Shin Kong Financial Holding Co Ltd

TWSE:2888

Earnings Call Analysis

Shin Kong Financial's Resilient Performance

In 2023, Shin Kong Financial Holding experienced mixed fortunes, posting a consolidated after-tax loss of TWD 7.3 billion but achieving robust growth in comprehensive income to TWD 33.7 billion and a 16% increase in shareholders' equity to TWD 246.1 billion. Notably, the firm sustained ESG excellence, ranking second globally in its industry on the DJSI World Index. Shin Kong Life saw a 27.6% decrease in first-year premiums, but targeted products lifted first-year premium equivalent by 3.8%. Investment returns dipped to 2.8%, with foreign policy sales reaching TWD 21.5 billion. Shin Kong Bank raised its net revenue by 5.6% to TWD 20 billion, spurred by a 7.3% climb in consumer loans. The wealth management domain flourished, jumping over 10% in income. Finally, MasterLink Securities boasted a dramatic 70% revenue uplift to TWD 8.8 billion, reflecting a strong finish to the financial year.

Shifting Tides in the Fourth Quarter Journey of Shin Kong Financial Holding

Diving into the financial seas of 2023's fourth quarter, Shin Kong Financial Holding Company faced some currents, recording a consolidated after-tax loss of TWD 7.3 billion, a stark contrast to its otherwise flourishing comprehensive income which saw an ascent to TWD 33.7 billion. Shareholders' equity also climbed a notable 16% to TWD 246.1 billion, while book value per share reached TWD 15.56.

Commitment to Sustainable Growth: Shining in ESG Achievements

Shin Kong Financial Holding navigates the investment waters with an ESG compass, having been recognized as a constituent of the DJSI World Index for the third year in a row, and ranking second in the global insurance industry group, illustrating its dedication to responsible and sustainable growth.

Shin Kong Life: Adapting Strategy Amidst Financial Storms

As the winds changed, first-year premiums at Shin Kong Life encountered a 27.6% decrease due to market challenges. Nonetheless, the company steered towards promoting regular pay and high CSM products, which led to a 3.8% year-on-year growth in first-year premium equivalent to TWD 20 billion. Shin Kong Life's focus on foreign currency policies, accounting for over 55% of total first-year premiums, secured stable interest spreads and aligned with its liability matching strategy. Boosting its investment voyage, the CSM contributions significantly rose to 91% in 2023, all while achieving a keen eye towards asset management with a total investment of around TWD 3.4 trillion by year-end.

Shin Kong Bank: Weathering Economic Fluctuations

Shin Kong Bank witnessed a 5.6% year-on-year lift in total net revenue to TWD 20 billion thanks to an uptick in net fee income and investment income, with consolidated net income making port at TWD 6.8 billion. The bank aimed to grow its loan balance, which hit TWD 807 billion, a 7% boost from the previous year. Moreover, consumer loans grew 7.3%, forming the backbone of the loan portfolio. Even as the net interest spread narrowed due to competitive interest rates, the bank's net interest margin adjusted to steady quarters. Wealth management income, powered by bancassurance and structured products, charted a course for over 10% growth. Asset quality, showing strong signs with an NPL ratio of 0.12% and a coverage ratio well above industry average, reflects a resilient portfolio despite the choppier economic waves.

Earnings Call Transcript 2023-Q4

[Jason Tsai, executive]

Welcome, everyone, to Shin Kong Financial Holding Company's 2023 Fourth Quarter Earnings Conference Call. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please visit www.skfh.com.tw under the Investor Relations section. Now I would like to introduce Ms. Monica Chang, IR team from Shin Kong Financial Holding Company. Ms. Chang, please begin.

[Tingyu Chang, executive]

Thank you, Jason. Ladies and gentlemen, welcome, and thank you for joining Shin Kong Financial Holding 2023 Fourth Quarter Results Conference Call. Before we get started, I'd like to introduce the management who are here with us today from Shin Kong Financial Holding here, President, Stefan Chang; CFO, Judy Ling, Vice President, Vicky Lu; and Isabella Wang from our IR team. From Shin Kong Life here are Chief Actuary, Hanwei Lin, Senior Vice President, Stefan Wang; and Vice President, Stacey Chen. The president we're about -- the presentation we are about to go through was sent up 2 hours ago. You may download it from our website.

Now let's please turn to Page 4. Shin Kong Financial Holding recorded a consolidated after-tax loss of TWD 7.3 billion for 2023. And Consolidated total comprehensive income grew prominently to TWD 33.7 billion. Consolidated shareholders' equity increased 16% year-on-year to TWD 246.1 billion, and book value per share was TWD 15.56. Our subsidiaries maintained stable business momentum during the year.

More details will be covered later on in the presentation. Before we move on, I'd like to share joyfully, our main achievements on ESG performance in 2023. Shin Kong Financial Holding was selected as a constituent stock of the DJSI World Index for the third consecutive year. And we're also honored to rank second globally in the insurance industry group. The company was also for the first time included in the DJSI Emerging Markets Index, reflecting our persistent commitment to corporate sustainability development.

Now let's start from Page 10, Shin Kong Life. First year premium for 2023 decreased 27.6% year-on-year to TWD 38.9 billion, ascribed to market headwinds. However, with the sales focus on regular pay and high CSM products, first year premium equivalent grew 3.8% year-on-year to TWD 20 billion. Our first year premium equivalent over first year premium ratio was around 51.5%, outperforming our major peers. Foreign currency policies can create stable interest spreads and better so liability matching.

The sales of foreign currency policies amounted to TWD 21.5 billion, accounting for more than 55% of our total first year premium. This ratio again outpaced our major peers. Page 11. CSM serves as an important profitability indicator under IFRS 17, and Shin Kong Life has set the target of accumulating TWD 30 billion per year since 2020. I -- we have been promoting protection products, health insurance, writers and those with high CSM to achieve this target. We are here delighted to share that our annual accumulation goal was once again achieved in 2023, which human spot from the left bar chart below.

The table in the lower right corner shows that the CSM contribution from protection type, health insurance and writers increased from 76% to 91% in 2023 despite the decrease in feta premiums. Page 14 gives an overall picture of Shin Kong Life's investment portfolio. Our total investment was around TWD 3.4 trillion at the end of last year. Investment return after hedging for 2023 was 2.8%, caused by less realized capital gains and high hedging costs compared to 2022. The breakdown of investment returns for different asset classes were: real estate, 4.9%; mortgage and corporate loans, 2.4%. -- policy loans, 5.2%, opens investment to 0.3%. -- domestic securities, 3.7% and cash 2.2%.

Page 15 shows the portfolio of overseas fixed incomes. At the end of 2023, the overseas fixed income position was around TWD 2.3 trillion. Our funds were mainly deployed in investment-grade corporate bonds and the portfolio remains similar to that of the previous quarter. Over 90% of the overseas fixed income position was deployed in U.S. dollar-denominated bonds. As for the investment region, North America and Europe remain our focus, showing a combined share of more than 63%. Page 11 -- sorry, Page 17. The pie chart on the left shows the mix of hedging vehicles. At the end of 2023, the hedge ratio was 78%, including India and our naturally hedged foreign currency policies. Shin Kong Life's full year hedging cost was 140 basis points.

The figure was higher than the previous quarter on the back of volatility in exchange rates in the fourth quarter Page 19 lists out Shin Kong Life's Tony time for outlook details the company's full year strategy. Now please move on to Shin Kong Bank, Page 22. -- boosted by growth in net fee income and investment income, total net revenue for 2023 rose 5.6% year-on-year to TWD 20 billion. Pre-provision operating income increased 3.1% year-on-year to TWD 9.5 billion. Consolidated net income amounted to TWD 6.8 billion.

Page 23. Shin Kong Bank's loan balance was TWD 807 billion at the end of 2023, which was 7% higher compared to the end of 2022. Consumer loan book grew 7.3% year-on-year, representing more than 60% of our loan portfolio as unsecured consumer loans and other consumer loans increased 11.6% and 7.4% year-on-year, respectively. Going forward, in 2024, Shin Kong Bank will expand consumer loans and SME loans to sustain our loan growth momentum, increased interest spread and loan-related fee income.

Page 24. As market competition led to higher deposit interest rates, net interest spread for the first quarter of 2023, lowered 7 basis points quarter-on-quarter to 1.59%. And net interest margin also flipped quarter-on-quarter to 1.2%. If we reclassify swap revenue, the adjusted net interest margin in the fourth quarter will be 1.3%, close to the figure of the third quarter.

Page 26. Wealth management income increased more than 10% year-on-year to TWD 2.8 billion. Our bancassurance and structured products with securities are the main drivers with fee income increasing 19.8% and 9.3% year-on-year, respectively. 2024, Shin Kong Bank will continue attracting new funds and expand client base to steadily increase wealth management, assets under management, focus on insurance policies and mutual funds to achieve high single-digit growth in wealth management income

Page 27. Ours asset quality remained benign. -- both NPL ratio and coverage ratio surpassed the industry average. The figures were 0.12% and over 1,100% respectively. New NPL generated in the fourth quarter of last year was nearly TWD 327 million. The amount is negligible to total loans. Lastly, Page 30, MasterLink Security. In 2023, full year operating revenue surged 70% year-on-year to TWD 8.8 billion, and consolidated after-tax profit amounted from TWD 362 million to TWD 2.5 billion. The decent growth was mainly attributed to prominent performance and prop trading, which contributed TWD 3.2 billion to income. Meanwhile, thanks to the increase in average daily market turnover, brokerage income also grew 6.7% year-on-year to TWD 5.2 billion. MasterLink's brokerage market share remains fixed in the market. I come to the end of the presentation. Thank you for your patience. We'll now proceed with the Q&A session.

[Jason Tsai, executive]

Thank you, Monica. And ladies and gentlemen, we will now begin our question-and-answer session. [Operator Instructions] And our first question will be coming from Jemmy Huang of JP Morgan.

[Jemmy Huang, analyst]

Two questions from me. First one is for the RBC ratio, we know that the interest rate capital charge will be increasing on a year-on-year basis. So could you provide some color like in the first half of this year, how much of the RBC ratios will be dragged down because of higher interest rate risk charges? And any other factors that will also drag down BC ratios in addition to the normal business expansion?

The second question is also on the holding [indiscernible]. Either on the banking side or on the insurance side, do you have any offshore CRE exposures in terms of lending or investments? How do we perceive the related asset quality or credit risks?

[Stephen Chen, executive]

Jemmy, for the first question. You're talking about the C3 risk that it continues with the current regulation that I think this year, the increased C3 risk will reduce RBC for about 20-plus percent for us. And so that's the -- if the situation remains, but I think there will be some discussion about -- if we continue the formula for Catlin and the C3 risk in RBC that's currently using now or there are some companies also reflect that maybe we should modify that a little bit more.

[Jemmy Huang, analyst]

Okay. Can I check, is that happening in first half or in second half in terms of the increase in the coefficient?

[Stephen Chen, executive]

In the first half, in the first half, when we published the first half RBC that will be used at that time.

[Jason Tsai, executive]

We're now in question-and-answer session. [Operator Instructions].

[Stephen Chen, executive]

Sorry, we have yet to answer the second question regarding the CRE. On the banking side, I think we don't have any outstanding CRE outside of Taiwan. And on the insurance side, I think we have only limited exposure in London is a building, which is -- I think is very -- with current market value around GBP 100 million -- USD 100 million, so it's -- the total exposure on CRE is very limited...

[Jason Tsai, executive]

Thank you, Jammy. [Operator Instructions] Then it appears to be no further questions at this point. And Mr. Chen, can we close the conference call now?

[Stephen Chen, executive]

Yes. But I would like to make a few comments regarding these actions. I think 2023 is a very challenging year. I think due to the market headwinds and the significant appreciation of NT dollar in the fourth quarter, we let go after tax laws. But I think we are quite optimistic regarding the market environment. this year. And also our business momentum of our subsidiaries picking up and also have shown a very positive momentum. And not only levers record after-tax profit in February, our capital gain of levers also saw significant improvement.

Hedging cost is also under control. On banking side, after-tax profit up to February also increased more than 10%, I think, 13% as compared with the same period of last year. And on security side, the trading of our bookage income also increased more than 50%, 50%. I think those are very good signs for us at the beginning of this year. In addition, I think we will continue to complete our capital fundraising exercise to improve our capital adequacy to meet the government requirements, regulatory requirements in due course, okay? That is about our sections. If there's no more comment or questions. So we conclude okay?

[Jason Tsai, executive]

Yes. Thank you, personally Chen. 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. 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. Thank you, and goodbye.