Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2020-Q3

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2020 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 2020 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 Vice President of the Financial Holding Company, to review the third quarter results with us. Also in the room are Hanwei Lin, Chief Actuary of Shin Kong Life; [ In Zhongde ], Head of the Investment Team in 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. The 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 17.7 billion for the first 9 months 2020. Earnings per share was TWD 1.38. Consolidated shareholders' equity increased 4.7% quarter-on-quarter to TWD 244.94 billion, and book value per share at the end of third quarter was TWD 18.41.

Core business of each subsidiary remained stable in the third quarter, which will be covered later in the presentation. I would also like to highlight that the result of the 2020 TCSA, Taiwan Corporate Sustainability Award, was announced last week. And Shin Kong won the Corporate Sustainability Report, Financial and Insurance Industry Platinum Award, which is the highest honor in the domestic sustainability management field and sustainability report evaluation.

In seeking profit and growth, Shin Kong Financial Holding also brings together the enterprise and functions of its subsidiaries to implement corporate governance and realize the ESG commitment through tangible actions.

Page 10. FYP decreased 29.4% year-on-year to TWD 59.49 billion due to product mix adjustments. As the share of regular premium increased to 63.4%, the first 9 months, FYPE over FYP was 36.8%. Also foreign currency policies remained the sales focus this year. FYPE of such policies amounted to TWD 43.72 billion, accounting for 73.5% of total FYP.

With new business inflows and lower declare rate, cost of liabilities declined 9 basis points year-to-date to 3.88%. For the full year 2020, cost of liabilities is expected to fall by 10 to 15 basis points.

Page 13 shows the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first 9 months 2020 was 4.02%. Breakdown of investment returns for different asset classes were: real estate, 3.9%; mortgage and corporate loans, 1.7%; policy loans, 5.5%; overseas investments, 3.4%; domestic securities, 7.4%; and cash, 0.4%.

Page 14 presents the portfolio of overseas fixed income at the end of September. Overseas fixed income topped TWD 1.9 trillion. Corporate bonds accounted for the largest share, representing 45.4% of the total, followed by international bonds at 28% and government bonds at 25.9%. About 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds.

As for our portfolio by region, North America and Europe are Shin Kong Life's key investment areas, accounting for a combined share of 62.3%.

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 77.1%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDF accounted for 58% and 42%, respectively, of traditional hedges. Appreciation of NT dollar and higher NDF cost drove up annualized hedging cost to 2.33% for the first 9 months. In order to better control hedging cost, Shin Kong Life will continue to build up its foreign currency volatility reserve. The balance reached TWD 5.4 billion at the end of October.

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 continued growth in the first 9 months, driven by the increase in investment income. Pre-provision operating profit was TWD 6.17 billion, which was 2.6% higher from a year earlier. Consolidated net income grew 15.3% year-on-year to TWD 4.72 billion.

Page 21. The bank's loan balance rose 4.6% year-to-date to TWD 634 billion. Consumer lending continued an upward trend with mortgage and unsecured loans increasing 4.9% and 6.9% year-to-date, respectively. As for corporate lending, the momentum came from SME loans. The full year target for loan growth remains unchanged at 6%.

Page 22. Net interest margin for the third quarter stayed at 1.21%. Net interest rate decreased 2 basis points quarter-on-quarter to 1.61%. As the deposit book is steadily repricing downwards, both net interest margin and net interest rate are expected to be stable in the near term.

Page 24. Wealth management income for the first 9 months was TWD 1.82 billion, and sales momentum came from mutual funds and overseas securities. The fee income from these 2 categories accounted for 53.7% of the total. Going forward, the bank will promote online marketing campaigns to attract new funds and grow its client base. The intelligent robo-advisory platform will be launched by year-end to enhance customer experience.

Page 25. Asset quality was stable with NPL ratio at 0.19% and coverage ratio at 669.5%. Both ratios were better than the industry average.

Page 27. MasterLink Securities recorded an after-tax profit of TWD 1.19 billion for the first 9 months 2020. The revenue from brokerage business grew 43.4% year-on-year to TWD 3.16 billion, accounting for 65% of the total operating revenue. Brokerage market share was 3.72% and ranked the sixth place in the industry.

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

[Operator]

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

[Jemmy Huang, analyst]

Just 2 questions from me. On Shin Kong Life, if I look at presentation Slide 14, I think your overseas fixed income allocation, the government bond proportion actually increased. But if we look at the geographic breakdown, North Asia actually increased at least to trend corresponding with each other or it's actually different. That's the first question.

Second one is on bank. I think the credit cost has been low -- lower than 2019, but previously, I think that your guidance were actually targeting flat credit cost year-on-year. So not sure whether we can see some upside on credit cost. And how do you perceive the asset quality outlook in the next 12 months for your own book?

[Stan Lee, executive]

Thank you, Jemmy, for your questions. First of all, I would say, the first question regarding to fixed income, you are absolutely right that we are increasing the government bond position. Also, those positions are mainly for the incremental portions, of course, is from the investment in North America. We are slightly adjusting down the Europeans and particularly for the nondevelopment countries, non-G7 bonds and shift toward North America bonds, mainly because of the concerns for credit.

State of the global had -- is under the severe impact of COVID-19. Of course, everybody has high hope to vaccines and also the stimulations of the central governments. But again, we will rather play safe now. That's the major reason why we shift to government bonds, why we also shift to North America.

For the bank, I have to make that the previous guidance was not very precise and in line with what is happening here. As I mentioned to you, we are -- I think not only Shin Kong, we all worry a bit about the impacts from COVID-19. However, if we look into the numbers of the bank across different segments, there's no deterioration. Also in the bank's presentations, the new NPL generated in this quarter was even lower. It was only about TWD 271 million. It's lower than our expectations, and that is also the reason why the credit cost for the first 9 months is annualized. That was only about 15 basis points.

In the previous quarter, I think the number was 17 basis points. Even from the quarter-to-quarter's point of views, it is now still very benign. However, we are not going to be very recklessly growing the business. We're still to remain relatively cautious. We think that some of the grace periods for our clients' payments, particularly for their interests, not their principals this year will somehow lengthen the default period if there's any. So now we still want to take care of the credit qualities first or asset quality first instead of growing the business first.

[Jemmy Huang, analyst]

Can I ask a follow-up question that, for the North Asia -- North America -- sorry, North America, are you buying U.S. government bonds? I don't think so, right? Or were you buying to Mexico the like SOE bonds?

[Stan Lee, executive]

We are buying into a longer-dated U.S. government bond. I'm not going to say those bonds will stay in our book for a long time, but if we look into the segment now, the new money yields, across the board, even do take the very long duration, say, 30, 40 years, mostly 40 years now [ goal is 7 ]. And to those SOEs from the emerging markets, what you can get is nearly 2.5%, not very high. And hence, to our stock now is we only sign and holding those very, very long duration bonds to get only 2.5%, 2.6% of yield and may not work.

So for the new terms, we think that it is about time to slightly shifting the book to OCIs. That is the reason why you see, when we shift some of the book from the ACs to OCIs, we're now growing the OCI bond portfolios to the amount of around -- TWD 20 billion -- TWD 200 billion, sorry, TWD 200 billion equivalent of the portfolio to the OCI bonds.

And because we have never been very active in terms of increasing OCI's portfolios, we are now relatively, say, considering it, right? And as we all know, there's not much yield pickup across the board, and the safer segment still in North America and in the treasury segment. So that's the reason why you see the incremental portions now -- for now increase in the longer-dated U.S. Treasury bond.

[Operator]

[Operator Instructions] The next question is coming from [ Jenny Yu ] of President Securities.

[Unknown Analyst]

I have 2 questions on Shin Kong Life. And for the first one, I would like to ask what's your product strategy going forward for ICS and IFRS 17 adoption. Will you sell more investment-linked products like other peers? And for the second one. FYP declined 30% Y-o-Y. Can we expect that similar trend into 2021?

[Stan Lee, executive]

I would like to have Chief Actuary Hanwei Lin to answer your questions. Hanwei?

[Hanwei Lin, executive]

For product strategy, currently, we're focusing on U.S. dollar-denominated products. Those products give us better value and investment yield. But in terms of ICS or IFRS 17, in order to accumulate the CSM, we're also focusing on traditional kind of product like the protection, term life, health insurance. And those products will give us value and better [ statement ] and to adapt to future IFRS 17.

Also, in terms of ICS, I think not just our product strategy, I think the product trend in the insurance industry will be given less guarantee in supplying the product to the customer because the longer-term guarantees will give you a higher capital burden on yourself. So I think the future product trend, you will see product might get shorter. But in my currently, whole life products, you will see more and more term product.

And as you mentioned, you might -- yes, you might see more and more investment type of product. That product currently is not our main focus, but in the future, we will also probably grow this kind of product in product mix.

As for FYP, yes, this year, probably down about 30%. I think next year, we also keep adjusting our product mix, as you mentioned, to adopt the future standard of IFRS 17 and ICS, so we transform from the shorter-term product -- shorter-pay products to a more regular-pay product and more protection kind of products. So those kind of products will have probably smaller premiums but better value for the company and the customers. So probably FYP next year will be -- probably will be also down a little bit, but we'll keep our value the same or even better.

[Operator]

And the next question is coming from [ Michael ], FA Securities.

[Unknown Analyst]

I have 2 questions. The first one is regarding the hedging cost. Can you help us clarify why the company's hedging cost is way higher than other life insurance companies? And the second question is regarding the VNB and VNB margin in the first 9 months and the outlook for year 2021.

[Stan Lee, executive]

Thank you, [ Michael ], for the question. On the hedging front, I would say that -- well, in this year, we face the same issue that we do hedge through NDF, that will be extremely difficult and pricey, right? Unfortunately, that is our case. Unfortunately, that is our case.

It doesn't necessarily mean, going forward, we have to face the same amount of pressure though because I think the Chinese session, I mentioned that we planned, there is a likelihood that we will further increase the FX of the reserve in the future, and that will help us to somehow decrease the NDF headwinds from time to time. Not for good, though, but from time to time. When it's very pricey, there's alternatives for us to manage the overall portfolios flexibly, which is not the case.

As you know that, before, the one-off reserve we provided in the month of July, we almost depleted all of our reserves. And we were forced to increase the NDFs in a very pricey moment. Now we have reserves in the level over TWD 5 billion as of the end of October. If there's a chance to further increase the reserve pool before the end of the year next year, we will start the year with a better off flexibility. And hopefully, that will help us to mitigate the very pricey hedgings now.

CS fund is a totally different story. CS mainly refers to differentials between U.S. and Taiwanese policy rates. And now because everybody is really low, the spread was thin. However, CS is not very flexible. And every move -- almost every moves in the CS, if you want to increase the hedging through the CS, it has to be done through applications to the central bank, depending on their approvals or not. So as for now, we mainly focus more on [ profits ], mainly focusing more of the FX reserves other than trying to increase the CS. It will be increased to through time but not instantly.

Your second question is about the product side, I would like to have Hanwei Lin to answer your question, [ Michael ].

[Hanwei Lin, executive]

Our VNB margin for the first 9 months did increase. It increased from 21% last year to 25% -- about 25% this year. So our VNB margin did increase. So the FYP down about 29% for the first 9 months but VNB -- because VNB margin increased, only down about 15%, 15%. And as for 2021 VNB because, because we are still in the budgeting process, so I will comment that probably next time.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Well, moderator, if there's no further questions, I'd like to now close the meeting.

[Operator]

Yes, sure. Thank you, Mr. Lee. And ladies and gentlemen, we thank you for all your questions, and 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.