Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2021-Q3

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2021 Third Quarter Earnings Conference Call. [Operator Instructions] 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, the Senior Vice President of Shin Kong Financial Holding Company. Mr. Lee, please begin.

[Stan Lee, executive]

Thank you, moderator. Welcome again for joining the Shin Kong Financial Holding 2021 Third Quarter Analyst Call. Before we start, I would like to introduce my colleagues who are with me today. Here in the meeting room are Hanwei Lin, Chief Actuary of Shin Kong Life; [ Kun-Hsi Liu ], 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 the 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 consolidated after-tax profit of TWD 21.66 billion for the first 9 months 2021, up 22.3% year-on-year. Earnings per share was TWD 1.62. Consolidated shareholders' equity reached TWD 249.76 billion and book value per share at the end of September was TWD 17.39.

The subsidiaries also delivered strong results for the first 9 months, which will be covered later in the presentation. We would like to highlight that the company's efforts on ESG matters were recognized by being included in the DJSI World Index earlier in this month. As ESG ratings, methodologies continue to evolve, we know there is still work to do and we will work hard to meet expectations.

Page 10. Not simply aiming for sales volume or market share, Shin Kong Life choose to promote foreign currency policies and value forecast products for stable interest spread, better asset liability matching and CSM.

Despite the decline in FYP, the sales of foreign currency policies for the first 9 months amounted to TWD 27.91 billion, accounting for 78.8% of the total. FYP of health insurance for the third quarter also grew 76.3% quarter-on-quarter as the COVID-19 pandemic came under control and sales activities picked up pace.

FYPE reached TWD 12.5 billion and FYPE over FYP was 35.3% higher than the industry average.

As for cost of liabilities, it grew 6 basis points year-to-date, to 3.77%.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first 9 months was 3.86% as investment income grew 1.6% year-on-year. Breakdown of investment returns for different asset classes were: real estate, 4.2%; mortgage and corporate loans, 1.7%; policy loans, 5.4%; overseas investment, 3.7%; domestic securities, 5.3% and cash 0.2%.

Page 14 shows the portfolio of overseas fixed income at the end of September. Overseas fixed income TWD 2 trillion. In the third quarter, the funds were predominantly deployed in investment-grade corporate bonds as a result. Corporate bonds accounted for the largest share, representing 48.3% of the total, followed by international bonds at 26.6%, emerging market government bonds accounted for 24.7%.

About 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds. You may also find the chart of the overseas fixed income's portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed incomes, showing a combined share of 61.2%.

Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of the first 9 months, hedging ratio was 79.7%, including CS, NDF and naturally hedged foreign currency policies. CS and NDF accounted for 53% and 47%, respectively, of traditional hedges. Annualized hedging cost was 1.75% as foreign currency volatility reserve was TWD 2 billion. As the cost of traditional hedges tools continue to decrease and Taiwan dollar remained largely stable versus U.S. dollar. The company is confident to keep the full year hedging cost below 2% as expected.

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 achieved a strong quarter on many fronts. Cumulatively, net interest income grew 11.9% year-on-year with stable loan growth. Net income increased 2.5% year-on-year to TWD 2.56 billion. Pre-provision operating profit reached TWD 6.77 billion, which was 9.7% higher from a year earlier. Consolidated net income grew 9.3% year-on-year to TWD 5.16 billion.

Page 21, the bank's loan balance rose 7.2% year-to-date to around TWD 700 billion. Consumer lending grew 11% year-to-date and represented the largest segment of the loan portfolio as mortgage and other consumer loans increased 11.4% and 15.7% year-to-date, respectively. The full year loan growth is expected to exceed 8%, which is higher than the original target.

Page 22. Fierce competition and abundant liquidity in the market put downward pressure on the bank's average lending rate. As a result, net interest spread for the third quarter decreased 2 basis points quarter-on-quarter to 1.65%. Net interest margin decreased 1 basis point quarter-on-quarter to 1.23%.

Page 24. Wealth management income for the first 9 months increased 6.8% year-on-year to TWD 1.94 billion, which was boosted by stronger sales momentum in investment products. As for product strategy, investment products are expected to draw more demand from clients in the fourth quarter. In the meantime, Shin Kong Bank will promote foreign currency policies and regular pay products. The growth target for wealth management income for 2021 is 5% to 10%.

Page 25. Asset quality was benign with NPL ratio at 0.17% and coverage ratio at 764.82%. Both ratios were better than the industry average.

Page 27, MasterLink Securities generated a brokerage fee income of TWD 4.39 billion for the first 9 months, which was 66.7% higher year-on-year. Proprietary trading income amounted to TWD 2.52 billion, driven by the disposal gain from equities, which was TWD 900 million higher year-on-year.

Consolidated net income increased more than 150% year-on-year to TWD 3.03 billion. And this is the end of our results presentation. Moderator, please start the Q&A session.

[Operator]

[Operator Instructions] Our first question is coming from [ Kate Chan ] of Morgan Stanley.

[Unknown Analyst]

I got 3 questions over here. So the first 1 would be, Shin Kong has been raising the have been raising capital in the past 3 years, about TWD 30 billion was raised and injected into Shin Kong Life. Do you plan to do another fund raising next year and invest it in Shin Kong Life again for IFRS 17 adoption? And if so, what would be the size and what kind of instrument will we be considering? So that's my first question.

And the second question would be on Shin Kong Life. So cash accounted for around 4.2% for Shin Kong Life's investment portfolio this quarter. So is this a comfortable level, do you expect to see further decline cash in the coming quarter?

And my last question would be on the bank. So we've seen both the net interest margin spread has declined in this quarter compared to last quarter. So I would want to ask what would be on the management's expectation of both U.S. and Taiwan rate hikes for next year? And how should that be improve our net interest margin for next year? So that would be my questions.

[Stan Lee, executive]

Thank you, Kate, for the question. About capital raising, you are right that we have been raising capital mainly for Shin Kong Life. But as I discussed with the investment community before, my thinking on why we raised capital. It's not because we want to have a very large amount of money and 1 shot [indiscernible] the capital needs. Well, because theoretically, that's not the most efficient way. Our way is to grow valuable products. As I mentioned, both in English and Chinese session, now the company's product strategy, particularly for insurance products. We are trying to accumulate as much as CSM as possible.

And apparently, you see that our FYP declined by 40% year-on-year for the first 3 quarters, and we are okay with it. It doesn't mean we are comfortable with it, so we are okay with it. If that produce enough value in our CSM. And that will be the key for us to adopt the new accounting rules and maybe the new capital equity rules. That's the key. To facilitate the products we want to sell to facilitate the general account book we are growing, we need capital to absorb the related assets and liabilities, risk generated from the growth. And that is why we are raising capital.

Are we confident that Shin Kong can adopt after 17 smoothly? Yes, of course. As today, I think it's CK, right, discuss with the investors before. You mentioned 2023 will be an important mark that insurance company shall be able to adopt preliminarily the IFRS rule, same here for Shin Kong. So we keep the same pace However, that also means maybe we need some support from the capital to grow such policies that can generate CSM as I mentioned.

So I cannot rule out the possibilities for us to raise another round of capital next year. I cannot give you a very solid and clear plan now because nothing has been approved by the Board yet. And I cannot give you any expectations of my own because that will be kind of irresponsible, but I can show you the same logic, the same thinking here. That we are heading to the way of adopting the new accounting rules and the new capital equity rules, and that means some capital may be raised.

I'm not seeing a [indiscernible] I'm not seeing a huge amount of capital that's been raised on a yearly basis. But there may be capital needs in the future. And no matter what the solid number will be, and it will be -- it's more inclined to be common equities. Again, any solid conquered information will be disclosed after the Board has a resolution.

And for cash, yes, we are now still seeing 4.2% as the proportion of the cash level. There is a chance for us to make the investment more efficient, and there's a chance that 4.2% will be even lower in the coming few quarters. Again, I think now it's very costly to hold cash, particularly in NT dollar, because the NT dollar cash yield is only 0.2%. And 0.2% is not even enough for new money, not to mention the overall cost of liabilities.

And for net interest margin, I do believe there is a chance for the interest rate -- benchmark interest rate to be hiked in Taiwan. There is a likelihood that we will benefit from that. However, personally, just personally, I don't think chance for me to see the Central Bank to hike the rate will be very, very high in the recent period. There is a chance, and we're looking forward to it. But just personally, I don't think it will happen very fast.

For the set or for the U.S. dollar-denominated bond yield, I'm a little bit more optimistic, particularly for the bond yield. If the bond yield climbing higher, and the bank now has slightly below 70% of the loan-to-deposit ratio, right? That means we have to utilize a certain amount of money and deploy those not only for loans, but also in the capital markets, right?

So if the new money and the reinvestment can enjoy the higher bond yield, that helps. That helps the [indiscernible] a bit. And that is also why in the Chinese session, the bank's President, bank CEO. Mr. [ Chen ] talk to the market is saying that there's a chance that we can stabilize NIM in the following quarters. I believe what he mentioned is more optimistic about is to the loan growth and also the investment yield, not the domestic [indiscernible].

[Unknown Analyst]

Yes. Great. One follow-up question is regarding -- you mentioned you're quite positive on the bond yields, especially those in the U.S. will reach a higher level for next year. So what kind of level are you guys expecting? And is the 10-year or 30-year bond yield really did go into a higher level, should that benefit our pre hedge or after hedge recurring yield for Shin Kong Life in next year? So do you expect a better recurring yield in 2022 compared to this year?

[Stan Lee, executive]

Thank you, Kate. We are more keen to see the term structure to be steepening or to raise in the longer end of [ term structure ]. 30 years U.S. dollar treasury now still below 2%. We think there's a chance for the 30 years bond yield treasure, of course, to be higher than 2% or maybe to 2.2%.

And what will be the impact? I cannot give you a very, very detailed number but I can share with you logically. Reinvestment and new investments for us retired about 1/10 of the bond portfolio every year, about 1/10. So if there is a 20 basis point yield pickup in average, because that 20 basis points may not happen for the whole year or maybe if we make it -- if we overly simplify it, saying that the overall yield is 20 basis points higher than the overall yield this year, 2021, then we can enjoy probably 2 to 3 basis points for our current bond portfolio. 2, 3 basis points, well that means a lot to recurring. I think it still means 1 to 2 basis points higher. And in this year, in 2021, you see that it's still in the declining trend. Our overall before-hedging yield still in the declining trend.

Just as I mentioned before, the decline compared to the year before, '21 to over 2020 it shrink significantly, cut in half. And for 2022, I believe the chance for us to have a more stable number, maybe still decline a bit, but not as much. And if the yield pick up enough, say much more than what I guided, 20 basis points, there's chance for us to lever it.

Should we be very optimistic? I wouldn't suggest though for the after-hedge recurring yield, I have confidence. I have more confidence because even in 2021, when we see the before-hedging yields declining, our after-hedge recurring yield is already 8 basis points higher than the year before.

The next year, I cannot be too optimistic about the further declining hedging cost. I think it will be stable, but there is a chance for the yield to pick up, right? So after hedge, I think I'm rather confident compared to the before hedge.

[Operator]

[Operator Instructions] And next, we'll have [ Frank Fung ] of Daiwa Capital Markets.

[Unknown Analyst]

I have 3 questions here, mostly on Shin Kong Life. The first 1 is on the cost of liabilities? I understand that for the past few years, you've guided a 5 to 10 bps decrease year-by-year. Do we foresee that trend to continue in 2022 or even down to 2023? That's the first 1 on the cost of liabilities.

And the second one is, I know that it's still in the budget season. But I'm asking is that if you have seen any trend on your recurring yield for next year, especially when rate hike is going to happen for the next maybe 12 to 18 months?

And the third 1 is regarding hedging cost. I've noticed that the hedging cost this year compared to peers is a little bit higher. Have you considered shifting some of your NDF positions maybe to currency swap? And as you may have known that the currency swap is actually relatively cheaper than NDF as of the end of this month or maybe today? Those are my 3 questions.

[Stan Lee, executive]

Thank you, Frank, for the questions. I would like to have Chief Actuary to answer your first question.

[Hanwei Lin, executive]

Yes. I think this year, cost of liability has been down about 6 basis points so far to quarter 3. So I think 5 to 10 basis points is right for this year, maybe close to about 9 basis points at the end of the year. I think next year, we'll still go down the similar product strategy to [indiscernible] our CSM and of course, depending on the market, I think 5 to 10 basis points can still continue.

[Stan Lee, executive]

Frank, did we answer your question for the first one?

[Unknown Analyst]

Yes, very big.

[Stan Lee, executive]

Let me answer your second question on the recurring yield. I think Kate and I have quite a comprehensive discussion for the last few minutes. Let me try to have some conclusions. First of all, I said that I'm more confident in the after-hedging yield, after hedging recurring yield to me, I think, it will further improve. That's what I'm thinking. It will further improve, mainly driven by not as this year the hedging, but driven by a rather stable -- relatively more stable before hedging yield and also continuously slightly improved hedging costs. That's one thing.

As for the before hedging side, would rather be relatively more conservative because the overall bond here still provides support for the overall profitability. Although we are selling less, much less than before, we had to somehow dispose some higher yield bonds that we had before. And those bonds somehow if we dispose it, they put on some pressure on us. And the new bonds, the new money yield, even if U.S. a long-dated bonds, of course, they have credit risk can give us only 3.3%, 3.4%. So it's lower than the older bonds that we are holding, right?

So I see there's still a likelihood that before hedging yields to go down a bit. But again, it really depends on the market. As I mentioned in the Chinese session, inflation is a good friend. It's a dear friend of an insurance company. Without inflation, we cannot see any steepening any parallel move of the term structure. And that will be a true issue, a real problem for insurance company. We need healthy inflation. We need a healthy term structure, a good slope of term structure, then we can operate the company, more comfortable, more consistently and that's what I'm saying.

And so overall, I've seen rather optimistic results expectations for next year's after-hedge recurring yield. And I'm rather conservative. But again, it will be more benign compared to 2021 in the decline of the -- before hedging, recurring yield.

And third question is on hedging. Yes, we would, in theory, in our minds, we would love to be free to transfer the NDF to CS now. The CS nowadays costs us less than 50 basis points for the 6 months pair of contracts. If we annualize the cost, still lower than 50 basis points. But for NDF, although it's much, much cheaper than before, still cost us more than 2% right? So you can see almost 10x of differentials in the cost. We would love to move it.

But there's a reason -- there must be the reason why not everybody is trying to unwind the NDF and redeploying the CSAs because that instrument is still highly regulated. Although the hedging itself is not going to affect the Taiwanese local spot rate. But if the swap bank, they want to hedge themselves, sometimes they have an impact on the local spot rate. And that is why Shin Kong Bank has to control such a trade.

And if there's any new money nowadays, we use CS to hedge. We use CS to wire the money out. But for the original assisted portfolio, there's not such a feasibility. So we have to somehow make some mitigations based on our current portfolio. First, we use proxy hedge. And secondly, we have to manage the hedging ratios more dynamically. That's what we are doing now. And that's also why we're delivering a TWD 7.5 billion less of cost for hedging in 2021 so far than 2020.

[Operator]

[Operator Instructions] And next, we'll have Michael of [ Cathay Securities ] for questions.

[Unknown Analyst]

I have 2 questions here. The first is regarding the cash payout. And I noticed that the unrealized losses on the financial assets had been widened to about TWD 11 billion in -- by the end of the third quarter. Will this affect the holding company's cash payout date for in year 2022?

And another question is on the FYP that we noticed that the FYP sales was quite sluggish year-to-date, down somewhere roughly 40% year-on-year that -- and we also noticed that some of your peers are selling a lot of investment in products that -- so will Shin Kong change the product strategy and also can I know the management's view that for the FYP sales in year 2022? Thank you.

[Unknown Executive]

Thank you, Michael. It's good to hear from you, it's been a while. For the first question on cash payout, I think we had some discussions in the Chinese section as well. Let me reflect on that and give you a conclusion. Of course, we have more than enough in the retained earnings. The undistributed earnings for before. And now the number is about TWD 49 billion. And yes, as you said, if there is a negative number on the unrealized gain or losses caused by OCI or PRO positions, we have to set aside a reserve for that, which is not a significant issue because I said before providing those realized loss, there was more than TWD 49 billion, right? So even we take out a portion of that still well above TWD 30 billion, that shall be enough for us to be stable to pay dividends for next year.

As for what is stable, as I mentioned, I think also as you asked, you know that in the past years, not every year, Shin Kong was able to pay out dividend. But since we offer preferred shares, I think being able to pay out dividend is very, very important for us. That's one thing I mentioned as stability. I think now to remain the payout ratio to be stable is still a little bit more to luxury as well. And now I would rather be more realistic. Being able to pay out. Being able to pay out at a reasonable level that everything is reasonable, acceptable, yield is rather stable, and that is what we are looking, what we're looking for now. And also, I mentioned in the Chinese session that our audience should be relatively confident, and we are relatively confident that we will be able to pay out dividends for 2022.

And next question is on FYP and product strategy. I would like to have the Chief Actuary answering that.

[Hanwei Lin, executive]

I think our product strategy will not change a lot as we said before, is still the same, it's still our target. We will also put a little more focus on investment products next year, as we said before. So I think next year, our FYP will grow a little bit, I think, because we are now thinking about putting more focus on investment products.

[Unknown Analyst]

Okay. Sorry, can I have 2 more follow-up questions? Okay. The first one is on the bank. There's -- I noticed that the investment income that for the bank in the third quarter is quite impressive, reached about TWD 1 billion. And the number is actually -- was quite stronger than the previous 2 quarters, which is only like TWD 400 million something. May I know why? And may I know that your investment portfolio for the bank right now, major in the bond or in the equity market?

And also another question is regarding the life insurance. I saw that the company reported a tax benefit of about TWD 1 billion in the third quarter and about $3 billion in the second quarter. And may I know why? And is that -- as far as I remember that it is mainly from the unrealized losses on the on the hedging position or something that is a -- so this is going to happen again in the fourth quarter or not?

[Stan Lee, executive]

Michael. First question is on the bank. The bank also similarly to what we've seen for life insurance, although the majority of their investment portfolio is on bond and larger share is in NT dollar. Foreign is slightly solid when we are spending the book. But again, in the third quarter, even it's a relatively smaller position, we received dividend cash for the local market. And that's the main driver for us to see a strong growth in the overall investment. And some bond that has been disposed, but I don't think that is a main fluctuation because the disposal bond happened almost every quarter, okay? So mainly because we have rally small, but it's very concentrated in terms of dividend payouts in the third quarter.

For the test benefit, this is a very good question, a very important question, but I have to apologize first hand that I -- even I cannot give you a very, very accurate projections on whether that will happen again in the fourth quarter. I think you are definitely right. That most of the benefit is from the unrealized loss on the hedging strategies, right? And whenever that happens, we credited ourselves with tax benefit. And when that got reverted, then we have to mark tax expenses again, it's not really that stable.

Just in the recent years and particularly when we don't have a lot of tax advances from the other assets we are holding that somehow show up in the book. After all, we had over TWD 2 billion -- TWD 2 trillion assets, TWD 2 trillion assets in U.S. dollar mainly denominated assets. Hedging ratio is not 100%. Even if it is 100%, we have some unrealized gain and losses fluctuated on a quarter basis. And that's why you're seeing this.

Fourth quarter, I think there is still a likelihood. But as you see a relatively stable spot rate, we see a rather stable proxies versus U.S. dollar, chance for us to have a huge amount unrealized gain or losses will be slightly lower, right? And hence, also theoretically for test benefits, number should be smaller. And if that's your theory, that's your expectation in the fourth quarter that will likely to be the case.

[Operator]

[Operator Instructions] There appears to be no further questions at this point. And Mr. Lee, can we close the conference call now?

[Stan Lee, executive]

Of course, moderator. Thank you, everybody, for joining our analyst call. And if you have any further questions, please contact our IR team or myself. Thank you.

[Operator]

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. 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.