CTBC Financial Holding Co Ltd
TWSE:2891
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CTBC Financial Holding Co Ltd
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Welcome, everyone, to CTBC Financial Holding Co.'s 2018 Second Quarter Earnings Conference Call. [Operator Instructions] Today's host will be Ms. Yaling Chiu, Executive Vice President and spokesperson of CTBC Financial Holding Co.; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Co.
The presentation will begin now.
Thank you, everyone, for joining CTBC's 2Q '18 Earnings Call.
Please turn to Page 3 for financial highlights. Overall, at a holding level, net income in the first half reached $21.9 billion, up 13% Y-o-Y. ROE and ROA remained high at 14.8% and 0.8%, respectively. EPS was $1.12.
On CTBC Bank, PPOP increased 16% Y-o-Y, driven by solid loan growth, NIM improvement, trading gains as well as steady fees. Taiwan Life has been focusing on regular-paid and investment-linked products this year. Life insurance profit grew 62% Y-o-Y on increased investment income and declined cost of liability.
Operating expense growth was contained. Cost/income ratio was lowered to 58% in the first half.
On asset quality, NPL ratio remained stable at 0.42%, with NPL coverage ratio of 312%. Credit costs remained benign at 18 basis points in the first half.
Capital position remained adequate. Holding CAR was 124% and double leverage ratio was 118%.
Bank CAR stood high at 14.1% and CE Tier 1 was 11.5%. Taiwan Life's RBC ratio was 318%.
Page 4 and 5 on profitability. Second quarter net profit reached $9.7 billion, down 21% Q-o-Q. First half net profit was $21.9 billion, up 13% Y-o-Y.
EPS was $1.12. ROE was 14.8% and ROA was 0.8%.
Page 6 on capital ratio. We remain well capitalized with group CAR at 124%, bank CAR at 14.1% and Tier 1 ratio at 12.7%. Life RBC ratio was 318%.
Page 7 on profit breakdown by legal entity. In the first half, bank profits reached $16 billion, up 6% Y-o-Y.
Life profits reached $6.8 billion, up 62% Y-o-Y. In terms of profit mix, Bank and Life contributed 73% and 31%, respectively, through holdings net profit. 51% of bank profits came from overseas.
Page 8 on net profit movement. In 2Q, operating revenue was down 4% Q-o-Q, reflecting a high base in wealth management and lottery fees as well as strong trading gains in 1Q. Increasing provisions was mainly due to loan growth and specific provisions.
Expense was up 3% Q-o-Q from ESOP and increases in marketing and personnel expense. Insurance pretax profit was up 107%, benefiting from cash dividend income and lower hedging costs.
On the bottom, for the first half, operating revenue was up 7% from increased net interest income led by loan growth and NIM improvement.
Wealth management fees and trading gains also show growth. Provisions increased, mostly due to recovery at TSB in 1Q '17.
Expense was up 1% Y-o-Y. Insurance pretax profit was up 61% on strong investment performance. Overall, net income reached $21.9 billion, up 13% Y-o-Y.
Page 9 on revenue breakdown. Total revenue was down 4% Q-o-Q, reflecting a high base in wealth management and lottery fees as well as strong trading gains in 1Q.
Total revenue was up 7% Y-o-Y from increased net interest income and trading gains and stable fees. Net interest income was up 11% Y-o-Y, driven by loan growth and NIM improvement. Fee income was flat Y-o-Y, while growth in wealth management, retail and overseas subsidiary fees was offset by declines in credit card and lottery fees.
The combined derivatives, FX and trading gains was up 13% Y-o-Y due to capital market gains on interest rate and foreign exchange products, derivatives and mark-to-market gains at TSB and proprietary trading gains at the securities arm.
Page 10 on bank lending portfolio. Total lending of credit card revolving at the end of June was $2.3 trillion, representing a growth of 1% Q-o-Q and 6% Y-o-Y.
NT dollar corporate loan was down 4% Q-o-Q and 2% Y-o-Y, mostly due to a lower demand for working capital and early repayments from government entity.
Foreign currency loan was up 2% Q-o-Q and 8% Y-o-Y. Mortgage continued to grow 3% Q-o-Q and 10% Y-o-Y with our exclusive government contract for lending to civil servants.
Unsecured lending was up 2% Q-o-Q and 4% Y-o-Y.
Credit card revolving was up 1% Q-o-Q and 10% Y-o-Y, benefiting from increased consumption.
Page 11 on foreign currency loan breakdown. Total foreign currency loan is around 45% of total loan. Overseas subsidiaries accounted for 58% of total foreign currency loans with TSB being the majority.
Overseas branches accounted for 30%; OBU plus DBU, 12%. On the right, overseas subsidiaries grew 6% Y-o-Y supported by growth at TSB, U.S., Indonesia and Philippine subsidiaries.
Overseas branch loan was up 15% Y-o-Y, mainly coming from China, Hong Kong, New York, Tokyo, Singapore and Vietnam branches. OBU plus DBU was up 5% Y-o-Y, driven by demand for working capital.
Page 12 on bank deposit mix. Total deposit as of June reached $3.1 trillion, of which foreign-currency accounted for 49%.
On the left, NT dollar deposit was up 1% Q-o-Q and 4% Y-o-Y, with savings rising to 58% of total NT dollar deposit.
On the right, foreign currency deposit was up 3% Q-o-Q and 14% Y-o-Y with savings accounting for 50%.
Page 13 on loan-to-deposit ratio. Overall, LDR increased to 75%. NT dollar LDR was 82%. Foreign currency LDR was 67%.
Page 14 on NIM and spreads. In 2Q, foreign currency spreads were up 1 basis point Q-o-Q to 2.31%, reflecting higher U.S. dollar rates. NT dollar spreads remained steady at 1.6%. Overall spreads were 1.9%. NIM was up 1 basis point Q-o-Q to 1.49% due to improved yields on marketable securities. In order to utilize funding more effectively, the bank continued to deploy excess U.S. dollar in capital markets to enhance operating revenue.
Page 15 on fee breakdown. Total fees were down 20% Q-o-Q, but positive market sentiment and Chinese New Year effect resulting in a high base in wealth management and lottery fees in 1Q.
Wealth management fee was up 5% Y-o-Y, driven by 12% growth in mutual fund fees and 3% growth in bancassurance fees.
Credit card fee is down 4% Q-o-Q and 6% Y-o-Y due to higher redemption of LINE Pay card rewards. However, as consumption was boosted by Life Pay cards, the growth, 36% Y-o-Y. Revolving balance was up 10% Y-o-Y and interest on revolving increased 9%.
Retail business was down 1% Q-o-Q and up 6% Y-o-Y from loan-related and ATM fees. Corporate business was down 5% Q-o-Q and flat Y-o-Y due to lower syndicated loan fees.
Overseas subsidiaries fee was down 32% Q-o-Q from higher corporate loan fees at TSB in 1Q and up 1% Y-o-Y, driven by loan-related and wealth management fee at TSB.
Lottery fee was down 62% Q-o-Q due to seasonal effect and down 8% Y-o-Y.
Page 16 on wealth management fees. On the right, bancassurance accounted for 63% and mutual fund accounted for 34% of total wealth management fees.
Page 17 on cost/income ratio. Expense growth remained unchanged. Cost/income ratio was lowered to 57.6% in the first half, better than the same period last year.
Page 18 on asset quality. Asset quality was benign with NPL ratio at 0.42%. NPL coverage ratio increased to 312%.
Page 19 on credit cost. 2Q credit cost reached 29 basis points due to loan growth and additional provisions for specific cases. First half credit cost was 18 basis points, up 14 basis points Y-o-Y due to reversal of loan loss reserve at TSB last year.
Moving on to Life business, Page 20, on total premiums. Total premiums reached $131.5 billion in the first half, down 3% Y-o-Y. Market share was 8%, ranked #5 in the industry.
Page 21 on first year premium. Taiwan Life has adjusted its product strategy to focus more on regular pay and investment-linked products this year. FYP has reached $68.7 billion in the first half, flat Y-o-Y. Market share was 10%, ranked #5 in the industry.
Page 22 on FYP breakdown by channels and products. In terms of channels, contribution from tied agents has increased to 18% of FYP, 36% from external banks, 35% from CTBC Bank and 10% from insurance brokers. On the right is the product breakdown. Interest sensitive accounted for 66% and investment-linked accounted for 31% of FYP.
Page 23 on FYP breakdown by types of payment and currencies. On the left, mix of regular paid product increased Y-o-Y, rising to 30% of FYPs in the first half '18. On the right, foreign currency policy accounted for 29% of FYPs in the first half '18.
Page 24 on FYPE. First half FYPE reached $12.4 billion. Market share was 7%, ranked #6 in the industry. On the right is the FYPE mix for your reference, which coincides on investment asset mix. Total investment asset reached $1.6 trillion, up 16% Y-o-Y.
Taiwan Life reduced cash and domestic fixed income positions and increase overseas fixed income and equity holdings.
In terms of portfolio breakdown: cash accounted for 3.7%; domestic fixed income, 9.5%; overseas fixed income, 65.8%; equity, 8.9%; real estate, 5.3%; mutual fund, 3.5%; mortgage and policy loans, 3.2%.
Page 26 on investment yield, cost of liability and hedging mix. First half investment yield was 4.02% and cost of liability dropped to 3.64%.
In terms of hedging, 65% of overseas investment assets were NT dollar policy, of which 74% were fully hedged. First half hedging cost was 1.13%, benefiting from depreciating NT dollar.
This will conclude the presentation. We can now open for Q&A.
[Operator Instructions]
Operator, our CFO, Yaling Chiu would like to make a summary of 2Q results before we head into Q&A session.
Okay. This is Yaling from CTBC. In summary, our first half result is quite good and mainly grew from our core business of banking -- Bank and Life subsidiaries. And all drivers are on track or ahead of our target, except for fees.
On fees, flat Y-o-Y, mainly due to lottery and credit card fees. But wealth management grew by 5%, therefore, we remain our guidance that we suggested in the beginning of the year.
So that's all my summary.
[Operator Instructions] Our first question is coming from Chung Hsu from Crédit Suisse. So we are going to take the next question and the next one is coming from Anthony Lam from HSBC.
I think a couple of questions from me. On the bank side, I think [ Janet ] did mention, I think, in the middle of presentation that there's some early payment by corporates and I think lower demand from corporates for working capital loans [indiscernible] our end. I also noticed pickup in foreign currency loans in second quarter. So I'm just trying to understand whether you -- I mean, what's your view on loan growth in the second half of the year? I think it's slightly below high single-digit guidance, I think, for the full year. So what are you -- I mean, continue to add to your foreign currency loan mix for margin enhancement and -- I'm sorry, that's the first one. And the second one is on the Life side. Could you give us a sense of perhaps recurring yield and effect first half and the level of FX we sell down at end of first half?
For the loan growth, we remain our guidance of mid- to high single-digit growth for the overall loan. And because the foreign currency loan for our overseas subsidiaries and Brexit, the momentum is quite strong, especially from -- actually, it's quite strong for all regions, including Greater China, Japan, North America and Southeast Asia, and especially for China because we focus on the industry of manufacturing, retail and wholesale. And we focus on the Chinese corporates rather than just Taiwanese corporates. So we see the loan growth momentum is quite strong and we remain our same guidance in anticipation for the second half of the year.
And recurring year before hedging is 3.48%.
3.48%, right?
Yes, correct.
Okay. And the level of FX we saw?
1.6% -- no, no, no. 1 point -- 1.9%.
And next, we'll have Sam Wong from Citigroup for questions.
This is Sam Wong from Citigroup. Actually, I have 3 questions. The first question is on the insurance strategy. You just mentioned that CTBC is undergoing a shift in the product mix. So I wonder whether there is an ultimate target for this shift in product mix in terms of, say, by product in terms of traditional investment-linked or interest-sensitive or by payment, say, single pay, regular pay or investment-linked, and whether there's a time line for this product shift strategy. My second question is on the full year guidance on FYP growth, VNB growth and VNB margin. What is the VNB right now? And my final question is on capital. I just kind of wonder why the capital declined a little bit comparing to last year.
I'm sorry, can you clarify the last question? Are you -- you're referring to the capital decline or can you further elaborate on the question?
Sure. I think in terms of the -- on Page 6 of the slide, the CET1 ratio of CTBC Bank declined from 13.1% in 2007 to 12.7% first half this year.
For product strategy, we would like to increase the regular paid portion and our foreign currency policy, due to the hedging costs, this may increase due to the [ paid down type ].
The VNB margins.
For VNB, we disclose VNB on the...
Annual rate.
Annual rate.
For the third question, if you are referring to the Slide 6, first of all, that's Tier 1 ratio, that is not CET1 ratio. And for the decline, actually, it slightly declined for Tier 1 ratio. That's mainly because of loan growth.
Oh, I see. Okay. Sorry, what's the guidance on VNBN full year FYP growth?
Can you please rephrase your question again? What's the VNBN that you refer to?
Value of new business for Taiwan Life.
We disclose VNB on an annual basis because we made assumption at the full -- at the end of the year. And currently, the hedging cost maybe have some changes. So we did not disclose VNB right now.
And the next question is coming from Jemmy Huang from JPMorgan.
Just 2 question from me. The first one is, if I look at the bank operating expenses, it is actually flattish year-on-year. Just trying to understand whether this is really underlying trend or whether there will be someone one-off impacts this year over last year? That's the first question. Second question is regarding your loan growth strategy. I think you mentioned China is, at the moment, picking up. But also, you booked some of the provision for one loan cases in China. And then given the current consensus about asset quality uncertainties in China, how comfortable management is regarding your risk management for your China portfolio or loan growth strategy in China?
For China loan growth strategy, the -- we are quite comfortable about our risk control. Actually, for the first half of this year, NPL for China region -- for China, 3 branches in China is 0. And for the second quarter, we do see one case in the early warning stage, so that's why we made some provision reserve for that single case. So we are quite cautious in the underwriting credit policy. And for the expense, the -- actually, one of the reason for the expense is ESOP, employee stock option, and for the first half, our stock price has -- our stock price is quite flat and ESOP is based on the stock price, so that's the one reason. And the other reason is we had some cost reduction plans for TSB. TSB total cost accounts for about 20% of our total bank operating expenses. So when they improve their fee ratio, then the whole bank will improve. And C/I ratio for TSB is about 84% last year, and for this year, it's -- it improved to 70%, about 70%. So that's one of the reason that we control our expenses. So going forward, I think that will be the trend, but it's subject to our ESOP cost.
Could I ask a follow-up? For 70% cost/income ratio in Tokyo Star Bank, do you see further -- room for further improvement? And then what would be the targeted ratio in the coming 12 months?
Well, actually, for the same tier -- I mean, the Tier 2 regional banks, the same level of our tier, C/I ratio is 70-something percent, 70% to 80% is quite normal. So -- but still, we -- our target is around 60% to 70%, and we want TSB to improve furthermore on C/I ratio.
[Operator Instructions] And your next question is coming from Chung Hsu from Crédit Suisse.
A few question from me. First, I want to ask about our Life business. I think given the recent regulatory change on overseas investment limit and also the changing market condition, the U.S.-euro curve and hedging costs, do -- should we expect any slowdown in Life asset growth second half this year or into 2019? And if we put in the context of the bank -- of the group's next strategy for the next few years, whether there is a shift of impact from this change in regulation and market conditions on your Life business asset growth. My second question is on expense. Just as a follow-up, so if -- can I just check? As of in first half this year, there's no ESOP impact. But can you remind us how much was the employee stock option expense in first half last year? And my third question is a model question actually. It's -- would you be able to give us guidance how much capital, how much earnings you're going to upstream from the bank to the parent company this year? I'm trying to understand how you will manage your double-digit ratio at the holding company.
From the earnings from bank upstream to holding company is around TWD 20 billion this year. For ESOP cost last year, it's around TWD 1.3 billion, and this year, it's around TWD 1.0 billion.
So this year, it's $1 billion. So it's actually flat year-over-year. So all the cost impact is basically the savings from Tokyo Star.
So basically, there are 2 drivers. One is from the savings from ESOP and the other is from the savings around Tokyo Star.
For the new regulation, currently, our foreign investment, around 72% of total assets, and we calculate under the new regulation. We have a small portion, like 0.6%, higher than new regulation. According to our estimate, the cost to exercise will keep going up. So after 2 or 3 months, the limit will -- go back to the -- well, under the limits of new regulation. So totaling of our view is that no big impact for us for Taiwan Life.
I think my question is, should we -- CTBC -- sorry, Taiwan Life is a growing asset, about $250 billion to $300 billion a year. Should we still expect that pace to continue?
Yes. We will keep the assets growing to 20 -- $200 billion and -- but we will focus on foreign currency policy.
[Operator Instructions] And your next question is coming from Anthony Lam from HSBC.
Just want to follow up on the previous question about the investment, foreign investment of Taiwan Life. I think, yesterday, there was also a clause about the limit to the international bond investment. I'm just wondering whether that one will affect your current open accounts in the international investment you have. So that's the first one. And other 2 regulatory-related questions about, one, whether the encouragement by regulator to encourage domestic banks on financial holding consolidation have any bearing on how we should think about your development strategy going forward or that's just something that won't really affect you, still once you prioritize as your dividend come in. And does -- I mean, that's the first one with regulation. So the second one is about the shareholding structure that I think the regulator commented on quite a couple of times in the past couple of months. Not sure whether the company is thinking about any sort of shareholding increase, I think, for major shareholders. So that's the second one.
For most of our foreign banks, most of our products are from overseas. Under the new regulation, 58%. Currently, we have excess around 0.6%. So according to our estimate, at the 2 months or 3 months, we are back to the normal limit -- under the limit.
And regarding the encouragement from FSC for the merger acquisition, I think the growth strategy for CTBC Holding Company is always in our -- from both organic growth and inorganic growth. So the encouragement is good because it's very crowded in Taiwan market and the over banking situation make our -- that the margin has the lowest -- one of the lowest NIMs in Asia. So I think this direction of the asset fee policy is good. But for CTBC, we continue -- we will continue to look at the appropriate target, which would have synergy of us to merge in an acquisition.
Anthony, regarding the shareholder structure, the one question about which part of -- I mean, your question, are you referring to the board election, the limit for -- when you acquire the proxy vote for the board election [indiscernible]?
Yes, yes. I think that was the comment by the regulator regarding some of the major selling shares to the secondary company about being able to appoint having some sort of larger -- I mean, disproportionate influence on the Board of Directors election, so I think just coming from that angle.
So far, we cannot answer on behalf of the major shareholders. But I think so far, we haven't heard there's any changes in the shareholding.
[Operator Instructions] And the next question is coming from Gurpreet Sahi from Goldman Sachs.
Regarding credit cost, I see that NPLs have not really moved much, but then credit cost is up. You say it is because of the base effect around Tokyo Star Bank not contributing much to the recoveries. But can you talk about how the risk, credit risk is being handled in terms of some of the macro numbers have been quite bad recently, especially around China. So how has -- and also, in Asia, currencies have taken a hit. So how have your customers reacted and which region do you see -- or which sector of your book do you see the most risk in terms of the credit risk?
So credit cost, you can see from the slide that in second quarter, credit cost is picking up. And that's mainly due to the -- some cases that happened in China, Southeast Asia and also Taiwan. And for the region that we are closely monitoring is China. So like you've mentioned that the downsize risk in the macroeconomic is not so good in China. So there's one case. It's in our construction industry. In the early warning situation, it's not to NPL status yet, but we decided to accept some provisions for this case.
Okay. Can I have a follow-up on credit card income? The fee income not really moving. So can you talk about how the other players are? And then how, on your credit card, is there more and more issuance of credit card or has it been in decline? Or do you have to give more rebates to consumers? What is the reason for the card income not moving up?
For the credit card, the reason that the credit card fee is declining is because of the LINE Pay card that we have. We have given out 2% rebate on LINE points and rebate. So as a result, you might see the card income has declined. However, we have -- we see the consumption is going up and also the recurring balance is growing quite strongly as well. So for our credit card business, per se, it's still a profit-making business. And also, for the LINE pay card, it's more than a credit card. I mean, it's more like a strategy product because we have still acquired new customers, especially in light of our new customers. That's 60% of the LINE Pay cardholders that are new to CTBC and also a big part of them are the younger generation. They are the people that are actually used to mobile payments. So for us, these are acquiring new customers. And also, through LINE Pay card, we're also able to get a lot of data, the big data. And from the data, that we can analyze the data for product cross-selling. So we're also cross-selling personal loan products to the cardholders. And also, some kind of individual mobile fee customers, we can also cross-sell one of the major products to accelerate our -- from our analysis, we still see this product is actually a very attractive product to CTBC.
[Operator Instructions] And next, we'll have Anthony Lam from HSBC for questions.
Just a quick one on wealth management. I think it's up 5% you mentioned. I think the underlying trend is a little bit weak. If you look at the mutual fund fees, I'm not sure whether -- what's your take on the bancassurance side? Given the enlarged mix from CTBC Bank distribution already, this will be -- I mean, upper limits. So I'm not sure whether -- I mean, our mutual fund side, we cannot understand this a bit, the way that you invest in the market. But could you give a sense of -- I mean, what should we be looking at for the second half? And could you remind us what is your wealth management fee target for 2018?
For wealth management, our guidance is low single-digit growth. That's the guidance we get in the beginning of the year, and we remain the same outlook for the second half of the year.
There appears to be no further questions at this point. We thank you for all your questions and that would be the end of the conference. We thank you for your participation in CTBC Financial Holding Co. conference call. You may now disconnect. Goodbye.