Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2022-Q2

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2022 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]

Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2022 Second Quarter Analyst Call. Before we start, I would like to introduce my colleagues who are with me today. Here in the meeting room, I have Hanwei Lin, Chief Actuary of Shin Kong Life; En-Fon Liao, 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 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 2.92 billion for the first half 2022. Earnings per share was TWD 0.16. Consolidated shareholders' equity was TWD 204.85 billion, and book value per share at the end of first half was TWD 12.95. Core business of each subsidiary remained stable in the second quarter, which will be covered later in the presentation.

Page 10. Boosted by strong sales momentum in foreign currency policies, FYP for the first half grew 47.1% year-on-year to TWD 32.22 billion, securing a market share of 7%. Shin Kong Life has adopted a product strategy aiming at foreign currency policies and value-focused products for stable interest spread, better asset liability matching and CSM. FYP of foreign currencies increased 57.5% year-on-year to TWD 26.56 billion, accounting for 82.4% of total.

FYPE reached TWD 9.82 billion and FYPE over FYP was 30.5%, beating the industry average. As for cost of liabilities, it decreased 2 basis points year-to-date to 3.71%.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first half was 3.44% due to lower investment income amid market volatility. Breakdown of investment returns for different asset classes were: real estate, 0.004%; mortgage and corporate loans, 1.8%; policy loans, 5.3%; overseas investment, 3.8%; domestic securities, 3.5%; and cash, 0.4%.

Page 14 shows the portfolio of overseas fixed incomes. At the end of June, overseas fixed incomes reached TWD 2.2 trillion. In the first half, the funds were mainly deployed in investment-grade corporate bonds. As a result, corporate bonds accounted for the largest share, representing almost 49% of the total, followed by international bonds at 26.4%. Government bonds accounted for 24.4%. Over 90% of the overseas fixed incomes position was deployed in U.S. dollar denominated bonds.

You may also have a look at the chart of the overseas fixed incomes 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 62.1%.

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 83%, including CS, NDF and naturally hedged foreign currency policies. CS and NDF accounted for 51% and 49%, respectively, of traditional hedges. Driven by Taiwan dollar depreciation and effective hedging strategy, annualized hedging gains for the first half was 0.11%.

The balance of foreign currency volatility reserve increased to TWD 18.4 billion at the end of the first half. Given the recent increase in the cost of CS, which is now higher than 2.5%, Shin Kong's mid- to long-term hedging cost is targeted below 200 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 continued to deliver stable results for the first half. Net interest income grew 14.2% year-on-year to TWD 6.99 billion on the back of net interest margin expansion and decent loan growth. Net fee income increased 2% year-on-year to TWD 1.73 billion. Shin Kong Bank generated a consolidated after-tax profit of TWD 3.18 billion, which was 3.8% higher from a year earlier.

Page 21. The bank's loan balance grew 2.8% year-to-date to TWD 741 billion. Consumer lending grew 3.9% year-to-date, representing the largest share of the loan book, as mortgage and unsecured consumer loans increased 3% and 6.6% year-to-date, respectively. For the second half of the year, SME loans and overseas loans will be promoted to enhance interest spreads and related fee income.

Page 22. Driven by rising interest rates, net interest margin expanded 9 basis points quarter-on-quarter to 1.34%, and net interest spread increased 11 basis points quarter-on-quarter to 1.76%. We expect to see net interest margin and net interest spread improve along with further rate hikes.

Page 24. Wealth management income for the first half increased 1.1% year-on-year to TWD 1.3 billion, which was boosted by stronger sales momentum in bancassurance products. The fee income from mutual funds declined 48.9% year-on-year as clients became more conservative in their investment decisions. With that in mind, Shin Kong Bank will focus on bancassurance products in the second half to increase wealth management income.

Page 25. Asset quality remains solid with NPL ratio at 0.13% and coverage ratio at 989.86%. Both ratios were better than the industry average.

Page 27. MasterLink Securities generated a brokerage income of TWD 2.64 billion for the first half, which was down by 23% year-on-year due to lower daily turnover in the stock market. Its prop trading business suffered another weak quarter due to market fluctuations. Consolidated after-tax loss was TWD 340 million for the first half.

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

[Operator]

[Operator Instructions] Our first question is coming from Frank Fang of Daiwa Capital Market.

[Frank Fang, analyst]

I have 2 questions regarding your life insurance operations. The first one, I know it's kind of early now but as for the second quarter, we see that the unrealized gains in the financial instruments, is that going to affect next year's dividend policy? And for the second, I just want to check up on a number, is that the asset and liability duration of the life insurance? These are the 2 questions.

[Stan Lee, executive]

Thank you, Frank. This is a very good question. However, well, as I said, it's a bit early to give you a firm answer. Well, I think it's clearly that quite challenging for every insurance players for the first half, particularly when we see the rate has been hiked and long-term -- long-dated bonds, also USD increased significantly.

Well, you can definitely see that Shin Kong's fluctuations in terms of the net worth or the net worth to asset ratio, which is also very important for the life insurance and their subsidiary. Our fluctuation is relatively controllable, right? Having said that, it's still quite a big challenge for us. I'm not going to say we can remain the same dividend policies for sure. But again, we are also not sure whether the whole situation could be changed in the following few months.

So now since both possible, right, we are going to strive, work on the best to maintain net worth at a relatively stable level. And also, I believe that life insurance, also the bank, the investment team is going to be very diligently manage the position.

The second question is on assets and liabilities. I'll let the Chief Actuary to answer your question.

[Hanwei Lin, executive]

Yes, liability duration is about 12 years. Duration of the bonds is about 12.5. As for the total assets, because including other assets, that's a little bit more interest-sensitive. The reflected duration of the total assets is about 8 to 12 for the last 5 years.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Moderator, since there's no further questions, we also have a very comprehensive discussion in the Chinese session. So if you would like to listen to the replay, please do so. If you have any new further questions, let us know. Our team will be very happy to answer any questions you may have in the future. But let's close the meeting now.

[Operator]

Sure. 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. You may now disconnect. Goodbye.