CTBC Financial Holding Co Ltd

TWSE:2891

Earnings Call Transcript 2021-Q4

[Operator]

Welcome, everyone, to CTBC Financial Holding Company's 2021 Fourth 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.

[Pai-Hung Yeh, executive]

[Interpreted] Thank you, everyone, for joining CTBC's 4Q 2021 Earnings Call. Please turn to Page 4 on financial highlights. CTBC Holding delivered a robust operating result throughout 2021 with record after-tax profit of TWD 54.2 billion, up 27% Y-o-Y. ROE and ROA reached 13.7% and 0.79%, respectively. EPS was TWD 2.73. Holding remained well capitalized with CAR at 131% and double leverage ratio at 115%. CTBC Holding recently received 1 notch upgrade to A3 from Moody's.

Total lending increased 11%, led by sustained growth in domestic corporate loans, mortgage and unsecured consumer loans, pickup in wealth management, corporate and lottery fees, supported fee income growth of 9% Y-o-Y. Capitalization remains sound with CAR at 14.6% and CE Tier 1 ratio at 11.5%. CTBC Bank recently received 1 notch upgrade to A1 from Moody's.

Taiwan Life reported strong after-tax profit growth of 40% Y-o-Y on the back of decent investment income, while cost of liability and hedging costs continued to improve. RBC ratio was down at 342%.

Page 5 on recent updates. On LHFG, CTBC Bank has increased its holding in Thailand's LHFG to 46.6% last year and gained majority control of the Board. CTBC Bank consolidated LHFG in 4Q '21. With the consolidation, CTBC Holding now has total assets of more than TWD 7 trillion.

On Board election, the Board plans to nominate 7 director candidates. The backgrounds of the candidates will be evaluated to ensure the Board has wide-ranging expertise, experience and capabilities.

The nominations will include 4 independent directors, including 1 female candidate to maintain the independence of the Board and reinforce its diversity. On employee RSA, the company plans to replace the ESOP with employee restricted stock awards in order to minimize the volatility that ESOP posed to earnings. The RSAs will be offered to middle management and above with a vesting period of 5 years and a total dilution of less than 0.46% for 2022.

The Board recently announced a cash dividend of TWD 1.25 per common share on 2021 earnings, implying a payout ratio of 45.8% and a dividend yield of 4.3%.

Page 6, on 2022 business focuses. On Institutional Banking, the company will enhance lending and fee product offerings amid rate hike cycle and eased COVID-19 measures. To cultivate overseas markets, we will focus on targeted segments and strengthen cross-border platform to serve corporates. In addition, we aim to provide differentiated products and services, leveraging digital capabilities.

On Retail Banking, we aim to penetrate high net worth individuals and affluent customer segments through diversified product offerings and innovative services. We will leverage digital and Big Data advantages across a broader range of use scenarios in order to expand our customer base. In addition, we'll continue to strengthen core competencies and partner with business alliances to develop innovative digital payment models.

On Insurance Business, Taiwan Life will prioritize growth in protection type and foreign currency policies, while fulfilling customer needs. In addition, we aim to expand customer base by optimizing digital platform, improving advisory model and enhancing service and product offerings. Considering the implementation of IFRS 17 and ICS, we formulate investment strategies and adjusted portfolio by balancing capital allocation and investment returns.

Page 7 on ESG. In February, the holding became the first corporate in Taiwan to sign up for Taskforce on Nature-related Financial Disclosures. We are committed in expanding our impact to ESG through our core financial services. CTBC Bank has extended green financing of TWD 153 billion and issued an underwritten sustainability bond totaling TWD 3 billion in 2021. In addition, Taiwan Life has made over TWD 41 billion sustainable investments in bonds, ETFs and funds and project financing.

Page 8 on Profitability. Holding's 2021 net income was TWD 54.2 billion. EPS was TWD 2.73. Group ROE was 13.7%, and ROA was 0.79%.

Page 9 on Capital Ratio. We remain well capitalized with group CAR at 131%, Life RBC ratio at 342%, bank CAR at 14.6% and CE Tier 1 ratio at 11.5%.

Page 10 on profit breakdown by entities. In 2021, Bank net profit reached TWD 29.8 billion, up 9% Y-o-Y. Life profit was TWD 23.1 billion, up 40% Y-o-Y. Holding reported consolidated net profit of TWD 54.2 billion, up 27% Y-o-Y. From the table on the right, Bank and Life contributed 55% and 43% to Holding's profit, respectively.

Securities and other subsidiaries reported decent profit growth and contributed 2% to Holding's profit.

Page 11 on net profit movements. On the bottom, for 2021, operating revenue was up 8% Y-o-Y, supported by sustained growth in net interest income, wealth management fees and trading gains. Provisions were down 17% Y-o-Y due to lower specific provisions. Full year credit cost was 28 basis points, as LH took additional provisions against its debt relief program in 4Q.

Expense was up 11% Y-o-Y, mostly on higher ESOP valuations. Life's pretax profit was up 41% Y-o-Y, supported by decent investment income and improved cost of liability and hedging costs. Overall, Holding's pretax profit reached TWD 62 billion and net income reached TWD 54.2 billion, up 27% Y-o-Y.

Page 12 on revenue breakdown, excluding Life. Total revenue was up 8% Y-o-Y. Net interest income was up 5% Y-o-Y due to sustained growth in NT dollar loans. Fee income was up 11% Y-o-Y, as buoyant capital markets supported wealth management, securities and investment trust fee income growth. Moreover, we observed stable fee income growth in retail, corporate and lottery business.

Combined derivative FX and trading gains was up 11% Y-o-Y, amid positive capital markets. Long-term investment and other income increased year-on-year due to disposal gains on collaterals and recognition of bargain purchase gains.

Page 14 on bank's loan breakdown. Total lending with credit card revolving was up 11% Y-o-Y, Excluding FX impact, total lending was up 14% Y-o-Y. NT dollar corporate loan was up 16% Y-o-Y and growth from government-related commerce and services and construction and real estate sectors. Foreign currency loan was up 9% Y-o-Y with the consolidation of LH. Excluding FX, foreign currency loan was up 16% Y-o-Y. Mortgage continued to grow 9% Y-o-Y amidst stable property market. Other loans were up 13% Y-o-Y, mostly on growth in unsecured consumer loans as we continued to expand our customer base and participated in labor-relief program led by the government last year.

Page 15 on foreign currency loan breakdown. Foreign currency loan accounted for 38% of total lending. Overseas subsidiaries accounted for 61% of foreign currency loans with TSB and LH being 2 larger subsidiaries. Overseas branches accounted for 28%. OBU plus DBU was 11%.

Looking at the foreign currency loan breakdown by region, Japan accounted for 36% of foreign currency loan; Southeast Asia, 26%; Greater China, 14%; and North America was 12%. With the consolidation of LH, overseas subsidiaries loan was up 12% Y-o-Y. Excluding FX, overseas subsidiaries loan was up 23%. If excluding the impact from FX and LH, overseas subsidiaries loan was down 3%, mostly due to repayment from corporate clients and adjustment of lending policy at TSB. However, U.S. and Indonesia subsidiaries both reported double-digit growth.

Overseas branch loan was up 4% Y-o-Y. Excluding FX, overseas branch loan was up 8% as most overseas branches observed loan growth momentum to pick up except Singapore branch. India and China branches reported double-digit growth. OBU plus DBU was up 4% Y-o-Y. Excluding FX, OBU plus DBU loan was up 7%, driven by growth in trade finance and syndicated loans.

Page 16 on bank deposit mix. Total deposits reached TWD 4.1 trillion, up 10% Y-o-Y. On the right, total NT dollar deposits were up 12% Y-o-Y. NT dollar savings accounted for 63%. Total foreign currency deposits were up 6% Y-o-Y. Foreign currency savings accounted for 58%.

Page 17 on loan-to-deposit ratio. Overall, LDR was 70.2%. NT dollar LDR was 77%. Foreign currency LDR was 60.8%.

Page 18 on NIM and spreads. In 4Q, foreign currency spread was 2.34%, up 16 basis points Q-o-Q. Due to the consolidation of LH and the repayment of lower-yielding loans, NT dollar spread was 1.53%, up 2 basis points Q-o-Q due to favorable loan mix. Overall spread was 1.83%, up 8 basis points Q-o-Q. 4Q NIM was up 4 basis points Q-o-Q at 1.43%. Excluding impact from LH, NIM was 1.4%.

Page 19 on fee breakdown. Total fees were up 9% Y-o-Y. Wealth management fee was up 18% Y-o-Y as the level of volatility in capital markets moderated compared to year 2020. Bancassurance fees were up 26% Y-o-Y. While structured products and other fees were up 19% Y-o-Y. Credit card fee was down 6% Y-o-Y as rebound on domestic consumptions per shop commissions as well as credit card rebates.

Retail business was up 1% Y-o-Y, mostly due to increase in loan-related fees. Corporate business was up 11% Y-o-Y, driven by increases in trust and syndicated loan fees. Overseas subsidiaries fee was down 1% Y-o-Y, mostly due to decline in loan-related fees at TSB. Lottery fee was up 2% Y-o-Y, due to record high sales in Chinese New Year despite adverse impact from COVID in 2Q.

Page 20 on wealth management fee. For wealth management fee breakdown in 2021, bancassurance contributed 59%, mutual fund 29%; custodian trust, 3%; and others 9% of total wealth management fees.

Page 21 on cost/income ratio. Cost/income ratio was 59% in 2021, higher than the ratio in 2020, mostly due to higher ESOP valuations. Excluding ESOP impact, cost/income ratio will drop from 59% in 2020 to 56% in 2021, indicating effective expense control.

Page 22 on asset quality. As of 4Q NPL ratio was 0.57% and NPL coverage ratio was 293.9%. Excluding impact from LH, NPL ratio was 0.43%, and NPL coverage ratio was 344.7%. 4Q credit cost was 46 basis points, up 18 basis points Q-o-Q, as LH took additional provisions against its debt relief program. Full year credit cost was 28 basis points. Excluding impact from LH, full year credit cost would be 24 basis points.

Moving on to Life business. Page 24 on total premium and first year premium. Total premiums were TWD 206.2 billion in 2021, down 1% year-on-year. FYPs were TWD 106.6 billion, up 19% Y-o-Y, mostly on growth in investment-linked products.

Page 25 on FYP breakdown by products and channels. On the left is the product breakdown. Investment-linked products accounted for 60%, interest-sensitive policies 36%, health and PA 3%, and traditional 1%. On the right, in terms of channels, 69% of FYPs came from CTBC Bank, 18% from external banks, 7% from tied agents, and 5% from insurance brokers and others.

Page 26 on FYP breakdown by type of payment and currencies. On the left, single paid products accounted for 24%, and regular paid products accounted for 15% of FYP. On the right, investment-linked product accounted for 60%, foreign currency policy 35%, and NT dollar policy 5% of FYP.

Page 27 on FYPE. Full year FYPE was TWD 22 billion. On the right is the mix for your reference.

Page 28 on investment asset mix. Total investment assets reached TWD 2 trillion. Taiwan Life reduced its cash holdings and increased investments in equity in 4Q. In terms of portfolio breakdown, cash accounted for 5%, domestic fixed income 9.8%, overseas fixed income 60%, equities 9.1%, mortgage 1.6%, policy loans 1.3%, real estate 4.5%, and mutual fund 8.5%.

Pre-hedge returns for each type of investment assets are as follows: cash 0.16%, domestic fixed income 2.01%, overseas fixed income 5.33%, equities 10.03%, mortgage 2.17%, policy loans 4.86%, real estate 0.84%, as part of the real estate project construction work is underway. And the return for mutual fund is 5.33%.

Page 29 on investment yield, cost of liability and breakeven point. In 2021, Taiwan Life still maintains positive investment spread. Overall investment yield after hedge was 4%. Recurring yield before hedge was 3.31%, cost of liability was down 5 basis points Y-o-Y to 3.05%, and breakeven point continued to improve at 2.74%.

Page 30 on hedging. On the left, 41% of overseas investment assets for foreign currency policies, 37% were fully hedged, 9% were OCI-positioned, and 13% were unhedged. On the right, FX reserve amounted to TWD 2.9 billion as of 4Q. Full year hedging cost was 1.19%, down 20 basis points Y-o-Y, mostly due to lower cost for hedging instruments.

Next section is the ESG highlights for your reference. That concludes the presentation.

[Yaling Chiu, executive]

Good afternoon, everybody. This is Ya-Ling Chiu. As this is the first analyst meeting in this year, I would like to take you through the outlook guidance for major drivers. Bank side, for loan growth, we expect double-digit growth, both for NTD loans and foreign currency loans. For NTD loans, as we grew by double digits last year, we believe this momentum will continue given the 4% GDP growth in Taiwan this year based on our in-house estimation.

And for foreign currency loan, for the last year, actually taking out Singapore and TSB, for other countries, the loan growth was double digit on a constant currency basis given the eased COVID-19 measures in those countries, and we also believe this momentum will continue. For Singapore, we also expect Singapore loan book will grow because the Singapore government is promoting advanced manufacturing and encouraging manufacturers in this sector to invest in Singapore. And this industry, I think Taiwan is good at this advanced manufacturing industry. So this is the opportunity for CTBC to serve our Taiwanese clients if they want to invest in Singapore.

And for TSB, also, the government has eased the COVID-19 measures. So we believe the business activities will be more than before. So also the M&A, merger and acquisition activities are quite active in local markets. So we will grow for the structured finance this year. So we believe TSB's loan book will grow by low single digits.

And in terms of NIM, because the rate hike from U.S. affects that and Taiwan Central Bank, our in-house estimation is there would be 175 basis points rate hike for U.S. rate and 62.5 basis points for NTD rate hike. And this will contribute to our overall NIM by 7 basis points. So we anticipate the NIM will be at 1.50%. So we can do a simple math. Last year, excluding LH, the overall NIM for the whole bank was 1.39%, and the consolidation of LH will contribute 4 basis points and plus rate hike 7 basis points. So 139 plus 4 plus 7 equals 1.50%. So our estimation for NIM for this year is 1.50%.

And for fee, we expect high single-digit growth, both for wealth management fees and credit card fees. And also, we expect growth from corporate fees given the loan growth and the syndication loan fees. And for credit cards, our expectation is to maintain at around 20 to 22 basis points, which is the regular level. And for cost-income ratio, our target is around 57% for this year.

On Life side, for recurring yield, our outlook is 3.27%, 3.27% for recurring yield. For cost of liability, we expect at 3.13%, 3.13% for cost of liability. And for hedging cost, because the depreciation of Taiwanese dollars, our outlook is 58 basis points. And then we also expect our AUM, the investment asset to grow by 5%. So that's all for the outlook guidance. Now we can start the Q&A session.

[Operator]

[Operator Instructions] The first question is coming from Gurpreet Sahi of Goldman Sachs.

[Gurpreet Sahi, analyst]

For the NIM guidance regarding 2022, can you also tell us, if the interest rates remain at this level that you forecast, then what would be the net interest margin in 2023 and 2024? Because I assume that the NIM the year 2 effect can be higher than the year 1. So any guidance on that?

[Yaling Chiu, executive]

Our estimation for the NIM in 2023 is 1.6%, 1.6%. And you are right, for 2022, the impact of the rate hike will not be fully reflected on our book yet. In 2023, if there's no further rate hike, then the NIM for 2023 will be 1.60%.

[Gurpreet Sahi, analyst]

Okay. And then 1 more question regarding the cost-to-income ratio guidance of around 57%. Is this excluding the ESOPs?

[Yaling Chiu, executive]

No, that already includes ESOP, it's all in.

[Gurpreet Sahi, analyst]

Okay. Understood. That's all my questions.

[Operator]

And next we have Jemmy Huang of JPMorgan for questions.

[Jemmy Huang, analyst]

A couple of questions from me. I think the first 1 is also on the cost/income ratio. When you say the 57% includes the ESOP, then what's the assumption behind? What's the amount that you assume is related to ESOP, because that's linked to share price performance?

The second question is on the bank. Earnings upstream this year from CTBC Bank is only around 40% of the reported earnings. But I do understand you have some OCI losses. So if we take into account that, so what's the percentage of your earnings upstream from CTBC Bank on the distributable earnings front?

And then the third question is, you mentioned in the Chinese session that you made an announcement to upstream earnings from Taiwan Life, but I cannot find the announcement. So could you give some color how much of earnings you apply to upstream? And then during the process, it's a regulator approve the original amount that you apply or it's a compromise levels after negotiation?

And then the final question is on the book value at Taiwan Life. I think you mentioned URCG was around TWD 16 billion by the end of last year. Majority is equity. So could I assume even on the fixed income side, it's also unrealized gain carried by the end of last year. And then how that has been migrating year-to-date? Presumably, it's facing some mark-to-market losses. Just not sure whether you still carry unrealized gains on your fixed income portfolio year-to-date?

[Yaling Chiu, executive]

For cost/income ratio of 57%, which already includes ESOP. So the assumption in this estimation is that the amount of ESOP is around NTD 1.6 billion, NTD 1.6 billion, which is lower than that in last year. And for Taiwan Life upstream dividends or -- actually, we have submitted the application to Insurance Bureau yesterday. And then we are waiting for the official approval. Then we would get Taiwan Life's Board to approve in May. So after Taiwan Life's Board approved, then we will make the official announcement. So then in the application, the amount is what we expected, which is 20% of the net income of Taiwan Life.

[Pai-Hung Yeh, executive]

And for unrealized gains at the end of last year, for fixed income, projection is around TWD 1 billion. And for equity, projection is around TWD 15 billion. At the end of February, fixed income projection is about TWD 11 billion, and equity projection is TWD 0.5 billion.

[Jemmy Huang, analyst]

Just another question hasn't been answered is the bank, the earnings upstream.

[Yaling Chiu, executive]

Yes, I was going to answer this question now. For bank, the net income is TWD 29.8 billion, around TWD 30 billion, and we reserve 30% for legal reserve. And then around another 30% is for the CTA, the special reserve. So then we upstream about 40%, the number you mentioned, almost all the distributable income to a holding company.

[Jemmy Huang, analyst]

For the 30% special surplus, is that due to also mark-to-market losses on the fixed income side and also the FX. And may I know, for the FX losses, is that mainly due to Japanese yen or any other currency?

[Yaling Chiu, executive]

For the 30% of special surplus, most of this figure is for FX. And this is for all the investment in overseas operations, including subsidiaries and branches.

[Operator]

[Operator Instructions] And the next question is from Chung, Credit Suisse.

[Chung Hsu, analyst]

I have 2 follow-up questions from the Chinese session earlier. The first 1 is, in Chinese session, you gave a credit cost guidance of 20 to 22 basis points. I wanted to check if this includes credit cost assumptions for the additional LH Financial Group? Because based on the number we see on NPL information, it looks like the implied credit cost for that business should be higher. So just wondering that 20 to 22 basis points is already inclusive of a higher credit cost from LH Financial Group.

The second question is on the dividend guidance. During the call, you mentioned that it depends -- even as Taiwan Life can continue to upstream and you can grow your bank earnings, the payout will depend on growth needs and double leverage. On the double leverage ratio, is there a target, say, 115% that you target to maintain through 2025? Or is that -- there's no strict say a target that you set for double leverage?

[Yaling Chiu, executive]

For double leverage ratio target, our internal target is 120%. And regulation is 125%, as you would have already known. And for the credit cost, 20 to 22 basis points is for regular provision, but for LH, as you mentioned, LH now is under pressure from Central Bank of Thailand to have additional reserve for the relief program. So this part has not been finalized yet. So we have not included this figure in this guidance.

[Chung Hsu, analyst]

So if I may follow-up on this, then how big would that additional provision be? And the timing for you to take that provision will be in 2022, I presume?

[Yaling Chiu, executive]

Probably, it will be around THB 0.5 billion to THB 1 billion.

[Chung Hsu, analyst]

And timing is going to be in 2022, right?

[Yaling Chiu, executive]

Yes.

[Operator]

[Operator Instructions] Okay. Then there appears to be no further questions at this point, 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.

Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.