First Financial Holding Co Ltd

TWSE:2892

Earnings Call Transcript 2023-Q2

[K. C. Lee, executive]

Good afternoon, ladies and gentlemen. Welcome to join us for First Financial Holding first half 2023 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 Q&A session. [Operator Instructions] Today's presentation material is on our IR website, www.ffhc.com.tw. Also, we provide 1-year replay service 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. Thank you, K. C. Okay. Let's start the presentation now. Please turn to Slide 5. This slide summarizes the Group's performance of first half and also the outlook of second half 2023. First Financial Holding posted a resilient result of TWD 13.2 billion earnings in first half 2023, presenting a solid 28.5% growth Y-o-Y. And the good news was that other subsidiaries made contributions in first half, especially for bank units. The benefit from SWAP gain transactions continued given the widened U.S.-Taiwan rate gap, and this played at the major profit driver this year so far.Taiwan has already posted the rate tightening since the second quarter, and it helps to loosen the domestic lending cost a little bit. And another spot for the second quarter was the fee revenue. Fee revenue rebounded in second quarter. Wealth management fee income grew by over 10% Y-o-Y, which was mainly driven by second quarter's performance, and we believe the trend will continue through the second half. And we saw the market was boosted especially from the AI fever and expected the export market and the related loan demand could take lot [indiscernible] to recover in second half. As of the ESG-related topic, we'd like to remind everybody that our 2022 sustainability report is online now. So please visit our website for the details.Okay, let's move to financial highlights. Please turn to Slide 7. This slide shows the group's key figures. The consolidated net income came to TWD 13.16 billion with 28.5% growth Y-o-Y. Both EPS and ROE had over 20% growth as well. Please take other figures as reference.And please turn to Slide 8 and Slide 9. Slide 8 provides the breakdown of group's net income. Total net revenue increased 8.6% Y-o-Y to reach TWD 35.2 billion in first half. Credit charge of this year was a little bit higher, while the insurance reserves was lower comparing with the same period the last year. Net income was TWD 13.2 billion, as we mentioned earlier. The next slide provides the picture of major subsidiaries' earnings. All major subsidiaries made contributions and had better performance fees compared with the same period last year.Okay. Let's move to Slide 11 for our operating results. Slide 11 shows group and bank's net income and ROAE. Group's net income was TWD 13.2 billion with 11.5% ROAE. Bank also generated TWD 12.3 billion with 10.4% ROAE.Please turn to Slide 12. This slide provides the breakdown of bank's earnings structure. Cumulative net revenue of first half 2023 reached TWD 30.2 billion with 22.2% growth Y-o-Y, benefited by SWAP gains. Investor gains drove over TWD 10 billion earnings with almost 400% increase Y-o-Y, and net interest income dropped 19%, mainly it was because of the funding shift. As we mentioned earlier, net fee income started to warm up in second quarter. So turning the decreased situation into a growing situation with 4.6% growth Y-o-Y in first half.Please turn to the next slide. Slide 13 provides the loan book structure. Total loan book dropped to TWD 2.34 trillion from the peak of prior quarter, but still had 4.9% increase Y-o-Y. As of the breakdown, large corp. loan still had 33.7% growth. SME increased 3.5% Y-o-Y. Mortgage book had 7.7% growth. Only FX loan book dropped 5.2% Y-o-Y. And Slide 14 shows the Q-o-Q trend. Please take it as reference.Okay. Let's move to Slide 15. This slide displays the trend of LDR, Spread ,and NIM. LDR slid a little bit to 69.7%, mainly because that NT dollar LDR dropped to 78.6%. However, FX LDR rebounded to 45.5% this quarter. And loan deposit spread has dropped 2 bps to 1.34%. NIM also dipped 1 bp to 0.76%. The SWAP gains was around TWD 1 billion each month in the second quarter, and the total SWAP gains this year accumulated to over TWD 7 billion in the first half. And the adjusted NIM was 1.14% for first half.Okay. Please turn to Slide 16. This slide shows Q-o-Q trend of the NT dollar and FX rate. NT dollar spread was down 1 bp to 1.35%. FX spread widened to 2.77%.Please move to Slide 17. This slide shows the deposits. Total deposits shrank to TWD 3.37 trillion comparing with the month at the end of first quarter, but still had 8.7% growth Y-o-Y. NT dollar deposit increased 13.1%. However, FX deposit was down 1.4% Y-o-Y. And the CASA rate further dropped to 64.1%.Okay. Please move to Slide 18. This slide shows the loan book concentration of major exposures. So please take that to reference.And let's move to Slide 19. This slide shows the mortgage yield, LTV ratios and new mortgage lending trend. Mortgage yield continued to trend up to 2.2%, which was consistent with the rate hike cycle. And the LTV ratio stayed pretty the same with the ratio of last quarter. New mortgage LTV ratio was 64.4%, average mortgage LTV ratio was 46.6%. And the bottom bar chart shows the amount of new mortgage lending this quarter was also similar to the amount last quarter.Okay. Let's flip to Slide 20 for the fee income. Cumulative net fee income of first half reached TWD 4.4 billion with 4.6% growth Y-o-Y. As we mentioned earlier, fee revenue in the second quarter accelerated a little bit to turn the situation into growing trends. Wealth management fee income was the key with 10.8% growth Y-o-Y, while non-wealth management fee income still fell behind.And Slide 21 shows the Q-o-Q trend of the fee income. Both mutual fund sales and the bancassurance had over 30% growth Q-o-Q.Okay. Let's move to Slide 22 for operating expense. Total operating expense of first half was TWD 12.7 billion with 12.3% growth Y-o-Y. However, the cost-to-income ratio still contribute well only increased a little bit to 42%.Please turn to Slide 23 for asset quality. Coverage ratio improved to 735.7% at the end of the second quarter. NPL ratio kept at 0.18% for consecutive 4 quarters. And bottom charts show the breakdown of NPL ratios. Individual NPL ratio dropped to 0.11%. Mortgage NPL ratio was also down to 0.07%. SME NPL ratio decreased 7 bps to 0.2%. Large corp. NPL ratio rose up to 0.16% for a one-off case.Please flip to Slide 24. The pretax profits of overseas branches over total profit further [ strained ] to 20.6%, which was mainly impacted by overseas bad debt. Top left pie chart was [ distorted spill]. So please just take that to reference.And please turn to Slide 25. Group CAR was 128%. Banks CAR and Tier 1 were 14.3% and 12.3%, respectively, at the end of first half.Okay. That's the presentation. I will turn back to the microphone to Annie for the QA session. Thanks.

[K. C. Lee, executive]

[Operator Instructions] The first question is from Ms. Peifan Shih of Morgan Stanley.Picking hopes to know what is adjusted NIM in second quarter when adding back the currency SWAP gains?

[Annie Lee, executive]

Okay. Until the end of first half, our adjusted NIM slowed down to 1.14%, which was mainly due to higher funding costs and we would see that this higher funding cost to drag down our NIM to some extent. But for the whole year projection, we would also see the full year's adjusted NIM should be able to slightly higher than the end of first half and move up to around 1.16%. So after we conclude a lower first half adjusted NIM at 1.14%, we still project a slightly higher adjusted NIM till the end of this year, up to 1.16%, which will be around 7 to 8 bps higher than the result of last year around 1.09%.

[K. C. Lee, executive]

Okay. And a further following question is about what's the expected currency SWAP gains, the absolute figure for 2023, Annie?

[Annie Lee, executive]

Up to end of July, we have booked around TWD 8 billion Swap gains, I mean, for the first 7 months of this year. However, due to the demand for the an FX hedging purpose, particularly from some insurance life player because they're influx of the first year premium actually decelerated for this year pretty much impacted by the higher U.S. dollar rate. So the demand for the new influx of this overseas investments should slow down. So we would project a much slower SWAP gains into the second half of this year. But we still can see that the total SWAP gains can climb up to more than TWD 11 billion for this year as a whole.So the momentum was pretty much driven by the influx of the CapEx hedging demand from markets. So for the whole year, we can still bid up to TWD 11 billion for the whole year. But for the first 7 months, we have concluded TWD 8 billion.

[K. C. Lee, executive]

And also, let's talk about how about the absolute figure of the first half. You just mentioned that from January until the end of July, which is TWD 8 billion SWAP gains. However, if we just are talking about the first half at figure of that?

[Annie Lee, executive]

Well, for the first half, we actually recorded around TWD 7 billion. Every month, there will be more than TWD 1 billion.

[K. C. Lee, executive]

And also the answer of the question from Pei is that we actually booked TWD 7 billion for the first half of SWAP gains and also until the end of July, we booked TWD 8 billion.Okay. Next question is also about the loan growth. Do you think that the 2023 loan growth of 4% Y-o-Y will maintain?

[Annie Lee, executive]

Yes. We still project that we can grow our loan book by 4% due to still resilient loan demand from corporate sector and also the mortgage lending. The large corp. and the SME sector would continue to extend their demand for the loan, even though the exporting sector sees some weakness in the first half. However, we should see going into the second half when we enter into the seasonal peak season, which would help to drive up the demand.And I'd like to mention the recent AI boon. So in that sense, the demand going into the second half, we should see some pickup. And that will help to drive up the loan demand from the corporate sector after we booked a moderate growth in the first half.And I would like to highlight about the mortgage lending. Even though there were certain crackdown measures adopted by the implemented by the government. However, the so-called long tail effect from the previous construction projects will gradually translate into the mortgage loan demand, which helped to boost our mortgage book in the first half, and that should sustain for a while before it goes to the following cycle. So these 2 areas will be the major growth driver for us to reach our original projection that we can still achieve around the 4% loan growth, mainly from corporate and from mortgage lending, both with a target of 4% and around 3.5% growth for the whole year.

[K. C. Lee, executive]

And also, the next question is also asking about FX loan growth. We have seen FX loan growth picked up in the second quarter. Do we still maintain the whole year FX loan growth of 6% Y-o-Y?

[Annie Lee, executive]

Currently, in domestic front, the loan demand was drafted by the weakening export input sector. So for DBU FX loan, it's actually dropped quite substantially. However, in the overseas market, particularly in the U.S. and North America, it continues to grow. So we should see some balance between the 2 sites that the Greater China and the ASEAN countries would see some slowdown. However, in the U.S. market we'll continue to lead the growth. So we would project our FX loan growth can maintain around marginal growth of around 3% due to the recovery and the tech boon going forward.

[K. C. Lee, executive]

Okay. And another question is still from Pei. Can I do the CET1 ratio in the second quarter?I think I have had the answer here, which is 10.59% for the CET1 ratio at the end of second quarter.Also the next following question is that related question is from [ Amanda Jung ]. Amanda wants to know that what is the adjusted NIM in the single quarter of the second -- I mean, the second quarter? Do we have that figure for the extreme special single quarter figure?

[Annie Lee, executive]

No, sorry, we don't have the second quarter adjusted NIM. Maybe we can get back to you when we have the figures later.

[K. C. Lee, executive]

Amanda, can you just e-mail us in your e-mail address? When we get the answer, maybe we can e-mail you back.And also a related question is from Eric Shih of KGI. Eric hopes to know if no rate cuts or rate hike in 2024, what the possible NIM trend given higher rate environment based on history experience?

[Annie Lee, executive]

Well, at least if the rate cycle stays unchanged. We would see that the gain from the SWAP should sustain. Not as much as what we have this year, but still higher than, I mean, 2 years ago. Because if the U.S. rates remain at the high end, then the the loan demand for FX lending would remain weak because I mean, corporate tend to borrow cheaper funding in terms of NT dollars then SWAP into U.S. dollar financing. And also because that the NT dollars exchange rates remain weak and it is pretty likely that we should see some reversal trend that U.S. dollars may become weaken if the U.S. rates start to fall.So the hedging demand from institution investor, particularly for the live player to resume because currently, they actually opened quite a huge exposure to -- for their overseas investment portfolio. So in that sense, the underlying demand for the SWAP transaction should remain intact. That's why we would project the SWAP gains may not -- maybe pick here this year. But for next year, it should be able to sustain -- I mean, not to falling level but at a relatively high level when we compare to prior year. So I should see if the rate level remain unchanged going into next year, the SWAP gains should remain intact, but peak this year.But currently, I cannot, I mean, predict how much -- how high that will be, but at least this trend should stand for another a couple of quarters at least.

[K. C. Lee, executive]

And we have another question is the loan demand, especially the FX loan growth demand. Actually can we know that which market do we see the loan demand for FX loans for this year or for the future quarters?

[Annie Lee, executive]

For the first half of this year, the main major growth region come from North American market. In terms of the Y-o-Y comparison, in the first half this year, our U.S. North American market grew the loan book expanded by more than 14%. So that pretty much offset the decline in the Greater China areas because actually, a lot of banks reduce their exposure and the Greater China, especially in China lending alone. So U.S. market represents a leading role that would help to boost our loan demand. And that can also be justified by our loan book expansion that our 2 main office in New York and Los Angeles LA, their loan book expanded by 8% and about 4.5% in the first half of this year. So this can be pretty much demonstrate that the growth driver was mainly originated from U.S. market and the size can be quite meaningful going into next year.

[K. C. Lee, executive]

Let's move to fee income. Actually, a question from [ Ms. Peggy ] and also from [indiscernible] of Goldman. Hopes to know that actually the second quarter fee growth, we have seen strongly recovered 17% Q-o-Q, especially from wealth management fees. And do we still target 2023 grow by 5% to 6% Y-o-Y? And which sector or which part will be driven by 8% Y-o-Y of wealth management growth?

[Annie Lee, executive]

After we passed on the very slow first quarter, going into the second quarter, our wealth management business actually improved quite significantly that our sales for mutual funds and the bancassurance that received quite a strong growth. Both business have seen some 11% to 12% growth for the first half this year. However, the non-wealth management fee revenue, particularly from the FX-related FX and the credit card business, we did not see good growth. And in terms of the loan-related growth, it also sees some slowdown in the first half. But when we enter into the second half that we should move into a seasonal peak season for the loan demand, we would see that the loan demand, the increase of loan demand would help to boost the loan-related fee business.So that's why we still maintain our projection for the whole fee revenue by growing 5% to 6%, which pretty much reflected the fact that the non-wealth management fee revenue streams still takes some time to recover going into the second half due to the slower loan demand momentum. But the wealth management momentum should see strength going into the second half, which is in line with our original prediction in the first quarter.

[K. C. Lee, executive]

And we have another question, which is from the dividend. This question is from [indiscernible]. May I know that any change for the future dividend policy, such as above 60%, given First Bank actually recorded a better earnings than prior year?

[Annie Lee, executive]

I mean, this question still takes time to make some assessment because we just mentioned that our capital base it's still under the criteria set for the DC banks. So we would have to recalculate until the end of the year, whether we can comply with the basic criteria prior to the 2025 date set by the regulators. So in that sense, I should say that at least the 60% payout ratio that we defined in the past would be the -- maybe the target and we try to reach. However, currently, it's still not very clear to see whether we can -- I mean, increase our payout ratio, I mean, up to 70% or more.So we would have to see with the capital management initiative, did there is some -- I mean did it reach our original target before we can, I mean decide how much that we can deliver our dividend payout. Maybe we can discuss that in our second quarter earnings release. It's still a bit earlier.

[K. C. Lee, executive]

And then let's move to provisioning and credit cost part. And a question from Ms. Peggy. Hopes to know that actually, the first half provisioning reached to TWD 2.4 billion with credit cost of 21 bps. Any specific defocuses happened in second quarter or expect more defocusing the second half?

[Annie Lee, executive]

In the first half of this year, the sizable I mean, provision, mainly came from overseas portfolio, 2 from our London offices, one from our Canada office. They're all -- one is a legacy exposure, which is the [ OPI ] and the Canada exposure was a so-called failure refinance project because this lending was originally to be sold and repay our lending. However, because the collateral was not successfully transferred to the new buyers. So that's why the original borrower defaulted on the loan. And we have already charged off this a successful refinance exposure, but that is pledged by the collateral. So we would project it can see some write-back going into the following quarters. So the major provision actually was actually driven by the overseas legacy exposure, one from [indiscernible] and the other is from Canada. And the total was about TWD 2 billion.

[K. C. Lee, executive]

Okay. And also, we have a related question from [ Ms. Tina Chen ] and also from Jason. They hope to know in Slide 23, about the large corp. NPL ratio actually went up 13 bps from the first quarter. May I know what's the reason behind this one? And is that which case and what's the exposure amount and related provisioning percentage? And will we still adding up the provisioning for this case, the single case, large corp.?

[Annie Lee, executive]

The NPL for the large corp. sector was LED manufacturer and the total exposure was around TWD 300 million --

[K. C. Lee, executive]

TWD 300 million so that's a LED manufacturing company. And what's the provisioning percentage for now?

[Annie Lee, executive]

Currently, more than 60% or 70%. For the single case provisioning may be less than 20%, but we would increase our provisioning against this exposure. Because the size of this NPL was not that significant, so it should be easily charged off later on. TWD 300 million NPL was not that significant. Yes, we would set aside adequate provision against this exposure.

[K. C. Lee, executive]

Okay. And also, we have another question from Monica [ Sunnybank ]. She hopes to know what's the China-related exposure amount and what's the percentage to the net value of a holding company?

[Annie Lee, executive]

Our total exposure to China business amounted to TWD 37 billion in total, which represents 16.5% of our net worth. So we are not among the higher level of peers, but we still trying to curb our China exposure gradually. And the reason why we cannot lower this exposure or this level to a very low percentage was because we do have some China operations that include the 3 branch offices and 3 leasing company upgraded in China. So we did attract a certain number of renminbi deposits. That's why we have to place out these deposits to get some return on our operation at the China business.However, our mature target audience in China operation will be focused on Taiwan-based business and/or other foreign-based business. So the risk should be well contained. So I should see that this level would continue to drop but in a very I mean, moderate pace due to our existing China operation there.

[K. C. Lee, executive]

And also, the China exposure, what the portion of the property related and also what's the investment-related are?

[Annie Lee, executive]

The China exposure mainly for the interbank lending and the investment, but pretty much minimum because I just explained that we have to digest the renminbi deposit that we absorbed that to place it via the Interbank lending to the so-called big 4 financial institution in China and not very much to the China-based development. We have 0 exposure to the [ troubled ] China developer. So it should be pretty much low risk.

[K. C. Lee, executive]

And also, we have another question is from [ guest ]. He hopes to know what's our CIE lending exposure amount, especially in the United States, including subsidiaries. What's the amount? And also what's the condition of their asset quality right now?

[Annie Lee, executive]

Given that we do have U.S. and -- I mean, North America exposure. However, in terms of the CI exposure, which is amounted to about 4% of our total loan portfolio. So the exposure can be seen quite not a very high level. And also the state servicing from this overseas CIE exposure still remain, I mean, they still service their bet for the time being, but we actually closely monitor the cash flow of this CIE lending to see whether they need to refinance or what about the value of the LTV level. So we are still monitoring this CIE exposure.However, the total exposure now looks manageable for the moment. And though some of the CIE has seen some delinquent problem. But as I just talked about that we have nearly charged most of the troubled exposure, including in the first half the exposure in Canada, but we should be able to recover from this charge-off going forward. So, so far, the overall CIE exposure remains manageable and which account for 4% of our total loan portfolio.

[K. C. Lee, executive]

And we have a follow-up question is about the new influx. As we see that the new influx increase both domestically and overseas, can Annie talk about that? What's the rationale? I mean, is there any specific sectors delinquency sector or a specific big case default case and what's the provisioning condition and what's the collateral situation?

[Annie Lee, executive]

Right. Most of these overseas NPL, I mean, the new influx was mainly collateralized by the property, including the ones that I mentioned in London and in Canada. And our strategy for the moment will be quickly charged off this delinquency loan and then gradually recover from the disposal of this collateral. So that's why in the first half, we have seen a rising NPL level in the overseas loan book.However, we can be able to recover from disposition of collateral and which will become the revenue stream in the coming years. So the provisioning level for this overseas NPL were above 80% or more. So which implies that we have already, I mean, provided sufficient provision against this overseas NPL up to now.And going forward, we are still monitoring a couple of exposure at the moment. But it still remains, I mean, well content because most of this overseas lending were collateralized by the property. So if we are not holding this collateral at our hand, we would also adopt a policy to sell it out that recovered the exposure quicker than the following, I mean, auction process. So these are some of our strategies to speed up the recovery of the overseas NPL.

[K. C. Lee, executive]

And also, we have Annie questions for the credit cost, which is from Peggy Shih. Peggy hopes to know, do we still maintain 2023 credit cost at 19 to 20 bps, Annie?

[Annie Lee, executive]

Yes, I think so. Yes, after we have already cleaned up the major part of the NPL in the overseas market, we still have certain recovery into -- going into the second half of this year. So the net credit cost can still be maintained at around 19 or 20 bps or even better than that. So 20 -- around 20 bps -- 19 to 20 bps net credit cost can be the target of this year.

[K. C. Lee, executive]

And also, we have another question from [ Monica Wang ]. Monica hopes to know what's our 2024 strategy for our new office or a new branch?

[Annie Lee, executive]

Currently, we are targeting new loan office in California, which will be under our U.S. subsidiary. But that will be not a very sizable operation, but mainly to capture the local opportunities to tap into the local lending business. So this maybe just a step to further expand our U.S. operation next year. That will be the current plan for next year in U.S. market.

[K. C. Lee, executive]

I think we have answered all of the questions. And so as we have almost very close to the end of the conference. So I'd like to turn the microphone to Annie, do you want to do conclusion to wrap up something?

[Annie Lee, executive]

Okay. I think I would like to highlight a bit about our asset quality up to the end of first half. Our policy to maintain a clean balance sheet to remain intact, so that's why we'll continue to charge off new NPL, including domestic or in overseas market. But up to now for domestic NPL, remain pretty much benign. But for the overseas market, we would closely monitor some areas in, let's say, in Eurozone or in the U.S. market.But in terms of the China market, we have already reduced our exposure in the prior years. So China's exposure should not be a headache for us. So we would project for this year, the asset quality will be pretty much in line with our prior projections, and we would continue to monitor the the progress or the delinquency ratio going into next year.I think that will be our -- I mean, we were still pretty keen to maintain a sound quality both for this year and for the future. Yes. Right.

[K. C. Lee, executive]

Okay. Thank you, everyone, and we hope you enjoy today's conference. We'll see you next quarter. See you.