CTBC Financial Holding Co Ltd
TWSE:2891
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CTBC Financial Holding Co Ltd
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Welcome, everyone, to CTBC Financial Holding Co.'s 2021 Third Quarter Earnings Conference Call. [Operator Instructions] After the presentation, there will be a question-and-answer session. [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.
Thank you, everyone, for joining CTBC's Third Quarter 2021 Earnings Call.
Please turn to Page 3 on financial highlights. CTBC Holding reported a record profit of TWD 46.5 billion in the first 9 months, supported by resilient earnings growth at CTBC Bank and Taiwan Life. ROE and ROA reached 16% and 0.93%, respectively. EPS was TWD 2.33. Holding remained well capitalized with CAR at 134% and double leverage ratio at 115.7%. Total lending increased 7%, led by strong domestic corporate loans, mortgage and unsecured consumer loans. Strong pickup in wealth management fees supported fee income growth of 9% Y-o-Y. Asset quality remains stable with NPL ratio at 0.4% as of 3Q. And credit costs remained benign at 21 basis points in the first 9 months. Capitalization remains sound with CAR at 14.9% and CE Tier 1 ratio at 12.3%.
Taiwan Life reported solid after-tax profit growth of 42% Y-o-Y, with investment income remained decent with dividend income coming in, in 3Q and cost of liabilities and hedging costs improved in the first 9 months. RBC ratio was sound at 381%.
Page 4 on recent developments. On LHFG, CTBC Bank has increased its holding in Thailand's LHFG to 46.6% in September this year and is now the single largest shareholder. In October, we gained control of a majority of LHFG, formally making LHFG a subsidiary of CTBC Bank. We also appointed Chairman of the Board and key senior managers. Going forward, LHFG will continue to leverage our overseas platform to provide expanded financial services to Taiwanese and foreign corporates in Thailand as well as to help Thai corporates expand overseas. LHFG will also further penetrate consumer banking with CTBC's support.
On ESG, the Holding is the first financial institution in Asia to disclose financed emissions by adopting PCAF methodology. CTBC Bank's sustainability bond was the first in Taiwan to be included in the Sustainable Bonds Database of the International Capital Market Association.
In July, the Holding and Hon Hai Group signed an MOU to raise an Electric Vehicle Fund aiming at TWD 10 billion. As the only GIIN member in Taiwan, we recently sponsor the first Taiwan Impact Investing Forum in November.
CTBC Holding's ESG rating is rated AA by MSCI and its constituent stock of the MSCI Taiwan ESG Leaders Index, DJSI World & Emerging Markets Index and FTSE4Good Index Series.
Page 5 and 6 on profitability. Holding's first 9 months net income was TWD 46.5 billion. EPS was TWD 2.33. Group ROE was 16%, and ROA was 0.93%.
Page 7 on capital ratio. We remain well capitalized with group CAR at 134%, Life RBC ratio at 381%, Bank CAR at 14.9% and Tier 1 ratio at 13.5%.
Page 8 on profit breakdown by entity. In 3Q, Bank net profit reached TWD 8 billion, up 16% Q-o-Q mostly driven by solid growth in wealth management fees and trading income. Life pretax profit was up 5% Q-o-Q supported by dividend income and lower hedging costs, while net income was TWD 6 billion, down 4% Q-o-Q with Life book tax income in 2Q. Holding's consolidated net profit was TWD 13 billion, down 5% Q-o-Q. In the first 9 months, Bank net profit reached TWD 22.8 billion, up 7% Y-o-Y. Life profit was TWD 22.6 billion, up 42% Y-o-Y.
Holding's reported consolidated net profit of TWD 46.5 billion, up 29% Y-o-Y. On the table on the right, Life and Bank each contributed 49% to Holding's first 9 months profit. Securities and other subsidiaries reported decent profit growth and contributed 2% to Holding's profit.
Page 9 on net profit movements. In 3Q, operating revenue was up 7% Q-o-Q supported by growth in net interest income, fee income and trading gains. Provisions increased 41% Q-o-Q due to increases in provisions for retail business and TSB.
Expense was up 3% Q-o-Q. As for Life, 3Q pretax profit was up 5%, and Holding both tax and undistributed earnings in 3Q and reported net income of TWD 13 billion, down 5% Q-o-Q.
On the bottom, for the first 9 months, operating revenue was up 5% Y-o-Y, supported by sustained growth in net interest income, wealth management fees and trading gains at the Securities and Venture Capital subsidiaries. Provisions were down 39% Y-o-Y due to lower specific provisions. Expense was up 10% Y-o-Y mostly on higher ESOP valuation. Life pretax profit was up 42% Y-o-Y supported by decent investment income and improved cost of liabilities and hedging costs. Overall, Holding's pretax profit reached TWD 53.4 billion, and net income reached TWD 46.5 billion, up 29% Y-o-Y.
Page 10 on revenue breakdown excluding Life. Total revenue was up 7% Q-o-Q and 5% Y-o-Y. Net interest income was up 2% Q-o-Q and Y-o-Y due to sustained loan growth. Fee income was up 14% Q-o-Q mostly driven by strong recovery in wealth management fee as COVID restrictions have loosened since 3Q. First 9 months fee income was up 11% Y-o-Y, attributing to stable growth in wealth management and lottery fees. Moreover, Securities and Investment Trust subsidiaries observed growth in fee income as business grew.
Combined derivative FX and trading gains was up 20% Q-o-Q due to dividend income and higher trading income from derivatives. It was up 5% Y-o-Y supported by trading gains at VC and Securities subsidiaries. Long-term investment and other income was down Q-o-Q and Y-o-Y as lottery rebate to Ministry of Finance increased Q-o-Q and Holding and AMC subsidiary booked property disposal gains last year.
Page 11 on Bank's loan breakdown. Total lending with credit card revolving was up 1% Q-o-Q and 7% Y-o-Y. Excluding FX impact, total lending was up 10% Y-o-Y. NT dollar corporate loan was up 3% Q-o-Q on growth from construction and real estate, government-related and commerce and service sectors. NT dollar corporate loan was up 28% Y-o-Y driven by increased demand in working capital mainly from government-related and commerce and service sectors. Foreign currency loan was down 1% Q-o-Q and 8% Y-o-Y.
Excluding FX, foreign currency loan was down 2% Y-o-Y. Mortgage continued to grow 1% Q-o-Q and 9% Y-o-Y amid stable property market. Unsecured lending was up 2% Q-o-Q and 16% Y-o-Y, attributing to our strategy that expands customer base and participation in the labor review program led by the government this year. Credit card revolving and others were up 1% Q-o-Q and 4% Y-o-Y.
Page 12 on foreign currency loan breakdown. Foreign currency loan was TWD 917 billion, which accounted for 34% of total loans. Overseas subsidiaries accounted for 55% of total foreign currency loans with TSB being the majority. Overseas branches accounted for 33%. OBU plus DBU was 12%. Overseas subsidiaries loan was down 13% Y-o-Y. Excluding FX, overseas subsidiaries loan was down 5% mainly due to repayment from corporate clients and moderated loan growth demand at TSB. Overseas branch loan was down 1% Y-o-Y. Excluding FX, overseas branch loan was up 3% as most overseas branches observed loan growth momentum to resume except Singapore branch. Vietnam, New York, India, Tokyo and China branches report double-digit growth. OBU plus DBU was down 3% Y-o-Y. Excluding FX, OBU plus DBU loan was up 1% driven by growth in trade finance.
Page 13 on Bank deposit mix. Total deposit reached TWD 3.9 trillion, up 2% Q-o-Q and 8% Y-o-Y. On the left, total NT dollar deposits were up 4% Q-o-Q and 14% Y-o-Y. NT dollar savings accounted for 63%. On the right, total foreign currency deposits were flat Q-o-Q and up 1% Y-o-Y. Foreign currency savings accounted for 58%.
Page 14 on loan-to-deposit ratio. Overall LDR was 70.7%. NT dollar LDR was 77.7%. Foreign currency LDR was 60.5%.
Page 15 on NIM and spreads. In 3Q, foreign currency spread was 2.18%, up 2 basis points Q-o-Q, but the Bank lower FX deposit rates and the lending yield improved at certain overseas branch. NT dollar spreads and overall spreads were flat Q-on-Q at 1.51% and 1.75%, respectively. 3Q NIM was stable Q-o-Q at 1.39%.
Page 16 on fee breakdown. Total fees were up 18% Q-o-Q and 9% Y-o-Y. Wealth management fee was up 23% Q-o-Q. A decent performance in capital markets and the easing of COVID restrictions supported business momentum. First 9 months, wealth management fee was up 21% Y-o-Y as the level of volatility in capital markets moderated compared to the same period last year. Mutual fund fees were up 11% Y-o-Y, while bancassurance fees were up 29% Y-o-Y. Credit card fee was down 11% Q-o-Q as rebound on domestic consumption push up commission as well as credit card rebates.
First 9 months credit card fee was down 6% Y-o-Y. Retail business was up 7% Q-o-Q as ATMs increased and down 1% Y-o-Y mostly due to fee waivers offered during COVID-19 level 3 alert. Corporate business was up 8% Q-o-Q driven by trust fee and up 1% Y-o-Y driven by increases in trust transfer agent and custodian fees. Overseas subsidiary fee was down 6% Q-o-Q as retail business fee decline at TSB and certain overseas subsidiary booked early repayment fee in 2Q. Overseas subsidiaries fee was down 6% Y-o-Y due to decline in loan-related fee at TSB. Lottery fee was up 77% Q-o-Q due to high price and up 2% Y-o-Y due to record-high sales in Chinese New Year despite adverse impacts from COVID in 2Q.
Page 17 on wealth management fee. For wealth management fee breakdown, bancassurance contributed 62%; mutual fund, 27% custodian and trust, 3%; and others 8% to total wealth management fees.
Page 18 on cost/income ratio. Bank's operating revenue was up 11% Q-o-Q, and operating expense was up 6% Q-o-Q, leading to a lower cost/income ratio at 56.6% in 3Q. In the first 9 months, cost/income ratio was 59%, higher compared to the same period last year mostly due to higher ESOP valuation.
Page 19 on asset quality. NPL ratio was 0.4%, and NPL coverage ratio was 314.9%.
Page 20 on credit costs. 3Q credit cost was 28 basis points, up 7 basis points Q-o-Q due to higher provisions for retail loans and TSB. First 9 months credit cost was 21 basis points, down 15 basis points Y-o-Y from the same period last year mostly due to lower specific provisions.
Moving on to Life business. Page 21 on total premium. Total premiums were TWD 56.4 billion in 3Q, up 26% Q-o-Q. First 9 months total premiums were TWD 155.9 billion, up 3% Y-o-Y. Market share was 7%, ranked #6 in the industry.
Page 22 on first year premium. FYPs reached TWD 30.8 billion in 3Q, up 38% Q-o-Q as sales of investment-linked and interest-sensitive policies increased. First 9 months FYPs were TWD 84.4 billion, up 36% Y-o-Y, mostly on growth in investment-linked products. Market share was 10.8%, ranked #3 in the industry.
Page 23 on FYP breakdown by types of payment and products. On the left, mix of single-pay products accounted for 20%, and regular pay products accounted for 14% of FYP. On the right is the product breakdown. Investment-linked products accounted for 66%; interest sensitive policies, 30%; traditional 1%; and health and PA, 3% of FYP.
Page 24 on FYP breakdown by channels and currencies. In terms of channels, 71% of FYPs came from CTBC Bank, 17% from external bank, 7% from tied agents and 5% from insurance brokers and others. On the right, investment-linked products accounted for 66%; foreign currency policy, 29%; and NT dollar policy, 5% of FYP.
Page 25 on FYPE. First 9 months FYPE was TWD 17.4 billion. Market share was 9.5%, ranked #4 in the industry. On the right is the FYPE mix for your reference.
Page 26 on investment asset mix. Total investment asset reached almost TWD 2 trillion. Taiwan Life reduced its cash holding and increased investments in overseas fixed income in 3Q. In terms of portfolio breakdown, cash accounted for 5.9%; domestic fixed income, 9.8%; overseas fixed income, 60.6%; equities, 8%; real estate, 4.5%; mutual fund, 8.5%; mortgage, 1.5%; and policy loans, 1.3%.
Page 27 on investment yield and cost of liabilities. In first 9 months, recurring yield before hedge was 3.39%, and overall investment yield after hedge was 4.43%. Cost of liabilities was down 15 basis points Y-o-Y to 3.05%.
Page 28 on hedging. On the left, 41% of overseas investment assets were foreign currency policy, 40% were fully hedged, 8% were OCI position, and 11% were unhedged. On the right, FX reserve amounted to TWD 1.8 billion as of 3Q. First 9 months hedging cost was 1.28%, 2 basis points lower from the same period last year mostly due to lower cost for hedging instruments.
That concludes the presentation, and now we are open for Q&A session.
[Operator Instructions] Our first question is coming from Chung Hsu of Credit Suisse.
I have 2 questions. My first question is on the Bank's P&L. I think there's quite a bit of an increase of your trading and derivative FX income in the third quarter. Can you give us more breakdown how much of that is from mark-to-market and actual [indiscernible] the realized gains?
My second question is a follow-up on earlier Chinese session. Your expense increase, a big part or a large part of it is because of ESOP. I think you mentioned you will be down 3 -- to confirm cost-to-income ratio will be 3% less or lower if without ESOP, right? And I think the year-over-year absolute OpEx increase would be 1% year-over-year. I just want to make sure I hear that correct.
Chung, thanks for your questions. Let me answer the second one. Yes, if we exclude ESOP, then the C/I ratio were will be 3% less, from 59% to 56%. And the general expense excluding ESOP grew by 1% to 2%.
Okay. Can I follow up that, earlier in a Chinese session, you gave a rather optimistic outlook for the Bank's operating income growth next year. What type of OpEx increase should we expect in 2022?
I think traveling is the one, and the T&E, I think the major one is T&E and also the infrastructure investment for our overseas branches and subsidiaries, I think these are the major ones. And plus the regular FTE head count increase, so I think that's the major expense increase.
I assume the expense increase should trail or be less than your revenue increase, meaning cost/income ratio should be lower if we -- even if we strip out the ESOP, correct? Is that correct?
Yes, given the expectation of revenue increase, if there is no large investment, then we should be expecting the improvement of C/I ratio, yes.
As for the pickup in the trading and derivatives in the third quarter is mainly from the Bank business. And in the third quarter that we see our trading instruments, including interest and exchange -- FX exchange products has been trading at the right direction so that we are seeing the increase in trading gain from those products.
[Operator Instructions] The next question is from Jemmy Huang of JPMorgan.
Just one question, a follow-up from the Chinese session that I don't think I got the answer in terms of how your business plan for LHFG in Thailand, I think, in terms of how you want to achieve the ROE or ROIC in the coming years.
Yes. For LH, our business plan is to -- for the short-term is to increase the banking customers by raising the benefit of the digital deposit products to attract customers to expand our customer base. And then we will cross-sell our secured loans for our lease customers. This is the short-term plan. And for the long-term, we will focus more on the retail business, which has a higher yield. So in this way, we expect we can improve the ROE for LH Bank or the whole group.
Is there any like specific targets that you think the operation could achieve?
Jemmy, are you referring to the earnings target for LH Bank?
Kind of like just trying to see, yes, whether rate can be ROE-accretive for the group.
In terms of the Bank, we just increased our shareholding in September, and we just get the majority of the [budget] in October. So -- and given that it's toward the end of the year, and we are actually planning and also we are studying our budget next year, so we will take -- when we are preparing the budget for 2022, we actually will review LH Bank and review their business plans as well. So the new guidance will be more clear after we have completed our budget for 2022.
But as the CFO mentioned that since we already have operation in Thailand, so for the current stage, we will continue to deepen our customer base in Thailand. And for the domestic market, we would like to for the digital channels acquire more customers and increase the deposit base and further down the road that we hope that we can duplicate our experience in wealth management business in Taiwan and to catch up the fee business in Thailand as well.
And also for the corporate business, since we have most extensive network across Asia, so -- and in Thailand is a big customer of Taiwanese manufacturers and also Chinese corporates and Japanese corporates as well, so we would like to expand our service to these customers especially servicing their cross-border financial needs. So that will be the initial plan. And of course, down the road, we would like to deepen into the local market as well.
But Jemmy, we did have business plan before we decided to increase our shareholding. And the ROE target definitely will be above our hurdle, which is 9% or 10% in the next 5 to 10 years. Because just like I mentioned, we want to build up the retail banking platform. And it takes time, and it needs some investment. So in next -- what we are looking is the ROE and the earnings after 5 -- in the next 5 to 10 years and -- but the original business plan will be revised because our team had traveled to Thailand recently and to understand the local market situation. So they come back, I think we will revise the business plan. So maybe next year, in the beginning of the next year, we have concrete numbers to tell you.
And next we have Brooksley Kang, Bank of America Securities, for questions.
Okay. So I have 2 questions. So firstly, on the recent Singapore banks curbing the financing for the property market in Taiwan. So I was wondering that how do we see the current level of ours at the current stage and how do we see the market whether mortgage and construction loan will continue to be a certain focus in 2022. That's the first question.
And the second question is that I think in the Mandarin session, the management mentioned the potential loan mix adjustment next year focusing on SME and the customer lending. Given that in third quarter, the FX loan actually makes some progress in certain regions, if we also feel comfortable to also drive the FX lending into next year.
For the loan mix, yes, foreign currency loans definitely is our target, our goal to grow. So I have mentioned in the Chinese session that given the positive outlook of the global and Taiwan economics, we believe both NT dollar loan and foreign currency loans will grow in next year. And plus the product strategy, like we will focus on consumer loans, some new consumer loan products and small business loans. So overall, I think we would increase high-yield loan from foreign currency loan and our consumer loan and our small business loan. So I think that's what I meant in the Chinese session.
So in short, yes, foreign currency loans definitely is in our target. And as for mortgage loan, I think the property market or housing market in Taiwan will still grow stability -- stably. Then plus, we have got the program for -- to serve our civil servant recently. So I think that, that's the driver to help us to grow mortgage. So based on the market and plus the program, we believe we will continue to grow our mortgage next year.
[Operator Instructions] Okay. Ladies and gentlemen, there appears to be no further questions at this point. We thank you for all your questions, and that will be the end of the conference. We thank you very much for your participation in CTBC Financial Holding Company's conference call. You may now disconnect. Goodbye.