Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2017-Q4

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Co.'s 2017 Fourth 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 Mr. Stan Lee, Senior Vice President of Shin Kong Financial Holding Company. Mr. Lee, you may begin.

[Stan Lee, executive]

Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2017 Fourth Quarter Analyst Call. Before we start, I would like to introduce my colleagues, who are with me today. We are happy to have President, Min-Yi Huang, of the Financial Holding Company to review the fourth quarter results with us. Also in the room are Sunny Hsu, Executive Vice President of the Financial Holding Company; James Yuan, Chief Investment Officer of Shin Kong Life; Han-Wei Lin, Chief Actuary of Shin Kong Life; Isabella and Zeke, 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 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 Zeke at (886) 975-731-274 for assistance.

Now please turn to page 4. SKFH recorded and consolidated after-tax profit of TWD 11.22 billion for 2017. Consolidated total comprehensive income include 58.1% year-on-year to TWD 20.51 billion. Net worth kept growing at the financial holding level with book value per share reaching TWD 13.87 at the year-end. At the end of 2017, capital adequacy ratio of the group and subsidiaries were all well above regulatory requirements. Group CAR was 117.7%, RBC of Shin Kong Life was 257.4%, and BIS of Shin Kong Bank was 13.1%. Core business of each subsidiary remained solid in 2017, which will be discussed later in the presentation.

Page 10. Compared to the high rates of 2016, FYP for 2017 declined 3.4% year-on-year to TWD 110.96 billion, representing a market share of 8.8%, besides Shin Kong Life choose not to promote investment-linked product. However, foreign currency policies remained the marketing focus in 2017, and FYP of such policies includes 118.9% year-on-year to TWD 52.04 billion, accounting for 46.9% of the total. With sufficient inflows of saving policies, cost of liabilities improved 14 basis points to 4.23% in 2017, better than our expectation.

Going forward, Shin Kong Life will actively promote foreign currency policies and protection products to facilitate ALM matching and VNB growth.

Page 13 presents an overall view of Shin Kong Life's investment portfolio. Investment return for 2017 was 3.92%, 12 basis points higher compared to 2016. Breakdown of investment returns for different asset classes were: Real estate 3.1%, mortgage and corporate loans 2.1%, policy loans 5.8%, overseas investments 4.2%, domestic securities 3.5% and cash 0.5%.

Page 14 shows the portfolio of overseas fixed income. At the end of 2017, corporate bonds accounted for the largest share, representing 46.6% of the total, followed by international bonds at 28.9%. Emerging market government bonds grew from 20.3% in 2016 to 22.6% in 2017. The chart on the upper right displays overseas fixed income portfolio by region. Shin Kong Life invested more funds in North America during 2017 with eyes on deriving bond yields and superior credit quality. Third, the share of North America increased to 34.2%, while that of Europe declined to 27.0%. The share of Asia and others slightly went up to 38.8%.

Page 16, hedging cost for 2017 was 1.55%, and foreign currency volatility reserve [ increased ] TWD 2.55 billion at year-end. Hedging ratio was 83.2%, including CS, NDF and natural hedged ForEx policy position. CS and NDF accounted for 60% and 40%, respectively, of traditional hedges. In order to better control hedging cost, Shin Kong Life will continue to promote sales of foreign currency policy in 2018. I would now hand over to Isabella, who will take you through the results of Shin Kong Bank.

[Isabella Wang, executive]

Thank you, Stan. Please turn to Page 22. Shin Kong Bank posted a consolidated after-tax profit of TWD 4.06 billion for 2017, 2.3% lower compared to 2017. This decline was mainly attributed to the increased provision expense, which grew 83.8% year-on-year. However, the provision expense is expected to normalize in 2018, as the remaining TRFs positions were completely settled in August 2017.

Page 24. The loan balance as of the end of 2017 went up 5.2% year-on-year to TWD 534.82 billion. Loan growth was driven by consumer lending, which grew 9.8% year-on-year. Over the past quarters, Shin Kong Bank has been expanding its overseas lending operations to maintain a stable interest rate. As of the end of 2017, the overseas syndicated loan balance reached to TWD 17.37 billion, indicating an annual growth rate of 92.4%. Going forward, the bank will continue to expand its overseas client base and build up close relations with key partners to enlarge its offshore earnings.

Page 25. The full year net interest margin and net interest spread were 1.57% and 1.96%, respectively, which was in line with our guidance. As for 2018, given the higher loan growth target and likely no further decrease in the funding cost, net interest margin and net interest spread are expected to be slightly lower than the level in 2017.

Page 27. Wealth Management income for 2017 grew 3.7% year-on-year to TWD 2.05 billion with strong set of momentum in mutual funds and overseas securities. The fee income from these 2 categories accounted for 45.5% of the total. This year, Shin Kong Bank will continue to recruit experienced financial consultants and enhance average productivity.

On the product side, foreign currency policies will be the sales focus. The growth target for Wealth Management income in 2018 remains double-digit.

Page 28. Asset Quality remains stable with NPL ratio at 0.24%, and coverage ratio at 488.29%. New NPL generated in the fourth quarter was TWD 300 million, down by TWD 151 million compared to the previous quarter. So that wraps up our result presentation. Moderator, please start the Q&A session.

[Operator]

[Operator Instructions]

[Min-Yi Huang, executive]

Before we start taking questions, I would like to take this chance to briefly talk about one page that we talked about the adoptions for IFRS 9. If you may turn to Page 18. On your left-hand side, you see that the statutory book value for the end of last year was 19.8 -- TWD 90.8 billion. As of the first date of 2018, you can see that there was incremental portion on the very top of the bar chart TWD 19.4 billion, increased mainly from mark-to-market for the FVOCI fixed income. If you take care to take a look at the chart on your right-hand side, you can see that, originally, we have about 80%, 8-0%, classified as no active market and hold to maturity, which don't have to be mark-to-market. As a result of reclassification on your right-hand side, you can see that the NAM, HTM position combined has decreased to 63.1%, roughly 17%, 1-7% decrease. The new classification is named as amortized cost, AC. The portion largely goes into the FVOCI, you can see that FVTPL overlays, mainly classify with the stock positions and the FVOCI mainly classified for the above positions combined accounted for 34%, which is significantly higher than what we had as of the end of last year.

But you don't have to worry about the -- for future fluctuations for the fixed income. It is because thanks to the investment team, particularly, to [indiscernible] who have been very actively manage portfolios in the OCI fixed income in the first 2 months 2018. Position has been decreased significantly. If you take a look at today's number, you will see the amortized cost, AC's position went back up to higher than 69%, it will soon be higher than 70%. And the decreased portion is mainly from the bonds, some of the positions has been disposed for those equities positions with unrealized loss. As a result of the management, if you take a look at our balance sheet for -- as for the end of February, you will see the unrealized losses for the financial assets have been erased. We have a positive unrealized gain as at the end of February. This is the essence of the reclassification. If you have further questions, please feel free to ask.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Well, I believe we have a very comprehensive discussion for the Chinese session, and our team is always here to serve you. If you have any further questions, please ask now. And moderator, if you could ask whether there is any questions again. If there's no question, let's end the meeting now.

[Operator]

Yes, thank you. [Operator Instructions]. Okay, there appears to be no further questions at this point. And we thank you for your participation in Shin Kong Financial Holding Company's Conference Call. There'll be a webcast replay within an hour. Please visit www.skfh.com.tw under the Investor Relations section. If you do 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.