First Financial Holding Co Ltd

TWSE:2892

Earnings Call Transcript 2019-Q1

[K. C. Lee, executive]

Good afternoon, ladies and gentlemen. Hi, everyone. Welcome to join us for First Financial Holding First Quarter 2019 Webcast Investor Conference. We thank you for your joining, and we will start with our presentation today, as usual, including snapshots, financial highlights and the operating results. Then we will invite Ms. Annie Lee, our IR Head, to proceed the Q&A session. And then you can raise your questions by typing at the bottom of the webcast link, or either in English or Chinese, it's fine with us.

And today's presentation material is already on our IR website. And also, we will provide 1 year replay service on the webcast meeting -- on the webcast when the meeting ended. Now I would like to turn over to Mr. Keith Ke to begin today's presentation. Keith?

Thank you, K.C. For the brief, turn to Slide 5. Here is a snapshot for the first quarter 2019. First of all, the group posted TWD 4.8 billion profit, with 4.8% growth y-o-y. Its major subsidiary, First Bank's earnings also grew by 3.4% y-o-y as well. Fee income and the treasury gains were the 2 growth drivers to lift to the bottom line. Our net interest income stepped back a little bit.

Meanwhile, First-Life net income also turned positive in the first quarter to make a good start. Even though the net interest income didn't increase at our expect, loan books still on its path to grow 6.5% y-o-y, mainly driven by F/X loan and the mortgage. F/X loan grew by 11.4% y-o-y. Mortgage also increased by 7.3%. On the other side, deposit also expand by 10.2% y-o-y, which was attributed by NT dollar deposit growth.

This ample liquidity inflow also helped the bancassurance fee income to grow 19.8% y-o-y. Treasury gains was another part to boost the net revenue in the first quarter, despite U.S. postal rate hike and the interest gap between U.S. dollar and NT dollars shall be narrowed down, which might reduce SWAP transaction. However, the bullish capital markets and the fixed income trading continued to drive the treasury gains by 76% growth y-o-y.

And last but not the least, the group has proposed to pay out TWD 1 cash and TWD 0.1 stock dividend under the TWD 1.4 EPS 2018, and it will be subject to AGM approval in June 21.

Okay. Let's move to financial highlights. Please turn to Slide 7. This slide shows group's key figures. As we mentioned, net income improved by 4.8% y-o-y and the EPS also slightly increased from TWD 0.37 to TWD 0.39 year-on-year. ROAE stayed the same at 9.16%. ROAA dropped a little bit to 0.64%. As for other figures, please see this slide for detail.

Now please flip to next slide. Slide 8 displays the breakdown of group's net income and next slide, Slide 9, presents the major subsidiaries net income. It shows that all subsidiaries had positive results in first quarter, but especially for the first slide, which we have mentioned earlier.

Okay, let's move to the next part, operating results. Please turn to Slide 11. This slide shows the group and the bank's quarterly net income and ROAE. Group net income was TWD 4.8 billion with 9.16% ROAE. And bank's net income was for TWD 4.7 billion with 9% ROAE.

Okay. Please move to Slide 12. This slide shows the breakdown of the bank's earning structure. Total net revenues grew by 8.6% y-o-y in first quarter 2019. As I will break down, net interest income dropped 2.1% y-o-y, partially still because of the interbank lending transferred to SWAP transaction phenomena and also partially due to the shrinkage of NT dollar spread.

Fee income increased to 2.5% y-o-y. Bancassurance and loan-related fee income were the major drivers for the growth. Trading gains also maintained its momentum with 75.9% growth y-o-y.

Please move to Slide 13, loan book. Total loan book grew by 6.5% y-o-y and reached TWD 1.71 trillion now. FX loan increased to 11.4% and mortgage increased 7.3%, which we mentioned. Commercial loan increased 5.2%, while SME was still, cautiously, with only 2.5% growth.

Please turn to Slide 14. This slide shows the q-on-q trend of the loan book. Total loan book increased 0.7% q-o-q, still FX and the mortgage loan all achieved further growth [ effective as written ].

Okay. Let's move to Slide 15 for bank's LDR, spread and NIM. LDR slid to 77.3%, not because of the weak loan demand, but due to even stronger deposits growth. NT dollar LDR dropped to 79%, and F/X LDR improved to 71.4%.

Loan to deposit spread was down to 1.26 -- 1.62%. NIM dramatically dropped to 1.08%. If restoring the interbank lending back from SWAP transaction, the adjusted NIM would rise to 1.21%, slightly behind the adjusted NIM of 1.24% last quarter. That's 3 bps difference with the adjusted NIM.

Please turn to Slide 16. This slide shows the breakdown of NT dollars spread and the FX spread. NT dollars spread decreased another 2 bps to 1.4%. Even though this spread was still higher than peers' average of 1.32% and F/X spread maintained at 2.44%.

Please move to Slide 17. This slide shows the deposit structure. Total deposit increased 10.2% y-o-y. NT dollar spread -- NT dollar deposit was even better, with 13.5% growth. And we mentioned this temporary liquidity was the reason to lower down the LDR, and it would bring some opportunities for wealth management, we believe. FX deposits grew by 1.6% and the CASA rates rose to 68.1% now.

Please turn to Slide 18. This slide shows the major exposures breakdown, please just take this as a reference. And next slide, Slide 19, displays the mortgage book. Mortgage yield dropped 1 bp to 1.78%. New mortgage LTV ratio stayed at 64.9%, and the average mortgage LTV ratio was hang at 45.5%. New mortgage lending amount was also pretty stable each month.

Please turn to Slide 20. This slide shows the net fee income increased 2.5% y-o-y in first quarter 2019. As of the breakdown, wealth management decreased by 5.1%, among which mutual fund sales decreased to 27%, while bancassurance increased almost 20%. Other than wealth management, loan-related fee income also improved 29% y-o-y.

Next slide shows the q-o-q trend of fee income, please check it as reference.

Now please move to Slide 22. Total operating expense increased by 6.9% y-o-y. However, with even higher net revenue growth, cost to income ratio dropped to 41.4% in first quarter now.

Okay. Let's move to asset quality. Please turn to Slide 23. This slide shows the coverage ratio, LLR ratio and the NPL ratio. Coverage ratio continue to improve to 418%. NPL ratio dropped another 1 bp to 0.31%. Both indicators prove that we're getting better asset quality now. Loan loss reserve ratio also improved to 1.28% as well.

Okay. Please move to Slide 24. This slide provides the breakdown of NPL ratios. Both individual and the mortgage NPL ratios were parked at 0.17%. SME NPL ratio dropped to 0.5% and the large corp NPL ratio slightly increased to 0.35%. Overall today, domestic NPL ratio was down 1 bp to 0.33% from last quarter and the overseas NPL ratio also dropped to 0.2% as well.

Please turn to next slide. Slide 25 shows the new NPL influx and the bad debt recoveries. Domestic new NPL influx doubled to TWD 1 billion, and the overseas new influx also increased to TWD 149 million this quarter. However, most of that -- the amount comparing with prior quarters were still quite healthy in the comparable, and most of the domestic new influx was from SME sector.

Please turn to Slide 26, overseas profits. The pretax profits of overseas branches over total profits reached to 48.3% now. OBU was a major part to lead the profit, which occupied 49% of total overseas profits. Other than OBU book, Hong Kong occupied 14.2%, North America was 13.4% and ASEAN filled in with another 11.7% of total overseas profits.

Overseas branches played more and more important roles to our business model and the group still continue to expand to the overseas territories, with more branches set to open in the second half of this year.

Please turn to Slide 27. Group CAR dropped to 125.2%. Bank's CAR slightly increased to 13.7%, and Tier 1 also edged up 1 bp up to 11.7%.

And Slide 28 shows the historical dividend payout. We have mentioned that -- the TWD 1 cash and the TWD 0.1 stock payout this year, and it equals to 71.4% cash payout ratio, which stayed in line with our dividend policy. Please take it as a reference.

Okay. That's the presentation. I will turn back the microphone to K.C. for the Q&A session.

[K. C. Lee, executive]

Thank you, Keith. And now I would like to turn to Ms. Annie Lee to proceed the Q&A. And before we start our Q&A session, I'd like to remind every investor or shareholder that you can raise your question.

Now I would like to answer the first question from Mr. Jemmy Huang of JPMorgan. Jemmy hopes to know that how much of the investment gains are related to SWAPs and what's the adjusted NIM for the first quarter for 2019, Annie.

[Annie Lee, executive]

Well, the absolute figure from the SWAP gain, which should be attributed to the so-called traditional interbank lending, stands for around TWD 700 million to TWD 800 million. If we convert or translate that into our NIM or our net interest income, that would approximate to an increase about 8% NII growth. So in that sense, the treasury gains should be revised down to just growth by 36%. But in total, the very ample liquidity still helped to boost our total net revenue. This will be our strategy that we continue to absorb more liquidity to help boost and support our lending project.

So the pressure from our lending business is mainly dragged by the expanding mortgage book, starting from last year, that actually tracked down our NT dollars lending spread by nearly 7 bps. Even though we try hard to expand our overseas FX lending, that actually increased by 9 bps on a y-o-y basis. The strategy that we tried to shift from our once very prevailing SME lending was mainly based on the strategy that the rising NPL ratio from SME book may dampen our profit in the end. So that's why we shifted part of the lending focus to more secure or collateral-based mortgage lending. But unfortunately, that actually dragged down our NT dollars lending spread. So we just mentioned that the overall NIM actually dropped by about 3 bps from the average level of 1.24% to -- this quarter, down to 1.25%. I suppose we will still have to try hard to boost our FX lending and see whether we can maintain our NIM at not very contracted level.

[K. C. Lee, executive]

Thank you, Annie. And the next coming question is from China Life, Ms. Wong. Ms. Wong hopes to know that what's the NIM guidance for this year? And do you think that the SWAP trading will still continue to grow in the coming quarters. The first 2, please.

[Annie Lee, executive]

Our NIM projection for this year may not be so promising from now on, as the U.S. had seen setback from their prior rate hike strategy. So it seems that the U.S. dollars or FX lending spread will no longer be a very expanding mood. That's why what our counteraction will be try to expand the loan portfolio on very solid base. So I guess our NIM projection for this year would be not very bullish; and hope that we can hold well at this level, not a sliding trend, but a stable level.

It's still hard to project how far it will impact overall NIM projection. I guess I may have to revise down the NIM projection from a flattish to a slightly negative trend. In terms of our SWAP transaction, yes, the market has come down from a very rampant SWAP costs last year. But still, the overseas investments from the very big life insurers still persisted. And I just talked about our SWAP gains for the first quarter amounted to nearly TWD 700 million. And we suppose, based on still very ballooning SWAP position, this trend may continue. So you recon the contributions from the SWAPs transaction will maintain but at a slower pace.

[K. C. Lee, executive]

Thank you, Annie. And the next coming question from Ms. Wong is that what the fee revenue guidance for this year, as we just saw that first quarter is expanded by about 2.2% only. So what's your fee guidance for the coming quarter?

[Annie Lee, executive]

Well the -- normally, for the -- for every first quarter of every year, it will be a slow start, due to a seasonal factor that we actually had a little bit in the New Year, a long holiday. But for this year, thanks to this relatively low market rates, particularly when U.S. posts its rate hike stance and the liquidity remain relatively ample and very sufficient. That's why this helped to boost our bancassurance business that, actually, it drive up the fee revenue.

And actually, the fee revenue tend to be a very market-driven business model, so you can see that the mutual fund sales for the first quarter did not perform that well, but following the trade tension between 2 big countries, that should shadow the confidence of the investors. So we reckoned for our wealth management business fee revenue this year, we may see some pressure. But we still managed to try to expand the customer base from the bancassurance business.

And another side of the fee revenue is sourced from the so-called loan business or FX-related business. This did see some good sign of recovery, thanks to the expanding loan business. So we still reckoned to maintain a low single-digit fee revenue growth. It may not be so high as more than mid-single digit, but I suppose that as we still try to offset so much liquidity, they still present the chances or opportunity to deliver products, particularly for the savings-type products to this depositor, that will still help to boost our more conservative product type, like bancassurance.

So we're still trying to target fee revenue growth around 4% to 5%, not as high as 7% to 8% in the early -- as we start the projection of this year. We will revise down a bit but still project a growth 4% to 5% fee revenue based on the slower wealth management, but a robust non-wealth management fee revenue source, particularly from the loan business.

[K. C. Lee, executive]

Okay. The next follow-up question is since the government has been adding many restrictions on savings insurance plan products this year, such as to cut the claim rate or something, and that will definitely impact the bancassurance fee revenue. So what's your view on this kind of impact to First Financial Holding?

[Annie Lee, executive]

The crackdown measures implemented by government definitely will take a shadow on the long-term development of the -- this bancassurance business. But I still have to highlight that the deposit growth at our bank system witnessed a very strong growth of more than 10%, particularly on the NT dollars front. Part of the reason would be the repatriated capital bid to the commerce vendor reporting system that impact the overseas high-net-worth customers or the Taiwan business. This would actually generate a very decent discount floor that when the money coming back to our home country, they would need a place to put in their -- I mean, for the higher return or some decent gain.

So even though the guaranteed yield announced by the manufacturer of this life insurer may be chopped down, but they still represent a good and more secured source of investment target. So we shall see that demand may slow down, but it would not disappear overnight. We still -- actually, the guarantee from this saving products still represent a higher than bank deposit rate. For instance, now we only offer up to by 1% for 1 year time deposit rate, but the savings product will still -- can provide 2 times, let's say, more than 2% for NT dollars savings products.

It still maintains its attractiveness where we consider the more secure nature of this type of products. So I don't see this will completely wipe out the demand for bancassurance business, but the so-called [ yield tree ] on investment type from the high-net-worth customer may divert to other source, for instance, like other more -- a little bit volatile investment, like investment some equity market or -- and so on. So I should see the fee revenue from bancassurance business may not be so buoyant, but the basis is still there. So we are not that particularly pessimistic about the new measures being announced by the regulators.

[K. C. Lee, executive]

Thank you, Annie. The next question is from Mr. Huang of JPMorgan. Mr. Huang hopes to know where is the new NPL formation domestically coming from in terms of the industry, that will be fine.

[Annie Lee, executive]

Well, frankly speaking, the NPL influx remain quite diversified. Part of that would be tech company that the other part, sourced from what we call the old economy, like some power equipment manufacturer operated in China, impacted by the China slowdown or other source like some wholesale/retail sectors that account for nearly 10% of our loan exposure. So it was a very diversified structured nature. We don't see any specific sector that has certain impact from our NPL influx.

But I would still like to highlight that the absolute figures of this new influx actually decreased quite substantially, when we compare it to the same period last year. And hopefully, when this legacy and the impact from the macro would bottom out, the influx will ease a bit, vis-à-vis our current projection. I mean it's diversified -- I mean they're very diversified.

[K. C. Lee, executive]

Next question is from -- still from Mr. Jemmy Huang. So First Financial still -- were you still targeting a 6% loan growth -- or not loan growth, targeting 6% growth on wealth management fee revenue growth this year?

[Annie Lee, executive]

I just talked about that I may revise down the fee revenue growth projection from 6% down to 4% to 5%. I suppose 4% to 5% should be achievable, based on a very ample liquidity and deposit growth.

[K. C. Lee, executive]

Okay. So then the next coming up question is what's your credit card guidance for this year?

[Annie Lee, executive]

Okay. The first quarter of this year we witnessed some delinquency from SME sector. So I mean the SME sector is still facing some pressures due to the slowdown of macro. However, for other sectors including mortgage, overseas SMEs are performing not so bad. So we would project our net credit cards for this year definitely will be lower than that of last year, and we'll maintain our projection at around 25 bps, 2-5 bps net credit card for this year.

[K. C. Lee, executive]

Okay. And next coming-up question is from Mr. Gurpreet of Goldman. Gurpreet hopes to know if any reading have you -- have you read any from your -- or heard from your customers on recent rounds of increased pension at least with U.S. and China trade wars. So any impact on business on your corporate customers.

[Annie Lee, executive]

Yes, definitely, coverage wise, would face how we're going to relocate the production site from the current China -- I mean the China factory and try to find another area that they can place their new production hub that -- so as to avoid the tariff impact. But frankly speaking, when you're talking about the impact, it's still in the beginning of this relocation approach, as most of the Taiwan companies, they do have multination production site, I mean including China, Southeast Asia countries. So when they were facing this trade tension, they would calculate how much they can -- they will suffer from the tariff increase and then when they relocate their production site, how much resources they have to actually place again.

So it takes time for this project to materialize. And so I must say, for those key players in each sectors, they do have the already -- I mean risk mitigation -- I mean projection ahead since late last year. So now they have seen each part of the production will be repatriated back to Taiwan and what part will be placed to like Southeast Asia countries. So for the key players, that should be fine. But the trouble may be more for some what we call the supply chain, the smaller players. As I just mentioned that we have witnessed the -- some delinquent borrowers, they actually suffer from the locus in Mainland China, where they are not able to, I mean, lower their risk and defer to IRR. So this would be the smaller player in the supply chain that will be impacted significantly. But fortunately, up to now, we think these losses or this NPL impact remain manageable for the moment.

[K. C. Lee, executive]

Okay. So a follow-up question is how does government has been actively promoting the 5+2 Innovative Industry program like the project finance. So will this project loan for repatriated Taiwan business, will it help to boost their loan demand? And as your view, is there any demand from this reallocation manufacturing industries?

[Annie Lee, executive]

Definitely, that will help to boost the loan demand from this strategic project loan. We have received some demand for loan application up to TWD 5 billion loan demand. So we are still accepting new loan application in the coming quarters. So yes, that will definitely have to boost the further loan book expansion. But they're still in the early stage of this trade tension and preferential government lending program. For this year, this new loan demand does not incorporate into our loan expansion plan, so this will be an add-up for the loan -- our loan book.

So I suppose that apart from the existing borrowers in our loan book, we will have extra loan demand from this coming-home Taiwan business for demand new lending problem in the future. But the size is still accumulating now. It's not -- we don't have an accurate number, except for the TWD 5 billion granted loan that I have mentioned. Based on government status with AML, the Taiwan government actually announced that they have received more than TWD 550 billion application, yes. So yes, we will definitely, I mean, join the parade to welcome this Taiwan business coming home for investment.

[K. C. Lee, executive]

Okay. Thank you, Annie. And another related question is do you see more competition in Taiwan's mortgage market? And Gurpreet also hopes to know what's the lowest offer we have here from the bank for the mortgage lending. Annie?

[Annie Lee, executive]

Well, low rate in the market that I heard is somewhere around 1.6%.

[K. C. Lee, executive]

1.6%, okay.

[Annie Lee, executive]

But we actually charge our clients around 1.8%. We're still higher than our competitors. Yes, our franchise would be we didn't have very expensive service network. So we try to compensate the part that cannot offer to our clients with lower rates, based on more supreme service anyway or to help those clients that they can -- that they don't need a higher LTV or something to get their mortgage lending.

[K. C. Lee, executive]

Okay. And another question is from a guest. A guest wants to know if we adjust for SWAPs, what's the NIM -- I mean the adjusted NIM for this quarter and the prior year, and the first quarter 2018?

[Annie Lee, executive]

Okay. I have [indiscernible] -- again, for adjusted NIM for first quarter this year, it was up from 1.08% to 1.21%, up 13 bps, 1-3. And compared with same quarter last year, this adjusted NIM will be from 1.22% to 1.28%, yes? Yes, yes. Last year, we announced the NIM was 1.22%, but post adjusted, it would be boosted to 1.28%. So there's about 7 bps lower.

[K. C. Lee, executive]

Okay. Yes.

[Annie Lee, executive]

7 bps lower.

[K. C. Lee, executive]

Okay. And another question is can Annie give us some comments on the First Life in terms of the average though, 17 will be exactly -- starting next coming quarters. So what's the impact on First Life, your subsidiary?

[Annie Lee, executive]

On Life, if you move it, remain not a very huge operation. Its asset size is up to -- less than -- about TWD 550 billion -- TWD 50 billion asset size. And we are happy to say that most of our or all of our product line remain profitable. So that's why we are -- we actually comply with the requirements cited by the regulators that we must deliver a total deposit margin. That's why the incoming IFRS 17 application, the new accounting rule, is to have no -- minimal impact on our life insurance unit.

[K. C. Lee, executive]

Compared with...

[Annie Lee, executive]

Yes. Thanks to a smaller size and very decent product pricing policy in the past. But we still manage to recap or boost the capital base of our life unit by injecting some small capital to this business unit to help them further grow their asset size and gain more profit in the future. But the recap should be less than TWD 1 billion. So it is still quite affordable. So very minimal impact for our future -- still smaller asset size and capital for product mix.

[K. C. Lee, executive]

Okay. And we have another question from Gurpreet. Gurpreet is curious about our wealth management business. In the first quarter, he says it didn't do well in the first quarter on a Q-o-Q basis. Why is that?

[Annie Lee, executive]

Because the retail front jumped nearly 27%, just by the market sentiment. However, the bancassurance business did quite well, thanks to the ample liquidity that attract a lot of interest from the savings product. And apart from that, the booming lending business helped to generate a decent loan-related fee revenue. So fee revenue from loan related actually increased by 29%, nearly 30%. So all of these factors have to contribute marginal growth on our fee revenue.

[K. C. Lee, executive]

Okay. And our last question is about a summary guidance for the coming quarters or until the end of 2019.

[Annie Lee, executive]

Yes, I just wondered why nobody raised the question. Okay. After we posted strong loan growth around 6.5%, for this year's lending target, we still maintained our projection as early this year, still around 4.5% to 5%. Due to the uncertainty of trade tensions ahead, the major growth drivers should come from our overseas lending and our still solid mortgage book. In terms of SME lending, we will maintain a more cautious and stable but still have a marginal growth about 3%. The mean guidance, yes, this is a tough question now. As we -- the very high cycle may see to an end, we will see some NIM contraction pressure. Hopefully, we can still maintain a not very significant NIM contraction going forward. We will still try to maintain a just marginal or flattish NIM projection.

In terms of fee growth, I just mentioned that 4% to 5% growth this year should be achievable. Talking about the cost. The credit cost definitely will be lower than that of last year, less than 25 bps for the whole year, net credit cost. The capital ratio, we set a target to raise it up to 400% and hope that we can become just at par with our peers. In terms of efficiency ratio, we will still have a [ little ] content efficiency ratio lower than 45% this year. Okay. That's it.

[K. C. Lee, executive]

Okay. Thank you, Annie. And since we don't have any coming-up questions, I'd like to conclude today's webcast meeting. And ever since that we announced -- first of all, I would like to thank our photo credit of the first page, on the homepage, is from our colleague, Mr. Keith Ke. He went to the Taipei lantern festival and shot the very beautiful photo with our logo on the very unique historical thing on Taipei Metropolitan -- near Taipei railway station, right. Okay.

[Annie Lee, executive]

This is a renovated, what we call, antique building in central -- Grand Central Taipei here. Yes.

[K. C. Lee, executive]

Okay.

[Annie Lee, executive]

This marks that we are having our 120 years anniversary.

[K. C. Lee, executive]

Okay. And also, we thank you for your joining us for today's conference, and we hope that you enjoy the webcast meeting and wish you a very nice weekend. Thank you.

[Annie Lee, executive]

And a very relaxing Dragon Boat Festival ahead. Thanks. Bye.

[K. C. Lee, executive]

Okay. Thanks Bye-bye.