Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2022-Q3

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2022 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 Shin Kong Financial Holding 2022 Third Quarter Analyst Call. Before the meeting starts, 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; [ En-Fon Liao ], Head of the Investment team of Shin Kong Life; Isabella and Christine, members of the IR team.

The presentation we'll about to go through was sent out 2 hours ago. You may also download 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 recorded consolidated after-tax profit of TWD 10.38 billion for the first 9 months 2022. Earnings per share was TWD 0.65. Consolidated shareholders' equity was around TWD 176.6 billion, and book value per share at the end of the quarter was TWD 11.6. Our subsidiaries have delivered stable results for the first 9 months, which will be covered later in the presentation.

I would like to highlight that the company's efforts on ESG matters were recognized by winning 2 awards in 2022 Taiwan Corporate Sustainability Awards earlier this month. As ESG is growing in popularity among investors, we will continue to realize ESG commitment through tangible actions.

Page 10. Driven by positive sales momentum in foreign currency policies, FYP for the first 9 months grew 18.5% year-on-year to TWD 42 billion, securing a market share of 6.7%. Shin Kong Life has adopted a product strategy aiming at foreign currency policies and value-focused products for stable interest spreads, better asset liability matching and CSM. FYP of foreign currency increased 19.5% year-on-year to TWD 33.4 billion, accounting for 79.5% of total FYP. FYPE reached TWD 13.3 billion and FYPE over FYP was 31.7%, beating the industry average. As for cost of liabilities, it decreased 4 basis points year-to-date to 3.69%.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first 9 months slightly increased to 3.87%. Breakdown of investment returns for different asset classes were: real estate, 0.2%; mortgage and corporate loans, 1.9%; policy loans, 5.3%; overseas investment, 4.3%; domestic securities, 3.8%; and cash, 0.7%.

Page 14 shows the portfolio of overseas fixed income at the end of September. Overseas fixed income topped TWD 2.2 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 26.4%. Government bonds accounted for 24.6%. Over 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds.

You may also have a look at the chart of the overseas fixed income portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed income, showing a combined share of 62.5%.

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 80.7%, including CS, NDF and naturally hedged foreign currency policies. CS and NDF accounted for 58% and 42%, respectively, of traditional hedges. Driven by U.S. dollar appreciation and effective hedging strategy, annualized hedging gain was 0.55%. The balance of foreign currency volatility reserve reached TWD 34.1 billion at the end of the first 9 months. Given the recent cost increase in CS and NDF, Shin Kong's mid- to long-term hedging cost is targeted below 200 basis points.

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 stable results for the first 9 months. Driven by rate hikes and continued loan growth, net interest income grew 13.4% year-on-year to TWD 10.6 billion. Net fee income fell 2.5% year-on-year to TWD 2.5 billion on the back of decline in wealth management fee. Pre-provision operating profit remained flat at TWD 6.7 billion, and consolidated net income was TWD 5.1 billion.

Page 21. The bank's loan balance grew 4.3% year-to-date to TWD 751 billion. Consumer lending grew 3.8% year-to-date, representing the largest share of the loan book as unsecured consumer loans and other consumer loans increased 9.8% and 9.9% year-to-date, respectively. As for corporate lending, the momentum mainly came from SME loans, which was up by 5.6% year-to-date.

Page 22. Net interest margin and net interest spread for the third quarter came down to 1.31% and 1.75%, respectively, due to stronger upward pressure on funding costs caused by rapid rate hikes. However, the accumulated net interest margin increased 6 basis points year-on-year to 1.3%, showing the bank's efforts to cope with the changing rate environment.

Page 24. Wealth management income for the first 9 months declined 1% year-on-year to TWD 1.92 billion. The fee income from mutual funds decreased 52% year-on-year as clients became sensitive towards market volatility. As a result, the bank managed to grow the contribution from bancassurance, which accounted for 39% of total wealth management income.

Page 25. Asset quality remains solid with NPL ratio at 0.12% and coverage ratio over 1,000%. Both ratios were better than the industry average.

Page 27. MasterLink Securities generated a brokerage income of TWD 3.8 billion for the first 9 months, which was down by 28.3% year-on-year due to lower daily turnover in the stock market. Loss from prop trading business narrowed in the third quarter, and consolidated after-tax loss was TWD 70 million for the first 9 months.

That concludes the presentation for today. Moderator, please start the Q&A session.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Thank you, moderator. I believe we had a very comprehensive discussion in today's Chinese session. And if there's no question for the English session, I think that's okay because our IR team will be more than happy to answer any following questions you have. So let us know. Give us a call and we'll be just one call away. Thank you.

[Operator]

Yes. Thank you, Mr. Lee. And ladies and gentlemen, we thank you for your participation in Shin Kong Financial Holding Co'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.