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

Thank you for standing by, and welcome to Fubon Financial's First Half 2022 Financial Results. [Operator Instructions] This call is being recorded. [Operator Instructions] Now I'll hand the call over to your host, Ms. Amanda Wang, the IR Officer of Fubon Financial Holdings. Ms. Wang, please begin.

Thank you. Welcome, everyone, for joining the call today. Please turn to Page 4 of the presentation. In the first half, Fubon Financial's EPS and also net profit both led the holding company peers and assets reached over TWD 10 trillion. Net worth was about TWD 626 billion. The book value per share on common share basis is around TWD 44.98. In Fubon Life, net profit is the key driver of the holding company, which is a result top among the life insurance peers. In terms of the premium market position, ranked top 2 and the return from investment side on after-hedge basis reached 5.94% that's on back of a decent capital gains and also the strong hedging performance. And while the capital market volatility continues, its equity-to-asset ratio maintained at over 6.5% and RBC at over 300%. In Taipei Fubon Bank, the profit was up by 25% that hit a record high. That's mainly driven by its asset growth strategy and also that bring up the asset's growth by 14%. The critical expansion strategy continues while its asset quality remains stable. In Fubon Insurance, the net loss in first half was reported at TWD 3.37 billion. That's mainly due to the impact from the COVID-related policies that including a cumulative total direct loss that exceeds TWD 20 billion and also the total retention loss that is around TWD 12.7 billion. More up-to-date data point will share with you in the presentation later on. And other than the COVID policies, the business momentum continues with the market share of 26% that continue to grow. And in Page 5, in Fubon Securities, the net profit was down and that reflect a more volatile stock market in Taiwan. While we are expecting potential synergies with Jih Sun Securities going forward to enhance our market position. The Jih Sun Securities Financial Holding's contribution of net profit is TWD 1.6 billion, down by about 20%, mainly reflects a security size performance, while the banking operation is up by 27.5%. And in ESG achievement, Fubon has been advocate in the sustainability initiatives including that we submitted the carbon reduction goals to SBTi. And we are a supporter of Race To Zero Campaign and also Business Ambition for 1.5 Celsius degrees campaign in face of economic change. And a few highlights of the actions that we take in decarbonization, including quite a few long product offerings from Taipei Fubon Bank. In Fubon Insurance, we also obtained the carbon footprint label that demonstrate our process from underwriting to -- from the business solicitation to issuance during the underwriting process. And in Page 6, the profitability of the holding company's net profit and EPS that both led the holding company peers. And in terms of the first 7 months earning that we announced earlier, the net profit was over TWD 83 billion and translate into EPS of TWD 6.81. In Page 7, the net profit from major subsidiaries. The banking side are all delivering net profit growth while the life insurance and securities and net profit came down. And the contribution from Fubon Life is around 91%, while the three banking subsidiaries contribution [indiscernible] -- so the combined, that is over [ 100 ], mainly reflect loss-making from insurance and also the tax expenses on undistributed earnings, that is around TWD 4.1 billion. In Page 8, in terms of the total asset, the holding company's total assets near TWD 10.5 trillion, and that is up by 4.8%, while the book value per share is around TWD 44.98. In Page 9, the ROA and ROE decreased that mainly reflect the earnings fluctuation and expansion assets while absolute level of the two ratios are remained well-performed. And next, let's move on to Page 11, in Fubon Life. The total premium came down by 22%. That reflects the FYP and also renewal premiums decline. In Page 12, the composition that we can see, the investment link and traditional life policies to grow, while overall FYP dropped due to the impact from the pandemic. And Page 13, FYPE is largely stable, while the growth of the regular pay that lifts up the FYPE to FYP's ratio. And while on your right-hand side, the VNB is down mainly reflect the product mix changes. In Page 14, the FYP's contribution from the agent and bancassurance channel, the two are the internal channels, that deliver Y-o-Y growth and that also drove up the FYPE's contribution. And Page 15, on the investment side. The portfolio adjustment mainly come from the addition into the bond position. And the reduction is mainly in the domestic equity, and reflects, one, is the realization of the capital gains and two, is because of impact from the market fluctuations. And Page 16, overseas fixed income composition that we continue to focus on investment-grade corporate credit and financial bonds while in terms of geographic exposure mainly is from the North America region. In Page 17, from investment income. Recurring return, that improved that mainly reflects -- sorry, the recurring investment income improved, mainly reflect the increase in interest income and also a cash dividend income. While FX gain increased Y-o-Y, driven by the U.S. dollar appreciation. And therefore, we can see the after-hedge investment return performed well at 5.94%. In Page 18, the composition of the hedging portfolio. The dollar's position increased up to 16 of the total bond and cash position as the U.S. dollar appreciate. And the overall hedging and FX is a net gain in first half of 52 basis points that mainly due to a stable recurring hedging cost and also FX gains. And as the CS and NDF cost remains stable, we can see [indiscernible] both before and after hedge basis. In Page 19, the cost of liabilities continued to improve, while the positive spread is maintained compared to the total investment return. Another spread is between breakeven point and the after hedge recurring return shows widening year-over-year. In Page 20, the unrealized balance shows quite a fluctuation mainly due to the market volatility. While the trend is upward moving, enhanced in July and year-to-date. In terms of the equity-to-asset ratio, it was over 6.5%. And that ratio actually topped among the six largest life insurers as of March. And the RBC ratio at well above 300%. And the media report earlier that there's only one life companies with equity-to-asset ratio of over 5% in June, and Fubon's level of 6.5% and trend up in July that shows a more solid position in the market. In Page 22, Taipei Fubon Bank's asset growth and also the market rate hike led drive up the increase of its NII of 13% growth. And on the other hand, is the treasury and fee income decreased by 30% and 6%, respectively. The other revenue go up, mainly driven by the recognition of the bargaining -- sorry, bargain purchase gain in Hyundai Cards, that is about TWD 2.8 billion. If excluding this factor, the other revenue line still up by 29.5%. In Page 23, Taipei Fubon Bank's loan growth are mainly driven by its retail loan, led up by 14.5% and corporate loan growth by 11.9% year-over-year. And total credit up by 12%. Further breakdown in Page 24. The growth of the NT dollar and foreign currency loans both contribute to the corporate loan growth at double digit, while the SME credit also grows decently at 14.8%. In Page 25, the mortgage grows up steadily at 15% and personal unsecured loan up by 10.4%. In Page 26, the deposit growth is up by 20%, including from NT dollars, both of 13% and foreign currency book by 33% on back of the asset growth strategy and that led to the LDR ratio led -- go down year-over-year. While in Page 27, we can see the spread and the margin continue to improve. And by end of Q2, the NIM reached 1.08% and loan-to-deposit ratio at 1.35%. In Page 28 and 29, that will show you the asset quality remains stable while the provisioning costs, mainly driven by the general provision as the loan growth. In Page 30, the credit card performance that we can see the active cards and also cost spending, both grow and outperform the market that lead us to gain the market share. In Page 31, the fee income was down by 6.4%, mainly due to the wealth management fees and also higher credit card marketing expenses while the syndication fee was up and therefore, the magnitude of the decline on net fees narrowed quarter-over-quarter. In wealth management fees, the insurance and trust fees delivered growth that partially offset the decline in mutual fund and structured products, while AUM for the overall wealth management was up by 8%. In Page 32, the market rate hike that contribute to the revenue growth in the overseas branches, while the provisioning decreased and that both led to stronger earnings growth of 46% in first half. In Page 34, regarding Fubon Insurance. The written premium was up by 13.6%. Both commercial and personal lines outperformed market growth. And the overall market share continue to grow and reach 26% that shows the leading position in the market for over 41 years. And the combined ratio up, that mainly reflects the impact from the COVID-related policies. And here, we also like to update with you regarding COVID-related spaces in Fubon Insurance. The numbers of the total effective policy was about TWD 1.6 million as of July. And compared to our earlier communication with the market that shows a meaningful decrease, which is about TWD [ 2.31 ] million in April, as we shared you in our previous analyst meeting. And regarding the losses, the cumulative total direct loss including claims and reserve from the COVID-related insurance is about TWD 30 billion. And while the retention loss is around TWD 15 billion. That is reflected in the net loss year to July. And regarding the release of the special reserve, we have TWD 3 billion released under the liability to offset the impact from the P&L. And additionally, it's another TWD 3.72 billion of special reserves released under the equity to supplement our book value and RBC. And going forward, as we see the daily infection cases gradually decreased recently, we expect the peak of this claim payment for the recent COVID situation probably is behind us, and we will continue to monitor the pandemic development and also reflects the provisioning on a monthly basis. And regarding the capital position, the Fubon Insurance's RBC ratio actually is well above 200% as of July. And after we're considering a few factors, including the infection development, the financial and also its capital position projection in '22, the Board passed the capital injection plan of TWD 15 billion on 16th this week. And RBC ratio is expected to increase by over 100% upon this capital injection and the proposal, we aim to complete by end of Q3. And in Page 36, regarding Fubon Securities. The first half net profit down that mainly reflect the TAIEX trend down and also market turnover. And as we expect the merger with the Jih Sun Financial Holding to be completed by the end -- the year-end this year. The mergers between the subsidiaries will be completed by mid of next year. We expect the potential synergies with Jih Sun Securities to further enhance our market position. In Page 38, in Fubon Bank Hong Kong, the loan and deposit both grow at double digit. The loan mainly driven by the corporate and mortgage business, while the deposit is mainly driven by the time deposits. And the net interest margin slightly down by 3 basis points. And while -- the asset growth is stable and about 2.3% growth in net profit. In Page 39 is Fubon Bank China. Its net interest margin was up by 5 basis points on back of the funding improvement and also the structure enhancement in deposit loans. And also on back of the NIM expansion and asset growth, its profit go up by 14.8%, while its asset quality remains stable. Okay. So I will stop my briefing here and hand over to Mr. Jerry Harn, the President of Fubon Financial Holdings. Thank you.

Thanks for your presentation in the very beginning. We would like to introduce management team in this call today. Mr. Jerry Harn, President of Fubon Financial Holdings will host the meeting. We also have Ms. Sophia Wang, Head of Accounting and Finance; and [indiscernible] in Fubon Financial; Mr. Roman Cheng, President of Taipei Fubon Bank; Ms. Tsai-Ling Chao and Ms. [indiscernible] from Investment Planning in Fubon Life. Mr. [indiscernible] Fubon Insurance, and we also have Ms. [indiscernible] from Fubon Bank China. Now we open for the Q&A session. Operator, please take questions from the audience. Thank you.

[Operator Instructions] Now for our first question is coming from Chung Hsu of Credit Suisse.

Let me start with the bank side. I want to follow up on the fee income. I just want to -- maybe I missed it in the Chinese session. I think that the fee income is down 6.4% year-over-year in the first half. I think most of the drop is in the second quarter. And when you look at the credit card fee, for example, it's almost zero. Just wondering if there's something more particular in the first half on the credit fee or other fee income? And what should we expect on fee income for the full year? I think previously, I believe management was guiding for 5% to 10% fee income growth for the year. Second question on the bank side is net interest margin on Fubon Bank Hong Kong. Just curious, why is the net interest margin down despite higher rates in the US dollar denominated assets? My third question for the bank is the asset growth for Fubon Bank has been low to mid-teens. I think Amanda mentioned in the presentation that is due to the bank's asset growth strategy. So it sounds like Fubon Bank intends to keep a high pace of asset growth. So in terms of capital management for bank, should we go to the model for Fubon Bank? Should we start to model for higher return earnings on Fubon Bank's subsidiary, meaning upstream -- capital upstream to the holding company in the coming years? I have two quick questions on the Fubon Life. One is on cost liability. I think in the Chinese session, management elaborated that recurring yield this year will increase and probably will continue to increase next year. Just wondering on the cost liability, is that -- would that also decline as well or is it likely to stay flat into this year and next year? And lastly, on FX hedging. On Slide 18, the blue bar, the currency swap and NDF cost is still only 29 basis points. I think if I hear correct in the Chinese session that you mentioned you have locked in a lot of longer tenure and swap contract. Just wondering when do move those contracts expire, meaning is it expire -- most of it expire in Q3? Or they will last until end of the year?

Okay. I will start first. Okay. This is Jerry Harn. I will ask -- I will answer the question regarding the Fubon Bank Hong Kong. Why under the circumstances of rising interest rates and the NIM has come down. I think it's mainly because the bank adopted a conservative deposit-taking strategy, that means they increased the deposit rate to attract the time deposit. So actually, the time deposit has increased substantially about 20%, if I don't remember wrongly. Therefore, the overall, the deposit cost, the liability cost increase. And on the loan side -- on the other hand, the fee has not fully reflected the rising interest rate trend because the liability costs adjust to the market faster than the asset, means the long rate adjustment. And we are expecting the loan rate adjustment will pick up in the third quarter. Therefore, in the third and fourth quarter, you will see an improvement -- further improvement on the net interest rate margin, okay? And also, the -- I'm sorry, maybe I missed the question a little bit, but I just want to make a general sort of statement. Our policy at the holding level is that we are expecting or hoping all subsidiary should upstream the distributable income as much as possible. Therefore, we would have sufficient capability or liquidity to distribute or maintain our dividend policy, as we sort of declare over the -- I mean, in the past, okay?

Thank you for your question about our credit card fees. Our credit card business actually registered very healthy growth. The card insurance -- new card issuance increased by 36% and the consumption spending increased by 10%. So also contribute the cross-sell unsecured lending balance increased by 23%. And the net interest margin from the unsecured lending from the credit card holders increased by 11%. Insurance cross-sell revenue increased by 11%. So we still remain comfortable to provide this benefit to our cardholders. Nevertheless, our growth fee income from the credit card, LDR, increased by 13% this year. So net-net is a healthy growth. For the first -- second half, we actually kept the reward program to our cardholders. But still -- the momentum is still healthy, and we -- for the overall, the fee income revenue for the whole year, we think we can remain at the same pace compared to last year. Regarding to the NIM, as you mentioned that our NIM increased, thanks to the rate hikes for the first half. So for the whole year, if we consider the U.S. dollar and NT dollar rate hikes, our total NIM will increase by 9 basis points to 1.13 for the whole year. And regarding our loan growth, we have high -- growth rate for all segments for loan growth. So for the whole year, I think we can remain at -- I think the middle things, even though -- while our cost sales remain healthy at 15%. So we don't think that's a concern on our card for the whole year, even we consider there is a reasonable cash dividend to the holding. So that is basically our answers.

Okay. We expect the cost liability will stay flat to next year -- this year. About the cash hedging cost. As we mentioned earlier or maybe last year that we've already been saying that we're already lagging 1 to 2 year cross currency swap contract from last half of the last year -- or last half of last year. And actually, you will gradually retire this year. And as we -- as I just mentioned earlier that because we can imagine our total hedge cost within 50 basis points this year. That means we still have a lot of long term -- our longer duration of our currency contract and I think that we still -- we'll keep moving to roll over, but it was subject to the market because if the treasury or interest between Taiwan and U.S. dollar, if it gets narrowed then we can have some cost everybody suggest to market. That's all.

If I may just follow up one question on the bank asset growth pace. After this year, is management intention to maintain a low gain asset growth of Taipei Fubon Bank?

Low to middle teens.

The next question is coming from Jemmy Huang of JPMorgan.

Two questions from me. The first one is also on net interest margin. I think compared to your previous guidance, the margin outlook is kind of being revised down. Could we understand the rationale behind? Is that mainly due to the June rate hike, the [ cover ] deposit up more or any other reasons? And then for the spread. I think with the lending spread up 11 basis points quarter-on-quarter in second quarter, could you give us some idea about how the Taipei dollar lending and also the U.S. dollar lending spread migration during the quarter separately? The second question is on COVID. I think you kind of guided every 1 percentage point increase in the infection rates will cause P&C to incur losses -- incur claims by about TWD 1 billion. But if we look -- if we take into account the average claim per policy still on the rising trend, should we expect this TWD 1 billion to be up still in the foreseeable future? Or how should we look at the trend over the past couple of quarters until now, how this TWD 1 billion has been migrated?

Sorry, I didn't catch your question. How is that TWD 1 billion migrated? It means our expectation on the infection rate?

No, sorry. What I mean is when you mentioned about 1 percentage point increase in the infection rate will result in roughly around TWD 1 billion. Is that always the same year-to-date? Or this TWD 1 billion actually increased from a couple of hundred million to TWD 1 billion or it's actually pretty consistent year-to-date?

It's pretty consistent, yes. Moving forward. Yes. So the -- it's a roughly straight-line relationship, okay?

Okay. Regarding your question about our indication on the NIM increase the last time and this time. That time, we indicated that our total NIM will increase by 11 basis points with the assumption that both of the U.S. dollar and NT dollar rate hikes can give us a much better net interest margin. But the NIMs reduced to 9 basis points from the 11 basis points, mainly because of the previously Taiwan Central Bank when they increase the NT dollar rate by 12.5 basis points. They also required all the banks should increase the deposit rate equivalent. So actually, they contribute -- almost zero contribution to our -- the NIM increase. So basically that the revised down is because of that. And regarding the -- our net interest margin for the second quarter increased by 1.24 to 1.35 in the second quarter. NT dollar net interest margin increased by 16 basis points, while the U.S. dollar net interest margin increased by 13 basis points.

Okay. Not sure every one of you would understand the background. I mean, in the past, when the Central Bank increased the NT dollars interest rate, we will normally reflect fully on the fixed rate deposit. But we only reflect partially -- partial increase on the saving rates. But this time, the Central Bank expect all the banks or financial institution to fully reflect the increase on both the fixed interest rate and the saving rate. And therefore, that erode our expectation of the margin increase. I'm sorry, I interrupt your question?

Yes. Sorry, can I follow up? So just trying to confirm, you mentioned the spread for Taiwan dollar actually up 16 basis points quarter-on-quarter while U.S. dollar spread only up 13 basis points quarter-on-quarter in second quarter, so which means the Taiwan dollar spread actually still up more than U.S. dollars? Is that correct? And then when you mentioned about the NIM outlook for the whole year. For the rest of the year, do you assume there will still be any NIM benefit from the Central Bank rate hike? Or will you basically assume the deposit rates -- the CASA deposit rates will increase at the same amount of time deposit rate?

Yes, we do expect there might be another 25 basis point rate hike for the NT dollar. But however, due to what we explained earlier, they won't contribute the net NIM increase -- the incremental NIM to us. That is our projection.

[Operator Instructions] And next, we'll have Steven Lam of Bloomberg Intelligence.