Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2020-Q4

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2020 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, 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 2020 Fourth Quarter Analyst Call. Before we start, I would like to introduce my colleagues who are with me today. We are happy to have Sunny Hsu, Executive Vice President of the Financial Holding Company, to review the fourth quarter results with us. Also in the room are Hanwei Lin, Chief Actuary of Shin Kong Life; [indiscernible], Head of the Investment Team in 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 the webcast. If you do not have the presentation, please let us know now. [Operator Instructions]. 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 consolidated after-tax profit of TWD 14.46 billion for 2020. Earnings per share was TWD 1.12. Consolidated shareholders' equity reached TWD 241.58 billion, and book value per share at year-end was TWD 18.12. Core business of each subsidiary remained robust in 2020, which will be covered later in the presentation.

Page 10. FYP was TWD 72.39 billion, representing a market share of 7.9%. As Shin Kong Life's product strategy was value-driven, FYPE reached TWD 27.44 billion and secured the forward position in the industry. FYPE over FYP increased from 29.3% in 2019 to 37.9%. Foreign currency policies remained the marketing focus in 2020. FYP of such policies amounted to TWD 54.39 billion, accounting for 75.1% of total FYP. In addition, cost of liabilities declined 14 basis points year-on-year from 3.97% to 3.83%, which was better than our yearly target. Going forward, in 2021, foreign currency policies and value-focused products will be prioritized as key strategy products. The share of foreign currency policies over total FYP is targeted at 70%, and cost of liabilities is expected to fall by 10 basis points.

Page 13 gives an overall view of Shin Kong Life's investment portfolio. Investment return for 2020 was 3.69% due to higher hedging cost. Breakdown of investment returns for different asset classes were: real estate, 3.5%; mortgage and corporate loans, 1.7%; policy loans, 5.5%; overseas investment, 3.3%; domestic securities, 6.1%; and cash, 0.3%.

Page 14 shows the portfolio of overseas fixed income. At the end of the year, overseas fixed income topped TWD 1.9 trillion. Corporate bonds accounted for the largest share, representing 47.3% of the total, followed by international bond at 27.2% and government bonds at 25.0%. About [ 90% ] of the overseas fixed income position was deployed in U.S. dollar-denominated bonds. You may also find that the chart of the overseas fixed income portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed income, showing a combined share of 62.4%.

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 75.7%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDF accounted for 57% and 43%, respectively, of traditional hedges. Appreciation of NT dollar and higher cost of NDF drove [ up ] hedging costs to 2.28% for the past year. The balance of foreign currency volatility reserve was TWD 5.2 billion at year-end. In order to better control hedging cost, Shin Kong Life will effectively adjust hedging ratio through the [ proxy ] basket and continue to build out its foreign currency volatility reserve.

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 continued growth in 2020. Investment income increased 81.8% year-on-year, while provision expense decreased 11.8% year-on-year. Consolidated after-tax profit reached TWD 5.94 billion, up 7.5% from year earlier.

Page 22. The bank's loan balance grew 7.9% year-on-year to TWD 654 billion. Consumer lending grew 10.3% in 2020 and representing the largest segment of the loan portfolio, while mortgage and unsecured loans increased 8.4% and 9.6% year-on-year, respectively. On corporate lending front, the momentum mainly came from SME loans, which went up by 15.3% year-on-year. Going forward, in 2021, the bank will pursue a balanced growth in both corporate lending and consumer lending with an eye to risk control. The full year target for loan growth is 8%.

Page 23. As the deposit rates steadily repriced downward, net interest margin and net interest spread rebounded 3 basis points quarter-on-quarter to 1.24% and 1.64%, respectively. The upward trend in net interest margin and net interest spread is expected to continue in the first quarter of 2021.

Page 25. Wealth management income for 2020 was TWD 2.42 billion. Strong growth in mutual funds offset the decline in bancassurance. In 2021, the bank will actively attract more funds and expand its client base to achieve an annual growth target of 8% for AUM. In the meantime, the intelligent robo-advisory will be launched to enhance customer experience, and the mobile device sales force management system will be built to digitize sales process and improve productivity.

Page 26. Asset quality was stable with NPL ratio at 0.19% and coverage ratio at 672.48%. Both ratios were better than the industry average.

Page 29. MasterLink Securities recorded an after-tax profit of TWD 1.9 billion for 2020, which was up by 22.9% year-on-year. The revenue from brokerage business grew 41.2% year-on-year to TWD 4.32 billion, accounting for 62% of the total operating revenue. Brokerage market share was 3.65% and ranked sixth place in the industry.

Looking into 2021, more feature services and marketing activities will be launched to secure different target clients. MasterLink Securities will promote the newly launched intelligent wealth management platform and strengthen its digital promotion models. The company will also utilize group resources to satisfy clients' needs and capture business opportunities.

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

[Operator]

[Operator Instructions] Our first question is coming from [ Nancy ] of Cathay Securities.

[Unknown Analyst]

The first question is what's the duration for Shin Kong Life's assets and liabilities? And the other question is what's the current crediting rate for Shin Kong Life's Taiwan dollar and U.S. dollar policies? Given the rising bond yield, does Shin Kong Life plan to adjust the crediting rate?

[Stan Lee, executive]

Thank you, Nancy. I would like to have our Chief Actuary, Hanwei Lin, to answer both of your questions.

[Hanwei Lin, executive]

Yes. The duration of the liability is about [ 11.23 ]. The duration of assets varies but we mainly look at the bonds. The duration of the bonds is about 11.91. So the main assets and the liability durations are about the same, very, very close. About the crediting rate, for Taiwan dollars current products, the crediting rate is between 0.8% to 1.9%; U.S. dollar products from 2.7% to 3.3%. We have seen that this year, especially U.S. [ dollar ] rate has been increasing. So actually, in March, we already raised U.S. dollar protection products, about 5 to 10 basis points already in March.

[Stan Lee, executive]

[ Nancy ], do you have any further questions?

[Unknown Analyst]

No. Thank you.

[Operator]

And next, we'll have Jemmy Huang of JPMorgan for questions.

[Jemmy Huang, analyst]

A couple of questions. On the [ last slide ], for the foreign currency policies you are selling, the mainstream products, could you give some color in terms of how the VNB margin look like compared to your average [ 26% ] in 2020? And then in terms of your guidance for cost of liability to decline by about 10 basis points year-on-year, just trying to understand, is that taking to account the fact that when the market yields are probably going up, then there will be potential increase in the crediting rates for your U.S. dollar policies as a result? Or will you basically assume that your [ guarantee ] rate -- or the crediting rate for the [ in-force book ] will be largely unchanged in 2021?

For the banks, could we get some guidance on your credit costs for this year compared to around 15 basis points last year? And also, in terms of the loan growth, the guidance is 8%. Should we assume it to be no similar between corporate loan and also consumer loan? Or there will be any particular focus for this year?

[Stan Lee, executive]

Thank you, Jemmy, for the question. For the life insurance product side, I would like to have Mr. Lin to answer your question.

[Hanwei Lin, executive]

The VNB margins for U.S. dollar products is about 20% in 2020. For 2021, as we said the meeting before that, we look to [ continue the same for ] U.S. dollar products and longer pay products. So the FYPE ratio will increase as well as the VNB margin. So if we sell more longer pay products, the VNB margin will increase.

For crediting rate, yes, for -- in terms of the budget, we look to [ decrease to close ] a bit about 10 basis points. Of course, for the products we're selling now, we might [indiscernible] the trend of the current market, as we did in March. We raised about 5 to 10 basis points in crediting rate. But that's for the new products only. So for the [ in-force ] or for most of the large book, that will probably not change that much. So we are still based on new products that are coming in that's lower than our current cost of liabilities. So in overall, the target is about 10 basis points.

[Stan Lee, executive]

Thank you, Hanwei. Before I answer the questions on the banks, I would like to add a couple of points on the life insurance side. Jemmy, you have asked great questions on whether we factor in the rate hike potential or just the long-dated bonds, reflecting the inflation expectations for the market. I would like to very straightforward say that for the budgeting purpose, well, there's no chance that we know that in the first quarter this year there will be such a significant movement in the longer end of the [indiscernible].

However, I would say the 10 basis points guidance shall be relatively solid because if, and as Hanwei Lin just mentioned, if there's any increase on the crediting rate of new products, that will also increase the attractiveness of such products to the clients. And there's just 2 factors driving down our profitability: first, the pricing; second, the amount that we can sell -- that can be sold from our long-dated products. And if there's any crediting rates increase because of the expectations for inflation or the competitiveness of other companies or the bank's instruments, well, they also increase attractiveness. So I would say, although I cannot guarantee -- there's nothing can be guaranteed by the guidance, but I think there's a solid logic behind that.

And the bank side, you asked about the credit cost. For 2021, we expect the credit cost to be between 20 to 25 basis points as the credit [ card ] was very, very benign in 2020, which was just 15 basis points as you mentioned. Loan growth target for next year is also set at 8%. The number on my hand showing that for corporate banking, slightly higher than 8%; for consumer banking, slightly lower than 8%. But again, the valuations there is not very high. So I can say that quite similarly for both the consumer and corporate side.

[Operator]

And the next question is coming from Chung Hsu of Crédit Suisse.

[Chung Hsu, analyst]

I just have one question on Page 15 of your presentation. My question is on the recurring yield pre-hedge. It's dropped to 3.65% from around 4% in the last 2 years. But if I look at domestic and foreign cash dividend income and rental income that you have on the same slide, they seem to be quite stable. So this must be a change or impact from your fixed income book. Is that due to your portfolio adjustment? And with that, how should we think about your pre-hedge recurring yield for 2021?

[Stan Lee, executive]

Thank you, Chung. This is a very, very good question. And I also think that for life insurance companies in Taiwan, this is a very important issue. Of course, the way you see it, the domestic, foreign -- and foreign cash dividends, those are from the equities portfolios of our ETF portfolios, relatively stable. Real estate, stable. Then what happened here is mainly from, first, the changes in the fixed income book. Last year, we have seen significant drop in the global yield, and that also triggered the call [ options ] embedded in the international bonds and some of our callable bonds held in the portfolio. The redemption amount last year was approaching to TWD 300 billion. Well, the good news is that interest rate's starting to rebound. And since [indiscernible] is already over, this year, we expect significantly less retention amount compared to last year, significantly less.

Also, another change will be the sales of the AC portfolio, amortized cars portfolio. Last year, the total amounts we disposed was slightly over 7%. But this year, because there's updated regulations from the FSC, we can only sell as much as 5% of the portfolios we're holding as amortized cars. So those 2 forces: first, less redemption; second, less amount that can be sold from the AC portfolio, will help us to stabilize the decrease of the recurring yield.

The good news is that from the reinvestment plus the new money from the first year premiums and also recurring premiums that accounted for about 13% to 15% of our overall asset. If there's any increase, and there's already some increase in the new money yield, we can enhance the new money yield quite efficiently compared to what we had in the fourth quarter last year. Fourth quarter last year, it will be almost impossible -- it was almost impossible for us to get new money yield higher than 3%. Now 3% is definitely available.

[Chung Hsu, analyst]

Thank you, Stan. That's very clear. Can I follow up with a question that if I look at your RBC ratio for the life, I believe it's on the back of the presentation, 212% at the end of last year. Would that be, in any way, constrain your ability to reallocate your portfolio or just try to reinvest a higher rate? Or if there's anything that you can do to remove or alleviate that constraint?

[Stan Lee, executive]

Thank you, Chung. To saying reinvest [ or new invest enjoying the higher-end ] long-dated bonds, I don't see a significant -- well, I don't see significant difficulties because of the lower RBCs because any bonds rated in investment-grade, risk charge is very, very low. If those bonds are higher than A rating, there's almost no risk charge. Any AA bonds or above -- single A bond and above, almost have no risk charge. So if we can only [ mine ] our duration matching business well, there should not be any effective risk from the current RBC scheme.

What we do have to worry about is whether we will have enough risk tolerance for equities. You see that we slightly reduced the equities [ portion ] in last year-end compared to 2019. Some part of it -- part of the reason is because our RBC ratio was not as high as we want it to be. That's what we have done. It may not be necessarily a bad thing because the global market now is on a relatively high end. So if we slightly reduce the exposures, we may as well have a better chance to redeploy into the market at the right time.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Well, moderator, I think we have very comprehensive discussions in both Chinese and English session. If there's no further questions, let's close the meeting now.

[Operator]

Yes. Thank you, Mr. Lee. 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. Goodbye.