CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Analysis

CTBC Financial Achieves Robust First Half and Eyes Shin Kong Acquisition

CTBC Financial Holding reported a strong first half of 2024, achieving a net profit of TWD 37.2 billion, a 29% increase YoY, and an EPS of TWD 1.85, with an ROE of 17.5%. CTBC Bank showed double-digit growth, with a net profit of TWD 23.2 billion, up 11% YoY. Taiwan Life saw a remarkable 154% increase in net profit, reaching TWD 13 billion. CTBC has initiated the acquisition of Shin Kong Financial Holding, planning to acquire up to 51% of its equity. This acquisition aims to strengthen CTBC's regional presence and enhance shareholder value with continued profit growth expected in the second half of the year.

Financial Performance Highlights

CTBC Financial Holding delivered record-breaking profit performance in the first half of the year, with a net profit of TWD 37.2 billion, reflecting an impressive 29% growth from the previous year. The earnings per share (EPS) stood at TWD 1.85, with a return on equity (ROE) of 17.5%. The core subsidiary, CTBC Bank, also showed remarkable performance with a net profit of TWD 23.2 billion, an 11% increase year-over-year. Taiwan Life, another significant contributor, recorded a net profit of TWD 13 billion, a staggering 154% increase.

Subsidiary Contributions

CTBC Bank achieved robust profit growth, driven by increased fee income and trading income. The bank's deposit and loan basis grew steadily, with a loan growth of 8% year-over-year. Taiwan Life's success was primarily due to favorable capital market conditions and effective hedging strategies, driving capital gains. Additionally, other subsidiaries, including securities and venture capital, also performed well, benefiting from a buoyant stock market.

Acquisition of Shin Kong Financial Holding

CTBC has approved a significant investment to acquire Shin Kong Financial Holding. The acquisition price is set at TWD 14.55 per share, comprising 0.3132 shares of CTBC common stock and TWD 4.09 in cash per Shin Kong share. CTBC plans to acquire between 10% and 51% of Shin Kong's equity. This strategic move is expected to enhance CTBC's position as a major international financial institution and drive shareholder value.

Capital and Asset Quality

CTBC remains well-capitalized with a group capital adequacy ratio (CAR) of 118%, and CTBC Bank's CAR at 13.5%. The bank's asset quality remained stable with a non-performing loan (NPL) ratio of 0.53% and an NPL coverage ratio of 306%. Credit costs increased due to higher provisions amid loan growth, reflecting prudent risk management practices.

Revenue and Profit Breakdown

In the first half of the year, total revenue excluding Taiwan Life increased by 11.7% year-over-year. Net interest income, despite a decline, was compensated by robust fee income and trading gains. The bank's net profit decreased in Q2 due to seasonal effects and higher provisions, but overall first-half profits reflected positive growth.

Future Outlook and Guidance

Looking ahead, CTBC expects steady profit growth driven by emerging technologies and domestic consumption. The company anticipates Taiwan's GDP growth to range between 1.3% to 2.8% for the year. The global financial market outlook points towards potential rate cuts in the upcoming Fed meetings, which could alleviate hedging costs and boost investment opportunities.

Sustainability and ESG Initiatives

CTBC Financial Holding continues to prioritize sustainable development, being included in the S&P Global Sustainability Yearbook for the fifth consecutive year. The company is actively engaged in international sustainability initiatives and has published Taiwan's first nature-related financial disclosure report according to TNFD guidelines.

Earnings Call Transcript 2024-Q2

[Unknown Executive]

Dear investors online, thank you for your patience. Thank you for joining CTBC Financial Holding's 2024 Q2 Earnings Call. Today's meeting will be chaired by CTBC Financial Holding President, Rachael Kao. Also in attendance are CFO, Megan Hsu; Chief Strategy Officer of Taiwan Life, Pai-Hung Yeh; and Head of IR, Justine Shen.

As we start the meeting, your phones will be on mute. And after the presentations, we will start to take your questions. So now I will hand the microphone over to President, Kao.

[Rachael Kao, executive]

Good afternoon, investors, analysts and media representatives. We apologize for the technical difficulties, which delayed our start, but everything is okay now. Sorry to keep you waiting. So again, thank you for joining CTBC Financial Holding's 2024 Q2 Earnings Call. Today's conference will be divided into 2 main parts. The first part is our routine report on our Q2 performance. And the second part is an update on the M&A deal that was announced last week. So let me first provide a summary of our performance for the first half of the year.

CTBC Financial Holding delivered outstanding profit performance in the first half of the year, achieving record highs. Our pretax profit reached TWD 46 billion, with a net profit of TWD 37.2 billion, representing an almost 30% growth compared to the same period last year. EPS was TWD 1.85, and ROE was 17.5%. In terms of our subsidiaries, our core subsidiary, CTBC Bank, achieved a double-digit growth. And in the first half, our pretax profit reached TWD 30 billion, a 14% increase Y-o-Y, marking a record high for the bank.

Our net profit was TWD 23.2 billion, 11% increase. That's also setting a record high if you exclude the purchase of Tokyo Star Bank in 2014 with a one-off gain. So our bank's operations benefited from the global capital market upturn, driving growth across various businesses. So compared to the same period last year, overall we grew by about 1%. The bank's deposit and loan basis also grew steadily, maintaining a well position. So the year-over-year increase in loans in the first half was 8%.

And in terms of our overseas subsidiaries, we also saw success in the first half. Our overseas pretax profit was TWD 11.3 billion, and that's a 10% increase compared to the same period last year. So the overall overseas profit now accounts for 38% of the bank's total profit. Our second largest profit engine Taiwan Life recorded a net profit of TWD 13 billion in the first half. That's a 154% increase compared to same last year. So that's also primarily due to the active capital market, and we also had a timely disposal of financial assets. And a stronger U.S. dollar and also effective hedging also worked in our favor.

In the core insurance business, sales of interest-sensitive and investment-linked policies increased. So our FYPs grew by 19% year-on-year. Other subsidiaries, including securities, VC and investment also benefited from a rise in Taiwan's stock market. So our fees income increased, our assets under management grew by 30% and VC investments also performed well, contributing to a steady profit growth.

So forward-looking, in terms of our outlook, the Q1 export number in Taiwan grew by about 10% year-on-year. And in the second half, due to a higher base, the growth might slow down, but our assessment suggests that due to the demand for emerging technology, applications and also domestic consumptions, we can still drive good growth. So we expect the GDP growth in Taiwan will go from 1.3% to 2.8% this year.

Regarding the global financial markets, we believe that in the next 3 Fed meetings, we should see rate cuts. And we do not expect significant changes in NT dollar interest rates by year-end. So overall, we anticipate continued steady growth in our bank's profits in terms of Taiwan Life. We also will benefit from the rebound of business momentum and also the Fed's rate cuts should also help reduce our hedging costs and increase our opportunities to realize investment gains.

So as a result, we believe that CTBC Financial Holding will continue to perform well in the second half of the year. In terms of sustainable development, CTBC has been included in the S&P Global Sustainability Yearbook for the 5th year in the row. So we're also ranked in the top 5%. We are also actively participating in international initiatives.

And we have also published Taiwan's first nature-related financial disclosure, reporting accordance with TNFD. So our IR will talk about that more in detail later on. And in terms of the merger and acquisition, again, there will be another section dedicated to that, but I would provide some key highlights.

So CTBC held a special Board meeting on August 23rd, and we approved a major investment project. So in adherence to legal and regulatory principles, we have initiated the procedures to acquire Shin Kong Financial Holding. So the fair acquisition price is set at about TWD 14.55 per share. So the proposed consideration for each Shin Kong share is approximately 0.3132 shares of CTBC Financial Holding's common stock and another TWD 4.09 in cash. So we plan to acquire 10% to 51% of Shin Kong Financial Holdings' equity.

So on August 26, which is Monday, we submitted the application to the FSC, and if we are to combine with the Shin Kong Financial Holdings, we expect to become an international financial institution in the region so that we can fulfill our CSR and enhance shareholder value. Again, later on, we'll have more details.

So now I will hand it over to the IR team to present the Q2 financial performance.

[Justine Shen, executive]

Thank you. First, please turn to performance highlights on Page 4. Holding's net profit reached TWD 37.2 billion in the first half, up 29% Y-o-Y, and EPS was TWD 1.85, achieving a record high. Holding's ROE was 17.5%. CTBC Bank's net profit was TWD 11.1 billion in Q2 and TWD 23.2 billion in the first half, ranked top 1 in the industry.

Bank's capitalization was adequate, and asset quality remained stable. Taiwan Life reported net profit of TWD 13 billion in the first half, up 154% Y-o-Y, benefiting from decent investment gains. Other subsidiaries, including securities, venture capital and investments performed well, benefiting from favorable capital market's conditions.

Page 5, profitability. Holding's EPS was TWD 1.85 in the first half. Group ROE was 17.5%, and ROA was 0.9%.

Page 6, capital ratio. We remain well capitalized with group CAR at 118%, Life RBC ratio at 318%, bank's CAR at 13.5% and CET1 ratio at 10.8%.

Now, profit breakdown by entities. In Q2, bank's net profit reached TWD 11.1 billion, down 9% Q-o-Q, mostly due to lower lottery fees on base effects and higher provisions amid loan growth. Life reported net profit of TWD 5.4 billion, down 30% Q-o-Q, due to higher hedging costs and decreased capital gains on base effect. Holding's net profit was TWD 16.3 billion, down 22% Q-o-Q.

In the first half, bank's net profit reached TWD 23.2 billion, up 11% Y-o-Y, driven by robust fee income growth and increased trading income. Life profit was TWD 13 billion, up 154% Y-o-Y, benefiting from decent capital gains driven by positive capital market's condition. Holding's net profit was TWD 37.2 billion, up 29% y-o-y.

Net profit movements on Page 8 are provided for your reference.

Page 9, revenue breakdown, excluding Life, total revenue excluding Life was up 0.5% Q-o-Q and 11.7% Y-o-Y. Net interest income was up 2.2% Q-o-Q and down 3.4% Y-o-Y. Fee income was down 13.3% Q-o-Q and up 26.3% Y-o-Y. Trading income and others increased 25% Q-o-Q and 35.5% Y-o-Y, driven by fixed income related gains and swap income at the bank as well as equity related gains at securities and venture capital subsidiaries.

Now let's go to our banking business, starting with profitability. Bank performed well in the first half. Net profit reached TWD 23.2 billion, up 11% Y-o-Y, ranked top 1 among peers. ROE was 12.85%, up 39 basis points Y-o-Y. Next, on loan growth, total lending with credit card revolving was up 0.8% Q-o-Q and 7.6% Y-o-Y. NT dollar corporate loan was down 1.8% Q-o-Q, mostly due to declines in government-related loans, but lending increased in manufacturing, construction and real estate and commercial and services sectors. NT dollar corporate loan was up 3.7% Y-o-Y, driven by growth in manufacturing and government sectors. Mortgage was up 2% Q-o-Q and 9.8% Y-o-Y as business momentum remained stable. Unsecured and other loans increased 1.7% Q-o-Q and 9.2% Y-o-Y. Foreign currency loan was up 1.5% Q-o-Q and 8.3% Y-o-Y.

Next on foreign currency loan breakdown. Overseas subsidiaries accounted for 57.6% of foreign currency loans with TSB and LH being 2 larger subsidiaries. Overseas branches accounted for 32.7%. Overseas subsidiaries' loan was up 4.7% as business momentum sustained at every overseas subsidiary. Overseas branch loan was up 18.2%. Growth was especially strong in Greater China, New York and Tokyo branches, all reporting double-digit growth. OBU plus DBU loan was up 1.9% as customer demand gradually resumed.

Page 14, bank deposit mix. Total deposits reached TWD 5.1 trillion, up 1.2% Q-o-Q and 8.1% Y-o-Y. On the right, CASA accounted for 61.2% of NT dollar deposits. Time-deposits accounted for 62.6% of foreign currency deposits, down by 30 basis points Q-o-Q.

Page 15, loan-to-deposit ratio. Overall LDR was 71.9%. NT dollar LDR, 83.3%. Foreign currency LDR, 57%.

Page 16, NIM and spread. Entity and foreign currency spreads slightly declined in Q2 as time-deposits ratio went up, but yield of market securities increased, supporting NIM to remain flat in Q2, including swap income. NIM was 1.6% in the first half.

Page 17, fee breakdown. Total fees were down 15.1% Q-o-Q due to seasonal base effect and lottery fees. Total fees were up 25% Y-o-Y. Wealth management fee was down 2.3% Q-o-Q due to lower sales of structured products and bonds. Wealth management fee was up 36.7% Y-o-Y as sales of wealth management products increased supported by sustained sales momentum in favorable capital market's condition.

Corporate business was up 2.1% Q-o-Q and 26.5% Y-o-Y, driven by loan-related syndication, cash management and private banking fees. Credit card fee was down 0.7% Q-o-Q, but up 28.3% Y-o-Y as business momentum sustained.

Page 18, wealth management fee. For wealth management fee breakdown in Q2, the proportion of mutual funds increased, underpinned by strong capital market's performance.

Page 19, cost-income ratio. Cost-income ratio was 52% in Q2, improved Q-o-Q. In the first half, cost-income ratio was 52.3%, improved 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.

Page 20, asset quality remained stable with NPL ratio at 0.53%, down 1 basis point Q-o-Q, mainly due to declines in NPLs from debt relief program. NPL coverage ratio was 306%. Q2 credit cost was 39 bps, up 13 bps Q-o-Q as government-related loans declined while private corporate loans increased, leading to higher 1% general provisions. Credit costs in the first half was 32 bps, up 12 bps Y-o-Y, mostly due to increased provisions for debt relief program and 1% general provisions for growing corporate loans.

Now moving to Life business. Taiwan Life reported net profit of TWD 13 billion in their first half, up 154% Y-o-Y, supported by decent investment gains amid positive capital market conditions. ROE was 17%, increased by 7.6 percentage points. FYPs in the first half increased 19% Y-o-Y, driven by stronger sales of interest-sensitive and investment-linked products. FYPE was up 14% Y-o-Y.

On the left is the product breakdown. We can see the proportion of interest-sensitive and investment-linked policies increase. On the right, in terms of channels, the proportion of bancassurance channel increased reflecting rising sales of interest-sensitive policies. On the left, regular-paid products accounted for 53% and single-paid products 34% of FYPs. On the right, foreign currency policy accounted for 45% and NT dollar policy 42% of FYPs.

Page 26, investment asset mix. Total investment assets reached nearly TWD 2 trillion. The investment asset mix remained relatively steady.

Now, we can move to the next page, Page 27, investment yield. Cost of liability and breakeven point in the first half, overall investment yield after hedge was 4.44%, improved Y-o-Y, reflecting higher capital gains. Recurring yield before hedge was 3.5%, down 10 basis points Y-o-Y due to lower cash dividend income. Taiwan Life continues to maintain positive investment spreads against rising costs of liabilities and breakeven point.

Page 28, hedging mix. On the left, 41% of overseas investment assets was foreign current policies, 27% were fully hedged, 22% were unhedged. And the rest was OC1 position. On the right, FX reserve amounted to TWD 11.1 billion as of Q2. Hedging costs was 52 bps in the first half, improved Y-o-Y, benefiting from NTD depreciation.

Page 29, turning now to ESG highlights. CTBC Holding continues to leverage the power of impact financing by providing practical and innovative financial products and services. We recently published 2023 sustainability report, which detailed CTBC Holding's actions and performance on ESG.

The content on Page 30 to 33 highlights the sustainability developments and recognitions of CTBC Holding. For more information and concrete reports, you may also refer to CTBC's Investment Relations website. That concludes the presentation.

Now, we move on to the acquisition explanation. Now we're going to give you an explanation. On Page 1, you see an outline of this acquisition for your reference. And now, for this acquisition, we see that in many different sectors, they will benefit from this acquisition, which will be beneficial to maximizing the performance of the future company.

Now, we can see the comparison here. CTBC, in terms of asset size and net profit, ranks among the top 3 in Taiwan. And based on this performance, the future net profit will exceed TWD 60 billion. We have the potential and the ability. Our asset size is larger than that of Shin Kong so it is a stable approach for a larger company to acquire a smaller one.

On the next page, we see ROE. In terms of holding, bank and insurance, they are much higher than Shin Kong, and they rank among the top in the sectors. So the acquisition will immediately enhance the profitability of Shin Kong. And also through robust cash flows, the asset situations can be improved immediately. Now, in terms of securities, after the acquisition, there will be a very good complementarity effect between the 2 securities companies.

Next page. After the acquisition, holding, we have a robust team to carry out resource integration and to enhance efficiency to unleash Shin Kong's profitability potential. CTBC Bank in the short term can largely increase the number of branches and to provide customized services, and also, we have comprehensive and professional teams and products to have a synergy.

CTBC Bank is also the most international bank in Taiwan, and this can help corporate customers of Shin Kong as well. So for the existing corporate customers of Shin Kong, we can have cross-selling services available, and CTBC Bank can help Shin Kong with capital market income to improve the operating performance.

As for life insurance business, Taiwan Life can increase capital utilization efficiency to have a mechanism established, and also, the product size can also be enlarged to accumulate profits. So the 2 -- the know-how can be exchanged between 2 sides to better capture customers' needs. We can also strengthen intelligent tools to increase the accuracy of risk control, and a variety of products can increase selling opportunities. So this can also help with cross-selling effect.

As for the securities business, we can enlarge the size of business. The customers on both sides are -- can complement with each other, and also, we can increase the competitiveness of the investment bank, exchanging experience and increasing the service coverage ratio. We can also -- this can also help CTBC's securities with different types of businesses and to expand high-frequency transactions and trades. And through increasing the number of branches, we can have 53 branches, providing a more comprehensive service for customers. And CTBC can also issue -- can also provide a variety of other services.

Now, on the next page, you can see that through this acquisition, CTBC is expected to become the most international and most representative financial holding. And with Shin Kong's strategic value, we can strengthen our 3 main engines, which are bank, life insurance and securities. So a lot of things can be enhanced, and we can also -- with a larger size, we can also strengthen our risk controls to bring stable returns for shareholders. So this can overall enhance the value for CTBC, and CTBC Bank will be able to become a regional bank.

From CTBC Bank's perspective, Shin Kong Bank, if we look at Shin Kong Bank, in terms of these aspects as shown on the slide, CTBC Bank performs very well, ranking among the best in Taiwan, and the ROE is 11.9%, and Shin Kong is only 9.8%. So CTBC Bank will be able to enhance Shin Kong Bank's profitability. And through this larger size, we believe that there can be a scale -- economy of scale, and wealth management performance will also bring a lot of growth momentum to Shin Kong to further increase the profitability.

Now, in terms of Life business, Taiwan Life has always performed very well in these aspects, much better than Shin Kong Life. You can see the 2 numbers here, 3.76% and 3.63%. After the acquisition, the profitability can grow largely. And with a larger scale, we can better be positioned to face market volatilities. This is beneficial for increasing the entire profitability.

On this slide, you can see that CTBC Bank has successful experience of M&A. In 2015, we acquired Taiwan Life, and Taiwan Life turned profitable. And as of H1 this year, you see the number shown on the slide, and the market share goes from 2.4% to 8.5%. And thanks to positive spreads and larger sales team and capital strategies, Taiwan Life in 2026 can connect to ICS Regulations without much impact.

Now, we look at the past 3 years of CTBC Bank. If we look at the past 10 years here, the cash yield rate and payout ratio, 51% and 4.7%, among Taiwan's holdings, this ranks among the best. CTBC, you see net profit grows 29% Y-o-Y. So this year's profit, we expect can be even better than that of last year. So in terms of the dividend payout, we remain cautiously optimistic about this.

Shin Kong Holding's profit after tax is shown on the slide, and the total year, this year, the number is expected to be higher than this number, so the payout -- dividend payout should also be pretty good. We don't issue too many shares for this acquisition, so this shouldn't impact our dividend payout next year.

So this concludes our explanation on the acquisition case of Shin Kong. Thank you for your listening.

[Unknown Executive]

Thank you for the explanation. Some media and analysts have already raised some questions. So I'm going to answer these questions first. There's a question about bank. As of May this year, the loan exceeded TWD 40 trillion, which was a historic high in Taiwan, so the question is, what's CTBC's view on the second half of this year? In September, it is -- interest rates are expected to be lower, so will it impact such performance?

As I mentioned -- to answer this question, at the beginning, I explained already in terms of lowered interest rates by the Fed, this will help our customers reduce their capital costs -- lending costs, so they will be more willing to borrow money. So customers will be more willing to borrow money. And in terms of the cost composition, because of lower interest rates, capital cost can also improve as a result in the long run. So this is more beneficial for the bank. So this year's profit probably will not be affected by lowered interest rates.

The second question is also related to bank. In H2, are you more positive about NIM, fee income or transaction income? Which will be the best?

Well, these -- to answer this question, these are the 3 main sources for banks. So in terms of NII and fee or others, we will try our best to increase them. As for NII, this is related to the previous question as well, our position continues to accumulate, and lowered interest rates will increase customers' willingness to borrow money, and also, it will reduce cost. So NII should be better in H2, in the second half of the year compared to H1. Fee factors are more related to market factors. For example, wealth management fees, when the market is vibrant, such income will be more stable.

The third question, CTBC Bank's mortgage percentage, is it higher than 28% because the government's cap is 30%?

To answer this question, internally, we have our internal -- right now, it's lower than 28%.

And there's also a question -- another question here. To -- now we still have TWD 100 billion -- we are still TWD 100 billion between our current situation and in the cap and 30%.

So we will continue to do such businesses still.

So another question about mortgage, volume, total volume control, how do we respond to the Central Bank's policy?

We will try our best to maintain our customer relationships. So we will mainly focus on the needs that are based on houses lived by residents themselves, so the necessary housing needs basically. And every month, we have some room for paying back, so the impact shouldn't be that large.

Another question, without mortgage's growth momentum, what will be the main driver?

Well, to answer this question, mortgage is our -- one of our main sources, but we also have overseas loans and corporate loans. Mortgage accounts for 30%, but that is also unsecured, which is also an important source. We try our best to grow every possible source. So there isn't a gap to be fulfilled by other business. This question doesn't exist. We try our best to diversify our sources and to lower our risks. At the same time, we try to maintain a stable mortgage business growth.

There are questions about the acquisition, but we submitted the documents on Monday already, and our colleague just gave a very comprehensive explanation, so I shouldn't answer such questions too much. There are some procedural questions though. For example, the regulator will examine the feasibility or eligibility. So I'm not going to answer this question on behalf of the regulator.

And also there are questions about special shares. I think for these questions, once this acquisition project is approved by the regulator, these will become practical questions. Right now, we wait for the approval of the regulator before we give you more explanations. So these are questions related to CTBC Bank.

Now I'm giving the floor to Chen for Taiwan Life's business. So our call is focused on our performance highlights in Q2, so we cannot comment too much on questions related to the M&A.

[Unknown Executive]

Regarding Taiwan Life, there is a question about H1 investment net profit, how much of it is regular profit and loss?

Well, the number is TWD 34.3 billion, down TWD 500 million Y-o-Y. And interest income is TWD 1.2 billion more than last year. As for dividends, it's TWD 1.7 -- well, roughly TWD 2 billion.

Another question related to capital gains. In H1, in terms of capital gains, it was TWD 12.7 billion, TWD 11.2 billion comes from equities and funds and the others are from securities -- from bonds, sorry. Now if we look at the investment mix, domestic to foreign is 7 to 3. So this is the rough ratio.

Right now, in terms of Taiwan Life's foreign -- overseas investment, how far are we from the cap?

When we look at foreign currency policies and overseas bonds, we still have 8%. We still have a room of about 8%.

There's a question about if we do mortgage, there is very little, and mainly corporate customers. For individuals, it really depends on customers' needs, but that is not the main business that we want to promote, that we want to push forward. As for conventional premiums, the percentage goes down. The conventional policies grew by 17% Y-o-Y. So the overall premium goes up Y-o-Y, and traditional goes up, and investment link goes up even more. So that's roughly the situation.

Another question from the media. Capital gains, that I -- this one I already answered. As for equities and bonds, in terms of insurance, we focus more on bonds. The percentage is higher here on bonds. And the fact is hinting at lowering interest rates. So in the future, prices, the bonds will go up.

As for equities, I think Taiwan Life will look at market situations and changes to allocate our ratio between equities and bonds. As for FX reserves and the new rules and regulations, there are some that are being discussed by the media, and there are some different versions that will be included -- that will be -- so what are the items that will be put into the reserves?

I think it's up to the regulator for the final approval. Right now, if we look at the reserves being discussed now, the impact on Taiwan Life will be minimum, roughly TWD 900 million at maximum. And the impact is very small on Taiwan Life. In this case, we will be more conservative regarding our application.

As for the items to be put into the reserves, after IFRS 17, if the reserves are lower than on the book, then the gap can be considered to fulfill the FX valuation reserves. I think there will be more concrete numbers to be issued in the near future.

Our total full-year hedging cost, to answer this question, in H1, it was 52 bps. And for recent FX volatilities, 2 years ago, we used 1% as our full-year budgeting and target -- sorry, for the full year, we used 1% as our target. In terms of equities and bonds combined, it's positive TWD 18 billion in fixed income minus TWD 17.6 billion. So this is the unrealized levels. Now it's turned positive. It's positive TWD 400 million roughly.

That's it. Now we give the floor to our investors online. So Jason, please?

[Operator]

[Operator Instructions] Jemmy Huang, please?

[Jemmy Huang, analyst]

I have a few questions. First, could you update us on your outlook for NIM? You said 1.6% to 1.63%. In H1, it was 1.6% already. So in H2, is there downward pressure? Previously, I remember you said that it would be a double-digit growth, but after 6 months, in 2024, do you have a full-year guidance that is clearer? So what is the double-digit level roughly? I have 2 other questions about M&A. I don't know if I should ask them.

First of all, TWD 14.55, how did you get this number? I remember that in the press conference, you said that you didn't sign an MoU, so the due diligence was based on public data. If we look at public data, Shin Kong's net worth is TWD 16 billion to TWD 17 billion, but there are unrealized losses. Of course, they have some real estate unrealized profits. So from your perspective, are there hidden values that the market does not pay attention to so that your price is higher than that of Taishin? Taishin said that -- already said their words. So what's your take on this TWD 14.55 is the fair value according to your calculation?

And I also remember that in the press conference, you said that in 2026, Shin Kong would need to increase capital for ICS and IFRS 17. So by saying so, do you mean in 2026 only or 3 to 5 years after 2026, Shin Kong would need to increase capital either because the capital needs will be higher and higher if they want to connect to these international standards? So is it still true that RBC should be higher than 250%; otherwise, there would be capital injection to maintain it at a level higher than 250%? These are my questions.

[Unknown Executive]

Thank you for the questions. Well, in terms of forward-looking NIM, it's the -- it's between 1.6% and 1.63% as what we said last time. As for another question, the 4 years will also be a double-digit growth. Well, Shin Kong's -- a big part of Shin Kong is Shin Kong Life, so Mr. Chen will answer this question.

Another question from Goldman Sachs is similar. How did we come up with this price? So Mr. Chen, please answer these questions. Thank you. Sorry, Mr. Yeh, CSO of Taiwan Life.

[Pai-Hung Yeh, executive]

In terms of the valuation of Shin Kong, bank and securities -- for bank and securities, we use the market numbers for evaluation. As for life insurance, there are a few parts for our evaluation, first of all RBC. Previously, their RBC was insufficient. So over the past 2 years, their investment of it was limited -- their investment was limited. For example, their foreign investment, their equity investments were both limited. Right now, their RBC has turned positive again. So it's -- we look at this company as a normally functioning operating company in our evaluation.

As for the AC position, there's an unrealized loss of minus TWD 500 billion. Okay. The cost of liability is about 3.76%, 3.77% roughly, and the recurring income is 3.43% roughly. So these AC positions that they hold are held in the long run. If they are held in the long run, then there are some spread losses, which we reflect on our future profit estimations. In other words, they don't need to sell these unrealized losses of bonds. Well, if that's the case, then we observe the spread losses and reflect those on our calculation. This is the second part.

And the third part is that we also consider the asset adjustment. There is an opportunity for them to be closer to the experience of Taiwan Life, which is what we mean by synergy. Of course, the synergy will not be reflected completely on the price of TWD 14.55, only part of it will be reflected on this price of TWD 14.55 synergy. I mean, with a larger size and with more business, they -- these are also part of the synergy that we mean. Based on these few steps, when we look at their future profits, this is the range, and then, we reflect this range on the price. And this is roughly the logic.

Someone mentioned a while ago, that when it comes to connecting to international standards, will there be a gap? I think there are 2 parts in my explanation. First, in terms of reserves, internally, we have internal evaluation, and there are also evaluation from consultants. So among connecting to the international standards, there won't be a need to replenish the reserves. And also, upon that point in time, there will be a CSM of almost about TWD 100 billion. This is based on the information disclosed in their conference call. So there shouldn't be a need to increase capital in terms of IFRS.

As for ISC -- ICS, sorry, we have also done internal evaluation. So there are transitional and localization measures, and they will be able to pass because of these. In the future, every year, they will have a CSM of TWD 30 billion. This is a number from their earnings conference as well. So after our internal and consultant examinations, we believe that at the beginning of the application of ICS with transition and localization measures, there won't be a need to increase capital.

After the merger, the room for issuing bonds to raise funding is also large. And the cost is also limited because we get the fund, which we can use for investment. And in this situation, the cost is only the spread. So the cost is relatively small. With all this into -- put into consideration, when the standards are raised with ICS, these factors are also reflected in our price, in the price that we put forward.

Let me add some more information. According to the regulator, new rules, standards and regulations, well, for companies that comply with existing rules and regulations, they should be able to connect to new rules and regulations and standards. So if this is the case, then there shouldn't be a need to increase capital either.

Another question about Taiwan Life fund investment, 8.9%, how much of it is denominated by Taiwan dollar, but are overseas funds? And the number is 0.9%.

Let me add some information. There's a question from an investor saying, how did we decide TWD 40 billion were following what Mr. Yeh said? The way we came up with TWD 14.55, we, first of all, look at the recurring numbers. When they operate by themselves, what is the cash flow situation overall? And also, as Justine said, the synergy of operation, for example, increasing investment efficiency, enlarging using the strengths of the businesses from both sides. So with all these taken into consideration, we come up with the price, with the number as a result.

So in terms of the recurring profit, the value that we calculate is already higher than their current market price. So this is our view. As for TWD 14.55, this depends on CTBC 's operations synergy, and we then take it as a part of the standards with the foundation of our tender offer.

Another question here. How do we decide TWD 40 billion of cash combined with shares?

Well, to answer this question, in accordance with Taiwan's laws, there's a limit, so the capital used that we have already used, and between the capital that we use and the cap, there is a distance of 2.8 billion shares. So if we want to get 51% of their shares, then we can do the math accordingly, and then, we deduct the number of shares that we can issue times the share price of CTBC. So the remaining value then is supported by cash of TWD 40 billion.

As for the capital adequacy situation, this is the question, as of June, the BIS was 33.5%, CET1 10.8%, CET1-BIS ratio, 14.3%. In June, we issued a cash dividend, so the ratio was lower. But according to our estimation, in H2, with our earnings coming in, the BIS situation will be much, much higher than what the law requires.

Now let's return online. Jason, please help us collect the questions online.

[Operator]

Morgan Stanley, Peggy Shih.

[Peifan Shih, analyst]

I have 3 questions. First of all, I want to better understand the impact on NIM of lowered interest rates, you said that it would be positive. So for 25 bps, what would be the impact? And also FX swap gain, what is the impact on that? And also in H2, FX swap gain, what is the amount? That's the first question.

The second question, for the cost went up in H1 due to GP, but to follow up, American CRE loan situation, we see that some other peers, some other banks continue to have CRE provisions. So I want to -- I want to understand the asset quality situation in the U.S. in terms of CRE.

And you also said that you can be optimistic, cautiously optimistic about the dividend policy, it will be the same -- roughly the same as last year. But now the share count dilution is 14% due to this M&A, and this M&A initially will increase the double leverage ratio. According to my calculation, it's roughly 124%. I don't know if this calculation is correct. So will it impact your dividend policy? This is my -- these are my questions.

[Unknown Executive]

First of all, in terms of swap gain, in H1, the swap gained was TWD 6.4 billion, which is a growth of about 40% Y-o-Y. In terms of NIM, on the slides previously, you saw that in Q1 and in Q2, NIM with swap didn't change much. It was roughly 1.61% or 1.60%. When we observe the long-term trend, NIM at the lowest point was in May. And starting from June and July, 2 months in a row, swap, including NIM, was roughly 1.64%. The reason is mainly because in Taiwan in March the Central Bank raised the interest rates. And because of that, our position were repricing, so the loan interest rates went up gradually.

And second, time-deposit ratio, the highest level was in May. NTD plus foreign currency in May, it was 50.2%. This is the share of time-deposits, and it has gone down over the past 2 months. So this helps our spread as a result. So this is about NIM.

As for the full-year outlook, we remain at 1.6% to 1.63%. This range doesn't change. In H2, due to lowering interest rates, swap points may go down. But in terms of NIM, there's room for going up. So the 2 factors -- because of these 2 factors, our NIM will stay in the range of 1.6% and 1.63% roughly.

As for CRE loan, currently, our asset quality doesn't change -- hasn't changed much. This is roughly the situation. Our position is roughly the same as last quarter, which is about TWD 67 billion. This is our position. As for asset quality, our asset quality, in terms of reserves, it's TWD 25 million. And the NPL ratio hasn't changed much.

Do we have plans to increase capital? This is the question. Well, to answer this question, normally, if we look at our business, normal business this year, we don't have a plan to increase our capital. The only possibility is that in the future, if we want to continue to increase the investment percentages for Shin Kong, then we may need to increase our capital, but this awaits the approval of the regulator first.

To correct a number, I mentioned Taiwan NT dollar-denominated mutual funds overseas, the percentage should be 4%. So this is a correction of a previous number.

Another question from an analyst about next year's dividend. At the beginning, Justine said that our profitability situation probably will not affect dividend even with the M&A for Shin Kong, so you can think about this. Our net profit in H1 grew by about 30% Y-o-Y, so a reasonable estimation -- expectation is that when we pay out the dividend next year for this year, there is a high chance to achieve the same level of this year.

After acquiring Shin Kong, of course, there's a dilution effect for sure. Our view is this, in principle, our pricing is lower than their net value. This is how we put forward our price. And TWD 36.9 billion, we will be raising debt. So we don't -- we issue only 2.8 billion shares, so we don't issue too many shares. So the impact on -- the impact will not be too large. So this is our explanation about this.

Now we open the floor for questions online.

[Operator]

Alex Ye from UBS.

[Xiaoxiong Ye, analyst]

I have 3 questions. First, your -- it's also about your calculation for Shin Kong Life, you said that before 2026, there wouldn't be a need to increase capital. But the RBC in -- if there are some fluctuations of the RBC in H2, then there might be some problems. And Shin Kong promised that between 2023 and '25, they would increase capital by TWD 7 billion every year, so there's this gap. What is your consideration?

You mentioned CET1 11.4% for bank, CET1. But if we look at Shin Kong Bank, it's under 11%. So after the acquisition, I don't know what will be the CET1 level next year. Will it be able to achieve 11% next year? These are my 2 questions.

[Unknown Executive]

Shin Kong promised the regulator. Regarding this promise, when we look at their bank and securities, profits, they will be able to support this number of TWD 7 billion capital increase every year. In their plans, they talked about using their earnings or capital increase, so we maintain this basic assumption of theirs.

Let me add some information. If there is any insufficiency situation, Holding's profit will be able to support that. As for CET1 in CTBC Bank, will this project will last quite long in Phase I? It's public acquisition from 10% to 51%, and there will be Phase II. And after the acquisition, there will be a next -- another phase. So your question is more about different subsidiaries acquiring different...

[Unknown Executive]

We have also conducted similar calculations internally, but there might be many moving parts. So we will reserve our comments for now. Thank you.

Additionally, the size of Shin Kong Bank is not very large for us, accounting for about 20% of our total. Therefore, given the current strength of our bank's capital, I believe it should not cause significant impact.

[Operator]

The next question is from KGI's Eric Shih.

[Eric Shih, analyst]

I have 3 questions. First, you mentioned that the price is below net value. Does this mean the company expects to recognize a bargain purchase gain if the acquisition goes smoothly?

Secondly, when evaluating Shin Kong Life's future capital increase, has the company considered including the reserve for a difference between mortality gains and negative spreads in the capital? Has this been evaluated?

Lastly, after successfully acquiring 51% through a public tender offer, what is the estimated pro forma double leverage ratio by the end of the year?

One final question. Since Taishin Financial mentioned yesterday that they do not rule out increasing the price. If Taishin's management increased the price, will the company consider raising the offer further?

[Unknown Executive]

Some questions will be prepared by my colleagues. First, I will answer your question about Taishin mentioning yesterday that they do not rule out increasing the price. Our approach is a bit different from theirs. We are conducting a public tender offer for 10% to 51%. And the documents have already been submitted to the regulatory authorities. So we will first see how the application with the regulatory authorities goes. Hypothetical questions are difficult to answer at this point. Thank you.

Regarding the future capital needs of Shin Kong life, what are the reserves for difference between mortality gains and negative spreads is reflected?

Our current evaluation is based on the content of the transitional and localization measures that have already been announced. The reserve for the difference between mortality gains and negative spread is not included in our calculation.

Additionally, regarding the impact on our [ VOR ], if we proceed with the public tender offer for Shin Kong, the financial holding company investment regulation stipulates that if we acquire another financial institution during the consolidation period, the risk capital requirements can be calculated at 20%. In principle, during the consolidation period, it will have a positive effect on our related ratios. Of course, the situation after consolidation will depend on the circumstances at that time.

As for whether it is a bargain purchase or a goodwill, this depends on the market conditions on the day we can control of the other company. So it is not possible to answer this question now.

[Operator]

Thank you very much for your questions. The Q&A session ends here. We will now hand the time back to the President.

[Rachael Kao, executive]

Thank you to all the analysts and media representatives for participating today. We apologize again for the delay in today's meeting due to technical issues with the system and data uploading. We hope today's briefing has provided sufficient explanation of the performance from January to June this year. Thank you.

[Operator]

Thank you, President. Thank you all for your participation. Today's meeting is now concluded. You may disconnect at this time. Thank you. Goodbye.