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

Thank you for standing by, and welcome to Fubon Financial's Year 2021 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, IR Officer of Fubon Financial Holdings. You may begin.

Okay. Thank you for joining the call today. I'm Amanda, and welcome to joining our full year 2021 results. And in the presentation today, we will begin with the Fubon financial performance review and followed by Q&A host by President, Mr. Harn and the senior management team. Firstly, please turn to Page 4. The key milestone of Fubon Financials in year '21 from the earnings performance, the EPS has been topped Taiwan's FHC for the 13th straight year. And the net profit also hit a record high in quite a few subsidiaries. In the operational expansion that we can see that in Fubon Financial Holdings successful tender offer that will lead to the expectation of expansion of the further comprehensive financial services. In China, the capital injection has been completed from Taipei Fubon Bank to Fubon China that will aim for a more stronger bounding between the Greater China area. In the ESG area, Fubon has had a few achievement in year '21, including in the TCFD report that we are the first one among the Taiwan financial sectors to publish the report, and we also aggressively to support the clients' transfer to a more eco-friendly practices. And among the global insurance company, we are also honored to be the top 3 in the Sustainalytics ESG ranking. In Page 5, now this is highlight for Fubon Financials. In terms of the net profit, we grew up by over 60% and reached TWD 144.6 billion. The net profit, the total assets and also book value per share all reached record high. In Fubon Life, the net profit growth is the key driver behind the holding company's earnings growth. In terms of the premium performance, we remain strong at top 2 and in investment return improvement and also the hedge cost improvement is a key driver behind. In Taipei Fubon Bank, the net profit reached TWD 18.7 billion. That -- on top of that, there's another TWD 1.2 billion of equity investment gains from Nutmeg. That is reflected under the OCI. And the total FHPL grew 13% Y-o-Y that bring overall scale up to TWD 3 trillion. In terms of the business momentum in credit card business, that remains strong and also the asset quality also stable. In Page 6, Fubon Insurance in its net profit performance is strong. That is up by over 20% with a market share gain leveraged 24.6% and grow over 12% on Y-o-Y. The brings us continuously being the leader in the market for not -- for 40 years. In Fubon Securities, the net profit growth of over 60%. And the key driver behind the brokerage fee, mainly due to strong market turnover and also the market share gain. In Jih Sun Financial Holding, the net profit reached over TWD 4 billion, and that is over 40% growth, mainly also from the brokerage business in the securities subsidiary. And on a pro forma basis, we can see the market share in brokerage margin loans and sub brokerage, all go up to the top 3 position. And also in the banking business, the pro forma numbers of branches also reached 179 that will be the top among the private bank. Please turn to Page 7. The net profit, TWD 144.6 billion, that is up by over 60%. And if we further move on to the first 2 months this year, net profit is also another strong one with over TWD 38 billion with EPS of over $3 per share. In Page 8, profit by subsidiaries that we can see that Fubon Life has been a key contributor that is over 70% of the total earnings, while the banking subsidiary on combined represented around 15%. And in Page 9, the asset growth of over 13% that brings our total assets to over TWD 10 trillion. And both the assets and also the net worth reached a record high. In Page 10, the ROA and ROE's results, we can see also grew, which reached 1.49% for ROA and 16.88% for ROE in year 2021. In Page 11, the market position across our major 4 subsidiaries, as you can see here, is a strong one. For Fubon Life, we ranked among top 2, Taipei Fubon Insurance is the one top one. And in the banking and security business, we all ranked at a top leading position. In Page 12, as we look into year '22, the opportunities and challenges that we see are including, number one is economy recovery that should bring in more growth opportunity. And number 2 is the ESG perspective that Fubon will leverage its financial expertise to help our clients as well as ourselves toward a more low carbon business model. In the meantime, we are mindful for a few factors, including: number one, the dynamics in the COVID-19's trend. And secondly, the inflation impact on the economy and also financial market. And thirdly, also the dynamics of the geopolitics. And in response in Fubon service perspective, the opportunities that we see from -- mainly from the clients' management, including the Jih Sun Financial Holdings consolidation opportunity that offer us a unique growth opportunity to broaden the customer base and also the cross-selling opportunity. And in the meantime, it's that fintech application that will definitely be another key tool to help us to enhance the customer experience and also efficiency. And going forward, we also continue to look for M&A and strategic alliance opportunity to further expand. And in Page 13, from the subsidiaries business growth perspective, out of our major 4 subsidiaries, firstly, in Fubon Life, the product focus will be on investment-linked, interest-sensitive insurance and also protection products. Following in the investment side, we aim for positive spread performance. And in overseas market in Fubon Hyundai Life, that will be our key focus. And for the company-wide speaking, we see ESG thematic investment and also initiatives will continue to be critical. In Taipei Fubon Bank, the asset growth will be focused on some areas, including the SME, the retail loans and also U.S. dollar assets. From state business, wealth management will continue to be the focus, and we would like to further expand our overseas platform in Greater China. And in Fubon Bank China, that's also a critical angle to further expand together with Taipei Fubon Bank and Fubon Bank Kong to expand our banking franchise. For Fubon Insurance, to sustain its leading position, the global trends is actually a key area that we continue to develop and also to utilize the digitalization tools. In Fubon Securities, we focus on online, offline consolidation and also the Fubon group advantage. And last, in Fubon Securities, the collaboration with Jih Sun that will be our key focus to generate the synergy. In Page 14, specifically on ESG area, we set the 4 dimensions of key strategies to focus on, i.e., the decarbonization, digitalization, empowerment and connection. And specifically on decarbonization, in the following page that we share with you our progress. As you can see from the left-hand side of the chart, the green finance outstanding grew by 12% Y-o-Y reached TWD 2.3 trillion, that is -- that brings us closer to our year '25 goal of TWD 2.45 trillion. And out of that, Fubon Life play a critical part in the low-carbon investments. And from the product offering, Taipei Fubon Bank play a key role in terms of the offshore wind power financing, the introduction of the sustainability-linked loans. And also we offer the first green loan in Taiwan certified by the third party. While in Fubon Insurance, we placed the largest issuer of the green energy project in Taiwan. And next, let's move on to Page 17. In Fubon Life, the total premium was down by 17.5%, mainly reflect the paid up of the regular paid products. While the FYP continued to grow, as we can see in Page 18, it grew by 4.6% and mainly driven by the interest sensitive and also investment-linked policy. In the meantime, the foreign currency policy also grew to reflect the total FYP at above 47%. And the out of the FYP composition, we can also see our investment-linked now accounts for over 45%. In Page 19, out of the FYPE and also the VNB, the change mainly reflects the product mix change, while we expect the growth should recover in year '22. And in Page 20, in terms of FYP and FYPE by channel, we continue to focus on our internal channels, i.e., the agent and also bancassurance. In Page 21, we will move on to investment portfolio. Total assets was up by 7.5% in year '21. The allocation mainly towards the overseas fixed income and also equities in both the domestic and overseas markets. And Page 22, out of the overseas fixed income portfolio, the change is mainly on the corporate credit that we increased starting from the first half of the year. And also, we have some reduction in the financial bounds that mainly reflect our redemption of the international balance, especially from Europe issuers. In Page 23, the composition of the investment income in Fubon Life, that we can see the return in both before and after hedge is increased, mainly due to the capital gain and hedge cost improvement. While the recurring investment income decreased, and we have continued to focus on the enhancement of the recurring income going forward. In Page 24, the hedge cost in year '21 reached 71 basis points. That is inclusive of the 11 basis points of the one-off FX reserve provision. While we see the currency swap and NDF costs combined speaking continue to be on the low level. On the recurring return on before and after hedge basis in your lower left-hand side, a decline year-over-year, mainly reflect the NT dollar appreciation and also realized gains, which we expect to see a more stabilized trend going forward. And in Page 25, in terms of the cost of liability versus investment return, we generate a widening of a positive spread and stands for the breakeven point versus the recurring return, also a positive and widening spread. And we see the cost of liability shows continuous improvement. It brings down to 3.29% as of end of '21. And we would like to share with you that the 3.29% definition is basically based on the policy interest rate that we offer to policyholders. And if we follow the same practice as the market peers to -- based on the policy reserve rate to calculate, it will be around 2.95%, and we will continue to update to you going forward. And in Page 26 in the investment performance in terms of URCG, we can see it go up to TWD 183 billion as of end of December. And the quarter-over-quarter appreciation mainly reflect the equity market's strength. And while we see the equity to asset ratio or the shareholder equities outstanding, which is among a leading position among peers. Page 27, in Fubon Hyundai Life, the overall FYP came down by about 10%, mainly due to a high base effect from the strong sales in year '20 of saving policies through the bancassurance channel, which is sub-served in year '21. While our overall asset continued to grow at around 8%, in the meantime, our spreads continued to be widening that bring our net profit increase meaningfully in year '21. And next, let's move on to Page 29 regarding Taipei Fubon Bank. The top line revenue grew by 2.9%, mainly driven by the NII, which we can see the asset growth of over 7% -- sorry, NII growth of over 7% on back of asset growth. While the net fee income decreased by 8%, mainly due to the wealth management fee and also the increase in the credit card and marketing expenses. Okay. And Page 30, in terms of the loan -- the credit composition, the overall credit growth is over 12%, mainly driven by the retail loan growth of 16% and corporate loan of over 6%. In Page 31, in corporate loan, the key driver behind is the NT dollar book that is over 10%, and SME growth is another key driver that is close to 20% and also accounts for over half of our corporate banking book. In Page 32, the retail credit, we can see the mortgage remain seasoned as over 15% growth. And from the personal unsecured loans, the credit loan growth of over 30% is a key driver. And in Page 33, the deposit mix and LDR, the deposit NTD is over 8% growth and foreign currency at over 30% growth. That together bring our overall deposit growth at 16% and mainly due to our NT dollar strong growth in NT book, so our LDR also increased. While the foreign currencies long returned to -- we are more conservative and therefore, the ratio, as you can see from your lower right-hand side came down to around 53%. And Page 34, in terms of the spread, we can see that in the earlier pages that the NT dollar loan growth is a key driver in our net interest income growth and the focus on our asset quality and net interest spread as a result came down by about 5 basis points and NIM down by about 4 basis points in year '21. In Page 35, in terms of asset quality has been stable across the major business lines, while the provisioning increase on a year-on-year basis, mainly due to the general provisions increase because of the loan growth. In Page 36, the credit card business, we can see the active cards and also card spending growth, both ranked top 1 in the market. And therefore, the market share continue to increase. And while the spending activity is among the highest of the top card holder -- card issuers. In Page 37, in terms of the fee comp, it came down by about 8%, mainly due to the decrease in the wealth management fees. While we can see the AUM of the wealth management continue to be -- steadily grow at a 5% growth. Then also on the quarter Q4 alone basis, we also see the growth momentum of about 20% Y-o-Y, which has remained strong. And in Page 38, the overseas branches that -- we see a decline of revenue and therefore, also a decline in profit contribution, which we also expect to see recover in year '22. And in Page 40, we move on to Fubon Insurance. The direct written premium growth of over 12% and bring our scale to over TWD 50 billion, out of which the personal line accounts for over 70% and increased strongly at 16% Y-o-Y. That -- on back of that, the COVID-related insurance policy is one of the growth drivers and then also bring in a new customer base of over 800,000, and that will bring us a potential growth opportunity across the holding company. And on back of the growth, we see our market share reached 24.6% and the combined ratio continued to improve to 92%. And in Page 42, we move on to Fubon Securities. The net profit growth reflect the brokerage fee income increase on back of the market turnover growth and also Fubon's market share gain. In the meantime, we focus on the cooperation with Fubon and Jih Sun, and we expect to see a further growth momentum across the business lines. In Page 44, we move on to Fubon Bank Hong Kong. The loan growth of 9%, mainly reflect the corporate sector. And the net interest margin also expand. And on back of that, we see the provisioning improvement. And therefore, the net profit shows a meaningful growth, while the asset quality remains stable. In Page 45, in Fubon Bank China, the loan growth of over 14%, on back of that is mainly from the retail loans. And while the net interest margin expand by 39 basis points, however, we see a slower treasury income. Net-net, the net profit still grew at over 17%, while asset quality also remains stable. And going forward, the focus is to further deepen our collaboration among the Taipei Fubon Bank from Bank China and from Bank Hong Kong. Okay. So this will conclude the presentation today. Thank you.

Thanks for the presentation. In the very beginning, we would like to introduce management team to answer your questions in this call today. Mr. Jerry Harn, President of Fubon Financial Holding will host. We also have Ms. Sofia Wang, Head of Accounting and Finance; and Dr. Rick Lo from [indiscernible] Research in Fubon Financial; Mr. Roman Cheng, President of Taipei Fubon Bank; Ms. Tsai-Ling Chao and Grace Chiu from Finance and Actuarial Division; and Cather Pao from investment planning in Fubon Life; Mr. [indiscernible] from Fubon Insurance and also we have [indiscernible] from Fubon Bank China. Now we open for the Q&A session. Operator, please take questions from the audience. Thank you.

[Operator Instructions] Our first question will be from Jemmy Huang.

Just a couple of questions from me. The first one is, can I confirm your full year loan growth this year is going to be high single digit. I'm not sure I hear correctly during the Chinese session. And then specifically, could you comment on the loan growth target for foreign currency loan and also mortgages. The second question is on the recurring yields at Fubon Life. I think I recall you seeing a possibility for the recurring yields to improve this year. But the final conclusion is actually recurring yields after hedge will be largely flat to slightly increase. So what's the implication behind your expectation on hedging costs this year? I think last year, you were targeting 70 basis points to 90 basis points, which is actually the final results are pretty in line. So any guidance for this year on the hedging costs. The third question is on net interest margin. I think you mentioned that you are expecting net interest margin to be similar to the 2021 level this year is no rate hike. When you refer to 2021, are you referring to 1.04% for the whole year or 1% as of fourth quarter? If it's 1.04% for the whole year level, what's the catalyst for you to bring your net interest margin from 1% to 1.04% if no rate hikes? The final question is on Russian bonds. I think you do mention that the terms and conditions, you will only accept the U.S. dollar payments. So should we assume that if the Russian government and also the corporates are paying the interest in robust, then you -- it will result in kind of like actual default or actual delinquent from your perspective?

Thank you for your question. The indication for the total loan growth for the bank for 2022 will be 10% to 15%. The foreign currency loan increase -- will increase by 20% to 30%. And unsecured individual lending will also increase by 20% to 30%. Mortgage loan around 10%. And the NIM growth catalyst, if no rate hike will mainly from SME lending and personal unsecured lending.

Okay. About hedge cost as you just mentioned, yes, I think we also -- behind our thought that hedging cost, actually is on upward trend. The reason that we did not have a better number for you today. But -- however, we think if [indiscernible], I mean the currency trading, if we do very well, then actually, you can cover the head cost incremental this year. The reason we just tell you that absent hedge yield, it could be also increased as well. And another question about loss suffering. And yes, in terms of our current term sheet, we only agree on the U.S. dollars. And the further ECL taking will be considered then based on the forward -- coming credit downgrade in the future, it will be the key. So that -- I don't think that it will be a significant impact at this moment.

So can I confirm that you would also expect hedging costs to be largely flat on a year-on-year basis?

It should be increased in terms of regular hedge costs. But however, overall, including our current foreign reserve, there will be a buffer for us, even our other trading skill like MDF, we will less use it or even we will use the profit if the other currency is stronger than NT dollar, you will be the other income -- to compensate the hedge -- regular hedge cost increase or expectation in the year. Yes. Overall speaking, it will be flat or even higher. You are subject to the non-hedge how we manage it.

Our next question will be from Steven Lam.

Can you hear me? Hello.

Yes, sir, we can.

Just want to start on the Life side. I think in the Chinese call, we kind of touched on the comment on you expect NBV to resume growth in 2022. Can I just get a better understanding on what is driving that? Is it both the volume and the margin in that case, any…

Sorry, we missed the first part of your question.

Can you hear me now?

Sorry. Yes, we can hear you, but it's not very clear, but go ahead, please.

Okay. Okay. So yes, I was asking for Life NBV. Supposedly, we're assuming a resumption of growth in 2022. Can I ask the contributing factors? For example, is it from a volume size or it's from margin or a combination of both? And any particular product segment that you think will be a key driver of that. And based on the first 2 months of data from FYP, it seems like there is some increase going on. So given the current situation, say, the war in Ukraine and the effect on the investment markets do you assume or do you expect some sort of a slowdown, say, in terms of your customers' appetite for insurance products in investment-linked policies, for example. So that's the life side situation. In investment -- on the investment, just quickly, I noticed that the -- within the overseas bonds, I know it's short-term changes in the fourth quarter only, but it looks like there has been an increase in allocation quarter-on-quarter in Asia and coincidentally in the government bonds. Could you highlight any specific investments that you have made in those areas? And the second part for investment would be -- of course, there's a lot of volatility right now. And it's great that you have disclosed your Russian exposure as of February. But if we sort of just look into March and maybe April, what kind of investment outcome could we expect? Like if there will be some headwinds with the headwinds mostly from equity or both equity and fixed income with the widening of credit spreads have an impact to your profit? And I guess, lastly, for bank, and thank you for your comment earlier on loans. So I'll throw a question on fee income. It seems like you have a very strong conviction on strong fee income, right, mostly coming from maybe mutual funds or insurance policies. But with the backdrop right now with the war again and maybe fed rate hike, how should we think about that in terms of the sales of mutual funds and investment-linked policies? And lastly, for bank. I know you have -- there could be some market speculation on your potential acquisition of Citibank. But can we have a general view in terms of your strategic thinking about conducting banking business in China versus Hong Kong over the next few years? Sorry for the many questions, but yes, that will be all.

Okay. I will comment on our China strategy. I think despite all the ups and downs globally, we still view China is one of the most important overseas markets for us for the colossal size of the markets and the -- there's a lot of Taiwanese, both corporate and individual operating in the area. So I think this is a natural market, I mean, for our banks to invest in the markets. So therefore, we will continue to explore or pursue suitable opportunity to expand our scale. Okay. That's basically our China strategy. And Hong Kong is part of our China strategy, okay? We have a subsidiary in Hong Kong and a branch in Hong Kong. Both are operating okay and the Hong Kong will continue to be an important window for China and also the hub for the regional market. So we will also continue to develop business in Hong Kong as well and particularly the linkage with Taiwan and China. We are continuing to build the networks for this greater China's business opportunity. Okay. That is a quick and short answer for your last question. We have Roman to answer the question on the bank's operations side.

Steve, thanks for your question. Regarding your question about wealth management fee income momentum. Let me share with you that our individual customer place total investment and insurance policy related AUM with the bank around TWD 1 trillion assets, while they also place TWD 1.4 trillion AUM asset in terms of the deposits. So deposit AUM still remain high, which reflects our individual customers, at this moment, tend to be wait and see and remain there or even increase their AUM mainly in the form of deposits. And yes, agree with you that the mutual fund investment because the volatility in the market, so the sales momentum tends to be stable. And while the insurance policy sales for the first 2 months, which is January and February this year, the insurance policy sales volume increased by 10%, and our fee revenue from the insurance policy sales increased by 33%. So for the whole year, we still remain quite -- on the 10% to 15% increase for the wealth management fee revenues. But that still depends on the market momentum and the change of the market volatility.

Just add one more minor comment. Taiwan is a very liquid and health -- wealthy markets for the -- I mean, as far as the wealth management business concerns. Given our experience in the past, if the stock markets that's not performed then the investment -- the fixed income type of business will grow. In the investment business will fail, then the insurance type of business will grow. So from a slightly longer perspective, it always balance out each other. And if you look at the overall wealth management market in Taiwan, no matter what, it grows one way or the other. So that's -- we don't have a crystal ball whether the -- how high the interest rate will go up to or how the stock market will perform. But what we can say is we've built a financial holding company platforms to cope with the change of the entire [indiscernible] investment markets. So we have the experience and the product capability and channel to cope with the change of the markets, okay. Okay. I will hand over to our life guy.

Okay. Hello, about the VNB growth in 2022, last year, because of the pandemic, our business was impacted, especially the agency channel. So last year, most of our business are coming from [indiscernible] and mostly unit-linked policies. And this year, we expect the business will gradually go back to normal. And the FYP will start to grow. And this year, since that market was impacted by the war and become very volatile, we expect some policy partially will shift from unit-linked policy to more conservative like traditional saving products or unit -- or interest-rate-sensitive product. And especially everybody expects the interest will go up, we expect some business will shift from unit-linked to interest-rate-sensitive products. [indiscernible] you are asking, the exposure in Asia and other countries increased. And we can say that the wait in Asia and other went up. Actually, we are already moderate diversified through EM [ sovereign ] issue over the quarter. And also over the past year, as you can see from the chart, our exposure to emerging market is still decreased. And about the incremental in the fourth quarter, actually, with increase not only limited to Asia, also, we are quite well spread across the region and also countries. And as I said actually it's very diversified. It's for the emerging markets question. Then the other question about the impact and the headwinds, [indiscernible] right now, despite a recent escalation in Russia and Ukraine [indiscernible] and the impact to the global economy so far we think it is quite limited. And also, because the Fed still forcing to a rate hike in face of continuous inflation pressure. So I think it's good for us because we can enjoy the benefit of the further rate hike or even as well if the credit spread widened further, then we can enhance our return yield at this moment. [indiscernible] some markets are, in our view right now, still -- as I mentioned in the Chinese section that with the earnings hit record in the 2021, [indiscernible] dividend yield is expect to increase significantly this year. So in our budget, we also [indiscernible] forecast. And also, Taiwan's company, of course, has competitive advantage and are highly profitable. So we think the lots of uncertainty will not have such impact on the Taiwan's stock market. And so we remain cautious optimistic toward the domestic market.

Have we answered all the questions?

Yes, certainly.

Thank you. And we no longer have any questions on queue, speakers. Please go ahead.

Thank you, ladies and gentlemen, for your participation in this call today. Welcome to contact IR team if you have further questions. Thank you.

Thank you for your participation. Please let us know if you have any further questions. You may contact our IR team who will answer your questions.

And that concludes today's conference call. Thank you everyone for participating. You may now disconnect.