First Financial Holding Co., Ltd. (2892) Earnings Call Transcript & Summary

Hi, I'm K. C. Good afternoon, everyone. Welcome to join us for First Financial Holding 2020 Full Year Earnings Result Webcast Investor Conference. As usual, we will start with our presentation, including 2020 performance summary, financial highlights and operating results. After today's presentation, we will invite Ms. Annie Lee. Now she is our EVP and IR Head to proceed the Q&A session. You can raise your question by typing at the bottom of the webcast window, either in English or Chinese is fine with us. Or you can e-mail us your questions after today's conference. Now I'd like to turn over to Mr. Keith Ke to begin today's presentation. Keith?

Thank you, K. C. Okay. Please turn to Slide 5. We put this slide at year-end to show the full year performance trend of the last couple of years. And it is obviously that the results of 2020 was not that pretty, mainly impacted by the coronavirus pandemic and finished TWD 16.8 billion earnings last year, which was 13% decline Y-o-Y. And please turn to Slide 6. Let's read up the conclusions of 2020. As we mentioned, due to the pandemic as well as the QE policy,and also the low rate environment, group results of 2020 was kind of recession. Treasury gains was dragged by reduced swap gains. And overseas momentum was also weak, especially for the U.S. and the Europe area. However, it's not all that bad in 2020. We do see the bright side in some aspects. Loan demand and investment recovered gradually started from second half to 2020, which was added by repatriation from Mainland China, especially for SME sector. IT industry, traditional industry and new start ups, all flash -- due to the low rate environment, we also fund wealth management and mortgage lending were relatively hard in Taiwan. We believe that pandemic would be eased gradually after the vaccine becoming universal and global economy is back to normal step by step. Last but not the least, First Bank joined the Equator Principles Association to endorse its commitments for ESG program. And we listed it here just for your information. Okay. Let's move to financial highlights. Please turn to Slide 8. This slide shows group's key figures. Most of our figures show contractions comparing with the results of 2019 due to the pandemic, as we said. Such as consolidated net income, EPS, ROA and ROE. Please turn to Slide 9. This slide provides the breakdown of gross net income. Net revenue dropped 4.4% Y-o-Y. Plus increased the credit charge and operating expense, which combines together to drag down the net income. And Slide 10 shows the major subsidiary's earnings. The flag subsidiary, First Bank reported TWD 15.7 billion net income with 17.6% decline Y-o-Y, which was the key factor to shrink the group's earnings. However, both securities and life insurance had a huge progress comparing with the results of 2019. Let's move to operating results. Please turn to Slide 12. On this slide, it shows the group and bank's net income and ROAE. Group finished with 7.62% ROE, First Bank's ROE was also down to 7.16%. Both fell behind prior year results due to the pandemic. And Slide 13 provides the breakdown of bank's earnings structure. Cumulative net revenue finished at TWD 44.1 billion, which was 6.8% decrease Y-o-Y. As of the breakdown, net interest income increased 2.5%, thanks for the strong loan demand to offset the low margin. Net fee income dropped 6.8% Y-o-Y. Gains on investment also shrank 27.9%. Please turn to Slide 14. This slide shows the loan book mix. Total loan reached TWD 1.91 trillion, which was 8% growth Y-o-Y. SME loan was fantastic with 13% growth, which was the key to support the loan demand. Mortgage improved to 4.6% Y-o-Y as with our -- as our expectation. But of FX loan dropped to 4.6% Y-o-Y. Please turn to Slide 15. This slide shows the Q-o-Q trend of loan book, pretty similar to the 4-year trend. Next slide displays the trend of LDR spread and NIM. LDR continued to decrease to 71% in which NT dollar dipped to 76.6% and the FX LDR trend down to 54.3%. Loan-to-deposit spread slipped 1 bip to 1.4%. While NIM reversed the falling trend to up 1 bip to 1%. Please turn to Slide 17. This slide shows the breakdown of Q-o-Q trend of NT dollar spread and FX spread. NT dollar spread bounced back to 1.25%, while FX spread slightly dropped to 1 bip to 1.92%. And Slide 18 shows the deposit structure. Total deposit increased 13% Y-o-Y and strong deposit demand was the reason to drag down the LDR. NT dollar deposit had 13% growth. While FX deposit also grew by 12.7% Y-o-Y. And right-hand side graph shows the NT dollar CASA rate, which continued to improve to 69.1% already. Let's move to Slide 19. Here shows the loan book concentration and the major exposures to specific industries. Please take a desk reference. And please turn to next slide. Slide 20 shows the mortgage book yield and LTV ratios. After 2 quarters low mortgage yield, it finally bounced back to 1.46% this quarter. Both new mortgage and average mortgage LTV ratio stayed at certain levels of 64.9% and 46%. And the bottom bar chart displays the monthly new mortgage lending. You can see in fourth quarter, the new mortgage lending dropped 14.3% Q-o-Q, which will be an alert for us. Please turn to Slide 21, the fee revenue. Total net fee income was TWD 7.33 billion in 2020, which decreased 6.7% Y-o-Y. Wealth management fee income dropped 12%, mainly caused by the shrinking bancassurance fee income. As of non-wealth management part, loan-related fee income increased 22%, but FX fee income decreased to 13% at the meantime. Please turn to Slide 22. This slide shows the Q-o-Q trend of fee income. Even our bancassurance was bouncing back Q-o-Q. But overall to say, the yearly trend was still down 41%. Let's move to Slide 23 for the cost part. Total operating expense was TWD 21.3 billion in 2020, which was 2.4% increase Y-o-Y. And the cost-to-income ratio was up to 48.3%. And please turn to Slide 24, let's take a look of the asset quality. Top chart shows the coverage ratio and NPL ratio. Cost ratio continue to rise to 527% and overtook the level of 2019. NPL ratio slightly up 1 bip to 0.24%. And the bottom chart shows the breakdown of NPL ratios. You can see all sectors stayed pretty the same with the last quarter. So please take it as reference. Let's move to Slide 25, the overseas profit. The pretax profits of overseas branches over total profits improved to 43.6%. Top left pie chart shows the profit breakdown. North America shrank to only 10%, but Asian improved to 21%. Please turn to Slide 26 for the capital ratios. Group CAR increased to 125.3%. Bank's CAR and Tier 1 both improved a little bit to 13.6% and 11.7%, respectively. Even though we had picked as the DC bank, but we think it won't affect our original dividend payout policy this year. Our cash payout ratio shows still maintained at our usual label. Okay. That's the presentation. I will turn back to the microphone to K. C. for a Q&A session. K. C.?

All right. Thank you. I hope you enjoy the presentation of our full year earnings results. Now I'd like to start the Q&A session. Before we start the QA session, I'd like to divide the Q&A into 2 parts. The first part is that how we are doing in 2020. And the second part is our guidance for the fiscal year of 2021. So the first part is that a question from our guests. The question from guest is he wants to know that the major reason that our fourth quarter, our NIM actually rebounded from 0.99% to 1%? And can Annie explain what's the reason behind the scenario, Annie?

Yes. The major impact that dragged our NIM will be come from our mortgage pricing, right? I guess many people know that we actually offer a so called interest holiday. Yes. Interest holiday measures to support part of the bailout program offered by those mortgage borrower since the second quarter through the third quarter. And since the end of this interest holiday in the fourth quarter last year, it really helped us to recover those NIM contractions by this mortgage pricing impact. Apart from that, we also quit some tough competition market like some area that the mortgage lending is to -- I mean the competition is too fierce. So we slowed down our mortgage lending in some area of this mortgage market that also helped to stabilize the drag of the whole NIM contraction. So that will be a major reason that helped to stabilize the overall NIM performance in the final quarter of of last year.

Okay. Thank you, Annie. And also a follow-up question is about our performance on the fourth quarter. Some of our investors hope to know that what's the major reason that our fourth quarter actually, the bottom line decreased quite a bit. So what's the major reason that the First Financial had a declining fourth quarter bottom line? Annie?

The main reason definitely will come from how to maintain sound asset quality. So in the final quarter of last year, particularly at the end of last year, in December, we hiked our provisioning in order to safeguard our asset quality that the cap ratio moved up to more than 500%, something toward the end of prior year. And the NPL ratio was also down to below the 0.25% that would help us to weather any potential risk ahead. So that will be the major rationale behind our strategy to prepare for any potential downside risk in the final quarter last year. So mainly to safeguard the asset quality in the final quarter. Otherwise, for the top line, it remains stabilized, particularly with stabilized the NIM performance.

Okay. And after we had post pandemic results starting from 2021. I'd like to provide some guidance for 2021, especially some of the investors are asking about what's the guidance of this year. First of all, is the question from Ms. Peggy Shih. Ms. Shih Hopes to know that our guidance for especially the -- let's start with the net interest income. How do we think that net interest income in 2021, Annie.

Okay. But I would like to first highlight the overall results of 2020. There will be 2 major parts that impact our overall financial results. One thing would be that the overseas profits actually decreased by nearly TWD 1.5 billion last year. And the other part would be our treasury gains, it also fell by around TWD 3 billion. And these 2 major profit drivers, they did not perform that well due to the pandemic and especially in the overseas easing monetary policy and a lot of crackdown measures that impact this once very profitable business line. So starting from this year, we would begin to recover part of this driver that First will be apart from the domestic lending business, we would resume our lending business, especially in the developed countries, in U.S. or in London, that's maybe some investor notes that we actually charged off some delinquency lending last year. So this year, our loan policy would resume our growth strategy in these developed countries, especially in the U.S. or in the Europe in London, where the vaccination program has already in the pipeline. After these 2 areas, evidence and very, very a huge drop in last year's markets. And overall, the loan market, we will be quite aggressive to grow the loan book by 7% to 8% and apart from the domestic strong demand that added by the repatriated or reallocation of supply chain by the SME of Taiwan business in the overseas markets, we would continue to grow our SME loan book by 8% to 9%, slightly higher than the overall loan growth rate. But for mortgage book, it would be more like organic growth by 4% to 5%, which was because that the pricing is still very pricing competition is still quite part for us. I would particularly like to stress that our target for the overseas market will be the key that help us to resume our profit in the past. Because in the prior years, the overseas market contributed more than 40% to 45% of our pretax profit. But last year, even though we worked quite hard to grow the loan size by 3%. However, the profit still dropped by nearly 15%, 16%, especially in the pandemic hit hard, China and the U.S. and lender markets. Though we still managed to grow our Asian countries that also booked good results, but still not sufficient to compensate the fall in these 2 major developed countries, including Greater China area. So starting from this year, we would be keen to -- back to the markets and gradually build up the asset. And hopefully, that the rates will stabilize here. It will help us to capture the opportunities of the rebound of the economy that will continue to support our overseas profit driver in the future.

Okay. I see. So there's a follow-up question from Mr. Jemmy Huang. Jemmy wants to know so is there any changes on our overall guidance for FY 2021? In which that Annie just mentioned that we plan to revise our loan growth momentum from the prior 7% to 8%. now we revised up our loan growth to 8% to 9% Y-o-Y. Is that correct, Annie?

And -- well, for us, in the first month of this year, we have witnessed a strong growth of nearly 8% to 5% in the first month. But since the recovery in the overseas market will be a great gradual momentum. So we would see the growth in the FX lending should be a progressive model, but not a very interesting one. So that's why we would slightly revised up our loan growth production from 6% to 7%, up to 7% to 8%. And that was because the way lending would maybe start gradually from the second or the third quarter. After the recovery in these developed countries.

Okay, So after reviewing the January loan growth recorded 8% growth, so we slightly revised up our long-run target from the prior 6% to 7% to 7% to 8% of 2021. Thank you. And also, we just mentioned the FX lending will be another growth driver, especially in which areas in U.S. or Europe or Asian countries? Annie?

But the mostly Asian countries is 1 nice one. However, we would project the U.S. and in Europe in London market, particularly in U.S. that represent more than 20% of pretax profits in the past, we hope we will gradually resume their profit contribution. Last year, it only generated less than 15% in the U.S. market. So we would be keen to grow that market back to the prior level up to 18% to 20%, hopefully.

Okay. Got it. So after the significant impact on U.S. and Europe areas, last year, we hope that the U.S. and Europe can rebound -- start to rebound this year. So that is -- is that our post pandemic strategy reallocation from the Asian countries to the U.S. and Europe area. Is that -- does that mean?

That should be regarded as a separate. I mean, different segments. In fact, apart from U.S. markets, our exposure to China was strategically lowered to a historically low level. Just -- I mean, just less than 25% against our total net worth for our China exposure. So currently, we plan to gradually recover or boost our exposure to China investments. From 20% something up to 25%. That will help us to capture some higher return investment that would also help to boost the contribution from Greater China, including China alone profit.

Okay. Let's talk about the fee income guidance. Jemmy hopes to know that there is a 2020 -- 22% increase in loan-related fees last year. And is that from the syndication loans or other reasons? That's the first part. And do we expect the trend to continue this year, the second question?

Yes, definitely, last year, the solar contribution for fee income, mainly came from loan related, especially for the syndicated lending. In terms of this year's target, we've be keen to attract more deposits that can be translated into wealth management-related businesses. So we set up a goal that to grow our wealth management fee up to 15%, 15%, and non-wealth management fee revenue target will be set by 13%, 13% so in total, the income will be boosted by around 13% to 14%, that will be our target for this year. So after we witnessed for around 7%, with we would look to regain momentum for the fee revenue for this year.

Okay. So a follow-up question is from -- the deposit growth. Do we expect the deposit growth to stay double-digit in fiscal year of 2021?

Yes. That's the -- that's possible because the rates still remains low.

Okay. And besides, I'd like to highlight that in January, our deposit actually grew by 15% -- 14% to 15% Y-o-Y. So it means that the capital inflow is still pretty resilient. And also, Annie just mentioned that we expect our wealth management fee will grow by of 13% -- sorry, 15% Y-o-Y and now wealth management fee income will grow by 13%. So it means that our total fee income revenue will grow by 13% to 14%. 13% to 14%, okay? That's slightly revised of our -- our fee income revenue guidance, right? Okay. And another question about our net interest income is from guest. Investor is asking about our net interest spread. How do we expect the rebound of our interest spread this year?

In our house view, we would not expect the rate to -- I mean, official rated to move higher at least until the end of this year. In that sense, the margin especially for the market rates will still remain at the low end. So we would see the NIM should stay flattish throughout the year of 2021. And if the -- any I mean any country, especially in U.S. -- if U.S. Fed this hike rate later than it would help to boost our NIM in the coming years. But frankly speaking, for the NIM projection this year is still remain quite flattish for the whole year.

Okay. And another question is from Peggy Shih of Yuanta. Peggy is especially asking about the bailout program that we provided last year. Her question is regarding the NPL guidance of this package. Is there any special sign that the pack -- the NPL of this package will grow this year or something? Annie?

Well, due to this belt package or program will be nearly 100% or 90% covered by the government credit insurance. So up to the final quarter of 2020, the delinquency ratio for SME actually dropped to just 28 basis points from as high as 42 basis points in the end of 2019. And the absolute numbers of this delinquency numbers was about TWD 50 million -- sorry, around TWD 50 million. So that was quite minimal, and we don't see this delinquent numbers with further hike anymore because the -- it seems that the economic activities has already stabilized in Taiwan. And not to mention that the government actually launched so many programs to support the corporate and individual as well. So that would not result in any deterioration of the asset quality of this -- of our plan. So we should see this payout program with a gradually rollover. And hopefully the -- when the economy rebounds, the -- this asset quality would remain stable.

Okay. And another question about our credit cost is from Eric Shih of KGI. And the first question is about the quite NIM recovered 1 bip to 1% in the fourth quarter, but net interest spread remains dropped 1 bip. Eric, I think that the NIM recovered to 1% is the accumulated NIM. However, the net interest spread actually, quarterly interest spread actually going up in NT dollars. So you can see the next slide actually went up a little bit. So it made our NIM recovered in the fourth quarter. Okay. And what about the 2021 NIM guidance, and I think Annie just explained our NIM guidance will remain...

Flattish.

Flattish. And what's the asset quality guidance for -- on the credit cost guidance for the 2021 from Changshu? Annie?

And I just talked about the bailout plan implemented by the government and support by the credit Insurance fund. So for domestic appeal, less like, it will remain stable. I also highlight the delinquency ratio from SME sector actually dropped to as low as 0.28% towards the end of 2020. So looking into this year, it would stabilize here. But we have to be more cautious on the overseas delinquency ratio because the recovery in this overseas market is quite uneven. So for this year's credit cost definitely will be lower than that of last year, and we would maintain our projection of the net credit cost around 16 to 17 bips, 16 to 17 bips.

Okay. So the net credit cost of 2021 will be expecting around 16 to 17 bips of this year. And okay, in terms of the treasury gains guidance, ever since 2020, there's a swap gains declining? And how do we expect 2021's performance on treasury gains? Annie?

Any in fact, in the prior cycle, most of -- I mean, about 1/4 of our treasury gains originated from the swap transaction in-country big quite a bit to this treasury business. But last year alone, I mean, in 2020, the swap gains dropped nearly 2.4 billion for 1 year alone and another product like the foreign currency I mean high-yield foreign currency portfolio also dropped nearly 800 million. So these 2 -- these 2 parts formed the major 4 of our treasury gains last year, it dropped to nearly 25%. And going into this year, 2021, the market would continue to become quite benign for both swap and foreign currency investments, it was further down a bit. However, we would swap -- I mean, we would shift to other parts like for domestic. Fixed income investments and also the equity markets in Taiwan stock market, that will also help to boost the gains for the treasury business. So this year, we hope we can maintain not very -- I mean the fall of the treasury gains will be minimal, less than 10%, not like the huge fall in last year. Hopefully, this year, the treasury business gradually recovered by more active investments in the domestic fixed income and also stock markets. And also capture the opportunities of the yield curve steepen in U.S. markets, we would still seek opportunities to trade this market that helped to offset the full and once in the past contribution from swap and high-yield on investments. So the full of the treasury gains will be locked between 10% only this year.

Okay. Another question is from Monica Wang of Sunny Bank. Monica Wang wants to know that Taiwan is going to have 4 -- 3 digital banks this year. How do we -- how do we look, the digital bank impact on your company and your bank and to the market spread. And does that mean that the spread of 2021 will continue to going downward or something?

Basically, I mean the target audience for this digital bank would be more likely for retail or individual but not for corporate sectors. Yes. And we have different customer segments for the traditional banking and the digital bank. And not to mention that the digital bank would also align with other electronic payment systems like live pay or other online shopping models. We don't see that the competition of this digital bank in the short-term would -- I mean, impacting our overall landscape of the NIM contribution. However, in the long term, it is more like in the -- how to capture the younger generation business, maybe 5 or 10 years ago because of the behavior of the customer has already shifted from the branch business into like mobile or other online services, that will be more like a mid- to long-term competition, but not in the short term, particularly in the area like corporate -- traditional corporate lending overseas market. So for us, we were also keen to join this parade at to serve our existing customers by more products like the digital oriented or those Savi products that we've satisfied this younger generation, but it is still stay at pricing competition, but not yet being migrate into a more innovative stage unless we can see that the target audience has already migrated into this younger generation. So I must say that the NIM contribution or contraction will not be imminent. But in the long run, it maybe something it will be -- it will be a tough market.

Okay. We have another question from Ms. Tina [ Chen ] from [indiscernible]. Tina hopes to know that is there any potential before cases that we should be aware this year.

I just talked about the overseas exposure in some areas like in US. But as this exposure over secured by collateral. So the problem will be there will be a time gap before we charge-off the legacy and also to dispose the collateral. Otherwise, for domestic portfolio is to remain stable as long as the economy continues to recover. So the potential downside risk is still originally from overseas, particularly from the -- those developed countries now. But it was all secure lending.

Okay. And another question is about our dividend policy from some of the investors. After First Bank was included in one of the 66 banks. Is there any significant impact on your dividend policy? Annie?

Not really. We normally with the peg on the payout ratio instead of the profit number alone. So we would still be able to maintain a payout ratio up to 60%. But in the long run, we would see how our profit margin recovered in the future. As long as we can continue to generate a decent profit, the dividend payout strategy would remain unchanged.

Okay. Another question is about our cost income ratio. Is there any guidance change on the cost income ratio, Annie?

Due to our projection for the top line, remain not very aggressive, maybe just single-digit growth. So we would see our CI ratio stay as high as 47% to 48%. That was for this year projection.

Okay. Another question is about our wealth management 2.0 plan. Any strategy for this wealth management 2.0 plan for First Bank? Annie?

And for the new wealth management program, which is targeting on the high NIM with customers, we mainly focused on that we can capture some influx of the overseas fund from this Taiwan business, especially from Greater China region. We will be more focused on the product offerings that helps this -- repatriate the capital being placed into the areas that can help them enhance their return and also to offer them more like a privileged product that can help them put their money into some area, except for the financial assets. For instance, like the investment into the REITs or other real estate's areas that, that will be another target for us. However, we would be more like serve these, these high net worth customers to fulfill their demand, not just for intense yield, but also have some tax plans that will help them transfer their assets to the younger duration that to avoid any tax burden, that will be another issue that's being placed in our upgrade wealth management plan.

Okay. And the next question is about our strategy. Comparing with the prior investor conference held in November, what's the major difference between the guidance of this time? Annie?

I must say that we would become more proactive to engage with the booming markets, the capital markets this year that -- it seems that people are quite optimistic about the recovery of the economy. So that's why we slightly hike our long target and also the target for the treasury business. Otherwise, for the asset quality, along it with no longer under pressure due to the recovery of the whole economy and maybe the vaccination plan would help us to enlarge our lending capacity in these developed countries. That will help us to resume our profit driver in the past. So that will be our guidance for this year's updates, which is more optimistic than what we had last year.

Okay. Another question from China Life is that due to the last year, it was because the pandemic, so it made your gross provisioning actually increased quite a bit. In terms of the provisioning, gross provisioning, low. Is there any plan for the provisioning budget only?

Our net credit cost that actually has dropped from 23 bips down to [ 15 bips ].

Yes. How about the gross provision?

Provision expense, at least TWD 1.5 billion lower net.

Okay, TWD 1.5 billion lower than prior year. Okay.

Yes.

Okay. I'd like to wrap up here. And the final question will leave to Annie and talk about our post pandemic strategy on the group. How about how the group actually reallocate the resources after the post pandemic and how do First Financial see that upcoming new President Biden in U.S. and the post vaccination period after that? What's your guidance for First Financial? Annie?

For us, we would like to revisit our niche market in U.S. or in Greater China, especially for China exposures. These 2 major continents both can help to generate decent top line for us. So I would say that starting from this year, we will be aggressively build up new assets toward these 2 areas that will help us to regain our path to victory glory in this region that will help us to regain our momentum in the 2 overseas markets for this year. China and U.S.

China and U.S., okay, especially our China exposure has down to the historical low level.

Actual low level.

Okay. So this year, we'd like to back to China to start our exposure. And after the new President Biden on boarded, we think that cross trade relationship will quite ease a little bit, right?

Yes.

Okay. Thank you for joining us today, and I'd like to turn over to Annie and allow her -- thank you. Annie.

Okay. Thank you for having us here to discuss about our outlook for this year. And I must say after this terrific pandemic last year, we should be more proactive going into 2021. And I also highlight that we will be keen to revisit the development countries, including U.S. and China, that these 2 major markets would offer opportunities for banks to produce significant profit contribution for us before the rates move higher, so we will be keen to allocate our resource into these areas in order to capture any upside momentum in the future. We should have more discussion next quarter. We do have refreshed the strategy next time.

Okay. See you next quarter.

See you then. Bye.

Bye.