Taiwanese dollar and higher cost for traditional hedging instruments. The balance of foreign currency volatility reserve reached 23.5 billion at the quarter end.

Page 20, driven by substantial growth in investment income, Shin Kong Bank's pre-provision operating profit reached TWD 2.14 billion which was 6.8% higher from a year earlier. Consolidated net income increased 4.8% year-on-year to TWD 1.49 billion.

Page 21. The bank's loan balance was TWD 749 billion at quarter end, slightly down by 0.7% year-to-date due to loan mix adjustments. Consumer loan book was roughly unchanged, representing 62% of the loan portfolio, as on secured consumer loans and other consumer loans increased 1.8% and 2.1% year-to-date, respectively. The bank's full year loan growth target remains 4% to 6% as lending is picking up pace in the second quarter.

Page 22. Net interest margin and net interest spread for the first quarter was 1.16% and 1.54%, respectively. We expect to see net interest margin and net interest rate grow gradually with improvements in deposit and loan mix, better fund utilization and stronger loan growth momentum.

Page 24. Wealth management income increased 2% year-on-year to TWD 679 million. Thanks to strong sales momentum in structured products and overseas securities. The fee income from these two categories accounted for 58% of the total. And the full year growth in wealth management income is targeted at mid-single digits.

Page 25. Asset quality remained solid with NPL ratio at 0.12% and coverage ratio higher than 1100%. Both ratios were better than the industry average.

Page 27, MasterLink Securities generated a brokerage income of TWD 1.07 billion, which was down by 22% year-on-year due to lower daily turnover in the stock market. However, MasterLink Securities flexibly adjusted its investment strategies and delivered a consolidated after-tax profit of TWD 717 million.

So I will now hand over to [indiscernible] to talk about the update on EV and AV.

[Unknown Executive]

Thank you, Isabella. Please turn to Page 29. For 2022 embedded value in the earnings rate, which goes from 2.9% to 4.98% in 30 years for NTD products and 3.87% to 5.44% for USD products. Investment yield is 4.15%. For VNB, it goes strong 3.31% to 4.96% and 4.61% to 5.33% in 30 years for NTD and USD products, respectively. The adjusted NAV decreased 4%. VIF increased 16% and the COC increased 2% as a result at end year 2022.

EV of Shin Kong Life increased 8% year-on-year to TWD 367.6 billion. In 2022, Shin Kong Life adopted a value-driven strategy and focus on foreign currency policies, protection products and healthy insurance policies, And the VNB increased 10% to TWD 20 billion. AV for 5 years of new business and 20 years of new business growth TWD 449.7 billion and TWD 566 billion, respectively.

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

Page 31. This page shows the detailed breakdown of adjusted NAV. Shin Kong Life's adjusted NAV at the end of 2021 was TWD 220.8 billion. Profit in 2022 decreased TWD 4.9 billion while unrealized gains on financial assets caused a decrease of TWD 47.3 billion in the adjusted NAV. As for other adjustments, which represented an increase of TWD 43.9 billion, mainly included the capital injection from the financial holding company. Therefore, Shin Kong Life adjusted NAV at the end of 2022 reached TWD 212.5 billion.

Page 32. VIF grew from TWD 234 billion to TWD 271.2 billion in 2022. The main contribution come from New Business, which added TWD 20.2 billion.

Page 33. VNB increased 10% year-on-year from TWD 18.2 billion to TWD 20.0 billion in 2022. The increase in the premium fund new business added TWD 0.3 billion from VNB and the product mix change decreased TWD 0.8 billion in VNB. However, the economic assumption change at TWD 2.1 billion to VNB.

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

[Operator]

[Operator Instructions] And our first question is coming from [indiscernible] Securities.

[Unknown Analyst]

I have two questions. And the first question is, what's the outlook for hedging cost this year? And the second question is, is there any change in your asset allocation in the coming quarters?

[Isabella Wang, executive]

Okay. Thank you, Nancy. I have our Senior Vice President, Stacy to share her thoughts on this.

[Unknown Executive]

As for the question for the hedging -- outlook of the hedging costs, yes, our year-end hedging cost target actually sit at or below 2%. Currently, we think this number is achievable. And then compared with the first quarter numbers, I think it will be lower than the first quarter. So several measures, we think it will be helped to mitigate our hedging costs in the coming quarters.

First, the change of FX reserve this positive method that can help us reducing hedging costs around 20 to 30 bps. And second, I think currently, for the past few months, we were doing to remit our cash back to domestic -- that also helped us to reduce the hedge cost that we are spending for the past few months. And third, of course, while the currency swap, that mainly reflects the interest rate differential between Taiwan and the U.S.

This part wouldn't be lower in the coming few months. But on the other hand, we do use NDF as our hedging tools. This part, we will take advantage of the cost of -- NDF costs will be lower when the appreciation, expectation of a Taiwan dollar is lower, then the cost will be lower. Then we will take this opportunity to lock in this lower cost so that the overall hedging cost will be lower compared with the first quarter.

So all in all, I think it will be gradually improved in the coming few quarters, that's for our hedging cost. As for the asset allocation, I think we will divide it into two parts. For the foreign currency-denominated policies, the main focus for the coming quarters will be overseas high-quality fixed income bond. I think the main focus will be A rated above more defensive NIMs is our main focus. And then, of course, the yield level will be relatively high at this time. So we will take this opportunity to do more diversification in terms of NIMs region and of course, we will invest in high-rated bonds.

That's for our foreign currency-denominated policy mainly invested in the fixed income part. Of course, on the other hand, for the Taiwan Dollar policies, as I just mentioned, for the overseas cash, we will remit back to Taiwan and then to do more domestic investment because the short-term hedging cost is relatively high. As for the asset class, I think in the short term, we will invest into more high dividend stock. That will be the first priority, and then we will see some relative return that is better to allocate -- that will be the asset allocation part.

[Operator]

[Operator Instructions] Okay. Then there appears to be no further questions at this point. Ms. Wang, can we close the conference call now?

[Isabella Wang, executive]

Yes. I believe we had a very comprehensive discussion in the Chinese session. So if you were unable to listen live, we encourage you to listen our replay -- so thank you again for your time, and I hope we will see you again in the next quarter. So please cut the call.

[Operator]

And ladies and gentlemen, we 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. And 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. Thank you, and goodbye.