First Financial Holding Co Ltd

TWSE:2892

Earnings Call Analysis

First Financial Holding Q1 2024: Solid Growth in Net Income and Fee Revenue

First Financial Holding reported a 5.8% increase in net income to TWD 7.01 billion for Q1 2024. EPS was TWD 0.52. The loan book expanded by 5.2%, driven by mortgages and large corporate lending. Fee income surged by 60.7% to TWD 3.3 billion, largely due to strength in wealth management. Despite a 20% drop in treasury gains, revenue grew 5.6% year-on-year to TWD 18.7 billion. The company expects fee revenue to grow by 30% for the year and maintains a stable credit cost projection of 15 basis points. The bank's operating expenses increased by 5.5%, mainly due to higher compensation.

Strong Financial Performance

First Financial Holding showcased a commendable performance in the first quarter of 2024, with net income rising by 5.8% year-over-year to TWD 7.01 billion and an EPS of TWD 0.52. This growth was buoyed by a significant increase in bank fees by 60.7%, which offset a decline in treasury gains. Notably, the loan book saw a 5.2% expansion, driven by strong mortgage and large corporate lending.

Key Financial Metrics

The quarter reflected solid fundamentals, with book value per share at TWD 19.04, ROE at 11.04%, and ROA at 0.64%. Additionally, the Group's capital adequacy ratio (CAR) and double leverage ratio remained at robust levels, recorded at 129.95% and 110.33%, respectively.

Subsidiary Performance

First Bank, a crucial subsidiary, posted a net income of TWD 6.5 billion, a 2.7% increase from the previous year. The bank's ROE also rose to 10.04%. The revenue for the quarter was TWD 15.6 billion, marking a 2.5% year-on-year increase. The key drivers included a substantial boost in wealth management fees, although treasury gains saw a 20% decline.

Loan and Deposit Dynamics

The bank's loan book grew to TWD 2.5 trillion, a 5.2% year-over-year increase, with mortgages up by 10.6% and large corporate lending by 12.6%. The NT dollar loan-to-deposit ratio was near 80%, though FX loan-to-deposit ratio was notably lower at 43%. Additionally, the net interest margin (NIM) experienced a slight contraction due to central bank rate hikes, adjusting to around 1.04% to 1.05% for the quarter.

Expense and Credit Quality

Operating expenses increased by 5.5% to TWD 6.6 billion, largely attributable to higher compensation costs. Credit costs were reported at 19 basis points, with overall credit quality remaining stable. The non-performing loan (NPL) ratio stood at 0.18%, with a coverage ratio of 742.13%.

Overseas Operations

Overseas operations faced challenges, contributing TWD 0.7 billion to pre-tax profits due to CRE backbones in North America. However, efforts to clean the balance sheet and charge-offs for significant credit losses are expected to result in recoveries, potentially bringing in TWD 2.5 billion to TWD 3 billion in the future.

Fee Income Projections

The company expects strong fee income growth, targeting a 30% increase for the entire year, which translates to over TWD 10 billion. This optimistic outlook is driven by robust performance in wealth management and bancassurance products.

Future Goals and Predictions

Looking forward, First Financial Holding aims for a 3% to 4% growth in SME loans and a 5% to 5.5% increase in the total loan book for the year. The company is also projecting sustained high levels of FX swap gains amounting to approximately TWD 12 billion to TWD 13 billion. Credit costs are anticipated to remain low at 15 basis points, bolstered by anticipated recoveries from charged-off exposures.

Earnings Call Transcript 2024-Q1

[Keith Ke, executive]

Good afternoon, ladies and gentlemen. Welcome to join us for First Financial Holding First Quarter 2024 Webcast Investor Conference.

We will start with the presentation, which includes the snapshot, financial highlights and operating results. After the presentation, we will invite Ms. Annie Lee, our EVP and IR Head, to proceed with the Q&A session. [Operator Instructions]

The presentation material is on our IR website, www.ffhc.com.tw. Also we would provide 1-year replay service for the webcast meeting for your convenience.

Okay. I will hand over the microphone to Ms. Yang, Chi-Tsai to start the presentation.

[Chi-Tsai Yang, executive]

Thank you, Keith. Good Friday afternoon, everyone, for the first quarter 2024 earnings results.

First Financial Holding reported a net income of TWD 7.01 billion, up by 5.8% year-on-year. EPS was TWD 0.52. A couple of highlights here. Bank fee grew by 60.7%, offset by a decline in treasury gains. Loan book expanded by 5.2%, which was driven by mortgage and large corp lending, and a cash dividend of TWD 0.85 per share, plus a stock dividend of TWD 0.03 per share were declared. These key points are covered in Page 5 of this presentation slides.

Let's move on for details. In addition to net income and EPS, we provide First Financial Holding's key financial numbers and ratios in Page 6. Here, they are. Book value per share for the quarter was TWD 19.04. ROE was 11.04%, and ROA was 0.64%. Group's CAR and double leverage ratio maintained at healthy levels. They were 129.95% and 110.33%.

In Page 8, first quarter's net income of TWD 7.01 billion was on a combined revenue of TWD 18.7 billion. The revenue was up by 5.6% year-on-year. For reserve and expense items, please refer to the data in this page.

Next, for key subsidiaries. Their performances overall are in line with our expectations. First Bank delivered a net income of TWD 6.5 billion, a rise of 2.7% year-on-year.

Now we focus on bank's results, starting on Page 11. Bank's ROE climbed to 10.04% on a net income of TWD 6.5 billion for the quarter.

Next page. On revenue side, for the quarter, revenue was TWD 15.6 billion, up by 2.5% year-on-year. In the beginning, we highlighted bank fee growing by 60.7%. It was TWD 3.3 billion for the first quarter 2024 versus TWD 2 billion for the same period last year. It reflected strength in wealth management business momentum that effectively met up for the fall from the treasury gains in the year to March. Treasury gain was down by 20% year-on-year or TWD 1.1 billion. Later, we'll talk more about the fee components.

In terms of net interest income, it was down by 3.1% under deposit cost pressure, given Taiwan Central Bank hiked rate by 0.5 of a 0.25 point in late March. We expect this change could positively translate into net interest income onwards.

As to the expense side, credit cost was 19 basis points for the quarter. Also we see credit quality of CRE loan at bank stabilized for now. Operating expense was TWD 6.6 billion, up by 5.5%, mainly because of higher compensation.

Moving on to bank's loan book. Mortgage and large corp lending drove total loan to increase. The total loan book grew to TWD 2.5 trillion, up by 5.2% year-on-year. Mortgage was up by 10.6%, driven by robust demand on government-sponsored housing program.

Large corp lending was up by 12.6%, driven by the rebound in economic activities, as post pandemic recovery is uneven and U.S. dollar rate environment is higher for longer. Loan growth in SME and FX segments were only modest this quarter. That said, we do think, along with broadening recovery of export sector as well as the expected fix rate cuts, SME and FX lending can grow further into the year.

Bank's loan book on quarterly basis should speak the same story in next page. Total loan was up by 3.3% quarter-on-quarter. Loan-to-deposit ratio spread and NIM was -- are in Page 15. Loan-to-deposit ratio inched up to about 70%. NT dollar loan-to-deposit ratio was close to 80%. However, FX loan-to-deposit ratio remains subdued at 43%. Spread was contracted to 1.1%. NIM was down by 6 basis points to 70 basis points. Adjusted NIM was 1% after adding ForEx swap gains.

In Page 16, we give quarterly spread data of NT dollar pool and of foreign currency pool.

Moving on to the deposit mix in Page 17. It was TWD 3.6 trillion for the quarter, up by 5.5% year-on-year. On the other hand, CASA ratio held at above 63%.

Before moving on to discuss fee revenue, we provide data on loan concentration and mortgage business in the next two pages. Data on loan concentration by industry is on Page 18. The proportions stayed more or less the same.

In Page 19, we deliberate mortgage business. The bar chart of monthly new mortgage volume in the bottom gives an encouraging signal of strong demand. Weak February should be an exception, reflecting only the Chinese New Year holiday effects.

In the upper left graph, we update on new mortgage loan-to-value ratio, the average mortgage loan-to-value ratio and the mortgage yield. For the quarter, new mortgage loan-to-value ratio stayed about 65%. On average, the mortgage loan-to-value ratio was 48%. Also the mortgage yield was at 2.18%.

In the pie chart, we show mortgage outstanding by property locations. The proportion stays similar as previous quarter.

Now we talk more about bank fee in Page 20 and 21. In Page 20, fee components are listed. For the quarter, out of the fee of TWD 3.3 billion, 53% was wealth management fee, 35% was loan-related fee. Wealth management fee contributed a total of TWD 1.7 billion, up by 62% year-on-year.

The business was benefited from active investors. They shifted asset allocation continuously to yield products. Loan-related fee had TWD 1.1 billion, up by 118% year-on-year. It was because of a one-off revenue item of TWD 0.56 billion, which was related to Taiwan High Speed Rail syndication program.

In Page 21, TWD 1.7 billion wealth management fee was broken down into three categories, TWD 0.8 billion in fund sales, TWD 0.8 billion in bancassurance and TWD 0.1 billion in custody. Fund sales for the quarter grew by 51% year-on-year and bancassurance by 18%.

Now turning to Page 22, bank's operating expenses. The operating expenses was up this quarter by 5.5% year-on-year to TWD 6.6 billion. The cost-to-income ratio stood around 42% comparing to the same period last year.

Coverage ratio, NPL data are next in Page 23. All in all, asset quality holds up well. Coverage ratio was 742.13%. NPL ratio was 0.18%. NPL ratio on specific segment maintained stable. The data on personal loan, mortgage, large corp lending and SME financing is given in the bottom of this page.

To complete our discussion of bank's results, summary of overseas operation is on Page 24. For the quarter, profits from aggregate overseas operation was still hurt by the fallout of CRE backbones in North America. After clinging up the balance sheet on overseas portfolio, total profits from overseas operations was about TWD 0.7 billion, comprising 9.5% of bank's pretax profits.

We see bank CRE loan shows no further deterioration for now. Therefore, contribution from overseas operations should return to normal in coming months.

To finish up, we show our capital strength in Page 25. Bank's CAR was 14.54%. Tier 1 was 12.62%. CET1 was 10.97%. With conservative cash dividend payout plan, our earnings in store will build resilient capital base that means DCIP requirements ended 2024 and 2025.

With this, I'll give the microphone back to Keith.

[Keith Ke, executive]

Okay. Thanks, Yatin. After first quarter's performance, I think some of you might think the -- that our bank's income statement looks maybe kind of different than our expectation.

So let's start the questions from Peggy Shih. She had several questions step by step. First one is the -- by -- our first quarter NIM looked like was different contraction in first quarter. What's the reason? And what's our target for our 2024 adjusted NIM now? And also the combined question should be the -- what the FX swap gains in first quarter and our outlook for 2024.

[Annie Lee, executive]

All right. Peggy, I'll start our story about our NIM projection. First, you may notice that the major loan momentum came from two sectors. One will be the mortgage and the other will be the large corp. And these two products represent not a very rosy NIM contribution for its nature because the mortgage tend to be nearly over collateralized. That's why the yield for the mortgage products tend to be lower than the other products that we normally focus on. One is the SME lending and the other will be FX loan.

So these two contribution from a more secured portfolio would naturally translate to a not very attractive NIM contribution. However, as the Taiwan Central Bank hike rate in March this year, that would help us to boost the net interest income gradually, as the yield for the mortgage would also pop up a bit, even though it's still lower than the other loan contribution, like SME or FX loan.

So this will be the major factor that impacts our NIM projection. However, as we still continue to grow our loan book in our franchise markets, including SME and FX loan.

And I have to particularly highlight that the delay of the U.S. rate cut did influence the momentum of the FX loan that reflected at our LDR for our FX loan portfolio, still remain at low around 40% -- below 50%. So that, to some extent, dragged down the NIM contribution.

But after we aggressively clean up the balance sheet in the overseas loan book and also build up our new assets following the recovery of the economy, hopefully, as we continue to grow our overseas loan portfolio, it will translate to a more attractive NIM contribution in the future.

So we still project that our NIM can reach around 1.04% to 1.05%, even though we have to revise down the NIM projection from earlier this year at around 1.09%, about 5 bps lower than our original projection.

And when we turn to our FX swap gains for this year, the good story is that the delay of the rate cut in U.S. markets, even though it damped the demand of the FX loan, but it also helped to drive up our FX swap contribution. In fact, in the first quarter, our swap transaction contribution amounted to nearly $3 billion, which is better than our original projection.

And going into the second quarter, we would see this swap gain with system for a while, as long as the U.S. rate remain at the high end. So we actually would revise up our FX swap gains for this year, mainly thanks to the delay of the rate cut in U.S. markets.

So I would see that our swap gain would see some -- a smaller contraction, maybe around TWD 12 billion to TWD 13 billion this year, which is about 10% to 15% lower than our level last year. And this projection is slightly higher than our original projection that about just TWD 10 billion for this year.

So it implies that about TWD 2 billion to TWD 3 billion higher than our original projection for FX swap. So these two -- these are the bright side and the dark side for the rate cut. So one is impact the NIM contribution, but the other would help to sustain the swap gains.

[Keith Ke, executive]

Okay. Thanks, Annie. And the second question is from Peggy. She also like to know, because our SME loan book in first quarter was only growth by 1.7% Y-o-Y, less -- kind of less than expectation. So she'd like to know what is the reason for weaker SME loan growth in first quarter. And are we going to change our target for the SME book for 2024?

[Annie Lee, executive]

Well, for SME lending, which is pretty much linked to -- let's say, apart from domestic demand, the export-driven related lending also plays the key role to boost our SME lending. And we have witnessed that the demand from large corp, especially for the tech sector, has already moving up, pretty much helped to translate the rise of the export orders. And we would see this would gradually translate into the supply chain where the SME sector plays a significant portion to boost their borrowing.

So for this year's SME lending, we have already recovered from a marginal contraction or a flattish growth last year. And in the first quarter, we booked around 1.7% growth, that will continue migrate into a higher floor.

However, because the -- let's say, the FX -- the exporting sector still recover gradually, so we would project our SME lending can resume its growth momentum to book around 3% to 4% growth for the whole year.

So it will be migrate quarter-by-quarter following the AI boom and the recovering exporting sector. This is some kind a lagger reflection following the recovery market in the exporting sectors. So SME loan for this year's target, we would maintain our 3% to 4% growth for the whole year.

[Keith Ke, executive]

Okay. And the follow-up question is also from Peggy Shih is talk about the fee income. I think Annie has addressed some point of the fee income. But she'd like to know the fee income was growth stronger than our expectation and -- in first quarter, but -- will this momentum be sustainable for whole year? And what's our target for the 2024 for the fee income?

[Annie Lee, executive]

Well, just like I mentioned that the higher rates in U.S. market did help the momentum for our fee revenue business, particularly for the yield chasing investors who are very keen to locking a higher yield portfolio that these retail investors are quite keen to investing some investment-grade and high-yield products in the overseas bond market.

So -- okay. So after we have booked nearly 60% growth in our fee revenue in the first quarter, we could see the whole year fee momentum should sustain, and we are now targeting a double the projection growth, around 30% for the whole year, 3-0 percent, and -- which implies that our total absolute volume of the fee revenue this year would actually top around TWD 10 billion -- more than TWD 10 billion this year.

This will be a record high for the fee revenue because apart from the overseas bond sales, another product, a very lucrative investment target would be the bancassurance products where the protection products, or the so-called the estate tax or the inheritance tax related, bancassurance products are very popular in the markets.

Both all booked a very good fee revenue stream. So we take a more optimistic projection for the whole year's fee income to book -- or to generate a record high growth rate for this year, at least a 30% growth this year.

[Keith Ke, executive]

Okay. Thanks, Annie. And I think this also replied for the questions from Eileen Chen from Yuanta as well. She should like to know the fee income expectation and also the breakdown. So I think Annie has already answered the question.

And still, we go back to Peggy's question. She'd like to know another one is the overseas profit contribution was dropped a lot in first quarter. So what's the reason? Can you address some more?

[Annie Lee, executive]

Still, the CRE exposure and losses that we provided represent a major [ force ] of the overseas profits. After we charge off nearly TWD 5.5 billion credit losses in the overseas portfolio mainly related to CRE, in the first quarter this year, we have to dispose around -- about TWD 2.7 billion influx of the CRE exposure. And we actually charge off nearly 60% of the exposure in the first quarter.

So this represented a major drag of the overseas profit in the first quarter. However, we also managed to recover from the disposition of this CI collateral. So in fact, in the second quarter, the prior charge-off collateral has gradually flowed back to become the recovery in our top line. We expect for this year, the recovery may amounted to nearly TWD 2.5 billion to TWD 3 billion. So that means a lot for the top line.

So I would like to particularly stress that most of this CI exposure were duly charged off, but that would follow up with significant recovery that can be justified by our substantial write-back in our book. So we would still maintain a very clean balance sheet in the overseas portfolio, which will help us to grow our assets going forward.

So that implies that when the rates start to move lower and the value of the CIE recover, then this legacy of the CIE losses may improve going into the second half of this year. And also we still managed to recover from the disposal of this CIE charge-off. That will help us to maintain our projection that our net credit cost to stay around 15 bps, which is much lower than that. We had in the prior 2 years more than 20 bps. Only 15 bps net credit cost this year after we charge off most of this overseas exposure.

[Keith Ke, executive]

Okay. Thanks, Annie. I think this also answer the questions from Jemmy Huang. He'd like to know some the reason behind much higher new NPL influx in first quarter and also the U.S. CIE exposure update. So I think Annie has already addressed the situation.

And also another question is for our credit cost. I think Peggy also like to know our target for the credit cost for 2024. What -- do we have any update?

[Annie Lee, executive]

Yes. We -- I just highlight that we still maintain 15 bps net credit cost this year due to the recovery of significant CIE recovery, as most of this CIE that we charge off can be recovered up to 60% to 80% up to now.

So we have charged off more than 80%. So it implies there will be some meaningful recovery from the NPL pool. We charged off more than the actual losses, so it will help us to recover from these NPL losses.

[Keith Ke, executive]

Okay. Sorry. Annie has just addressed. I didn't hear that. So our credit cost was unchanged at 15 bps for the -- for your target. And Peggy's final question is about our -- because we will -- maybe we will like to imply for the IRB model in 2026. So how much will that improve our CET1?

[Annie Lee, executive]

About 2.9% to 3% after we implement IRB model, but that would be postponed until 2 years later. That will be 2026, as we haven't actually submit our application to the regulators. And it would take up to 2 years to finalize the IRE -- IRB approval.

So it will really help us to reduce our RWA down to about TWD 400 billion. TWD 400 billion RWA, risk-weighted assets, can be reduced. So that would improve the capital base by up to 2.9% to 3%. But it's still subject to the final approval of the regulators upon the coming 2 years.

[Keith Ke, executive]

Okay. Thanks, Annie. I think, because from last quarter's conference, maybe our expectation from the IRB model should be more conservative, but we have recalculate for the impact. So Annie just updated the new information for the IRB impact.

And so far, I think that's our questions. And because Eric Shih, he wants to have the outlook for our NIM and fee and credit cost, some predictions. So I will address for the conclusion, for any new predictions for our 2024 outlook.

For loan book, as of the SME loan, it should be a growth by 3% to 4% for full year. And our NIM, we have dropped a little bit from 1.09% to 1.04% to 1.05% this quarter. And our fee income would increase by 30%.

And our swap gains is like to -- earnings this year should be around TWD 12 billion to TWD 13 billion. And the credit cost is maintained the same as 15 bps, 1-5, bps. So let's update for some of our predictions for 2024. [Operator Instructions]

[Annie Lee, executive]

Okay. Keith, can I add up some more projections here?

[Keith Ke, executive]

Okay.

[Annie Lee, executive]

All right. Still, our total loan book can expand by up to 5% to 5.5%. That remains the same, unchanged, because the momentum from mortgage and corporate lending still remains solid. Especially for the first-time homebuyer, the government subsidized lending, the momentum is still quite strong.

And in terms of the NIM, this is pretty much linked to the timing that the U.S. Fed cut rate. If the U.S. Fed postpone its rate cut timing, then perhaps our NIM can perform better because our swap gains can be higher due to the rate gap between U.S. and Taiwan.

So this is pretty much subject to the projection that most people in the markets would project that the U.S. Fed will cut rate in the -- in September or maybe going into the fourth quarter. That would actually become quite dynamic projection for the whole year.

In terms of the fee revenue stream, we are quite optimistic about the fee momentum as the fund floor in the markets remain quite strong. And we should see this fee momentum will quite sustainable, and that the 30% fee revenue growth can become a quite solid projection. So all of this can contribute to a solid top line for this year, but it's still pretty much subject to when the Fed actually cut rate.

But we would not project the Taiwan Central Bank would hike the rate anytime soon. So based on this scenario, it will conclude our projection for this year. But still, we have to proactively react to the projection in the markets anyway.

[Keith Ke, executive]

Okay. And there's one more questions from our guest. He'd like to know the loan growth, and Annie just answered, it Is 5% to 5.5% for the full year. And he also like to know the operating expense target.

[Annie Lee, executive]

Okay, okay. Our SG&A would remain 8% growth. So our CI ratio should maintain at around 46% this year, 46%.

[Keith Ke, executive]

Okay. Our CI ratio is 46%. So far there is no more questions coming in. [Operator Instructions]

So if there is no more questions coming in, and we'd like to -- have you -- if you have any questions, you can just write e-mail to either Yatin or my e-mail box after the meeting.

And now there is no more questions coming in, so I'd like to turn the microphone to Annie for the conclusion.

[Annie Lee, executive]

Well, I think I've answered most of the key questions. I suppose a lot of investors are quite concerned about the CIE exposure. And I have clearly stated that we are almost approaching the end of this CIE exposure now. And then we will be very positive that we can recover from this overcharged CIE losses going forward.

So I must say that the significant [ force ] of our credit cost will be the major positive factor for this year's bottom line. And hopefully, we can achieve our target this year by continuing to growing our loan book and maintain a stable capital base and also the decent write-back from our CIE losses in the prior years.

All right. So maybe we can just end up here, and we will see you next time when we have chance to chat again. Thank you, all.

[Keith Ke, executive]

Thank you.

[Chi-Tsai Yang, executive]

Thank you.

[Keith Ke, executive]

Bye-bye.

[Chi-Tsai Yang, executive]

Happy Friday.