First Financial Holding Co Ltd

TWSE:2892

Earnings Call Transcript 2021-Q2

[K. C. Lee, executive]

Good afternoon, ladies and gentlemen. Hi, everyone. Welcome to join us for our First Financial Holdings First Half 2021 Webcast Investor Conference. We will start with our presentation, including first half 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. You can raise your questions by typing at the bottom of the webcast window, either in English or Chinese is fine with us. Also today's presentation material is on our IR website. And also, we will provide 1-year replacement of the webcast meeting for your convenience.

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

[Keith Ke, executive]

Okay. Please turn to Slide 5. Second quarter was a tough one since Taiwan faced a severe pandemic started from middle of May. However, group survived and reported the same and solid results. First half cumulative earnings finished at TWD 10.9 billion with 24.5% growth Y-o-Y.

Total loan book grew by 9.3% Y-o-Y. This solid performance was mainly driven by SME lending. Demand-driven for [ loss ] work-from-home cases cumulated certain sectors and boosted the corporate lending. On the other hand, FX lending also rebounded a little bit, mainly benefited by U.S. and Europe lockdown lifting.

Nonbank subsidiaries gradually grew up and contributed 12.2% of group's total profits at the end of June 2021, especially from securities and insurance. This result was good for group's long-term development.

Looking forward to second half, management team expects the company to go back to the normal as the pandemic being controlled. [indiscernible] for first half 2021. Let's move to financial highlights. Please turn to Slide 7. This slide shows group's key figures. As we mentioned at the beginning, the group reported a solid result of TWD 10.9 billion with 24.5% growth Y-o-Y, and it brought about better EPS, ROA and ROE, et cetera. Please take those figures as reference.

Let's turn to Slide 8. This slide provides the breakdown of group's net income. Net revenue improved 11.7% Y-o-Y, reaching TWD 31.3 billion. Credit charge decreased to only half comparing with the same period last year. Both of these help to boost the bottom line to reach TWD 10.9 billion.

Please turn to Slide 9. This slide shows the major subsidiaries earnings. Bank generated TWD 9.5 billion profit with 11.9% growth Y-o-Y. Securities cumulative earnings came to TWD 876 million in first half, which was 462% growth Y-o-Y. In the meantime, insurance also marked a TWD 346 million net income with 96.6% growth Y-o-Y. Most of these 2 subsidiaries showed solid results to share the earnings burden from bank units.

Let's move to operating results. Please turn to Slide 11. Here shows the group and the bank's net income and ROAE. Group ROAE improved to 9.7%, while bank's ROAE also climbed up to 8.7%.

Slide 12 provides a breakdown of bank's earnings [Audio Gap] TWD 2.9 billion with 3.1% growth Y-o-Y at the end of second quarter. Net interest income and fee income were the key to support the net revenue. Treasury gains was kind of struggle, mainly caused by lacking of the SWAP game. And reduced credit charge and the increased bad debt recovery both helped to bolster the bottom line.

Okay, please turn to Slide 13. This slide shows the loan book mix. Total loan has reached over TWD 2 trillion with 9.3% growth Y-o-Y. SME loan was the key, as we mentioned earlier. Year-on-year growth now reached double digits of 12.2%. Other categories such as mortgage, large corp and FX loan, all had organic growth between 3% to 4%.

Please turn to Slide 14. This slide shows Q-o-Q trend of loan book. Corporate loan was quite solid to keep total loan book at 3% growth Q-o-Q under severe pandemic in Taiwan this quarter. Please take this slide as reference.

And Slide 15 displays the trend of LDR spread and NIM. LDR was slightly up to 71.9%, NT dollar LDR continue to improve to 79.5%. However, FX LDR further dropped to 50.6%. Loan-to-deposit spread increased 1 bp to 1.4%, and the NIM also improved 1 bp to 0.99%.

Please turn to Slide 16. This slide shows the Q-o-Q trend of NT dollar and FX spread. NT dollar spread slid 1 bp to 1.24%, FX spread continued to trend up to 2.07%.

Please turn to Slide 17. Let's take a look of the deposit structure. Similar to the trend of first quarter, total deposits continued to maintain strong demand with 16.9% growth Y-o-Y. NT dollar deposit had 9.5% growth, which slowed down the growing trend a little bit. However, FX deposit had a dramatic 21.4% growth, which was also the key to drag down the FX LDR. At the right-hand graph shows the NT dollar CASA rate, which has already reached 61.6% now.

Please turn to Slide 18. Here shows the loan book concentration of major exposures. The loan structure was pretty similar to last quarter. Please take it as reference.

Let's move to Slide 19. This slide shows the mortgage book yield and LTV ratios. Mortgage yield stayed at 1.46% for 3 consecutive quarters. New mortgage LTV ratio slid to 64.8%, while average mortgage LTV ratio slightly up to 45.74%. Bottom bar chart displays the monthly new mortgage lending. And you can see the Q-o-Q growth was impressive with 66.9% growth.

Please turn to Slide 20 for fee revenue. Total net fee income was TWD 3.77 billion for first half 2021, which increased 3.7% Y-o-Y. Wealth management fee income had 4% growth. And it's worth to mention that our key investment product sales had over 9% growth Y-o-Y. As of non-wealth management, loan-related and FX fee income each had 2.6% and 3.7% growth Y-o-Y.

Please turn to Slide 21. This slide shows the Q-o-Q trend of fee income. Total fee income had 8.6% growth Q-o-Q, mainly driven by bancassurance and the non-well.

Let's move to Slide 22. Total operating expense was TWD 10.4 billion, which was 4.9% growth Y-o-Y. And it makes the cost-to-income ratio came to 45.4%.

Please turn to Slide 23. Let's move to asset quality. Top chart shows the coverage ratio and NPL ratio. Capital ratio improved to 595.9%, while NPL ratio was also down to 0.2%, which was as low as the level back to middle of 2016. Bottom charts show the breakdown of NPL ratios. All sector NPLs were trending down, including individual NPL was down to 0.17%. Mortgage NPL was down to 0.12%. SME NPL ratio dropped to 2 bps to 0.25%. Large corporate NPL was also down to 0.33%.

Let's move to Slide 24 for the overseas profits. Overseas was impacted a lot by the pandemic in first quarter. However, it gradually recovered this quarter. The pretax profits of overseas branches over total profits came back to 34.7%. Top left pie chart shows the profit breakdown. OBU and Greater China combined half of the profits. ASEAN occupied 23.3%, while North America occupied another 18.6% of total overseas profits.

Please turn to Slide 25 for the capital ratios. Group's CAR increased to 135.1%. New LTV method was adopted at the end of June, which helped to improve both bank CAR and Tier 1. We would stay at least 60 bps higher with new method, maybe even more. Banks CAR and Tier 1 reached to 14.1% and 12.3%, respectively.

Okay, that's the presentation. I will turn back to the mic phone to Annie and the KC for the conclusion in the QA session.

[K. C. Lee, executive]

Thank you, Keith. Now I'd like to start the Q&A session. And may I remind everyone that we will start from the time slot that the first question comes from Mr. Jemmy Huang of JPMorgan. Jemmy hope to ask that do we expect NIM to further trend up in the second half? Also fee income growth momentum is tracking below our target of 10% in fiscal year 2021. So is there any downside to our guidance on fee income growth? And I think the first question will be how do we expect a NIM trend in the second half of this year?

[Annie Lee, executive]

Well, the good thing is that the 2 major source of the interest -- net interest income. One was from the NT-dollar lending and the other is from the FX lending. The lending spread for NT dollars remained stable around 1.24% to 1.25% in the first half of this year. And the good thing is that FX spread actually moved up to increase by about 9 bps. The FX lending spread moved from below 2%, 1.98% up to 2.07%. That was mainly attributed to the more demand from investment, especially from the expansion of manufacturer overseas markets, particularly from offshore banking units that we -- have witnessed more than 30% growth of loan demand in the OBU units.

So the improvement in the FX lending spread will help us to stabilize our overall NIM contribution. So we would see until the end of this year, our NIM should be stabilized at this level of 1% due to the expectation that we will not see any rate hike from the local central bank.

In terms of the fee projection, because of the second quarter that the lockdown of the retail markets and also the very slow momentum in domestic spending, private spending. So the fee momentum did slow down a bit. So we managed to catch up the reopen of markets starting from -- in the middle of the third quarter that the sales of the investment products and also the bancassurance products will gradually pick up. And another factor that impacted the slower momentum for fee revenue, that our mortgage lending tend to be slower in the first half of this year but have already recovered in the second quarter of this year. So that will help to boost the fee revenue from the mortgage insurance side. So we would see while the investment boom would sustain throughout the end of the year, the fee revenue should gradually recover from the low of the second quarter.

In fact that we still target our fee revenue to be able to end up with a growth of 6% to 7%, slightly slower than the 10% projection, but we still managed to make up the gap that we did not reach in the second quarter of this year. So for the whole year, the fee revenue target would be slightly lower than the 10% growth, but around 6% to 7%.

[K. C. Lee, executive]

Okay. So to sum up, the NIMs should be stay stabilized in the second and we slightly revised down the growth from 10% originally to 6% to 7% for the total year. Okay. And the second question is from Peggy Shih of Yuanta. Peggy hopes to know that she found that our short-term investment gains grew by 35% Y-o-Y and she hopes to know what's our position on capital investment of, especially, the stock market?

[Annie Lee, executive]

Well, we were not that keen to place or build up a very huge portfolio in the equity market, like our peers did. So the composition of the total gains from the investment portfolio still mainly came from the investment in the fixed income portfolio that we actually booked nearly TWD 3 billion investment gains from the fixed income investment, including the U.S. dollar portfolio. We now own more than TWD 330 billion portfolio for fixed income investments.

In terms of the talent stock equity portfolio, we now only possess about TWD 21 billion to TWD 22 billion, not as high as our peers. But we mainly focused on the -- some core investment that will derive more decent cash dividend that we will lock in the higher dividend yield investment targets, but not for the short-term trading portfolio.

So the overall return from the fixed income is around TWD 3 billion for this year, and the equity investment, including the cash dividend revenue will be up to around TWD 1.6 billion, including short-term and trading investment portfolio. And another part will be the SWAP transaction that will also contribute a lot, up to about TWD 1 billion even though it has been quite -- I mean, having reduced quite substantially from as high as nearly TWD 3 billion from last year to just TWD 1 billion this year. So the 3 portion would mainly come from fixed income and equity investments. And then the last part will be for a SWAP transaction. That will form the whole picture of our treasury gains this year.

[K. C. Lee, executive]

Okay. And another follow-up question is about our recovery. Peggy hopes to know that is there any significant recovery in the first half of this year, what case can we reveal, what's the case?

[Annie Lee, executive]

Definitely, the recovery came from the disposition of the collateral. We did recovery from 1 or 2 single cases that we have placed assets that we actually disposed in the market. So we recovered quite significantly that contributed to the write-back of the first half of this year. And we will manage to dispose some other exposures, some other collateral. So will continue to recover from the legacy portfolio for our NPL portfolio. We would project the whole year recovery will be up to similar level of last year, around TWD 3.4 billion to TWD 3.5 billion this year for recovery alone.

[K. C. Lee, executive]

Okay. And in terms of the pandemic bail-out, she hopes to know what's the total amount of the bail-out cases and what about their asset quality?

[Annie Lee, executive]

When we recall of this bail-out plan, it was completely or nearly 90% to 100% backed up by the government. So the total lending size was up to around TWD 24 billion for the SME in some specific factors. And this will be covered by the government fund in case there's any delinquency. And up to the end of the first half, the delinquency ratio still relatively low, below 30 bps for the whole portfolio, less than 0.3% for the NPL ratio. Higher than our overall NPL ratio, but still relatively low 0.3% only, backed up by government.

[K. C. Lee, executive]

Okay. Another follow-up question is, considering that the bail-out plan and the pandemic. And is there any chance that we will revise down the net credit cost this year so far?

[Annie Lee, executive]

For the first half of this year, we have booked a net credit cost around 12 bps. And for the whole year, we would see the whole year's net critical definitely should be lower than that of last year, around 14 bps to 15 bps.

[K. C. Lee, executive]

14 to 15 net credit cost.

[Annie Lee, executive]

Yes, that was quite good for now because we have already cleaned up most of the balance sheet in the overseas lending book.

[K. C. Lee, executive]

All right. Okay. And I'd like to shift to another question is from Jemmy Huang. Jemmy hopes to know that our FX lending. He said that our FX loan growth momentum remains below trend until the first half of this year. So do we expect the momentum to pick up in the second half?

[Annie Lee, executive]

Yes, sure. The overall picture for our FX lending is quite unique. Let me put it this way. In the first half of this year, the FX lending in our OBU unit grew double digit up to 20%. However, the loan book in overseas market remained negative 7%. So the total FX loan book only grew, as you know, by just 2% to 3%.

However, up to end of July, the demand driven by the manufacturer and also the investment boom from OBU unit continue to strength -- strengthen that the OBU lending has already grew by 35% in the first 7 months. And the overseas lending also gradually pick up. So we would see our FX lending may gradually move upward, maybe not so high as 10% for the whole year but up to 7% to 8% should be achievable, thanks to the still relatively strong OBU lending demand, OBU book.

[K. C. Lee, executive]

Okay. So let's talk about our forecast in the second half about -- the first one is from the Peggy question. She hopes to know our forecast around our second half or even next year in 2022, about your outlook about -- first of all, she hopes to know about the NIM and spread and loan growth and also fee income growth.

[Annie Lee, executive]

Sure. The loan book has already seen very strong performance up to 9% in the first half. So we would see the whole year the lending momentum should sustain. So we would see our loan book can expand by 7%, I suppose at least 7% that the GDP growth may go up to 6%. So 7% should not be a problem. And the SME sector will remain a strong one that the SME book will continue to grow by 11% to 12%.

In terms of mortgage book, because we are more conservative when screening or be selective for [Audio Gap] quite decent for us to achieve as the -- we have seen the market rates in U.S. dollars already bottomed out. And after the U.S. may gradually [ tamper ] its policy that U.S. dollar lending rate would move upward from here. So 1% NIM should be our target for the whole year.

We go back to the fee momentum that I just mentioned that after we recover from the second quarter domestic pandemic impact in this still booming domestic investment markets that rates still remain low that investment products is still quite popular in the market. So we should see both the wealth management and other loan-related or FX-related fee will continue to grow by 6% to 7%. That will be our projection.

When we move to our cost side, the efficiency ratio should stay relatively stable around 46% something, which is quite satisfactory up to now. And credit cost that we will be quite comfortable that it will stay low, as low as 14 to 15 bps. So that would run up our projection for this year.

And if we would like to move on to talk about the next year's outlook, I must say that most people still project that the rates still remain at this level until the end of next year before it's further move upward. However, the market consensus would gradually shift to rate [ height ] -- I mean, projections. So that with the pricing into the market rates that would help us to reprice our assets with our clients that when we continue to expand our FX lending, it will help us boost our NIM and generate decent net interest income in the coming future.

So we would see for next year, the rate cycle will become more favorable for bank units. But in the other -- in the acquisition side would be, how that rate hike momentum would impact the equity market and the fixed income market, so there will be 2 sides of a raise that one is benefit the banking sector. The other would be for the -- I mean, broker and like the investment trust or even insurance company anyway. So we would project for next year, the rates still low, but has already bottomed out, and the banks should -- definitely can benefit from this improved sentiment anyway.

[K. C. Lee, executive]

All right. Okay. Thank you. We have another question from Goldman, Mr. Gurpreet Sahi. Gurpreet hopes to know that he saw our double leverage ratio actually has fallen in the first half. So do we have any plans for any capital structure change?

[Annie Lee, executive]

The falling double leverage was mainly due to that we reduced our borrowing for investments. That would -- that will be for -- to improve our overall financial structure. But in terms of the capital management profile, we would see that when we're going to enter into the [ DC ] mode in the coming 4 to 5 years, the dividend policy will be quite challenging for us.

So for us, that -- how to balance the dividend payout and also the -- our business expansion will be the key that we can continue to grow our business and at the same time to satisfy our investors demand that we can continue to deliver decent dividend to them. So I must say that the dividend policy will be the major driver that the overall capital management can fully comply with this requirement in the coming years. No major recap plan on fundraising in the pipeline anyway in. Suppose there is no M&A demand.

[K. C. Lee, executive]

Okay. And also, we have another question from Ms. [ Tina Chen ] of [ Toni ]. [ Tina ] hopes to now that our outlook in the second half in terms of the asset quality. She is wondering that if there is any potential significant corporate lending, bad debt will surface in the second half, Annie?

[Annie Lee, executive]

No major -- actually no major credit events in the second half of this year. So the credit charge for the whole year would stabilize at around the level that I just mentioned 15 bps.

[K. C. Lee, executive]

Okay. And also, we have a question from guests. Is -- can Annie talk about your overseas strategy for the coming quarters, especially after the Europe and the U.S. has rebounded from the second half of this year -- expected to rebound in the second half. How do you look at the overseas rebound in Europe?

[Annie Lee, executive]

Our strategy always focused on where to grow our business and how to improve our return. So when we started our expansion in the U.S. and also in Europe market. This will be the key strategic point that how can we -- anything that can help us to boost our ROE and also our loan growth. That would be major driver that we would expand our business. We started our third business office in the Houston, that would further help us to explore into the local business in the southern part of U.S. markets.

And also that we're still quite keen to open our Frankfurt branch office, that would also target the Brexit issue that a lot of the business or opportunities we started in Frankfurt, even though we have already had a London office. So we should see in these 2 newly deployed overseas sites would help us to gain the future growth opportunities. And the truth is some of our peers already follow up our steps to open an office in Houston that would justify that wherever we go, that will be, maybe, a good idea to follow.

So I must say that continue to find a new source of growth to our ongoing strategy with First.

[K. C. Lee, executive]

Okay, thank you. And we have another question is regarding to our nonbank subsidiaries. We knew that in the first half, the First Group has had a pretty shining nonbank subsidiaries performance. Do you expect that they will continue to have major -- have profit contribution in the coming years or just this year?

[Annie Lee, executive]

For the nonbank units, this year was -- can be mainly attributed to a very booming investment market, especially for the broker business, they actually booked a record high profit. And thanks to the daily -- the higher daily trading volumes. But for a more longer-term perspective, our life units may be a good contributor because they plan to grow their asset under management and continue to invest in decent model. So we would see that life units will be an important driver for long-term growth, but the broker units can play the role that can capture very immanent market opportunities that help to gain from the market flows and also contributed to the whole group.

But we would also help to lift up our momentum in our trust fund units because if we can have a stronger life units, then the fund from the life units can help to deploy into this investment trust fund. So that can be twin engine that they can also generate a decent fee revenue for us. So I must say that life and trust fund and also broker business can form consolidated triangle growth engine for the whole group, apart from the bank units.

[K. C. Lee, executive]

Okay. And I have another question from Mr. Eric Shih from -- of KGI. Eric hopes to know how do we think our asset quality in ASEAN countries in the second half of 2021. It seems that overwhelming pandemic is spreading in some ASEAN countries, like China. So is there any potential rising new NPL and credit costs for that area, any?

[Annie Lee, executive]

In terms of the asset quality from ASEAN countries, it looks that not much delinquency for the moment as the -- I mean, the size of lending remain relatively smaller than that of the some other major markets like in U.S. because there are more syndication lending in the other region. And this lending in the ASEAN markets are more localized and the sites tend to be smaller.

So we would see that the delinquency ratio will be much lower than that of the major markets like U.S. or other developed countries. And up to now, no major delinquency, but we still have to monitor how the pandemic will impact the performance of their existing lending portfolio anyway. Yes, we should see.

[K. C. Lee, executive]

Okay. Also, we have another question from Linda. She hopes to what's our overseas profit contribution as a percentage of our overseas profit contribution expectations?

[Annie Lee, executive]

We managed to reach up to 40%. But for the first half due to some write-downs of portfolios in Hong Kong and New York. So the profit contribution was dragged down. But after we clean up this delinquency portfolio, the contribution should improve in the latter half of this year. First half, the lower portion because the charge-off of -- from Hong Kong and New York.

[K. C. Lee, executive]

Okay. So we're still targeting a 40% versus profit contribution the coming year. Okay. Thank you, Annie. And I think so far, we don't have any coming questions. And is there any conclusion you want to make or to wrap up today's conference?

[Annie Lee, executive]

I would like to highlight that even though we experienced a top time in the second quarter of this year. However, we still managed to work out some efficient way to continue to expand the business. And we are quite confident that our overseas plan would gradually, I mean, become resilient that the recovery in this major market have already turned quite aggressive or proactive.

Now we are now contacting or engaged with some major sectors that we can organize syndication lending or other new loan demand. Hopefully, when most of the world will recover from the pandemic impact, the business will be quickly back to norm and as the economic activities come to more booming that would help to boost the bank's profit. So the lending activities would recover. So we would see a more brighter prospect for next year after most of the vaccination plan is already in place and people will get back to the normal life the whole world will become just like we had in the pre-pandemic crisis.

[K. C. Lee, executive]

Right, right. Thank you, Annie. Thank you for the conclusion. And we hope that you enjoy today's webcast conference and stay safe, and we'll see you next quarter.

[Annie Lee, executive]

Okay. Bye-bye. Thank you. Don't forget to get vaccinated.