CTBC Financial Holding Co Ltd
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CTBC Financial Holding Co Ltd
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Welcome, everyone, to CTBC Financial Holding Co.'s 2018 Third Quarter Earnings Conference Call. [Operator Instructions] Today's host will be Ms. Ya-ling Chiu, Executive Vice President and spokesperson of CTBC Financial Holding Co.; and Mr. Pai-Hung Yeh, Chief Operating Officer of Taiwan Life Insurance Co. And the presentation will begin now.
Thank you, everyone, for joining CTBC's 3Q '18 Earnings Call. Please turn to Page 3 for financial highlights.
Overall, at the holding level, net income in the first 9 months reached $31.2 billion. ROE and ROA remained high at 13.9% and 0.8%, respectively. EPS was $1.60. Our CTBC Bank PPOP increased 8% Y-o-Y, driven by widened NIM, expanded lending, growth of trading gains and wealth management fees.
Taiwan Life has been focusing on regular-paid and investment-linked products this year. Life insurance profit increased 14% Y-o-Y. Both were supported by increased investment income and declined cost of liability and partly offset by rising hedging costs.
Operating expense growth was moderate Y-o-Y. If excluding ESOP impact, cost/income ratio improved to 57% in 9 months '18 from 58% in 9 months '17.
On asset quality, NPL ratio was 0.4%, with NPL coverage ratio of 315%. Credit costs remained benign at 19 basis points in the first 9 months. Capital positions remained adequate. Holding CAR was 123% and double leverage ratio was 118%. Bank CAR stood high at 14.2% and CET1 ratio was 11.7%. Taiwan Life RBC ratio was 310%.
Page 4 and 5 on profitability. Third quarter net profit reached $9.3 billion, down 3% Q-o-Q. First 9 months net profit was $31.2 billion, up 1% Y-o-Y. EPS was $1.60. ROE was 13.9% and ROA was 0.8%.
Page 6 on capital ratio. We remain well capitalized with group CAR at 123%, bank CAR at 14.2% and Tier 1 ratio at 12.9%. Life RBC ratio was 310%.
Page 7 on profit breakdown by legal entity. In 3Q, Bank profits reached $6.8 billion, flat Q-o-Q driven by sequentially increased net interest income and fees, and partly offset by higher ESOP variations. Life profits reached $3.2 billion, down 20% Q-o-Q due to rising hedging costs despite of increased dividend income and net interest income.
In the first 9 months, Bank profit reached $22.8 billion, up 2% Y-o-Y. Our main improvement, loan extensions as well as growth of trading gains and wealth management fees. Life profits reached $10 billion, up 14% Y-o-Y on enhanced investment income and lower cost of liability. Holdings net profits came in at $31.2 billion, up 1% Y-o-Y. In terms of profit breakdown, Bank and Life contributed 73% and 32%, respectively.
Page 8 on net profit movements. In 3Q, operating revenue was down 2% Q-o-Q, reflecting sequential growth of net interest income and fees, but a decline of trading gains due to a high base in 2Q. Provisions were down 29% Q-o-Q due to higher specific provisions in 2Q. Expense was up 8% Q-o-Q mostly on ESOP valuations. Excluding ESOP, operating expense was up 2%. Insurance pretax profit was down 39%, due to higher hedging costs. Overall, net income reached $9.3 billion, down 3% Q-o-Q.
On the bottom, for the first 9 months, operating revenue was up 6% from increased net interest income, led by loan growth and NIM improvement. Wealth management fees and trading gains also showed growth. Provisions increased partly due to recovery at TSB in 1Q '17.
Expense was up 6% Y-o-Y on higher ESOP valuations. Insurance pretax profit was up 5%, benefited from improved investment income and declined cost of liability, partly dragged by increased hedging costs. Overall, net income reached $31.2 billion.
Page 9 on revenue breakdown. Total revenue was down 2% Q-o-Q and up 6% Y-o-Y. Net interest income was up 3% Q-o-Q and 10% Y-o-Y driven by loan growth and NIM improvement. Fee income was up 3% Q-o-Q and growth of wealth management, corporate lottery and overseas subsidiary fees. Fee income was down 1% Y-o-Y as growth of wealth management and retail fees was offset by decline of credit card and lottery fees.
The combined derivatives, FX and trading gains, was down 16% Q-o-Q due to lower capital gains on foreign exchange-related products and equities. The combined derivative FX and trading gains was up 13% Y-o-Y from capital market gains on interest rate products.
Page 10 on Bank lending portfolio breakdown. Total lending with credit card revolving at the end of September was $2.3 trillion, representing a growth of 1% Q-o-Q and 5% Y-o-Y. NT dollar corporate loan was up 1% Q-o-Q and down 2% Y-o-Y. If excluding government loans, corporate loan was up 4% Q-o-Q and 2% Y-o-Y due to stronger demand for working capital.
Foreign currency loan was flat Q-o-Q and up 5% Y-o-Y.
Mortgage continued to grow 3% Q-o-Q and 11% Y-o-Y, supported by the recovery of the property market and our exclusive government contract for lending to civil servants. Unsecured lending was up 2% Q-o-Q and 5% Y-o-Y. Credit card revolving was up 3% Q-o-Q and 9% Y-o-Y as consumptions continue to grow.
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 1% Y-o-Y, supported by growth at U.S., Indonesian and Philippine subsidiaries. Overseas branch loan was up 13% Y-o-Y, driven by expansion of client base and strengthened demand for working capital in Hong Kong, China, Tokyo, Singapore and Vietnam branches. OBU plus DBU was up 8% Y-o-Y, driven by demand for working capital.
Page 12 on Bank deposit mix. Total deposit as of September reached $3.1 trillion, of which foreign currency accounted for 48%. On the left, saving deposits increased to 59% of total NT dollar deposit. On the right, savings deposit increased to 51% of total foreign currency deposits.
Page 13 on loan-to-deposit ratio. Overall, LDR was 74%, NT dollar LDR was 81% and foreign currency LDR was 67%.
Page 14 on NIM and spreads. In 3Q, foreign currency spreads were down 2 basis points Q-o-Q to 2.29% due to interest from early repayments at TSB in 2Q. If excluding this impact, foreign currency spreads were up 3 basis points. NT dollar spreads were up 1 basis points to 1.61%. Overall spreads were [up] 1.89%. NIM was up 1 basis point Q-o-Q to 1.5% due to improved yields on marketable securities despite of lower LDR.
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 fee were up 5% Q-o-Q and down 2% Y-o-Y. Wealth management fee was up 11% Q-o-Q, driven by 14% growth of bancassurance fees and 5% growth of mutual fund fees. Wealth management fee was up 4% Y-o-Y driven by the growth of bancassurance and mutual funds fees.
Credit card fee was down 17% Q-o-Q and 15% Y-o-Y due to higher redemption of LINE Pay card rewards despite our continued growth of credit card consumptions and commissions as consumptions were boosted by LINE Pay cards to grow 34% Y-o-Y. Revolving balance was also up 9% Y-o-Y.
Retail business was flat Q-o-Q and up 6% Y-o-Y from loan-related and ATM fees. Corporate business was up 9% Q-o-Q due to higher fees from cash management. And Corporate business fee was down 1% Y-o-Y as growth of cash management, custodian and security brokerage fees was offset by shrinkage of syndicated loan fees.
Overseas subsidiaries fee was up 16% Q-o-Q from higher corporate loan fees at TSB and down 3% Y-o-Y, mostly due to lower wealth management fees at TSB.
Lottery fee was up 8% Q-o-Q due to new product launch in 3Q, and was down 8% Y-o-Y due to lower accumulated jackpots this year.
Page 16 on wealth management fees. On the right, bancassurance accounted for 65% and mutual funds accounted for 32% of total wealth management fees.
Page 17 on cost/income ratio. Cost/income ratio increased to 65% in 3Q and 60% in the first 9 months mostly due to higher ESOP valuations. If excluding ESOP impact, cost/income ratio was 59% in 3Q and 57% in 9 months.
Page 18 on asset quality. Asset quality was benign with NPL ratio at 0.4%. NPL coverage ratio increased to 315%.
Page 19 on credit cost. 3Q credit cost dropped to 19 basis points due to specific provisions last quarter. First 9 months credit cost was 19 basis points, up 9 basis points Y-o-Y due to more general provisions resulting from loan growth this year and recovery at TSB last year.
Moving on to the Life business, Page 20 on total premiums. Total premiums reached $211 billion in the first 9 months, up 2% Y-o-Y. Market share was 8%, ranked #6 in the industry.
Page 21 on first year premium. FYP reached $107 billion in the first 9 months, up 4% 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, 34% from external banks, 38% from CTBC Bank and 9% from insurance brokers. On the right is the product breakdown. Interest sensitive has lowered to 70% and investment-linked accounted for 27% of FYP.
Page 23 on FYP breakdown by types of payment and currencies. On the left, mix of single-paid products has dropped to 44% of FYP and regular-paid products accounted for 29%. On the right, foreign currency policy accounted for 30% of FYP.
Page 24 on FYPE. First 9 months FYPE reached $19.3 billion. Market share was 8%, ranked #6 in the industry. On the right is the FYPE mix for your reference.
Page 25 on investment asset mix. Total investment asset reached $1.6 trillion, up 16% Y-o-Y. Taiwan Life reserved a higher cash position for financial investment opportunities. In terms of portfolio breakdown: Cash accounted for 5.4%; domestic fixed income, 8.6% -- 8.7%; overseas fixed income, 64.2%; equities, 9%; real estate, 5.1%; mutual fund, 4.4%; mortgage and policy loans, 3.2%.
Page 26 on investment yield, cost of liability and hedging mix. First 9 months, investment yield was 3.94%, impacted by higher hedging costs. Cost of liability continue to improve, dropped 7 basis points Y-o-Y to 3.63%. In terms of hedging, 65% of overseas investment assets were NT dollar policies, of which 73% were fully hedged.
This will conclude the presentation and we can now open for Q&A.
[Operator Instructions] And the first question is coming from Anthony Lam from HSBC.
A few questions on the Bank side and one on the Life side. I think firstly, in terms of loan growth, if I remember correctly you're basically guiding for, I think, high single-digit loan growth for this year. I think up to third quarter loan growth, it's about 3% -- I mean, 5% year-on-year. Just trying to check out what's the sources of weakness despite the foreign currency loan growth you mentioned in the presentation? That's one.
And on asset quality, I noticed on the appendix that there's about $1.3 billion new NPL formation in this quarter. Just trying to check -- it's actually close to $1.4 billion. Just trying to check whether this is related to special mentioned loans in Mainland China in the construction industry that you'd mentioned in the same quarter. And I mean -- I think certainly, I think on the bank, more broadly, [sort of grip same] cost/income ratio, [effectively] I think you mentioned is due to the ESOP because of more employees expanding their options. Just trying to check whether there's any risk that you can't keep the 58% to 59% of cost/income ratio.
And on your Life side, just trying to check the hedging performance. Could you give us a sense of what's the hedging cost for third quarter or first 9 months, and the balance of [ FYP served ESO ] recurring with. And I also noticed that the 10th in October, I think Taiwan Life also suffered loss. Was it related to hedging cost of [ fund ]? And what should we think about in terms of hedging costs going forward?
The first question about loan growth. We do maintain the high single-digit growth in first half. But in third quarter, it's down to mid-single-digit, about 5%. And the weakness is from a couple of countries that have -- like syndication is still down in Hong Kong and some clients pay down their loans in New York. And in Japan markets, loan growth is slower than expected. So this is the weakness about loan growth in the quarter. And the second question is about asset quality. As of September, the NPL did not include the construction company in China yet. For third question, it's about the C/I ratio. Because the employees' stock option, the stock price of CTBC rolls a lot in September. But in October, the stock price, coming down again. So for the full year, our C/I ratio still -- our estimation for our C/I ratio was still maintained at 58% to 59%.
For the hedging cost, for the third quarter is 1.49%. It's higher than half year. And ESO in September, the hedging cost raised 1.05%. The reason why the third quarter is the higher than first half of -- first half year is that we have well positioned denominated RMB. RMB depreciated 3.9% in the third quarter. It caused a $0.7 billion loss, that's why the hedging cost have gone up in the third quarter, the major reason.
And the foreign -- the currency result is -- at the end of September is $1.7 billion and October is $2.3 billion. The hedging cost, we keep a target at 1.3% for '21 F. But that could change about why October is loss. The reason is we have a projection caused by fair value through P&L. The projection is for trading gains in the market. During October, the market dropped. In Taiwan market, it's 14%. In the U.S. market, it also dropped a lot. So it cost $1.7 billion loss in the October for this fair value through P&L position. Right now, we evaluate the performance and we will comment at the position at suitable timing.
Could I take the follow-up, I think one on the NPL? So if the current NPL ratio did not include the construction industry loan in China in third quarter, just wondering what gave rise in the new NPL formation in the third quarter of around $1.4 billion, and I think on the hedging cost side, just wanted to double check if I heard correctly is 1.25% in the first 9 months? And regarding the position in renminbi, I'm just trying to see whether you have similar plans as you had for, do you think, fair value through profit and loss position in overseas markets and domestic markets to terminate your position in that particular renminbi investment?
So the NPL increase in third quarter is because -- is due to the details in Singapore. It's an industry related to environment and going green...
Renewables or water purifying, right?
Water purifying, yes.
Okay. I think I assume that should be an idiosyncratic case and not really -- I think sometimes investors might be concerned more broad-based, I think, deterioration maybe in China or some other overseas countries. So I'm just trying to ask just to get a sense, that's actually not happening yet.
Actually, the construction company in China, the NPL will happen in October.
Okay. So that should also be isolated and it's not related to more broad-based deterioration in asset quality, do you think, in your overall foreign currency book or overseas books, is that correct? Is that the correct interpretation?
Yes, it's just a specific case, not the overall deterioration of asset quality in our view.
Okay. Okay, okay.
And the hedging cost of 1.25% is for the first 9 months. RMB position, because the percentages of our AUM is quite small, so we will keep the position.
All right. Just I guess curious whether you'll be concerned about, I think, further depreciation in RMB. Because I think the macro environment is getting pretty uncertain, so I'm not sure whether you also have some assets spread around in this RMB position to think of -- I think contain your exchange translation losses potentially.
Currently, our -- what are we doing is that we hedge in RMB to U.S. dollar and are hedging the whole U.S. dollar portfolio together. So maybe we still have time lag or time difference. But as I mentioned, the position is just RMB 7 billion compared to our assets is 1.8%. So it's quite small.
And the next question is coming from Sam Wong, Citi.
This is Sam Wong from Citi. I have 3 questions. The first one is what drove the strong FYP and FYPE growth in 3Q? And the second one, it's on recurring yield. So what is the prehedged recurring yield at 9 months '18, and how does it compare with current yield last year? Finally, just want to quickly confirm if currently the full year loan growth forecast is at mid-single-digits.
For the loan growth outlook for this year, the weakness we just mentioned about third quarter loan growth is because syndication is still down and some clients paid down. But other than that, other loan growth still maintain the momentum of how we expected in third quarter. So in fourth quarter, we still remain our outlook of loan growth about mid- to high single digits.
For FY '18 loan growth, the regular-paid growth at 12% compared to last quarter, and the foreign currency policy growth of 38%. But I think total premium growth 62% that we have. We stopped sales of single premium products in the third quarter. It has had a stop-selling event in the third quarter. But after that, for the -- but in the after -- we don't have any single product -- single premium product. For the recurring years, 3.8% compared to last year is, what, 3.66%.
All right. Just 2 follow-up questions. So the -- can I interpret that as the FYP and FYPE growth was mainly driven by the newly launched single premium products. And the breakeven point was Taiwan Life according to the Mandarin conference call should be 3.08%, is that correct?
I would like to clarify that the product in the FYP in the third quarter was not due to the new single premium product that we launched. Basically, we actually stopped selling single premium products during third quarter. Certainly, we stopped selling that before the start of the December quarter. That's why we brought up single premium product in the third quarter.
The breakeven point is 3.08%.
[Operator Instructions] And the next one is coming from Anthony Lam, HSBC.
Yes, it's me again. I think I have another question around wealth management. I observed that the wealth management fee actually did okay in third quarter. I think it was up 3% year-on-year and it's better than some of your peers' performance. Just trying to get a sense how you really mainly get through the market volatility to maintain some sort of growth in wealth management, could you give us a sense of how you achieved that?
Our performance is outperforming our peers in third quarter. I think that's because we maintained a good relationship with our customers, and we have long-term franchise value in the market and our customers trust our advisory. Because we -- others -- not the same -- different from our peers, we don't do product push. We don't do product hard push. We -- instead, we do overall asset portfolio allocation based on our customer's risk-taking appetite. So that's the long-term relationship with customers, rather than just short-term hard push. I think that's the reason that we can outperform our peers.
[Operator Instructions] And the next question is coming from Gurpreet Sahi from Goldman Sachs.
Yes, it points for begging the question regarding credit cards. So as you said, your credit card fees are falling, whereas for industry it could not be falling as fast. So can you tell us the reason as to why there is this sort of underperformance?
The credit card fees is falling because it's affecting our LINE Pay co-branded card. Because the LINE Pay card has been so popular, so actually their consumption volume actually grew about 34% year-on-year. But for this year, actually, we give 2% LINE point as the rebate. And given the popularity of the LINE points, the redemption rate for LINE point is actually much higher. So as a result, we actually see the credit card fee income decline.
However, as we highlighted earlier, the consumption fee is growing and also the revolving balance is growing. And also we have -- up to end of September, we have already issued 1.8 billion cards -- or million cards, and we target to issue up to 2 million cards already in this year. So it's actually very successful to acquire [indiscernible] customers, especially for this card, 50% are new customers and around -- also around half of our cardholders are so-called younger generation, so they are the potential customers for CTBC as well. Yes, so this was -- this card is actually more like for customer [appreciation], and it's actually also very successful for acquiring new customers. And we also see the success the of LINE Pay card, so we have also start to rethinking the loyalty program for next year. So there might be some changes to our loyalty program for LINE Pay cards next year.
Okay. So it seems that you increased the LINE fee or the payout with LINE, so you've got less fees to keep for yourselves, although you had more volume of cards. So as far as modeling is concerned -- as you say, it was your target for this year in terms of volume. So as far as modeling is concerned, for next year on, if you increase the loyalty points again, there could be a similar decline despite the volume growth, am I right in thinking it that way?
Just to clarify. So the question about if we change the loyalty program, it might be hurt our [ card ] consumption for 2019, is that the question?
The question is really trying to understand how to model credit card fees versus volume. So industry volumes are rising and yours recorded some volume numbers for you that shows that there is a rise, right? But I'm still -- on the revenue, it's negative because you increased your loyalty payout to the customers, where you had to pay out a bit for LINE. So next year onwards, how should we about modeling this, should that payout be increasing and in the rebate for loyalties?
Yes. Actually, for the LINE Pay card, as you see that -- because we gave out the LINE points of the -- I mean, rebate, and so it's deducted directly from the fees. So as a result, we see the fee income of credit cards declined. However, for our total credit card business, it's still profitable, because for Line Pay cards we have very little marketing expense and also we don't have [appreciation] costs. Unlike other credit cards, they have cost structure and revenue structure is a bit different. They have probably lower fee costs deducted from the total [ number ]. They're probably bearing higher marketing costs and [appreciation] costs.
So for CTBC, I think we're probably the only one or the only [indiscernible] bank in Taiwan making profit around the credit card business. So we actually do see our credit card business structure as still very healthy. And as I mentioned there, we are rethinking the rebate program. It's not necessarily increasing the rebate, but probably we're trying -- probably design a different type of loyalty program. So continue to give benefit to our customers, while we might -- I mean, instead of the -- give up the rebate directly, we might change the loyalty program a little bit. So it's still under discussion and will be announced by the end of the year. So hopefully, that will help to put up fee income from credit card next year.
[Operator Instructions]
There appears to be no further questions at this point. We thank you for your questions. That could -- and that would be the end of the conference. And we thank you for your participation in CTBC Financial Holding Co.'s conference call. You may now disconnect. Goodbye.