CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Transcript 2020-Q3

[Operator]

Welcome, everyone, to CTBC Financial Holding Company's 2020 Third Quarter Earnings Conference Call. [Operator Instructions]

And today's host will be Ms. Ya-Ling Chiu, CFO and spokesperson of CTBC Financial Holding Company; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Company. And the presentation will begin now.

[Unknown Executive]

Thank you, everyone, for joining CTBC's third quarter earnings call. Please turn to Page 3 on third quarter earnings highlights. Overall, CTBC Holding continued to deliver stable earnings amid COVID-19's impact on global economy. At holding level, ROE reached 13.6%, ROA at 0.76%, EPS at TWD 1.8. CTBC Holding maintained a balanced, diversified business model, ensuring resilient earnings, with the highest Q1 to Q3 earnings of all local bank holding companies. Holding also maintained well capitalized with CAR ratio at 115.77% and maintained decent double leverage ratio at 116.5%.

CTBC Bank observed stable momentum in its core businesses despite the negative impact from rate cuts and COVID-19 pandemic. It maintained sound domestic loan growth led by strong mortgages and consumer loans. Fee income from wealth management, retail business and lottery group saw credit card spending was lower due to the pandemic. For asset quality, NPL ratio rose to 0.48% due to individual default cases, though credit costs lowered to a normalized level of 23 bps in the third quarter. Capitalization remained strong with CAR ratio at 13.51% and CET1 ratio was at 10.97%.

For Taiwan Life, its after-tax net profit increased by 14.4% Y-o-Y due to strong investment gains and lower cost of liability. Life continued to adopt a value-focused strategy, and it also leads the industry with highest portion of interest-sensitive policy and foreign currency policy among peers. It also pursued a balanced, diversified investment policy aimed at improving recurring investment income. RBC ratio remained superior at 310%.

Please turn to Page 4 on ESG progress and updates. CTBC Holding established a new functional committee, Sustainability Committee, under the board in June 2020, with all independent Board directors serving as the committee's members. Holding also became first in Taiwan to join the PCAF global carbon accounting partnership in October 2020 and signed on to the TCFD recommendations in April 2020. It is also the first financial institution to receive the Award of Excellence in Energy Management from the UN Clean Energy Ministerial. And it is the constituent stock of the MSCI Taiwan ESG Leaders Index, DJSI World & Emerging Markets Index, FTSE4Good Index Series and Taiwan SE Corporate Governance 100 Index.

For CTBC Bank, CTBC Bank became an Equator Principles signatory in January 2019 and adopted the Principles for Responsible Banking in December 2019. Moreover, it is the first in Taiwan to issue a green bond in 2017 and a sustainability bond in November 2020, also supporting clean energy development by serving as a lead arranger for Taiwan offshore wind power project financing. In addition, it was named as one of the top-performing financial institutions in the Fair Treatment of Customers and COVID-19 relief program by the Financial Supervisory Commission in July 2020.

Taiwan Life adopted the Principles for Responsible Investment and incorporated ESG considerations into investment analysis and decision making, also published the PRI report in July. In addition, Life adopted the Principles for Sustainable Insurance and continued to develop financial inclusive insurance products and services and published the PSI report in November. Life also lead Taiwan industry in investment in domestic solar and offshore wind power generation projects and continuously participate in green investments.

Page 5 and 6 on profitability. CTBC Holding's first 9 months net profit was TWD 36.13 billion, decreased by 5.4% Y-o-Y. EPS was TWD 1.8. Group ROE was 13.6% and ROA was 0.76%. Page 7 on capital ratio. We remain well capitalized with group CAR at 115.8%, Life RBC ratio at 310%, bank CAR at 13.5%, Tier 1 ratio at 12%.

Page 8 on profit breakdown by legal entities. In the chart above, in the third quarter, bank profits were TWD 7.98 billion, grew 57.1% Q-o-Q, while profits were TWD 7.76 billion, grew 98.4% Q-o-Q. Holdings consolidated net profit reached TWD 16.95 billion, grew 141.5% Q-o-Q. In the below chart versus September, bank net profit reached TWD 21.46 billion, down 14.9% Y-o-Y, while profits were TWD 15.91 billion, up 14.4% Y-o-Y. Holdings consolidated net profits were TWD 36.13 billion, down 5.4% Y-o-Y. On the chart on the right, bank and Life contributed 59% and 44% of first 9 months earnings, respectively.

Page 9 on net profit movements. In the above chart, operating revenue was up 3.8% Q-o-Q with the growth in fee income. Provisions were down 56.4% Q-o-Q and expense was down 7.4% Q-o-Q, mostly reflecting lower ESOP valuation expense. As for Life, benefited from increased dividend income and continuously improved cost of liability. Life pretax income increased by 65.4% Q-on-Q. Holdings pretax income was TWD 18.6 billion and holding net profit was TWD 17 billion, up 141.5% Y-o-Y.

On the bottom, operating revenue was down 4.3% 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 gains. Provision was up 162.9% and expense was down 6.1% Y-o-Y, reflecting the decrease in ESOP valuation. Insurance pretax profit was up 13.4%, benefited from investment income and decreasing cost of liability. Overall, holding pretax income was TWD 44 billion, slightly down 6.2%. Holdings after-tax net income was TWD 36.1 billion, down 5.4% Y-o-Y.

Page 10 on revenue breakdown, excluding Life. Total revenue was up 3.8% Q-o-Q, down 4.3% Y-o-Y. Net interest income was down 0.4% Q-o-Q due to rate cuts, up 0.5% Y-o-Y as NT dollar loans grew 6.5% Y-o-Y. Fee income was up 25.7% Q-o-Q, benefited from wealth management, lottery, overseas subsidiaries, corporate and retail fees. First 9 months fee income grew 2.1% Y-o-Y, as bank fee grew 0.2%, attributing to the growth in wealth Management, lottery and retail fees, while fee income from credit cards, corporate business and overseas subsidiary dropped due to the pandemic.

Securities and investments subsidiaries observed growth in fee income as business grew. Combined derivatives, FX and trading gains were down 28.3% Q-o-Q, and it was down 33.4% Y-o-Y due to higher base last year and lower investment gains due to the pandemic. Long-term investment and others were up 7.7% Q-o-Q, and they were down 93.7% Y-o-Y as long-term investment gain from LHFG increased and lottery-related rebate increased Y-o-Y. Please see profit mix on the right where NII accounted for 55%; fee 35%; trading, derivatives and FX 10%.

Page 11 on Bank's loan breakdown. Total lending with credit card revolving at the end of September was TWD 2.5 trillion, reflecting 0.4% Q-o-Q decline and 0.7% Y-o-Y growth. NT dollar corporate loan was down 2.7% Q-o-Q due to repayment from public enterprises, and the growth was mainly from manufacturing industry. It was down 4.1% Y-o-Y despite repayment from public enterprises. Excluding loans from public enterprises, NT dollar corporate loan was up 0.9% Y-o-Y, mainly from construction and real estate industry.

Foreign currency loan was down 2.5% Q-o-Q and 6.6% Y-o-Y. Excluding FX, foreign currency loan was down 1.8% Y-o-Y, which will be further explained in Page 12. Mortgage continued to grow 3% Q-o-Q and up 9.5% Y-o-Y under stable market. Unsecured lending was up 4.8% Q-o-Q, attributing to the sustainable strategy that increases customer base and up 38.8% Y-o-Y due to increased customer base and the participation in labor-relief program led by the government.

Credit card revolving was flat Q-o-Q and down 9.7% Y-o-Y as consumptions weakened due to pandemic. Please refer to the graph on the right for our lending portfolio mix, where foreign currency loan accounted for 40%, NT dollar corporate loan accounted for 22%, mortgage 30%, unsecured lending 7% and credit card revolving and others together accounted for 2% of the total lending.

Page 12 on foreign currency loan breakdown. Foreign currency loan at the end of September was TWD 1 trillion, which constituted 40% of total lending. Overseas subsidiaries accounted for 57.5% of total foreign currency loans with TSB accounting for 43.7%. Overseas branches accounted for 30.8%. OBU plus DBU was 11.7%. On the right, overseas subsidiaries loan was down 6.9% Y-o-Y. Excluding FX, overseas subsidiaries loan was down 2.3% Y-o-Y as long as TSB decreased due to repayment despite seeing double-digit growth in Indonesia. Overseas branches loan was down 6.4% Y-o-Y. Excluding FX, overseas branches loan was down 1.5% Y-o-Y despite double-digit growth on China, India and Vietnam branches. OBU plus DBU was down 7.3% Y-o-Y. Excluding FX, OBU plus DBU loan was down 1.2% due to some clients postponed expansion plan under the pandemic.

Page 13 on bank deposit mix. Total deposit as of September reached TWD 3.6 trillion, up 3.9% Q-o-Q and 5.1% Y-o-Y. On the left, total NT dollar deposits were up 4.3% Q-o-Q and up 10.4% Y-o-Y. NT dollar savings deposit accounted for 59.9%. On the right, total foreign currency deposits were up 3.5% Q-o-Q and down 1.1% Y-o-Y. Foreign currency savings deposit accounted for 54%.

Page 14 on loan-to-deposit ratio. Overall LDR was 72.77%. NT dollar LDR was 77.64%. Foreign currency LDR was 66.57%. Page 15 on NIM and spread. In the third quarter, foreign currency spreads were down 4 bps Q-o-Q to 2.08%. NT dollar spreads were 1.51%. Overall spreads were 1.74%, down 1 bp from last quarter. Third quarter NIM was down 4 bps Q-o-Q to 1.4%. And year to September, NIM was down 7 bps Y-o-Y to 1.44%.

Page 16 on fee breakdown. Total fees were up 25.9% Q-o-Q and up 0.2% Y-o-Y. Wealth management fee was up 33.5% Q-o-Q under mitigated impact on investment market from the pandemic, driving the sales of mutual fund and investment-linked policy. Mutual fund fee income was up 28% Q-o-Q and bancassurance fee income was up 24.7% Q-o-Q. First 9 months wealth management fee was up 7.7% Y-o-Y as mutual fund fee grew 28.5% Y-o-Y, despite bancassurance fee were down 10.5% Y-o-Y due to the increase in premium.

Credit card fees was up 3.6% Q-o-Q due to the rebound in domestic consumption and down 13% Y-o-Y due to decreased consumption momentum under the pandemic. Retail business was up 12.3% Q-on-Q as ATM and loan-related fees increased. It was up 13.8% Y-o-Y driven by ATM fees due to the revamp of mobile and online banking apps as well as other transaction business. Corporate business was up 21.2% Q-o-Q due to the growth from loan syndication and trust fees.

It was down 11% Y-o-Y, mainly due to decreased fee income from syndication due to large cases amid the pandemic. Overseas subsidiary fee was up 34.1% Q-o-Q, mainly due to growth in corporate business fee from TSB. It was down 25.6% Y-o-Y due to decreased corporate business fee and wealth management fee from TSB. Lottery fee was up 36.6% Q-o-Q and up 5.8% Y-o-Y due to high reward in first 9 months.

Page 17 on wealth management fee. For wealth management fee breakdown, bancassurance contributed 56%, mutual funds 31%, custodian and trust 3%, structured and others 11% of total wealth management fees. Page 18 on cost/income ratio. On cost/income ratio, overall operating revenue was up 2.7% Q-o-Q and operating expense was down 5.6%. Cost/income ratio was at 56.21% in the third quarter. For the first 9 months, cost/income ratio improved to 56.62% from 56.94%.

Page 19 on asset quality. NPL ratio was at 0.48% and NPL coverage ratio increased to 293.6%. Excluding Hin Leong case, NPL ratio was 0.37%. Page 20 on credit costs. Third quarter credit costs was 23 bps. First 9 months credit costs was 36 bps, reflecting increasing provision in specific cases. Moving on to Life business, Page 21, on total premium. Total premiums were TWD 49.5 billion in the third quarter, up 19.5% Q-o-Q. First 9 months total premiums were TWD 150.8 billion, down 10.5% Y-o-Y. Market share was 6.4%, ranked #6 in the industry.

Page 22 on first year premium. FYP reached TWD 22.9 billion in the third quarter, up 46.8% Q-o-Q, reflecting increased sales of investment-linked products. First 9 months FYP was TWD 61.8 billion, down 1.6% Y-o-Y with higher base last year as we stopped selling NT dollar single paid products and short-term regular paid NTD policies. Market share was 8.8%, ranked #4 in the industry.

Page 23 on FYP breakdown by types of payment and products. On the left, mix of single paid products has increased to 35.4% of FYP, and regular paid products accounted for 28.9% of FYPs. On the right is product breakdown. Interest-sensitive policy accounted for 56.8% and investment-linked accounted for 35.8% of FYP, traditional for 3.1% and health and PA increased to 4.4% of FYP.

Page 24 on FYP breakdown by channels and currencies. In terms of channels, contribution was mainly from bancassurance with 50.6% from CTBC Bank and 26.8% from external banks. Tied agents contributed 12.8% of FYPs, while insurance brokers accounted for 8.8% and others 0.9% (sic) [ 0.7% ]. On the right, investment-linked product accounted for 35.8%, foreign currency policy accounted for 44.9% and NT dollar policy accounted for 19.3% of FYP.

Page 25 on FYPE. First 9 months FYPE was TWD 17.8 billion. Market share was 7%, ranked #5 in the industry. On the right is the FYPE mix for your reference. Page 26 on investment asset mix. Total investment asset reached TWD 1.9 trillion. In terms of portfolio breakdown, cash accounted for 5.4%, domestic fixed income, 10.9%, overseas fixed income 60%, equities 7.8%, real estate 4.4%, mutual fund 8.9%, mortgage 1.3% and policy loans 1.3%.

Page 27 on investment yield, cost of liability and hedging mix. First 9 months cost of liability was 3.2%, down 34 bps Y-o-Y. Investment yield after hedging was 4.15%. Recurring yield before hedging was 3.71%. In terms of hedging, 40% of overseas investment assets were foreign currency policies, while 60% of overseas investment assets were NT dollar policies, of which 59% were fully hedged, 14% were OCI positions and 28% were unhedged. Third quarter hedging cost was up to 1.53% because of appreciated NT dollar. Annualized hedging cost was 1.3% for the first 9 months.

The presentation will stop here. Thank you.

[Yaling Chiu, executive]

Okay. Thank you, [ Sofia ], for the presentation. This is Ya-Ling Chiu. Before we start Q&A session, I would like to talk about the outlook guidance. Our third quarter results were pretty much on track. So the outlook guidance would be pretty much the same as Q2 guidance we provided before. Overall, C/I ratio, credit cost and wealth management fees were better than what we expected. But since there's still uncertainty in fourth quarter, especially for the pandemic is still not very good in other countries, so we would like to maintain the same guidance for C/I ratio at 59% and credit cost at 40 basis points for the whole year.

While we think wealth management momentum might be able to maintain at third quarter's level, so the outlook for wealth management fee will revise from flat in Q2 to low-to-mid single-digit growth this time. And on Life side, Life's recurring yield and cost of liability are revised down, but the spread -- the current spread maintains the same. So outlook for recurring yield is down from 3.65% we provided last time to 3.57% this time. And cost of liability is also down from 3.23% to 3.12% this time. And hedging cost will revise up in accordance to -- with NT dollar appreciation trend from 115 basis points in Q2 to 128 basis point in Q3.

So now we can start Q&A session. Thank you.

[Operator]

[Operator Instructions] And our first question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

Just 2 questions from me. The first one, I think, you previously mentioned that revenue at Tokyo Star Bank was also driven by the weak TMU operation. Just trying to figure out, relatively small banking at Tokyo Star Bank. What kind of TMU operation they involved in? And then or it's just pure investment mark-to-market losses? And we can see some improvement in the coming quarters. The second question is for Taiwan Life. The FYP is only down 1% to 2% in the first 9 months, but given the product mix is largely under low-margin ones, could we get some idea how the VNB year-on-year momentum looked like in the first 9 months?

[Yaling Chiu, executive]

Regarding TSB's TMU sales, that's the FX derivatives we sell to our clients. Because the FX derivatives are for about 7 to 10 years and the long-term derivatives contains a high risk from our point of view. So at this volatility -- it is volatile market. We temporarily stop the products for now and for risk control. Going forward when the market is stabilized, then we will relaunch the product and add some risk control, maybe limit the duration or the tenure then to relaunch the product to boost the revenue of TMU in TSB.

[Pai-Hung Yeh, executive]

For the VNB decreased 6.6% Y-o-Y. And we saw that for the third quarter is -- was increased 9% than the second quarter. That's all.

[Operator]

[Operator Instructions] And the next question is coming from Edwin Liu from HSBC.

[Edwin Liu, analyst]

I have 2 questions here. First one is on your NPL ratio. May I just confirm that the increase in third quarter in NPL ratio is partly driven by the Hin Leong case? Meaning that the Hin Leong case was not part of the NPL in second quarter? And the next question is on wealth management fee. I saw that the increase in third quarter was partly from bancassurance and partly from mutual fund. Just wonder, in terms of mutual fund, what kind of product are you see -- have you been seeing from customer demand? And do you think that's sustainable going to fourth quarter and the first quarter next year?

[Yaling Chiu, executive]

For the NPL in third quarter, yes, that's for Hin Leong case. So it's taking our Hin Leong case either in NPL or in provision. Actually, we think the asset quality is under control. And for second question, the -- what management see in third quarter on mutual fund side, we actually provide the product linked with the industry for the new trends like health and health and care and cloud and 5G and also ESG sustainability-related investment for mutual funds. And for the momentum in fourth quarter, actually, in October and November, as of now, we see the momentum is quite the same as the momentum in third quarter. So that's why we revised up the growth for wealth management fee in the next quarter.

[Operator]

And next we'll have Gurpreet Sahi of Goldman Sachs, Hong Kong.

[Gurpreet Sahi, analyst]

I have 2 questions. First is checking on margins. So do you think that the rate cuts by central banks -- the impact is fully now reflected in the margin? And so this 1.40% margin at the group level can now be sustained over the next couple of quarters, so that we can expect NII to start growing again? And my second question is regards to cost/income ratio. The full year guidance of around 59%. Now for first 12 -- for the first 9 months, cost/income ratio is slightly better than last year. And last year, cost/income ratio was just under 58%. So why this very bearish guidance as to what cost can come in the fourth quarter? Or are you more worried about the revenue? If you can throw some light on it.

[Yaling Chiu, executive]

Yes. Margin, NIM, net interest margin has been stabilized. For August, September and October, we see the NIM was at 1.39% to 1.4%, this level. So we believe NIM has been stabilized in third quarter and fourth quarter. For C/I ratio is slightly better than what we expected in the first 9 months. But in 4 months, like I just mentioned because the pandemic COVID-19 situations getting worse in other countries, so probably, the revenue were not as good as what we expected in the fourth quarter. And traditionally, we will have some accrual of expenses in our book in the fourth quarter. So that's why we remain the same outlook for C/I ratio.

[Operator]

There appears to no further questions at this point. Ladies and gentlemen, we thank you for all your questions. That would be the end of the conference. And we thank you for your participation in CTBC Financial Holding Company's conference call. You may now disconnect. Goodbye.