CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Transcript 2019-Q4

[Operator]

Welcome, everyone, to CTBC Financial Holding Co.'s 2019 Fourth Quarter Earnings Conference Call. [Operator Instructions]

Today's host will be Daniel Wu, the President of CTBC Financial Holding Co.; and Ms. Ya-Ling Chiu, Executive Vice President and Spokesperson of CTBC Financial Holding Co.; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Co. And the presentation will begin now.

[Yaling Chiu, executive]

Thank you, everyone, for joining CTBC's 4Q '19 Earnings Call. Please turn to Page 3 for 2019 highlights.

Overall, at the holding level, ROE reached 13.04%, ROA at 0.72%, EPS at TWD 2.16. Net profit grew 19% Y-o-Y, demonstrating a record profit of TWD 42.9 billion. Holding also maintained strong capital with CAR ratio at 115.7% and decent double-leverage ratio at 115.6%.

For CTBC Bank, high net interest income was driven by robust loan growth in NTD corporate, mortgage and personal loan Y-o-Y.

Meanwhile, fee momentum was strong in wealth management, credit card and corporate business. Asset quality remained benign with stable NPL ratio of 0.36%, and credit costs were 22 bps. Bank CAR ratio was at 13.8%, and CET1 ratio was at 11.3%.

For Taiwan Life, its after-tax net profit was TWD 13.1 billion, increased 58% Y-o-Y due to successful shift to value-focused strategy with decreased liability costs and enhance recurring yield.

RBC ratio remained superior at 298.3%. CTBC is constituting stock of the MSCI Taiwan ESG Leaders, DJSI Emerging Markets Index, FTSE4Good Index Series and Taiwan Stock Exchange Corporate Governance 100 Index for its outstanding performance in ESG.

CTBC Holding also maintained a leading bank in net and mobile banking with 4.5 million and 3.1 million customers, respectively. It pioneered in cross-border transactions and policy eClaim via blockchain technology.

Please turn to Page 4 on our focus on banking and insurance businesses as well as digital and fintech opportunities.

For banking business, we will pursue opportunities following capital repatriation and supply chain reallocation while continue to strengthen profitability overseas by deepening cross-border and cross-selling opportunities via CTBC's overseas platform.

Meanwhile, we aim to continue to enhance capital efficiency and continue to improve cost-to-income ratio.

For insurance business, Taiwan Life will continue to pursue a value strategy focusing on regular-paid, protection-type, investment-linked and foreign currency policies.

Meanwhile, Taiwan Life continues to reduce asset and liability mismatching, strengthen sustainable profit contributions and improve overall customer experience by revamping internal process via digital technology and conducting more sophisticated customer segmentation.

In 2020, CTBC will also continue its efforts in digital transformation, utilizing digital channels in attracting customers, performing digital transactions and conducting operations and client management. CTBC will also focus on strengthening digital infrastructure including core IT, cloud, data as well as fostering a culture of innovation with talent development and agile process.

Page 5 on profitability. Holding 2019 net profit was TWD 42.9 billion, up 19% Y-o-Y. EPS was TWD 2.16.

Page 6. Group ROE was high at 13.04% and ROA was 0.72%.

Page 7 on capital ratio. We remain well capitalized with group CAR at 115.7%, CAR -- bank CAR at 13.8%, Tier 1 ratio at 12.4% and CE Tier 1 ratio at 11.3%. Life RBC ratio was 298%.

Page 8 on profit breakdown by legal entities. Overall, 4Q net income was down due to 3Q record high profit in bank and Life, from increased core earnings and dividend income, while 4Q provision increased from specific cases. On the bottom, in 2019, bank profits reached TWD 30.9 billion, up 4.1% Y-o-Y.

Life profits reached TWD 13.1 billion, up 58% Y-o-Y. Holding profits reached a record profit of TWD 42.9 billion, up 19% Y-o-Y. In terms of profit breakdown, bank and Life contributed 72% and 31%, respectively.

Page 9 on net profit movements. Overall, 4Q net income was down due to 3Q record high profit in bank and Life, from increased core earnings and dividend income as well as 4Q provision increased from specific cases.

On the bottom, as net interest income and fee income of Holding, excluding Life, grew 8.5% Y-o-Y and investment margin improved, operating revenue was up 9.2% Y-o-Y. Provision increased 14% Y-o-Y, and credit costs were 22 bps, up 2 bps year-on-year. Expense was 8.8% Y-o-Y. Foreign currency loan was down 3.3% Q-o-Q -- sorry, insurance pretax profit was up 81.6%, as recurring yield enhanced as Taiwan Life continues to adjust its product strategy and diversify its investment mix, while cost of liability also decreased. Overall, Holding net income reached TWD 42.9 billion, up 19% Y-o-Y.

Page 10 on revenue breakdown, excluding Life. 4Q '19 total revenue was down 12.5%. 2Q '19 -- 2019 total revenue was up 9.2% Y-o-Y, attributing to 8.5% growth in solid core NII and fee income. Net interest income was down 2.4% Q-o-Q, as NIM was down 3 bps due to U.S. rate cut in the fourth quarter, it was up 7.2% Y-o-Y from continued loan growth. Fee income was down 5.5% Q-o-Q due to higher base in third quarter on wealth management and lottery fees, and up 10.7% Y-o-Y on growth of credit cards, wealth management, lottery, corporate and retail fees.

Combined derivative, FX and trading gains were down 39.1% Q-o-Q due to higher base in third quarter with more dividend income but up 18.9% Y-o-Y from equity and debt security gains.

Please see profit mix on the right, where NII accounted for 53%; fee, 33%; core earnings combined constitute 86% of total revenue. Meanwhile, trading, derivatives and FX accounted for 13%.

Page 11 on bank's loan breakdown. Total lending with credit card revolving at the end of December was TWD 2.5 trillion, reflecting flat Q-o-Q, an increase of 4.5% Y-o-Y. NT dollar corporate loan was up 0.7% Q-o-Q, where growth from public enterprises, financial and construction and real estate industry were offset by decreased manufacturing and commerce and service industry loans due to decreased demand in working capital and repayment from customers. It was up 7.4% Y-o-Y from public enterprises, construction and real estate industry as well as financial industry.

Foreign currency loan was down 3.3% Q-o-Q due to over 3% NTD appreciation, both USD dollar and Japanese yen. Excluding FX, foreign currency loan was down 0.2% Q-on-Q, mainly due to affected OBU and DBU momentum attributing to U.S.-China trade war. However, excluding FX, Southeast Asia region loans grew 6.4%, mainly from Indonesia, Philippines, Vietnam and India. Foreign currency loan was down 0.3% Y-o-Y, which will be further explained on Page 12.

Mortgage continued to grow 2.7% Q-o-Q, and up 8.5% Y-o-Y due to recovery of property market. Unsecured lending was up 4.8% Q-o-Q, and up 11.5% Y-o-Y. Credit card revolving was up 0.6% Q-o-Q and 1.1% Y-o-Y on increased consumption.

Please refer to the graph on the right for our lending portfolio mix, where foreign currency loan accounted for 42%; NTD corporate loan accounted for 24%; mortgage, 28%; unsecured lending, 5%; 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 December was TWD 1.03 trillion, which constituted 42% of total lending. Overseas subsidiaries accounted for 58.5% of total foreign currency loan, with TSB being the majority. Overseas branches accounted for 31.1%. OBU plus DBU was 10.4%.

On the right, other than TSB, which we employ a slow growth with value strategy, lending and other overseas subsidiaries continue to increase. Overseas branches loan was up 5.8% Y-o-Y as we continue to expand our customer base and as trade finance and syndications increase. Growth was mainly from Singapore, Vietnam, Tokyo and in China. OBU plus DBU was down 13.7% Y-o-Y due to decrease in working capital attributing to the U.S.-China trade war.

Page 13 on bank deposit mix. Total deposits as of December reached TWD 3.38 trillion, of which NTD accounted for 54.5% and foreign currency accounted for 45.5% of the deposits.

On the left, total Taiwanese dollar deposits were down 1.2% Q-o-Q and up 11.6% Y-o-Y. NT dollar savings deposit accounted for 56.8%.

On the right, total foreign currency deposits were down 2.8% Q-o-Q and up 2.6% Y-o-Y. Foreign currency savings deposit accounted for 50.6% of foreign currency deposits.

Page 14 on loan-to-deposit ratio. Overall, LDR was 74.33%. NT dollar LDR was 78.8%. Foreign currency LDR was 68.93%.

Page 15 on NIM and spread. In the fourth quarter, foreign currency spreads were down 9 bps Q-o-Q to 2.23% due to U.S. rate cut. NT dollar spreads were 1.56%. Overall spreads were 1.83%, down 5 bps from last quarter.

4Q '19 NIM was down 3 bps Q-o-Q at 1.47%. 2019 NIM was 1.5%, flat from 2018.

Page 16 on fee breakdown. Total fees were down 6.2% Q-on-Q, but up 10.5% Y-o-Y. Wealth management fee was down 4.5% Q-o-Q due to higher mutual fund and bond income in 3Q, attributing to a better investment market condition. However, it was up 6.3% Y-o-Y. In detail, bancassurance increased 5.7%. Mutual funds decreased 11.7% due to continued effect from U.S.-China trade war in the investment market.

In addition, bond-related fee income increased attributing to stimulated sales in bonds due to U.S. rate cut. Credit card fee was up 6.6% Q-o-Q from increased consumption, attributing to anniversary sales in department stores and decreased credit card rebate amount. 2019 credit card fee was up 39% Y-o-Y. Retail business was down 1.8% Q-o-Q and up 7.1% Y-o-Y, driven by loan-related and ATM fees. Corporate business was down 11.1% Q-o-Q due to higher dividend income from Q3. It was up 2.9% Y-o-Y, mainly due to increased fee income from syndication loans. Overseas subsidiaries fee was down 24.2% Q-o-Q due to the decrease in corporate lending fees of TSB. However, it was up 0.2% Y-o-Y.

Lottery fee was down 17% Q-o-Q due to higher rewards in 3Q, but it was up 12.5% Y-o-Y.

Page 17 on wealth management fee. For wealth management fee breakdown, bancassurance contributed 61%; mutual funds, 30%; custodian and trust, 3%; structured and others, 6% of total wealth management fees.

Page 18 on cost/income ratio. For cost/income ratio, operating expense and operating revenue decreased 3% and 10.6%, respectively. Cost income ratio was 60.2% in 4Q '19 and 57.72% in 2019.

Page 19 on asset quality. Asset quality was benign with NPL ratio at 0.36%, decreased 4 bps from last quarter, and NPL coverage ratio increased to 369.4%.

Page 20 on credit cost. 4Q '19 credit cost was 44 bps, up 41 bps Q-o-Q due to specific overseas cases in 4Q.

4Q '19 credit cost was 22 bps, up 2 bps from 2018.

Moving on to Life business. Page 21 on total premium. To create a sustainable business model, Taiwan Life continue to adjust product strategies to focus on regular-paid, protection-type investment-linked and foreign currency policies. We stopped selling NTD single-paid products in 3Q '18 and gradually stopped selling short-term regular-paid NTD policies in the first half of 2019. Thus, 2019 total premiums were TWD 232.3 billion, down 21.4% Y-o-Y. Market share was 6.7%, ranked #6 in the industry.

Page 22 on first year premium. 2019 FYPs were TWD 83 billion, down 38.2% Y-o-Y due to product strategy adjustment. Market share was 6.5%, ranked #6 in an industry.

Page 23 on FYP breakdown by types of payment and products. On the left, mix of investment linked-products was 25%. Regular-paid products has increased from 36% to 45.1% of FYP, and single-paid products have dropped from 40.6% to 29.9% of FYPs.

On the right is break down by products. Interest-sensitive policy accounted for 67.5%, investment-linked accounted for 25%, traditional increased to 2.5% and A&H increased to 5.1% of FYPs.

Page 24 on FYP breakdown by channels and currencies. In terms of channel, contribution was mainly from bancassurance, 42.6% from CTBC Bank and 27.6% from external banks. Tied agents contributed 20.6% of FYPs; insurance brokers, 7.6%; telemarketing and others, 1.7%.

On the right, investment-linked product accounted for 25%, foreign currency accounted for 43.3% and NT dollar policy accounted for 31.8%.

Page 25 on FYPE. 2019 FYPE was TWD 21.4 billion, decreased 18% Y-o-Y due to product strategy adjustments. Taiwan Life increased regular-paid promotions and thus, FYPE decreased less than FYP. Market share was 5.4%, ranked #6 in the industry. On the right is the FYPE mix for your reference.

Page 26 on investment asset mix. Total investment asset reached TWD 1.8 trillion. In terms of portfolio breakdown, cash accounted for 5.3%; domestic fixed income, 10.2%; overseas fixed income, 59.8%; equities, 8.2%; mortgage, 1.6%; policy loans, 1.4%; and real estate, 4.4%. Mutual fund increased to a stable portfolio to account for 9.2% of total investments.

Page 27 on investment yield, cost of liability and hedging mix. Cost of liability continue to decrease. 2019 cost of liability was 3.45%, down 16 bps from 2018. Recurring yield before hedge was 3.86%, increased 10 bps Y-o-Y. Investment yield was 3.84%, up 36 bps from 2018. 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 64% were fully hedged, 13% were OCI-positioned and 22% were unhedged. Taiwan Life increased TWD 1.5 billion FX valuation reserve in 4Q '19. Thus, annualized hedging cost was 2.05% for 4Q '19, 1.46% for 2019.

The presentation will stop here, and we'll now open for Q&A.

[Operator]

Okay. Ladies and gentlemen, sorry, we are facing a technical problem of the audio conference.

[Operator Instructions]

[Unknown Executive]

We have a question from Goldman Sachs. The question is, can you lay out your bank NIM guidance as well as the bank loan growth target for the year? We will have the CFO to answer the question.

[Yaling Chiu, executive]

Thank you for your question. Actually, we have revised our full year forecast after the coronavirus outbreak. Since there are still a lot of uncertainties, we are assuming the virus will be contained by the end of second quarter. Under which, we also make the following assumptions: loan demand will decline and will rebound in the second half of the year; volatility of the financial market will impact our wealth management and credit card momentum; asset quality will deteriorate; Fed will cut rates by 100 basis points; and Taiwan Central Bank, under this pressure, will cut rates by 25 basis points. And we also will have a fixed income, which is benefits from mark-to-market valuation. So under these assumptions, our drivers for this year would be for loan growth is low to mid-single digits, both for NT dollar loans and for foreign currency loans. And for NIM, because we assume Fed will cut 100 basis points and Taiwan Central Bank will cut 25 basis points, so we anticipate NIM will decline by 4 to 5 basis points, which were around 1.54% for the whole year in 2020.

Fees will be flat to low single-digit growth. And for credit cost, will deteriorate to 20 to 25 basis points. And cost/income ratio, we are targeting at 59%. That's the outlook for banking side.

[Unknown Executive]

We are sorry that we are having a problem with the teleconference. And should you have any question, please shift to the webcast and type your question.

And now we have a question from HSBC. The first question is how should I look at the bank's trading income on the lower Fed rate and lower bond yield? So we will have the CFO to answer this question.

[Yaling Chiu, executive]

We see opportunities on fixed income. Like I just mentioned, that the -- we see the upside opportunity on the mark-to-market valuation on fixed income. So these trading gain or mark-to-market gains will partially offset the decline of net interest income.

[Unknown Executive]

Yes. And we -- and [ with regards ] for Taiwan Life. The first question is, for Taiwan Life the unrealized gain position at the end of February 2020.

And the second question is the credit rating profile of Taiwan Life's overseas bond portfolio.

And the third question is if Taiwan Life has any plan or quota to issue preferred shares in 2020.

So we will have Mr. Pai-Hung Yeh from Taiwan Life to answer this question.

[Pai-Hung Yeh;Executive Vice President of Taiwan Life Insurance Co., executive]

Unrealized gains at end of February for bonds is TWD 10.6 billion, and therefore, stock and mutual fund together is negative TWD 5.3 billion. Credit rating, BBB above is 99% for total bond portfolio; and above A is 70% -- 80%, around 80%, 81%.

[Unknown Executive]

And there is a third question, does Taiwan Life has any plan to issue preferred shares in 2020?

I'm sorry, I think the question should be referred to the holding company. So we will have the CFO, Ya-Ling to answer the question.

[Yaling Chiu, executive]

No, we don't have plan to issue preferred shares in 2020.

[Unknown Executive]

We are sorry that we're down because we have some technical problem with the teleconference. So should you have any question please shift to the webcast and type your question.

Thank you for listening to CTBC's analyst meeting today. We are deeply sorry for the teleconference. And we seem to have no further questions. And the meeting will end today right now. Thank you.

[Operator]

Thank you. And ladies and gentlemen, we're sorry about the inconvenience that the system caused. We thank you for your participation in CTBC Financial Holding Co.'s Conference Call. You may now disconnect. Goodbye.