Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2018-Q2

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2018 Second 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, you may begin.

[Sin Young Lee, executive]

Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2018 Second 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 second 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 our IR team.

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 the 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.

Without further ado, please now turn to Page 4. SKFH continued its profitable growth in the first half 2018, posting a consolidated after-tax profit of $16.71 billion. Earnings per share was $1.54. Consolidated shareholders' equity grew 8.7% year-to-date to $169.56 billion, and book value per share as of the end of June was $13.98.

Recently, in August, SKFH has been approved by competent authorities to acquire MasterLink Securities as 100% owned subsidiary through share swap. The share swap effective date is set at October 1, 2018. Core business of each subsidiary remained stable in the second quarter, which we will discuss later in the presentation.

Page 10. FYP for the first half 2018 declined 4.4% year-on-year to $55.29 billion, representing a market share of 7.8%. Not simply aiming for sales volume, Shin Kong Life managed to maintain its FYP over FYP ratio at 30.3%, which was above industry average. Besides, Shin Kong Life chose to promote foreign currency policies and protection products to contain hedging costs, facilitate ALM matching and grow value of new business. FYP of foreign currency policies for the first half increased 24.6% year-on-year to $32.02 billion, while sales momentum for protection products sustained through the second quarter with FYP reaching $2.51 billion, up 29.0% year-on-year.

With sufficient inflows of saving policies, cost of liabilities decreased another 4 basis points in the second quarter to 4.16%, in line with our guidance.

Page 14 shows an overall view of Shin Kong Life investment portfolio. Annualized investment return for the first half 2018 reached 4.4 -- 5 7 percent -- 4.57%, thanks to a solid investment income of $56.4 billion. Breakdown of investment returns for each asset classes were: real estate, 3.2%; mortgage and corporate loans, 1.8%; policy loans, 5.9%; overseas investment, 4.1%; domestic securities, 8.0%; and cash, 0.5%.

Page 15 presents the portfolio of overseas fixed income. At the end the first half 2018, corporate bonds accounted for the largest share, representing 44.8% of the total, followed by international bond at 33.1%. Emerging market government bonds declined from 22.6% to 20.6% at the end of June.

The chart on the upper right displays the overseas fixed income's portfolio by region. Shin Kong Life focuses on North America and Europe as its key investment area. The share of Asia and other edged up to 39.1%, with increased investment in higher-yielding U.S. dollar government and corporate bonds with superior credit quality.

Page 17. Annualized hedging cost for the first half was 1.66%, and foreign currency volatility reserve was $3.85 billion at quarter end. Hedging ratio was 84.4%, including CS, NDF and the naturally hedged ForEx policy position. CS and NDF accounted for 62% and 38%, respectively, of traditional hedges. In order to better control hedging costs, Shin Kong Life will actively increase the share of foreign currency policy sales.

So now I'll hand over to Isabella who will take you through the results of Shin Kong Bank.

[Isabella Wang, executive]

Okay. Thank you, Stan.

Please turn to Page 21. Shin Kong Bank continues to deliver encouraging results for the first half 2018. Consolidated net income increased 29.4% year-on-year to TWD 2.55 billion, with net interest income up 6.6% year-on-year and investment income up 31.5% year-on-year. After TRF losses were fully provisioned last year, the provision expense for the first half decreased 33.7% year-on-year.

Page 22. Thanks to the higher momentum in corporate loans in the second quarter, total loan balance increased 2.8% quarter-on-quarter to TWD 549.09 billion. In order to maintain a stable interest spread, Shin Kong Bank has been cultivating overseas markets and expanding overseas lending operations over the past quarters. As of the end of June, the overseas syndicated loan balance reached TWD 20.06 billion, up 15.5% year-to-date.

Going forward, the bank will continue to grow its overseas client base and build a closer relationship with key partners to enhance its offshore earnings. Loan growth for 2018 is targeted at 6%.

Page 23. As bond yields inched higher and the loan-to-deposit ratio rose from 72.9% to 74.5% in the second quarter, net interest margin increased 2 basis points quarter-on-quarter to 1.57%. Net interest spread edged up 1 basis point quarter-on-quarter to 1.98%, which was driven by the continued growth in overseas syndicated loans.

Page 25. Wealth management income for the first half 2018 grew 7.8% year-on-year to TWD 1.06 billion, which was boosted by stronger sales momentum in investment products.

For the second half of the year, there will be alignment in the campaigns conducted for specific younger clients. The bank will also offer preferential rates on time deposits to attract new funds for future business growth.

On the products side, foreign currency and regular-paid policies will be the sales focus. The growth target for wealth management income in 2018 remains double digits.

Page 26. Asset quality was stable with NPL ratio at 0.24% and coverage ratio at 562.33%. New NPL generated in the second quarter was TWD 382 million and is only accounted for 0.07% of total loans.

So that is the end of our results presentation. Moderator, please start the Q&A session.

[Operator]

[Operator Instructions] And first, we'll have Anthony Lam from HSBC for questions.

[Anthony Lam, analyst]

I'm thinking of couple of quick questions. Firstly, on VNB, I think you did share in the first quarter results that VNB back then fell by about 5% to 6%. Just trying to get an update on that, whether it's [ fell down ] in the second quarter [indiscernible] in the first half. That's the first one. And in terms of hedging costs and the impact on premium, I mean, [indiscernible] weak revenue just want to get an update on the number.

[Unknown Executive]

First half, the VNB also down about 4% to 5%. Same as the FYP was down 4.5%.

[Sin Young Lee, executive]

Anthony, I think we were really focused on what we guided the market at. There was a decline, right? And for this period, given that we have seen the growth of protection products has reached about 29% and foreign currency products rose to reach 25%, I believe the margin should be slightly improved compared to what we had. If the overall FYP ratio -- FYP number can add [indiscernible] as last year, the VNB growth will sustain. But with a decline of FYP, and I believe what [indiscernible] actually mentioned was that will [indiscernible].

[Anthony Lam, analyst]

Understood. And what about the recurring yield and then half [indiscernible], I mean, at the end of first half?

[Sin Young Lee, executive]

Yes. The -- before hedging, recurring yield was 3.57%. But this number hasn't reflect most of the dividend income that we'll have for 2018. Only $2.5 billion has been recognized in the first half. In the second half, we expect to recognize around $10 billion, right? So overall, we believe, before hedging, recurring yield will remain, if not higher, only slightly lower than last year and pretty much have a chance to come in similar level. After hedge, the figure for the first half is around 2.5% because our annualized hedging cost for the first half is 1.66%. So given what I mentioned before, most of dividends will be recognized in the second half. The -- after hedge, recurring yield will also become higher compared to the first half one.

[Operator]

[Operator Instructions]

[Sin Young Lee, executive]

I believe most of the questions has been discussed in the Chinese session. So if you have any question, please let us know now, otherwise, we are going to close the meeting.

[Operator]

[Operator Instructions]

[Sin Young Lee, executive]

Well, apparently, there's no further questions, so let's close the meeting now.

[Operator]

Thank you very much, Mr. Lee. 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. Goodbye.