Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Analysis

Shin Kong Financial Holds Resilient Amid Loss

Shin Kong Financial Holding faced a consolidated after-tax loss of TWD 693 million in the first 9 months of 2023. Despite this, comprehensive income grew over 100% to TWD 18.35 billion, and shareholders' equity increased by 8.8% to TWD 230.75 billion. The firm experienced a 27.9% decrease in first-year premiums due to challenging market conditions, yet the focus on high-value products led to a 6.7% growth in First Year Premium Equivalent (FYPE), surpassing industry averages with 47% of FYPE over the first year premium. Striving to accumulate a Contractual Service Margin (CSM) of TWD 30 billion annually, Shin Kong made progress despite the dip in premiums. Investment returns after hedging reached 3.04%, with hedging costs down to 89 basis points aided by the U.S. dollar's strength. Shin Kong Bank posted an 8.5% rise in pre-provision operating profit to TWD 7.3 billion and predicted an annual loan growth of 4% to 6%. Wealth management growth was strong with expected income to surpass initial forecasts, and asset quality remained superior with a non-performing loan (NPL) ratio of 0.12%. Brokerage and investment income also saw significant growth during this period.

Challenging First Nine Months with Positive Comprehensive Income Growth

Shin Kong Financial Holding faced a tough first nine months of 2023, reporting a consolidated after-tax loss of TWD 693 million. Despite this, the company saw its consolidated total comprehensive income surge by over 100% year-on-year to TWD 18.35 billion. This resilience is reflected in an 8.8% increase in shareholders' equity year-to-date, amounting to TWD 230.75 billion, and a boost in book value per share to TWD 14.59.

Recognition for ESG Commitments

Shin Kong has been acknowledged for its Environmental, Social, and Governance (ESG) efforts, receiving awards at the 2023 Taiwan Corporate Sustainability Award. The firm remains dedicated to fulfilling its ESG pledges with actionable initiatives, aligning with the growing investor focus on sustainability.

Insurance Segment Adapting with Increased FYPE Amidst Premium Decrease

The company reported a significant 27.9% decrease in the first year premium for life insurance products due to challenging market conditions. Nevertheless, the firm managed to increase first year premium equivalent (FYPE) by 6.7% year-on-year, which indicates a focus on regular payment and high systemic products, culminating in TWD 14.2 billion in FYPE and beating the industry average for the ratio of FYPE to first year premium (FYP). Sales of foreign currency policies, constituting 54.6% of total FYP, generated TWD 16.5 billion, emphasizing stable interest spreads and better asset liability matching.

Shin Kong Life Focuses on Protection Products to Boost CSM

Efforts to promote protection products, health insurance, and riders by Shin Kong Life have been successful with the contribution from these product types to coverage space margin (CSM) increasing from 71% to 88% in the current year. The company aims to continue accumulating a CSM balance of TWD 30 billion annually as part of its strategy.

Diverse Investment Portfolio Yields Mixed Returns

The company reported an annualized investment return after hedging of 3.04% across various asset classes. Real estate contributed 1.7% to this figure, followed by mortgage and corporate loans at 3.4%, policy loans at 5.2%, overseas investments at 2.8%, domestic securities at 4.1%, and cash at 2.4%.

Overseas Investments and Hedging Strategy

Shin Kong holds a significant position in overseas fixed income, amounting to TWD 2.4 trillion, chiefly in U.S. dollar-denominated investment-grade corporate bonds. Over 90% of this is invested in U.S. dollar bonds, and the firm maintains a hedging ratio of 81.1%. With the U.S. dollar appreciating, hedging costs have been reduced to an annualized 89 basis points, leading management to expect that full-year hedging costs will remain below 150 basis points.

Banking Division Delivers Steady Performance

The company's banking arm, Shin Kong Bank, reported an 8.5% increase in pre-provision operating profit to TWD 7.3 billion and a 2.3% growth in net income to TWD 5.2 billion year-on-year. Consumer loans saw a 5.1% boost, with expectations for full-year loan growth between 4% to 6%.

Mild Changes in Net Interest Margins and Wealth Management Growth

Shin Kong Bank achieved a modest rise of 3 basis points in net interest margin quarter-over-quarter, reaching 1.23%. Wealth management income grew by 8% to TWD 2.1 billion due to a surge in sales of structured products, with year-end expectations to exceed prior forecasts.

Superior Asset Quality and Brokerage Income Growth

Asset quality indicators highlight an NPL ratio and coverage ratio at 0.12% and over 1,100%, respectively, outstripping the industry average. Brokerage income for the third quarter rose by 14.6% quarter-over-quarter, contributing to an after-tax profit of TWD 1.99 billion in the first nine months.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2023 Third Quarter Earnings Conference Call. [Operator Instructions] Please visit www.skfh.com.tw under the Investor Relations section. And now I would like to introduce Ms. Isabella Wang, IR team 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 2023 Third 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 Holding; Vicky Lu, Vice President of Shin Kong Financial Holding; Hanwei Lin, Chief Actuary of Shin Kong Life; Stephen Wang, Deputy Chief Investment Officer; Stacey Chen, Senior Vice President; Monica, member of our IR team.

The presentation we are about to go through was sent out 2 hours ago. You may download it from our website or participate through the webcast. Now please turn to Page 4. Shin Kong Financial Holding recorded a consolidated after-tax loss of TWD 693 million for the first 9 months of 2023. Consolidated total comprehensive income grew more than 100% year-on-year to TWD 18.35 billion. Consolidated shareholders' equity increased 8.8% year-to-date to TWD 230.75 billion. Book value per share at the end of the third quarter was TWD 14.59.

Our subsidiaries maintained stable business momentum during the first 9 months. More details will be covered later on in the presentation. I'd like to highlight that Shin Kong's efforts on ESG practices were highly recognized by winning various grant awards in the 2023, Taiwan Corporate Sustainability Award earlier this month. As ESG is growing in importance for investors, Shin Kong will continue to realize ESG commitments through tangible actions.

Page 10. First year premium for the first 9 months decreased 27.9% year-on-year to TWD 30.2 billion due to unfavorable market conditions. However, with sales focus on regular paid and high system product, FYPE grew 6.7% year-on-year to TWD 14.2 billion, and the ratio of FYPE over FYP was 47% beating the industry average. Foreign currency policies can create stable interest spreads and better asset liability matching. The sales of foreign currency policies amounted to TWD 16.5 billion, accounting for 54.6% of total FYP.

Page 11 and Page 12. 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 and riders, both high CSM products to accumulate CSM balance. The top priority is to accumulate CSM of TWD 30 billion per year since 2020. I -- the table on the lower left corner on Page 12 demonstrates Shin Kong's achievement on CSM balance over the past few years. In the table on the lower right corner shows that the CSM contribution from protection type, health insurance and riders increased from 71% to 88% this year despite the decrease in first year premium.

Page 15 shows the overall view of Shin Kong Life's investment portfolio. Total investment was around TWD 3.5 trillion at the end of the first 9 months. Annualized investment return after hedging for the first 9 months was 3.04%, and mainly due to less realized capital gains and higher hedging costs compared to the same period last year. The breakdown of investment returns for different asset classes were: real estate, 1.7%; mortgage and corporate loans, 3.4%; policy loans, 5.2%; overseas investments, 2.8%; domestic securities, 4.1%; and cash 2.4%.

Page 16 shows the portfolio of overseas fixed income. At the end of the first 9 months, 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. As for the bond portfolio by region, North America and Europe were Shin Kong Life's investment focus, showing a combined share of 63.8%.

Page 18. The pie chart on the left shows the mixed hedging vehicles. At the end of the first 9 months, hedging ratio was 81.1%, including CS, NDF and naturally hedged foreign currency policies. Annualized hedging costs further reduced to 89 basis points on the back of U.S. dollar appreciation. So full year hedging cost is expected to stay under 150 basis points as we guided in the previous quarter.

Page 22, driven by increased investment income. Shin Kong Bank's pre-provision operating profit reached TWD 7.3 billion, which was 8.5% higher from the same period last year. Consolidated net income grew 2.3% year-on-year to TWD 5.2 billion.

Page 23. The bank's loan balance was TWD 769 billion at the end of the first 9 months, which was 2.5% higher year-on-year. Consumer loan book grew 5.1% year-on-year, representing 63% of the loan portfolio as unsecured consumer loans and other consumer loans increased 13.1% and 4.4% year-on-year, respectively. So full year loan growth is expected to be 4% to 6%.

Page 24, benefiting from higher loan-to-deposit ratio and improved fund utilization. Net interest margin increased 3 basis points quarter-on-quarter to 1.23%. Net interest spread edged down 1 basis point quarter-on-quarter to 1.6%. Given the current interest rate level, we expect to see net interest margin and net interest spread in the fourth quarter stay similar to the level of the third quarter.

Page 26. Wealth management income increased 8% year-on-year to TWD 2.1 billion, thanks to surge in sales of structured products and security. On top of that, bancassurance showed strong momentum in the third quarter with income growing 15.4% quarter-on-quarter, while sales of mutual funds also made a notable impression with quarterly growth of 24%. The full year wealth management income is expected to exceed the earlier guidance.

Page 27. Asset quality remained robust. NPL ratio and coverage ratio were 0.12% and over 1,100%, respectively. Both ratios surpassed the industry average. New NPL generated in the third quarter was nearly TWD 262 million, accounting for less than 0.1% of total loans.

Page 29, fueled by the increase in average daily market turnover. Brokerage income for the third quarter grew 14.6% quarter-on-quarter, making the first 9 months brokerage income reached TWD 3.83 billion. MasterLink Securities also capitalized on market trends to enhance investment income and the after-tax profit amounted to TWD 1.99 billion for the first 9 months.

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]

Got a couple of questions for life insurance here. If we compare to Slide 10 of the FYP breakdown and also the Slide 12 of the CSM breakdown. Could you roughly give us some idea how much of the 88% the protection in Slide 12 is contributed by the PA Health and group type of products and how much from the traditional -- the protection -- maybe the protection component of the traditional policies? And then is the FYPE a good reference for the year-on-year migration on CSM going forward?

And second question is, is it possible to give us some rough idea of the blended liquidity premium you use to -- under the IFRS 17? And then also the rough breakdown of the assets between the middle bucket and also the general bucket?

And another question for the banks is that you do disclose the swap revenue for the first 9 months. Should we assume your total roughly around TWD 250 million to TWD 300 million swap revenue for fourth quarter as well. And then if we exclude swap revenue from your investment income, we can still see roughly around TWD 1 billion increase year-on-year in this item in the first 9 months. Is that trading games largely related to equity or related to fixed income products?

[Stephen Chen, executive]

Regarding the liquidity premium and also the protection-type insurance, maybe I would like to have Hanwei Lin to answer the first 2 questions. And for the swap, I will answer the question.

[Hanwei Lin, executive]

First question, Jemmy you asked about from Slide 10 to 12. A little difficult to -- I would say all of the -- all the health and the PA products, the CSM, from those kind of products are all included in protection type of the CSM. And within traditional -- within the traditional probably from -- some of them -- as for traditional, they are saving time also protection type of products. So it's a protection type of products within the traditional that will be included in the protection type of CSM. I think maybe around 20% of those traditional products of premium. Did that answer your first question?

[Jemmy Huang, analyst]

Yes, sure. That's still helpful.

[Hanwei Lin, executive]

Okay. Thank you. Can you repeat your second question?

[Jemmy Huang, analyst]

Is there any like rough range of the blended liquidity premium you use under IFRS 17. And within this -- my understanding is the liquidity premium, it's currently calculated under the 3 bucket approach, right? And I think the top bucket is probably not likely to be used. So just trying to get an understanding, like within the middle bucket and also the general bucket, what's the rough mix between these 2 buckets?

[Hanwei Lin, executive]

For the liquidity premium, I think -- since right now, calculated a very in detail. So we -- I don't think I have a blended liquidity premium. For all different buckets, the liquidity premium varies, it's from 20- to 70-plus liquidity premium and that is in each different bucket. So based on the different segments. As for the different assets, I think I need -- I have to provide a more detailed information maybe later.

[Jemmy Huang, analyst]

No problem. Yes. No problem.

[Stephen Chen, executive]

Okay. But going back to the first question, I think the protection-type policy to my understanding, we account for probably 37% of our FYP. That is my understanding. And so -- and we -- regarding your first question on the swap income. The total swap income of the first 3 quarters around TWD 840 million. And for the third quarter, the swap income amount to about TWD 237 million. And because of the interest differential between U.S. dollar and also NT dollar. I think that the opportunity for the swap business are still there. And so I expect the swap income of the full quarter maybe remain the same level of the third quarter. That is my estimate. I'm not so sure I answered your questions, Jemmy.

[Jemmy Huang, analyst]

Yes. But just 2 follow-ups. The first one is investment income, if we exclude the swap revenue, we still see roughly around TWD 1 billion increase year-on-year. So trying to understand where that additional TWD 1 billion coming from, either from the equity trading games or fixed income trading games or is that related to the structured product on the wealth management businesses?

And I think back to the insurance part. Also just trying to gauge whether FYPE, the year-on-year momentum could be a better indication for CSM growth going forward?

[Stephen Chen, executive]

Apart from the swap income, the remaining TWD 1 billion income is due -- is related to the investment gain on our bond portfolio...

[Hanwei Lin, executive]

Yes, Jemmy. I think compared to FYP, you can use FYPE as a better index for the CSM.

[Operator]

[Operator Instructions] Next, we'll have [ Nancy Chen ] of [indiscernible] Securities.

[Unknown Analyst]

I want to know what the outlook for hedging costs this year and for 2024. And do you feel more pressure given the recent Taiwan dollar appreciation?

[Stephen Chen, executive]

Okay. I would like to have Stephen or Stacey to answer the questions.

[Stacey Chen, executive]

Okay. Nancy, yes, as you just mentioned, the current market is quite challenging. But as you probably know, the long-term Taiwan dollar is kind of being reversed. So with this high hedge costs right now and then the shallow Taiwan dollar NT market, we tend to stay poised and then weather through this short-term volatility while using FX valuation reserve as the buffer. But meanwhile, we will use some [ process ] hedging to observe the short-term volatility and then -- which seems quite effective so far. With regarding to the hedging cost outlook for this year and next year, as we just mentioned, is still 1.5% as our target Nancy, does that answer your question?

[Unknown Analyst]

Yes.

[Operator]

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

[Stephen Chen, executive]

Sure. Thank you for everyone participating in this event. And I think if there's no more questions, we would like to conclude these sections. Thank you for your participation.

[Operator]

Yes. Thank you. 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.