Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2021-Q2

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2021 Second Quarter Earnings Conference Call. [Operator Instructions]. 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, please begin.

[Stan Lee, executive]

Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2021 Second 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; [ Kun-Hsi Liu ], Head of the Investment Team 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 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.

Now please turn to Page 4. SKFH recorded consolidated after-tax profit of TWD 13.62 billion for the first half 2021, up 74% year-on-year. Earnings per share was TWD 1.04. Consolidated shareholders' equity increased 7.2% quarter-on-quarter, to TWD 248.04 billion. And book value per share at the end of first half was TWD 18.6.

Subsidiaries also posted strong results for the first half which will be covered later in the presentation. I would like to highlight that the company completed a capital raising of TWD 8.2 billion through its issuance of common shares last week. The fund will be injected into Shin Kong Life by the end of September. It will strengthen its capital position and enhance RBC ratio by around 11%. Page 10, not simply aiming for sales volume or market share, Shin Kong Life choose to promote foreign currency policies and value-focused products for stable interest spreads, net asset-liability matching and CSM. Despite the decline in total FYP, the sales of foreign currency policies for the first half amounted to TWD 16.87 billion, accounting for 77% of the total.

FYPE reached TWD 8.53 billion and FYPE over FYP increased from 36.7% in the first to 39% in the first half 2021. Cost of liabilities decreased 4 basis points year-to-date to 3.79%. For full year 2021, cost of liabilities is expected to fall by 10 basis points.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first half was 3.84%. As investment income grew 8.4% year-on-year, breakdown of investment, returns for different asset classes were: real estate, 4.9%; mortgage and corporate loans, 1.7%; policy loans, 5.5%; overseas investments, 3.8%; domestic securities, 4.5% and cash 0.2%.

Page 14 shows the portfolio of overseas fixed accounts at the end of first half. Overseas fixed income has topped 2 trillion. Corporate bonds accounted for the largest share, representing 47.7% of the total, followed by international bonds at 27.1%. Emerging market government bonds accounted for 24.7%. About 90% of the overseas fixed-income position was deployed in U.S. dollar-denominated bonds. You may also find the chart of the overseas fixed income portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed income, 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 half, hedging ratio was 77.5%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDF accounted for 53% and 47%, respectively, of traditional hedges. Annualized hedging cost was 2.05% and foreign currency volatility reserve was TWD 1 billion. In order to better contain hedging costs, Shin Kong Life will flexibly adjust hedging ratio through its proxy basket and continue to build up the foreign currency volatility reserve. The full year target for hedging cost is 2%. However, the Taiwan dollar strengthened again in August, and the company will watch closely our hedging cost.

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 strong quarter on many fronts. Net interest income grew 9.9% year-on-year with improved deposit structure and stable loan growth. Net income increased 2.1% year-on-year to TWD 1.7 billion. Pre-provision operating profit reached TWD 4.11 billion, which was 3.7% higher from a year earlier. Consolidated net income grew 3.4% year-on-year to TWD 3.06 billion.

Page 21, the bank's loan balance rose 5.5% year-to-date to around TWD 689 billion. Consumer lending grew 7.6% year-to-date and represented the largest segment of the loan portfolio as mortgage and other consumer loans increased 8.3% and 9.3% year-to-date, respectively. The full year target for loan growth remains 8%.

Page 22. As the deposits continue to reprice downward and the ratio of demand deposits increased, net interest rate for the second quarter increased 2 basis points quarter-on-quarter from 1.65% to 1.67%. More deposits were joining to drive growth across all business units, causing loan-to-deposit ratio to fall from 69.7% to 69% in the second quarter. Due to the lower loan-to-deposit ratio and bond yield, net interest margin for the second quarter decreased 1 basis point quarter-on-quarter to 1.24%.

Page 24. Wealth management income for the first half increased 5.4% year-on-year to TWD 1.29 billion, which was boosted by stronger sales momentum and investment products. Investment products will be sales-focused in the second half of the year. Meanwhile, Shin Kong Bank will also promote regular premium and foreign currency policies to increase wealth management income.

Page 25. Asset quality was stable with NPL ratio at 0.18% and coverage ratio at 732.24%. Both ratios were better than the industry average.

Page 27. MasterLink Securities generated brokerage fee income of TWD 2.88 billion for the first half, which was a 2.5% higher year-on-year. Proprietary trading income amounted to TWD 1.98 billion, driven by the disposal gain from equity which was TWD 1.01 billion higher year-on-year. Consolidated net income increased more than 200% to TWD 2.22 billion.

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

[Operator]

[Operator Instructions]

[Stan Lee, executive]

It seems that there's no question raised for the presentation. So let me ask again. If you have any questions, please let us know now. Otherwise, we're going to close the meeting.

[Operator]

And then we have 1 question, and the first question is coming from Jennifer of Sun Life.

[Unknown Analyst]

I have 2 questions. First one is NIM declined 1 basis point in the second quarter. And how do you look at the trend for NIM in the second half year? And the second one is on Shin Kong Life. Your internal guidance for CSM is to accumulate more than TWD 30 billion every year. General decline in FYP in the first half year, how do you look at CSM going forward?

[Stan Lee, executive]

Thank you, Jennifer. Let me answer your first question about NIM first, and I'll let our Chief Actuary answer about the CSM and others.

I think we also have a very good discussion in the Chinese session as well on this issue. In the presentation, I mentioned that there were 2 reasons why we have seen the NIS has been improved by 2 basis points, while we've seen NIM decrease by 1 basis point. The 2 reasons includes: first, we have seen a slight decline loan-to-deposit ratio. It was almost 70%, 69.7%. In the past quarter, it went down to 69%. So it had some marginal effect on that. And also because we have roughly about 31%, that has to be utilized otherwise than launch. The bond yield is declining, and it remaining low also had a negative impact on the NIM, which was the case in the past quarter. And the 2 drivers makes the NIM slightly lower.

Our expectation is that -- is the overall benchmark rate, interest rates remains the same, not even high. We think the whole year number for NIM and NIS, respectively, were both being quite similar to what we have seen in the first half of 2021. And that was the guidance, quite similar, it should be quite similar to the first half, not the second but the first half of 2021.

Hanwei, can you answer the sort of the next question?

[Hanwei Lin, executive]

Although we have low FYP in the first half, our CSM is about the same as the one we had in the first half last year because we're focusing on the protection products, the foreign currency products and the loan payment, the products that we're going to produce. So our goal remains and accumulate about TWD 30 billion CSM every year. I think that's to remain, has not been changed.

[Stan Lee, executive]

Jennifer, did we answer your question?

[Unknown Analyst]

Yes. Thank you for all the information.

[Stan Lee, executive]

Thank you, Jennifer, for your question.

[Operator]

[Operator Instructions] There appears to be no further questions at this point. Mr. Lee, can we close the conference call now?

[Stan Lee, executive]

Yes, please. Let's close the meeting now.

[Operator]

Yes, thank you. 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.