CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to CTBC 2023 Second Quarter Analyst Meeting. Today's meeting will be hosted by Ms. Rachael Kao, Chief Strategy Officer of CTBC Financial Holding Company; Ms. Megan Hsu, CFO of CTBC Financial Holding Company and Mr. Pai-Hung Yeh, Chief Strategy Officer of Taiwan Life. Now we welcome Ms. Rachael Kao to give a brief remark.

[Rachael Kao, executive]

Good afternoon. Welcome to participate CTBC Second Analyst Meeting at Friday late afternoon. First of all, I will give you some highlights of second quarter performance for CTBC Financial Holdings. At second quarter, CTBC Financial made TWD 15.9 billion quarter-on-quarter 22% growth compared to last quarter and which performance was over expectation, especially for 3 reasons: first of all, is the rebound of the stock market. For investment units like Venture Capital, Securities and Taiwan Life, we see good performance of equity trading. And the second reason is for the dividend payout at the second quarter. The third reason is we saw Taiwan dollar depreciation in May and June, and we see a better result of remittance.

For CTBC Financial Holdings, the first 6 months, the after-tax net profit was TWD 28.8 billion, which contributed about [ 19% ] of the total earnings of last year 2022. And for the first half performance, we saw ROE at 16.2% and the EPS at TWD 1.48, which is the highest among all Taiwanese financial holding companies. At the core entity CTBC Bank. The first 6 months, we saw a net profit of TWD 21 billion, which was 29% increase year-over-year. As the overseas expansion, we saw the record high performance of TWD 10.2 billion, which also accounted for 38% of the earning of the total bank. And we continue to see the loan continue to expand and also the interest rate at high end. So we expect the bank can keep the momentum and the total earnings of this year we think can over last year and make a record high of this year. And for Taiwan Life, that's one uncertainty is given the interest rate at the high end, there's still struggling for fixed income investment and the uncertainty also comes for the fixed exchange rate if exchange rates continue to stay at this moment or depreciate further, that we may see some better results.

But if the opposite, maybe the Taiwan Life earnings will be impacted as well. So far, we see quite promising year of 2023. And then we will have my colleagues to give you more details of the first -- the second quarter performance. Thank you.

[Megan Hsu, executive]

Thank you, everyone, for joining CTBC's Second Quarter 2023 Earnings Call. Please turn to Page 4 on performance highlights. Holdings net profit reached TWD 15.9 billion in 2Q and TWD 28.8 billion in the first half up 22% Q-o-Q and 19% Y-o-Y, respectively. Holdings ROE was 16.2%, ranked #1 among peers. CTBC Bank's net profit was TWD 9.6 billion in 2Q and TWD 21 billion in the first half. The strong performance was driven by increased net interest income, fee income and trading gains. Bank's asset quality was stable and capitalization remain adequate. Taiwan Life reported net profit of TWD 6 billion in 2Q show a strong recovery Q-o-Q driven by dividend income, increased investment gains and lower hedging costs.

In the first half, Life's net profit was down Y-o-Y due to higher hedging costs. Taiwan Life continued to focus on long-term value products. Capitalization was strengthened with RBC ratio at 289%. Page 5 on profitability. Holdings EPS was TWD 1.84 (sic) [ TWD 1.48 ] in the first half. Group ROE was 16.2% and ROA was 0.76%. Page 6 on capital ratio. We remain well capitalized with group CAR at 116%, Life RBC ratio at 289%, bank CAR at 13.3% and CE Tier 1 ratio at 10.5%. Page 7 on profit breakdown by entity. In 2Q, Bank net profit reached TWD 9.6 billion, down 16% Q-o-Q, mostly due to lower lottery fees on base effects and higher provisions amid loan growth. Life net profit reached TWD 6 billion, driven by dividend income, increased investment gains and lower hedging costs. Holdings consolidated net profit was TWD 15.9 billion, up 22% Q-o-Q. In the first half, Bank net profit reached TWD 21 billion, up 29% Y-o-Y driven by higher net interest income, fee income and trading gains.

Life profit was TWD 5.1 billion, down 42% Y-o-Y mostly due to higher hedging costs and lower investment gains on base effect. Holdings reported consolidated net profit was TWD 28.8 billion, up 19% Y-o-Y. Page 8 on net profit movement for your reference. Page 9 on revenue breakdown excluding Life. Total revenue was down 4% Q-o-Q and up 25% Y-o-Y. Net interest income was down 1% Q-o-Q with foreign currency deposit mix change and increased swap positions caused net interest margin to narrow. Net interest income was up 12% Y-o-Y driven by sustained loan growth. Fee income was down 16% Q-o-Q, mostly due to seasonally high base of lottery fees in 1Q. It was up 11% Y-o-Y, to wealth management, lottery, credit card, retail and corporate fees increased. Fee income at investment trust and venture capital subsidiaries also grew.

Combined derivative FX and trading gains was up 11% Q-o-Q due to dividend income and swap income. It was up Y-o-Y driven by dividend income, swap income and commercial paper related gains as well as increased equity-related gains at Securities and Venture Capital subsidiaries. Long-term investment and other income was down Q-o-Q, but up Y-o-Y as the company booked disposal gains on the sale of the office floors in the first quarter this year. Page 11 on bank's loan breakdown. Total lending with credit card revolving was up 3% Q-o-Q and 14% Y-o-Y. NT dollar corporate loan was up 3% Q-o-Q, driven by growth in manufacturing, construction and real estate and finance and insurance sectors. NT dollar corporate loan was up 28% Y-o-Y driven by growth in manufacturing, construction and real estate, government-related, finance and insurance and commerce and service sectors.

Foreign currency loan was up 1% Q-o-Q and 6% Y-o-Y. Mortgage was up 4% 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 3% Q-o-Q and 10% Y-o-Y mostly on growth in unsecured consumer loan 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 60% of foreign currency loans with TSB and LH being 2 larger subsidiaries. Overseas branches accounted for 30%. OBU and DBU was 10%. Overseas subsidiaries loan was up 9% Y-o-Y driven by sustained business momentum in LH as well as U.S. and Philippines subsidiaries reporting double-digit loan growth.

Overseas branch loan was up 6%, as most overseas branches observed loan growth to sustain except Hong Kong, Vietnam and New York branches. OBU and DBU was down 7% Y-o-Y, as rising interest rate led to lower demand for loans. Page 13, on Bank's deposit mix. Total deposits reached TWD 4.7 trillion flat Q-o-Q and up 11% Y-o-Y. On the right, total NT dollar deposits were down 1% Q-o-Q and up 9% Y-o-Y. NT dollar savings accounted for 62%. Total foreign currency deposits were up 2% Q-o-Q and 13% Y-o-Y. Foreign currency savings declined to 42% of total foreign currency deposits as increases in U.S. dollar interest rates represent a strong incentive for depositors to shift from savings to time deposits. Page 14 on loan-to-deposit ratio. Overall LDR was 71.6% NT dollar LDR was 81.6%. Foreign currency LDR was 58.3%.

Page 15 on NIM and spread. In 2Q NT dollar spread was 1.84%, up 2 basis points Q-o-Q, driven by stable loan growth. Foreign currency spread was 2.6% down 5 basis points Q-o-Q as decline in CASA ratio and increased swap positions caused spread to narrow. 2Q NIM was down 7 basis points Q-o-Q to 1.48%. Including swap income, NIM was 1.7% in the first half. Page 16 on fee breakdown. Total fees were down 18% Q-o-Q and up 10% Y-o-Y. Wealth management fee was up 6% Q-o-Q, driven by increased sales of structured products, bancassurance and mutual funds. Whilst management fee was up 11% Y-o-Y as business momentum for structured products and mutual funds recover and increases in interest rates supported sales of bonds. Credit card fee was down 13% Q-o-Q as growth in consumptions push up commissions as well as credit card rebates.

Credit card fee was up 7% Y-o-Y, driven by increased consumption. Retail business was down 4% Q-o-Q and up 9% Y-o-Y, mostly driven by sustained growth in consumer loans. Corporate business was down 5% Q-o-Q mostly due to a high base of syndicated loan fees in 1Q and up 6% Y-o-Y, mostly driven by syndicated loan fees. Overseas subsidiaries fee was down 18% Q-o-Q as TSB booked higher loan-related fees in 1Q and down 2% Y-o-Y due to lower fee income at LH and U.S. subsidiaries. Lottery fee declined Q-o-Q on seasonal base effect and was up 15% Y-o-Y as product diversification supported stronger sales. Page 17 on wealth management fee. Bancassurance contributed 53%; mutual fund 23%; custodian interest 4%; and bonds and others, 20% to total wealth management fees in 2Q.

Page 18 on cost/income ratio. Cost/income ratio was 56% in 2Q, flat Q-o-Q and cost/income ratio in the first half, marginally increased Y-o-Y due to increased operating expense, along with growing operating revenue and higher ESOP valuation. Excluding ESOP valuations, cost/income ratio would be around 55% decline Y-o-Y. Page 19 on asset quality. NPL ratio was 0.49% and NPL coverage ratio was 334%. 2Q credit cost was 29 basis points, up 18 basis points Q-o-Q, mostly due to reversal of reserves in 1Q and increased provisions against new loans in 2Q. The first half credit cost was 20 basis points, marginally down 1 basis point Y-o-Y. Moving on to Life business. Page 21 on total premium first year premium and FYPE. Total premiums were TWD 32.9 billion in 2Q, up 16% Q-o-Q. The first half total premiums were TWD 61.1 billion, down 18% Y-o-Y.

2Q FYPs were up 45% Q-o-Q as sales of interest-sensitive policies and investment-linked products increased. The first half FYPs were down 40% Y-o-Y as the banking turmoil in the first half affected sales of investment-linked products and customers turn to tight deposits that capture rate hike trend. However, China Life has been focusing on long-term value products. FYPE was up 52% Q-o-Q and 17% Y-o-Y. 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 10%, traditional 2%, interest-sensitive policies, 77% and investment-linked products, 11% of FYP. On the right, in terms of channels, CTBC Bank contributed 38%; External Banks, 30%; Tied agents, 14%; and insurance brokers, 17% of FYP. Page 23 on FYP breakdown by type of payment and currency.

On the left, weights on regular paid products increased to 65% and single paid products accounted for 24% of FYP. On the right, foreign currency policy accounted for 52% and NT dollar policy, 37% of FYP. Page 24 on investment asset mix. Total investment assets reached nearly TWD 2 trillion as of 2Q. In terms of portfolio breakdown, cash accounted for 2.5% domestic fixed income, 8.8%, overseas fixed income, 61.3%, equities, 10.1%, mortgage, 2.4%; policy loans, 1.3%, real estate, 5.2% and mutual fund 8.4%. Page 25 on investment yield, cost of liability and breakeven point. In the first half, overall investment yield after hedge was 3.25%. Recurring yield before hedge increased by 86 basis points Y-o-Y to 3.6%. Cost of liability increased to 3.17%, reflecting rate hikes. Breakeven point was 2.89%.

Page 26 on hedging mix. On the left 43% of overseas investment assets were foreign currency policies, 33% were fully hedged. 10% were OCI position and 14% were unhedged. On the right, FX reserve amounted to TWD 12.7 billion as of 2Q. Hedging cost was 102 basis points in the first half increased Y-o-Y reflecting rising cost of hedging instruments. Page 28, on ESG highlights. CTBC Holding is committed to 2050 Net Zero and has submitted SBT targets to SBTi for review. In June, CTBC issued a sustainable finance statement, committing to exiting coal burning and unconventional oil and gas industries by 2035. We recently published the first TCFD report demonstrating our efforts to integrate climate change risk in our risk management and related opportunities in our business.

Also this year, we published the first impact investment report which disclosed how our impact investments correlated to UN sustainable development goals and 6 major impact themes. In addition, CTBC has been selected for 2 consecutive years as one of the companies listed as Asia Pacific climate leaders, compiled by the Financial Times for our efforts in reducing carbon emissions. That concludes the presentation.

[Operator]

And now we start our Q&A session. Before you entering your question, we already have some pre-ask question. Recently there are many questions regarding CTBC's China exposure, and we will have Ms. Rachael Kao to answer on this question.

[Rachael Kao, executive]

Yes. Given there's some news on China exposure of Taiwanese financial holding company in -- CTBC has been identified as one of the highest China exposure, financial institution in Taiwan. And let me explain the rationale behind. As of the most recent numbers, CTBC's financial -- CTBC Bank China exposure accounted for about 53% of the regulation. And the regulation counts or the financial institutions overseas and also onshore/offshore investment and loans and interbank borrowing and the ratio has to be below 100% of the equity. And as of the most recent number, CTBC was 53% in which the highest among all Taiwanese financial holding company.

Given that we think that although we are 53%, but within the portfolio, asset quality and also given the local environment, we think that the risk still under control, given that China is a first national rating country. And from our portfolio, for the 53%, that's roughly 30% is related to the lending or the investment to Taiwanese corporate and foreign investor. And for the real exposure to the Chinese company, it's only accounted about 22%. And the top 3 borrowers, first of all, it's Oppo and Vivo and the second one was Far East Horizon and the third was [ KKR ]. And those are kind of multinational or very famous financial-related exposure in China, and there's no relationship with China local developer. So the exposure to the recent problem company, Country Garden, that CTBC doesn't have any relationship or investment to this company.

And secondly, currently China is related exposure, the asset quality but still maintain benign that NPL ratio stayed at 0.21%. It still relatively low compared to other markets. And we are actually very small in Chinese market, and we are still very terrific and also build on our portfolio based on our strategy. So there's many -- the major customer segment for CTBC bank at China-related market is the expansion of Taiwanese corporation and most of the time, they are part of the global operation in China and also there's some supply chain. We make sure there's a real content operation in China. And also we understand all the fund management, and we watch very closely of the operation.

And besides that, China is part of CTBC global international strategy that's one of the major points we try to differentiate CTBC from other financial holding company given as I mentioned earlier, the overseas earnings contribution from overseas to CTBC Bank accounted for 38% and which was more than 50% growth year-on-year. So we continue to see very strong momentum from our overseas operation. So -- and China is a part of it. So we think although this current exposure was 53%. However, it's not a number, but the content and how we manage that. Our internal management [ pipeline ] was below 78%, and the government is 100% and from our past experience, that the ratio went the highest at 72%, 2 or 3 years ago.

And I think currently, it's down to 53%. We have been closely monitored the local business operation and also the asset quality. So we will continue to do so because it's part of our global strategy. And there's some explanation of the recent news on China exposure.

[Operator]

Now we have questions from Goldman. Why did the CET1 ratio drop by 130 basis points Q-on-Q. Can we increase this ratio by the end of this year to 10.5% to 11%?

[Rachael Kao, executive]

Yes, you're right. In addition to the dividend payment, it's actually increase of our operational risk capital charge due to the some faulty case at our branch. It's kind of mishandling of customers' fund and there's some overcharge of the operational risk and also the second part of your question is on the CET1, we think it's possible to come back to 10.5% at the year end of 2023.

[Operator]

The next question is the guidance for the swap gains for the second half 2023.

[Rachael Kao, executive]

The NIM of including the swap point, it's roughly for the full year, we forecasted at 1.68%.

[Operator]

The next question is the guidance for the fee income growth for full year 2023.

[Rachael Kao, executive]

For the fee income, I think early this year, we gave the guidance about high single digits for the full year. However, we see very good momentum from wealth management. So by looking at full year, we think it's possible to do, to be like double-digit growth for the fee income for the full year.

[Operator]

The next question is the outlook for insurance profit for second half post the decent second quarter performance can we kind of -- can Taiwan Life achieve [indiscernible] profit for year 2023?

[Unknown Executive]

And for this question, Taiwan Life actually remains its guidance for the full year which we previously gave out, the investment yield is remained to be 3.22% before -- after hedge and the recurring yield will be 3.52% before hedge. And so the guidance remained the same and for the profit for the second half, it really depends on the hedging cost. And so far, we see the hedging cost is 102 basis points, which is slightly better than the original full year guidance of 108 basis points. However, it really depends on the FX trend in the second half. If we do see better, the NT dollar to continue to be depreciated. It's possible that we will have some benefit from the hedging cost or some savings from the hedging costs. So it really is the area that we will keep on. And so basically, that's the guidance for Taiwan Life.

[Operator]

And next one, we have a question from JPMorgan. What is the CI ratio if excluding ESOP and ISA in first half versus first half 2022.

[Unknown Executive]

And the cost-income ratio of year '23, the first half is around 52.5%. And for last year, the same period is about 55.8%.

[Operator]

The next question is the FX reserve savings this year for Taiwan Life based on the new regulation.

[Pai-Hung Yeh, executive]

For FX reserve, the [ ceiling ] is TWD 13 billion reduced from TWD 74 billion. And the ceiling has been heated at the end of July.

[Operator]

And now we have another question. The U.S. 10-year yield was up a lot in third quarter, likely to impact book value of Taiwan Life. Any plan to further strengthen the capital of Taiwan Life, including any capital raising plans?

[Pai-Hung Yeh, executive]

Right now, our RBC ratio is 289%. And we can provide most of bond to amortization cost position. And for RBC calculation, also use the amortization measure. So the year up quite not impact the RBC ratio. And another perspective it will have an impact on our book value. But right now, as to mention, it's not very large because our amortization cost position percentage have 85%. So the impact is limited. So we don't expect any capital strengthen needs.

[Rachael Kao, executive]

Sorry, in addition to Pai-Hung's explanation, actually for Taiwan Life has issued TWD 13 billion of sub debt on July 21. So although in the material, you saw our RBC was 289% at end of June, if we pro forma the TWD 13 billion sub debt, it will become to 314% for your reference.

[Operator]

Now we are in the Q&A session. If you would like to ask questions, please type down your question. [Operator Instructions] It seems that we have no further questions. Thank you for attending CTBC Financial Holding Company's Second Quarter 2023 Analyst Meeting today. We see you next time. Bye-bye.