Fubon Financial Holding Co., Ltd. (2881) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Fubon Financial's 2020 financial results. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. Now I'll hand the call over to your host, Ms. Amanda Wang, Investor Relations Officer of Fubon Financial Holdings. You may begin.

Thank you. Welcome, everybody. Thank you for joining the call today. I'm Amanda from Fubon's Investor Relations. Let me walk you through the key highlights for the presentation today. Please turn to Page 4. In Page 4, there are 3 key highlights for the milestones we achieved in year 2020. Firstly, Fubon delivered top EPS among peers, with a record high earnings in Fubon Life, Fubon Insurance, Fubon Securities and Fubon Bank China. For the growth into the next page, we complete the tender offer of JihSun successfully, which will be a key driver in providing a comprehensive financial services going forward. Expansion in China market also continuing. And in the ESG area, that is a highly committed area for Fubon. And it is our honor as a constituent of MSCI and DJSI index and also we are the first and the only Taiwan financial ranked A-list in both the CDP climate change and also Supplier Engagement Leaderboard. In Page 5. Fubon Financial made a net profit of over TWD 90 billion in year 2020, which represents over 50% of growth year-over-year in spite of the COVID-19 pandemic. And the key drivers from the key major subsidiaries. Firstly, in Taipei Fubon Bank, we delivered a balance sheet growth and also mix adjustment, while the asset quality remained benign. And we delivered the highest growth among peers in terms of numbers of active credit cards that lead us to a higher growth in card spending and ahead of the market average performance. In Fubon Life, we ranked top 2 in terms of FYP, renewal premium and also FYPE. On the investment side, we are delivering both a positive spread in terms of the recurring return versus breakeven point and also total return compared to the cost of liability. In Fubon Insurance, we keep our top position with a market share of over 24%. In Fubon Securities, the brokerage revenue is the beneficiary of the market turnover strength, and the net profit also increased meaningfully. In Page 6, the overall pretax profit for the holding company is over TWD 100 billion. While the EPS reached a record high of TWD 8.54. And the top ranked among Thailand financial holding company peers. In Page 7, the composition from -- earning contribution of each subsidiaries. As you can see, in Fubon Life, Insurance, Securities and Fubon Bank China, all shows growth, while Fubon Life is the main driver of the group that contribute over 66% while the 3 subsidiaries together account for another 22.6%. In Page 8, the asset size reached over TWD 9 trillion with a growth rate at 8%, while the book value reached a record high with over 25% Y-o-Y growth. In Page 9, along with the earnings growth, the ROA of 1% and ROE of 13%, both at a record high during the past 3 years. In Page 10, the market position of our major 4 subsidiaries, as you can see, all keep a leading position among peers. Page 11. Looking into the new year in 2021, we see the opportunity side that economy recovery and also a gradual stabilization from the pandemic should drive multiple growth opportunities, especially in the wealth management business. While on the challenging side, the market volatility, especially from the interest rate movement will lead us cautiously to navigate through the market. From a business operation perspective, cross-sell fintech are [ commencing. ] More strategically, we continue to look for opportunities to expand scale through M&A and strategic alliances. In Page 12, in each of our main business, in Fubon Life, the focus on product variety and aiming for a positive spread performance. In Taipei Fubon Bank, the growth through a dual approach from both online/offline is the focus. And also, we plan to further broaden our overseas operation. In Fubon Insurance, we aim to continue to expand our top 1 position. In Fubon Securities, the focus will be on brokerage and develop the wealth management potential. Next in Page 13, we would like to share with you the strategic rationale behind the tender offer on JihSun tender offer. We complete the offer successfully this month, and the transaction is a milestone in Taiwan's financial industry. The rationale behind is to expand the securities and banking business to achieve the scale of economy and a better balanced revenue stream among business lines and the customer base expansion. And in Page 14, to complete the merger, there will be 3 stages we'll go through. Firstly, regarding the fund raising. Fubon plan to issue common and preferred shares total TWD 49 billion to fund the transaction. And the plan is expected to be complete in second half this year. And second stage is the merger between the 2 FHCs, which is also expected to complete second half this year. And thirdly, is the merger of the subsidiaries that is expected to complete next year, in year 2022. And above schedule are all subject to Board resolutions, shareholders meeting approval and also regulatory approval. And in the next few pages, we would like to walk you through some benefits we expect to achieve going forward. So on Page 15, from the Securities business. As you can see on a pro forma basis, the brokerage market share will increase meaningfully to over 9% for securities business. And in Page 16, we can also see in terms of margin loan and sub brokerage business will be also ranked upward to top 3. While in Page 17, the futures and options business would reach a top 5 market position. For the banking side, in Page 18, the numbers of branches would be the highest among private banks. And the deposit market share will be top 10 or top 4 among private banks. And in Page 19, in terms of loan and SME market share, will both achieve a top 10 on a pro forma basis. And next, let's move on to Fubon Life. Please turn to Page 21. The total premium in year '20 was down by 8.4%, mainly due to a slower FYP, while the renewal premium continued to grow at 9% Y-o-Y. In Page 22, we can see the FYP decline of over 40%, mainly reflect the product focus moving toward regulatory policy as well as the impact from the COVID-19 pandemic and regulatory changes on the product offering. In Page 22 -- sorry, in Page 22, again, we can see that the product mix actually moved forward investment-linked policy, which we have over 32% of FYP and also the higher-margin type of products in health and accident policy that also go up to 7.9% of FYP. Page 23, with the focus of the regular-paid product, the VNB margin improved to 19% versus 15.8% a year ago and the higher-margin type of policy that contribute to this VNB improvement as well as the regular paid product. In Page 24. By business channel, the FYP impact across the board, but more drastic to the bancassurance channel. However, from the Taipei Fubon Bank's contribution, we can see the percentage now is getting higher, that reflect the value of cross-sell synergy. In Page 25, the investment asset now reached nearly TWD 4.4 trillion, and that is an 8.8% growth Y-o-Y. In terms of the asset allocation, percentage in domestic assets increased in Q4 versus a quarter ago. This mainly reflect the allocation and also the value appreciation. And [ as a rise ] start from this year, the cash position gradually go up, which reflect -- we expect the yield steepening opportunity if continues, that will help us to deploy the cash position to enhance the overall yield going forward. In Page 26, in terms of the overseas fixed income portfolio, we continue to overweight on the corporate credit and financial bonds. In the following page, Page 27. In the bottom of the table, you can see the investment yield reached 5.09% post hedge or 4.49% -- sorry, 5.09% before hedge or 4.49% after hedge. And both improved on a year-over-year basis. [ Other ] capital gain largely comes from fixed income assets, that contributes TWD 34.7 billion and also equity asset capital gain of TWD 41.8 billion. And other than that, the hedge cost is improved, while the dividend income from mutual funds also contribute to the investment return performance. In Page 28, in your upper left hand side in the chart, the overall hedge cost was improved. And you can see recurring hedging costs improved from the spread narrowing of the NT and USD. And the overall hedging cost of 93 basis points was in line of our expectation, which our earlier guidance is below 100 basis points for this year. And on your right-hand side, the hedging portfolio, and the currency swap accounts for 85%, which is the majority of our hedging tool. And on your lower left-hand side, the recurring return before hedge trend down, that mainly reflect a lower market rate and also the NT-dollar appreciation. While on the post hedge recurring returns, that was up and due to the better recurring hedging cost benefit. In Page 29, the cost of liability improved meaningfully at 22 basis points as the new policy carry a lower cost and also the renewal policy. That's why we can reprice at its anniversary. And that also led to the improvement in the breakeven point, as you can see, of 2.79%. And so if we compare these 2 ratios with the return ratios we just shared with you, we can see the positive spread between the cost of liability with a total return of 115 basis points or breakeven point versus the recurring return after hedge, [ less ] 25 basis points. In Page 30, the unrealized balance increase to over TWD 150 billion end of last year. And that led to the shareholder value increase to over TWD 484 billion, while the equity-to-asset ratio also improved to slightly over 10%. In Page 31, in Fubon Hyundai Life, we would like to share with you the results after our management since our investment -- our investment that the company become a subsidiary in year 2018. We delivered a meaningful transformation in terms of the profit, the scale that you can see in the FYP and asset growth all deliver decent growth. And the collaboration with the Hyundai Motor Group that help us to grow the pension business that make us top 2 in the Korean market. In response to the growth, we plan to go through a capital raising of TWD 11.9 billion equivalent that's expected to be complete in third quarter this year, and that will bring the stake for Fubon Life's investment up to 77%. And next, let's move on to Taipei Fubon Bank. In Page 33, the revenue slightly came down, while we can see the core earnings from NII remain on growth track of over 9% growth -- that is mainly driven by the loan and deposit mix improvement. The fee income decline reflects a softer syndication market and also insurance product mix change, while the treasury related revenue came down by 40% plus, mainly due to the interest rate swap and FX swap as interest spread narrowing between USD and NT. In Page 34, the loan growth of Taipei Fubon Bank is at 10% and outperformed the market growth of 6%. In Page 35, in terms of the corporate banking book, we can see both the NT and foreign currency growth and while the NT dollar growth is relatively strong at 13.7% growth, while the SME sector also grew decently at over 17%. In Page 36, in the retail market, mortgage growth at over 8%, while other consumer credit also grows by over 11%, mainly driven by the personal security. On the funding side, in Page 37, the demand deposit ratio shows meaningful improvement from both NT book and also the foreign currency book. And this is mainly driven by our improvement, especially from securities trading account, the credit card merchants business and also the opportunities of capital repatriation. And on the right hand side, we can see the loan deposit ratio largely stable. And while the investment assets for foreign asset allocation is also one of our priority, so if we top-up that to the foreign currency LDR, they will reach 60 -- around 64%. In Page 38, in terms of the spread and margin performance, we can see from your left-hand side that the quarterly loan deposit spread shows improvement of 3 basis points in Q4 and it reached 1.29%, while the net interest margin stabilized at 1.07%, starting from second quarter last year. Both on a 4-year perspective, both ratio trend down a bit by 7 bps for loan deposit spread and 2 bps for NIM, largely due to the rate cut impact. Well, going forward, we expect the ratio would turn stabilize. In Page 39, the asset quality remained quite outperformed, as you can see, the data point here for NPL and coverage ratio. For Page 40, the fee performance for Taipei Fubon Bank, we see a slight decline of 3%, largely due to the wealth management business. The sales volume actually grow over 20% and including wealth management, investment or insurance product. While the product mix change in the insurance business led -- lead to the slight decline in the wealth management fees. In Page 41, from the overseas branches, the revenue down about 26%, mainly came from the rate cut, the decline of loan balance, especially in the Hong Kong and Singapore branch, and also the COVID-19 impact. And the profit contribution as a result from overseas was down to 11%. And next, let's move on to Fubon Insurance in Page 43. We delivered 7.7% premium growth that is, again, we grow faster than market, and therefore, the market share further increased to 24.1%. While underwriting performance continued outstanding with a net combined ratio at 92.4%. And in operation in China, Page 44 shows that the premium growth of nearly 20%, that mainly come from the personal line. While the underwriting result, the combined ratio on your right-hand side also shows improvement from both expense and also loss ratio. And going forward, the company will focus on the big business mix improvement and further diversified out of the auto business. In Page 46, in Fubon Securities, the key business indicators on your upper right-hand side, you can see the brokerage underwriting, emerging market trading all ranked top 3. While the wealth management is our potential growth area where we can see the subbrokerage market share also increased and reached over 10%. And in the lower part of this page, we can see the revenue and also the net profit increase that largely reflects a beneficiary of higher market turnover in brokerage business. In Page 48, for Fubon Asset Management business, the AUM was up by 5%. However, net profit was down, mainly due to higher risk reserves in the investment of Founder Fubon asset management company. Going forward, we expect the product variety will continue to be the growth focus. And next, let's move on to the overseas banking subsidiaries. In Page 50, Fubon Bank Hong Kong, the loan and deposits both grows decently for loan growth is 5% -- 5.7% and deposits at 2%. On Page 51, the net profit contraction largely reflects a lower net interest margin, as you can see, a decline of 28 basis points and also higher provisions and also the impact from COVID-19. We expect the profitability should show improvement this year. In Page 52, in Fubon Bank China, the deposit and loans both delivered decent growth. Deposit growth of 30%-plus and loans at 15%-plus. And the asset balance for this year, we reached over 100 billion of RMB. And on top of the asset growth, we focus on the mix enhancement and further develop the Taiwanese clients' opportunity through Fubon's connection. In Page 53, the net profit -- the net profit reached 31.9% growth, while the driven -- the driver mainly comes from the net interest income growth. As you can see, the net interest margin increased by 4 basis points, mainly due to a better mix in deposit and loans. And overall asset quality remained benign with NPL ratio of 0.55%. And lastly, Fubon Bank China's capital raising plan that we expected to complete in first half this year -- that should provide further growth capacity in the future. And this is the end of the briefing, and thank you for your attention. And next, we would like to open for Q&A and host by the President of Fubon Financial Holdings -- President, Mr. Jerry Harn.

[Operator Instructions] Our first question is from Chung Hsu of Crédit Suisse.

Congratulations on your successful tender with JihSun. I have 3 questions. And my first question is related to this JihSun transaction, capital raising. I just wondering if of that 60% common equity, do we know, as of now, if it will be a rights issue or GDR and whether any portion of that capital raise will be privately placed? And second part of the question -- of this question is on the preferred share, if my calculation is correct, the Fubon Group will have more than TWD 90 billion worth of preferred share outstanding. Just want to check that none of those preferred shares issued about 4 years ago, 5 years ago, need to be redeemed any time in the next 2 years. My second question is on the cash dividend. I know in earlier Chinese session, management gave some guidance about a constant payout ratio for 2021. But I think management also said they may consider use or issue some stock dividend. So my question is, I just want to clarify whether that constant payout ratio is inclusive of stock dividend? Or is just that will be just purely for cash? And my third and last question is on Taipei Fubon Bank. The cost income ratio, I don't think the OpEx was -- so guidance was given in the Chinese session, and the cost income ratio increased from 48% to 50% last year. I think based on your guidance for your NIM, loan growth and fee, your revenue will most likely grow this year. Just wondering if we could see a decline in cost income ratio in 2021?

Okay. As the capital raising.

Capital raising. Private placement. [Foreign Language]

Okay. With regards to our proposed common equity raising based on our current plan, it should be done via a public offering of common in local markets. We -- I mean, honestly, our preference is to do a DR in international market. But the use of the proceeds is for domestic market and it's extremely unlikely that Central Bank would grant approval for us to do a DR Issue. So it's going to be a common stock and through public markets. Okay?

[Foreign Language]

Well, there's a couple of years away from us. Yes. We don't have a redemption plan for that year. And that is equity type of preferred shares. So the option is with the company, whether we want to redeem that or we decided not to redeem it, okay? And with regards to our cash dividend policy, the overall payout ratio includes both cash dividend and stock dividend. We are planning to distribute a part of it, not in a huge way, okay? Part of it via the stock option, okay, but not in the big portions. That's our current plan.

[Foreign Language] Income.

CIR.

Our cost-to-income ratio in 2020 was 47% and the number has come down to 45% in the first quarter. Depends on the market. I think looking forward, 2021, we expect the cost-to-income ratio should remain at a similar level as 2020.

Can I just clarify that the preferred shares that was issued in 2017 can remain as treated like an equity at a holding level by -- even 2 years later, I mean it would not become -- meaning, I understand it's a perpetual, all preferred shares you issued at the holding level of -- are all perpetual. Just checking -- want to confirm that none of those...

Yes. Confirm, confirm.

Our next question is from Jemmy Huang of JPMorgan Securities.

Also 3 questions for me. First one, also continued on dividend policy. I think previously, the market perception is -- or according to the previous guidances, you want to maintain a stable DPS grade or increase, if possible. And whatever the DPS this year finally out, should we expect this also represent management's confidence to maintain similar DPS, whether it's a combination of cash or stock or cash...

I'm sorry, your dividend payout -- dividend per share? When we're saying we want to maintain a stable dividend policy, we mean payout ratio. So our dividend DPS should reflect the growth of our net income last year.

I see. Okay. Got it. Yes. Then second question will be on the merger with JihSun. I think previously, we have seen some cases that there need to be set aside additional expenses to settle the employee contracts or tenders with the previous company. So is there any possibility that we need to incur additional costs related to employee compensation as a result? And then the final question will be on the bank. I think within the revenue line, other income was down around almost 50% year-on-year last year, mainly due to the swap revenue. So could you give us some color, in terms of the swap revenue, what's the year-on-year change? Or what's the number in 2020 vs 2019? And whether there will be any possibility for recovery this year?

Okay. Regarding our -- the upcoming merger with JihSun Bank -- JihSun Financial. As you know, this is hostile takeover. So our analyses are all based on public information. We have just contacted the JihSun management recently. And we will start our due diligence as soon as possible, okay? But before the end of our due diligence, I'm afraid that I cannot give you more detail as to how we are going to consolidate and the costs associated with the proposed consolidation at a later stage. But having said that, the JihSun Secure -- JihSun Financial in total has just over 3,000 staff. And even if we need to do some personnel consolidation at the bank or the security side, it's very easy for us to absorb through other subsidiary under the financial holding company. So we don't see that to be a big issue. And if it does happen, we need to do some employee adjustment plan, we don't expect it to be a huge number to our P&L, okay? We will provide more details after May when we complete our due diligence process. And that's what I can really provide at this moment.

Regarding the question about the swap revenue increase in 2020 versus 2019 because in 2019, we see the opportunities that the interest rate U.S. dollar versus U.S. dollar -- Taiwan dollar vs U.S. dollar issue, so we had a possibility for us to do the cross currency swap.. So we enjoy good swap revenue. But that gap has been narrowed, as Amanda mentioned earlier. So then revenue redeems in 2020. As you can see, even without the opportunity to do the cross currency swap, we also had the funding and gathering strategy moved to our NII business. So you can see our bond investment increase and our loan also increased by 10%. So the -- part of that revenue drops are mitigated by our NII increase. Looking forward in 2021, that interest gap actually versus 2020, that gap will not drop that dramatically versus 2020 versus 2019. So we can also expect our NII can still maintain healthy growth in the middle single digit, and the swap revenue reduce can also be handled.

At this time, there are no questions on queue. [Operator Instructions] There are no further questions on queue. Oh I'm sorry, there is one question. [Operator Instructions] Thank you for patiently waiting. Our next question is from Brooksley Kang of Bank of America Securities.

Good afternoon to the management. I have a few questions to double check. So first, I think the tender offer of the JihSun deal already settled. Does that mean that we will start to recognize JihSun earnings as early as in our first quarter financial reporting? Sorry?

Correct. We started yesterday already. Sorry, just to give you a quick answer. We just completed the settlement with JihSun shares yesterday. So we'll start counting the profit from that starting yesterday.

Okay. Okay. And then the second question is on banks. Why did government-related loan grow very fast in 2020? Is that due to the interim liquidity management or the trend will likely to continue this year as well? And third question on life insurance. I just wanted to doublecheck the number of the reinvestment capacity of Fubon Life is 3% or 13% of the AUM as in the Mandarin session?

I think the increase for the government-related lending is due to 2 reasons. Number one is the base of -- the base is very [ low. ] So high growth is not competitive as price. And definitely, we, as one of the major Taiwanese bank, we know how to operate the government treasuries -- for example, Taipei City government. So we know their demands. And also, we see an increase of credit spread in NTD. So we increased our exposure with government-related lending.

About the total available for investment is about 13% of our AUM [ liquid share ] including the cash and also [indiscernible] premium, also redemption.

Well, apology, I can't hear very clearly. It's 13%, right -- 1-3 percent...

Yes. Firstly...

Okay. Thank you.

1-3, yes. And that's including the cash, the premium inflow and also the investment income that we can pull for further reinvestment.

Oh, right. The interest income from the existing bond portfolio.

Yes, exactly.

Thank you. At this time, there are no further questions on queue. Speakers, please proceed.

So if no further questions, operator, we'll end the session here.

Thank you very much, and that concludes today's conference. Thank you all for participating. You may disconnect at this time.

Thank you very much.