Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2019-Q4

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2019 Fourth 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, the 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 the Shin Kong Financial Holding 2019 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; Hanwei Lin, Chief Actuary of Shin Kong Life; Isabella and Christine, members of my 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 16.63 billion for 2019. Consolidated total comprehensive income reached TWD 46.88 billion, TWD 82.18 billion higher year-on-year compared with a loss of TWD 35.30 billion a year earlier. Earnings per share was TWD 1.34, and book value per share at the end of the fourth quarter was TWD 15.42. Core business of each subsidiary remained robust in 2019, which will be covered in the subsequent slide.

I would also like to add that the capital adequacy ratios of the group and subsidiaries were all above regulatory requirements at the end of 2019. Group CAR was 111.1%. RBC of Shin Kong Life was 220.8%. BIS of Shin Kong Bank was 14.4%, and BIS of MasterLink Securities was 371.9%.

Page 10. FYP for 2019 reached TWD 116.86 billion, securing a market share of 9.2%. As Shin Kong Life has been actively promoting foreign currency policies, FYP of such policies grew 12.6% year-on-year to TWD 80.53 billion, accounting for 68.9% of total FYP. The improved product mix led to a year-on-year increase of 2% in VNB. In addition, cost of liabilities decreased another 3 basis points in the fourth quarter to 3.97%, better than our yearly target.

In 2020, Shin Kong Life will continuously lay its focus on foreign currency policies, production products and regular-paid policies to control hedging costs and accumulate fundamental income. The share of foreign currency policies over total reserve is targeted at 20%, and cost of liabilities is expected to be 5 to 10 basis points lower than 2019.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Investment returns for 2019 increased 21 basis points year-on-year to 4.2%, thanks to higher recurring income and properly controlled hedging cost. Breakdown of investment returns for different asset classes were: real estate, 3.2%; mortgage and corporate loans, 4.4%; policy loans, 5.5%; overseas investment, 3.5%; domestic securities, 8.3%; and cash 0.8%.

Page 14 shows the portfolio of overseas fixed incomes. At the end of the year, overseas fixed incomes amounted to TWD 1.77 trillion. Corporate bonds accounted for the largest share, representing 47.3% of the total, followed by international bonds at 28.9%. Emerging market government bonds accounted for 22.9%. You may see the chart of the overseas fixed income's portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed income with combined share of 59.3%.

Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of fourth quarter, hedging ratio was 71.8%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDF accounted for 69% and 31%, respectively, of traditional hedges. Hedging cost for 2019 was 1.73%, similar to the level of 2018. Foreign currency volatility reserve serving as a buffer for fluctuations in foreign exchange was TWD 2.1 billion.

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

[Isabella Wang, executive]

Thank you, Stan. Please turn to Page 21. Shin Kong Bank delivered a stable performance for 2019. Its net income grew 10.3% year-on-year to TWD 3.54 billion on the back of strong growth in wealth management business. Investment income increased 22.1% year-on-year, while provision expense decreased 11.4% year-on-year. Consolidated after-tax profit reached TWD 5.52 billion, up 5.9% from a year earlier.

Page 22. The bank's loan balance rose 6.8% year-on-year to TWD 605.85 billion. Consumer lending continued an upward trend with mortgage and unsecured loans increasing 6.4% and 5.7% year-on-year, respectively. As for corporate lending, the momentum mainly came from domestic large corporates and overseas syndicated loans. Going forward, the bank will grow loans with an emphasis on quality.

Page 23. Due to fierce competition in the market and Fed rate cuts, both net interest margin and net interest spread for the whole year came down to 1.44% and 1.82%, respectively. Given the ongoing low yield environment and competitive pressure from peers, the bank expects the full year figures to fall below the level of 2019.

Page 25. Wealth management income for 2019 increased 17.7% year-on-year to TWD 2.54 billion, with strong sales momentum in mutual funds and overseas securities. The fee income from these 2 categories accounted for 46.6% of the total. This year, Shin Kong Bank will actively attract new funds and expand its client base. On the product side, mutual funds and overseas securities are expected to be sales focused. Meanwhile, the bank will promote foreign currency policies and regular-paid products to drive up wealth management income.

Page 26. Asset quality was stable with NPL ratio at 0.2% and coverage ratio at 636%. Both ratios were better than the level of 2018.

Page 29. MasterLink Securities recorded an after-tax profit of TWD 1.54 billion, up 85.7% year-on-year. Proprietary trading income grew 84% year-on-year to TWD 2.59 billion, driven by the increased disposal gains from equity and fixed income. Brokerage market share was 3.7%, with a ranking of top 6 in the industry. In 2020, in order to sustain growth in brokerage and wealth management business, MasterLink plans to strengthen its trading platform and roll out global advisor services. The company will also introduce featured products through partner channels. As for underwriting business, MasterLink will leverage group resources to earn decent sales.

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

[Operator]

[Operator Instructions] And the first question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

I understand you might not be able to give out very specific guidance. But could you share, like, for the banking operation in terms of the trend -- trend-wise, how should we perceive -- I think you mentioned net interest margin will still be on downward trend, but is that downward magnitude in 2020 will be even bigger than 2019? And also, how should we expect the credit cost and the loan growth migration? That's the first question.

Second one is, I think the effective tax rate for the life insurance operation has been pretty volatile. Just trying to understand, is that due to the unrealized losses on the hedging side or any other specific reasons?

[Stan Lee, executive]

Thank you, Jemmy, for the questions. As what we discussed in the Chinese session, yes, we are still in the blackout period. So I cannot give you any specific guidance on the changes of earnings. However, I can show you the trend of how the interest rate -- benchmark interest rates decrease and will change our guidance to the NIM. For NT dollars, every 25 basis point downward change will cause about 6 basis points decrease in our overall NIM, while about 25 basis points change will cost a 0.6 basis point change in the NIM. That should give you enough information to calculate our expectations for the decrease of NIM changes. However, now we don't have a very clear view on the NT dollars. So as I guided, NT dollars accounted for over 80% of our overall deposits. And so still, it has much a higher impact to our overall book. We don't have a very clear view on how the Central Bank will change its benchmark rates now.

For loans, we expect it to grow still another 7% for this year. We will be rather cautious to any industries or to any individual clients that have more severe supply chain issues. Again, instead of giving you a very clear guidance of how we plan to migrate the loan growth, the business growth, I would like to say that the credit cost still, as far as we can expect now, is that it will remain at a similar level of last year. Last year, the credit cost, as defined by new NPL over the overall loan size, it was around 20, 22 basis points. So this year, we expect it to be very similar as last year.

I believe your second question is on more technical effective tax rate of life insurance, and you are absolutely right. Last year, we have seen a high increase in the FX reserve in the first half. That means we have some gains from the FX hedgings, and of course, some of those are unrealized. If there are unrealized gains, we have to set aside a meaningful size of unrealized gains for the tax. However, things changed in the fourth quarter. Fourth quarter, the reserve level went down to only about TWD 2.1 billion, right? So from more than TWD 10 billion to only TWD 2.1 billion, that means we suffer from the hedgings. And that take out a significant amount of our realized gains from hedgings or realized positions, and also some of the tax benefit has to be write off as well. And that is why if you observe our full quarterly effective tax rate, you will see very, very significant changes.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Well, I think we had very comprehensive discussions in the Chinese session. If now we don't have any questions, then let's close the meeting.

[Operator]

Yes. Thank you, Mr. Lee. And ladies and gentlemen, 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. Goodbye.