CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for joining first quarter financial holding -- sorry, thank you for joining CTBC Financial Holding Company first quarter analyst meeting. Today, we have Ms. Megan Hsu, CFO of CTBC Financial Holding Company; and Mr. Pai-Hung Yeh, Chief Strategy Officer of Taiwan Life to host the meeting. We will beginning with the first quarter result presentation and then followed by Q&A.

[Megan Hsu, executive]

Thank you, everyone, for joining CTBC First Quarter 2023 Earnings Call. Please turn to Page 4 on performance highlights. CTBC Holding's net profit reached TWD 13 billion in 1Q '23, improved significantly compared to 4Q '22. Compared to the same period last year, net profit was down 21% Y-o-Y due to net loss at Taiwan Life. While core banking business remained resilient, our subsidiaries also resumed growth.

Holding's ROE was 14.6%. Ranked #1 among peers. The Board decided to pay out a cash dividend of TWD 1 per share, implying a payout ratio of 64.5%, a dividend yield of 4.4%.

CTBC Bank's net profit reached TWD 11.4 billion, up 38% Q-o-Q and 53% Y-o-Y. Ranked #1 among peers. This performance was driven by increased net interest income, fee income and trading gains as well as lower provisions. Bank's capitalization was sound with CET1 ratio at 12%. Asset quality remained stable and credit cost was 11 basis points in 1Q.

Taiwan Life's net loss was TWD 882 million, lower compared to the same period last year, largely due to higher hedging costs. Its P&C subsidiary has booked COVID policy-related loss and reserve of TWD 21.3 billion in 2022. Up to 1Q '23, the reserves remain sufficient to cover related loss. Taiwan Life continued to focus on long-term value products, although FYP growth slowed due to the decline in sales of investment-linked products. Capitalization was sufficient with RBC ratio at 254%.

Page 5 on profitability. Holding's EPS was TWD 0.66 in 1Q. Group ROE was 14.6% and ROA was 0.69%.

Page 6 on capital ratio. We remain well capitalized with group CAR at 121%, Life RBC ratio at 254%, Bank CAR at 14.9% and CET1 ratio at 11.8%.

Page 7 on profit breakdown by entity. Bank net profit was up 38% Q-o-Q and 53% Y-o-Y, driven by higher fee income and trading gains.

Life's net loss narrowed quarter-over-quarter as its P&C subsidiary booked COVID policy-related loss and reserve in 4Q '22. Life's profit declined compared to the same period last year due to higher hedging costs and subdued investment gains.

Other subsidiaries, together, delivered net profit of TWD 2.2 billion.

Holding's consolidated net profit was TWD 13 billion, down 21% Y-o-Y.

Page 8 on net profit movements. In the chart above, operating revenue was up 13% Q-o-Q. Provisions were down 70% Q-o-Q. As for Life, 1Q pretax loss narrowed compared to 4Q '22 as its P&C subsidiary booked COVID policy related loss and reserves in last quarter. Overall, Holding's net income improved significantly compared to 4Q '22.

On the bottom, operating revenue was up 29% Y-o-Y. Provisions were down 15% Y-o-Y. Life pretax profit declined on higher hedging costs and subdued investment gains. Holding's pretax profit reached TWD 15.8 billion, down 25% Y-o-Y. Overall, Holding's net income was down 21% Y-o-Y.

Page 9 on revenue breakdown excluding Life. Total revenue was up 13% Q-o-Q and 29% Y-o-Y. Net interest income was down 6% Q-o-Q. As foreign currency deposit mix change, slow foreign currency loan growth and increased swap positions caused net interest margin to narrow. Net interest income was up 18% Y-o-Y, driven by sustained loan growth and widened net interest margin benefiting from rate hikes.

Fee income was up 32% Q-o-Q, driven by higher lottery, corporate and wealth management fees. Fee income was up 7% Y-o-Y as lottery, credit card, retail and corporate fees increased. Combined, derivative FX and trading gains was up Q-o-Q and Y-o-Y, mostly due to higher swap income at the bank and increased trading income at securities and venture capital subsidiaries. Long-term investment and other income was down Q-o-Q due to higher. lottery rebates to MOF in 1Q and was up Y-o-Y as the company booked disposal gains on the sale of the office floors.

Page 11 on Bank's loan breakdown. Total lending with credit card revolving was down 1% Q-o-Q and up 13% Y-o-Y. NT dollar corporate loan was down 1% Q-o-Q due to lower loan demand amidst slower economic growth. NT dollar corporate loan was up 26% Y-o-Y, driven by growth in manufacturing, government-related commerce and service sectors. Foreign currency loan was down 3% Q-o-Q and up 5% Y-o-Y. Mortgage was up 2% Q-o-Q and 14% Y-o-Y, supported by stable business momentum and our participation in lending to civil servants. Unsecured and other loans were up 2% Q-o-Q and 8% Y-o-Y, mostly on growth in unsecured consumer loans as we continue to expand our customer base.

Page 12 on foreign currency loan breakdown. Foreign currency loan accounted for 35% of total lending. Overseas subsidiaries accounted for 61% of foreign currency loans with TSB and LH being two larger subsidiaries. Overseas branches accounted for 28%. OBU plus DBU was 11%. Overseas subsidiaries loan was up 8% Y-o-Y, driven by sustained business momentum in LH as well as U.S. and Philippine subsidiaries reporting double-digit loan growth. Overseas branch loan was up 2% as most overseas branches observed loan growth to sustain except Hong Kong, Vietnam and New York branches. China, Singapore and India branches reported double-digit growth. OBU plus DBU was down 2% Y-o-Y.

Page 13 on bank deposit mix. Total deposits reached TWD 4.7 trillion, up 2% Q-o-Q and 14% Y-o-Y. On the right, total NT dollar deposits were up 4% Q-o-Q and 14% Y-o-Y. NT dollar savings accounted for 61%. Total foreign currency deposits were down 1% Q-o-Q and up 16% Y-o-Y. Foreign currency savings declined to 42% of total foreign currency deposits as rising U.S. dollar interest rates represented a strong incentive for depositors to shift from savings to time deposits.

Page 14 on loan-to-deposit ratio. Overall, LDR was 71%. NT dollar LDR was 81%. Foreign currency LDR was 58%.

Page 15 on NIM and spread. In 1Q, NT dollar spread was 1.82%, up 7 basis points Q-o-Q, driven by loan growth. Foreign currency spread was 2.65%, down 12 basis points Q-o-Q as decline CASA mix, slow foreign currency loan growth and increased swap positions cost spread to narrow. 1Q NIM was down 8 basis points Q-o-Q to 1.55%. Including swap income, NIM was 1.71%.

Page 16 on fee breakdown. Total fees were up 31% Q-o-Q and 6% Y-o-Y. Wealth management fee was up 7% Q-o-Q, driven by increased sales of mutual funds and structured products. Wealth management fee was down 3% Y-o-Y as sales of bancassurance and mutual funds weakened despite stronger sales of bonds. Credit card fee was down 2% Q-o-Q as holiday season supported consumptions in last quarter. Credit card fee was up 12% Y-o-Y due to increased consumption. Retail business was flat Q-o-Q and up 11% Y-o-Y as retail business growth trigger increase in fees. Corporate business was up 59% Q-o-Q and 8% Y-o-Y, mostly driven by syndicated loan and trade finance fee. Overseas subsidiaries fee was up 16% Q-o-Q and 7% Y-o-Y as corporate-related fees increased at TSB and Philippine subsidiary. Lottery fee increased Q-o-Q and Y-o-Y, supported by seasonal Chinese New Year effect and stronger sales of diversified products.

Page 17 on wealth management fee. For wealth management fee breakdown, bancassurance contributed, 54%; mutual fund, 23%; custodian and trust, 4%; and bonds and others, 19% through total wealth management fees.

Page 18 on cost/income ratio. Cost/income ratio was 56% in 1Q, flat Q-o-Q. Cost/income ratio declined Y-o-Y due to increased operating revenue and lower ESOP valuation.

Page 19 on asset quality. NPL ratio was 0.51%, and NPL coverage ratio was 322%. 1Q credit cost was 11 basis points, down 27 basis points Q-o-Q on lower 1% GP and specific provisions. Compared to the same period last year, 1Q credit cost was down 4 basis points Y-o-Y due to lower specific provisions.

Moving on to Life. Page 21 on total premium, first year premium and FYPE. Total premiums were TWD 28.2 billion in 1Q, down 9% Q-o-Q and 34% Y-o-Y. FYP were TWD 8.7 billion, down 6% Q-o-Q and 61% Y-o-Y as attractive time deposit rates at banks affected sales of interest-sensitive products. A recent turmoil in the financial markets affected sales of investment-linked products. However, FYPE increased 10% Q-o-Q and only declined 17% Y-o-Y as Taiwan Life continue to focus on long-term value products.

Page 22 on FYP breakdown by products and channels. On the left is the product breakdown. We can see weights on value products notably increased. Health and PA accounted for 12%; traditional, 2%; interest-sensitive policies, 80%; and investment-linked products, 6% of FYP.

On the right, in terms of channels. CTBC Bank and external banks each contributed 31% of FYP. Tied agents and insurance brokers each contributed 19% of FYP.

Page 23 on FYP breakdown by type of payment and currency. On the left, weights on regular paid products increased to 66% of FYP and single-paid products accounted for 28%.

On the right, investment-linked products accounted for 6%; foreign currency policy, 50%; and NT dollar policy, 44% of FYP.

Page 25 (sic) [ 24 ] on investment asset mix. Total investment assets reached nearly TWD 2 trillion. In terms of portfolio breakdown, cash accounted for 3.6%; domestic fixed income, 8.8%; overseas fixed income, 61.1%; equities, 9.7%; mortgage, 2.4%; policy loans, 1.3%; real estate, 5.1%; and mutual fund, 8.1%. On the right is the pre-hedge return for each type of investment assets for your reference.

Page 26 (sic) [ 25 ] on investment yield, cost of liability and breakeven point. In 1Q, overall investment yield after hedge was 2.65%. Recurring yield before hedge increased Y-o-Y to 3.27%. Cost of liability increased by 9 basis points Y-o-Y to 3.15%, reflecting rate hikes. Breakeven point was 2.83%.

Page 27 (sic) [ 26 ] on hedging mix. On the left, 43% of overseas investment assets were foreign currency policies, 30% were fully hedged, 10% were OCI position and 17% were unhedged. On the right, FX reserve amounted to TWD 12 billion as of 1Q. NT dollar appreciation and rising cost of hedging instruments resulted total hedging cost of 135 basis points in 1Q, increased Y-o-Y from the same period last year.

Next, we move on to Taiwan Life and 2022 EV report. Page 28 on EV. EV reached TWD 221.5 billion, of which adjusted net worth was TWD 125 billion. Value of in-force business before cost of capital was TWD 161 billion, and the cost of capital was TWD 64.4 billion. EV is TWD 35.6 per Taiwan Life share and TWD 11.4 per CTBC Holding share.

Page 29 on EV assumptions. Investment yield for NT dollar policies starts from 3.56% in 2023 and will gradually rise to 4.09% in 2042. Investment yield for U.S. dollar policies starts from 4.31% in 2023 and will gradually rise to 5.33% in 2042. Discount rate applied was 10%. RBC capital requirement remain at 200%. PwC has provided an independent review on EV assumptions.

Page 30 is EV sensitivity for your reference.

Page 31 on EV comparison. EV decreased by TWD 36.2 billion Y-o-Y. As adjusted, net worth decreased by TWD 39.3 billion and VIF increased by TWD 5.1 billion.

Page 32 on adjusted net worth movement. Adjusted net worth declined to TWD 125 billion, mainly due to net loss of TWD 3.4 billion, changes in unrealized loss on financial assets of TWD 43.9 billion and other adjustments of TWD 5.6 billion.

Page 33 on VIF movement. VIF movement was mainly driven by VNB of TWD 7.3 billion plus release of 2022 expected profits and interest rolling forward of TWD 0.8 billion and investment yield assumption change of TWD 0.7 billion and offset by other assumption changes of TWD 4 billion.

Page 34 on VNB movement. VNB was TWD 5.9 billion, supported by variable product mix change of TWD 2.5 billion and offset by decline in sales volume of TWD 3.3 billion.

Page 36 on ESG highlights. CTBC Holding is committed to 2050 net zero and has submitted SBT targets to SBTi for review. We expect to release our SBT target by end of this year. In addition, we are the only financial institution in Greater China to participate in the pilot program led by the United Nations Environment Program Finance Initiative and pass the draft risk management and disclosure framework from the TNFD.

That concludes the presentation. We are now open for Q&A.

[Operator]

Now we are in the Q&A section [Operator Instructions] Now we have a question from JPMorgan, Jemmy.

The question is what is the impact on Taiwan Life RBC ratio for additional capital injection into P&C subsidiaries this year?

[Pai-Hung Yeh, executive]

Since the loss has recognized in our income statement and also balance sheet, then if we inject TWD 5 billion to P&C company, then our RBC ratio will lower 1% only.

[Operator]

There's another question on Taiwan Life. Do you need to inject common equity into Taiwan Life?

[Pai-Hung Yeh, executive]

No, we don't -- we do not need a holding company to inject capital to Life.

[Operator]

And there's another question about how do the company plan to manage on FSC's double leverage ratio?

[Megan Hsu, executive]

[Interpreted] The double leverage ratio of the financial holding company as the -- as March is around 120%, and they'll be lower than this number. And we do not think there's any chance or opportunity to issue common equity this year.

Yes. So we think the current double leverage ratio is below 120% is at a comfortable level. So there's no further -- there's no any plan for issuing common equity to improve the double leverage ratio.

[Operator]

And another question is also from JPMorgan, Jemmy.

The question is about why the Q-on-Q decline on Taiwan Life? RBC ratio is related to high interest rate links. And the adjustment should be in first half instead of first quarter 2023.

[Pai-Hung Yeh, executive]

Since the rule were applied to this year, then we use the new rule from first month. So we refer the new interest rate risk.

[Operator]

Another question is about -- for -- is about CTBC Bank. If including reported -- if including both reported NII and swap revenue, is the combined revenue momentum better or worse than the company's expectation for year 2023?

[Megan Hsu, executive]

[Interpreted] Yes. This combined revenue momentum is a little bit better than our expectation.

[Operator]

And another question on net interest margin. For the adjusted interest margin, including swap, which is around 1.71%, how did it change quarter-on-quarter?

[Megan Hsu, executive]

[Interpreted] This number for quarter 4, last year, is around 1.7%.

[Operator]

And there's another question on CTBC Bank. How much more do you expect your foreign currency CASA ratio to decline in this rate hike cycle? Based on your historical experience, when will it stabilize and at what level?

[Megan Hsu, executive]

[Interpreted] And this is actually a very tricky question. Because actually, this year, we -- I mean, the most recent recycle is actually one of the shortest in the recent years. So it's actually we don't really have this kind of similar experience.

But given that the fact already, just raised the rate to above 5%, and we think it's about the end of the recycle for this year. So hopefully, the situation will gradually be stabilizing.

[Operator]

[Operator Instructions] It seems that we have no further questions from investors. And thank you for your kind participation. This is now the end of the English Analyst Meeting.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]