First Financial Holding Co Ltd

TWSE:2892

Earnings Call Transcript 2023-Q1

[K. C. Lee, executive]

Good afternoon, ladies and gentlemen. Welcome to join us for First Financial Holding First Quarter 2023 Webcast Investor Conference. We will start with our presentation, including first quarter snapshot, financial highlights and operating results. Then we will invite Ms. Annie Lee, who is currently our EVP as well as Head of IR to proceed the QA session. [Operator Instructions]

Now I'd like to turn over to Mr. Keith Ke to begin today's presentation, please.

[Keith Ke, executive]

Thanks, K. C. Okay, please turn to Slide 5. This slide represents the overall picture of first quarter's performance 2023. Overall, to say, group posted a resilient earnings results in first quarter, which was mainly driven by bank units. Both group and the bank had over 30% growth Y-o-Y.

Benefited by the widened interest rate gap between U.S. dollar and NT dollar, currency SWAP gains reached over TWD 4 billion in first quarter. And that's the key point to boost the earnings. On the other hand, non-banks resumed their momentum in first quarter as well.

We've seen continuous rate hikes in the past year had impacted the global economy dramatically. The global inflation was huge, but we think it will become moderate eventually. Group will continue to evaluate the market environment and adjust the business strategy.

A proposal of TWD 0.8 cash dividend and TWD 0.3 stock dividend is subject to AGM approval on June 16, 2023, and the cash payout ratio would be about 51%.

Okay. Let's move to financial highlights. Please turn to Slide 7. This slide shows group's key figures. The consolidated net income of holding company reached TWD 6.6 billion with 34% growth Y-o-Y, as we mentioned. It also drove the EPS, ROE and ROA.

Please turn to Slide 8. This slide provides the breakdown of group's net income. Total net revenue increased 14.7% Y-o-Y to reach TWD 17.7 billion in first quarter. Credit charge was higher. However, the insurance reserves was lower comparing with the same period the last year. Total net income ended at TWD 6.6 billion.

And next slide provides the picture of major subsidiaries' earnings. Again, as we mentioned at the beginning, bank had a 31.2% growth, while non-banks all had some improved to support the growth of group's earnings.

Okay. Please turn to Slide 11 for the operating results. This slide shows group and bank's net income and ROAE. Group's net income was TWD 6.6 billion with 11.5% ROAE. Bank also generated TWD 6.3 billion with 10.7% ROAE. Both ROAEs have reached double digits in first quarter.

Please move to Slide 12. This slide provides the breakdown of bank's earnings structure. Cumulative net revenue of first quarter reached TWD 15.2 billion, which was 31.4% increase. And this is mainly driven by gains on investments, which has over 600% growth Y-o-Y. As we mentioned, over TWD 4 billion currency SWAP gains was the key issue.

As of the core earnings, net interest income decreased 16%, mainly because part of the funding shifting to SWAP transaction. And net fee income also dropped 4.1% Y-o-Y. This slowing, we believe it was mainly impacted by some turbulent incidents globally, and we expect it to catch up in coming quarters.

Please turn to Slide 13. This slide presents the loan book mix. Continuation of the solid growing trend, total loan book still had 11.6% growth to reach TWD 2.37 trillion. As of the breakdown, syndication market was still solid. Large corp. loan had a 57% growth Y-o-Y. SME also had 5.5% growth. Mortgage book increased another 9.3%. Although, FX loan book was flat, overseas still showed a strong demand with 10% growth Y-o-Y. But that's part of reason because the lower basis of last first quarter.

And Slide 14 shows the Q-o-Q trend of the loan book mix. You can see the loan demand was not that strong as we mentioned for the Y-o-Y base.

Let's turn to Slide 15. This slide shows the trend of LDR, spread and NIM. LDR dropped to 70%. NT dollar LDR slid a little bit to 81.4%, while FX LDR was down to 42%. Both loan-to-deposit spread and NIM drove down quite a lot to 1.36% and 0.77%, respectively. However, the adjusted NIM shifted the momentum with SWAP gains included. Annie will address more about this part later.

Okay. Please turn to Slide 16. This slide shows Q-o-Q trends of NT dollar and FX spread. NT dollar spread was down 2 bps to 1.36%, while FX spread decreased to 2.75%.

Please turn to Slide 17. This slide shows deposit mix. Total deposits reached TWD 3.39 trillion with 11% growth Y-o-Y. NT dollar deposit increased 12.2%. FX deposit was also up 8.3%. And you can see the right-hand side, CASA rate continued to drop to 65.4%.

Please turn to Slide 18. This slide shows the loan book concentration of major exposures.

And please move to Slide 19. Slide 19 shows the mortgage yield, LTV ratio and the new mortgage lending trend. Mortgage yields continued to increase to 2.09%. Both new mortgage LTV ratio and the average mortgage LTV ratio slid a little bit to 64.4% and 46.6%, respectively. And the bottom bar chart shows that the new mortgage lending was trending down a little bit Q-o-Q.

Please turn to Slide 20 for the fee income. Cumulative net fee income of first quarter 2023 was TWD 2 billion, which was lower than the fee revenue earned the same period last year by 4%. Wealth management dropped 7.7% with the bank fee. Could we had addressed some reasons earlier because of the slowing start.

And Slide 21 is the Q-o-Q trend. Please take it as reference. Let's move to Slide 22 for operating expense. Total operating expense for first quarter was TWD 6.2 billion, with 12.7% growth Y-o-Y. However, with even higher net revenue improvement in first quarter, the cost-to-income ratio still dropped dramatically to only 40.9%.

Okay. Let's move to asset quality. Please turn to Slide 23. Top chart shows the coverage ratio continued to improve to 731.1%. NPL ratio lagged at 0.18% for consecutive 3 quarters. Bottom chart show the breakdown of NPL ratios. Individual NPL ratio increased to 0.13%, mortgage NPL ratio increased to 0.09%. On the other side, SME NPL ratio dropped to 0.27%. Large corp. NPL ratio was down to 0.03%.

Please turn to Slide 24. The pretax profits of overseas branches over total profit shrank to 23.6%, which was mainly because of the domestic SWAP gains increased too fast, while overseas P&L didn't go too well in first quarter. Because of some of the one-off bad debt cases booked in London and the OBU book. So these 2 reasons to distorted the overseas profits to only 23.6% this quarter. So the top left pie chart shows -- it also shows kind of distorted. Maybe you can just take it as reference.

Please turn to Slide 25. Group CAR improved to 129%. Bank CAR and Tier 1 also rose up to 14.2% and 12.3%, respectively, in first quarter.

And next slide, it shows the trend of our dividend payout. As we mentioned at the beginning, the group would pay TWD 0.80 for cash and TWD 0.30 for stock.

Okay. That's the presentation today. I will come back to the microphone to any further conclusions and the QA session.

[K. C. Lee, executive]

Thank you, Keith. Now we'd like to proceed our Q&A session.

Our first question is from Peggy Shih of Morgan Stanley. And her first question is the reporting NIM decreased by 22 bps to 0.77% in the first quarter. So how much is from currency SWAP business?

And a follow-up question is, if we add back currency SWAP gains, what will be the adjusted NIM for the fourth quarter of 2022 and the first quarter of 2023?

[Annie Lee, executive]

Well, I think Keith just talked about this NIM expansion for first quarter this year. The actual figures that we booked for our currency SWAP gains was up to around TWD 4 billion. And for the whole year of last year, the currency SWAP gain was similar to that number, it's around TWD 3.9 billion. So the adjusted NIM for the whole year last year was 1.1%. And for the first quarter this year, we actually see NIM further expanded by 11 bps, which have to book the adjusted NIM up to 1.21%. So that was quite tremendous.

[K. C. Lee, executive]

Okay. Since we already knew that the currency SWAP gains was TWD 4 billion in the first quarter. So a follow-up question is, will we still maintain 2023 of just NIM target around 1.19% at the end of this year?

[Annie Lee, executive]

Yes. Supposedly, if the interest rate gap between the 2 nations persisted throughout the year, which implies that the U.S. rates should stay unchanged, then hopefully, we can continue to translate this interest rate gap into our SWAP transaction, and that will help to maintain our NIM expansion at this 1.2% to 1.21% level.

[K. C. Lee, executive]

And a follow-up question about currency SWAP gains is, do you say that first, currency SWAP gains will decrease in the coming quarters? Or what's the target of the currency SWAP gains in 2023?

[Annie Lee, executive]

Based on our current transaction volume, we actually would like to revise our whole year projection for the SWAP transaction gains from original around TWD 9 billion, up to TWD 11 billion to TWD 12 billion, which can be quite optimistic. Because up to end of April, we actually booked nearly TWD 5 billion SWAP gains. So as I just talked about that, as long as the rate gap persistent then this SWAP gains can continue to be further translate into our top line until the end of this year. But that is pretty much subject to that U.S. does not cut rate toward the end of this year, but until early next year.

[K. C. Lee, executive]

Okay. And I'd like to jump to another related question from Mr. Jemmy Huang.

Jemmy hopes to know that what's the adjusted NIM in the first quarter 2023?

[Annie Lee, executive]

First quarter. Yes. Yes, it's a duplicate question. Adjusted NIM 1.21%.

[K. C. Lee, executive]

Okay. 1.21, okay. And also, we have another related question about NIM is from Gurpreet.

Gurpreet hopes to know if we adjusted back for TWD 4 billion SWAP gains in the first quarter, it seems that underlying NIM fell 2 bps quarter-on-quarter. Why is that?

[Annie Lee, executive]

Sorry, I can't catch you – what…

[K. C. Lee, executive]

I think his question is that, if we added back the TWD 4 billion SWAP gains, it seems that still underlying NIM still fell by 2 bps quarter-on-quarter. It means that we still have a lower NIM comparing with last quarter. So he is wondering why will that be?

[Annie Lee, executive]

You mean the incremental part, but not the whole figures?

[K. C. Lee, executive]

Right.

[Annie Lee, executive]

Well, this is pretty much because that the funding cost from our deposit side also we moved -- I mean, moved higher. So that was pretty much offset the SWAP impact. So I guess this may...

[K. C. Lee, executive]

Okay. I think…

[Annie Lee, executive]

Yes, actually moved higher.

[K. C. Lee, executive]

I think since the Fed and the Taiwan Central Bank actually raised the rates in the fourth quarter at the end of March. So I think it kind of thwarted our NIM…

[Annie Lee, executive]

The calculation…

[K. C. Lee, executive]

Yes, calculation of NIM also. And if we compare it quarter-on-quarter, I think it will be kind of -- distorted and it should be smooth for the coming quarter.

[Annie Lee, executive]

I think I'll add up one more thing that, if we would like to really look into the general feature of this NIM impact, if we can actually add up the net interest income and SWAP gains together, then you can see the whole actual numbers increased by nearly 30%, and that will also translate into our net revenue. So in that sense, this SWAP transaction can -- you cannot just look into individual items, but you have to combine these 2 items together and we can see that because the falling LDR in the U.S. dollar's lending, so much of this U.S. dollar basket has been channeled to the SWAP transaction. And I guess this would help to explain some of the shortfall between the adjusted NIM and the nominal or reported NIM. You combine the 2 accounts together, and you can see this would be the genuine influence over this rate gap.

[K. C. Lee, executive]

Okay. And now we'd like to turn back to loan book question from Peggy Shih.

Peggy hopes to know, what the target of our loan book growth for the full year of 2023. Will we still maintain at 5% growth?

[Annie Lee, executive]

Well, given that the sluggish exporting sectors in the first quarter that we do think that we may not be able to beat our targets at around 5% or above. And also, the GDP growth also has been revised down to 2% something. So we would actually like to, I mean, set a lower target for our loan growth around 4%.

But among all the sectors, the corporate lending, including large corp., SME would still remain resilient that we are still targeting a 4% growth. However, due to the slowdown of the mortgage lending, we set not a very aggressive target to lower our mortgage book expansion by just 3%.

In terms of the overseas lending, which still remains quite robust. That the operations lending book expanded by nearly 10%. And the fall of the total FX lending was mainly addressed by the domestic FX lending. Therefore, we would revise down our FX lending book by about 3% and lower down to just 6% from original 9%, which is still pretty much a leg up due to the slower exporting market. So the total loan book will grow by just 4%, and we revised down the mortgage lending by -- to 3% and average lending to 6%.

[K. C. Lee, executive]

Okay. Let me repeat. The conclusion will be, actually, we revised down our total loan book target to 4% for the full year of 2023, in which that the FX loan book will remain 6%, right? 6%.

[Annie Lee, executive]

4% to 6%.

[K. C. Lee, executive]

From 9% to 6%. And also mortgage lending remained at 3%.

[Annie Lee, executive]

3%, yes.

[K. C. Lee, executive]

Which is an organic growth for us and -- okay. And another follow-up question will be the fee revenue. Actually, the first quarter of fee revenue decreased by 4% Y-o-Y. So will we still maintain a fee revenue growth like 5% to 6% or -- and where does the momentum come from?

[Annie Lee, executive]

We actually see the slowdown for the fee revenue mainly impacted by the headwinds in the financial markets, especially in the U.S. market, the failure of this U.S. SVB Bank and also the bankrupt or the failure of the Credit Suisse Bank did erode the confidence of investors, which really deter us to propose adequate products to our customers. But after the market calmed down a bit and moved into the second quarter, we have witnessed the demand for investment products resumed. That at the end of April, our wealth management business gradually recovered better.

So we still like to maintain our total fee revenue target at around 5% to 6%, which should be mainly driven by the wealth management because that after the -- maybe the U.S. rate start to move higher that the demand for some high-yield fixed income products still quite attractive, and that's also being justified by our strong sales from the FX bond portfolio. And this would help to boost our fee revenue from wealth management. So we set a target to grow our wealth management business by increased fee revenue by 7% to 8%.

And apart from the wealth management revenue, we also see some -- the demand for some of the FX -- sorry, on a loan part that our loan-related fees continue to remain quite strong. That the first -- in the first quarter, the loan-related fee actually grew by around 4% to 5%. So all this would help us to achieve the whole year's target that the fee revenue can keep our projection around 5% to 6%.

So the 2 stories would be, 8% growth for wealth management fee, which will be mainly driven by the investment products appetite to lock in the high-yields overseas bond portfolio. And for the non-wealth was mainly driven by still resilient loan-related fee, which would be around 4% to 5% growth this year.

[K. C. Lee, executive]

Okay. And another topic for the investors are the credit cost. We have [ Jina Chen ], Jemmy Huang, guest, [ Eric], Jemmy Huang, Gurpreet, Peggy, they are asking -- first of all, let me step by step. The first question, what are the major delinquent cases for credit costs in the first quarter of 2023?

[Annie Lee, executive]

The bank delinquency portfolio came from our European market, which was related to -- that we already mentioned the [ OBU ] exposure and also another lending to the property developer. And these 2 exposure actually cost us around nearly TWD 800 million to TWD 900 million. We have already set aside around up to 40% to 80% provision against these 2 major exposures. One is the [ OBU ] and the other is property developer. Yes. So out of the -- around TWD 2.1 billion gross provision in the first quarter, the European market was the major source of this portion.

And the rest part would be, because in the first quarter, our loan book also expanded quite dramatically. So we have to satisfy additional general provisions, which was around TWD 400 million to TWD 500 million. And the rest part would be our strategic move to boost our cost ratio. So you can see that the cost ratio actually moved higher after we conclude our first quarter results. So the total provision includes about 45% for our provision set for the European exposure and about 20% is for the new lending and another 30% will be for the -- our plan to boost our coverage ratio.

[K. C. Lee, executive]

Okay. And another question is, when we talk about the European exposure and [ Eric Shih ] wants to know that what's our U.S. commercial property exposure situation? Will we revise up our forecast credit costs in the full year or can we give them more color for new NPL on Page 34 of our presentation slide?

[Annie Lee, executive]

Well, in terms of our exposure in the U.S. markets, up to now we have 2, I mean, surveillance exposure. One is in the New York that we have some lending to the commercial real estate. However, because the LTV still remain not very high, that the loss ratio should, I mean, remain manageable. Which implies that as long as this exposure in the U.S. -- in New York can be refinanced smoothly, then the repayment can be in place. Because all these exposure are fully collateralized. So it's not -- we're not particularly worried about this.

And the other exposure is in the Canada. And this exposure was also fully collateralized. So the loss ratio in these 2 cities would be not so huge. So we will not be so worried about the exposure in the U.S. -- I mean, in the North American market because most of this lending are fully collateralized and also the LTV still remain manageable.

[K. C. Lee, executive]

Okay. And we have another follow-up question is about the career question that is, the new NPL comparing with the fourth quarter of 2022 and Y-o-Y and is -- what are the delinquent cases [ career ] sector? I mean, sector -- related sector is. They belong -- which sector do they belong?

[Annie Lee, executive]

Part of the sectors for the property developer and part of that will be some service sector like [ OBU ]. [ OBU ] is if for -- kind of service sector, right?

[K. C. Lee, executive]

Medical care service.

[Annie Lee, executive]

Service sector. And in the prior cycle, the delinquent sector, part of that will be for manufacture or -- like Marelli. Marelli is pretty much for -- Marelli in Tokyo last year, it's pretty much for the manufacturer. So I mean in the prior cycle or last year, this delinquent source originated from sectors -- manufacturing sector. But in the follow-up cycle now being pretty much for the property development, mostly would be service sector. Like property developer that would be not for manufacture, but for service sector. So it's kind of rotate that from manufacturing sector to service sector and pretty much impacted by the COVID.

[K. C. Lee, executive]

Okay. And now I would like to wrap up the credit cost question. Okay. Let's highlight the projection for this year's -- that's 19 to 20 bps. Okay. So…

[Annie Lee, executive]

Unchanged.

[K. C. Lee, executive]

Unchanged projection for the credit cost of this year still maintain 19 bps to 20 bps for the full year of the net credit cost.

[Annie Lee, executive]

The reason was because, most of this exposure are fully collateralized. So it takes time to dispose or to refinance this lending that eventually it can be recovered by the disposition of collateral or have adequate refinancing plan. I mean this all-secured lending, so we are not particularly worried about the actual losses will be too high.

[K. C. Lee, executive]

Okay. Apart from that, we have another follow-up question is, how about domestic? Are we worried about domestic credit cost or the quality of asset quality, any deterioration domestically?

[Annie Lee, executive]

Not really. Actually up -- I mean, the post pandemic markets -- in the domestic market, we can see that the private consumption sector and service sector all recovered quite strongly. And it should be pretty much attributed to the bailout package from the government that it actually helped to underpin the -- some SME sector of the manufacturing sector in domestic markets. And this exposure that we actually lend out in the pandemic yields, it's all -- would have been covered by the credit insurance guaranteed by the government. Yes. So the losses…

[K. C. Lee, executive]

No worries on domestic asset quality. And another question, we have here is from Jemmy Huang.

Jemmy hopes to know that if syndication momentum is good. Why are the loan-related fees not showing strong growth, Annie?

[Annie Lee, executive]

We actually -- I mean, tightened our lending standards against the corporate sectors due to the -- some of the cooling measures imposed in the property sectors. But still that because the prior lending limit has been extended to the borrowers. So it will only impact the new lending in the future. But for the existing credit limit, it will still be draw down by the prior transaction. So we should see that the lending momentum would decelerate gradually. Yes.

[K. C. Lee, executive]

Okay. Let's shift to the dividend. And another question from Peggy. She hopes to know that -- she wants to know the reason why our 2022 cash dividend payout ratio decreased. Will it turn back to 65% to 70% level for the coming future?

[Annie Lee, executive]

I mean, this question would have to be -- have some -- we have some relation to how much profit that we can generate this year. If we can boost our profits by this level -- I mean, up to, let's say, 30% to 40%, then hopefully, we can contribute more to the -- our bottom line and help to underpin the overall capital base.

And another factors would be, how fast is our valuation on the OCI account can recover them, because now the U.S. rate hike may see some halt as the recovery from the investment portfolio gradually resumed.

These 2 factors, one is the current profit level and then the recovery [ speed ] from the OCI accounts would dominate, can we move back to a higher payout ratio, yes? So we should work hard, but it's still subject to the -- how about the market rates level.

If U.S. market -- I mean, the rates go down as early as next year, then maybe the recovery in the OCI account can be sooner than are expected.

[K. C. Lee, executive]

Okay. And we have another question, which is from Gurpreet, that's about our capital. And he hopes to know what is bank's core CET1 ratio at the first quarter. And what our actions to move to target as we are one of the D-SIB banks now, what should be the targeted CET1 and CAR ratios?

[Annie Lee, executive]

At the end of first quarter this year, our CET1 reached 10.57%, which is gradually close to the statutory level around 11%. And the total CAR level also rose up to 14.21% at the end of first quarter. But the main issue is, how much earnings that we can contribute or generate to buffer our CET1. And also, like I just talked about that, how fast is our OCI accounts can be covered. Yes, because prior to the rate hiking cycle, we almost reached the D-SIB criteria.

[K. C. Lee, executive]

Okay. And another follow-up question is about the overseas profit. What do we expect the overseas profit's contribution this year?

[Annie Lee, executive]

Due to the huge charge-offs in the first quarter, I suppose we would have to gradually, I mean, improve our overseas profits. But up to -- I mean, move up to more than 40% may not be so easy, hopefully, up to at least 30% -- above 30%. Yes.

[K. C. Lee, executive]

Okay. So far, it's still not so clear for the overseas profits contribution, because the charge-offs will happen in the beginning and then the recovery will happen…

[Annie Lee, executive]

Later.

[K. C. Lee, executive]

Later. So they're going to be [ fixed ]…

[Annie Lee, executive]

[ Still expand ]

[K. C. Lee, executive]

Right. And also, I think we have answered all of the questions here, and we'll just see if -- let me shed if we have some question we did not answer.

Okay. And we have another question, which is from guest. His question is that, do you think that first we'll have more provisioning in the coming quarters in overseas market?

[Annie Lee, executive]

If you say more provisions, I must say that…

[K. C. Lee, executive]

I think his question is to have more provision than expected, not more provisioning. Yes, his question should be more than expected provisioning in overseas market. That would be more precise.

[Annie Lee, executive]

Not really. Up to now we have almost provided provision against our exposure. We actually provided more provision against this exposure. Like I mentioned at the -- normally in the past, the loss ratio for the overseas lending was up to around just 50%. Actually, we have charged -- we have satisfied more than 50% of the provision against this exposure. So I don't see we have the urgent demand to further increase our provision or charge off against this exposure. And don't forget we can still recover from our legacy pool that we charged off in the past. For instance, like our exposure in China.

[K. C. Lee, executive]

Right.

[Annie Lee, executive]

[indiscernible] it may also see some recovery. It depends on how fast we can recover from the disposition of this collateral.

[K. C. Lee, executive]

Okay. And we have the final question, which is from guest. His question is about operating expense question. What's the reason that the first quarter actually, we booked more operating expense and what's the target of CI ratio for this year?

[Annie Lee, executive]

In the first quarter, the increase of the SG&A was mainly due to more VAT and the sales tax cost. Because our revenue increased quite significantly, so that would have to -- we have to pay more taxes for the VAT and sales tax. That would be up to about nearly TWD 300 million.

[K. C. Lee, executive]

Okay. Okay. Thank you, everyone. I think we have answered all of the questions that we had on our screen. And if you have just happen to have more questions, welcome to e-mail us after today's conference. Thank you for joining us.

[Annie Lee, executive]

K. C. I think I missed the last question about CI ratio targets.

[K. C. Lee, executive]

Okay. The CI ratio targets? Around 45%. Are still around 45%. Okay. Thank you. And Annie, do you have anything to add?

[Annie Lee, executive]

No, nothing. I think that we have answered the questions. See you next quarter.

[K. C. Lee, executive]

See you. Bye-bye.