First Financial Holding Co Ltd

TWSE:2892

Earnings Call Transcript 2018-Q4

[K.C. Lee, executive]

Thank you for waiting. The meeting will begin shortly. Hi, I am K.C. Good afternoon, everyone. Welcome to join us for First Financial Holding 2018 full year earnings results webcast investor conference. As usual, we will start with our presentation including 2018 performance summary, financial highlight and the operating results. After the presentation we will invite Ms. Annie Lee, our IR Head, to proceed the QA session. You can raise your questions by tapping at the bottom of the webcast window in the English or Chinese, it's fine with us. Or you can e-mail us your questions after today's conference. Also the [1 year] replay will be on the website soon after today's conference. And now we welcome you join us and 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, please turn to Slide 5. On this slide it shows the trend of historical performances. After recession of year 2017 net income bounced back with 12.3% growth in 2018 and ended with TWD 17.3 billion earnings. The bottom line might not meet expectations to some investors especially when comparing with the results of 2016. That was mainly because the bank unit put effort to lift the coverage ratio which was break down by Ching Fu case in fourth quarter 2017.

Please turn to Slide 6. A quick review of 2018. As we mentioned First Financial Holding ended with TWD 17.3 billion net profit growing by 12.3% Y-o-Y. Bank unit was still a major driver to bolster the earnings. Bank's loan book increased 7.3% Y-o-Y, which was the best in 7 years. Mortgage and the FX loan were the major factors to support the growth. Other non-bank subsidiaries also injected profits to group as well. And due to the weak macro outlook Bank provided some extra reserves in fourth quarter as well.

Let's move to second part, financial highlights. Please turn to Slide 8. This slide shows group key figures. Net income improved by 12.3% Y-o-Y. Both EPS and ROAE also had a huge improvement comparing with the results prior year. Asset size increased about 11% and the last [call] constrained the growth of ROAA. Most figures showed on the table were quite healthy, please take it as reference.

Slide 9 displays the breakdown of gross net income. Bank's credit charge decreased to 19% comparing with the year 2017, and it helped to bolster the bottom line. On the other part, higher insurance reserves reflected a higher net revenue. So it didn't impact the total net income much.

Please turn to Slide 10. This slide provides the net income of major subsidiaries. Bank's earnings supported the group's earnings with 15.8% growth Y-o-Y. Securities unit only output 40% of total net income of 2017, which was impacted by macro economy in second half last year. And the insurance unit still showed negative results last year.

Let's move to Slide 12, the operating results. This slide shows group and the Bank's quarterly net income and ROAE. Please take it as reference.

And please turn to Slide 13. The breakdown of bank's earnings structure. Total net revenues grew by 7.1% Y-o-Y in 2018 as I will break down. Net interest income was kind of flat with 0.6% decrease. That's mainly because U.S. and NT dollar interest rates gap still existed. [Forward] phenomenon of interbanking lending flowing to swap transaction continued. The growth of net fee income strength to only 1.4% at the end of 2018, which was impacted by a weak macro we just mentioned in second half last year. The non-wealth fee revenues, wealth management had 2% growth and bancassurance supported with 7.9% growth. Treasury gains maintained its momentum with 46.4% growth Y-o-Y.

Please move to Slide 14 for the loan book. Total loan book increased 7.3% Y-o-Y and as we just mentioned it was 7 years high. Total loan book has reached TWD 1.7 trillion now. FX loan increased 12.5% Y-o-Y, which was boosted by overseas branches. Mortgage also had a 7.5% growth. These 2 categories were 2 major drivers to support the loan growth last year. Commercial loan increased another 4.1%, while SME was cautiously with only 2.2% growth.

And Slide 15 shows the Q-o-Q loan book trend. Please take it as reference.

Okay. Now please turn to Slide 16 for Bank's LDR, spread and NIM. LDR improved to 78.7% due to a strong loan demand. NT dollar LDR increased to 81.3% and FX LDR also stood [at] 70.5%. Loan spread maintained at 1.64% while NIM dropped to 1.18%. If we restoring the interbank lending back to from swap transaction NIM would rise up to 1.24%.

Please turn to Slide 17. This slide shows the breakdown of NT dollar spread and the FX spread. NT dollar spread dropped 2 bps to 1.42%. FX spread also slid 2 bps to 2.44% as well. Reasonably speaking the policy of chasing more mortgage loan in the [last] SME loan would drag the spread a little bit. Rather we think that it will be also relatively safe.

Please flip to Slide 18. This slide shows the deposit structure. Total deposits increased 7.9% Y-o-Y. As I will break it down. NT dollar deposits grew by 9.3%. FX deposits grew by 4.3%. CASA rates dropped a little bit to 67.9% but still was the -- at the top level among peers.

Please turn to Slide 19. This slide shows the major exposures breakdown, which was pretty similar to last couple of quarters. So please take it as reference.

The next slide displays the mortgage book. Mortgage yield dropped another 1 bps to 1.79%. New mortgage LTV ratio was 64.8%; our averaging mortgage LTV ratio stayed at 45.4%. New mortgage lending also steadily sustained about TWD 8 billion to TWD 9 billion per -- each month.

Next 2 slides will show the fee income breakdown. In Slide 21 this shows net fee income grew by 1.4% Y-o-Y in 2018 and wealth management increased by 2%, we just mentioned. Other categories stayed pretty the same with previous year.

And Slide 22 displays the Q-o-Q trend. So please take it as reference.

Now please move to Slide 23. Total operating spend increased 7.4% Y-O-Y making cost to income ratio end at 43.2% in line with our prediction.

Let's move to asset quality. Please turn to Slide 24. This slide shows the coverage ratio, LLR ratio and NPL ratio. Coverage ratio continue to rise up to 390%. Our NPL ratio was down to 0.32%. Loan loss reserve ratio also improved to 1.25% at the end of 2018.

All these figures had the same message, that our asset quality got better and better after putting efforts in extra provisionings all year long.

Please move to Slide 25. This slide provides a breakdown of NPL ratios. More writing off then new NPL influx come in for last couple of quarters will help to lower down the NPL ratios.

Top [indiscernible] graph shows that individual NPL ratio dropped to 0.18% and the mortgage to NPL ratio dropped to 0.16%. SME NPL ratio also decreased 5 bps to 0.52%. And the large corp's NPL ratio is also down 2 bps to 0.34%. So all these figures have to lower down domestic NPL ratio to 0.34% now. And overseas NPL ratio slightly increased to 0.23%, pretty similar to last quarter.

Please turn to Slide 26. This slide shows the new NPL influx and the bad debt recovery. Domestic new influx was dropped to TWD 548 million. And the overseas new influx also dropped to only TWD 41 million in fourth quarter. So both were conserved pretty well.

Please turn to Slide 27, overseas profits. The pretax profits of overseas branches over total profits slightly increased to 44.3% as I will break down. OBU occupied 39% of total overseas profits. North America occupied 14.8% and Hong Kong occupied 13.6%.

ASEAN and the China also had about 10% of total overseas profits. It's worth to mention that the branches in China gradually pick up the earnings last year after (a) down session in the year before.

Please turn to Slide 28. Group CAR increased to 131.6%. Bank's CAR was 13.6% and the Tier 1 ended at 11.6%. So please take it as reference.

Okay. That's our presentation today and I will turn back the microphone to K.C. and Annie for the QA session.

[K.C. Lee, executive]

Thank you, Keith. Now I would like to proceed QA session. And today it's our pleasure to have our IR Head Ms. Annie Lee here, to answer all of your questions. You can ask your question at the right corner of the question box either in English or Chinese is fine with us. Now I'd like to answer the first question from Mr. Jemmy Huang of J. P. Morgan. Jemmy wants to know that if we reverse the swap trading cost adjusted for the full year of 2018? Annie?

[Annie Lee, executive]

If we translate the swap impact back to our total NIM it roughly stands up to 6 bps. So the actual adjusted NIM should increase from 1.18% to 1.24%. And frankly speaking, it was still lower than the prior year level, lower than the 1.26% from 2017. So it was partly because that we focused more on the mortgage lending, which were dragged down a bit for our margin. But this was not only due to have to hedge our portfolio to compensate to the falling lending to SME. So if we engage with more fully collateralized mortgage lending then definitely the margin would get a hit. But hopefully as we gradually boost our overseas lending that will help to offset the gap between the NT dollar's falling margin and the more widened FX margin. So this is kind of a tradeoff between the falling NIM impact.

[K.C. Lee, executive]

Okay. Thank you, Annie. I think Annie just answered a follow up question of Jemmy Huang about, if taking into account the swap NIM also went down and where is the margin pressure coming from? And Annie just explained that since we took more mortgage lending instead of SME lending it would drag our NIM a little bit down to, I mean, on Q-o-Q comparison. However if we do more non-collateralized lending the NIM will be going up, so it's a kind of a option question. Okay. The next question is about our asset quality from Mr. Jemmy Huang. Jemmy wants to know what's our latest view on asset quality trend. And it seems that the First Bank's coverage ratio is still lower than the industry average. So will the First Bank further raise it in the coming year, Annie?

[Annie Lee, executive]

I believe that we highlight in the prior quarter's earnings results release conference at -- yes we managed to boost our coverage ratio in order to catch up with our peers' level. However it takes time to boost the so-called the peer -- the peers' level. After we managed to boost our coverage ratio at the end of last year to nearly 390% a level this -- for this year 2019 we're still keen to further increase our coverage ratio by setting -- set aside more provision. So our target for this year would be above 430% or 440% in order to further, I mean, create more buffer for future or potential downside.

But good news is that after we charge most of these legacies of Ching Fu and as we went over all these credit cycle you can see from our presentation that the new influx for last year actually is we're trending lower on a quarterly basis. So we believe that after we clean up most of this legacy and also boost our coverage ratio we will gradually back to normal and catch up to our peers' level at the -- towards the end of this year. But not completely back to the level so the so-called pre Ching Fu losses because data was up to more than 500% or 600% of coverage ratio, it may take another year when we can really bounce back to that level.

[K.C. Lee, executive]

Okay. So would we expect a similar level of the credit cost, Annie?

[Annie Lee, executive]

This year definitely the total net credit charge will be lower from the prior 2 years. We are targeting less than 25 bps net credit cost this year. Definitely lower from 32 bps or 43 bps from prior 2 years.

[K.C. Lee, executive]

Okay. So lower than 25 bps of credit cost, net credit cost of this year.

[Annie Lee, executive]

And that's to the pre-Ching Fu level.

[K.C. Lee, executive]

Okay. Another question is from Jemmy is about our dividend policy, should we expect similar cash payout ratio of 70% of dividend policy for First Financial, Annie?

[Annie Lee, executive]

So as we achieve a growth trend I mean we are back to our growth trend, our earnings, definitely we will try to a maintain sustainable and a -- I mean a very stable dividend payout. For this year yes, we would try to manage to maintain a similar payout ratio that is still subject to the Board approval. So I must say that yes, we can do that but is still wait for 2 more months before our Board will make up the decision, yes.

[K.C. Lee, executive]

Another question is about our treasury gains of this year. We knew that First Bank actually made up quite a lot swap trading last year and what's the expected trading days and instead of lower swap trading how did First Bank make up this gap, Annie?

[Annie Lee, executive]

So last year we took advantage of this interest rate gap and really make huge profit from the swap transaction. When we convert that into the actual numbers or figures is close to around TWD 1.4 billion gains from this swap gain, but after the U.S. market suspend its rate-hike expectation the market would actually ease a bit. So for this year the selling swap transaction demand would no longer help to generate such juicy returns or gains for the our treasury business. However as the year close, trading would be another opportunity that we can still making a decent profit, we would increase our portfolio trading and hope to further gain the or beat the market to compensate the falling demand from our swap transaction. And this was still good chances that we would work hard to achieve.

[K.C. Lee, executive]

I have another question coming in to ask about our overseas strategy, and what's our group's overseas strategy overall this year? Is there any change on our strategy?

[Annie Lee, executive]

So First Group's overseas expansion roadmap would still be quite a balanced and a growth plan which we have already announced that we would manage to start another operation in the tax system in U.S. in order to capture the business opportunity in the southern part of U.S. Also we are keen to re-open our Frankfurt operation this year after we are confronting Brexit issue. Also the ASEAN markets we would manage to start our representative office in Jakarta that -- to see whether we can try to enter into this very highly populated market in the region. Apart from that in the existing operation in the Cambodia we still manage to further expand our new units there. So all in all we would continue to increase or boost our overseas presence, and increase its portfolio, and try to gain a very balanced and diversified business and profit source.

[K.C. Lee, executive]

And another coming question is about our outlook of Taiwan's real estate market. Ever since First Bank started to focus on mortgage lending last year, the mortgage lending went up quickly. So what's your view on mortgage and also on Taiwan's real estate market this year?

[Annie Lee, executive]

So most of the bankers' or individual investors' property market represent a more longer-term investment tool. And last year that we have witnessed the -- some price correction in the property markets that also produced decent opportunity that the homeowner investor would begin to enter into the market to get their own proposition. So we are not that conservative about the property market as it is always put on the top list for most of the investors to allocate to their assets.

So the property market should I mean bottom out or stabilize a bit. Our mortgage strategy would be more on the so called -- where the market liquidity is better and the outlook or demand is much more promising and the inventory remain low. So for us this property market is still a good target for bank to further penetrate. And not to mention when you have the mortgage products you can also generate other cross-sell opportunities that you can introduce the so-called mortgage insurance products or other wealth management business. So mortgages still represent a good recall for banks to further engage with.

[K.C. Lee, executive]

And I have a question from [Tina Chen]. Tina hopes to know the guidance of our -- or can Annie give us some picture of our 2019's business guidance such as lien and loan growth, deposit growth, credit costs, fee income and so on. Okay, let's start with our loan growth target. Okay, Annie.

[Annie Lee, executive]

Sure. My loan growth projection still remain the same. We managed to pick our dividend growth, which is lower than 3%, we are targeting 4.5% to 5% loan growth this year, mainly driven by 2 growth driver. 1 is the mortgage that I just mentioned, the mortgage we managed to grow about 4%. And another big driver definitely would be the overseas lending. The FX lending we managed to advance another 7% to 8% mainly growth by our overseas lending portfolio. We are targeting about 8% to 10% --

[K.C. Lee, executive]

8% to 10% for the FX lending.

[Annie Lee, executive]

FX lending, yes.

[K.C. Lee, executive]

And of the whole loan growth will be 5%.

[Annie Lee, executive]

In terms of the NIM projection. Frankly speaking, the NIM projection may not be so optimistic due to price competition and also the macro does not represent a good outlook for the domestic rate hike. So the NIM, we try to maintain a flat NIM expansion. So it would be flattish.

[K.C. Lee, executive]

Okay for 1.24%.

[Annie Lee, executive]

Yes, hopefully. I would like to highlight that our focus on SME market still remain key, but due to the credit cycle we will only manage to grow our SME loan by about just 2% to 3%, similar to last year not like what we have done in the prior cycle that we used to grow by more than 6% to 8%. So this is a lower cycle for SME lending this year.

[K.C. Lee, executive]

Okay. So the loan picture of -- is very similar to last year. Okay. And how about the deposit growth? Will it grow faster than last year?

[Annie Lee, executive]

Deposit growth is another still area that we actually achieve a very aggressive deposit growth by 9% last year. This year will be pretty similar if not as high as 9%, 7% to 8% should be.

[K.C. Lee, executive]

Okay. 7% to 8% on deposit growth?

[Annie Lee, executive]

Yes.

[K.C. Lee, executive]

Okay, let's talk about the fee income.

[Annie Lee, executive]

Yes. The fee revenue this is still the same. But once management will then play the -- of the top growth for our fee growth, we are targeting a 7% fee growth this year and mainly driven by the wealth management by 6%. And another 2 growth drivers would be our loan related and FX fee revenue.

[K.C. Lee, executive]

Okay. So fee income will be 7% to 8%. And how about the expense side, expense?

[Annie Lee, executive]

For costs side, the SG&A would grow by about 6% due to some investment in the core system and other compliance or [NL] in that consultancy cost. Yes.

[K.C. Lee, executive]

So cost income ratio will -

[Annie Lee, executive]

[Cost-]income ratio this year we are targeting about 45%.

[K.C. Lee, executive]

Okay. 45% of cost-to-income ratio.

[Annie Lee, executive]

And the effect of the inflation -- less than 25% --

[K.C. Lee, executive]

Okay.

[Annie Lee, executive]

And cost to ratio we are -- we manage to achieve more than 400 to 440.

[K.C. Lee, executive]

440.

[Annie Lee, executive]

Okay.

[K.C. Lee, executive]

4-0 400 to 420. 440?

[Annie Lee, executive]

Yes.

[K.C. Lee, executive]

Okay. And we have another question from Mr. Chung Hsu. Mr. Chung wants to know that why don't we targeting at pure Internet banking.

[Annie Lee, executive]

That's a very good question, because how to make decent profits from Internet banking will be the key. For us we already have physical branch network domestically and overseas. So for the Internet banking or so called the regional distribution it would not represent a very decent profit driver for us at the moment. So that's why we exit the original team of the so-called national champion team with China Telecom, because for us the key issue for us will be how to improve our existing service as the viable regional system but not to set up a pure new Internet banking for us. So that's why we're not particularly keen to join this parade of the Internet banking at the moment.

[K.C. Lee, executive]

And also we have another question. It's about our China strategy. [Edwards] thinks that some competitors are talking about their China strategy, well First Bank or First Group well how do you take into account these strategies about China?

[Annie Lee, executive]

I believe most investors remember that a couple of years ago before the renminbi depreciation, actually a lot of Taiwan initial players were really keen to expand into China markets. However, don't forget before we can really make profits, we must input huge capital into this market. So we have already set up 3 branch offices and bundled with a [leasing] company in the China major cities. We reviewed this allocation in China should be sufficient for the moment as we can still continue to serve our China business via our offshore network including Hong Kong, Macau and even OBU. So that's why unless we are very keen to further penetrate into the local China markets, otherwise it's not worth at the moment to inject very huge capital into the China market or even to transform the existing branch office into so-called subsidiary operation, as we are more focused on the so-called wholesale lending business instead of the retail business.

So for us, clearly we must very carefully manage our capital and to seek for a very good return on capital before we actually put more capital into a market like China, that it's really like black hole to us so most of the capital that we input into this market. So for our China story, I must say that we will be more prudent. After we review all the chances that we can get a decent profit from this market then we will not be so aggressive to input too much capital into this very huge or jumbo market for the moment. So I must say that existing China network for us should be sufficient for us at the moment.

[K.C. Lee, executive]

And also a figure for your reference is our 3 branches network in China actually contribute 10% of our total overseas pre-tax profit last year. And very similar to the [construction] presented to the ASEAN countries last year. Okay, another question from [Bruce Lee] of Merrill Lynch. He says, we just mentioned about our credit card guidance targeting at lower than 25 bps this year. So is this hypothesis based on that loan strategy to mortgage lending or we expect the overall SME lending will be better as a quality profile? Annie?

[Annie Lee, executive]

Actually the lack of the NPL that we encounter in prior -- I mean in this cycle is mainly driven by the corporate sector, particularly some sectors that were hugely impacted by the down cycle. So I must say that this is not particularly impacted by which specific area but this is really a -- I mean a clear cycle which is in a downward trend. But for us that when as we -- when we allocate our lending to the mortgage, it will represent the more collateralized portfolio would be a more secure one for us. So the credit cost can be justified that the trending lower mortgage NPL ratio which will help us to improve our delinquency ratio for us. And I must admit that, yes, SMEs is much more vulnerable to the down cycle. So that's why we shift or adjust our lending strategy to tighten our -- this is smarter with SME -- but when the credit cycle start to rebound then we would definitely get back to SME lending anyway. But for the moment it's still a bit risky for this credit cycle anyway.

[K.C. Lee, executive]

And to my view that I think a single question from Bruce Lee is that he wants to know that, will there be other SME NPL service this year? I think a single question.

[Annie Lee, executive]

Now this is like that -- it's hard to predict for us. Now it's getting, I mean getting to the end of the credit cycle. But I cannot say that there will be no more, I mean, NPL service from SME sector as normally there will be a [lag] from the delinquency of SME. But we try to adjust our lending portfolio to reduce our exposure to SME sector but there's a [indiscernible] increase our secured lending and reduce the unsecured portfolio with SME, yes.

[K.C. Lee, executive]

So the question -- the answer of this question should be both. Due to the timing strategy from SME to mortgage and overall could possible, a better asset quality profiles for SME lending this year, is that correct?

[Annie Lee, executive]

Yes, yes.

[K.C. Lee, executive]

So we should try to explain that both ways.

[Annie Lee, executive]

Okay. Both ways -- that's a very excellent question.

[Annie Lee, executive]

So SME exposure will lead to I mean maybe improved asset quality, yes.

[K.C. Lee, executive]

Okay. A very difficult question, right?

[Annie Lee, executive]

Yes. It's hard to do the projection like this because normally there would be -- if there's a prolonged down cycle then definitely there will be more SME NPL -- I cannot say there will be no more NPL.

[K.C. Lee, executive]

Okay. Yes, I see. Okay. And so far we don't have any coming up questions. And I think we have answered all of your questions and also I want to highlight that this is our preliminary earnings result webcast conference. And after the audited results are coming out in the end of March, we will upload latest audited result presentation files to our website. So you can download it from our website soon. And as we have answered all of your questions and starting from tomorrow there'll be a 4-day holiday, we hope that you enjoyed today's conference. And if you have any further questions feel free to e-mail me or Annie or Keith. Okay Annie, would you like to say anything?

[Annie Lee, executive]

Okay. Thank you all to join our conference today. Hope you have a very good, nice long weekend.