Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Analysis

Shin Kong Financial Posts Strong Profit Growth and Strategic Developments

Shin Kong Financial Holding reported a consolidated after-tax profit of TWD 19.7 billion for the first nine months of 2024, marking a significant growth driven by robust business momentum. With a solid first year premium increase of 20.5% year-on-year, reaching TWD 36.4 billion, the company captured a 6.2% market share. Notably, net interest income grew by 8% to TWD 10.3 billion, with wealth management income climbing 31.9%. Looking ahead, the bank anticipates mid-single-digit loan growth in 2024, while the targeted contribution to its CSM balance remains at TWD 30 billion annually.

Strong Financial Performance Overview

In the first nine months of 2024, Shin Kong Financial Holding reported a remarkable consolidated after-tax profit of TWD 19.7 billion. Additionally, the consolidated shareholders' equity rose by 6.4% from the previous quarter, reaching TWD 287.5 billion. This performance underscores solid operational momentum across the company's subsidiaries.

Impressive Growth in Premiums

Shin Kong Life recorded a 20.5% increase in first-year premiums year-on-year, totaling TWD 36.4 billion, which reflects a steady market share of 6.2%. A significant factor in this growth is the strong sales in foreign currency policies, which brought in TWD 19.9 billion—making up over half of the total first-year premiums. Notably, first-year premium equivalent (FYPE) also saw growth, increasing 3.7% year-on-year to TWD 14.7 billion.

Focus on Profitability Metrics: CSM Accumulation

The company emphasizes the importance of the Contractual Service Margin (CSM) under IFRS 17 as a vital profitability indicator. Shin Kong Life aims to accumulate TWD 30 billion in CSM annually, a target it has pursued since 2020. In the first nine months of 2024, CSM showed an 8% growth year-on-year, with health insurance and protection products contributing 89% to this growth.

Robust Investment Portfolio

As of the end of September 2024, Shin Kong Life's total investments amounted to approximately TWD 3.5 trillion. The annualized investment return increased by 88 basis points over the year, reaching 3.92%, driven by realized capital gains from equities. The company's strategic positioning in investment-grade corporate bonds was reinforced with over 90% of its overseas fixed income held in U.S. dollar-denominated bonds.

Banking Segment Shows Resilience

Shin Kong Bank reported a year-on-year net interest income growth of 8% to TWD 10.3 billion. This increase was attributed to net interest margin expansion and significant loan growth. The bank's total loan balance grew to TWD 848 billion, reflecting a 5.1% increase year-to-date. The consumer loan segment, which constitutes 62% of the portfolio, rose by 4.8% year-to-date, with expectations of mid-single-digit growth for 2024.

Asset Quality Remains Strong

The company's asset quality has shown resilience, with the Non-Performing Loan (NPL) ratio at a low 0.12%, significantly surpassing industry averages. This strength is complemented by a coverage ratio exceeding 1,000%, which indicates effective risk management practices.

Future Expectations and Guidance

Looking ahead, Shin Kong Bank expects its net interest spread to remain stable throughout 2024, while net interest margin is anticipated to increase. Additionally, the wealth management segment is set for over a double-digit growth rate, exceeding previous yearly guidance, which is an optimistic sign for investors.

Regulatory Environment and Strategic Agility

Regarding the adoption of IFRS 17, the management indicated that decisions regarding fair value approval chains are still under evaluation, with more clarity expected by the first half of next year. They posited that by the beginning of 2026, their pro forma equity value would likely see only a slight decrease, with a robust cushion provided by accumulated CSM.

Commitment to ESG Initiatives

In alignment with global sustainability trends, Shin Kong Financial has been recognized with an 'AAA' rating in the MSCI ESG rating system, highlighting its commitment to environmentally sustainable practices and governance. Such recognitions are increasingly vital in attracting investment in today's market.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2024 Third Quarter Earnings Conference Call. [Operator Instructions] And 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 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 2024 Third Quarter Results Conference Call. Before we begin, please allow me to introduce the management team who are here with me this afternoon. 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, Executive Vice President; Stacey Chen, Senior Vice President; Monica, member of our IR team. The presentation we are about to go through will 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 Holdings recorded consolidated after-tax profit of TWD 19.7 billion for the first 9 months of 2024. Consolidated shareholders' equity increased 6.4% quarter-on-quarter to TWD 287.5 billion. Book value per share at the end of the third quarter was TWD 16.1. Our subsidiaries maintained solid business momentum during the past quarters, and more details will be covered later on in my presentation. I would also like to highlight that Shin Kong Financial Holding was awarded AAA, the highest level in the MSCI ESG rating. The company also won numerous prizes in the TCSA and GCSA award this year. So all these honors demonstrate our efforts in the ESG field.

Page 10. First year premium for the first 9 months increased 20.5% year-on-year to TWD 36.4 billion, representing a market share of 6.2%. Shin Kong Life focuses on providing foreign currency policies and high system products, which create stable interest spreads, better asset liability matching and CSM accumulation. The sales of foreign currency policies was TWD 19.9 billion, accounting for 54.6% of total first year premium. FYPE grew 3.7% year-on-year to TWD 14.7 billion and FYPE over FYP was 40.4%, beating the industry average.

Page 11. CSM serves as an important profitability indicator under IFRS 17 as we have guided the market. Shin Kong Life has been selling protection products, health insurance, riders, various high system products to accumulate its CSM balance. The company's top priority is to accumulate CSM of TWD 30 billion per year since 2020. The table on the lower left corner demonstrates Shin Kong's achievement on CSM over the past few years. As you can see, CSM for the first 9 months of 2024 grew 8% year-on-year. The table on the lower right corner shows that the CSM contribution from protection type, health insurance and riders was 89%, remaining at a high level.

Page 14 presents 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 increased 88 basis points year-on-year to 3.92%, mainly contributed by higher realized capital gains from equity compared to the same period last year. The breakdown of investment returns for different asset classes were: real estate, 2.5%; mortgage and corporate loans, 2.5%; policy loans, 5.3%; overseas investments, 2.6%; domestic securities 9.6% and cash, 1.8%.

Page 15 shows the portfolio of overseas fixed income. At the end of September, overseas fixed income position was around TWD 2.3 trillion. The funds were mainly deployed in investment-grade corporate bonds and the portfolio remains similar to that of the previous quarter. More than 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 with Shin Kong Life's investment focus, accounting for a combined share of 65.2%, similar to the level of the previous quarter.

Page 17. The pie chart on the left shows the mix of hedging instruments. At the end of the first 9 months, hedging ratio was 82.7%, including CS, NDF and naturally hedged foreign currency policies. Annualized hedging costs went up to 145 basis points on the back of Taiwan dollar appreciation. The balance of foreign currency volatility reserve amounting to TWD 20.7 billion at the end of September. Shin Kong's annual hedging cost is targeted below 150 basis points for 2024.

Moving on to Page 21. Shin Kong Bank sustained its growth momentum in the third quarter. Net interest income grew 8% year-on-year to TWD 10.3 billion on the back of net interest margin expansion and decent loan growth. Net fee income grew 32.6% year-on-year to TWD 3.3 billion, mostly boosted by the increase in wealth management fee income. The bank's pre-provision operating profit reached TWD 7.6 billion which was 4.5% higher from the same period last year. Consolidated net income grew 5.5% year-on-year to TWD 5.5 billion.

Page 22. The bank's loan balance was TWD 848 billion at the end of the first 9 months, which was 5.1% higher year-to-date. Consumer loan book rose 4.8% year-to-date to TWD 522 billion, representing 62% of the loan portfolio as unsecured consumer loans and other consumer loans increased 7% and 21.6% year-to-date, respectively. We expect to see mid-single-digit loan growth in 2024.

Page 23, driven by higher loan-to-deposit ratio and improved fund utilization, net interest margin increased 2 basis points quarter-on-quarter to 1.25%. Net interest spread edged down 1 basis point quarter-on-quarter to 1.58%. Given the current market conditions, we expect full year net interest spread to stay similar to the level of 2023 and net interest margin to go up.

Page 24 -- Page 25. Wealth management income increased 31.9% year-on-year to TWD 2.7 billion, thanks to surge in sales in -- of mutual funds and bancassurance products. The full year wealth management income is expected to exceed the yearly guidance with double-digit percent increase.

Page 26. Asset quality remained robust. NPL ratio and coverage ratio were 0.12% and over 1,000%, respectively. Both ratios surpassed the industry average. New NPL generated in the third quarter was nearly TWD 466 million, accounting for less than 0.1% of total loans.

Page 28. Driven by the increase in average daily market turnover, brokerage fee income for the first 9 months grew 39.2% year-on-year, making the brokerage income reached TWD 5.3 billion. MasterLink Securities also capitalized on market trends to enhance its investment income and the after-tax profit amounted to TWD 2.9 billion for the first 9 months.

So that pretty much concludes the presentation for today. Now I would like to proceed with the Q&A session.

[Operator]

[Operator Instructions] Now we'll have the first question, Jemmy Huang, JPMorgan.

[Jemmy Huang, analyst]

Just one question from me is for Shin Kong Life. For the IFRS 17 adoption, have you already decided which year is the cutoff date before which you will use the fair value approval chain after which using the modified retrospective method?

[Stephen Chen, executive]

I think we still have time to consider and make decision on the answer. So I think you'll be more clear probably in the first half of next year.

[Jemmy Huang, analyst]

And maybe a follow-up is, I think, from most of other life insurance companies' comments, most guidance is that on the day 1 of 2026, the pro forma equity value probably will be down slightly and mainly just trying to build up the CSM for the future year. Not sure if it will be the similar case for Shin Kong Life as well that the pro forma book value or equity will only be down slightly on the pro forma basis.

[Stephen Chen, executive]

Well, I think right now, the fair value of liability is we have plus numbers. I think most companies have that because the interest rate has been higher than before. So -- and we also need to consider the negative side is the percentage of the assets that from AC assets that -- from AC to OCI because you know that you will cause some loss. And also how much CSM you want to have on the first date as well as maybe you want to put something into the foreign volatility exchange reserve.

So -- but I think all of that we will not -- we will keep the current net worth ratio, at least the same -- it won't be lower than the ratio right now. And plus, if the CSM can be added to a net worth ratio after the 2026, we have accumulated at least more than TWD 100 billion plus CSM from previous years. And that will also add a ratio -- increased ratio of more than 2.5% from the current level.

[Jemmy Huang, analyst]

The ratio you mentioned is the regulatory requirement for equity-to-asset ratio?

[Stephen Chen, executive]

Yes, yes.

[Operator]

[Operator Instructions]

[Stephen Chen, executive]

Okay. If there is no more question on table, I think we can call it a day. And thank you for everyone's participation in this conference call.

[Operator]

Yes. Thank you, President Chen. 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. Thank you, and goodbye.