CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Transcript 2021-Q1

[Operator]

Welcome, everyone, to CTBC Financial Holding Company's 2021 First Quarter Earnings Conference Call. [Operator Instructions]

And today's host will be Ms. Ya-Ling Chiu, the CFO and spokesperson of CTBC Financial Holding Company; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Company. And the presentation will begin now.

[Pai-Hung Yeh, executive]

Thank you, everyone, for joining CTBC's First Quarter 2021 Earnings Call. Please turn to Page 3 for our financial highlights. CTBC Holding delivered a robust operating performance with after-tax profit increasing 62% Y-o-Y. ROE and ROA reached 20.9% and 1.2%, respectively. EPS was TWD 1.01. Holding remained well capitalized with CAR at 128.3% and double leverage ratio at 115.3%.

CTBC Bank maintained solid loan growth in domestic corporate loans, mortgage and consumer loans benefiting from economic recovery. Strong fee income growth came from positive business momentum in wealth management and lottery fees, while the COVID-19 impact on credit card fee moderating. For asset quality, NPL ratio was 0.48% with credit cost of 14 basis points. Capitalization remains sound with CAR at 14.8% and CE Tier 1 ratio at 12.1%.

Taiwan Life reported strong after-tax profit growth of 143% Y-o-Y due to strong investment income and lower cost of liability. It has adopted a dynamic strategy and additional FX reserves of TWD 1 billion in April, weather potential FX fluctuations. RBC ratio remains sound at 327%.

Page 4 on ESG update. CTBC Holding is the first financial institution in Taiwan to join the partnership for carbon accounting financials and serves as the Chair of PCAF Asia-Pacific. CTBC Bank is the first in Taiwan to issue a green bond, sustainability bond and social bond.

On governance, the coding is and only listed financial institution in Taiwan with independent directors filing majority of board. It was recently ranked the top 5% in the 7th Corporate Governance Evaluation by Taiwan Stock Exchange. CTBC Holding ESG rating is rated AA by MSCI, and it's a constituent of the MSCI Taiwan ESG Leaders index, DJSI World & Emerging Markets Index, and FTSE4Good Index Series.

Page 5 and 6 on profitability. Holding's first quarter net income was TWD 19.7 billion. EPS was TWD 1.01. Group ROE was 20.9% and ROA was 1.2%.

Page 7 on capital ratio. We remain well capitalized with group CAR at 128.3%. Life RBC ratio at 327%, bank CAR at 14.8% and Tier 1 ratio at 13.3%.

Page 8 on profit breakdown by entity. In 1Q, bank net profit reached TWD 8 billion, down 4% Y-o-Y. Life profits were TWD 10.3 billion, up 143% Y-o-Y. Holdings consolidated net profits were TWD 19.7 billion, up 62% Y-o-Y. From the table on the right, Life and bank contributed 52% and 41% of 1Q earnings, respectively. Securities and other subsidiaries reported decent earnings growth and contributed to 7% of holdings earnings.

Page 9 on net profit movements. In the drop above, operating revenue was up 14% Q-o-Q, attributed to strong fee income growth and trading gains. Provisions decreased mostly due to lower specific provisions. Credit cost for 1Q declined to 14 basis points, down 19 basis points Q-o-Q. Expense was up 6% Q-o-Q, mostly on higher ESOP valuations.

As for Life, 1Q pretax profits increased as cost of liability continued to decline and investment income increased amid strong capital markets movements.

On the bottom, operating revenue was up 12% Y-o-Y, supported by growth in management, retail and lottery fees and trading gains. Provisions were down 53% Y-o-Y. Due to lower specific provisions expense was up 23% Y-o-Y, mostly on a higher ESOP evaluations.

Life pretax profits were up 136% Y-o-Y, supported by increased investment income and declining cost of liability. Overall, holdings pretax profit reached TWD 22.6 billion, and net income reached TWD 19.7 billion, up 62% Y-o-Y.

Page 10 on revenue breakdown excluding Life. Total revenue was up 14% Q-o-Q and 12% Y-o-Y. Net interest income was flat Q-o-Q and down 2% Y-o-Y. Free cuts impacted net interest margin. Fee income was up -- was up 13% Y-o-Y, supported by growth in wealth management, retail, lottery, securities and investment businesses, while the impact on credit card fees from the pandemic operating. Combined derivatives, FX and trading gains was up 127% Q-o-Q. Higher trading income from bond investment combined derivative FX and trading gains was up 72% Y-o-Y due to higher income related to equity reinvestment amid positive capital market movements.

Long-term investment and other income declined Q-o-Q due to higher lottery rebates to MLS in 1Q. Long-term investment and other income was [ 37% ] Y-o-Y as income from HFG recovered.

Page 11 on bank's loan breakdown. Total lending with credit card revolving up 3% Q-o-Q and 4% Y-o-Y. And the corporate loan was up 12% Q-o-Q, driven by growth in government-related and commerce and service sectors. NT dollar corporate loan was up 9% Y-o-Y, mainly from growth in government-related commerce and services and financial sectors.

Foreign currency loan was down 2% Q-o-Q and 9% Y-o-Y. Excluding FX, foreign currency loan was down 3% Y-o-Y. Mortgage continued growth 2% Q-o-Q and 11% Y-o-Y as transaction volumes in property market continued to grow. Our secured lending was up 1% Q-o-Q attributing to our strategy that expands customer base and up 32% Y-o-Y due to increased customer base and the participation in labor relief program led by the government. Credit card revolving and others were flat Q-o-Q and up 6% Y-o-Y.

Page 12 on foreign currency loan breakdown. Foreign currency loan was [ TWD 955 billion ], which accounted for 37% of total loans. Overseas subsidiaries accounted for 56% of total foreign currency loans with TSB being the majority. Overseas branches accounted for 31%. OBU plus DBU was 13%. The demand for foreign currency loans moderated, mostly due to the pandemic. FC loan was down 4%. Overseas branch loan was down 8% Y-o-Y. Excluding FX, overseas branch loan was down 3% despite double-digit growth from China, India and Vietnam branches. OBU plus DBU was down 5% Y-o-Y. Excluding FX, OBU plus DBU loan was up 1%, driven by growth in syndication and trade finance.

Page 13 on bank deposit mix. Total deposits reached [ TWD 3.8 trillion ], up 1% Q-o-Q and 10% Y-o-Y. Our left, total NT dollar deposits were up 4% Q-o-Q and 15% Y-o-Y. NT dollar savings accounted for 61%. On the right, total foreign currency deposits were down 3% Q-o-Q and up 4% Y-o-Y. Foreign currency savings accounted for 55%.

Page 14. On loan-to-deposit ratio. Overall, LDR was 69.7%. NT dollar LDR was 75.9%. Foreign currency LDR was 61.5%.

Page 15 on NIM and spread. 1Q NIM was down 1 basis point Q-o-Q to 1.39%, mostly due to impact on marketable securities from rate cuts and lower LDR. Foreign currency spreads were up 2 basis points Q-o-Q to 2.15% as the bank lower FX deposit rates. Overall spreads were up 1 basis point Q-o-Q to 1.78%.

Page 16 on fee breakdown. Total fees were up 27% Q-o-Q and 10% Y-o-Y. Wealth management fee was up 15% Q-o-Q and 24%, driven by strong sales of mutual funds and investment-linked products, a mid- positive sentiment in the capital markets. Consequently, mutual fund fees were up 14% Q-o-Q and 21% Y-o-Y, while bancassurance fees were up 14% Q-o-Q and 27% Y-o-Y. Credit card fee was down 8% Q-o-Q due to higher credit card commissions and recovered domestic consumptions in last quarter. Credit card fee was up 1% Y-o-Y as consumptions picked up. Retail business was up 1% Q-o-Q and 6% Y-o-Y as retail loan growth triggered increasing fees. Corporate business was up 32% Q-o-Q, driven by syndicated loan and trust fees down 21% Y-o-Y, mainly due to shrinkage of syndicated loan fees.

Overseas subsidiary fee was up 9% Q-o-Q. Fees related to corporate business increased at GSP and down 23% Y-o-Y due to decline in loan-related fees to TSB. Lottery fee was up 169% Q-o-Q and 16% Y-o-Y due to seasonal Chinese New Year effect.

Page 17 on wealth management fee. For wealth management fee breakdown, bancassurance contributed 55%, mutual funds 34%, custodian trust 3% and others 8% of total wealth management fees.

Page 18 on cost income ratio. Bank operating revenue was up 11% Q-o-Q, and operating expense was up 8% Q-o-Q, leading to a lower cost income ratio at 60.8% in 1Q. Cost income ratio was higher compared to the same period last year, mostly due to higher ESOP valuations.

Page 19 on asset quality. NPA ratio was 0.48% and NPL coverage ratio was 270%.

Page 20 on credit cost. 1Q credit cost was 14 basis points, down 19 basis points Q-o-Q from 4Q and 17 basis points Y-o-Y, from the same period last year, mostly due to lower specific provisions.

Moving on to Life business. Page 21 on total premiums. Total premiums were TWD 54.7 billion in 1Q, down 6% Q-o-Q and 9% Y-o-Y. Market share was 7%, ranked #6 in the industry.

Page 22 on first year premium. FYPs reached TWD 31.1 billion in 1Q, up 12% Q-o-Q and 33% Y-o-Y, mostly on growth in investment-linked products. Market share was 11%, ranked #3 in the industry.

Page 23 on FYP breakdown by types of payment and products. On the left, mix of single-pay products accounted for 12% and regular paid products accounted for 15% of FYP. On the right is the product breakdown, investment-linked products accounted for 73% and interest-sensitive policies accounted for 23% of FYP.

Page 24 on FYP breakdown by channels and currencies. In terms of channels, 70% of FYPs came from CTBC Bank, 13% from external banks, 8% from Thai agents and 5% from insurance brokers and others. On the right, investment-linked products accounted for 73%, foreign currency policy 21% and NT dollar policy 66% of FYP.

Page 25 on FYPE. FYPE reached TWD 7 billion. Market share was 11%, ranked #4 in the industry. On the right is the FYPE mix for your reference.

Page 26 on investment asset mix. Total investment assets reached TWD 1.95 trillion. Taiwan Life reduced cash and mutual propositions and increased overseas fixed income and real estate holdings. In terms of portfolio breakdown, cash accounted for 4.6%, domestic fixed income 10.8%, overseas fixed income 16.7%, equities 7.9%, real estate 4.6%, neutral fund 8.8%, mortgage 1.4% and policy loans 1.3%.

Page 27 on investment yield and cost of liability. In 1Q, recurring yield before hedge was 3.57%, and overall investment yield after hedge was 5.45%. Cost of liability was down 35 basis points Y-o-Y to 3.05%.

Page 28 on hedging mix. On the left, 40% of overseas investment assets were foreign currency policies, 36% were fully hedged, 8% were OCI position and 15% were unhedged. On the right, FX reserve amounted to TWD 2.5 billion as of 1Q. Talent Life has adopted a dynamic hedging strategy and sell additional FX reserve of TWD 1 billion in April to weather potential NT dollar fluctuation. 1Q hedging cost was 1.32%, higher from the same period last year due to NT dollar appreciation and increased costs for hedging instruments.

Next, we move on to Taiwan Life's and 2020 EV report. Page 30 on EV. EV reached TWD 225.4 billion, of which adjusted net worth was TWD 123.4 billion. Value of in-force business before cost of capital was TWD 146.2 billion, and the cost of capital was TWD 44.2 billion. EV is TWD 40.3 per Taiwan Life share and TWD 11.6 per CTBC holding share.

Page 31 on EV assumptions. Investment yield for NT dollar policies starts from 3.57% in 2021 and were gradually to 4.03% in 2040. Investment yield for U.S. dollar policy starts from 4.32% in 2021 and will rise gradually to 5.04% in 2040. Discount rate apply was 10%. RBC capital requirement remain at 200%. PwC has provided an independent review on EV assumptions.

Page 32 is EV sensitivity provided for your reference.

Page 33 on EV comparison, EV increased by TWD 16.6 billion Y-o-Y. Adjusted net worth increased by TWD 15.4 billion and VIF increased by TWD 1.4 billion in 2020.

Page 34 adjusted net worth movement. Adjusted net worth increased to TWD 123.4 billion, mainly due to profits of TWD 16.5 billion in 2020.

Page 35 on VIF movement. Increasing VIF was due to VNB of TWD 11.2 billion, and release of 2020 expected profits and interest rolling forward of TWD 2.8 billion and offset by investment yield assumption change of TWD 7.2 billion and other changes of TWD 5.3 billion.

Page 36 on VNB movement. The increase in VNB was driven by sales volume change of TWD 0.8 billion and offset and offset by product mix change of TWD 4.2 billion and investment yield and other assumption changes of TWD 1.1 billion.

This will conclude the presentation.

[Yaling Chiu, executive]

Afternoon, everyone. This is Ya-Ling. Before we start a Q&A session, I would like to update you that our outlook for this year remains unchanged. Just the same as this time we provided. In terms of the impact of recent outbreak of COVID in Taiwan, here's our view.

First, most of our corporate client product for export, which will not be impacted by domestic situation. And secondly, credit card spending would drop, and wealth management fees might decrease. We have done, and as mentioned, according to the historical data last year, the impact will be very insignificant, COVID can be contained by the end of June. Revenues that could be affected the most are trading gains from domestic equity market. However, we haven't seen any significant punch on Thailand stock market yet so far.

In short, the impact of recent COVID outbreak will be very insignificant if Taiwan can contain COVID by the end of June.

Okay, but this is a very simple update, then we can start Q&A.

[Operator]

[Operator Instructions] The first question is coming from Jemmy Huang, JPMorgan.

[Jemmy Huang, analyst]

I have 2 questions here. First one is on the credit cost for the bank. I think the first quarter is taking much lower than your full year target. Should we expect there could be some positive surprise on critical or you think the overall credit cost will still be trending up if you loan growth momentum to pick up in the coming quarters over where you individual corporate cases to come in the second half of this year?

And then the second question is on talent life. Could you give us some idea about how you expect the VNB will -- where the growth would be for 2021 even if you have a very strong profound investment link product? And supposedly, the VNB growth may be much lower than the FYP growth?

[Yaling Chiu, executive]

Question about credit cost on banking side. First quarter, this point is lower than our outlook guidance. That was because there are some reversal, some cases in the first quarter, actually, up to April, the overall credit cost was 20 basis points. Therefore, we still remain our outlook for this year at 20 to 25 basis points.

[Unknown Executive]

For Taiwan Life, due to the percentage of unit link is higher than is high currently. We expect growth rate for VNB is a single-digit growth.

[Jemmy Huang, analyst]

So VNB to grow single digits, what's the assumption behind your FYP growth this year?

[Unknown Executive]

FYP growth around 28% -- around 28% growth for FYP.

[Operator]

[Operator Instructions] And the next question comes from Chung, Crédit Suisse.

[Chung Hsu, analyst]

I just have a follow-up question on Taiwan Life. I'm not sure if I got the correct number from the Chinese session. Can you give us a sequential change or potential decline in cost of liability for Taiwan Life into year-end? I think I heard [ 3.06 ]. I think in the first quarter, it was [ 3.05 ] already. So I presume -- I assume that this cost liability will continue to decline into year-end. So I just want to make sure that I'll double check the number. And also on your recurring yield, given potentially a better control FX hedging cost this year and also increase in bundle. I just want to get a sense of what your expectation or guidance for recurring yield on Taiwan Life.

[Unknown Executive]

For cost of liability, currently, the number is a little bit better than our expected. However, due to the investment yield U.S. dollar is higher along a 50 basis points than the end of last year. It means if we would like to sell U.S. dollar policy, then we should have the we should have a competitive crediting that remains for FYP for new business. We have [indiscernible] to increase the crediting rate. According to our outlook, we expect a total liability is [ 3.46 ] right now.

For current year. Our expectation our outlook maintain the [ 3.26 ] for the whole year, is our expectation. Since although currently, the U.S. dollar investment year is higher, but for May increase [ may ] 10 basis points or more steel fluctuations or maintain the outlook.

[Chung Hsu, analyst]

Can I just follow-up on the FX pension costs. I understand that your you took TWD 1 billion extra provision -- excuse me, FX in April. If we look at this year-over-year basis, should we expect a hedging cost to be lower or you will use stronger-than-expected investment income that so far this year to certify more FX results?

[Unknown Executive]

We observed that for the course of instrument is getting lower than last quarter. It means after the -- we renewed the hedging instrument instrument will have a lower cost. But NDF cost is around 4.7% for the first quarter, still -- is still very high. So we're using increased result to fluctuation. After we increased the result, we expect the -- and renew the instrument using the cost we expect for the whole year, the hedging cost I mean our outlook still maintains 1.11%.

[Operator]

Next we'll have Brooksley Kang of Bank of America Securities.

[Brooksley Kang, analyst]

I had a question on bank now on credit cards. If the virus infection our break in Taiwan cannot be fully contained before end of June, what are type of credit card standing that will be negatively impacted? And if that will be similar to what we have seen back in like first quarter, second quarter in 2020. So under the situation, if it's fair to say that the credit card fee level this year will not be lower than in 2020?

[Yaling Chiu, executive]

For credit card fee income. Yes, we either we incorporate the impact of the recent COVID outbreak domestically. We don't expect credit coffee will lower than in last year. At least it will be flat or regional, we expect it would depend on the situation of the COVID now.

[Operator]

There appears to be no further questions at this point. And now I hand it over to Ms. Ya-Ling Chiu for closing comments. Go ahead, please, Ms. Chiu.

[Yaling Chiu, executive]

There's no any further questions. Thank you for joining the 2021 first quarter analyst meeting. We'll see you next quarter. Thank you.

[Operator]

Thank you, Ms. Chiu. And ladies and gentlemen, we thank you for your participation in CTBC Financial Holding Company's conference call. You may now disconnect. Stay safe, and goodbye.