CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Analysis

CTBC Reports Robust Growth Amid Strong Q3 Performance

CTBC has showcased a remarkably strong performance in the third quarter, with its pretax income reaching TWD 23.7 billion and net profit at TWD 19.8 billion. This contributed to a nine-month aggregate of TWD 48.6 billion in net profit, a 51% increase year-over-year. Much of this growth is attributed to the robust dynamics within CTBC Bank and Taiwan Life, alongside positive gains from foreign exchange as the NT dollar depreciated. The earnings per share (EPS) for the period stood at TWD 2.44, complemented by a return on equity (ROE) of 17.6%. While momentum is expected to remain stable, the peak earnings for life insurance businesses are anticipated in the third quarter.

CTBC's Stellar Nine-Month Performance and Financial Highlights

CTBC Financial Holding Company reported a historic peak performance in the first nine months of 2023. The firm's after-tax profits surged by over 50% year-over-year to TWD 48.6 billion with an impressive earnings per share (EPS) of TWD 2.44 and a return on equity (ROE) of 17.62%. Two main engines propelled this growth: CTBC Bank's solid and diversified income streams and Taiwan Life's favorable dividend payouts and forex advantages.

Banking and Life Insurance Sectors: A Dual Source of Growth

CTBC's banking and insurance sectors both exhibited robust growth trajectories. CTBC Bank achieved its highest ever net profit for the first three quarters, at TWD 31.7 billion, a testament to the growth in net interest income, fee income, and trading income. Taiwan Life also reported a remarkable rebound with a net profit of TWD 14.5 billion, bouncing back from previous COVID-related setbacks, with a strategic emphasis on value products that saw an 18% year-on-year increase in FYPE.

Detailed Performance Metrics

CTBC's total revenue rose 3% quarter-over-quarter and 20% year-over-year, with fee income enjoying a 14% year-on-year increase. Loan portfolios across various sectors showed promising expansion, and stable asset quality was highlighted by a non-performing loan (NPL) ratio of only 0.48%. On the insurance side, investment assets for Taiwan Life hit nearly TWD 2 trillion, while hedging costs improved significantly.

Operational Efficiencies and Capital Adequacy

Operational efficiency at CTBC saw a quarterly improvement, with the cost/income ratio dipping to 53%. Capital adequacy remained a priority with a group capital adequacy ratio (CAR) of 122%, and for the banking subsidiary, the Common Equity Tier 1 (CET1) ratio was satisfactory at 10.6%. The company is confident in its prospects, poised to meet future regulatory requirements and support its dividend policy while maintaining its strong CAR positions.

Forward-Looking Strategies and ESG Commitment

Looking ahead, CTBC is focused on maintaining its growth momentum while embracing environmentally sustainable practices. The company indicated its commitment to achieving net zero emissions by 2050 and emphasized a continuous transition towards low-carbon operations, aligning its business strategy with broader societal and environmental goals.

Financial Forecast and Future Goals

CTBC remained cautious in providing precise future financial guidance since they are in the midst of the budgeting process. Nevertheless, for the bank entity, they signaled a target CET1 CAR of over 11% by 2025, up from the current 10.6%, indicating they will adjust their strategy accordingly to meet this goal.

Earnings Call Transcript 2023-Q3

[Justine Shen, executive]

Welcome to joining CTBC Financial Holding Company 2023 Third Quarter Analyst Meeting. Today, the meeting will be hosted by Ms. Rachael Kao, Chief Staff Officer and Spokesperson of CTBC Holding; Ms. Megan Hsu, CFO of CTBC Holding; and Mr. Pai-Hung Yeh, Chief Strategy Officer of Taiwan Life.

First of all, let's welcome Ms. Rachael Kao to speak a few words.

[Rachael Kao, executive]

Thank you, Justine. Before we head -- go through the analyst meeting package, I would like to give you some highlights of CTBC's third quarter performance.

For the third quarter of CTBC, the performance continues to be very strong. The pretax income for third quarter was TWD 23.7 billion, and after tax was TWD 19.8 billion. If we accounted for the cumulative January to September, the pretax was TWD 56.5 billion, and after tax was TWD 48.6 billion. We saw a very strong momentum in year-on-year, more than 50% growth. And the EPS was -- for the 3 quarters, was TWD 2.44, and ROE was 17.62%. And we saw a historical high performance for the first 9 months compared to before.

And the highlight of the third quarter, first of all, is the core subsidiary, CTBC Bank. We saw continued momentum and -- from institutional banking and also the wealth management of retail banking. We saw very good numbers. And then later on, we will explain in more detail.

And for the Taiwan Life, our insurance business also because of the dividend payout focused on the third quarter and also Taiwan dollar depreciated in the third quarter. So we saw good FX benefit. And also, we took some advantage of the stock market trading. So all the 3 recent contributed to the high performance of the Taiwan Life of the third quarter. So in the third quarter, we saw TWD 9.3 billion for the Life business. And for the first 9 months, we saw TWD 14.5 billion.

So in addition to Bank and Life, that we also see very strong momentum for our other subsidiary like our Securities, Venture Capital, [ site ] business and also Lottery, which all contributed to our performance for the first 9 months.

And looking forward, I think we will expect very stable and strong momentum from the Bank. However, for the Life, because the fourth quarter is -- this will not too much dividend in the fourth quarter, so we think that the peak earning of Life business should be in the third quarter. So -- but to continue, if we add together for this year, we think it's still high chance to achieve historical high earnings for this year.

And here is the brief update for me, and then later on, we will have more details later on for our presentation packages. Thank you.

[Megan Hsu, executive]

Thank you, everyone, for joining CTBC's Third Quarter 2023 Earnings Call. Please turn to performance highlights on Page 4. Supported by resilient operating performance at CTBC Bank and Taiwan Life, Holding's net profit reached TWD 19.8 billion in 3Q and TWD 48.6 billion in the first 9 months, up 25% Q-o-Q and 51% Y-o-Y, respectively. EPS was TWD 2.44. Holding's ROE was 17.6%, outperforming peers.

On the Bank, CTBC Bank's net profit was TWD 10.8 billion in 3Q and TWD 31.7 billion in the first 9 months, marking the highest net profit for the first 3 quarters on record. The strong performance was driven by sustained net interest income and fee income growth and increased trading income. Bank's asset quality was stable, and capitalization remain adequate.

Taiwan Life reported net profit of TWD 14.5 billion in first 9 months, show a strong rebound from one-off COVID loss last year. Hedging costs declined in 3Q amid NT dollar depreciation. Capitalization at Taiwan Life was strengthened. It issued sub-debt of TWD 13 billion in July.

Page 5, profitability. Holding's EPS was TWD 2.44 in the first 9 months. Group ROE was 17.6%, and ROA was 0.83%.

Page 6, capital ratio. We remain well capitalized, with group CAR at 122%. Life RBC ratio at 337%. Bank CAR at 13.4% and CE Tier 1 ratio at 10.6%.

Page 7, profit breakdown by entities. In 3Q, Holding's net profit was up 25%, driven by solid growth at CTBC Bank and Taiwan Life. Bank net profit reached TWD 10.8 billion, up 12% Q-o-Q, mostly due to increased fees and trading income. Life net profit reached TWD 6 billion (sic) [ TWD 9.348 billion ], up 56%, benefiting from lower hedging costs as NT dollar continued to depreciate in 3Q.

In the first 9 months, Holding's net profit was up 51% Y-o-Y, supported by strong operating performance at the Bank. Bank net profit reached TWD 31.7 billion, up 10% Y-o-Y, driven by higher net interest income, fee income and trading gains. Life profit was TWD 14.5 billion, rebounded strongly, owing to higher recurring income this year and a low base effect of corporate loss last year.

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

Page 9, revenue breakdown excluding Life. Total revenue was up 3% Q-o-Q and 20% Y-o-Y, largely driven by decent operating results at the Bank. Net interest income increased 2% Q-o-Q and 7% Y-o-Y. Fee income increased 9% Q-o-Q and 14% Y-o-Y. Combined derivative FX and trading gains increased Y-o-Y, driven by swap income and commercial paper related gains as well as equity-related gains.

Let's go to our banking business. Starting with loan breakdown on Page 11. Total lending with credit card revolving was up 4% Q-o-Q and 11% Y-o-Y, largely driven by solid growth in NT dollar loans. NT dollar corporate loan was up 4% Q-o-Q, driven by growth in manufacturing and commercial and service sectors. NT dollar corporate loan was up 16% Y-o-Y, reflecting resilient loan demand across sectors. Mortgage was up 5% Q-o-Q and 16% Y-o-Y, supported by stable business momentum and our participation in lending to civil servants. Unsecured and other loans increased. Thus, we continue to expand our customer base for unsecured consumer loans.

Page 12, foreign currency loan breakdown. Foreign currency loan was up 4% Q-o-Q and Y-o-Y. Overseas subsidiaries accounted for 59% of foreign currency loans, with TSB and LH being 2 larger subsidiaries. Overseas branches accounted for 31%. Overseas subsidiaries loan grew, driven by sustained business momentum in LH and U.S. subsidiary, both reporting double-digit loan growth. Overseas branch loan increased as most overseas branches observed loan growth to sustain, except Hong Kong, Singapore and Vietnam branches. OBU plus DBU loan was down as rising interest rates leads to lower customer demand for loans.

Page 13, Bank deposit mix. Total deposits reached TWD 4.8 trillion, up 2% Q-o-Q and 8% Y-o-Y. On the right, CASA ratio in NT dollar deposits has been relative stable, accounting for 61% of total NT dollar deposits. Time deposit ratio in foreign currency deposits increased to 61% because higher U.S. dollar interest rates represent a strong incentive for depositors to shift from savings to time deposits.

Page 14, loan-to-deposit ratio. Overall LDR was 73.7%. NT dollar LDR rose to 85.5%. Foreign currency LDR was 58.3%.

Page 15, NIM and spread. In 3Q, NT dollar spread continue to improve, while foreign currency spread was down Q-o-Q, as decline in CASA ratio and increased swap positions caused spread to narrow. 3Q NIM was 1.47%. Including swap income, NIM was 1.7% in the first 9 months.

Page 16, on Bank's fee breakdown. Total fees were up 10% Q-o-Q and 13% Y-o-Y, driven by improved momentum in wealth management, credit card and corporate business. Wealth management fee grew in 3Q as sales momentum sustained, driving mutual funds, structured products and bancassurance fees to increase. Wealth management fee increased 17% Y-o-Y, as business momentum recovered and rising interest rates supported sales of bonds.

Credit card fee was up 18% Q-o-Q, as travel season pushed up commissions. Credit card fee was up 10% Y-o-Y, driven by consumptions, which increased nearly 30%. Corporate business was up 22% Q-on-Q, driven by syndicated loan and cash management fees, and up 12% Y-o-Y, reflecting increased syndication and M&A volume.

Page 17, wealth management fee. For wealth management fee breakdown in the first 9 months, the proportion of mutual funds increased, underpinned by better capital market performance this year. In addition, the proportion of funds increased, reflecting the impact of rate hikes.

Page 18, cost/income ratio. Cost/income ratio was 53% in 3Q, improved Q-o-Q. Cost/income ratio in the first 9 months rose to 54.9% due to increased operating expense along with growing operating revenue and higher ESOP valuations.

Page 19. Asset quality at the Bank remained stable, with NPL ratio at 0.48%. NPL coverage ratio was 337%. 3Q credit costs were 29 basis points, relatively stable Q-o-Q. In the first 9 months, credit costs were 23 basis points, remained benign.

Moving to Life business. Let's go to Page 21, which shows information about total premium, first year premium and FYPE. FYPEs in the first 9 months declined Y-o-Y as the banking turmoil earlier this year affected sales of investment-linked products and customers turned to time deposits that capture the rising interest rates. However, Taiwan Life has been focusing on long-term value products, driving FYPE to increase by 18% Y-o-Y.

Page 22, FYP breakdown by products and channel. On the left is the product breakdown. We can see the proportion of value products, including health and PA and traditional policies' notable increase, reflecting Taiwan Life's focus on long-term value products. The proportion of investment-linked products declined as customers turn to other financial products.

On the right, in terms of channels, the proportion of bancassurance channel was lower, reflecting decline in sales of interest-sensitive and investment-linked policies. On the other hand, the proportion of insurance brokers and tied agents increased.

Page 23, FYP breakdown by type of payment and currencies. On the left, the proportion of regular paid products has increased. On the right, foreign currency policy accounted for 51% and NT dollar policy, 40% of FYP.

Page 24, investment asset mix. Total investment assets reached nearly TWD 2 trillion. In terms of portfolio breakdown, cash position slightly increased Q-o-Q as Taiwan Life continued to receive cash dividend in 3Q. The proportion of other types of assets remain relatively steady.

Page 25, investment yield, cost of liability and breakeven point. In the first 9 months, overall investment yield after hedge was 3.25% (sic) [ 3.85% ]. Recurring yield before hedge was 3.72%, both improved Y-o-Y, reflecting a low base effect of COVID loss last year and improved recurring income this year. Taiwan Life continues to maintain positive investment spreads against rising cost of liability and breakeven point.

Page 26, hedging mix. On the left, 42% of overseas investment assets were foreign currency policies. 33% were fully hedged. 15% were unhedged, and the rest was OCI position.

On the right, FX reserve amounted to TWD 13 billion as of 3Q. Hedging cost was 39 basis points in the first 9 months, improved from the first half largely due to NT dollar depreciation in 3Q.

Turning now to ESG highlights. CTBC Holding is committed to 2050 net zero. We are aware that the financial industry has a responsibility to lead the sustainable development of society and our environment. CTBC Holding will continue working with our customers and suppliers to move towards low-carbon operations through [ radical ] solutions.

That concludes the presentation. We are now open for Q&A.

[Justine Shen, executive]

Thank you. We are now in the Q&A session. [Operator Instructions] And now we have the first question from Citi, Michael.

How much ESOP cost was recorded in third quarter '23?

Okay. The amount for the third quarter for the total financial holding company is -- was [ $304 million ]. And for Bank's was TWD 226 million.

We have a second question from Goldman. Can you please guide around year '24 target for loan deposit fees and [ full ] VNB, also hedging costs?

[Rachael Kao, executive]

Sorry for the question that we are still in the budgeting process. We are not able to provide any guidance at this moment. Thank you.

[Justine Shen, executive]

[Operator Instructions] Now we have a second question from Goldman. What is the target CAR for this year with and without ESOP?

The cost/income ratio for the first -- for the 9 months was, original for -- was 54.9% for Bank. And [ without our ] expense was 54%.

Another question from Goldman. So another question from Goldman. Are we confident that CET1 CAR and -- will be 11% plus starting 2025? Is it around 10.5% now? Are we at [ DC Bank ], so need that level, how to get there?

Before our CFO provide more details, I can, first of all, give some quick response. And our CET1 ratio at the end of September is around 10.6%. And we are expecting the more earnings coming soon. So the CET1 ratio actually will improve. And this year, the regulatory requirement for CTBC Bank is 10.5%. So we are comfortable that it's 10%. So we are comfortable that we will maintain above that level. And as of the requirement for 2025, which is 11%, we are also confident that we will do a necessary adjustment and to -- and also continuing to accumulate in our earnings to achieve that level.

[Rachael Kao, executive]

I would like to add some comments on the CAR ratio and dividend policy. As Justine mentioned that we'll continue to make profit for our bank operation. That's why that for the target going forward for '24, '25 that we are confident that we will achieve all the targets.

And then for the dividend, I think that one of the reasons for the lower of the CET1 for this year was some -- for our dividend payout at the Holding company that's highly relied on the earnings contributed from the Bank because the Life operation last year that we do have like P&C issues. So for this year, that we have very healthy earnings from the Life operation. So we think for next year to distribute this year's earning that the Bank can reserve the necessary capital at hand. So we don't think that's going to impact the dividend payout at the Holding company. So there's some comment at -- for our dividend policy and also for our CAR ratio.

[Justine Shen, executive]

Next question is from KGI. Can you offer third quarter 2, 3 financial holding company OCI?

The amount of other interest in the equity in September was TWD 57.7 billion.

And we have a question regarding Taiwan Life. What is the bond exposure by Taiwan Life, which is on the fair value OCI or fair value P&L and plus still adjust to mark-to-market loss? And in third quarter '23, why the unrealized mark-to-market in other equity items related to bonds not seeing further mark-to-market losses given the rise in U.S. bond yields?

[Pai-Hung Yeh, executive]

For Taiwan Life, the bond exposure and the fair value P&L is TWD 94.5 billion. And under OCI is -- was TWD 100.8 billion at the end of September. And the unrealized -- and the unrealized loss for FVPL was TWD 7.7 billion at the end of September. And for OCI, the unrealized loss was 28 -- no, no, TWD 21 billion at the end of September. Compared to last year, it was TWD 5.8 billion loss further. That's all.

[Justine Shen, executive]

And the next question is from JPMorgan. Are you planning to apply for IRB? If yes, when would you expect to use IRB? And what is rough benefit for CET1 ratio?

[Rachael Kao, executive]

Okay. For the IRB, actually, for CTBC, we have been implemented IRB for, say, maybe more than 10 years. But now that we're talking to the regulators that to use IRB for our CAR ratio base for calculation for the risk-weighted asset, we're still in the process, communicating to the regulators. So we are not sure yet for the timing. And then definitely, it will be benefit, but probably, it's not ready to disclose the potential benefit at this moment, but it's quite a big upside. That's for your reference. Thank you.

[Justine Shen, executive]

And the next question is from Goldman. How much growth in Tokyo Star Bank on loans deposit?

Sorry, we have another question before. There's a question about 2023 full year loan and deposit target and also the fee growth target and also the credit cost target. And as for Life, the 2023 target for pre-hedging recurring yield and cost of liability.

Okay. Full year loan and deposit growth expectation for year 2023, we'll expect it to be high digital -- high digit -- high single-digit growth. And for fee income growth, we expect it to have double-digit. And for credit cost, we expect it to be 25 basis points. And for Life, the target pre-hedge recurring yield are expected to be 3.61%. And for cost of liability was 3.21%.

And the next question is about Tokyo Star. And how much growth in Tokyo Star Bank on loans and deposits can we see now? And it has -- and where the growth come from?

The loan balance for the Tokyo Star Bank this year was about low-digit growth.

[Operator Instructions] And now we have another question. It's about Taiwan Life. What's the hedging cost target for this year? And also regarding the traditional hedging position, why is the split between credit swap and NDF?

Originally, we actually guided for 108 basis points for the hedging cost this year. However, actually, we've been see FX gain in the third quarter. So we are expected that the credit cost -- the hedging cost for the full year can be lower to 60 to 70 basis points. And the swap proportion was around 57% to 58% -- sorry, NDF portion was about 57% to 58%.

[Operator Instructions] It appears that we have no further questions. And thank you for attending the meeting. If you have any other questions, you have -- always feel free to contact CTBC IR team. And thank you for your participation. Goodbye.