Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2018-Q4

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Co.'s 2018 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 Co. Mr. Lee, please begin.

[Sin Young Lee, executive]

Thank you, moderator.

Good afternoon, ladies and gentlemen. Welcome again for joining Shin Kong Financial Holding 2018 Fourth Quarter Analyst Call.

Before we start, I would like to introduce my colleagues who are with me today. We are happy to have Min-Yi Huang, President of the financial holding company, to review the fourth quarter results. With us also in the room are Sunny Hsu, Executive Senior 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 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 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 a consolidated after-tax profit of TWD 10.48 billion for 2018. Earnings per share was TWD 0.89, and book value per share at the end of the fourth quarter was TWD 11.8. Core business of each subsidiary remained solid in 2018, which will be discussed later in the presentation. I would also like to add that the capital adequacy ratios of the group and the subsidiaries were all above regulatory requirements at the end of 2018. Group CAR was 113.7%. RBC of Shin Kong Life was 227.4%. BIS of Shin Kong Bank was 14.4%, and BIS of MasterLink Securities was 392%.

Page 10. Driven by strong demand in the fourth quarter, FYP for the whole year reached TWD 126.66 billion, securing a market share of 9.2%. Shin Kong Life has been actively promoting foreign currency policies and protection products to contain the hedging cost, facilitate ALM matching and grow value of new business. FYP of foreign currency policies for 2018 increased 37.5% year-on-year to TWD 71.55 billion, accounting for 56.5% of total FYP.

With sufficient inflows of policy premium, cost of liabilities decreased another 5 (sic) [ 15 ] basis points in the fourth quarter to 4.08%, better than our yearly target. VNB also grew more than 6% year-on-year.

In 2019, Shin Kong Life will continuously place its focus on foreign currency policies and protection products to control hedging cost and enhance VNB. FYP for foreign currency policies is targeted to increase 10%. Total FYP will be over TWD 100 billion, and cost of liabilities will be 5 to 9 basis points lower than 2018.

Page 14 presents the overall view of Shin Kong Life's investment portfolio. With higher capital gains and recurring income in 2018, investment return increased 7 basis points to 3.99%. Breakdown of investment returns for each asset classes were: real estate, 1.7%; mortgage and corporate loans, 1.8%; policy loans, 5.8%; overseas investment, 3.6%; domestic securities, 7%; and cash, 0.7%.

Page 15 presents the portfolio of overseas fixed incomes. At the end of 2018, overseas fixed incomes amounted to TWD 1.72 trillion. Corporate bonds accounted for the largest share, representing 45.5% of the total, followed by international bond at 31.7% and government bond at 21.5%. Overall, distribution was similar to the previous quarter, and the average yield before hedging of overseas fixed incomes was around 4.7%.

The chart on the upper right corner displays the overseas fixed incomes portfolio by region. Shin Kong Life remained focused on North America and Europe as its key investment areas. The share of Asia and other was 39.4%, and the funds were deployed in high-yielding government and corporate bonds denominated in U.S. dollar with superior credit quality.

Page 17. Due to sharp fluctuations in foreign exchange and higher cost for traditional hedging instruments, hedging cost for 2018 was 1.72%. Foreign currency volatility reserve was TWD 4.73 billion at year-end. Hedging ratio was 82.7%, including CS, NDF and the naturally hedged ForEx policies position. In order to contain hedging costs, Shin Kong Life will ramp up sales of foreign currency policies this year, and share is expected to exceed 70% of total FYP. Shin Kong Life will look to increase the balance of foreign volatility reserve according to regulation changes. At the end of February this year, the balance of foreign volatility reserve already reached TWD 7.29 billion.

I will now hand over to Isabella, who will take you through the results Shin Kong Bank and MasterLink Securities.

[Isabella Wang, executive]

Okay, thank you, Stan. Please turn to Page 22.

Shin Kong Bank sustained its growth momentum with net interest income increasing 5.7% year-on-year to TWD 11.82 billion. After PIF losses were fully provisioned in 2017, the provision expense for 2018 decreased 36.2% year-on-year. Consolidated after-tax profits reached TWD 5.22 billion, up 28.5% from a year earlier.

Page 23. Total loan balance grew 6% year-on-year to TWD 567.07 billion, which was in line with the company's guidance. Consumer lending maintained an upward trend with mortgage and unsecured loans increasing 8.3% and 6.7% year-on-year, respectively.

As for corporate lending, Shin Kong Bank has concentrated its effort on overseas syndicated loans with an existing loan book totaling TWD 24.92 billion, which was up 43.4% year-on-year. Loan growth target for 2019 will be 6%.

Page 24. Due to higher U.S. dollar funding costs, both net interest margin and net interest spread for the whole year came down to 1.54% and 1.94%, respectively. Given the fierce competition in the loan market and a limited room for further rate hikes, it will be challenging for the bank to maintain net interest margin and net interest spread at the level of 2018.

Page 26. Wealth management income for 2018 grew 5.4% year-on-year to TWD 2.16 billion, with strong sales momentum in bancassurance, which accounted for 50.6% of total wealth management income. This year, Shin Kong Bank will offer deposits with preferential interest rates to attract new funds and cultivate clients with AUM over TWD 3 million.

On the product side, foreign currency policies and regular-paid products will be the sales focus. The growth target for wealth management income in 2019 is double digits.

Page 27. Asset quality was stable with NPL ratio at 0.23% and coverage ratio at 570.15%. New NPL generated in the fourth quarter were TWD 672 million, and this mainly came from an individual case, which accounted for TWD 464 million. However, this case was fully provisioned at the beginning of 2018 and was written off at year-end.

Page 30. MasterLink Securities recorded an after-tax profit of TWD 0.83 billion for 2018. The revenue from brokerage business grew 10% year-on-year to TWD 3.37 billion, accounting for 66.2% of the total revenue. Brokerage market share was 3.78% with a ranking of top 6 in the industry.

In 2019, in order to sustain growth in the brokerage and wealth management business, MasterLink plans to upgrade its intelligent stock picking system and launched robo-advisor services. The company will also recruit brokers with financial planner certificates to enhance overall productivity. As for underwriting business, MasterLink will leverage the group's resources to build up pre-IPO position and earn SPO deals.

So this is the end of our results presentation. Moderator, please start the Q&A session.

[Operator]

Thank you. And ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And the first question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

I have 3 questions, and first one is on hedging. I think that you actually increased the traditional hedge proportion in the fourth quarter compared to third quarter. But all peers have been trying to reduce that. So could you let us know on how would you -- what is your hedging strategy this year? And if you plan to lower the traditional hedge, how low it could be? And then recall that you previously mentioned that you want to increase the FX reserve to around TWD 10 billion in the first quarter. I'm not sure whether this remains your guidance or target.

The second question is on the banking side. Could you also provide some of the preliminary guidance for the banking operation this year I think in terms of loan growth, pre-provision operating profit growth as well as the hedging cost -- sorry, the credit cost? And I think at the current level of credit cost, would you expect there could be some further improvement this year?

And then the final question is on the capital. I believe some of your peers with higher RBC ratio than you already announced their fundraising. And then at the current level of RBC ratio, how comfortable you are that you have the sufficient buffer for the ongoing businesses? And then given the RBC ratio is relatively low now, why the financial holding company still decide to pay out dividends this year even though it's not from the insurance part -- the holding company? I think ideally, you should try to actually preserve some capital to inject into the life insurance operation if needed.

[Sin Young Lee, executive]

Thank you, Jemmy, and thanks for the array of your questions. First one is regarding to hedging cost. Before I let the CIO talk into details to you, I would like to say that we remain very flexible. I wouldn't say lowering our hedging ratios is our target, which is definitely not. I'm not going to say higher-ing it, as what we have done in the first quarter. It is our policy. We would like to remain flexible and would like to apply whatever the market conditions and also the guidelines that our risk management department has given. Please, James.

[Honglong Yuan, executive]

Regarding the hedging strategy, by the end of last year, we -- so -- because given the depreciation of the NT dollar for the entire year pretty much in 2018, we thought there is -- there might be a little bit pressure in the vision of first quarter that the NT dollar will be stronger. So we put a little bit more on the NDF side to keep up the hedging ratio for the very short term and just for the first quarter. So as time goes by and -- the hedging ratio would come down, but it's -- that wouldn't change dramatically. Our fully hedged position, including the foreign policy -- foreign currency policy, will be hovering a little between 70% to 90%, and it doesn't change much. And I believe that in this year, we pretty much move in tandem with the others that the hedging ratio would be actually got to be lower than last year. So our fully hedged will be around somewhere 60% and not much different from last year. Thank you.

[Sin Young Lee, executive]

Thank you, James. Your second question is on

[Audio Gap]

February, FX reserve increased by around TWD 2.5 billion compared to what we had at year-end last year, increased to TWD 7.3 billion, which is not that far away from what I had mentioned, TWD 10 billion. However, given that the dialogues between insurance companies and also regulators are still ongoing, we're not sure what are the reclassifications for any of the reserves will be available. However, we will continuously work very hard and remain -- our asset hedging strategy is very flexible. As James had just shared with you, we can increase that TWD 2.5 billion not because of any reclassifications of the special reserves but because we have gained some monies from the unhedged positions and proxies hedgings positions. That's the only reason why we can increase it, so we have to remain quite flexible. I will say there is a chance -- I cannot guarantee, but there's a chance that we can make the target we gave to you before.

And also for the banking, you asked about a few guidance. I would say for loan growth, 2019, still targeting at 6%. And for wealth management fee growth, we would like to see a 10%-or-above growth, although we are guiding the market that 2018, we'll likely see double digit. However, for the -- as of the year-end, we've seen a return -- a growth rate around 5.4%. And this year, we're going to focus more on the clients who has assets higher than TWD 3 million. We're also going to have some preferential deposits programs to allow more possible AUMs from our clients.

And for credit cost, if we define that by the reserve expenses over the average loan size we had last year, 2018, the number was 0.3%, about 30 basis points. A couple years ago, I said that we cannot remain as low as 0.2% or even lower than 0.2%. We'll be going slightly higher. And last year, what we had is pretty much in line with the guidance. 2019, our view is that it could be at a similar level and even have a chance to have a slightly decrease in the provisions. But I don't think the change will be very significant, right? So still around that level and maybe slightly improved.

And for RBC ratio, you are exactly right that a few of our competitors, friendly competitors, of course, are planning to have some capital injections to life insurance. And in hindsight also, what we had last year, we do -- we did see -- [ net worth ] did decrease quite significantly in the fourth quarter. But the good news is that in the first quarter, of course, it's not at the end yet, but so far, we have seen unrealized losses from the financial instruments that we invested, classified in the overlays or in OCIs originally gave us a loss as high as TWD 19.5 billion as of the end of 2018. Now the number is already positive. So I've seen significant improve. And also, from the AC's perspective, from those amortized costs, no need to be mark-to-market to shareholders' equity. We have seen significant loss last year. But now it's also quite approaching to breaking even. Right, so very encouraging. Overall, AC plus the OCI's overlays positions, we have seen improvements over TWD 110 billion so far starting from the beginning of the year.

As for dividend policy, as you mentioned, we're going to distribute the cash. If we define it very, very clearly, those may not be dividend. That's our capitals accumulated before, and that meant that the amount is quite, I'll say, modest. It's not a huge amount, only TWD 0.2 per share. In total, amounts around TWD 2.4 billion. The distribution will not harm the group CAR too significantly.

Do we want to increase the capital -- inject the capital into our life insurance? There's a potential. And you can also read from our announcements that there is a likelihood. There's a mandate that we would like to plea the AGNs (sic) [ AGM ] to give us the flexibilities to raise from GDRs, placements and including the preferred share in total amounts not exceeding TWD 10 billion this year if there's any need, we believe, because we have no preferred shares outstanding, and there has been a few years that we haven't had any significant placement -- private offerings. I think the chance for us to pull through is very, very solid. It's very, very solid. If there's any need from our subsidiary, particularly the life insurance subsidiary, we will have the abilities then to downstream the capital. The point for us to be able to offer your clients and our investors some of the cash is because we need to remain our attractiveness in the capital market. We are a financial company. At least we have to provide some of the cash flows to our long-term shareholders. And we'll love to see those long-term shareholders to stay with Shin Kong and to support our further needs in the capital markets, if there's any.

[Jemmy Huang, analyst]

Yes, maybe I have 2 follow-up questions. First one is on the RBC ratio. And so what's your guidance, I mean, the targets? Do you still want to maintain above 250%? Or you are fine if you stay below 250% for maybe a couple of reporting periods? The second question is regarding the potential fundraising. Sorry, I probably missed that, but are you considering issue a preferred equity as well? And then because recently, I understand these financial regulators probably no longer prefer the financial holding company to issue preferred equity. So just trying to get a sense how your interpretation on that.

[Sin Young Lee, executive]

Jemmy, as for RBCs, we will definitely remain above regulatory requirements. However, given the volatilities in the market, and you have seen that already now below -- slightly below 230%, I wouldn't say that 250% is the floor. That will remain to be our policy, right? We have to remain flexible. But as I mentioned, there are ways for us to increase our capital. The most efficient way may not be only referring to capital raising but what I mentioned to you, the REIT bonds in the market, we seized opportunity. Our investment team did their job well in the first quarter. And we have seen -- not including the ACs. AC is not an insurance equity. Those including in the mark-to-market for the shareholders' equity has rebound now more than TWD 20 billion, right? And that's the thing we want to -- and you also asked about whether there's a chance for us to offer preferred shares. My answer is yes, there's a chance. And I do not believe regulators have any clear rule to stop us from offering preferred shares. Preferred shares is a very feasible, say, capital raising instruments for us. I do believe what they want us to do is not to let the subsidiaries, particularly the life insurance, to raise any hybrid capitals for the market. They will love to see the insurance companies to have some injections, if any, from the common equities. Those will be from the holding company. The preferred shares, which is likely, however not approved by the agency yet, not -- we -- I cannot be very, very confirming your answer, but I can say that if there's a chance that we offer preferred shares, those will be the preferred shares that will be -- have a feature without any cumulatable dividends. That means those will be as senior as common equities. That will give us a chance to downstream the capital into the life insurance and as legitimate as the common equity.

[Operator]

[Operator Instructions]

[Sin Young Lee, executive]

Well, moderator, if there's no further questions, I think Jemmy's questions already covered most of the concerns and interests of our audiences. If you have any further question, please do not hesitate to contact me personally or contact my IR team. We'll be very happy to answer any questions you have. Let's close the meeting now.

[Operator]

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. 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.