First Financial Holding Co Ltd
TWSE:2892
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First Financial Holding Co Ltd
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Good afternoon, everyone. I'm K.C. Welcome to join us for First Financial Holding Third Quarter 2022 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 and conducting procedures and guidelines. For more information, please refer to our website, www.ffhc.com.tw.
Okay, let's start with our performance presentation. Presentation material can be downloaded from our website, and 1-year replay will be available after today's conference. After the presentation, we'll invite Ms. Annie Lee, our IR Head and EVP to proceed the Q&A session and talk about 2023 outlook as well. [Operator Instructions]
Now I'd like to turn over to Mr. Keith Ke to begin today's presentation. Keith?
Okay. Thank you, K.C. Okay, please turn to Slide 5. Here is the wrap up of the group's performance in first 3 quarters 2022. The group's cumulative earnings reached TWD 16.4 billion in the first 3 quarters, finally, catching up with the same period results last year. And the bank unit's performance was the key. Thanks to resilient, loan growth boosted both net interest income and the loan-related fee revenue. On the other hand, the widening interest gap between U.S. dollar and NT dollar led the funding shift and has led to increase the FX swap gains.
Relative to good results from bank units, nonbanks were kind of fading away this year. Securities and the insurance were both impacted by the turbulent markets, especially when investors prefer to seek after higher yield fixed income products due to rate hikes. It is expected to see some funding shifts. Overall to say, we look forward a challenging year in 2023. It should take time to be back to norms post-COVID. Group shall stay resilient and focus on core business to neutralize risk management and business growth.
Okay, let's move to financial highlights. Please turn to Slide 7. This slide shows group's key figures. Group consolidated net income of first 3 quarters was TWD 16.5 billion, which was flattish comparing with the same period result last year. EPS, ROE and ROA still fell behind. However, the gap was narrowed. Please take other figures as reference.
Let's move to Slide 8. This slide provides the breakdown of group net income. Total net revenue improved 10% to reach TWD 52.2 billion. Even with higher credit charge and the insurance reserves, the total net income still ended at TWD 16.4 billion.
Slide 9 displays the earnings of major subsidiaries. Group net income was mainly supported by bank's outstanding results to offset the backward performances from other major subsidiaries. Let's move to the next part.
Operating results. Please turn to Slide 11. This slide shows group and the bank's net incomes and ROEs. Group net income was TWD 16.4 billion, with 9.9% ROE, while bank's net income also came to TWD 16 billion, with 9.5% ROE.
Okay. Please turn to Slide 12. This slide provides the breakdown of bank's earnings structure. Cumulative net revenue of first 3 quarters was TWD 39.5 billion, with 12.4% growth Y-o-Y. As of the breakdown, net interest income had 13.9% growth Y-o-Y. Fee income grew by 5.4%. Gains on investment had a tremendous improvement in third quarter, which have to turn the Y-o-Y decline into 14.5% growth. Partial reason was coming from the swap gains due to the enlarged interest gap between U.S. and NT dollar.
Okay, please move to Slide 13. This slide presents the loan book mix. Total loan book reached TWD 2.26 trillion, with 11.8% growth Y-o-Y. Large corporate loan led the growth with 33% increase. Among the categories, mortgage grew by 10.9%. SME had 6.7% growth. FX loan also increased to 17%.
And Slide 14 shows the Q-o-Q trend. Again, Large corporate loans had 10.7% growth Q-o-Q, which led to the growth of other categories. Please take other figures as reference.
Please turn to Slide 15. This slide shows the trend of LDR, spread and NIM. LDR continued to improve to 73%. NT dollar LDR reached 84.3%, while FX LDR was also up a little bit to 47.7%. Loan-to-deposit spread improved to 1.46%. However, NIM dropped to 1.02%. This is partially because of the funding shift we just mentioned earlier.
Please turn to Slide 16. This slide shows Q-o-Q trend of NT dollar and FX spread. NT dollar spread continued to improve another 7 bps to 1.38%. FX spread had a huge improvement of 28 bps increase to reach 2.51% now.
Please turn to Slide 17. This slide shows the deposit mix. Total deposit was up 9.7% Y-o-Y, which was mainly driven by FX deposits. It has a 24% growth. And NT-dollar deposit also had a 4.2% increase in the meantime. On the right-hand side, it shows the CASA rate slightly dropped to 70.3% now.
Okay. Please turn to Slide 18. This slide shows the loan book concentration of major exposures. Please take it as reference.
Let's move to Slide 19. This slide shows the mortgage book yield, LTV ratios and the new mortgage lending trend. Mortgage yield is no exception to take the rate hike trend, to rise up, is already 1.84% now. New mortgage LTV ratio was locked at 64.5%, while average mortgage LTV ratio edged up to 46.5%. Bottom bar chart presents monthly trend. Although Y-o-Y mortgage loan book was still quite solid, we do see some declines of new mortgage amounts Q-o-Q.
Please turn to Slide 20. Let's take a look of fee revenue. Cumulative net fee income of first 3 quarters reached TWD 6.1 billion, which was 5.4% growth Y-o-Y. As our breakdown, wealth management fee income in third quarter was kind of weak to turn cumulative income 0.7% decrease Y-o-Y. Loan-related fee income was still solid with 22.4% growth Y-o-Y.
Please turn to Slide 21 for the Q-o-Q trend. On this slide, it shows total fee income was trending down as of the wealth management, both bank assurance and mutual fund fee income were slowed down and showed Q-o-Q decline.
Please turn to Slide 22 for the operating expense. Total operating expense in first 3 quarters was TWD 17.3 billion, with 8.6% growth Y-o-Y. Cost-to-income ratio continued to drop to 43.8%. Please take it as reference.
Okay. Let's move to Slide 23 for the asset quality. Top chart shows coverage ratio and NPL ratio. Coverage ratio moved up to 684%, while NPL ratio dipped another 1 bp to 0.18%. Bottom chart shows the breakdown of NPL ratios. Both individual and mortgage NPL ratios sled to 0.12% and 0.08%, respectively. SME NPL ratio dropped 2 bps to 0.28%, while large corp NPL ratio stayed at 0.08%.
Please turn to Slide 24 for overseas profits. The pretax profits of overseas branches over total profits improved to 37.7%. Suffered by one of new influx from Tokyo branch last quarter we mentioned last quarter, the top left pie chart was still distorted. So please just take it as reference.
Please turn to Slide 25. Group's CAR sled to 123.8%. Bank's CAR and Tier 1 also dipped a little bit to 13.6% and 11.6%, respectively.
Okay. That's the presentation today. I will turn back the microphone to Annie for the conclusion and the QA session.
Okay. Thank you, Keith. Before we proceed the Q&A session, we'd like to talk about the third quarter's performance first. Then we will discuss more about 2023 guidance. So we'll start with the question from Ms. Peggy Shih. Peggy hopes to know that, well, let's talk about the third quarter's provisioning, it looks like the reason behind the provisioning increase is about the syndication loan, single case, in Europe, and what about the provisioning plan and the timing of this new NPL. Annie?
For our NPL provisioning for this year, as we disclosed earlier, which was one-off soaring cases from London -- lending in our London branch -- sorry that is for Tokyo, sorry, it's for Tokyo. That auto parts company that we have already provided. Okay, we have provided more than -- more than half of the exposure that's remaining, which represents a haircut of nearly 44%, and the remaining portion will still need to be further provided due to the secondary market price continued to fall down.
So we gradually charge off extra provisioning against this exposure for this Tokyo auto parts syndication lending. So up to end of this year, there will be more than 70% provisioning against this exposure in the Tokyo office. So that would represent completely -- nearly completely charge-off the losses incurred from this lending portfolio. So the major source of the NPL from Tokyo office should be nearly done.
And as for the increasing of the other provisioning was mainly driven by a ballooning lending portfolio that we would have to provide at least 1% general provision. So these 2 factors affect our group's provisioning for the third quarter and throughout the whole year this year.
And another reason that the net credit cost for this year looks slightly higher than our original projection was because there were some write back source from the disposition of our collateral actually delayed their collection, and it will be further postponed until early next year. So the actual, I mean, recovery on the disposition of our collateral will be less than what we expected earlier this year. So all this factors influenced our original projection that the net credit cost actually move higher up to nearly 22 bps for this year as a whole.
Okay. Thank you, Annie. And we have another follow-up question is about the currency swap. What's the currency swap contribution in the third quarter? And what's the estimated full year's contribution of currency swap?
In fact, the currency -- I mean, the swap can gradually translate into our treasury business throughout the second and third quarter. So based on our current interest rate gap projection for this year as a whole that the swap gains will be as high as nearly TWD 2.53 billion -- TWD 2.3 billion to TWD 2.5 billion...
TWD 2.3 billion to TWD 2.5 billion for fiscal year 2022.
Yes. And it still continue to expand as the LTV for the FX lending is getting lower, however, the extra liquidity with the flat -- with the flow to the swap gains, that would help to boost the swap-related transactions momentum also generate decent swap profit. And we would see this gains with further -- I mean, will be further boosted, that will become even more exaggerated that. We will have to translate into the actual net interest income later on, we will have to explain further. So the swap gains for this year will be somewhere around TWD 2.3 billion to TWD 2.5 billion for this year, and the next year will be even much more than that.
All right. Okay. Let's still focus on the third quarter performance. What about the NIM? It seems that the NIM has been decreasing starting from the third quarter. If we add back the currency swap, what's the adjusted NIM for the cumulative third quarter this year?
Well, the actual accounting for swap gains will be booked as a swap gains and into the account of treasury, however the interest expense cost will be booked as net interest income. So that's why the actual net interest income was a bit distorted because the actual gains was booked in another account. So we would -- it will be more adequate that we make an adjustment to frankly translate the actual gains throughout this fund floor. As we just mentioned that the adjusted NIM incorporate the swap gains will be as high as 1.06% to 1.07% up to the third quarter and also throughout the whole year until the end...
1.06% to 1.07% through the full year of 2022, also accumulated to the third quarter. And also, we have another question, which is about, if we look back the trading income in the third quarter, how do you expect the full year of trading income, not including the currency swaps contribution.
Well, actually, if we exclude the swap against, the trading gains for treasury will be not so -- I mean, not as well as the swap gains because the capital market for this year was not a very outperformed one. So we adopted a very conservative attitude that we did not engage things very, I mean, risky or very exotic derivative products that would translate into not a very aggressive trading strategy. So it would represent the gains from our trading will be -- will not be so attractive anyway.
So we would mainly focus on the traditional -- I mean, the placement -- the fund placement business, which is now more concentrated or focused on swap. And that would help to generate quite a lucrative or decent profit for the whole year. And that would also help to boost the adjusted NIM that we would see that will further boost our overall net revenue throughout the end of this year or next year. So actually, the -- I mean, the pure trading gains for treasury was not that prominent.
Okay. And we have another question from Jamie Huang of JPMorgan. Jaime hopes to know if we -- hope to know the absolute amount, what are the swap revenue last year to the accumulated 9 months, and how about this year?
I just mentioned that for this year, the projection for swap gains was -- will be TWD 2.3 billion to TWD 2.5 billion...
For the 9 months of last year.
Yes. Sorry, no, for the whole year.
No. He wants to know what about the 9 months of this year comparing with the last year.
Okay, for the 9 months this year -- okay, for the first 9 months, the swap gains was up to TWD 1.2 billion.
TWD 1.2 billion.
But these gains, we just said, would further exaggerate it to even higher than that. So I mean, more than double the size for the gains. Yes.
Okay, what about last year.
Last year was only 8 -- sorry, TWD 870 million.
TWD 870 million.
Yes. That was for whole year, last year. Because last year, there was no interest rate gap at all.
That was a really small portion.
Yes, very small and very narrow gap between U.S. dollar and NT dollar. It was until this year that the interest rate gap has been widened to 3% or more than that. Yes. So that will help to boost the overall gains for swap transaction.
Last year, for the whole year, swap gains was just like less than TWD 1 billion, TWD 807 billion. But this year, up to 9 months, we have already produced TWD 1.2 billion and it will further boost up to TWD 2.3 billion to TWD 2.5 billion, which means that nearly 3x currency swap was -- really a booster. Yes. And next year -- for next year, it will be even more.
Okay. Well, let's talk about that later. And let's finish the 2022 guidance. Mr. Eric Shih hopes to know that the credit cost of the fiscal year for 2022, is there any change on your guidance before?
For this year, we would see some more extra provision against -- apart from the Tokyo exposure and also some exposure or delinquent portfolio would need to be further charge-off. So for this year's credit cost guidance will be lifted from my original projection around 18 bps to 19 bps up to 22 bps for this year due to the extra provisioning.
Okay. 22 bps for fiscal year of 2022. All right. Okay. And let's move to the second part, which is the 2023 guidance. I'd like to start with some of you are concerned about the NIM expansion for 2023. So let's start with the guidance from NIM expansion. Annie, can you just talk about the NIM guidance for 2023?
For next year, the NIM guidance would be quite exciting. Actually, our adjusted NIM outlook will be as high as an increase of 9 bps to -- about 9 bps to 10 bps.
All right. Adjusting NIM compared with adjusting NIM of this year, it will be 9 bps to 10 bps expansion projection to 1.15% to 1.16%.
Yes.
All right. Okay. So how does it happen? I mean, how does First Bank generate so much NIM expansion. Can you talk about that the contribution of NIM -- on adjusted NIM, sorry.
Yes. Basically, we have attracted quite huge liquidity that our U.S. dollar deposits grew by 24% this year. So this very ample liquidity has been channeled to swap transaction that's -- actually locking the widened swap gains that help to boost the overall swap gains. So our projection for next year's swap gains will be as high as nearly TWD 9 billion the full year. So that will be -- help to boost the overall net interest income, I mean, NIM, up to...
Okay. So the lion's share of the adjusted NIM contribution will be from the currency swap gains of 2023. We projected early TWD 9 billion for full year. That's pretty exciting. And also, can we talk about the loan growth of next year?
When we turn back to our loan book expansion, that will be pretty much impacted by the not so optimistic GDP growth, that most of the analysts or government agency actually revised down the GDP growth that was less than 3% or as low as 2.5% to 2.7%. So in that case, we set a target to grow our loan book by about just 5%, which is to beat the GDP growth. And in terms of the composition of the loan portfolio, the main growth drivers still source from FX lending that we were targeting a 7% to 8% loan growth from the FX, particularly overseas loan portfolio.
In terms of the SME lending, it will be slowed down from current nearly 7% to about 4% to 5%. And when we look into the mortgage book, after it recorded a double-digit 10% to 11% expansion rate next year the mortgage book that was also losing some steam because the higher rates will impact the mortgage buyers' momentum to engage in higher lending because their financing costs actually become higher. So the main growth driver will be from FX lending more than 7% and SME and mortgage book would slow down to 4% or 3%. Yes.
Okay. Let's conclude the loan growth. The total loan book growth will be projected for a 5% growth. In terms of the different sectors, for SME, we projected a 4% to 5% growth. And for mortgage lending, we projected a 3% to 4% growth. And for FX lending, which will be the highest one, we projected a 7% growth for next year. And so it will be the major projection for our loan book.
And let's talk about the fee income revenue. Can Annie talk about the fee income guidance for next year?
Next, the fee revenue should see moderate growth around 5% to 6% after we recorded a flattish result this year. This year was mainly because that the mutual fund sales was not that -- was not that attractive because of the sluggish market. But next year, due to the low base period factor, the wealth management fee revenue should see some decent growth up to 8% to 9%.
However, the loan-related fee should see some set back because this year, we already reached 20% to 22% growth for the loan-related fee, thanks to the very buoyant lending expansion. So next year, based on the 5% loan growth outlook that the loan-related fee should remain flattish. And another area that would help to boost the fee revenue will be for the overseas fee revenue.
All right. Okay. Thank you, Annie. And we have other treasury gains projection. Because they are -- we have projected the currency swap gains, how about the other financial products like...
The other financial products...
Long term investment and equity investment or something.
Well, in fact, most analysts or trading house all projected a conservative market next year after the rate hike and the volatile situation in the equity and the capital markets. So for the ex swap transaction, the traditional treasury gains would see some setback. One reason would be due to that the dividend income from our core holding for the equity investment would go lower because that profits from this investment targets may lower their dividend payout. So that would, to some extent, then that impact our or dividend income.
So apart from swap gains, other treasury activities, the gains would become lower next year. That will be our major assumption. However, if the equity market does perform better than our imagination, then maybe the treasury gains will go up from our original prediction. Yes.
Okay. So the basic scenario is that if we exclude swap gains that other equity and long-term equity investment will be slightly decline next year. However, if we add back the swap gains, it will still have a brilliant grow like single -- double-digit growth, right? Because the swap gains was -- so far was still pretty brilliant.
Yes. More than 4 times besides that we booked to this.
That's the scenario that we have had so far. And also, let's talk about the fee side. How about the operating expense?
For the cost front, the operating expense would grow by 6%, mainly driven by the -- one source would be headcount cost, and the other source will be from the increased like the purchase of green energy power and also the restored travel cost. And also our fee paid to the deposit insurance would also be high. So the 6% operating cost increase was mainly driven by these factors.
Okay. Driven by inflation as well. Okay. And also let's talk about the cost income ratio. Will it still be the same as this year?
Yes, somewhere around 45%. This year, it will reach about 46%. Next year, 45%.
Okay. And let's talk about the credit cost of next year. A lot of investors are concerned about the credit cost. How do First Financial see the credit costs of next year?
Next year, we still maintain a prudent provisioning strategy that post the huge expansion of our loan book, there may be some, what we call it, the natural influx of the loan portfolio. So next year, our credit cost would stay around 19 bps to 20 bps, just about 2 bps lower than that of this year, due to the expansion of our loan book and also, the overseas portfolio may also produce certain delinquent exposure. So that would not -- I mean, reduce our provision in a very large extent. So next year, credit cost is just slightly lower than 20 bps something.
Okay. So net credit cost will be 19 bps to 20 bps -- 1-9 bps to 20 bps for next year. This is because that we have had pretty much a recovery from the debt expense that we have had for the past 2 years. And also, let's talk about another part is our rights issue plan from Eric Shih, hopes to know is there any rights issue plan for next year or for the coming 2 years?
No, no. Yes. Actually, no plan for the time being. Because we still generate up to 9% ROE. So this can help to finance our loan growth plan. That our loan book only -- would only advance by 5%. So an ROE of 9% should be -- looks decent to support the asset growth next year.
Okay. And the last part is the dividend. The dividend payout policy is a very, very important issue for investors. Can Annie talk about the dividend payout policy for next year?
Well, our dividend plan should stay pretty close to what we normally do. However, due to the huge jump in our loan portfolio that actually -- that actually reduced our core capital, which means the CET1 and the Tier 1 as well. So in that sense, we would have to see next year -- for next year's loan book to stay on what we originally projected that less than 5%, then the dividend payout would not see some pressure that we have to retain more earnings to support the loan growth. So we would we would see that the 60% payout ratio can -- may be a target for next year's payout.
All right. 60% of cash. Mainly by cash?
Yes.
Okay. And we have another question from an Tina Chen. Tina hopes to know, can we update the total loan growth for this year only, because the accumulated 9 months is a little bit beyond the expected 8% to 9% growth. Can Annie talk about the fiscal year loan growth of this year?
For this year, we would be able to achieve nearly 11% to 12% loan growth. And the main reason was driven by the hiking of U.S. dollar rate that most clients actually arbitrage to borrow the low-cost NT dollars and then to finance or to convert into higher-yield U.S. dollar assets. So that, I mean, resulting higher NT dollar LDR ratio up to 84%, but the LDR ratio for U.S. dollar went down to less than 50%. So this was partially, I mean, distorted by the interest rate gap between NT dollar and U.S. dollar. So this year's loan book expansion is a bit more than our prior projection. Because this year's GDP growth was not that prominent.
Double-digit loan growth for this year, that's right.
Yes, yes.
Okay. And I think we need to catch up with some rationale behind the projection of next year. This is because what's the rationale behind the currency swap gains expansion. So what does First Financial look the U.S. Fed rate hike cycle to be continued next year? And how about this year's projection for the U.S. Fed? And also for the Taiwan Central Bank's rate hike?
It seems that market consensus all agree that the Fed will continue to hike rate, even though that the long-term rate has already reached up to more than 4.5%. Some people even talk about that a higher than 5% U.S. dollar rate. So I mean, the even higher U.S. rates may be possible. But in Taiwan, that our central bank will be more conservative or hesitant to hike rate. So the rate gap between the 2 nations would become the major source that the swap gains will be even more distorted that -- I mean, people tend to borrow lower cost NT dollars and then arbitrage it to invest in U.S. dollars or finance their dollars liabilities. So this would be the major reason that a very bias loan portfolio looks like. Otherwise, if there is no such, what we call, the interest rate get the distortion, I suppose our original projection for our loan book expansion should stay less than double digit.
All right. Okay. Since we have touched base on the rate hike, so what's your projection of First Bank's deposit growth for next year?
Next year, deposit growth should be lower after the higher base period this year, which should be lower than 5%, not as high as the double-digit growth this year.
A pretty slowed down momentum for the deposit growth.
Yes. And also, the CASA will continue to fall.
So the CASA rate, what's the projected CASA rate?
I suppose that will be somewhere around 68% or 67%, continue to fall.
But however, the LDR rate will be higher.
Yes. Yes. That's right.
Okay. All right. So that's the rationale behind our expectation. But let's talk about the full year. How do you think that next year's global view or your First Financial's view of next year. And let's wrap up for today's conference.
Okay. Well, for next year, our in-house view would see a slower growth in Taiwan. But in the overseas market, we should see how this rate hike cycle would end in the first half or in the first quarter, and that would have a chance to see whether the economy has already bottomed out. So there are divergency outlook between the bull and the bear that some people would see the equity market should bottom out. So the treasury gains should be much more optimistic. But we shall see because this is really much subject to how Fed stop its hands to hike rate and to ease the inflation pressure. And for the equity market to become more -- much more normal, I would say that will be up to next year -- the next half of 2023, the second half of 2023, after Fed stop hike rate.
Okay. Okay. Okay. I think we have answered all of the coming questions. So let's just wrap up here. And we wish that we have answered all of your questions. But however, if you still have questions, do not hesitate to e-mail us or give us a call, and we can answer you. And is there anything that, Annie, you want to say, to add up something.
Yes. Hey, I suppose most of investors do concern the dividend policy, okay? So I must say that we would definitely pay cash dividends. But how much, it will still subject to further -- I mean, further discussion anyway. We're among the ones that can have the capability to distribute decent cash dividend next year. Yes.
All right. Okay. Thank you, Annie. In conclusion, we hope you enjoyed today's conference. Bye-bye.
Bye.