First Financial Holding Co Ltd
TWSE:2892
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First Financial Holding Co Ltd
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Good afternoon, ladies and gentlemen. I'm K. C. Welcome to join us for First Financial Holding's Third Quarter 2019 Webcast Investor Conference.
Before we proceed the presentation, I'd like to disclose the following information. Starting from December 2015, in order to improve corporate governance code, First Financial Holding has set out ethical corporate management best practice principles in conducting procedures and guidelines. For more information, please refer to our website.
Okay, let's start with our performance presentation. The materials can be downloaded from our website, and 1-year replay will be available after today's conference. And after today's presentation, we will invite Ms. Annie Lee, our IR Head, to proceed our Q&A session and talk about 2020 outlook as well. You can raise your questions by typing at the bottom of the webcast, right-corner window, either in English or Chinese is fine with us.
Now I'd like to turn over to Mr. Keith Ke to begin today's presentation. Keith?
Okay, please turn to Slide 5. Let's take a quick review of group's performance in first 3 quarters 2019. Group's total earnings grew by 7.2% Y-o-Y. Solid growth was mainly coming from bank and the insurance units. First Bank booked plus 6.2% net income growth, and the First Life also reported TWD 267 million profit, which was totally different from the net loss results in past years.
The repatriation of overseas funds continued to permit, and we were -- after [we take it], it would eventually boost the CapEx lending and the corporate -- I mean it will eventually boost the CapEx lending from corporates and the lower supply chain. Hopefully, SME and large corp. loan demand would gradually pick up.
We also believe that the mortgage market was forming up to declare more residential housing transactions to its settlers. As for the wealth management fee income, we also found the mutual fund gradually replace the bancassurance to become the major source in second half 2019.
And finally, annualized credit cost dropped to 20 bps. We look forward to a more stable asset quality in coming quarters.
Okay, let's move to financial highlights. Please turn to Slide 7. This slide presents group's key figures. Not only net income grew by 7.2%, as we mentioned, EPS also improved 7% Y-o-Y. Both ROAE and ROAA gradually picked up. ROAE had 2.3% growth Y-o-Y. Please take other figures as reference.
Let's move to Slide 8. This slide shows the breakdown of group's net income. Bank's credit charge dropped a lot, which helped to boost the net profit.
And Slide 9 shows the net income of major subsidiaries. As we mentioned, bank had 6.2% growth. Insurance made earnings turn positive all year long. Our other major subsidiaries' net income fell behind comparing with net results same period last year.
Let's move to operating results. Please turn to Slide 11. This slide shows the group and bank's net income at the annualized ROAE. Group's accumulated net income reached TWD 15.4 billion with 9.73% ROAE. Bank's net income also achieved TWD 15 billion with 9.55% ROAE.
Please flip to Slide 12. This slide shows the breakdown of the bank's earnings structure. Total net revenues grew by 2.2% Y-o-Y in first 3 quarters, which was bolstered mainly by the 21% growth from investment gains. As for the core earnings, net interest income decreased to 2.9% Y-o-Y. Fee income also slowed down in third quarter and attributed a flat result. Net credit charge was the key to bolster the earnings.
Okay, please turn to Slide 13 for loan book breakdown. Total loan book increased to 4.4% Y-o-Y, reaching TWD 1.73 trillion. Mortgage book maintained at 6.7% growth. Corporate loan also had a stable performance. Large corp. loan book increased to 17.9% Y-o-Y. SME had 2.6% growth. FX was a little bit disappointment for us, which [jumped] to only 1.9% growth Y-o-Y. However, overseas loan book still maintained relatively stable at 5.2% growth.
Slide 14 further shows the Q-o-Q trend of loan book. It's very clear that on this graph, you can see the SME loan gradually picked up with about 1% growth Q-o-Q.
Please move to Slide 15 for bank's LDR, spread and NIM. LDR slipped to 77.5%, among which NT dollar LDR was down to 80.1%, while FX LDR rose up a little bit to 69%. Loan-to-deposit spread dropped another 1 bp to 1.6%. However, NIM stopped shrinking and slightly lifted to 1.07%.
Please turn to Slide 16. This slide shows the breakdown of NT dollar spread and the FX spread. NT dollar spread stayed at 1.39%. However, FX spread continued to drop 13 bps to 2.26%, which was impacted by U.S. rate cut.
Please turn to Slide 17. Total deposit increased to 3.2% Y-o-Y, mainly coming from the NT dollar deposit side, which had 3.9% growth Y-o-Y. FX deposit grew moderately with 1.3% Y-o-Y. As for the deposit structure, NT dollar CASA rate continued to drop to 66.25% to reflect the potential rate cut expectation.
Please turn to Slide 18. This slide shows the loan book concentration, and it was spread with [ CAGR ]. Only wholesale, retail and real estate had around 10% occupation. Others were all above 5% something. Please take it as a reference.
Let's move to the next slide. Slide 19 presents the mortgage book. Bottom bar chart shows the monthly new mortgage lending. Quarterly amount was stable with around TWD 35 billion each quarter. Top-right chart shows the mortgage yield and the LTV ratio. Mortgage yield slid to 1.77%. And both new mortgage and the average mortgage LTV ratio was slightly up a little bit.
Please turn to Slide 20 for the fee income breakdown. Going into the third quarter, fee income was less choppy, one for our bank. The growth of total fee income turned negative with 0.4% decrease Y-o-Y.
As for the breakdown, wealth management fee income dropped 3% Y-o-Y. Third quarter bancassurance fee was not as good as the result in the same quarter last year, so it make the total about 4% decrease for cumulative bancassurance fee income. However, mutual fund sales gradually picked up with only 2.5% decrease now. And loan-related fee income improved 6.7% Y-o-Y, thanks to the growth of syndication loan.
Please turn to the next slide. This slide shows the Q-o-Q trend of the comp. Although third quarter bancassurance was not as good as the same quarter last year, as we mentioned, but still similar results last quarter with 18% growth. Please take as a reference.
Let's move to Slide 22. The increase of operating expense dropped to only 5% at the end of third quarter, which helped to lower the CI ratio to only 42.9%.
Please turn to Slide 23 for the asset quality part. Slide 23 shows coverage ratio continue to improve to 497%, almost 500%. And the NPL ratio dropped another 2 bps to 0.26%. Overall today, asset quality was under control.
And Slide 24 further shows the breakdown of NPL ratios. Individual and the mortgage NPL ratios rose up to 0.23% and 0.21%, respectively, while SME NPL ratio dropped to 0.36%. Large corp. NPL ratio stayed the same at 0.19%. Domestic NPL ratio improved to 0.28%, and the overseas NPL ratio edged up to 0.16%.
Please turn to Slide 25. Let's take a look at our new NPL bad debt recovery. The influx of third quarter was controlled well with only TWD 751 million, and the most of the new influx was from the domestic side. Recovery was quite stable each quarter with TWD 790 million this quarter.
Please turn to Slide 26, the overseas profits. The pretax overseas -- the pretax profit of overseas branches over total profit stayed the same at 44.4%. OBU dropped a little bit to occupy 38% of total operating profit mainly because with the less loan demand. Hong Kong, North America and ASEAN each occupied around 13% to 15%.
Please turn to Slide 27. Group CAR was up to 121%. Bank's CAR stayed at 13.2%, and Tier 1 improved to 11.3%.
Okay, that's the presentation. I will turn back the microphone to K. C.
Thank you, Keith. Thank you for joining us for First Financial's third quarter conference. As usual, we will answer in Q&A session, and then Annie Lee will proceed with our 2020 outlook.
So the first question, I will start with the NIM from Jemmy Huang. Jemmy hopes to know what was the reason for the NIM improvement Q-o-Q and what would we expect the trend in the coming quarters. Annie?
After several quarters of tightened lending standards and also increased some coverage collateral requirements from our loan book, we managed to -- actually, we managed to improve the asset quality first. So you can see the trend of our overall delinquency ratio seems stabilized. Particularly for the one smarter goal, SME book, we actually tried hard to catch up with the trend of the corporate loan demand. But in terms of the cautious outlook for the corporate sectors, the base service capability, so we still try to get more collateral. So that's why it hit hard to our NIM, particularly for the lending spread.
So going to the third quarter this year, fortunately, we managed to make a -- well content for the whole asset quality, particularly for the once vulnerable SME book, apart from the quite strong mortgage book. That contributed to stabilize the NIM outlook. So this can be the major reason that our NIM become more stabilized into the third quarter.
And apart from that, the SME book now turned to a more positive trend to gain momentum and become growth again. That would also help to boost our lending spread in the future. So we managed to maintain a more stabilized NIM structure, particularly when we are facing downward U.S. dollars contraction lending spread that we suffer from. We suffer from the rate cut from our FX lending book that could actually narrow down our overall FX spread profit.
So going forward, when we take a look at next year's NIM projection, we would manage to maintain NIM outlook at not very positive, but at least stabilized somewhere around 1.03% to 1.02%. It implies that NIM contraction -- I mean the pressure for NIM compression may still persist for some while.
Thank you, Annie. And we have a follow-up question. It's about our adjusted NIM. What is our adjusted NIM for 3 quarters after we revert back the SWAP gains?
Well, the adjusted NIM figures still remain a downward trend, that the adjusted NIM where we incorporate our SWAP gains, it will be turned upward to 1.11%. But when we compare with the level that -- the same period last year, in the third quarter of last year, we still see a falling trend. That was around 1.2%. So this really can reflect the negative impact from the U.S. dollars rate cut and also the competition in domestic market for the NT dollars lending competition.
So that's why I just mentioned that for next year, we're still facing the NIM outlook pretty much similar to current level or even a bit lower to around just 1.03% something. There's still some -- a few bps downward pressure anyway.
Okay. And can you recall what's the adjusted NIM for the second quarter?
Second quarter should be wider than this. Okay, second quarter, the adjusted NIM was around 1.14%. So...
1.14%, okay. So when that...
That means that implies -- which implies that our NIM still continue to slip going into the third quarter, which is pretty much impacted by the U.S. dollars rate cut basically from the narrowing FX lending spread.
Okay. And also, a follow-up question is about our Taiwan dollar CASA ratio. We see that there is a declining CASA ratio for NT dollar. Is it due to the rate cut expectation? And why is that?
No. The thing is that as we approach the cap of the stockholders, the lending ceiling for the mortgage and the real estate loans, which is kept at 30%, so we managed to control this limitation. So we attract to sell more deposits with -- at the higher cost of time deposit in order to maintain our expansion in our mortgage lending. You can see our mortgage lending actually expanded by nearly 6.7%, which was quite a robust growth. So that's why we have to attract some higher-cost time deposit in order to -- I mean in compliance with this cap limitation as we are approaching the limit quite soon.
Okay, understood. Understood. Okay, there's another question about our credit appetite from Jemmy Huang. He mentions that it seems that First was quite conservative on credit outlook in the beginning of this year, so is it fair to say that First now has improved your risk appetite now?
Yes, I think so. I just talked about that we try quite hard to clean up our SME book as we actually witnessed some delinquent cases in our SME book during the downturn starting from the second half of last year. But sadly speaking, we have already passed the peak of the SME book, so we would try to catch up with CapEx-driven credit growth in the coming years that was added by the government-sponsored incentive loan. So we would see the SME book or SME lending will become next year's stellar area that we would begin our lending momentum next year. We set out a goal to grow our SME lending book by around 6% next year after a very marginal growth in this last year.
Okay. Thank you, Annie. And then let's talk about -- a little bit about your subsidiary, First Life, from Jemmy Huang. Jemmy hopes to know that -- it seems that the early turnaround of First Life was driven by investment gains. Were those recurring revenue or just the trading gains? Do you expect the operation will remain profitable in the coming 2020?
So our insurance unit is pretty much subject to the so-called the scale of its operations. This insurance unit actually was impacted by that very economic scale business model, which means that the cost is quite fixed. However, its revenue cannot offset this fixed cost.
Our strategy post our acquisition from Aviva was merely target at -- enlarge its premium revenue. So we have now reached the annual sales of more than around 150 or at least 150 first-year premium revenue last year and this year. That helped to boost the whole fund size that this insurance unit has managed that generated decent profits from their investment.
The profit from this insurance unit is pretty much linked to its investment portfolio, which was around more than 70% or 80% linked to the recurring income, like the fixed income or the so-called core earning -- core investment from the equity investments. So we still manage to boost their fund size that can help them offset the fixed cost problem. That's why we are quite optimistic that next year, they would continue to generate profit from their stable recurring income from the fixed income and the equity investment portfolio.
All right, got it. And let's talk about the wealth management. There's a question from Gurpreet of Goldman. He hopes to know that -- what explains the better wealth management business in the third quarter and which one is driven for -- I mean by the market value or actually the money coming back in Taiwan. Which side do you think? Thank you.
Actually, there should be multiple factors that drove up the fee revenue from the wealth management business. As -- since the market this year performed -- actually, I mean, outperformed the expectation of most people expected. So we managed to, I mean, distribute more products like insurance fund -- sorry, mutual funds or bancassurance products, even though we were hit hard by the suspension -- the sales suspension from regulators for internal products or the bancassurance products.
So the -- I mean the repatriated fund may be part of the reason, but the truth is that the market of this year was really good. And that really helped to boost the confidence of the -- most of the investors and also the sales take. So we've managed to maintain this momentum to distribute more products next year and to book more -- I mean higher-commission products that can help to grow more on the wealth management business.
Okay. So you mean that the strong equity market performance may not be entirely driven by capital repatriation?
Yes, yes.
So it's early stages right now?
Yes.
Okay. Thank you. Okay, the next follow-up question is about our trading gains. We see -- it's from [ Tina ], and she says that we had quite good gains, trading gains of subsidiary present in the first 3 quarters. Can we still maintain the profitable trends next year?
Nobody really expected the treasury business will become so prosperous and getting so much profit. Part of the reason could be attributed to the widening effect -- I mean the volatility in the FX market. That would help to produce opportunities that the clients, particularly the Life insurance company, would have. Their hedging demand assume that our treasury department can gain from the offering of this SWAP and currency SWAP transaction.
So going into next year, we still remain on positive business stance that the volatility in the FX and also the interest rate gap will still generate decent opportunities that the treasury business can get something out of this area. That's why we target another 10% growth in our treasury business.
And apart from that, the investment portfolio for our treasury department would also gain some steam that would help to contribute something from the investment for this higher-yield investment portfolio, particularly for the fixed income portfolio. All these factors would help to achieve our goal that our treasury gains will continue to boom.
Okay, got it. And now there's a guidance for our trading gains. It's 10% growth for next year. Okay. And then let's talk about some guidance for 2020. I believe that many of you are concerned about our guidance. Can Annie give us some outlook of our business for next year? Annie?
Most of our customers, particularly the corporate sectors in the Mainland China, has also seen the pressure of higher tariffs from the U.S.-China trade conflict. So I mean a lot of this corporate clients have already started the reallocation plan to move part of their operation back to Taiwan in order to avoid this tariff impact. This can be translated to our very robust loan growth in the fourth -- in the third or fourth quarter this year. We have now witnessed the application for new lending up to about TWD 30 billion up to the end of October. And we see the continuing demand in the coming years with a further surface.
That's why we set out a quite aggressive target to grow our loan book at around 7% to 8%, which this -- the GDP growth in the past history, which is pretty much based on the expectation that this -- I mean we repatriated the capability in Taiwan that helped to grow the bank and started the next credit growth. And a lot of that will be CapEx-related, actually have to start up the new factory and purchase more land or -- and set up a machinery in order to start up their operation here.
So next year, our loan growth target has been set out quite high around -- somewhere around 7% to 8%. A lot of that will be from SME and corporate sectors, that we managed to grow these 2 sectors by 6%.
In terms of the mortgage lending, after we book nearly 7%, 6.7% to 7% mortgage loan book expansion, we also see it bottom out in the property markets this year. That's why we also target aggressive mortgage lending, that we would grow our mortgage lending at 8% as well.
When we talked about the FX lending, FX lending, we also witnessed this relocation of capability from China to spread out to ASEAN countries or elsewhere. So that's why we set up aggressive target to grow our FX lending by 12% next year. So overall, our lending book would see a very, very proactive target next year.
And the other side is for the fee revenue. We at least booked a very flattish growth this year for our wealth management book -- for our fee revenue. So next year, due to the relatively low base period effect, we would set out a target to grow our fee revenue to grow by 9%. Yes. And most of this growth driver would come from the wealth management pretty much linked to the sales of more mutual funds and bancassurance products, both.
Apart from that, as we would target a very robust loan growth next year, so the loan-related fee would also advance by 7% next year. And we will also try to grow our overseas and FX-related fee revenue by 15% to 30%. All of this can contribute to 9% fee growth next year.
In terms of our NIM projection, I just mentioned that we were still facing the fierce competition in the market. So the NIM projection would be further down to 1.02% to 1.03% next year, still seeing a downward trend. I...
Wealth management...
No, I talked about -- yes, I talked about treasury.
10%.
Oh, wealth management. Okay, wealth management, 8% growth. Yes. Fee revenue growth by -- total growth by 9%; wealth management, 8% target; loan-related, 7% target; overseas, 15%; and FX, 13%. For treasury, yes, for treasury, we would manage to grow another 10% next year, thanks to the still volatile market, particularly from the NT dollar's volatility and the spread, the interest rate spread between U.S. and Taiwan.
Okay. Okay, let's wrap up the revenue side. And first of all is our total loan book growth for next year is 7% to 8%, 7% to 8%; in which SME and large corp., we intend to grow by 5% to 6%, 5% to 6%, okay? And mortgage, which we already booked a quite successful growth this year, and we're still talking a pretty much higher growth of 8% -- I mean 7% to 8%. And as for the FX banking, double-digit growth. And we internally have had a 12% growth for our target.
And for the fee revenue side, we actually booked a flattish revenue -- fee revenue growth this year. And we -- so based on a low base, we hope that we can achieve a total of 9% fee income growth, in which the wealth management occupies 8% growth and FX occupies 15% to 30% growth, and loan-related fee will have a 7% growth.
And as for our trading gains, we have had -- we see spread gains booked a quite substantial growth this year, so we are talking 10% growth for the next year. And for the NIM expectation, we hope that we can remain 1.02% to 1.03% next year. And I think that for the revenue side, we already conclude for the -- for you.
And now I'd like to ask a target for our expense side. Annie?
Yes. For cost side, we would have some cost for the so-called the compliance and for the implementation of the IT core system. So next year, we set out a growth target for the expense ratio at around 6.6%, which pretty much was driven by the cost, the actual cost for a core system for our IT framework and also for the compliance service charge.
In terms of our efficiency ratio, the level would be somewhere around 44% to 45% next year. With the further growth going down to the net credit cost the next year, after cleaning up most of the delinquency in our loan book, next year, the net credit cost can be somewhere about 18 to 19 bps, which would be slightly lower than the level this year, about 20 to 25 bps. That will be for the cost side.
Okay. Let me wrap up our cost side. For the expense -- operating expense, it will probably remain the CI ratio range from 44% to 45% next year. And for the next -- net credit costs, we hope that we can maintain the 18 to 19 bps for the next year, 1-8 to 1-9, fixed for the next year.
And is there any other big issues to add? Okay. And another question is about our dividend payout ratio. Annie?
The first ratio to, I mean, catch up with the trend of our profit growth will be our core banking, that for the long-term shareholders that support us for quite some time, so we would at least maintain the 60% payout ratio, mainly in cash. In case that our profit growth was quite or is quite significant, then we would see whether we will boost our payout ratio. In fact, this year, our payout ratio was up to 70%.
70%, yes.
I must say that 50% will be the norm, and above that will be quite possible anyway. So 60% payout ratio in cash. And this...
Okay, most of the...
[ Profitability ] in cash, 70%, yes.
Okay. So the payout ratio, by conclusion, will remain the same and at least 60% for our long-term payout ratio.
And also, we have another question. It's about our 2020 overseas fund investment from Ms. [ Wang Qi Hing ] of China Life. She wants to know that -- can you expect that -- how much we will add up in our overseas fund portfolio up to 2020? I mean, she means the end of 2020, should be.
Let me check for a while the numbers. Up to the third quarter this year, our overseas investment for fixed income product is up to about TWD 200 billion. I suppose it make up about 60% -- 50% of our total fixed income investment. I must say that the growth for this portfolio would further grow another, say, 10% to 15% will be possible as the overseas investment yield are much more higher than that of Taiwan. And this is particularly for our bank investments as they don't need to hedge their overseas portfolio, that they adopt a natural hedge approach so they can have the capacity to increase their investment portfolio. So for 10% to 15% expansion for the overseas investment portfolio will be possible.
Okay. Thank you, Annie. And also another follow-up question is about our overseas expansion in 2020. How is our plan for 2020 overseas expansion?
We have now flagged the permission to start up our Jakarta branch office at the end of third quarter. And for the fourth quarter this year, we would get the license for Houston, for Houston branch office in the U.S. So next year, in the first quarter next year, hopefully, after we get the approval to open our Frankfurt branch office, we would have at least 2 branch offices, one in Houston, the other will be in Frankfurt. This would be the first half of next year.
And in terms of the subsidiary in the U.S., there would be one more sub-branch in California. And in terms of the ASEAN areas, we would set up another 2 more sub-branch office in Cambodia next year. So there will be 1, 2, 3 -- 5?
Yes, 5.
5 branches opened next year.
Yes. Okay. Thank you, Annie. And so far, we don't have any incoming questions. And I'd like to wait for another minute to see that if there's any incoming question. If there's no, I'd like to wrap up here. And is there anything that, Annie, you want to add more?
No, no.
Okay. Well, I think that we have had all concluded our 2020 guidance. And for all of you, and we thank you for your joining today, and we hope you have a nice weekend. And see you next quarter and a happy New Year. But Annie?
Yes. Thank you guys for joining us with our conference today. Wish you have a merry Christmas and a profitable 2020 in 2020.
Okay. See you. Bye.