Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Analysis

Shin Kong Financial Q2 2024 Highlights Strong Performance

Shin Kong Financial delivered robust results in Q2 2024, with consolidated after-tax profit reaching TWD 20.5 billion and shareholders' equity growing 3.4% to TWD 270.2 billion. Shin Kong Life's first year premium surged 21.3% to TWD 28.6 billion, driven by sales of foreign currency policies. Net interest income for Shin Kong Bank rose 8% to TWD 6.7 billion, while net income increased 36.7% to TWD 2.2 billion. Wealth management income also saw a significant rise, up 33.6% to TWD 1.8 billion, and the bank's asset quality remained robust. Full-year loan growth is expected to be in the mid-single digits.

Shin Kong Financial Holdings Sees Significant Profit Growth

In the first half of 2024, Shin Kong Financial Holdings recorded a remarkable after-tax profit of TWD 20.5 billion. This led to a 3.4% quarter-on-quarter increase in consolidated shareholders' equity, which reached TWD 270.2 billion. The book value per share at the end of the second quarter was TWD 17.09.

Shin Kong Life Insurance's Strong Performance

Shin Kong Life Insurance saw its first-year premium increase by 21.3% year-on-year to TWD 28.6 billion, capturing a market share of 7.6%. This growth was largely driven by strong sales momentum and a strategic focus on foreign currency policies, which accounted for TWD 16.7 billion, or 58.5%, of total first-year premiums. Additionally, Shin Kong Life's strategy of promoting protection products, health insurance, and riders, all of which yield higher Contractual Service Margin (CSM), contributed to significant profitability. Notably, the CSM for the first half of 2024 grew by 14% year-on-year.

Strong Investment Portfolio

Shin Kong Life's investment portfolio totaled around TWD 3.5 trillion by the end of the first half of 2024. The annualized investment return after hedging was 4.4%, driven by higher realized capital gains from equities and lower hedging costs compared to the previous year. A large portion of this portfolio consisted of overseas fixed-income assets, totaling TWD 2.4 trillion, primarily invested in U.S. dollar-denominated investment-grade corporate bonds.

Effective Hedging Strategy

The company's hedging ratio stood at 84.8% by the end of the first half. This included instruments like currency swaps, non-delivery forwards, and naturally hedged foreign currency policies, contributing to a reduction in annualized hedging costs to 117 basis points, largely due to the appreciation of the U.S. dollar. The foreign currency volatility reserve was TWD 23.7 billion at the end of June.

Shin Kong Bank's Consistent Growth

Shin Kong Bank delivered stable results with an 8% year-on-year growth in net interest income, reaching TWD 6.7 billion, and a 36.7% increase in net income to TWD 2.2 billion. The bank's net interest margin rose by 9 basis points quarter-on-quarter to 1.23%, and the net interest spread increased by 5 basis points to 1.59%. The bank's loan balance was TWD 833 billion, marking a 3.2% increase year-to-date. The asset quality remained robust, with an NPL ratio and coverage ratio at 0.12% and over 1000%, respectively.

Wealth Management and Brokerage Income

Wealth management income surged by 33.6% year-on-year to TWD 1.8 billion, driven by increased sales of mutual funds and bancassurance products. Full-year wealth management income is expected to exceed the yearly guidance. On the brokerage side, income for the first half of 2024 grew 50.9% year-on-year to TWD 3.5 billion, significantly boosting the overall profitability of Shin Kong Financial Holdings.

Outlook and Strategic Considerations

Looking forward, Shin Kong Financial Holdings expects mid-single-digit loan growth for the full year. Given the favorable current market conditions, the net interest margin is anticipated to stay similar to the 2023 levels, with an outlook for higher net interest rates. The company remains focused on maximizing returns while maintaining robust risk management, particularly through its effective hedging strategies and strong asset quality in loans.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2024 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.

Now I would like to introduce Ms. Isabella Wang, IR from Shin Kong Financial Holding Company. Ms. Wang, please begin.

[Isabella Wang, executive]

Good afternoon, ladies and gentlemen. Welcome again for joining Shin Kong Financial Holding 2024 Second Quarter Results Conference Call. Before we get started, please allow me to introduce the management who are with us today. Here in the meeting room are Stephen Chen, President of Shin Kong Financial Holding; Judi Ling, CFO of Shin Kong Financial Holdings; Vicky Lu, Vice President of Shin Kong Financial Holding; Emily Lu, Vice President of Shin Kong Financial Holding; Hanwei Lin, Chief Actuary of Shin Kong Life; Stephen Wang, Executive Vice President; Stacey Chen, Senior Vice President of Shin Kong Life; Monica, member of our IR team.

Now please turn to Page 4. Shin Kong Financial Holdings recorded consolidated after-tax profit of TWD 20.5 billion for the first half of 2024. Consolidated shareholders' equity increased 3.4% quarter-on-quarter to TWD 270.2 billion, and book value per share at the end of the second quarter was TWD 17.09.

Our subsidiaries build up stable business momentum during the first half, and more details will be covered later on in my presentation.

Page 10. Driven by strong sales momentum and foreign currency policies, first year premium for the first half increased 21.3% year-on-year to TWD 28.6 billion, boosting market share to 7.6%. Shin Kong Life's product strategy aims to provide foreign currency policies and high CSM products, which create stable interest spreads, better asset liability matching and CSM accumulation.

The sales of foreign currency policies was TWD 16.7 billion, accounting for 58.5% of total first year premium. On the other hand, FYPE grew 6% year-on-year to TWD 11.1 billion. And FYPE over FYP was 38.6%.

Page 11, just as we have guided the market, CSM serves as an important profitability indicator under IFRS 17. Shin Kong Life has been promoting protection products, health insurance, riders, those high CSM products to accumulate CSM balance. The company's top priority is to accumulate CSM of TWD 30 billion since 2020.

The table on the lower left corner demonstrate Shin Kong's achievement on CSM over the past few years. As you can see, CSM for the first half of 2024, grew 14% year-on-year. The table on the lower right corner shows that CSM contribution from protection type, health insurance and riders was 87%, remaining at a high level.

Page 14 presents the overall view of Shin Kong Life's investment portfolio. Total investment was around TWD 3.5 trillion at the end of the first half. Annualized investment return after hedging for the first half was 4.4%, mainly contributed by higher realized capital gains from equities and lower hedging costs as compared to the same period of last year.

The breakdown of investment returns for different asset classes were: real estate, 2.2%; mortgage and corporate loans, 2.5%; policy loans, 5.3%; overseas investment, 2.9%; domestic securities, 11%; and cash, 1.7%.

Page 15 shows the portfolio of overseas fixed income. At the end of June, overseas fixed income position was around TWD 2.4 trillion. The funds were mainly deployed in investment-grade corporate bonds and the portfolio remains similar to that of the previous quarter. Over 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds.

Page 17. The pie chart on the left shows the mix of hedging instruments. At the end of the first half, hedging ratio was 84.8%, including currency swap, nondelivery forward and naturally hedged foreign currency policies. Annualized hedging costs further reduced to 117 basis points on the back of U.S. dollar appreciation. The balance of foreign currency volatility reserve amounted to TWD 23.7 billion at the end of June.

Now let's move on to the bank. Page 21. Shin Kong Bank delivered stable results for the first half. Net interest income grew 8% year-on-year to TWD 6.7 billion on the back of net interest margin expansion and decent loan growth. Net income grew 36.7% year-on-year to TWD 2.2 billion, mostly driven by the increase in wealth management income.

The bank's pre-operation -- the bank's pre-provision operating profit reached TWD 5 billion, which was 3.4% higher from the same period last year. Consolidated net income grew 1.2% year-on-year to TWD 3.5 billion.

Page 22. The bank's loan balance was TWD 833 billion at the end of the first half, which was 3.2% higher year-to-date. Consumer loan book rose 2.1% year-to-date, representing 61% of the loan portfolio as unsecured consumer loans and other consumer loans increased 4.5% and 10.4% year-to-date, respectively. The full year loan growth is expected to mid-single digits.

Page 23. Benefiting from higher loan-to-deposit ratio and growth in high spread loans, net interest margin increased 9 basis points quarter-on-quarter to 1.23%. Net interest spread rose 5 basis points quarter-on-quarter to 1.59%. Given the current market conditions, we expect full year net interest margin to stay similar to the level of 2023 and net interest rate to go up.

Page 25. Wealth management income increased 33.6% year-on-year to TWD 1.8 billion, thanks to surge in sales of mutual funds and bancassurance products. The full year wealth management income is expected to exceed the yearly guidance.

Page 26. Asset quality remained robust. NPL ratio and coverage ratio were 0.12% and over 1,000%, respectively. Both ratios surpassed the industry average. New NPL generated in the second quarter of 2024 was nearly TWD 390 million, accounting for less than 0.1% of total loans.

Page 28. Fueled by the increase in average daily market turnover, brokerage fee income for the first half grew 50.9% year-on-year, making brokerage income reach TWD 3.5 billion. MasterLink Securities also capitalized our market trends to enhance investment income and after-tax profit amounted to TWD 2.1 billion for the first half.

That concludes the presentation for today. Now I would like to proceed with the Q&A session.

[Operator]

[Operator Instructions] Our first question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

A couple of questions for life insurance operation. The first one is in Page 35, the adjusted net worth movement. Could you break down the other movement of minus TWD 10.3 billion by some of the major items? And the second question is for the new FX reserve mechanism, what's the ceiling for the FX reserve balance?

The third question is if I look at your FYP mix, the FYPE divided by FYP is actually the ratio is down year-on-year, but the VNB margin appears to be better year-on-year. So how do we reconcile the discrepancy?

The final question is, in theory, I think the board should respond to the CTBC's tender offer by giving the opinion to the shareholders. So will you do that after the official, let's say, FSC approves CTBC tender offer, then the Board will announce the opinion on the tender offer?

[Stephen Chen, executive]

Sorry, can you repeat the -- the first question?

[Jemmy Huang, analyst]

Yes sure. The first question is in Page 35. The adjusted net worth movement. There is other movement minus TWD 10.3 billion. Is it possible to give some breakdown of the major items?

[Stephen Chen, executive]

You can -- we [indiscernible] question.

[Isabella Wang, executive]

Yes. For FX [ translation ] reserve, I think your question is about the ceiling of the reserve in the future if we will apply the new method. And the ceiling will be TWD 190 billion because the regulation want us to increase the capital. So that's why if we apply the new guidance, we will have a higher ceiling.

[Stephen Chen, executive]

Let me get back to you on the CTBC TO tender offer proposal. I think upon approval, regulatory approval, which may take place on September 16, and they will submit the TO application immediately. At the same time, they will also copy their application to our company. So upon receiving their formal proposal of TO tender offer, we will have our Audit Committee to review their proposal.

And of course, the proposal will also be reviewed by an independent financial adviser, which will assist our Audit Committee to come up with their recommendation to the Board. That is the process, okay?

On the VNB [indiscernible] better.

[Hanwei Lin, executive]

For the VNB, last year, I think because last year, in -- for last year, the FYP reduced more than 20%. So I think during the last year, you see the changing -- the product structure that we improved from that. And also we talked about in early session, the VNB equivalent investment return are also higher. So overall, the VNB performance is better than the FYP number.

And Jemmy, for the TWD 10.3 million other adjustment, I have the answer, but I [ just ] going to find you right now. I go give you back...

[Jemmy Huang, analyst]

Yes, sure.

[Operator]

[Operator Instructions]

Okay. There appears to be no further questions at this point. President, Chen, can we close the conference call now?

[Stephen Chen, executive]

Okay. Yes. Thank you for everyone's participation in this conference call.

[Operator]

Thank you, President, Chen. 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. Thank you, and goodbye.