Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2023-Q2

[Isabella Wang, executive]

Good afternoon, ladies and gentlemen. Welcome again for joining Shin Kong Financial Holding 2023 Second Quarter results briefing. My name is Isabella Wang and I'll be the host for the online meeting today. Before we get started, I'd like to introduce the management who are with us right now.

Here in the meeting room are Stephen Chen, President of Shin Kong Financial Holding; Judi Ling, CFO of Shin Kong Financial Holding; Vicky Lu, Vice President of Shin Kong Financial Holding; Hanwei Lin, Chief Actuary of Shin Kong Life; Stephen Wang, Deputy Chief Investment Officer; Stacey Chen, Vice President of Shin Kong Life; Monica, member of our IR team.

The presentation we are about to go through was sent out 2-hours ago. You may download it from our website or participate through the webcast. As we are holding an online webcast this time, you may raise your questions by typing them in the Q&A chatbox. We'll get to that after the presentation.

Now please turn to page 5. Shin Kong Financial Holding recorded a consolidated after-tax loss of TWD 6.33 billion, for the first half of 2023. The second-quarter profit was TWD 2.7 billion, showing a decent recovery from losses in the first quarter. This was mainly driven by the turnaround at Shin Kong Life during the quarter, while earnings at the other subsidiaries remained stable. Consolidated shareholders equity increased 11.6% year-to-date to TWD 236.78 billion, and book value per share at the end of the second quarter was TWD 14.98.

Our subsidiaries remained solid business momentum during the first half and more details will be covered later on in the presentation.

Page 10, Due to product mix adjustment, FYP for the first half decreased 26.9% year-on-year to TWD 23.6 billion, securing a market share of 6.7%. Shin Kong Life's product strategy aims to provide foreign currency policy and value-focused products, which create stable interest spreads, better asset-liability matching, and CSM. The sales of foreign currency policy were TWD 13.7 billion, accounting for 58.2% of the total FYP. FYPE grew 6.2% Year-on-year to TWD 10.4 billion, and FYPE over FYP was 44.2%, beating the Industry average.

Page 13 presents the overall view of Shin Kong Life’s investment portfolio. Total investment amounted to TWD 3.4 trillion at the end of the first half. Annualized investment return after hedging for the first half was 2.48%, due to less realized capital gains and higher hedging cost compared to the same period last year. The breakdown of investment returns for different asset classes were: real estate 1.6%, mortgage and corporate loans 2.4%, policy loans 5.2%, overseas investment 2%, domestic securities 4.1%, and cash 2.2%.

Page 14 shows the portfolio of Overseas Fixed Income. At the end of the first half, 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 48.7% of the total, followed by international bonds at 26.1% and government bonds at 24.8%. 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 remained the company's investment focus, showing a combined share of 63.2%.

Page 16, the pie chart on the left-hand side shows the mix of hedging vehicles. At the end of the first half, the hedging ratio was 78.1%, including CS, NDF, and naturally-hedged foreign currency policies. CS and NDF accounted for 53% and 47%, respectively, of the traditional hedges. Annualized hedging cost gradually reduced to 176 basis points in the first half on the back of Taiwan Dollar depreciation. The balance of foreign currency volatility reserve reached TWD 26.3 billion at the end of June.

Page 20. Driven by rising investment income, Shin Kong Bank’s pre-provision operating profit reached TWD 4.8 billion, which was 13.5% higher from a year earlier. Consolidated net income increased 10.1% year-on-year to TWD 3.5 billion.

Page 21, The bank’s loan balance was TWD 764 billion at the end of the first half which was 3.1% higher year-on-year. Consumer loan book was roughly unchanged, representing 62% of the loan portfolio, as unsecured consumer loans and other consumer loans increased 13% and 5.8% year-on-year respectively. In the second half of the year, Shin Kong Bank will continue to promote SME lending, unsecured consumer loans and overseas loans.

Page 22, benefitting from higher loan-to-deposit ratio and improved fund utilization, net interest margin increased 4 basis points quarter-on-quarter to 1.2%, and net interest spread expanded 13 basis points quarter-on-quarter to 1.67%. We expect to see net interest margin and net interest spread grow gradually with the adjustment in deposit mix and stable loan growth.

Page 24. Wealth Management Income increased 3.9% year-on-year to TWD 1.35 billion, thanks to strong sales momentum in structured products and securities. The fee income from these categories accounted for 51% of the total. The Bank will focus on Bancassurance and mutual funds in the second half to bring in wealth management income.

Page 25. Asset Quality remained solid with NPL ratio at 0.12% and Coverage Ratio higher than 1,100%. Both ratios were better than the industry average. New NPL generated in the second quarter was TWD 450 million, of which one case accounted for TWD 340 million. Our investors can be -- can rest assured that the case was fully collateralized with no loss expected.

Page 27. Boosted by the increase in daily market turnover, MasterLink Securities’ brokerage income for the second quarter grew 20.7% quarter-on-quarter and its brokerage income for the first half reached TWD 2.35 billion. MasterLink Securities also capitalized on market trends to enhance investment income and delivered a consolidated after-tax profit of 1.54% (sic) [ TWD 1.54 billion ] for the first half.

So that concludes the presentation for today. Now we'd like to proceed the Q&A session.

[Unknown Executive]

The first question comes from JPMorgan, Jemmy Huang.

First, the improvement on recurring yield appears smaller than peers. Is that due to lower overseas investment filings or other reasons?

Second, are you still expecting FYP to be flat year-on-year? If not, what is the implication on VNB growth?

Third, what is the size of swaps revenue in 2023 first half? And do you expect further NIM expansion in the second half of 2023.

Fourth, what is the regulatory filings for FX reserve balance?

Last one, please elaborate your China exposure at both banking and life insurance operations in terms of size and customer investment profile.

[Stephen Chen, executive]

Hello. I'm Stephen Chen, President of Shin Kong Financial Holdings. Let me respond to the question regarding the China exposure. Overall, our exposure is around TWD 67 billion, which is -- which accounts for 1.5% of our total asset of the financial holding portfolio. And out of this TWD 67 billion exposure, [ lifers ] account for around 72%, whereas the banks account for 22%.

And let me talk about the bank's exposure first. I would like to assure you that we have no -- absolutely no exposure on the property sectors. Also, the bank has no exposure on POE -- in PRC exposure. So 70% of the bank's exposure is relating to the Taiwanese enterprise, and also foreign enterprise in China. And the other 30% is the SOE, PRC SOE exposure, which is basically -- basically, it's the [ sovereignty ] risk. Talking about the [ lifers ] exposure, half of the exposure is relating to our bond holding on 2 well known high-rated corporate bond, which is Tencent and also Alibaba corporate bond.

As you know, these 2 issuer are very -- basically, they are top-tier POE in China with the rating -- the bond ratings above around A plus. So we are very comfortable with the -- the width attached with these 2 corporate bond. The rest of the bond or investment exposure under the [ lifers ] and [ bearers ] are all [ sovereignty ] risk, basically as a government bond or the bond for SOE issuer. So that is pretty much our exposure. So we are comfortable because we -- our exposure is all related to these high rated liquid asset, okay? That's my response to the China exposure. Let me pass it to Stacey to talk about the investment relating to VNB...

[Stacey Chen, executive]

Thank you. Regarding the first part the recurring yield, I think our recurring yield in the first half has improved for 9 bps already. And then in terms of overseas investment limit, yes, currently, we are at the high end. But considering the high hedging costs, we deliberately not to increase the overseas investment right now. So overall, our recurring yield has improved a little bit, but not related to the overseas investment limit.

And secondly, it's about the FX reserve. To answer your question, yes, our FX reserve has reached the upper limit in July. So I think in terms of that, that will provide us more [ feasibility ] of our hedging strategy.

[Unknown Executive]

Jemmy, the VNB, our VNB margin is about the same as last year. However, the FYP for the first half had a negative growth of about 27%. So I think the VNB for the first half has also -- was reduced by about the same percentage. For the whole year, as I said in the Chinese session, right now, it's difficult to predict how much FYP we're going to have. It's also kind of difficult to grow FYP in this kind of environment this year. So I think the margin will be about a similar situation as the first half. So the VNB growth will also be very similar to the kind of growth -- the reduction in FYP.

[Stacey Chen, executive]

Jemmy, so your question regarding to the bank. The bank's investment income for the first half was TWD 2.2 billion, and the swap revenue accounted for 30% of that. As for the net interest margin, net interest spread, as we guided in the Chinese session, the net interest margin, net interest spread for the second quarter has improved compared to the first quarter.

So we don't have a clear target for the year. However Shin Kong Bank will strive to gradually adjust its deposit structure and to enhance its demand deposit ratio also to promote more businesses that has higher yields. So that should enhance the net interest margin and net interest spread.

[Isabella Wang, executive]

We are now in the Q&A session. [Operator Instructions] We will have our senior management to answer your questions.

So there appears to be no further questions. So President Chen, should we close the call?

[Stephen Chen, executive]

Sure. Thank you for everyone's participation in this conference call, and have a good day.

[Isabella Wang, executive]

Thank you.