CTBC Financial Holding Co., Ltd. (2891B.TW) Q2 FY2025 Earnings Call Transcript & Summary

[Interpreted] Welcome to CTBC Holding 2025 Q2 Earnings Call. Today's meeting will be chaired by Rachael Kao, President of CTBC Holding. Also present are Megan Hsu, CFO of CTBC Holding; Pai-Hung Yeh, CSO of Taiwan Life; and Justine Shen, Head of IR of CTBC Holdings. [Operator Instructions] First, I would like to invite President Kao to give her opening remarks.

Good afternoon, investors and analysts. Thank you for attending CTBC Holding's 2025 Q2 Earnings Call. First of all, I would like to explain to you the overall profit of CTBC Holding. CTBC Holding's pretax net profit in the first half of this year reached TWD 41.4 billion and after-tax net profit TWD 35.8 billion, down 3.7% Y-o-Y, which is roughly the same Y-o-Y. In the first half, affected by Trump's policies, global stock bond and FX markets fluctuated more than last year. As a result, the overall after-tax profit of the industry declined by 35% Y-o-Y, but CTBC Holding performed better than the industry average. After-tax EPS, TWD 1.78, and ROE, 16.3%, ranking the first among all the holding peers. As for our subsidiaries, our core subsidiary, CTBC Bank, achieved outstanding performance in its core businesses in the first half of this year with after-tax net profit reaching TWD 27.8 billion, up 20% Y-o-Y, setting a new record in history for the same period and ranking first among bank peers. Overall, thanks to a 13% increase in loan volume Y-o-Y and a decrease in foreign currency funding costs, the NIM widened, driving the company's NII in H1 up nearly 20% Y-o-Y. Wealth management and credit card performance remained stable, with fee income in the first half of this year growing by nearly double digits Y-o-Y, about 9%. The overseas business performance was also impressive, with pretax profit reaching TWD 12.4 billion in H1 of this year, up 10% Y-o-Y, accounting for 36% of the bank's pretax profit. Our second largest engine, Taiwan Life, had an after-tax net profit of TWD 7.2 billion in H1, down 45% Y-o-Y. In terms of insurance business momentum, the company continues to deepen its channel operations and launch diversified products. FYP income in H1 was up 5% Y-o-Y and [ YP-7 ], up 17% Y-o-Y. In its investment business, the sharp appreciation of the NTD in H1 of this year resulted in significant FX losses. To strengthen its ability to cope with FX fluctuations, Taiwan Life has obtained approval from the regulator to apply the new FX reserve scheme starting in June. In July, TWD 15.1 billion was set aside from its liability reserve to replenish the FX reserves. As for our future outlook, in H1 this year, Trump's tariffs and policy fluctuations led to rising global trade tensions and financial market volatility. With high uncertainty, companies rushed to stock up in advance, leading to strong exports in Taiwan in H1. In mid-August, the government announced that economic growth in H1 was as high as 6.75%, with growth in the second half predicted to be 2.3%, forming a high to low trend. So the whole year's growth is 4.45%, which is higher than the initial forecast. In addition, Powell hinted at a rate cut at Jackson Hole, and the Fed's meeting in September is a focus of attention as well. And also, the tariff situation is going to be confirmed. Overall, the economic situation in the second half of this year will require attention -- caution still. We will give you more details later. In terms of the impact on our clients, I'll talk about that later. As for sustainable development, we continue to promote that. We continue to be selected by MSCI ESG leaders, and also, FTSE4Good, among others. And the scores given by rating agencies improved year-by-year, and we will continue to unleash the influence and the power of sustainable investment. So this concludes this quarter's highlights. Now, I would like to invite our IR colleagues to give you a detailed report on our Q2 performance. Thank you.

Holding reported net profit of TWD 35.8 billion in the first half, down 4% Y-o-Y on lower profits at Taiwan Life despite resilient profitability at CTBC Bank. EPS was TWD 1.78. Holding's ROE was 16.3%, leading peers. CTBC Bank's net profit was TWD 27.8 billion in the first half, up 20% Y-o-Y, marking a record high. Bank's capitalization was solid, and asset quality remains stable. Taiwan Life's net profit was TWD 7.2 billion in the first half, declined Y-o-Y due to higher hedging costs amid sharp depreciation of the U.S. dollar in 2Q. Taiwan Life adopted new FX reserve scheme and took additional FX reserves of TWD 15.1 billion to better withstand currency volatility. It issued sub-debt of TWD 23.8 billion in total in August and September to further boost its financial strength. Other subsidiaries, including securities, Taiwan lottery and investments saw weaker performance both Q-o-Q and Y-o-Y due to a weaker capital markets performance and base effect. Page 5, profitability. Holding's EPS was TWD 1.78 in the first half. Group ROE was 16.3%, and ROA was 0.8%. Page 7, capital ratio. We remain well capitalized with group CAR at 116% and Life RBC ratio at 323%. Bank's CAR was 13.8%, and CE Tier 1 ratio was 10.9% as a typically upstream earnings in June. Page 8, profit breakdown by entity. In 2Q, bank net profit reached TWD 14.3 billion, up 7% Q-o-Q, driven by increased net interest income and lower provisions. Life reported net profit of TWD 1.6 billion, down 71% Q-o-Q, mainly due to elevated hedging costs caused by the sharp depreciation of U.S. dollar. Holding's net profit was TWD 15.9 billion, down 20% Q-o-Q. In the first half, bank net profit reached TWD 27.8 billion, up 20% Y-o-Y, driven by robust net interest income growth and sustained fee income. Life's profit was TWD 7.2 billion, down 45% Y-o-Y, mostly due to higher hedging costs. Holding's net profit was TWD 35.8 billion, down 4% Y-o-Y. Let's go to our banking business. Bank's net profit reached TWD 27.8 billion, up 20% Y-o-Y, outperforming peers. ROE was 14.2%, up 1.4 percentage points Y-o-Y. Page 11, revenue breakdown. Total revenue was down 1% Q-o-Q and up 12% Y-o-Y. Net interest income was up 3% Q-o-Q and 19% Y-o-Y. Fee income was down 19% Q-o-Q and up 10% Y-o-Y. Trading income and others increased 33% Q-o-Q, driven by equities and derivatives-related gains, and down 3% Y-o-Y due to lower swap income and weaker capital markets performance. Next, on loan growth. Total lending with credit card revolving was now 1% Q-o-Q and up 13% Y-o-Y. NT dollar corporate loan was down 2% Q-o-Q, mainly due to the decrease in government loans, and was up 16% Y-o-Y, driven by growth in government services and real estate sectors. Mortgage was up 4% Q-o-Q and 12% Y-o-Y as business momentum remained stable. Unsecured and other loans increased 3% Q-o-Q and 14% Y-o-Y. Foreign currency loan was down 4% Q-o-Q and up 10% Y-o-Y. Next, on foreign currency loan breakdown. Overseas subsidiaries accounted for 57% of foreign currency loans, with TSB and LH being 2 larger subsidiaries. Overseas branches accounted for 32%. Overseas subsidiary loan was up 9% Y-o-Y. Business momentum of most subsidiaries remains resilient, reporting high-single to double-digit growth. Overseas branch loan was up 7%. Growth was especially strong in Singapore, Tokyo and India branches, all reporting double-digit growth. OBU+DBU loan was up 33%, driven by inventory stockpiling ahead of tariffs, which led to higher loan demand for working capitals. Page 14, bank deposit mix. Total deposits reached TWD 5.4 trillion, flat Q-o-Q and up 6% Y-o-Y. On the right, CASA accounted for 58% of NT dollar deposits. Time deposit mix of foreign currency deposits was lower, accounting for 62%. Page 15, loan-to-deposit ratio. Overall LDR increased to 76.1% as both NT dollar and foreign currency loans grew faster than deposits. NT dollar LDR was 85.1%. Foreign currency LDR was 63.4%. Page 16, NIM and spread. In Q2, NIM went up to 1.5%, as Fed rate cuts led to lower funding costs, including swap income. NIM was 1.63% in the first half. Page 17, fee breakdown. Total fees were down 19% Q-o-Q due to a seasonal base effect at lottery and up 9% Y-o-Y. Wealth management fee was down 7% Q-o-Q, impacted by market volatility and NTD appreciation and was up 7% Y-o-Y, as sales momentum was stronger compared to the same period last year, driving sales of bank insurance and structured products to increase. Credit card fees were up 3% Q-o-Q and 8% Y-o-Y, supported by continued growth of credit card consumption. Corporate business fees were down 9% Q-o-Q, mostly due to higher syndicated loan fees in Q1 and up 18% Y-o-Y, driven by loan-related and private banking fees. Page 18, wealth management fee. For wealth management fee breakdown in Q2, the proportion of mutual fund decreased due to capital market volatility, and the proportion of bancassurance increased. Page 19, cost/income ratio. Cost/income ratio was 51.8% in Q2, improved Q-o-Q. In the first half, cost/income ratio was 51.9%, improved Y-o-Y, driven by faster growth in operating income and contained OpEx growth. Next on asset quality. Asset quality remained stable with NPL ratio at 0.48%. NPL coverage ratio was 324%. Q2 credit cost was 26 basis points, down 7 basis points Q-o-Q, as declines in loans led to lower general provisions. Credit cost in the first half was 29 basis points, down 3 basis points Y-o-Y, mainly due to decreases in provisions for the retail segment. Moving to Life business. Taiwan Life reported net profit of TWD 7.2 billion in the first half, down 45% Y-o-Y due to FX volatility. ROE was 9.4%. Total premiums in the first half were up 7% Y-o-Y, and FYPs grew 5% Y-o-Y, driven by increased sales of investment-linked policies. On the upper right-hand side is the FYP product breakdown. We can see the proportion of investment-linked policies increase to 24%. On the lower left-hand side, regular paid products accounted for 45% and single-pay products 31% of FYPs. Foreign currency policy accounted for 50%, and NT dollar policy, 27% of FYPs. On the lower right-hand side, in terms of channels, the proportion of CTBC Bank increased to 40%, reflecting increased sales of investment-linked policies. Page 24, investment asset mix. Total investment assets reached TWD 2 trillion. Taiwan Life sees market opportunities to realize gains from equities and sales, resulting in an increase in cash holdings. In addition, Taiwan Life continued to adjust currency matching and lower the proportion of foreign bonds. The allocation of other asset classes remain relatively steady. Page 25. In the first half, total investment yield after hedge was 3.5%. Recurring yield deferred hedge was 3.63%. Despite the cost of liability increased, Taiwan Life continues to maintain positive investment spread. Page 26, hedging mix. On the left, 42% of overseas investment assets were foreign currency policies, 33% were fully hedged, 16% were unhedged, and the rest was OCI position. On the right, FX reserve amounting -- amounted to TWD 3.4 billion as of Q2. Hedging costs were 1.81% in the first half, increased Y-o-Y mainly due to the sharp depreciation in the U.S. dollar. Turning now to ESG highlights. CTBC Holding remains committed to ESG, and our continuous efforts have led to improved ESG ratings from leading agencies, including S&P Global, FTSE Russell and ISS. Please refer to Page 28 and 29 that highlight the sustainability performance of CTBC Holdings. That concludes the presentation. We are now open for Q&A.

[Interpreted] Okay. Thank you for the presentation. I would first like to address some common questions from investors. And later during the Q&A session, you can focus on questions that I haven't addressed. First of all, it seems that the U.S. is going to cut rates. As for the impact on the bank, if we look at the asset and liabilities, well, if the U.S. cuts rates, the foreign currency capital cost can go down, which can be positive, so we believe that with 1 bp of rate cut, the NII impact is going to be about TWD 8 million. That's the current situation of the portfolio. As for the most impacted clients or industries, well, since April, since Trump's announcement of the reciprocal tariffs, we have reviewed our corporate clients, hoping to understand the degree of impact and their countermeasures. And, therefore, we can set up some measures afterwards. So we look at the clients with more than 10% of their revenue from the U.S. We consider the distribution of their production basis and how they can shift the burden of tariffs elsewhere in order to evaluate high, mid, low risks. If we look at the mid- to high-risk's clients, they account for roughly 1.5% of the entire bank only. We will continue our review in this unusual time when the impact of tariffs is not over yet. Every month or every quarter, we will carry out this review. If we look at the latest numbers, the number is going down compared to previously, 1.5% is the latest number, which I just talked about. You also asked about 72.2% in terms of mortgage and 30%. As of June, our percentage is 28%. There is still room of about TWD 100 billion between that and 30%. And the new government mortgage policy for young people is only for state-owned banks, so private banks. Our bank cannot do that business. We focus on our existing clients as priority direction. In August, we launched a co-branded credit card with Uni-President Group. It has been 1 month. It seems that it's very popular. The number of cards issued meets or exceeds even our expectations. As of the end of August, more than 9 million cards have been issued in our bank. We believe that we will exceed 10 million by the end of this year. As for insurance, as of June this year, we apply to the regulator for the new FX reserve scheme. The additional amount is about TWD 100 million, so we have -- so that was the first batch of money, and we continue with the second batch of money, and the amount was roughly TWD 15 billion. So as of the end of August, the reserve is about TWD 20.6 billion. So whether regardless of IFRS 17 or ICS, upon our adoption, we believe that we will exceed the legal threshold by 100%, and our internal goal is 125%. This is our internal management goal. As of bond issuance, we postponed our earnings call because of this issue. And this year, CTBC Holding applied for TWD 40 billion quota of bond issuance, and we have issued around TWD 20.5 billion already. And for bank, the quota is TWD 30 billion, and we have used that up. And for issuance, there's still a TWD 6 billion quota remaining. So we will look at the market situation to continue to do that. And you also asked about our overseas presence and deployment. Many state government banks recently have decided to eliminate their presence in Southeast Asia. Our overseas presence is relatively comprehensive. Our main presence goes across Greater China, Japan, North America and Southeast Asia, with more than 300 presences. And faced with global trends and Taiwanese businesses continuing to invest overseas, our overseas presence will continue to take roots. Our overseas profit continues to grow, as I mentioned. And in bank, overseas business account for 36%. So in North America, due to tariffs, we have applied for establishing a branch in Los Angeles of CTBC Bank. We will also set up an office in Texas, trying to strengthen some Taiwanese businesses related areas in Texas and near Mexico. In Southeast Asia, we have performed pretty well. We will apply for an office in Hai Phong and another one in Binh Duong, and they are expected to launch in November. In India, we have applied for OBU. It's GIFT City. In Q4, the business will start, hoping to service more Taiwanese businesses there and reducing their investment cost because in GIFT City, there are -- it's tax-free. So we hope to meet customers' needs by doing so. We originally had one office in Australia. We are planning to upgrade it to a branch. Australia and Singapore can co-work on some projects. And also, due to our existing clients, we want to continue to develop in Australia. As for Japan, our Tokyo branch will establish a subbranch in Fukuoka. And TSB, it's a subbranch, in Kumamoto, will be upgraded to a branch because Taiwanese businesses and Taiwanese people now go mainly to Kyushu to invest. So this is our overseas deployment and development overseas. We hope to more deeply invest where there are more Taiwanese businesses and overseas Chinese populations. So these are some of the common questions raised by investors. If you have any further questions, feel free to raise them.

[Interpreted] [Operator Instructions] JPMorgan, Jemmy Huang, please.

[Interpreted] I have 4 questions. First of all, could you talk about Q2 swap revenue? How much is it roughly? And if the U.S. is going to cut rates, can we expect the NII to go up while swap revenue continues to go down? If we look at H1 NIM, it is at the low end, right? I don't know if in H2, there will be some upside catalysts there. My second question, regarding the credit card cooperation with Uni-President Group, I don't know if there will be some upfront expense this year, be it onetime or otherwise. Can there be some expense related to that? My third question, Tokyo Star Bank, if you look at the profit contribution -- profit growth is mid- to high-double digit, right, in the first half of this year. If you look at PPop and credit costs, Y-o-Y change, how is the change Y-o-Y? And how can -- how do we look at the earnings momentum or ROE? My last question. Do you have the latest double leverage ratio? And in terms of CTBC Bank, is the maximum of TWD 25 billion that you can contribute to the Holding, is that the cap? If double EBIT ratio is tight, it seems, do investors need to worry about the payout capacity next year? Or for double leverage ratio, are you going to actively revise it downward?

[Interpreted] In terms of spot revenue, first of all, to answer this question, in the first half of this year, the total swap revenue was TWD 4.16 billion in Y-o-Y terms, it went down by 35% in it. Of course, there's swap point gradually going down. That's one factor. That's one reason. As for future trends, we believe that for book NIM, it continues to go up. But with swap added, the impact of swap is getting smaller and smaller. So from January to June, NIM with swap is 1.63%, so 3 points more Y-o-Y. For the full year, NIM with swap is still between 1.63% to 1.66% within our guidance. As for double leverage ratio, in June, we reached 125.9% because when we were planning cash dividend payout, there wasn't yet the tariffs factor. And in May, the NTD appreciated sharply. So in June, after the payout of dividend -- or double leverage ratio exceeded 125%, but the real impact is that if we want to apply for reinvestment to the regulator, the amount with reinvestment has to be lower than 125%. Before August, with our earnings growth and with the bond and stock prices going up, the number went down already to 124.5%, roughly. In the future, can the bank only contribute TWD 1.5? Well, there is a chance for us to exceed our capitalization. If that's the case, we don't need to follow the cap of TWD 1.5, but this still depends on our business development to determine how much CTBC Bank can contribute -- can pay to the CTBC Holding. As for Tokyo Star Bank, its performance has been great this year. The ROE has reached 7.8%. Last year, it was 4.65% in the same period last year. So the growth is significant. First of all, in Japan, there have been rate hikes. So second, the yen has fluctuated, so there's hedging needs from clients. So hedging transactions have enjoyed better profit as a result. So in the first half of this year, pretax revenue was TWD 1.86 billion, a growth of 49%. In H1, the asset quality was well maintained in Tokyo Star Bank, so this is our explanation. Okay. For credit card-related expense. Well, this is a secret. We cannot elaborate too much on this. But we've had a lot of cooperation, including marketing expense. As for card making expense, marketing expense and also a bit more discount, so all of these are part of the credit card related expenses that you mentioned.

[Interpreted] The next question is from Michael Zhang of Citi.

[Interpreted] I have a few questions. First of all, I want to ask you about M&A. Do you have some plans in terms of M&A, especially in terms of some life insurance companies? And what are your considerations as managers? Second, I want to ask you about loan momentum. Can you share with us, when you look at corporate loans, is there a recovery taking place? When you look at the second half of this year and next year, can loan growth remain at a high level? And also, in terms of wealth management, mutual fund income has declined slightly. I don't know when the capital market recovers. Do you see some wealth management growth that is recovering?

[Interpreted] Let me first answer the question about the overall holding's development strategies. We are holding, which is bank-centric, bank accounts for 70%; insurance, about 30%. This is our long-term direction. We are bank-centric. And depending on clients' needs, we have different subsidiaries to satisfy clients' needs. We focused on our organic growth. So a lot of businesses have enjoyed double-digit growth. So organically, we try our best. As for inorganic growth, we look at market situations. If there are suitable targets and with synergy with us and if we can provide better products and services for clients, then we will consider that option. We don't comment on any specific case. So this is my answer to your question about M&A. As for Wealth Management, in Q2, well, in April, Trump announced reciprocal tariffs impacting -- well, giving a lot of uncertainties to the investment market. So wealth management clients remain conservative in April. Sales went down as a result. But now, many issues have been clarified, and we know better the U.S. policy directions now. In May, June, July, August, momentum has recovered and exceeding the situation of Q1, so wealth management development is as what we have expected.

[Operator Instructions]

[Interpreted] Sorry, let me explain our loan momentum in Q2. Compared to Q1, Q2 was slightly worse. But in it a big part of it is due to FX or NTD appreciation. Our foreign currency in Q2 went down by 4.3%. The amount was TWD 62.6 billion. FX impact was TWD 125 billion. So if we exclude FX impact, actually, our foreign currency momentum was still there. It actually grew by 4.3%. As for the second half of this year, in terms of loan momentum, do we see a better situation? Well, indeed. Corporate clients, in Q3, we see that our momentum is recovering quite a lot. We will continue to look at the situation in the future. Our clients continue to have some capital needs for money demand. I think for the whole year, it will -- the growth will be at a double-digit level.

[Interpreted] The next question is from KGI, Eric Shih.

[Interpreted] First of all, a question about life insurance. In Q2, what was the unrealized profit and how much has it recovered until August? The hedging share in Q2 went up. So in August, was it still -- did it go up or down? When the NTD appreciates by TWD 1, what is the sensitivity situation? In July, you released TWD 15 billion, so does that impact the transition CSM efficiency? And what is the growth speed annually? And for ICS adoption, you said that there would be no impact. Is it still the same? So how much AC will go to [ AD-OCI ]? Another question. President mentioned some M&A principles. If there's an M&A in terms of life insurance, so what is the capital? How are you going to evaluate the capital synergy? In the future, if you want to have an M&A, is it possible that you increase your capital or what? As for CTBC Bank, I want to know if the credit cost is still at what you previously forecast.

[Interpreted] As for unrealized -- stock unrealized, amount was TWD 7 billion at the end of June. Our FX reserve includes TWD 15.1 billion newly added. And also, with FX fluctuations at the end of August, the FX reserve was slightly over TWD 20 billion. If there is an appreciation of TWD 1, well, it has to do with the hedging percentage, right? In the past, our percentage was 46%. Right now, it's roughly 56% to 57%, so TWD 1 will impact TWD 700 million to TWD 900 million. As for M&A, as long as there is an impact on insolvency capacity, we will take that into consideration.

[Interpreted] Okay, to add some information about M&A. Before and after M&A, we will comply with regulator's regulations. We don't want to comment any further or explain any further on any specific company or industries. Apologies for that. As for credit costs, our whole year forecast is 25 to 30 bps. The guidance hasn't changed since earlier this year. Another question was about TWD 15 billion added to FX reserve. It has no impact on CSM. Of course, these numbers will continue to highly related to interest rates on the market. But when we transfer that TWD 15.1 billion, it will have no impact on the CSM that we talked about. That's it.

[Interpreted] [Operator Instructions] This question is from Alex Ye, UBS.

[Interpreted] My first question -- my question is about swap adjusted NIM forecast. You said that you maintain the same guidance, but in H2, it's likely that the rates will be cut. So do you think that this direction can be maintained at 1.6%? Or there will be some downward pressure? Second, if next year -- well, if the -- what is your outlook for NTD interest rates if there's also rate cuts? What is the sensitivity?

[Interpreted] Alex, sorry, your voice is not stable. Could you get closer to the microphone?

[Interpreted] Sorry about that. Let me repeat my question. Adjusted NIM, could you give us some outlook about next year? Is it possible to maintain at 1.6% roughly? Second, for NTD interest rate policy, what is the outlook and the sensitivity? As for the adoption of IFRS 17 on January 1 next year, the rate cuts in the U.S., from 25 to 75 bps, how much of an impact will that be on the adoption? The adjustment will be on the distributions, right? Well, the media has reported on ICS measures getting tighter. So ICS ratio after adoption is about 130, right? And you said right now, it surpasses 125, right? So I want to ask you, when the policy gets -- when the measures get tighter, will the ratio be lower than the original forecast? Or what is the impact?

[Interpreted] NIM outlook, to answer this question first, in the second half of this year, we consider rate cuts in the U.S. and its impact on the swap point. The overall trend is that book NIM every month will continue to widen, and the swap impact is going down every year. So for the full year, our outlook remains at what I said, between 1.63% to 1.66%. As for interest rate sensitivity, I want to mention first the entity. If there is a rate cut of 25 bps, NIM will go down by roughly 1.6 bps. For foreign currency, if there is an interest rate cut of 25 bps, our NIM will go up by 0.4 bps. Before the -- in terms of the adoption of IFRS 17 next year, of course, the interest rate environment will have some impact. If our reserve liability amount can go down a lot, then the AC position will be more, and that will be the main direction. Of course, it depends on the market interest rate change. As for ICS, it seems that the rules will still be adjusted to a certain extent. And from the media reports, we see the directions. So based on these directions, our RBC now is 323%, which means that we have -- and also we have some debt issuance. Before the end of this year, we believe that the RBC will be around 350% roughly. Based on that, next year, staying at 125% shouldn't be a problem for us. Of course, there will be some room for adjustment of rules and regulations, and -- but right now, it seems that it's highly likely to be over 125%.

[Interpreted] [Operator Instructions] There are no further questions. Thank you so much for your participation. This concludes our earnings call. Thank you. Goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]