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

Thank you for standing by, and welcome to Fubon Financial's Third Quarter 2023 Financial Results. [Operator Instructions] Questions will be taken at the end of the presentation. And this call is being recorded. [Operator Instructions] And now, I will 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. Thank you for joining Fubon's first 9 months' earnings results call today. And there will be 2 sessions in this call, including Fubon's performance review and followed by the Q&A hosted by the President, Mr. Harn, and also the senior management. Please turn to Page 4. In Fubon's first 9 months net profit, we reached over TWD 67 billion. That including EPS, both are the top among the holding companies in Taiwan while the assets continued to grow at over 3% and book value up by over 30%. In Fubon Life, the profit of TWD 43 billion, that make us rank top 1 among the peers in Taiwan. And the earnings are mainly supported by the recurring return before hedge that increased, and also, the premium side. We have a top 2 market position across FYP, TP, and FYPE. And also on the capital position, we are -- continues to be solid with equity to asset ratio at over 8.5% and RBC over 350%. In Taipei Fubon Bank, net profit reached over TWD 20 billion. That, again, will hit another record high. And in terms of the profit driver, the net interest margin had growth of 9 bps year-on-year and also the loan growth. While net fee income grew by 37%, that reflect the growth in wealth management and also on the credit cards business. In Fubon Insurance, the net loss continues to narrow down. It came down to TWD 2.4 billion of loss, while the monthly income turned positive starting from April. On the premium side, the size continues to grow by over 5% and investment return at over 4.5%. In Fubon Securities, the net profit is over TWD 5 billion and up by close to 60%. That mainly comes from the investment gains as the TAIEX trended up. On the ESG side, we are honored to receive the awards and certificates from both in Taiwan and also from global institutions, including by ISS, by Sustainalytics, and by CommonWealth Magazine to Fubon Financials. And also a few awards to Taipei Fubon Bank. In Page 6, in terms of the action across subsidiaries. In Fubon Life, we have continued to focus on the green investment that we reached over TWD 1.6 trillion. While in Taipei Fubon Bank, the size also reached to TWD 594 billion. And we are also the first here to public the TCFD report. And also, we have developed the Eagle Eye AI detection technology that leads the industry. And in Fubon Insurance, we are the first in the industry to propose a Net Zero Underwriting by year '50. While in securities, we also have initiatives as well. In Page 7, in terms of profitability, the net profit and EPS trend down, but still make us the top 1 among the holding companies in Taiwan. In Page 8, across the subsidiaries, we can see that the profitability came down in Fubon Life, Fubon Insurance, and Fubon Bank China. In Fubon Life, it is mainly on back of the volatility in capital markets. While P&C's loss gradually narrowed down, and Fubon Bank China, largely due to the decline in NIM and also the provisioning requirement increased. While the performance in other subsidiaries including in Taipei Fubon Bank, Fubon Securities, and Fubon Bank Hong Kong are actually quite robust. And in Page 9, the asset size continues to grow while the book value increased by over 30% year-over-year. And in Page 10, ROA and ROE on an annualized basis is here for your reference. If we can move on to Page 12, let's start the Fubon Life section. The premium size FYP declined pretty much in line with the market. That is also in about 17% level. While the renewal premiums are coming down due to the paid-up for the regular-paid policies, and therefore, the total premium declined by 8.8%. That, again, is similar to the industry's average. And in Page 13, in FYP, the mix, we can see that we pretty much moved towards the product strategy we're aiming, i.e., is to enhance our CSM to prepare for the IFRS 17 and ICS adoption. So putting to a number, we can see the regular paid policy now go up to about 40% of FYP, and the health, accidents, and others also trend up to 8.9% while the investment-linked policy came down to close to 30% of FYP. And in Page 14, we can see the FYPE as a result grew by 39%. And on back of the product mix change. And this result is largely outperformed compared to the industry's FYPE growth by about 9.7%. And on your right-hand side, we can also see the VNB grew by 25% and margin enhanced hand to over 21%. In Page 15, in terms of the channel's contribution, internal channels continue to be the main focus, including tied agents, Taipei Fubon Bank, and other subsidiaries. This together accounts for around 70% of our FYPE. While our market ranking from bancassurance is at the top in the industry. And if we look at the FYPE's contribution by channel, actually, we can see across all channels, all shows growth in FYPE. In Page 16, in the investment side, the mix largely is that we reduced the position in equity -- domestic equity assets, that is to capture the capital gain opportunities and also to maintain sufficient cash level. And going forward, we'll continue to monitor the market carefully to adjust the asset allocation while overseas fixed income position increased largely due to the appreciation of the U.S. dollar. And in Page 17, composition of the overseas income is largely similar. In Page 18, in terms of investment income, firstly, the total investment assets, we delivered stable growth of over 4%. And in terms of the contribution, the recurring income improved by over 7%. That mainly reflect the higher interest rate environment and also the appreciation of the dollar. While the hedge cost is high, and therefore, led to decrease on the return and also the capital gains compared to last year's high base, and then, both led to the investment return at 4.33% this year. And in Page 19, the FX gain improved to -- sorry, the FX gain improved quarter-over-quarter to about 292 basis points in Q3 as the U.S. dollar appreciated by about 3% above in a single quarter and YTD appreciated by over 5%. And therefore, the total first 9 months' hedge cost and FX gain is about 12 basis points. That is better than our expectation. While on your lower left-hand side, the recurring return before hedge actually shows improvement to 3.66%, and on the after hedge, because of considering CS and NDF cost, therefore, is decreased to about 2.71%. And in Page 20, the spread between investment return and cost of liability, we continue to maintain a positive spread while the breakeven point spread with the recurring return after hedge turned slightly negative by 5 bps, it's mainly due to cost, as we just mentioned on the CS and NDF side. In Page 21, on the URCL, we can see it trended slightly up quarter-over-quarter, and it reached TWD 81.6 billion of unrealized loss. While compared to the year-end last year, we still see over TWD 100 billion of recovery. And then also bring -- our equity-to-asset ratio as well as the RBC ratio improved over the same period of time. And next, let's move on to Taipei Fubon Bank section. In Page 23, the total revenue was up by over 17%. It's driven by NII fee and treasury income. And in NII, the growth is largely due to the NIM's expansion by 6 -- 9 basis points and also loan growth close to 6%. Fee income growth was also quite robust at over 37%. While the treasury income growth also comes from the contribution from the stocks, bonds, and FX gains. And on next page, we can see the credit expansion of 5.9%. They actually outperformed compared to the market average of about 4%. And in Page 25, the corporate loan segment grew by 5.8% and largely driven by the foreign currency assets. In the meantime, we see the SME loans also grew by close to 10% growth. And in the retail side, in Page 26, the mortgage continues to grow quite decently at 8.4%. While the personal loans in -- specifically in unsecured consumer loans delivered a quite robust quarter-over-quarter growth at 8%. And in Page 27, on the deposit side, the bank increased by over 3% of deposit base, largely driven by the NTD book, specifically in the retail's segment. And in foreign currency, we control the outstanding balance, and also, we improved the utilization. So we can see the percentage on your lower right-hand side improved to 86%. In Page 28, in terms of NIM and spread, both metrics shows improvement quarter-over-quarter. And also on the first 9-month basis, we also see NIM's improvement. And that largely reflects on the loan -- the lending's momentum and also the foreign currency bond's deployment. And while if we include the SWAP revenue, the 9-month NIM actually also up by 20 bps and reached 1.3%. In Page 29, the asset quality remained stable and outperformed compared to industry average. And while the quarterly provision is largely due to the GP and also a few selective cases in domestic area. And in the following page, in the credit card, we can see the active cards and cost spending shows quite high momentum and also outperform, and therefore, we gained the market share, largely owing to COSTCO affinity card's contribution. Although monthly per card spending slightly trend down by 2%, that's largely due to the base effect that we have a higher growth in active cards while insurance payment on a per card basis slightly trend down. In Page 81 -- sorry, 31, the fee income side, growth is over 37% and largely from the wealth management fees and also quite significant growth from the credit card, as we make adjustments in the marketing expenses and also the expansion in card spending. While the wealth management may contribute over 85% of the fee revenue, it was up quite meaningfully at close to 30%, specifically from the bancassurance contribution and the trend we expect to continue. In the following page, the overseas branches contribution is also quite strong. The net profit has doubled, and that contributed over 20% of the bank's bottom line. And next, let's move on to Fubon Insurance. The direct written premium grew decently at over 5%. While underwriting profit grew by 13%, and the combined ratio is below -- well below 90% if we exclude the COVID-related impact. And the following section, Fubon Security, we can see the net profit growth of close to 60% Y-o-Y. That make us a top 2 in peers, largely due to the investment gains. And while the market position across the board improved upon the merger. And the following section is Fubon Bank China. In terms of loans and deposits, we both grow at high single digits and the revenue and net profit turned positive quarter-over-quarter that we can see the improvement mainly on back of the net interest income and also the SWAP revenue. The net interest margin came down while the inclusive of the SWAP actually came down to a level -- narrowed down to 17 basis points and reached 1.38%. And the trend is largely due to the market rate environment in RMB and also the adjustment in our lending portfolio, specifically on the online lending. And on the funding cost side, the U.S. dollars increased -- funding cost increased. On the asset quality-wise, we continue to keep at a relatively stable level. So this concludes the presentation. And next, we will open for the Q&A and hold by the President of the Fubon Financial Holding, Mr. Jerry Harn. Thank you for your attention.

And ladies and gentlemen, we are now in question-and-answer session. [Operator Instructions] Now first question is coming from Leon Qi of Daiwa.

This is Leon Qi from Daiwa. I have 2 questions today, one on the insurance side and the other on the investments. Firstly, I do appreciate management's color just now on your FYP and the improving profitability and more capital-efficient product mix. In particular, I noted that Fubon is one of the insurers, which has been a pioneer in terms of selling the participating products. Would you please share with us some color in terms of the competitive landscape in participating products in the market? Plus we also know that one of the international insurers has also been quite aggressive in terms of participating products. So first question is on the competition in participating products. And secondly, given that more recently there has been some changes in terms of the VAT interest rate in the U.S. for 2024. And we do understand that the U.S. interest rate and the interest rate spread between Taiwan dollar and the U.S. dollar actually affects a lot of faucets of our investments. So I appreciate if management can help us to give some color how we should think of our investment portfolio, investment allocation strategy going into 2024.

The competitive landscape for the participating insurance product.

Yes, Leon, thank you for your question. About participating product, actually, Fubon Life is the first pioneer to launch the participant product in first quarter. And so far, the market actually, the competitor, maybe the potential will be -- one of the forming companies provide participating product. So actually, we are a pioneer. So we did not see a lot of competitiveness in participating product. Also, if we compare the participating product to the interest-sensitive life product, actually, as we mentioned before, the product feature provided to the customer is actually different to the interest-sensitive product because actually we provide customers more protection-oriented features. And also, because we expect the customer will pay us with longer so we can provide a higher return to the customer also because it's a sharing mechanism between the company and the shareholder -- company and the customer. So it's actually, of course, win-win situation. So another one is our company advantages. Actually, based on our past investment performance, actually, we are quite good at investment. And so we are quite confident that we -- actually, we have a more competitive advantage over other companies. Another one is for launching a participating product, actually, we need a lot of education to the sales channel. So we did a lot of work this year. So I think we can hope -- we hope that we can have a more diversified portfolio to -- in the future also to adopting the future challenge. Yes.

Yes. Quite a few of our competitors are now evaluating the possibility to follow our lead to launch participating products in the market. But we would like to emphasize that the 1 important competitive edge for us that is our investment track records. As you probably know, we continue to maintain much higher than the industry peers in our investment performance, and that is the -- I think, the key competitive edge for us to continue to sell and compete our potential competitor in this landscape. Okay. Do you want to share any color on our investment strategy or thoughts based on our ops?

Yes, the strategy in case the interest rate comes down.

Thank you. Let me say in our early session, and I will repeat, again, that in terms of our asset allocation, we have a sufficient cash on hand. Currently, it's about TWD 270 billion, and we retain the possibility to rebalance our portfolio in the future. Then, also talking about the rate, we expect the interest rate will hover in at a relative high range and like a sharp rise should be slim. So we will seize market opportunity to invest primarily in NT dollar-denominated ETF to enhance yield and also reduce our regular hedge cost. And about some market, we think about that as the tightening circle approach to the end. We were looking for the opportunity to invest in stocks met with upside potential. About the investment.

I trust that you appreciate that the market is very volatile. So we may change our investment strategy according to the market conditions. Okay. Any other questions, please?

Next, we'll have Jemmy Huang of JPMorgan.

Just 3 questions from me. First one is for the COVID reinsurance claim, could I just reconfirm according to the accounting requirement, you still need to set aside 100% provision by -- if you cannot get back all the receivable in 2 years? If that is...

No, that's not.

That's not.

No, there's no requirement.

Okay. So in terms of the accounting practice that you mentioned, you need to set aside TWD 600 million to TWD 700 million in fourth quarter. What would be the like additional provision required in 2024 if you still cannot get back a majority of the receivable? I think that's the first question.

I'm sorry. Okay. Okay. Let me answer this one, okay? It's 25% of the receivable.

By 2024?

If we did not collect our receivable in 2 years, and that is our internal. I mean in order to maintain our accounting book's integrity, not because of the regulator's requirement. It's purely internal accounting discipline. So that is 25% of the receivable in 2 years' time, okay?

I see. And second question is on the investment income related to the investment property. I think according to your disclosure, there was other gains and losses of around TWD 3.1 billion in the first 9 months compared to, I think, losses over the past 3 years. Just trying to figure out where the volatility comes from for this part of gains and losses related to investment property apart from the rental income. And I guess the final question will be with your expectation for interest rate to stay higher for longer, how do we consider the credit risks for both your banking and also the life insurance operations? And how should we expect your -- or have you had done any adjustment in terms of the investment and also the lending risk management needed?

So about -- you just mentioned about the income, about the valuation of our property. Actually, it's because this year, we have completion of our A25 building, which coupled is about more than TWD 2 billion increase in valuation. It's because of the building complication. And also, we have some -- just increasing rent. Rental is due to the low vacancy rate, so which led to -- also led to our -- some increase in automatic real estate valuation. So it's both -- from both combined together.

Interest rate hike has been this situation, especially in this year, especially on the U.S. dollar. But you can see the Taiwanese companies, they tend to lean on the local currency to avoid such kind of high cost -- interest cost. But for those foreign companies of the borrowers, I think they will adjust their balance sheet in various currency. But at least for this year, we don't see there's a credit cost hike because of the interest rate cost increase. So if you say for next year, if the interest rate hike will go down, and this affects directly to this kind of credit risk, we don't -- I don't think there's a significant relationship.

We have done a stress test based on this higher interest rate internally. So the -- we have been watching the portfolio quite closely. And based on the condition of thinking book at the moment, we do not foresee in the near future, i.e., maybe 6 months, we don't see a deterioration in terms of our overall asset qualities.

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

Two questions here. One is on your new business value creation. I was just curious, what is your expectation? I think in the Chinese session, you mentioned about -- you gave some comments on NBV and FYP. I was just curious, would you say most of the NBV increase is coming from margin or it's a pretty good mix of volume and margin? I'm asking that because I think in the first 9 months of this year, clearly, from an FYP standpoint, your margin expanded quite nicely. But then, on the FYPE standpoint, I think there's some deterioration. Now, I know this is probably from math, but I just want to get a sort of overview in terms of your margin expectation. It sounds like from the product that you're selling, say, more participating or some more protection, it should be trending up. I just want to verify that at least for the next couple of quarters. And then secondly, on the investment side, my main question would be -- I think you made some comments about you've exited some Taiwanese equities to control risk. And at the same time, you probably loaded up some more foreign bonds. Could you sort of explain to us in what kind of foreign bonds you have been more sort of constructive about? And where those sort of did you put -- hedged on those funds or you're willing to take some unhedged position? And if you can give some guidance in the coming months or quarters on the same investment class, that would be great.

Thank you for your question. For 2024 outlook, actually, in our Chinese session, we mentioned about that we -- actually, we will continue our momentum this year. So FYP will grow at double digit. And as for the margin, actually, we're hoping that we -- our product mix will improve this year based on our trend now. But actually, we -- in this year, we already improved a lot of the FYPE and regular premium selling, so we are hoping that product mix will improve next year. And so in that way, actually, the margin will improve at the same time. And the second question is about your mentioning that VNB divided by FYP, the ratio, it's because that when you sell in the more single premiums, actually, the VNB divided by FYP will improve. This is because when you calculate the FYPE for the single premium, especially were much flat by 0.1% -- 0.1. So it was making it -- it will much rise by 10x. So in third quarter, actually, we reduced our selling in single premium. So that's why you see that our VNB is divided by FYP. It seems like it deteriorated a little bit. But it's not -- it's just because our -- we are shifting to a regular premium product. And third question is about VNB margin. I think that for product-wise, in this quarter, we are selling more -- compared to last quarter, we're selling more -- some more saving-oriented products. So that's why you see a little bit deteriorating in margin. Yes. Thank you.

And also about our bond investment. We're pretty sure that, say, if for the NTD-dominated policy, then actually, we just buy NTD-dominated ETF to set for -- just regular or just see a hedge cost. And for the U.S. policy, it's because the IFRS risk is taken -- have been taken by our policyholder. That means, actually, for the policy, U.S. dollar policy will not need to hedge. And in later case, we just buy some -- just trade foreign bonds into this position. Yes, that's my answer.

Okay. Can I have a follow-up on that one?

Sure.

Yes, yes. So the reason why I asked this is because it seems like -- of course, from Slide 19, there's a good illustration in terms of before hedge and after hedge, right? Now, based on your last comment in terms of, say -- well, I'm buying -- I'm using the NT dollar-denominated international bond ETF for my Taiwan dollar liability, so that means...

Definitely. Yes.

Yes, right, right. So you can save a lot of hedging costs there. And then, for -- yes, for foreign policies, obviously, you match it with foreign bonds, so that's fine. So I'm curious, but the implied sort of hedging cost, right, versus last year has widened quite a bit. So that tells me that in that process you're still being hurt by some of the higher hedging costs. Of course, you have other FX gains that you can collect in the past few quarters. So I guess I'm just trying to take a step back and see what is the outlook for next year. I think you also mentioned you don't expect too high of an overall hedging cost situation next year, right? Is it around 50 to 100 basis points or something like that?

No, no, I'm talking about the range, actually, at least year forecast, not for next year. And also...

Not for next year. Okay.

Yes. And also the reason you just -- for your question, I would say it because -- think about maybe we pay a lot on our CS hedge costs, maybe, say, okay, see from the year-to-date maybe we pay total about 100 basis points as a whole. But, however, because the new Taiwan dollar depreciated against the U.S. dollar, maybe just tilted, they still have 5% or 4%, that make us have a huge FX gain on this negative position. And also, as you can see on our Page 19, that we have a negative position of -- against the U.S. dollar of about 22% until the third quarter. That means it makes our -- as a whole, our average total expenditure is -- actually it's not that -- maybe we make a total fee -- sorry, as a whole, we just only paid 20 -- just 12 basis points to bank as a whole for this year as of our total expenditures. Then -- so actually -- but looking forward, I would say that because NT dollar right now is currently stronger than in recent -- past couple of days. So our hedge strategy also will adjust accordingly that we also have already closed some just NT -- sorry, U.S. native position and also use the NDF and costs there are to hedge the current stage.

Right. And would you say that -- I think in the last few months, most of the fixed income strategy was you go for the shorter end, try to stay away from the longer end to capture the very attractive 5% or 4%, 5% short-term rate. Of course, for life insurance, you probably don't too much for short term. But I'm just curious, is that -- does that still make sense? And is it just U.S. Treasury or you're willing to take a bit more credit risk in that respect? Yes.

I think we'll adjust our hedging positions according to our views to the markets. We are currently of the view that the NT dollar will probably on the short term is on the stronger side, then we will adjust, maybe we'll increase our hedging position a little bit. But, number one, the hedging cost, I mean, we will continue to maintain at current level for probably -- we don't know, probably another 6 months. But as to the ForEx gain, based on our hedge position, we will adjust according to market condition, and that's hard to predict.

Right, right. But within the U.S., like would you say it's still the U.S. Treasury or you...

No, we are primarily investing in the corporate or financial institution's bonds of investment grade.

Yes, that's interesting because from your Slide 17, on a quarter-on-quarter basis, it seems like there's a bit more in the European allocation, and then, the North American one sort of shrank a little bit. I don't know if it's like market movement or something like that. Yes.

Yes. But we will adjust that the -- according to market conditions, the -- but our primary investments are in the U.S. markets and for the U.S. corporate and the U.S. financial institution. We may adjust -- I mean, a little bit quarter-by-quarter, but it's not much anyway.

[Operator Instructions]

Are we having more additional questions from the guests?

Maybe let me ask one more time. [Operator Instructions]. Okay. Then there appears to be no further questions at this point. We thank you very much for all your questions. That will be the end of the Q&A session. And then now I hand the call back to the President, Harn. Thank you.

Okay. Thank you very much for your participation. If you have any further questions, you're most welcome to connect our IR people. We will provide as much information as we could. Thank you very much for your participation today. Thank you.