Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2020-Q2

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2020 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, Senior Vice President of Shin Kong Financial Holding Company. Mr. Lee, please begin.

[Stan Lee, executive]

Good afternoon, ladies and gentlemen. Welcome again for joining Shin Kong Financial Holding 2020 Second Quarter Earnings Call. Before we start, I would like to introduce my colleagues who are with me today. We are happy to have Sunny Hsu, Executive Vice President of the Financial Holding Company, to review the second quarter results with us. Also in the room are 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.

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 7.83 billion for the first half. Earnings per share was TWD 0.61. Consolidated shareholders' equity reached TWD 233.87 billion. And book value per share at the end of second quarter was TWD 17.88.

Core business of each subsidiary remained stable in the first half, which will be covered later in the presentation. I would also like to highlight that the company completed a capital raising of TWD 10 billion through its issuance of preferred shares B this week. The fund will be injected to Shin Kong Life by the end of September to strengthen its capital position and increase RBC ratio by 13%.

Page 10. FYP decreased 32.2% year-on-year to TWD 43.64 billion, primarily due to adjustment in product mix. As the share of regular premiums increased to 67.3% for the first half, FYPE over FYP was 36.7%. Also, foreign currency policies remained the sales focus this year. FYP of such policies amounted to TWD 32.24 billion, accounting for 73.9% of total FYP. With new business inflows and lower declared rate, cost of liabilities declined 6 basis points year-to-date to 3.91%. For the full year 2020, cost of liabilities is expected to fall by 12 basis points.

Page 13 shows the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first half 2020 was 3.77%. Breakdown of investment returns for different asset classes were: real estate, 4.2%; mortgage and corporate loans, 1.8%; policy loans, 5.5%; overseas investment, 3.5%; domestic securities, 5.3%; and cash, 0.4%.

Page 14 presents the portfolio of overseas fixed incomes. At the end of first half, overseas fixed incomes topped TWD 1.8 trillion. Corporate bonds accounted for the largest share, representing 47.2% of the total, followed by international bonds at 28.4% and government bonds at 23.6%. About 90% of the overseas fixed income's position was deployed in U.S. dollar-denominated bonds.

As for the overseas fixed income portfolio by region, North America and Europe remained Shin Kong Life's key investment areas, accounting for a combined share of 60.9%.

Page 16. The pie chart of the left-hand side shows the mix of hedging instruments. At the end of the first half, hedging ratio was 84.4%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDF accounted for 54% and 46%, respectively, of traditional hedges. Appreciation of NT dollar drove out annualized hedging cost to 2.27% for the first half. Now although to better control hedging cost, Shin Kong Life voluntarily added TWD 4 billion to foreign currency volatility reserve. The balance reached TWD 4.9 billion at the end of July.

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 half, driven by the growth in wealth management income and investment income. Pre-provision operating profit reached TWD 3.96 billion, which was 5.4% higher from a year earlier. Consolidated net income increased 18.8% year-on-year to TWD 2.96 billion.

Page 21. The bank's loan balance rose 3% year-to-date to TWD 624 billion. Consumer lending continued an upward trend with mortgage and unsecured loans increasing 3.1% and 5% year-to-date, respectively.

As for corporate lending, the momentum mainly came from SME loans. The full year target for loan growth remains at 6%.

Page 22. Due to market competition and rate cuts, net interest margin and net interest spread for the second quarter came down to 1.21% and 1.63%, respectively. Given the ongoing low yield environment and competitive pressure from peers, the full year figures are expected to fall below the level of 2019.

Page 24. Wealth management income for the first half increased 3.1% year-on-year to TWD 1.22 billion, boosted by strong sales momentum in mutual funds and overseas security. The fee income from these 2 categories accounted for 51.7% of the total.

In the second half of the year, Shin Kong Bank will actively promote online marketing campaigns to attract new funds and expand its client base.

Page 25. Asset quality was stable with NPL ratio at 0.19% and coverage ratio at 666.08%. Both ratios were better than the industry average.

Page 27. MasterLink Securities generated a brokerage income of TWD 1.91 billion for the first half 2020, which was 37% higher year-on-year. Brokerage market share was 3.72%, remaining top 6 in the industry. As the market stabilized, MasterLink Securities improved its cost trading performance and proceed a consolidated net income of TWD 574 million for the first half.

And this is the end of our results presentation. Operator, please start the Q&A session.

[Operator]

[Operator Instructions] And the first question is coming from [ Albert ] of Nan Shan Life.

[Unknown Analyst]

This is [ Albert ]. I have 2 questions. For Shin Kong Life, what's your growth target for VNB in 2020? And for Shin Kong Bank, how do you like -- at wealth management income growth for 2020?

[Stan Lee, executive]

Thank you, [ Albert ]. For the first question, I would like to have Hanwei answer it.

[Hanwei Lin, executive]

Yes. Our FYP, down 32% in the first half. VNB is only down about 14%. As you can see, our FYP increased from 26% to 37% and our VNB margin also increased from 19.6% to 25%. Second half will continue with this trend, selling products with higher FYP ratio and VNB margin. FYP for the whole year might still be lower, maybe down 20% to 30%, but we hope that VNB can stay at the same level or being lower. It can be down less than 10%.

[Stan Lee, executive]

And [ Albert ], as for your second question, we would like to remain a positive growth for the overall wealth management income. Sales focus still remains at the investment products, including the mutual funds and also the overseas securities. And those 2 segments in the first half grew by 27% and 33% year-on-year, respectively. We do believe that in the second half, particularly after July, will be rather challenging to sell the insurance products. However, looking into the product mix of what we have done in the first half, we believe there are several to grow in the FX for exchange product. And also, there are still some potentials. It may not be in the second half, it might be in the future for the bank to sell higher-margin products, including the production lines.

Also, in the first quarter, we will start to provide services through the launching of intelligent robo-advisory platforms. And we believe that will help us to promote online marketing and also attract new funds and client base.

[Operator]

[Operator Instructions] And the next question is coming from Brooksley Kang of Bank of America Securities.

[Brooksley Kang, analyst]

It's Brooksley. I have 2 questions mainly on Life business. So do we have any further FX reserve top-up plan coming up? And how do Shin Kong see if the FX reserve level is sufficient? Is there any benchmark or ratio to follow? And second question is on RBC ratio. May I have more color on where is the -- or discrepancy between the bigger book value while lower RBC ratio in the first half '20? And what's our internal comfortable level for RBC ratio?

[Stan Lee, executive]

Thank you, Brooksley. For the FX reserve, the current level, I'm referring to the end of July. However, it hasn't been firm yet. I can share with you that we have been -- further increased the FX reserve to slightly over TWD 6 billion, partly thanks to the voluntarily added positions in July. Before July, we have around TWD 0.9 billion. And we have voluntarily already added another TWD 4 billion into the pool, and we have -- approaching to TWD 5 billion, that gives us some more flexibility. And also partly because we also remain relatively conservative and stay in the -- stick with the rule to reserve over 70% for the trading gains -- market gains, if there's any on the FX on hedge positions. For that question, I'm not sure whether, James, you have anything to add on, particularly for the future strategies. If there's any, please.

[Honglong Yuan, executive]

Well, it's good enough. I think the -- well, the NT dollar remained pretty much unchanged since the end of June. And what matters was the property part, which we own roughly TWD 3 billion equivalent of RMB. RMB appreciate about 3 -- north of 3%. So that part contributes some of the gains to the reserve increase that Stan just mentioned. With the added reserve, we are able to lower our fully hedged ratio. Our target is between 75% and 85%. So we are going to move towards the 75% from quarter end about low 80s, and that will provide some relief on the NDF cost.

And for the property part, we are not going to have other property before the end of the year other than the physical holding of, for instance, RMB debt and other local currency debt. And we will remain -- or try to shoot for the high 70s fully hedged ratio.

[Stan Lee, executive]

Right. And also you asked about what's the comfortable level for the remaining balance of FX reserve. I think this is a very difficult question to answer. By default, the reserve is -- the purpose of the reserve is trying to help us to absorb some of the unexpected move from the market volatility. Well, conceptually, we started from around TWD 4 billion a few years before. And that is also the reason why, in July, we decided to add another TWD 4 billion when the pool almost dried out. I cannot give you a clear guidance whether the current level, as I mentioned, TWD 6 billion, is comfortable or not. However, it is apparently better than what we had as of the end of June.

In the future, I think we don't have any clear strategies for another one-off, say, in provisions for the FX reserve. But we do believe with appropriate tradings and our strategies laid out, as James Yuan just mentioned, we have checked to increase the pool not only by the one-off reserve, as you mentioned, but also the continuous management of the unhedged and the property position.

The second question is on RBCs. RBC, as of the end of June, was around 211%, which is lower than what we had at the end of last year and also lower than what we had a year before. The reason is mainly because in the end of second half last year, we still have FX reserves as high as almost TWD 10 billion. And as of the end of June this year dropped to less than TWD 1 billion, and that somehow affects the RBC ratios by more than 10%. And also, the end of June, the market price for the equities is higher than the average price. And you probably know that when calculating RBCs, the RBC's qualified capital is now adjusted by the average price for the equity positions, and that will deduct the RBCs by more than TWD 10 billion again. So that's the main reason why we've seen a decline of the RBC ratios. Well, the good news is that we have just pulled through the deal of preferred shares B for the capital injections of Shin Kong Life in the first week of September. After the injections, we can increase RBCs by as much as 13% that will be helpful to the overall capital levels of the life insurance subsidiary. Brooksley, did I answer your question?

[Brooksley Kang, analyst]

Yes. Clearly.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

So moderator, if there's no further questions, let's close the meeting now.

[Operator]

Yes. Thank you, 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. Should you have further questions, please don't hesitate to contact the IR team of SKFH by phone or by e-mail, and you may now disconnect. Goodbye.