CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Transcript 2020-Q2

[Operator]

Welcome, everyone, to CTBC Financial Holding Co.'s 2020 Second Quarter Earnings Conference Call. [Operator Instructions] And today's host will be Ms. Ya-Ling Chiu, the CFO and Spokesperson of CTBC Financial Holding Co.; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Co. And the presentation will begin now.

[Yaling Chiu, executive]

Thank you, everyone, for joining CTBC's Second Quarter 2020 Earnings Call.

Please turn to Page 3 on second quarter 2020 highlight. Overall, CTBC Holding continued to deliver stable earnings amid COVID-19's impact on global economy. At Holding level, ROE reached 10.95%, ROA at 0.61%, EPS at $0.93. Net profit was down 6% year-on-year, mainly due to higher tax expenses on undistributed earnings. Holding also maintained well-capitalized with CAR ratio at 112.29% and maintained decent double leverage ratio at 116.92%. For CTBC Bank, it observed solid core revenue growth as NT dollar loan growth was stable at 8.9% year-on-year, and net interest income was up 2.5% year-on-year.

Fee income from wealth management, retail business and lottery were strong, though credit card spending was lower due to the pandemic. Overall asset quality remains benign with NPL ratio at 0.39%. Capitalization remained strong with CAR ratio at 13.33%, and CE Tier 1 ratio was at 10.8%. For Taiwan Life, its after-tax net profit increased by 38.7% year-on-year due to strong investment gains and lower hedging costs. Life also successfully shifted to a value-focused strategy with cost of liability lowered to 3.28%. RBC ratio remained superior at 293%.

Please turn to Page 4 on event updates for second quarter 2020. As for August 5, CTBC Bank has actively participated in various COVID-19 relief programs held by the government, with 252,395 cases, totaling TWD 50.1 billion approved, in which we had more applications and more approved cases than any other bank in the government-backed relief loan program for COVID-19 affected workers. Moreover, CTBC is recognized by the Financial Supervisory Commission as a top relief program participant for our efficient online application process. We provided efficient COVID-19 relief services via our advanced digital application and internal review processes, which are developed by our already well-established cross-functional agile team and accelerated through robotic process automation.

Regarding ESG highlights. In order to accelerate the progress of ESG, CTBC Holding established a sustainability committee in June 2020 with all Independent Board Directors serving as the committee members. For ESG implementations, CTBC signed on to the TCFD recommendations of the G20 Financial Stability Board in April 2020 to further realize our commitment to actively respond to climate risks. As from the owners, CTBC received the top Award of Excellence in Energy Management from the UN Clean Energy Ministerial forum and was named as one of the top financial institutions in the fair treatment of customers by the Financial Supervisory Commission in July 2020. CTBC also remains constituent stock of the MSCI Taiwan ESG Leader index, Dow Jones' SI Emerging Markets Index, FTSE4Good Index Series and TWSE Corporate Government 100 Index.

Please turn to Page 5 and 6 on profitability. CTBC Holding's first half net profit was TWD 19.18 billion, decreased by 6% year-on-year. EPS was $0.93. Group ROE was 10.95%, and ROA was 0.61%.

Please turn to Page 7 on capital ratio. We remain well-capitalized with group CAR at 112.3%, Life RBC ratio at 293%, Bank CAR ratio at 13.3%, Tier 1 ratio at 11.9%.

Please turn to Page 8 on profit breakdown by legal entities. In the chart above, as Bank operating revenues decreased due to the impact of rate cut and the pandemic and provision also increased due to individual cases, Bank profits reached TWD 5.1 billion in the second quarter, down 39.4% quarter-on-quarter, although Life net insurance income increased and cost of liability improved continuously. Income taxes spend increased in the second quarter, leading to Life profits of TWD 3.9 billion, down 7.6% quarter-on-quarter. On the other hand, Holding on an unconsolidated basis has a negative profit of TWD 3 billion, mainly resulted from the recognition of 5% on undistributed earnings tax. Thus, Holding's consolidated net profit reached TWD 7 billion, down 42.3% quarter-on-quarter.

In the below chart, Bank net profit reached TWD 13.47 billion since NT dollar loans and fee income from wealth management, retail business and lottery has grew steadily. However, the growth of credit card spending and foreign currency loan was lower due to the pandemic. Increased provision also resulted in a decrease of Bank profit by 11.8% year-on-year.

In the first half year, Life net profit reached TWD 8.1 billion, up 38.7% year-on-year, driven by the continuous decrease in cost of liability, lower hedging costs and the growth in investment income. On the other hand, Holding has an unconsolidated net profit of negative TWD 3.3 billion, reflecting the 5% undistributed earnings tax. Holding has a consolidated net profit of TWD 19.2 billion, down by 6% year-on-year. From the chart on the right, Bank and Life contributed 70%and 42% of first half year earnings, respectively.

Please turn to Page 9 on net profit movement. In the above chart illustrating our quarterly results, operating revenue was up 0.6% quarter-on-quarter with the growth in investment income, offset by decreased net interest income and fee income in the second quarter due to rate cut and the pandemic. Provision were up 85.5% quarter-on-quarter and expense was up 15.6% quarter-on-quarter, mostly reflecting the increase in ESOP valuation expense due to the rising stock prices. As for Life, since its net insurance income increased, cost of liabilities improved continuously, contributing to Life. Pretax income increased by 8.1% quarter-on-quarter and Holdings pretax income at TWD 11.2 billion. However, income tax expense rose due to the increase of 5% on undistributed earnings tax. Holding net profit was TWD 7 billion.

On the bottom, operating revenue was down 3.4% with the growth in NT dollar loan and wealth management, retail and lottery fee income, offset by decreased credit card fee, foreign currency loan and trading gain. Provision was up 121.5% and expense was down 5.1% year-on-year, reflecting the decrease in ESOP valuation. Insurance pretax profit was up 44.7%, benefited from investment income and lower hedging costs as well as decreasing cost of liability. Overall Holding pretax income was TWD 25.4 billion, slightly down 1.2%, however, affected by the 5% tax expenses on undistributed earnings. Net income was TWD 19.2 billion, down 6% year-on-year.

Please turn to Page 10. Our revenue breakdown, excluding Life. Total revenue was up 0.6% quarter-on-quarter, down 3.4% year-on-year. Net interest income was down 2.7% quarter-on-quarter due to rate cut, up 2.9% year-on-year due to stable growth in NT dollar bond. Fee income was down 24.9% quarter-on-quarter. Besides higher base of lottery fee in the first quarter due to seasonal effect, other fee income decreased due to the pandemic. First half year fee income grew 0.6% year-on-year, attributing to low growth in wealth management, lottery and retail fees, while fee income from credit card corporate business and overseas subsidiaries dropped due to the pandemic, resulting in a decrease in Bank fee of 1.2%. However, securities and investment subsidiaries observed growth in fee income as business grew.

Combined revenue, foreign exchange and trading gains were up 57.8% quarter-on-quarter due to increased equity-related gains amid improved investment market. It was down 31.1% year-on-year due to higher base last year and decreased investment-related gains amid the pandemic. Long-term investment and others were up 140.5% quarter-on-quarter as long-term investment gain increased from LHFG in Thailand and higher lottery-related rebate back to the Ministry of Finance were recognized in the first quarter. They were down 37.1% year-on-year as long-term investment gain from LHFG decreased and lottery-related rebate increased year-on-year. Please refer to profit mix on the right where net interest -- net investment income accounted for 56% of revenue; fee, 35%; trading, derivatives and foreign expense, 11%; others combined, minus 2%.

Please turn to Page 11 on Bank loan breakdown. Total lending with credit card revolving at the end of June was TWD 2.5 trillion, reflecting 0.3% quarter-on-quarter decline and 3.2% year-on-year growth. NT dollar corporate loan was down 4.5% quarter-on-quarter due to repayment from public enterprises. Excluding loan from public enterprises, NT dollar corporate loan was up 1.5% quarter-on-quarter, mainly from construction and real estate as well as financial industry. It was up 3.3% year-on-year despite repayment from public enterprises. Excluding loans from public enterprises, NT dollar corporate loan was up 7.8% year-on-year with increased demand in working capital under repatriation program, mainly from construction and real estate and manufacturing industry.

Foreign currency loan was down 2.2% quarter-on-quarter and 3.8% year-on-year. Excluding foreign exchange, foreign currency loan was down 1% quarter-on-quarter and grew 1% year-on-year, which will be further explained on Page 12. Mortgage continued to grow 2.2% quarter-on-quarter and up 8.4% year-on-year on the stable market. Unsecured lending was up 21.1% quarter-on-quarter and up 36.4% year-on-year, attributing to the sustainable strategy that increases customer base and the participation in labor relief program led by the government. Credit card revolving was down 7.6% quarter-on-quarter and 8.1% year-on-year as consumption weakened due to the pandemic.

Please refer to the graph on the right for our lending portfolio mix, where foreign currency loan accounted for 41%; NT dollar corporate loan accounted for 23%; mortgage, 29%; unsecured lending, 7%; and credit card revolving and others, together, accounted for 2% of the total lending.

Please turn to Page 12 on foreign currency loan breakdown. Foreign currency loan at the end of June was TWD 1.02 trillion, which constituted 41% of total lending. Overseas subsidiaries accounting for 57.5% of total foreign currency loans with TSB accounting for 43.7%. Overseas branches accounting for 31.9%. OBU plus DBU was 10.7%. On the right, overseas subsidiaries loan was down 4.4% year-on-year. Excluding foreign exchange, overseas subsidiaries loan grew 0.2% year-on-year. Despite a decrease in TSB due to repayment, other subsidiaries observed continued growth.

Overseas branches loan was down 1.1% year-on-year. Excluding foreign exchange, overseas branches loan grew 4% year-on-year, mainly from China, Hong Kong, Vietnam and India branches. OBU plus DBU was down 9.3% year-on-year. Excluding foreign exchange, OBU plus DBU loan was down 5.1% due to some clients postponed expansion plan under the pandemic.

Please turn to Page 13 on Bank deposit mix. Total deposit as of June reached TWD 3.5 trillion, up 1.3% quarter-on-quarter and 4.2% year-on-year. On the left, total NTD deposit were up 3.8% quarter-on-quarter and up 9.6% year-on-year. NT dollar saving deposit accounted for 60.7%. On the right, total foreign currency deposit was down 1.8% quarter-on-quarter and down 2% year-on-year. Foreign currency savings deposit accounted for 54.7% of foreign currency deposit.

Please turn to Page 14, our loan-to-deposit ratio. Overall LDR was 74.07%. NT dollar LDR was 78.67%. Foreign currency LDR was 68.36%.

Please turn to Page 15 on NIM and spread. In the second quarter, foreign currency spreads were down 13 basis points quarter-on-quarter to 2.12%. NT dollar spreads were 1.51%, down 7 basis points quarter-on-quarter. Overall spreads were 1.75%, down 10 basis points from last quarter. The second quarter NIM was down 5 basis points quarter-on-quarter to 1.44%.

Please turn to Page 16 on fee breakdown. Total fees were down 26.2% quarter-on-quarter and down 1.2% year-on-year. Wealth management fee was about 16.9% quarter-on-quarter as the pandemic affected the investment market, impacting the sales of mutual fund, investment-linked and saving policies, as mutual funds fee income was down 23.8% quarter-on-quarter and bancassurance fee income was down 13.7% quarter-on-quarter.

First half year wealth management fee was up 5.3% year-on-year as mutual funds fee grew 27% year-on-year despite bancassurance fee were down 9.5% year-on-year due to the increase in premium. Credit card fee was down 7.2% quarter-on-quarter and down 12.2% year-on-year due to decreased consumption momentum under the pandemic. Retail business was down 3.8% quarter-on-quarter as ATM and loan-related has decreased. But it was up 1.5% year-on-year driven by loan-related fees and ATM fees due to the revamp of mobile and online banking app.

Corporate business was down 30.8% quarter-on-quarter and down 9.1% year-on-year, mainly due to decreased fee income from loan syndication and private banking businesses. Overseas subsidiaries fee was down 46.8% quarter-on-quarter and down 15.7% year-on-year due to decreased corporate business fee from TSB. Lottery fee was down 56.6% quarter-on-quarter due to seasonal effect and up 2.5% year-on-year.

Please turn to Page 17 on wealth management fee. For wealth management fee breakdown, bancassurance contributed 56%; mutual fund, 32%; custodian and trust, 3%; structured and others, 8% of total wealth management fees.

Please turn to Page 18 on cost/income ratio. On cost/income ratio, overall operating revenue was down 5.3% quarter-on-quarter, and operating expense was up 9.8% due to ESOP valuation. cost/income ratio was at 61.15% in the second quarter. For the first half year, cost/income ratio improved to 56.82% from 57.7%.

Please turn to Page 19 on asset quality. Asset quality was benign with NPL ratio at 0.39%, down 2 basis points from last quarter, and NPL coverage ratio increased to 370.8%.

Please turn to Page 20 on credit costs. The second quarter credit cost was 55 basis points. First half year credit cost was 43 basis points, reflecting increasing provisions of specific cases.

Moving on to Life business. Please turn to Page 20 first total on premium. Total premiums were TWD 41.4 billion in the second quarter, down 30.9% quarter-on-quarter. First half year total premiums were TWD 101.3 billion, down 14.6% year-on-year. Market share was 6.3%, ranked #6 in the industry.

Please turn to Page 22 on first year premium. FYP reached TWD 15.6 billion in the second quarter, down 33.1% quarter-on-quarter, reflecting the decrease in the sales of interest-sensitive products as the company lowered the declared interest rate amid rate cut. First half year FYP was TWD 38.9 billion, down 21.4% year-on-year as we stopped selling NTD single paid product and short-term regular paid NTD policies last year. Meanwhile, the sales of investment-linked products also decreased due to the new regulation. Market share was 8.3%, ranked number fifth in the industry.

Please turn to Page 23 on FYP breakdown by type of payment and products. On the left, mix of single paid products has increased to 43.2% of FYPs and regular paid products accounting for 30.5% of FYPs. On the right is the product breakdown. Interest-sensitive policy accounted for 66.3% and investment-linked accounted for 26.4% of FYPs. Traditional for 2.9% and health and PA increased to 4.5% of FYPs.

Please turn to Page 24 on FYP breakdown by channels and currencies. In terms of channels, contribution was mainly from bancassurance with 44% from CTBC Bank and 30.4% from external banks. Tied agent contributed 14.8% of FYPs; while insurance brokers, 9.6%; and others, 1.1%. On the right, investment-linked product accounted for 26.4%. Foreign currency policy accounted for 52.4% and NT dollar policy accounted for 21.2% of FYPs.

Please turn to Page 25 on FYPE. The second quarter FYPE was TWD 5.4 billion. First half year FYPE was TWD 11 billion. Market share was 6.2%, ranked #7 in the industry. On the right is the FYPE mix for your reference.

Please turn to Page 26 on investment asset mix. Total investment assets reached TWD 1.9 trillion, up 8.2% year-on-year. In terms of portfolio breakdown, cash accounted for 5.2%; domestic fixed income, 10.8%; overseas fixed income, 59.9%; equities, 8.5%, real estate, 4.4%; mutual fund, 8.4%; mortgage, 1.4%; and policy loans, 1.3%.

Please turn to Page 27 on investment yield, cost of liability and hedging mix. The first half year cost of liability was 3.28%, down 12 basis points due to lower declared interest rate. Investment yield after hedging was 3.92%. Recurring yield before hedging was 3.46%. In terms of hedging, 40% of overseas investment assets were foreign currency policy, while 60% of overseas investment assets were NT dollar policies, of which 62% were fully hedged, 14% were OCI position and 24% were unhedged. The second quarter hedging cost was up to 1.48% because of appreciated NT dollar. Annualized hedging costs were 1.18% for the first half year, down 17 basis point year-on-year.

My presentation will stop here. We'll now open for Q&A session.

[Operator]

[Operator Instructions] We're now in question-and-answer session. [Operator Instructions] And there appears to be no questions at this point, and we will -- I'll pass the call back to the management team.

[Yaling Chiu, executive]

Okay. Thank you all for joining CTBC's Second Quarter Analyst meeting. If there is no further question, then we conclude today's meeting. I'll see you next quarter. Thank you.

[Operator]

Thank you. And ladies and gentlemen, we thank you for your participation in CTBC Financial Holding Co.'s conference call. You may now disconnect. Goodbye.