Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2019-Q3

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2019 Third 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 2019 Third Quarter Analyst Call. Before we start, I would like to introduce my colleagues who are with me today. We are happy to have Sunny Hsu, Executive Senior Vice President of the Financial Holding Company, to review the third 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 continued its positive momentum in the first 9 months 2019, reporting a consolidated after-tax profit of TWD 19.06 billion. Consolidated total comprehensive income reached TWD 43.74 billion, TWD 45.11 billion higher year-on-year, compared with loss of TWD 1.37 billion a year earlier.

Earnings per share was TWD 1.55. Consolidated shareholders' equity increased 39 -- 32.9% year-to-date to TWD 192.18 billion, and book value per share at the end of September was TWD 15.17. Core business of each subsidiary remained stable in the third quarter, which will be covered later in the presentation.

Page 10. FYP for the first 9 months 2019 increased 0.4% year-on-year to TWD 84.22 billion, securing a market share of 8.4%. Shin Kong Life has been actively promoting foreign currency policies to contain the hedging cost, facilitate ALM matching and grow value of new business. FYP of such policies for the first 9 months grew 21.3% year-on-year to TWD 55.96 billion. The improved [ balance ] mix led to a year-on-year increase of 8.2% in VNB. In addition, annualized cost of liabilities declined 4 basis points quarter-on-quarter to 4%, in line with our guidance.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first 9 months 2019 reached 4.33%, thanks to a higher recurring income and properly controlled hedging cost. Breakdown of investment returns for different asset classes were: real estate, 3.2%; mortgage and corporate loans, 4.3%; policy loans, 5.6%; overseas investments, 3.9%; domestic securities, 7.3%; and cash, 0.8%.

Page 14 presents the portfolio of overseas fixed income. At the end of the third quarter, overseas fixed income amounted to TWD 1.79 trillion. Corporate bonds accounted for the largest share, representing 46.2% of the total, followed by international bond at 30.3%. Emerging market government bonds accounted for 22.7% at quarter end.

You may see the chart of the overseas fixed income's portfolio by region on the upper-right corner. North America and Europe accounted for the majority of overseas fixed income with a combined share of 59.8%.

Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of third quarter, hedging ratio was 74.1%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDF accounted for 69% and 31%, respectively, of traditional hedges. [ Amount ] fluctuations in foreign exchange and revised hedging cost for the first 9 months was well controlled at 1.5%. Foreign currency volatility reserve reached TWD 8.4 billion, up by TWD 3.6 billion year-to-date.

I will now hand over to Isabella, who will take you through the results of Shin Kong Bank and MasterLink Securities.

[Isabella Wang, executive]

All right. Thank you, Stan. Please turn to Page 20. Shin Kong Bank delivered a stable performance for the first 9 months 2019. Its net income grew 10% year-on-year to TWD 2.62 billion on the back of growth in wealth management business. Pre-provision profits grew 5.4% year-on-year to TWD 6.01 billion, and consolidated after-tax profit was TWD 4.09 billion, up 4.9% year-on-year.

Page 21. The bank's loan balance rose 3.3% year-to-date to TWD 585.71 billion. Consumer lending maintained an upward trend with mortgage and unsecured loans increasing 3.8% and 4.3% year-to-date, respectively. As for corporate lending, the momentum mainly came from domestic large corporates and overseas syndicated loans. The loan growth target for 2019 remains unchanged at 6%.

Page 22. Due to fierce competition in the loan market and Fed rate cuts, net interest spread for the third quarter came down by 2 basis points quarter-on-quarter to 1.8%. Net interest margin remained flat at 1.43%. Given the ongoing competition in the loan market, the bank expected the full year figures to fall below the level of 2018.

Page 24. Positive market sentiments have helped to create sales momentum, driving up fee income from mutual funds and overseas securities by 23.2% and 32.2% year-on-year, respectively. Wealth management income for the first 9 months grew 18.5% year-on-year to TWD 1.88 billion. As for product strategy, mutual funds and overseas securities are expected to draw more attention from clients in the fourth quarter. Meanwhile, Shin Kong Bank will promote foreign currency policies and regular-paid products. The growth target for wealth management income in 2019 is double digits.

Page 25. Asset quality was stable with NPL ratio at 0.2% and coverage ratio at 635.07%. New NPL generated in the third quarter was TWD 385 million, down by TWD 165 million compared to the previous quarter.

Page 27. MasterLink Securities recorded an after-tax profit of TWD 1.3 billion, up 31.1% year-on-year. Brokerage market share was 3.69% with a ranking of top 6 in the industry. Proprietary trading income grew 50.5% year-on-year to TWD 2.13 billion, which was driven by the increased disposal gains from equities and fixed income.

So this is the end of our results presentation. Please start the Q&A session.

[Operator]

[Operator Instructions] The first question is coming from Daisy Chen of Nan Shan Life.

[Daisy Chen;Nan Shan Life Insurance Co., Ltd, analyst]

I have a question about cost of liabilities. As for the end of third quarter, the cost of liabilities was 4%. So what's the target for year-end? And can we expect a decline of 10 basis points for the next year?

[Stan Lee, executive]

Thank you. For this year, the target is 10 basis points or above. So you know that from 4.08% in 2018, if we deduct another 10 basis points or slightly more, that's going to be less than 3.98%.

As for next year, I would like to hand to Hanwei Lin to answer your question.

[Hanwei Lin, executive]

Because we expect probably a lower FYP in the next year, so cost of liability, we expect maybe lower, about 5 to 10 basis points. It's hard to say a definite number. It depends on the market condition and -- but we're still keeping selling U.S. dollar policy and protection policies. So a range -- there might be a wider range, but I think lower about -- from 5 up to 10 basis points.

[Stan Lee, executive]

Did that answer your question?

[Daisy Chen;Nan Shan Life Insurance Co., Ltd, analyst]

Okay, okay.

[Operator]

The next question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

Just one question from me. If you take into account your view on the interest rate environment and also your [ asset allocation ], do you [ see -- do you ] expect the recurring yield can show year-on-year improvement in 2020?

[Stan Lee, executive]

Hanwei?

[Hanwei Lin, executive]

Well, if you look at the reinvestment rate now versus the beginning of the year, it dropped about 80 basis points, right? So there -- certainly, there is a little bit difficult to maintain that momentum in terms of increase in the recurring yield. It's going to be very difficult from the overseas investment front. But on the domestic one, we will continue to increase the high dividend yield stock to beef up the [ real ] NT-dollar [ rate. ] So hopefully, that part will offset part of the drop in the recurring [ lowering ] interest rate. But fortunately, that our costs in terms of the dividend cost and the new policy right now, the rate is declining as well. So that part was certainly offset in terms of the profitability.

[Jemmy Huang, analyst]

Yes. Okay. So I mean if we compare the pre-hedging recurring yield versus your cost of liability, so you think the spread is now going to narrow in 2020. Is that a fair statement?

[Hanwei Lin, executive]

Well, it's because -- because [ we hold ] the inventory, for instance, our [ recurring ] foreign fixed -- overseas fixed, [ the view ] is that's around 4.8%, 4.85%. And for the international [ bar -- Formosa bar, sorry, ] it's about 4.5%, and that hasn't changed much. So the new money certainly is going to draw a little bit on the recurring side, but it's not going to be huge in terms of if we are only looking at next year. And for sure, if you are looking even further ahead and the interest rate continue to drop, that the recurring yield in terms of foreign fixed is going to drive that for sure.

[Stan Lee, executive]

All right. So Jemmy, it seems to me, right now, it's hard to be very optimistic on enhancing or even maintaining the spread. The fact is that since the third quarter last year, we have finally seen the positive spread before hedging, okay? Before hedging, we started to have a yield higher than the cost [indiscernible]. Now the spread is around 15 basis points.

Is that positive spread going to shrink or not? I think to be relatively neutral on the market conditions, I think there's a likelihood that the cost was continuing to drop, not as fast as this year, as Hanwei just indicated, yet the yield may drop slightly faster than the cost. But still, that is not the net results for the recurring [ profitabilities. ] There's another missing puzzle. That is recurring mortality, mobilities and fee incomes.

Next year, along with the change of the regulations, we are going to focus even more on selling the foreign currency policies and the protection products, both, in a sense, will help us to enhance the recurring fundamental incomes. So we'll see whether those positive factors will be enough or not enough to offset the slightly stressful situation in the global yield environment.

[Hanwei Lin, executive]

And one other silver lining is that if you look at the CS, currency swap hedge cost in the beginning of the year, roughly [indiscernible] close to 3% or sometimes north of 3%, and now it's around 1.7%. So -- but that to me is still very high. But if you look at the spread between the 10 years or 30 years, U.S. and the Taiwanese treasury, so I think there is -- that's a positive sign is that the currency swap rate cost is going the right direction and NDF will follow suit, and that will be pretty positive for us.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

If there's any further question, please ask us now. If there's not, then moderator, let's close the meeting.

[Operator]

Yes. Thank you, Mr. Lee. And ladies and gentlemen, 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.