CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Analysis

CTBC Financial Holding Q1 Profit Surge

CTBC Financial Holding reported a remarkable first quarter, with net profit soaring to TWD 20.9 billion, marking a 179% increase quarter-on-quarter and 61% year-on-year. This growth was driven by strong performances in CTBC Bank and Taiwan Life, highlighted by robust fee and trading income. Earnings per share reached TWD 1.07, and the Board approved a cash dividend of TWD 1.80 per share, indicating a 63.8% payout ratio. Looking ahead, the company is optimistic about maintaining stable growth and expects its performance for the year to surpass last year’s results.

Impressive Q1 Financial Performance

The first quarter of 2024 saw CTBC Financial Holding Company recording a substantial increase in profits, driven by a favorable New Taiwan (NT) dollar exchange rate and robust performance in the Taiwan stock market. Pre-tax profit reached TWD 25.5 billion, marking a 62% increase from the previous year. Net profit rose to TWD 20.9 billion, a 61% improvement. The holding company was able to leverage the depreciation of the NT dollar and strong stock market gains to achieve these results.

Strong Performance of Taiwan Life and CTBC Bank

Taiwan Life Insurance significantly contributed to the overall profit, with a net profit of TWD 7.6 billion in the first quarter, benefiting from lower hedging costs and increased investment gains due to the depreciation of the NT dollar. CTBC Bank also showed solid growth with a pre-tax profit of TWD 15.7 billion, which was an 11% year-over-year increase, and net profit of TWD 12.1 billion, up 7%. The bank's growth was driven primarily by strong fee income from wealth management, credit cards, corporate business, and trust funds.

Growth in Fee Income and ROE

Fee income from wealth management surged by 40% in Q1, contributing to a total fee income growth of 23%. Other subsidiaries, including securities and venture capital, saw profits rise by 20% to 30%, supported by a prosperous stock market and increased trading volume. The company’s earnings per share (EPS) reached TWD 1.07, and the return on equity (ROE) stood at an impressive 19.7%, up from 14.6% in the previous year.

Challenges and Future Outlook

The New Taiwan dollar was stable at an exchange rate of 32.5% against the US dollar, which limits further depreciation and thus potential profits. Despite the high EPS of 23x after Taiwan stock market reached the 20,000 mark, growth is expected to slow. Nevertheless, dividend income from June to August is anticipated to support life insurance profits. For the banking sector, economic growth in Taiwan is expected to be 3.1% this year, driven by the tech industry and domestic demand. The bank predicts stable profit growth, facilitated by positive economic indicators and delayed interest rate cuts by the US Federal Reserve.

Capital Ratios and Dividend Policy

CTBC Holding remains well-capitalized, with a group Capital Adequacy Ratio (CAR) of 123%, Life RBC ratio of 305%, and Bank CAR of 13.9%. The board declared a cash dividend of TWD 1.80 per share, implying a payout ratio of 63.8%, up from the usual 45% to 50% range. This increase is attributed to strong profits and improved asset valuations.

Expansion and Market Presence

The company aims to grow its market share in Taiwan, particularly in the banking sector, though M&A activities are subject to regulatory approval and finding suitable candidates. CTBC remains committed to both organic growth and strategic mergers. The firm is also leveraging its commercial franchise network to support Taiwanese and Chinese businesses expanding overseas, with a profitable presence in regions like India and a solid performance in US commercial real estate with a low NPL ratio of 0.5%.

Sustainability and Recognition

CTBC Holding has been recognized in the S&P Global Sustainability Yearbook for five consecutive years, ranking in the top 5% globally. CTBC Bank received accolades as Asia Pacific’s Best Bank for Sustainable Project Finance and Taiwan’s Highly Commended Sustainable Bank, reflecting a strong commitment to ESG initiatives.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome, everyone, to CTBC Financial Holding Company's 2024 First Quarter Earnings Call.Today's call will be hosted by Mr. James Chen, President of CTBC Financial Holding Company; Ms. Rachael Kao, Spokesperson of CTBC Financial Holding; Ms. Megan Hsu, CFO of CTBC Financial Holding; Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Company; and Ms. Justine Shen, Head of Investor Relations of CTBC Financial. [Operator Instructions]Now the floor is given to President Chen.

[Jia-wen Chen, executive]

Dear analysts and investors, welcome everyone to CTBC's 2024 First Quarter Earnings Call.CTBC Holding's business performed well in Q1 as NT dollar depreciated. In addition, the stock market in Taiwan had a strong performance. So, CTBC Holding's pre-tax profit reached TWD 25.5 billion in Q1, increased 62% from the same period last year. Holding's net profit reached TWD 20.9 billion, increased 61% from the same period last year. So the main reason for growth is Taiwan Life. Since last year, at the same period, the NT dollar appreciated and that would affect the foreign exchange, and there was a cost according to that. And this year, since New Taiwan dollar depreciated and Taiwan stocks performed well, so the investment team captured profits during this period.So for the first quarter in 2022, net profit reached TWD 7.6 billion for Taiwan Life. Other than that, our core business, Bank also performed well. For Q1, pre-tax profit reached TWD 15.7 billion. And compared to last year, we grew by 11% Y-o-Y and net profit reached TWD 12.1 billion, that's 7% growth compared to last year. For the Bank, the main growth comes from deposits; stable growth. And fee income performed quite well, especially for wealth management, thanks to the prosperity of stock markets.The fee income of wealth management reached 40% growth for Q1. And the fee income for Credit Cards and Corporate business and trust funds, so total fee income grew by 23% in the first quarter. And because of that, the Bank's profit also reached historical highs. And other subsidiaries, including securities and VC also grew by 20% to 30%, thanks to the prosperity in Taiwan stock market as well as the increase in trades. And for Q1, our EPS grew by -- has reached TWD 1.07. And for our ROE, reached 19.7%, that is also better than last year's 14.6%.Looking onwards to the second half of this year. For Taiwan Life, the profit challenge would be on New Taiwan dollar because now New Taiwan dollar's exchange rate for U.S. dollar has been 32.5%. So, there is no more room for depreciation. So, we cannot expect profit to come as easily as the first quarter. And also for the Taiwan stock market, after reaching the 20,000 mark, the EPS has been 23x, and there is also limited room for growth going forward. And that would affect the investment income for Taiwan Life. But there are also benefits for our life insurance since June to August, traditionally, these 3 months are for stock dividends payouts and Taiwan Life has a huge position in Taiwan stock. So dividend income is expected to generate profit.For the Bank side, this year, Taiwan's economy will perform better compared to last year. We expect to reach 3.1%. And because of tech industry, it's driving the overall economy and domestic demand is performing well as well. So the Bank's profit, we expect to see stable growth, especially because the Fed in the U.S. expect to delay rate cuts and with lower cuts as well. And for Taiwan Central Bank, last month, there was an unexpected rate hike last month, and all these movements may not have a huge impact on the bank's profit, but they are all positive. So, we are very optimistic of the Bank's side performance in the second half of this year and the holdings overall. Even though we may not see as high levels of growth for the first quarter, but we do expect our performance this year to surpass last year's. And this is the brief introduction to the first quarter.And I'll pass the mic to our IR colleague to give detailed figures, and I'll answer the questions afterwards.

[Unknown Executive]

Welcome. Thank you for joining CTBC First Quarter 2024 Earnings Call.Please turn to performance highlights on Page 4. Supported by resilient operating performance at CTBC Bank and earnings recovery at Taiwan Life, Holding's net profit reached TWD 20.9 billion in the first quarter, up 179% Q-o-Q and 61% Y-o-Y, respectively. EPS was TWD 1.07. Holding's ROE was 19.7%. The Board recently decided to pay out a cash dividend of TWD 1.80 per share, implying a payout ratio of 63.8%. CTBC Bank's net profit was TWD 12.1 billion in the first quarter, up 26% Q-o-Q and 7% Y-o-Y.The strong performance was driven by robust fee income growth and increased trading income. Bank's capitalization was solid and credit costs remained benign. Taiwan Life reported net profit of TWD 7.7 billion. Showed a strong rebound, benefiting from lower hedging costs and increased investment gains, Capitalization remains strong with RBC at 305%. In other subsidiaries, including securities, venture capital investments in Taiwan Lottery also performed well. Next, Holding's EPS was TWD 1.07 in the first quarter and group ROE was 19.7% and ROA was 1.02%.Moving on to our capital ratio. We remain well capitalized with group CAR at 123%, Life RBC ratio at 305% and Bank CAR at 13.9%. and CE Tier 1 ratio at 11.1%.Next, profit breakdown by entities. The Bank net profit was up 26% Q-o-Q and 7% Y-o-Y, driven by robust fee income growth and increased trading income. Life reported net profit of TWD 7.7 billion, benefiting from lower hedging costs amid NTD depreciation and increased capital gains driven by positive capital markets performance. And Holding's net profit was up 179% Q-o-Q and 61% Y-o-Y.Net profit movement on Page 8 is provided for your reference. On Page 9, revenue breakdown, excluding Life. Total revenue was up 8% Q-o-Q and 9% Y-o-Y. Net interest income was down 7% Q-o-Q and 5% Y-o-Y. Fee income was up 41% Q-o-Q and 25% Y-o-Y. For trading income and others, increased 1% Q-o-Q and 26% Y-o-Y, driven by fixed income related gains and swap income at the bank as well as equity-related gains at venture capital and securities subsidiaries.Next, let's go to our banking business, starting with loan breakdown on Page 11. Total lending with credit card revolving was up 1% Q-o-Q and 9% Y-o-Y. For NT dollar corporate loan, it was up 0.5% Q-o-Q, driven by growth in government loans and up 8.1% Y-o-Y, driven by government and manufacturing sector growth. For mortgage, it was flat Q-o-Q and up 12% Y-o-Y as business momentum remained stable. Unsecured and other loans increased 0.9% Q-o-Q and 10.8% Y-o-Y. Foreign currency loan was up 2% Q-o-Q and 8% Y-o-Y.Next is the foreign currency loan breakdown. Overseas subsidiaries accounted for 59% of foreign currency loans, with TSB 25% and LH 17%. And overseas branches accounted for 32%. Overseas subsidiaries loan grew, especially for LH U.S., Indonesia subsidiaries reporting double-digit loan growth. We observed loan growth to sustain at every overseas branch. And with -- growth was especially strong in China, Tokyo, New York and Vietnam branches, reporting over 30% rise if excluding ForEx impact. OBU plus DBU loan was down as high interest rates led to lower demand for loans.Next, the bank deposit mix. Total deposits reached TWD 5.1 trillion as of the end of March, up 1% Q-o-Q and 7% Y-o-Y. And on the right, CASA accounted for 61% for NT dollar deposits increased by 2 percentage points Q-o-Q. And time deposit ratio in foreign currency deposits increased to 63% as high U.S. dollar interest rates represent a strong incentive for depositors to shift from savings to time deposits.Next, for loan-to-deposit ratio, overall LDR was 72%. NTD LDR rose to 84.1%. Foreign currency LDR was 56.4%. Next, for NIM and spreads, overall spreads narrowed in the first quarter as LDR trended lower and rising foreign time deposits drove funding costs up. And on the left, we can see that since the spread narrowed and due to overall spread and reclassification of net interest income in last quarter, including swap income, NIM was -- the first quarter NIM was 1.37%, down 10 bps and including swap, NIM was 1.61% in the first quarter.For fee breakdown, total fees were up 43% Q-on-Q and 23% Y-o-Y, driven by improved momentum in wealth management, corporate and credit card businesses. Wealth management fee grew 7% Q-o-Q and 43% Y-o-Y as sales momentum remains strong, driving sales of structured products and bancassurance to increase. In addition, capital markets soared, supporting sales of mutual funds.Corporate business was up 99% Q-o-Q and 22% Y-o-Y, driven by syndication, loan related and cash management fees. For credit card fee, it was up 23% Q-o-Q and 21% Y-o-Y as business momentum sustained. For wealth management fee breakdown in Q1, the proportion of mutual funds increased, underpinned by strong capital market performance. The CTBC Bank's cost-to-income ratio was 53% in Q1, improved Q-o-Q and Y-o-Y, driven by faster growth in operating income and contained OpEx growth. In addition, the company does not need to book ESOP valuations anymore starting this year.Asset quality remained stable with NPL ratio at 0.54%. NPL coverage ratio was 298%. Q1 credit cost was 26 bps, down 6 bps Q-o-Q, mostly due to a one-off reclassification of NPL recovery in last quarter. Q1 credit cost was up 15 bps Y-o-Y, mostly due to a 1% increase in general provisions against new loans.Moving on to Taiwan Life. In Q1, FYP was up 34% Y-o-Y as sales of interest-sensitive and investment-linked products recovered. FYPE was up 21% Y-o-Y.Next, on the left is the product breakdown. We can see the proportion of interest-sensitive policies increased. And on the right, in terms of channels, the proportion of bancassurance channel was higher, reflecting increasing sales of interest-sensitive policies.Next page, on the left, regular paid products accounted for 58% and single-pay product, 37% of FYP. On the right, foreign currency policy accounted for 50% (sic) [ 52% ] and NTD policy, 42% of FYP. In terms of investment asset mix, total investment assets reached nearly TWD 2 trillion. The investment asset mix remained relatively steady.In terms of Taiwan Life's investment yield, in Q1, overall investment yield after hedge was 4.74%. Recurring yield before hedge was 3.38%. Both improved Y-o-Y, reflecting higher investment gains this year. Taiwan Life continues to maintain positive investment spread against rising cost of liability and breakeven point.Moving on to Taiwan Life's hedging mix. On the left, 41% of overseas investment assets were foreign currency policies, and 30% were fully hedged. 18% were unhedged and the rest was OCI position. On the right, FX reserves amounted to TWD 9.8 billion as of Q1. Hedging cost was 34 bps in Q1, improved Y-o-Y, benefiting from NTD depreciation.Now, we move on to Taiwan Life's end of 2023 EV report. EV reached TWD 258.7 billion as of the end of 2023, the equivalent of TWD 13.2 per CTBC Holding share. Investment yield for NT dollar policy starts from 3.44% in 2024 and will gradually rise to 4.24% in 2043. Investment yield for U.S. dollar policy starts from 4.32% in 2024 and will gradually rise to 5.41% in 2043. PwC has provided an independent review on EV assumptions. The sensitivity analysis is provided for your reference.Now for EV comparison. In 2023, EV increased 17% Y-o-Y as adjusted net worth increased by TWD 41.1 billion, while value of in-force declined by TWD 5.8 billion.Now ANW movement. Adjusted net worth grew in 2023, mainly due to net profit of TWD 12.4 billion and changes in unrealized gain on financial assets of TWD 31.4 billion. In addition, other adjustments was down by TWD 6.2 billion, mainly due to FX reserve decline.On value of in-force business movement, VIF was TWD 155 billion, down 3.6% Y-o-Y. VIF movement was mainly driven by VNB of TWD 8.3 billion, plus release of 2023 expected profits and interest rolling forward of TWD 3.5 billion and offset by other assumption changes such as morbidity and lapse rates. VNB after cost of capital was TWD 7.2 billion, up 22% Y-o-Y, supported by improved product mix as well as changes of model and discount rate assumptions.And last but not least, turning on to ESG highlights. CTBC Holding has been included in the S&P Global Sustainability Yearbook for the fifth consecutive year. This time, ranking among the top 5% of performance worldwide. In addition, CTBC Bank has been named Asia Pacific's Best Bank for Sustainable Project Finance by Global Finance, and Highly Commended Sustainable Bank in Taiwan by FinanceAsia. These accolades recognize CTBC's enduring commitment to ESG initiatives and sustainability performance. Please feel free to download CTBC Holding's sustainability reports, or find out more on the IR page of our website.That concludes the presentation. That is the presentation from our IR colleague. Next, I will invite all of you to ask questions. Thank you.

[Operator]

[Operator Instructions] So the first question is from Jemmy Huang from J.P. Morgan.

[Jemmy Huang, analyst]

I have several questions. For Bank side, the NIM in the first quarter dropped. I remember in the past, you mentioned that it would go down. But going forward, NIM will gradually come back up. I don't know if this prediction or projection is consistent with the current status going on to the second quarter. And what's the rebound of the NIM? Would that be different from the expectations?The second question is on credit cost. For the first quarter, when I look at loan growth, I see this 1.1%. It's not a strong performance compared to the past quarters. The momentum isn't as strong. And when we look at the presentation, the new NPL information, we see that is relatively high. So the question would be for your asset quality expectations and the overview? And the credit cost, how much comes from PE?And for Life side, my question is for the current version, the FX reserve, what's your -- how do you expect the reserve to increase if we move from other special reserves? So, how much can be increased? And for PE, for EV and VNB, ROE in 2023? And cost of capital, that's the next question. The overall cost of capital decreased. I want to know the reasons. And in the past, the discount rate was higher than competitors, but it dropped -- adjusted lower.

[Unknown Executive]

To answer all of your 4 questions, for the bank side, I would invite our CFO to answer the 2 questions and then I'll invite our CSO at Taiwan Life to answer the insurance questions.

[Megan Hsu, executive]

So for the Bank side, the first question is on NIM, the outlook for NIM and foreign currency momentum. To answer your questions, in Q1, as you said, NIM dropped. And from this current trend, we do see positives and disadvantages. First of all for the coming quarter when we look at the outlook of the next quarter, we mentioned that U.S. rate cuts, we expect it to go on in the second half of this year. But the House view expects that the timing and the degree of rates cut would be later and smaller compared to our previous expectations.And the de-inventory pace of our clients is lower than our expectations. So the capital in time deposits remain high. And due to these reasons, our deposit cost dropped smaller than our expected. So for NIM -- and that is why we see a decline in NIM. And we expect in Q2, NIM will still in the bottom but because of the USD-NTD spreads, remain a positive because U.S. rate cuts is delaying. So for the guidance we provided last quarter, it's quite consistent with last year's expectations and spread is relatively high for longer. So, we see that swap gain will be higher than expected.Next question is on the foreign currency loans and whether it's as expected -- increase as expected. Performance-wise, we can see that in Q1, foreign currency indeed grew. There is a trend going up. For last year, our clients see the pressure of de-inventory. So it was lower last year. But for Q1, foreign currency, we see a 2% growth. It's around TWD 27.3 billion increase. And we expect if this trend goes on, it will be beneficial for our NIM. So for our NIM guidance, last quarter is around 1.63% to 1.66%. And due to the aforementioned reasons, we now adjust it to [ 1.62% ] and to 1.63%. And if the demand for foreign currency continues to increase, the lending increases. We will adjust the outlook again.To answer your second question on credit costs, our colleagues in the presentation mentioned that GP is the main reason for credit cost changes. And if we look at the growth of loans, it may not support such a great GP. And to explain, it's because of our retail loans. In the past, Taiwan government launched initiatives, allowing clients to delay loan payments due to COVID. That's a part of the COVID aid program. So the clients do not have to pay the principal for unsecured loans. That is why we see this decrease. And since the period has ended, the distressed assets reduced. So for last year and this year, we have addressed these positions and we provided more for such bad debt.And if we look at the trend, the position is declining. Therefore, our asset quality has improved in the GP. That's the cause for GP. So versus the last quarter, our GP increased by TWD 1.5 billion. In particular, TWD 0.5 billion came from the unsecured loans I mentioned. And the other TWD 1 billion, the increase in position is because of the situation I explained. For credit cards, we saw an increase in the reserves and the provisions. But the credit card provision is smaller than the unsecured loans. And these are the questions from the bank side.

[Unknown Executive]

To add something about credit cost, 26 bps was actually still within our budget. We expect it to be between 25 bps and 30 bps. Compared with Q4 last year, it was down. However, it was up by a lot Y-o-Y. And that's because like I said in Q1 last year, there were some non-performing loan issues. Also the provisions was TWD 13 billion. And during COVID, the government has this policy to alleviate the burden on the creditors. But that program ended. And so starting from last quarter, we began to be more strict about these non-performing loans. And now as of last quarter, it amounted to TWD 8 billion. And when that program ended, the NPL will increase. We expect that by June -- or it will peak in the middle of the year. And that number will come down in Q3. As we can see from the numbers, it peaked in March and actually began to come down in April. So, we expect the provisions to return to the normal level in Q1.About insurance, may I ask Pai-Hung from Taiwan Life to comment about FX reserve.

[Pai-Hung Yeh, executive]

Now to answer your questions, based on the items on our list, it's now at TWD 1 billion. And regarding time deposit, there's also the reserves for other policies. So in the future, when we adopt IFRS, these reserves that's not used could be used to make up for the idle items. So, I think if you look at the root cause of it, when we adopt IFRS 17, we need to make up for the gap in the FX reserves. It's a very substantial amount, maybe in the tens of billions. We still have to yet to come up with a method to adopt IFRS. But in general, in the future, we adopt IFRS 17, the unused reserves could be used to make up for the lacking in FX reserve. About EV yields, this year is at 4.15%, down 2 bps from last year -- sorry, up by 2 bps. The yield is 4.52%, down from last year. Mainly because this year, we need to deal with a large amount of surrendering. And so we need to deal with the NT dollar policies being surrendered because their values is lower and that's why it has dropped to 4.52%.Regarding discount rate, every year, when we announce the EV, we also review it from 3 perspectives. First, we will use the CAPM model to calculate the number. And also, we will calculate based on stock price variations. This year, it will be between 8.8% and 10.5%. It's in the lower bound. We also referenced the numbers, the discount rate used by our peers and that's why we set it at 9.5%. Last year we issued loans as well. We've been reviewing the overall cost of capital. And with new loans issued, the cost of capital has come down slightly and that's why we've adjusted the discount rate at 9.5%.Regarding lower cost of capital, it's actually a reflection of the lower discount rate from 10% to 9.5% and also from sensitivity. I think based on the EV that we've announced, it's aligned with the discount rate.

[Jemmy Huang, analyst]

A follow-up question. In swap, it's up by TWD 3.2 billion, more than the TWD 110 billion from last year. Is that right? You mentioned about using the unused reserve to make up for the FX reserve, it would be in the tens of billions. What do you mean by the unused reserve?

[Unknown Executive]

First, to answer your question about swap in Q1, it was at TWD 3.2 billion. In the last guidance, we said we want to remain at the TWD 11 billion from last year. As of now, we expect a 5% to 10% growth. So for the reserves, because we are following IFRS 14 and the liability is calculated with that and the liability calculated under IFRS 17, we now see a higher number. So when we switch to IFRS 17, there will be a huge gap. And for that gap, we will apply for the foreign exchange reserves and that will be used that way.Have I answered your question?

[Jemmy Huang, analyst]

Yes.

[Unknown Executive]

Thank you to questions from J.P. Morgan. Do we have any other questions?

[Operator]

Next question is from Morgan Stanley, Peggy Shih.

[Peifan Shih, analyst]

I have several questions. The first question is about dividend distribution. This year, it's TWD 1.80. That's around 64% compared to previous years. It's around 45%. So, we see a huge increase. And I want to asked about the reason. The second question is that the long-term dividend payout policy, is it possible to increase? Because we did said that all subsidiaries have a high CAR and we do see the Bank structure improved greatly. So, do we have a change in long-term dividend payout ratio? That's my question.The second question is that the current market, there are lot of M&A activities. We want to ask management for your perspective on M&A. Do you have any M&A plans for CTBC? And what kind of indicators do you consider, for example, the synergy of M&A or other aspects? And recently for overseas subsidiaries, if the ROE is not performing well, do you consider selling these subsidiaries? So, that's the second question.The third question is that for the Bank, you mentioned that provision expense. So for the U.S. CRE asset quality, I want to ask about the asset quality of CRE in the U.S.And also I have questions for life insurance as well. So for the first quarter, life performed well. And I want to ask the gain for stock investment gains. And for the OCI, what's the percentage of stock gains and other gains because going forward, you'll recognize stock dividend income? So, do you have an expectation compared to the last year's levels?And last question. For hedging cost is really low for the first quarter. It's only 0.34%. And that has -- that's partly because of foreign currency. And last year's whole year hedging costs is around 1%. So, do you plan to adjust the percentage going down?

[Unknown Executive]

So the first question, we pay out TWD 1.80 this year. It's higher than expectation. As you know, the financial industry's dividend payout has more to do with the valuation of our financial assets other than after-tax profits. And for last year, we do see a historical profit revenue of TWD 56.1 billion. And another main reason is because we do see a TWD 40 billion increase in our evaluation of our financial assets. And that's a turnaround of the liability of the financial assets. So that has a huge impact on our profits. And that is why we increase dividend payout. For the policy, we want to balance between our operation and to reward our investors and stockholders. Going forward currently, because our CAR can cover, so we want to maintain a stable payout level. That's the first question.For the second question, M&A, as you know, Taiwan's financial industry is quite mature. For the banks, for insurance companies, for securities, the market in Taiwan have been very mature. So, we do see the growth. Organic growth would be our expectation because it's difficult to reach 10% growth organically. But for M&A policy, ideally, we do want to proceed with our plans, but there would be a difference in reality. We do want to purchase a well-performed large bank in Taiwan. But even though we perform well, but our market share total in Taiwan is only around 8%. That's relatively low in the nature chamber, because the whole market share is relatively low. So if we can -- if we're able to expand our market share in Taiwan, that would be ideal, because Taiwan is a market that we're most familiar with and banking sector is our most familiar core business as well.Thirdly, for our branches, physical branches, we now have 150-plus branches in Taiwan. There is room for growth. Even though we are performing well digitally, but when we compare to global leading banks, including J.P. Morgan, RBC, even though they increase in their digital banks, their physical banks have been expanding as well, because integration between the virtual and the physical would be the best customer service. Many trades cannot be conducted by digital branches. You have to rely on physical branches to provide such service. And also recently, Taiwan has a strict regulation on the branches for the -- for anti-frauds. So the wait time for physical branches have been quite long. Customers have to wait for a long time for any trades or any process because of KYC and other anti-frauds measures. And even though we have managed to maintain customer satisfaction, but I feel like there's something that we need to improve. So ideally, we do want to proceed with M&A, but it's not something we can do only if we want to do so. We need to have suitable targets, and we need to be approved by the regulators. For Taiwan Life and CTBC Securities, as long as we can identify partners that can increase our market share and create synergy, and also one that we can purchase at a good price, we will sit down and evaluate the plans. And some of our overseas subsidiaries, their ROA is quite low. We have been using our emergency funding to support that. But over the long run, I believe that we have to maintain our operations in the locations that we value. We are -- our commercial franchise is a network. It's not like running an investment portfolio. We don't just buy and sell assets. We have to really operate the businesses. So, we need to take a holistic view and where it's necessary, we will engage in merging.Now, there's been a recent wave of migration of Taiwanese business overseas. And because of our overseas presence, we managed to post TWD 19 billion in relevant business. And in India, we have been there for 2 decades. We didn't turn a profit, but now we are already turning a profit. Strategically, these subsidiaries and branches are very important because for Taiwanese businesses and Chinese business as well, they go into the Indian market and we are already there. If you are able to serve them, then they will reward us with their other businesses in other locations, for example, the ones in Singapore and Hong Kong. So in the short term, we are not having plans to divest in any of the subsidiaries. Instead, we believe the current strategy and the current layout is quite beneficial for the Holding as a whole.Regarding the CRE in the United States, the quality is quite solid. I think I've talked about this in the last call as well. The balance is at TWD 2.2 billion and loan-to-value is about 53% and only 10% of them is office. The current NPL is 0.5%. Coverage ratio is 205%. So, we don't think the CRE in the United States will be an issue in the near future.Maybe Pai-Hung will comment on your question relating Taiwan Life.

[Pai-Hung Yeh, executive]

About capital gain, in Q1, it was at TWD 6 billion and for bonds, it was at TWD 700 million. For unrealized gain, in Q1, it was 4.7 -- negative TWD 4.7 billion. And for stocks, it's at TWD 17 billion. And regarding dividend income, compared with last year, we expect it to be in several billion. Last year -- based on last year's observations, some of the sectors pay less of a dividend, so that was reflected in our predictions. And also in Q1, the market was quite strong. The stock market performed really well.The stocks were up, and so we balanced our portfolio based on that. So, we expect it to be a balance between the capital gain and dividend. So as of now, we expect smaller dividend gains from last year. The previous expectations would be 1%, and there is a change in foreign currency exchange between NTD and USD. So it's very difficult for us to give you a prediction. So, we will maintain this 1% prediction. What's beneficial is that NTD appreciated. So the spread narrowed, and that would be helpful for our whole year performance.

[Peifan Shih, analyst]

I want to give a -- ask a follow-up question for the long-term dividend payout policy. You mentioned that you will maintain a stable payout because in the past, the payout will be around 45% to 50%. Will you grow to 60% going forward?

[Unknown Executive]

[ May ], to answer your question, I think it's very difficult for the financial industry to target the percentage of profits as dividend payouts because the profits would be affected by the evaluation of your financial assets and other factors. As long as our CAR is able, we do want to payout dividend as competitively as possible and that do not have to be directly related to our profits percentage. Thank you, May, for your questions. Do we have any other questions?

[Operator]

Next question is from UBS, Alex Ye.

[Xiaoxiong Ye, analyst]

My first question is on M&A considerations, especially for life insurance. You mentioned that there is a synergy that we need to consider. And from past experience, we see that CTBC Holding will be the main position. I don't know if the positions between Taiwan Life and CTBC would be contradictory and would that affect your M&A considerations? In the past, we mentioned that Taiwan Life's operation logic is that for it to maintain a stable profit. So if life insurance continue to expand, may that affect Taiwan Life's profitability? So, what's your consideration? That's the first question.The second question is for the fee income growth momentum for wealth management and your forecast for the second half of this year.The third question is on foreign exchange reserve. After switching to IFRS 17, the liability gap would be considered in the calculations, but asset side will have to recalculate according to IFRS 17. So the consideration in the past was only focusing on the liability side and that would be an impact on mark-to-market. But now when the liability side, FX reserve will remain in the liability side as FX reserve. How do you balance the balance sheet according to that?

[Unknown Executive]

So for your first question, indeed, we focus on holding and financial sector and the profitability. The profits of our Bank side is around 70%, and that is our core business. So ideally, we do want to have a larger market share in the banking sector. But for life insurance, we do follow the same logic whenever -- regardless of our needs for increasing equity. As long as it's affordable, we will consider M&A. We will still look at the whole picture to maximize the group's value.The second question on the fee income for wealth management, it's still performing well in the second quarter. But it may be affected by the fund sales for the first quarter because of stock market performance. Secondly, the structured products sold well, especially stock linked and bond-linked products and the funds may be affected to the stock market. So the second half of this year's performance is harder to predict. On the long term, we do see a positive outlook for the second half of this year. Regarding FX reserves, Pai-Hung, would you like to take this one?

[Pai-Hung Yeh, executive]

Now, we've talked about -- as we adopt IFRS 17, there's an option to reclassify. That's right. Indeed, when we adopt IFRS 17, we will reconsider how many of the assets will be classified. Those assets -- the unrealized gain or loss will be reflected in our net worth. How much percentage of that will become FX reserve, and how many assets will be reclassified? That's a question that we will address when we have a comprehensive overview -- review of the Holding, and we will also talk with the regulator to decide a right proportion.

[Unknown Executive]

Thank you to your question, Alex. Any other questions?

[Operator]

[Operator Instructions]

[Unknown Executive]

If not, we will now conclude today's call. And if you have any other questions or if you have follow-up questions, please feel free to contact our colleagues at IR. They'll be happy to provide more information. Thank you for joining us today. Thank you, President Chen. And thank you for joining us today. Please feel free to sign off. Thank you.[Statements in English on this transcript were spoken by an interpreter present on the live call.]