Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Transcript 2021-Q4

[Operator]

Welcome, everyone, to Shin Kong Financial Holding Company's 2021 Fourth Quarter Earnings Conference Call. [Operator Instructions] 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 2021 Fourth Quarter Analyst Call. Before we start, I would like to introduce my colleagues who are with me today. Here in the main room, are Hanwei Lin, Chief Actuary of Shin Kong Life; [indiscernible] Head of the Investment Team of Shin Kong Life; Isabella and Christine, members of the IR team.

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. [Operator Instructions]

Now please turn to Page 4. Shin Kong Financial Holding recorded consolidated after-tax profit of TWD 22.73 billion for the 2021, up 57.2% year-on-year. Earnings per share was TWD 1.67. Consolidated shareholders' equity increased to 9% year-on-year to TWD 263.38 billion and book value per share at the year-end was TWD 18.21.

Facing challenges caused by COVID-19 pandemic, Shin Kong subsidiary has managed to deliver strong performance, which will be covered later in the presentation.

Page 10. Not simply aiming for sales volume or market share, Shin Kong Life has chosen to promote foreign currency policies and value forecast product for stable interest spread, better asset liability matching and CSM.

Despite decline in FYP, the sales of foreign currency policies amounted to TWD 42.63 billion, accounting for 80.8% of the total. FYP of health insurance grew 9.7% year-on-year to the strong demand from clients. FYPE reached TWD 18.87 billion, as FYPE over FYP was 35.7%, beating the industry average.

As for cost of liabilities, it decreased 10 basis points year-on-year to 3.73%, which was in line with our yearly guidance. Going forward, in 2022, foreign currency policies and value forecast products will be prioritized as key strategic products. FYP of foreign currency policies is expected to grow by 20% annually. On top of that, Shin Kong Life will increase sales of investment-linked products to the clientele's growing demand. Total FYPE is targeted to exceed TWD 60 billion and cost of liabilities is expected to fall by 5 to 10 basis points.

Page 13 presents the overall view of Shin Kong Life's investment portfolio. Investment return for 2021 was 3.77%. Assessment income grew 7.8% year-on-year. Breakdown of investment returns for different asset classes were real estate 3.7%; mortgage and corporate loans, 1.7%; policy loans, 5.4%; overseas investment, 3.9%; domestic securities, 4.3%; and cash 0.2%.

Page 14 shows the portfolio of overseas fixed income at the end of December. Overseas fixed accounts topped TWD 2.1 trillion in the fourth quarter. The funds were mainly deployed in investment-grade corporate bonds. As a result, corporate bonds accounted for largest share, representing 48.6% of the total, followed by international bond at 26.6%. Government bonds accounted for 24.4%. About 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds.

You may also find the chart of overseas fixed income portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed incomes, showing a combined share of 61.5%.

Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of the fourth quarter, hedging ratio was 81.8%, including CS, NDF and naturally hedged foreign currency policies. CS and NDF accounted for 51% and 49% respectively of traditional hedges. Lower cost of traditional hedging pushed down hedging cost to 1.53% for the past year. The balance of foreign currency volatility reserve was TWD 2.7 billion at the year-end, but further increased to TWD 7.5 billion in February as Taiwan dollar weakened against the U.S. dollar. I repeat, a further increase to TWD 7.5 billion at the end of February. Hedging costs for 2022 is targeted below 150 basis points.

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 strong performance in 2021. Net interest income grew 12.1% year-on-year with continued loan growth. Net income increased 3.2% year-on-year to TWD 3.47 billion. Pre-provision operating profit reached TWD 8.92 billion, which was 13.8% higher year-on-year. Consolidated net income grew 10.3% year-on-year to TWD 6.55 billion.

Page 22. The bank's loan balance grew 10.2% year-on-year to around TWD 720 billion at year-end, which was higher than the original target of 8%. Consumer lending grew 12.5% year-on-year and representing the largest segment of the loan portfolio as mortgage and other consumer loans increased 12.1% and 21.6% year-on-year respectively.

Going forward, in 2022, the bank will promote both corporate lending and consumer lending with tight risk control. The full year target for loan growth is 3%.

Page 23. Net interest spread for 2021 was 1.65%, which was the same level as the previous year. Net interest margin for 2021 decreased 2 basis points year-on-year to 1.24% due to market competition and excessive liquidity. In 2022, the bank will increase its demand deposit ratio and loan-to-deposit ratio to maintain growth momentum in net interest income.

Page 25. Wealth management income increased 7.2% year-on-year to TWD 2.59 billion, which was boosted by stronger sales momentum and investment products. In 2022, the bank grew actively attracting funds and expand its client base to achieve an annual growth target of 7% for AUM. In the meantime, the bank will build a stronger relationship with value clients and increase the number of high net worth clients, those with AUM exceeding TWD 10 million by double digits.

Page 26. Asset quality was benign with NPL ratio at 0.16% and coverage ratio at 800.93%. Both ratios were better than the industry average.

Page 29. MasterLink Securities generated a brokerage fee income of TWD 5.64 billion for 2021, which was 57.4% higher year-on-year. Proprietary trading income amounted to TWD 3.26 billion, driven by the disposal gain from equity which was TWD 740 million higher year-on-year. Consolidated net income increased more than 100% year-on-year to TWD 3.92 billion.

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

[Operator]

[Operator Instructions] Now our first question is coming from [ Nancy Chong ] of Cathay Futures.

[Unknown Analyst]

I have 2 questions. And the first one is Shin Kong's recent dividend payout ratio has been below 30%. And any future plans to raise it to peer levels? And the second one question is what's the latest asset and liability duration?

[Stan Lee, executive]

Thank you, Nancy. For the first question, yes, I know that our payout ratio is somehow lower than our peers. However, you also know that we are still under the need for further capital raising. Again, as I previously mentioned, there will be no kitchen sinking actions. However, there is need for new capital. At that time, if we raise capital and pay out significant amounts of dividends to the investors that in the -- well, in this rationale, it just -- it's not very rigid.

So as far as we don't have a very clear guidance whether we are going to increase the payout ratio or not. As I previously guided the market, our target is trying to pay out per share at a reasonable, stable level. That's my short answer. Your second question, I would like to have our Chief Actuary answering.

[Hanwei Lin, executive]

Yes. Duration of the liability is about 12. And asset duration, mostly bonds, are about 12.5.

[Operator]

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

[Jemmy Huang, analyst]

Sorry, I came late to this call. If I already ask the question being asked, apologize. I think 2 questions from me. First one, in terms of the loan growth, can you give us a little bit breakdown in terms of the key drivers this year because last year, it was purely driven by the consumer loans and the mortgage is over 10%. And given the tightening measures by the government, by the regulators, should we expect loan growth driver to be somewhat different?

And then on the corporate side, quarter this year will still be largely driven by domestic loans or we should see better growth on the foreign currency side. The second question is on the credit cost. I don't recall you having big [ P-4 ] cases last year. So presumably, the credit cost last year was mainly driven by the general provision for the loan growth. And if you look into this year, if you are guiding for lower loan growth and then potentially lower revenue growth, then should we expect cost to further decline year-on-year, even your guidance in the Chinese session doesn't sound like that?

[Stan Lee, executive]

For the first question, the loan growth has started to grow at 7% to 8% in various loan book. I would say the difference between 2022 and 2021 will be a more balanced growth drivers. If we bring the 2 book by corporate or by personnel, I would say both will grow at the same pace, at around 7% to 8%. The overall growth target is also 8%. However, you're definitely right, that was a great observation and questions that I believe in the segments for foreign growth somewhat will be higher than what we observed in 2021. 2021 is only 5%.

I believe that foreign side will support the overall corporate loan book as a target at 7% to 8%, right? I believe foreign book would grow, maybe take up double digit, maybe. And for credit cost, to be very frank, we don't give very, very clear guidance for that because after all, it is very, very sensitive directly linked to the yearly earnings. My rough guidance is that given that this year is 16 basis points. I don't expect it to be significantly higher than current level. So I think we may have enough confidence to keep it on the 20 basis points. That is my rough guidance.

[Operator]

[Operator Instructions]

[Stan Lee, executive]

Moderator, if there's no further questions, let's close the meeting now.

[Operator]

Sure. 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. If you should 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.