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Welcome, everyone, to CTBC Financial Holding Company's 2022 Third Quarter Earnings Conference Call. [Operator Instructions] Today's host will be Ms. Rachael Kao, Spokesperson of CTBC Holding; Ms. Megan Hsu, CFO of CTBC Holding; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life. And now I would like to turn the call over to Ms. Rachael Kao, spokesperson of CTBC Holding. Ms. Kao, please proceed.
Good afternoon. This is Rachael. And since I'm the first participant, I mean the new participant to the IR meeting, let me introduce myself briefly. My name is Rachael Kao, and I have been working at CTBC Holding for 26 years, and I was relocated from Tokyo Star Bank this August.
And before my experience at Tokyo Star, I was also doing IR and also CFO at the Holding company and the bank. So maybe some of you are quite familiar with me.
And today, we also have a new participant, it's the CFO of the holding company and the bank, and her name is Megan Hsu, and she has been working at CTBC especially in finance area for more than 20 years. So she's very experienced, and we try to have the new management to be younger and then try to promote more managers at the bank and the holding company. And then they start today's analyst meeting. Thank you.
Thank you, everyone, for joining CTBC's Third Quarter 2022 Earnings Call. Please turn to Page 4 on performance highlights. CTBC Holding's net profit was TWD 7.9 billion in 3Q and TWD 32.2 billion in the first 9 months, down 1% Q-o-Q and 31% Y-o-Y, respectively.
ROE reached 12% with EPS of TWD 1.60 in the first 9 months. CTBC Bank's net profit increased 45% Q-o-Q and 27% Y-o-Y, attributable to strong loan growth and margin expansion.
Taiwan Life's net profit dropped Q-o-Q and 77% Y-o-Y due to COVID policy-related claim costs and subdued investment gains. Overall, the group's capitalization remains sufficient. CTBC Holding's CAR was at 123.1% while double leverage ratio was contained at 123.9%.
CTBC Bank capitalization was strong with CAR at 14.2% and CET1 ratio at 11.1%. Asset quality was sound with NPL ratio at 0.5% versus 3Q and benign credit cost of 22 basis points in the first 9 months.
Taiwan Life's RBC ratio stays sound at 305%. Taiwan Life announced it will reclassify partial financial assets in October according to IFRS 9 in order to further strengthen its equity asset ratio and better withstand market volatility in the future.
On recent updates, Holding continued its commitment in ESG and were selected to join FSC's Coalition of Movers and Shakers on Sustainable Finance in September.
Page 5 on profitability. Holdings first 9 months net income was TWD 32.2 billion. EPS was TWD 1.60. Group ROE was 12% and ROA was 0.6%.
Page 6 on capital ratio. We remain well capitalized with group CAR at 123%, Life RBC ratio at 305%, and CAR at 14.2% and CET1 ratio at 11.1%.
Page 7 on profit breakdown by entities. In 3Q, bank net profit reached TWD 12.7 billion, up 45% Q-o-Q, supported by growth in net interest income, fee income and trading gains. Life made a loss of TWD 3.7 billion, mostly due to claim costs and reserves related to COVID policy.
Other subsidiaries, including securities, venture capital and Taiwan lottery all reported earnings growth. Holdings consolidated net profit was TWD 7.9 billion, down 1% Q-o-Q. In the first 9 months, bank net profit reached TWD 28.9 billion, up 27% Y-o-Y, driven by increases in net interest income and trading gains and contained growth in operating expense.
Life profit was TWD 5.2 billion, down 77% Y-o-Y, mostly due to COVID policy-related claims and lower investment income of base effect. Holding reported consolidated net profit of TWD 32.2 billion, down 31% Y-o-Y.
From the table on the right, Bank and Life contributed 90% and 16% to Holdings' first 9 months profit, respectively. Page 8, on net profit movements. In the chart above, operating revenue was up 14% Q-on-Q, driven by growth in net interest income, fee income and trading gains. Provisions were flat Q-o-Q, and credit cost in 3Q was 25 basis points.
Expense was up 4% Q-o-Q. As for Life, 3Q pretax profit declined mostly due to claim costs related to COVID policies. On the bottom, operating revenue was up 10% Y-o-Y as loan growth and widened net interest margin underpinned increase in net interest income. Provisions were up 19% Y-o-Y, mostly due to impact from LH.
Credit costs remained benign at 22 basis points. Expense was down 2% Y-o-Y on lower ESOP valuations. Life pretax profit was down 63% Y-o-Y on COVID policy-related claim costs and subdued investment income. Holdings pretax profit reached TWD 46.8 billion, down 12% Y-o-Y. Overall, Holdings' net income reached TWD 32.2 billion, down 31% Y-o-Y.
Page 9 on revenue breakdown excluding Life. Total revenue was up 14% Q-o-Q and 10% Y-o-Y. Net interest income was up 9% Q-o-Q as loans increased and net interest margin widened due to rate hikes and changes in loan mix.
Net interest income was up 26% Y-o-Y as loans grew and net interest margin widened due to changes in loan mix and higher yields on marketable securities, benefiting from rate hikes. Fee income was up 5% Q-o-Q, partly due to increased wealth management fees, as rate hike movements spur sales of bonds. In addition, corporate, credit card, retail, lottery and investment trust fees increased.
Fee income was down 6% Y-o-Y, with volatility in capital markets, wealth management and securities fees lower. For corporate, credit card, retail and investment trust fees increased. Combined derivative FX and trading gains was up 95% Q-o-Q, driven by higher trading income from FX-related products in addition to dividend income and mark-to-market gains on securities.
Combined derivative FX and trading gains was down 7% Y-o-Y due to lower trading income as securities and venture capital subsidiaries. Long-term investment and other income was down 29% Q-o-Q due to higher lottery rebates to [ MLF ] and was down 67% Y-o-Y as the bank no longer booked long-term investment income from LH after consolidating the entity.
Page 11 on bank's loan breakdown. Total lending with credit card revolving was up 7% Q-o-Q and 17% Y-o-Y. The bank consolidated LHFG in 4Q '21, excluding the impact from LH, total lending was up 11% Y-o-Y as of 3Q.
NT dollar corporate loan was up 15% Q-o-Q, driven by working capital needs. NT dollar corporate loan was up 13% Y-o-Y, driven by higher investment demand, working capital needs and property development. Foreign currency loan was up 6% Q-o-Q and 27% Y-o-Y.
Excluding the impact from LH, foreign currency loan was up 9% Y-o-Y. Mortgage was up 3% Q-o-Q and 13% Y-o-Y, supported by stable business momentum and our participation in lending to civil servants. Unsecured and other loans were up 2% Q-o-Q and 6% Y-o-Y, mostly on growth in unsecured consumer loans as we continue to expand our customer base.
Page 12 on foreign currency loan breakdown. Foreign currency loan accounted for 37% of total lending. Overseas subsidiaries accounted for 57% of foreign currency loans with TSB and LH being 2 larger subsidiaries. Overseas branches accounted for 31%. OBU plus DBU was 12%.
Looking at the foreign currency loan breakdown by region: Japan accounted for 30%; Southeast Asia, 28%; Greater China, 15%; and North America, 15%. Overseas subsidiaries loan was up 34% Y-o-Y, driven by the consolidation of LH and solid business momentum at U.S., Indonesia, and Philippines subsidiaries reporting double-digit loan growth.
Excluding the impact from LH, overseas subsidiaries loan was up 1%. Overseas branch loan was up 17% Y-o-Y, as Hong Kong, Singapore, New York and India branches observed double-digit growth. OBU plus DBU was up 25% Y-o-Y, driven by growth in trade finance and syndicated loans.
Page 13 on bank deposit mix. Total deposits reached TWD 4.5 trillion, up 6% Q-o-Q and 15% Y-o-Y. On the right, total NT dollar deposits were up 5% Q-o-Q and 10% Y-o-Y. NT dollar savings accounted for 62%. Total foreign currency deposits were up 6% Q-o-Q and 22% Y-o-Y. Foreign currency savings accounted for 51%.
Page 14 on loan-to-deposit ratio. Based on average loans and deposits, overall LDR was 70.5%. NT dollar LDR was 77.6%. Foreign currency LDR was 61%.
Page 15, on NIM and spread. In 3Q, foreign currency spread was 2.7%, up 17 basis points Q-o-Q due to rate hikes and changes in loan mix. NT dollar spread was 1.77%, up 8 basis points Q-o-Q, driven by rate hikes and favorable changes in loan mix. Overall spread was 2.1%, up 9 basis points Q-o-Q.
In addition, rate hikes led higher yields for marketable securities. 3Q NIM was up 5 basis points Q-o-Q at 1.62%. Excluding impact from LH, NIM was 1.58%, up 5 basis points Q-o-Q. NIM in the first 9 months was 1.55%, up 16 basis points Y-o-Y, benefiting from rate hikes.
Page 16 on fee breakdown. Total fees were up 6% Q-o-Q and down 7% Y-o-Y. Wealth management fee was up 6% Q-o-Q, driven by increased sales of bonds as rate hikes triggered rises in bond yields and prompted customers to investment in bonds.
Wealth management fee was down 24% Y-o-Y. This volatility in capital markets impacted customer demand and caused sales of bancassurance and mutual funds to weaken.
Credit card fee was up 4% Q-o-Q due to higher consumptions driven by traveling and sales season in summer. Credit card fee was up 15% Y-o-Y due to recovery consumption, supported by expanded customer base and business ecosystem and further penetration of mobile payments.
Retail business was up 7% Q-o-Q and 15% Y-o-Y due to increases in ATM and loan-related fees. Corporate business fee was up 5% Q-o-Q on higher syndicated loan and trust fees and up 26% Y-o-Y driven by syndicated loan, trust and loan-related fees.
Overseas subsidiary fee was up 3% Q-o-Q as corporate fees increased at TSB and up 15% Y-o-Y, mostly due to the consolidation of LH. Lottery fee was up 8% Q-o-Q due to higher lottery sales and relatively flat Y-o-Y due to lack of high prize this year.
Page 17 on wealth management fee. For wealth management fee breakdown in 3Q, bancassurance contributed 58%; mutual funds, 22%; custodian and trust, 4%; and others, 15% to total wealth management fees.
Page 18 on cost-to-income ratio. Bank operating revenue increased 12% Q-o-Q, while operating expense was up 4% Q-o-Q, leading to a lower cost-to-income ratio of 46.5% in 3Q.
In first 9 months, cost-to-income ratio was 52.2%, lower compared to the same period last year, mostly due to growth in operating revenue and decreased ESOP valuation. Excluding ESOP impact, cost-to-income ratio would be 53.8% in the first 9 months, which is lower compared to 56.5% in the same period last year, indicating contained growth in operating expense.
Page 19 on asset quality. Asset quality remained stable with NPL ratio at 0.5%. NPL coverage ratio was 322%. Excluding impact from LH, NPL ratio was 0.36% and NPL coverage ratio was 378%.
3Q credit cost was 25 basis points, down 1 basis point Q-o-Q. First 9 months credit cost was 22 basis points, up 1 basis point Y-o-Y, mostly due to impact from LH. Excluding impact from LH, first 9 months credit cost will be 16 basis points.
Moving on to Life business. Page 21 on total premium and first year premium. Total premiums were TWD 32.5 billion in 3Q, up 2% Q-o-Q. First 9 months total premiums were TWD 106.9 billion, down 32% Y-o-Y.
FYP were TWD 12.5 billion in 3Q, down 6% Q-o-Q as sales of U.S. dollar single-pay interest-sensitive policies declined but sales of health and investment-linked policies increased.
First 9 months FYPs were TWD 48.2 billion, down 43% Y-o-Y as volatile capital markets affected sales of investment-linked products and customers turn to interest-sensitive policies that capture rate hike trend. FYP market share was 7.7%, ranked #5 in the industry.
Page 22 on FYP breakdown by products and channels. On the left is the product breakdown: investment-linked products accounted for 17%; interest-sensitive policies, 78%; health & PA, 5%; and traditional, 1% of FYP. On the right, in terms of channels, 51% of FYPs came from CTBC Bank; 33% from external banks; 9% from tied agents; and 7% from insurance brokers and others.
Page 23 on FYP breakdown by type of payment and currencies. On the left, regular paid products accounted for 42% and single-pay products accounted for 41% of FYP. On the right, foreign currency policy accounted for 69% and NT dollar policy, 15% of FYP.
Page 24 on FYPE. First 9 months FYPE was TWD 13.8 billion. On the right is the FYPE mix for your reference.
Page 25 on investment asset mix, reached nearly TWD 2 trillion. China Life took suitable opportunities to realize some profits and increase its cash holdings. In terms of portfolio breakdown: cash accounted for 5.1%; domestic fixed income, 9.4%; overseas fixed income, 60.1%; equities, 9.6%; mortgage, 2%; policy loans, 1.3%; real estate, 4.7%; and mutual fund 7.8%.
On the right is the pre-hedge return for each type of investment assets for your reference. Equities position generated a negative return of 3.2%, largely due to loss at P&C.
Page 26 on investment yield, cost of liability and breakeven point. In the first 9 months, China Life still maintains a positive investment spread. With impact from P&C, overall investment yield after hedge was 3.31% and recurring yield before hedge was 2.51%.
If excluding impact from P&C, overall investment yield after hedge was 4.26% and recurring yield before hedge was 3.47%. Cost of liability increased 4 basis points Y-o-Y to 3.09%. Breakeven point continued to improve at 2.71%.
Page 27 on hedging mix. On the left, 43% of overseas investment assets were foreign currency policies, 33% were fully hedged, 10% for OCI position and 14% were unhedged. On the right, FX reserve amounted to TWD 14.9 billion as of 3Q.
NT dollar depreciation resulted in hedging gains of 40 basis points in the first 9 months. Overall, hedging costs declined [ 158 ] basis points Y-o-Y from the same period last year. Next section is the ESG highlight for your reference. That concludes the presentation.
Thanks, Janet. Before we move into the Q&A section, I would like to have the highlights of the performance for the first 9 months.
First of all, for the CTBC insurance. In October, we actually -- in our model, we took the [indiscernible]rate up to 46%. So for year to October date, we now booked 14.3 loss on the COVID policy, and the one thing to remind is it's about TWD 5 billion kind of additional loss that we took in October, but in our financial statement it's going to be reflected in the third quarter financial report.
Since the CTBC insurance loss, we don't think they going to repeat again. So if we look at the overall financial holding company earnings at the after-tax basis for the 3 quarters is TWD 32.2 billion, which was down about 30.7% compared year-on-year to 2021 with ROE at 11.9% and EPS at TWD 1.6.
But if we took the COVID policy excluded, our earnings was actually TWD 44.4 billion and slightly declined compared to last year [ at 4% ] and ROE going to stand at 16% with EPS at TWD 2.22. So in this sense that we hope that for 2023 that we can get away with the COVID policy issues and then have a better future going forward.
And before we move in, I would like to cover some of the questions that recently frequently asked by investors. One is whether we're going to do additional recapitalization at the Holding company. And as you heard about the presentation that currently for the Holding company, the bank and our life insurance, the capitalization is actually at a very sufficient level.
And even though there we are considering a recapitalization at CTBC insurance, but its parent bank -- its parent company, Taiwan Life is going to do the recapitalization. So currently, for the Holding company, we don't consider there's a need for recapitalization in the near future.
And another question that is our dividend policy. For the 3 quarters, the after-tax income is TWD 32.2 billion. Although that we have some mark-to-market loss at the book, but so far that we still have undistributed earnings at the book, and they're still available for distribution for our dividend. And we do think that we have to pay out capacity, and we also intend to maintain a stable dividend payout policy.
However, the final numbers that we still need to confirm with the regulators and also subject to the Board's confirmation.
So since the bank are going to book a record high earnings this year, so the Holding company -- the bank earnings is going to upstream to the Holding company, I think that can support the Holding company to pay out dividend for the investors. So let's summarize some key questions from investors. And before we move into the Q&A, I have Pai-Hung to maybe summarize some of the questions related to insurance or life part. Thank you.
For COVID policy, we already recognized TWD 40.3 billion on our P&L. And for [indiscernible] up to at the end of October was [ TWD 12.4 billion ], which is -- which was investing rate around 38%. We recognize -- we used the assumption of 46% on our P&L.
And we -- since we already recognized the loss, so the RBC and the net worth was negative for our P&C company. So we need to -- the third time capital injection to P&C from Taiwan Life even we need to keep the injection to P&C.
Our -- for Life RBC still around 300% and above. And the net worth was -- it is 4.58%. And for accounting clarification, the impact was -- our net worth ratio of -- from 3% up to around 5%, we move around TWD 100 billion OCI purchasing to NT and the net worth impact was TWD 33 billion. Thank you.
So we open up the floor for questions. Thank you.
[Operator Instructions] And our first question is coming from Jemmy Huang of JPMorgan.
Two questions from me. First one is for the bank. If based on your numbers in the Chinese session on the ESOP impacts. And if we exclude that, the year-on-year OpEx in the banking side is actually up roughly around 10% year-on-year.
Just trying to understanding for this 10%, how should we read through this number? Where is the OpEx growth coming from? And should we expect the high single digit to maybe 10% OpEx growth to be a more normal base? That's the first question.
Second one is still on the COVID policy impacts. I think what Pai-Hung just mentioned, your total pool that imply infection rate is roughly around 38% based on the claim application.
I think the nationwide infection rate was roughly around 32% by the end of August. So based on your understanding and analysis, what are the key reasons the pool of your infection rate is actually higher than the nationwide levels?
Jemmy, thank you for your question. Regarding your question on the OpEx expense and the reason that you see high single digit up to 10% increases because this year, we actually had consolidated LH.
So last year, actually, the LH was consolidated in the fourth quarter. So when you look at the third quarter number, it's actually not apples-to-apples, so that's the reason that you see a bigger increase in OpEx.
For COVID policy, we did some analysis. We funded for our customer pool more concentrate on city rather than suburb. That's one of the reasons. And another one is that I heard that some people since the symptoms -- and the symptom, maybe some people have infected if the symptom is not -- so it's very light, then they would not go to the clinics, that's why.
But if the people have COVID policy, they will do that. I think it's another reason. So currently, for the -- at the end of October, the nationwide is 33% infection rate. But for our P&C, it's 38%.
Then I have a follow-up question on OpEx. I mean if we exclude the LH impacts then, what's the underlying OpEx growth that we should look at on a more recurring basis?
So for the bank, we are not considering the ESOP impact and also we take out the LH impact. The overall operating expenses grew about 3%, mainly driven by the credit card promotion campaigns.
[Operator Instructions] Next question is coming from Gurpreet Sahi of Goldman Sachs Hong Kong.
I just wanted to check on the regular guidance regarding the growth target into next year. And also what kind of margin we can expect NIM for next year?
Thanks for your questions. Actually, we are now still compiling our internal budget. I think I will wait until maybe next meeting with you and then can give you more highlights on our growth target and also NIM.
But currently, so far, we see the NIM is increasing since the major financial market is still increasing the rate. And we still see strong loan growth from the market, especially post COVID, and we see more demand from especially Greater China and Southeast Asia, and we hope that going forward, the loan growth will still maintain its current level. Thank you.
Okay. And can I quickly check on this insurance asset reclassification? So given that this has happened in the fourth quarter, so should we expect like excluding this one-off impact, so like the 5% equity to asset.
So now whatever the yields do, we should expect no impact, so equity to assets should be stable at around 5%? Is that the way to think about it?
After reclassification, the net worth ratio, we do some sensitivity test if for the equity dropped 50% and the interest rate goes high 50 basis point, we still can maintain the net worth ratio 3% and above for your reference.
Okay. So just checking, equity dropped 50%, 5-0, and interest rate rise by 50 basis points, 5-0. That's correct?
Yes, that's correct.
[Operator Instructions] And there appears to be no further questions at this point. Ladies and gentlemen, we thank you for all your questions, and that will be the end of the conference. We thank you for your participation in CTBC Financial Holding Company's conference call. You may now disconnect. Goodbye.