KGI Financial Holding Co., Ltd. (2883) Earnings Call Transcript & Summary

Good afternoon. I'm the speaker at the moment from CDF [indiscernible]. Welcome all of you to joining CDF's 2023 Q3 Investor Conference Call. And today's agenda will have 4 parts. First of all, we will invite our CEO at CDF, Steve, to talk about the overall performance review of CDF and so the strategy uptake of ABCDE strategies. Next, our CFO, Jenny Huang, will explain the financial overview. Then, for each subsidiary, we will invite Mandy Chao to cover the performance upgrade, and next session will be QA. Before I invite Steve, you can use the interpretation function in Webex. Steve, the stage is yours.

[Foreign Language] So I want to give you a brief update of our financial performance for the first 9 months of 2023. Our net income was TWD 17.5 billion, earnings per share of TWD 1.05. We continue to drive innovation and transformation as a sole recipient of the IDC Digital Infrastructure Award in Taiwan, and we're also selected to the FTSE4Good Emerging Index for the seventh consecutive year. In terms of China Life, 9-month net income was TWD 11.3 billion. We continue to remain focused on high-value products and increase the market share of regular-paid policies. VNB margin also continued to go up 35.3% versus 29.3% at the same period last year. And we managed to also increase our pre-hedging recurring yield by 10 basis points up to 3.85% as of the end of September. For KGI Bank, 9-month net income of TWD 4.2 billion and annualized ROE of 8.9%. We continue to grow our SME and personal loan business, which grew 16% and 24%, respectively. And our consumer finance business is up 252% year-on-year with a profit of RMB 305 million in 2023 so far this year. Also, our customer wealth management fee income grew 30% compared to the same period last year, and our AUM is now in excess of TWD 500 billion. CDIB Capital 9-month net income was TWD 1.4 billion, with an annualized ROE of 6.5%. The Board approved new investments in both InnoLux Fund II and our data center project fund, which is expected to yield TWD 6.4 billion in fee-paying AUM next year. We also pledged up to TWD 3 million in a matching fund in the NDC's Regional Revitalization Initiative as a partnership to support micro and small businesses to energize local economies. KGI Securities delivered a very strong set of results with net income of TWD 5.4 billion, a 101% increase on last year. And overseas contribution was also up 172%, with a 13% ROE, which is above the industry average. [indiscernible] and also increased our brokerage market share from 10.4% to 11.4%. Customer AUM also continues to grow strongly, up 25% year-on-year, up to TWD 413 billion as of September. Also, as of late November, ROCI valuations remain at a comfortable level, which should enable us to pay dividend in 2024, subject to AGM and Board of Directors' approval. And we now turn to the next page, a quick update on our overall strategy. We continue to accelerate our digital efforts and have expanded our partnerships and alliances to build ecosystems. We're also beginning to include AI to our leading innovation part of the strategy. Our employee engagement continues to improve. Results for this survey this year were 73, which were up on 68 the year before, 61 two years ago and 53 three years ago. Anything above 70 is outstanding. Through customer focus, we've continued to drive NPS. We recently received overall results based on third-party, double-blind studies, which we are #1 overall, and also tied for #1 in digital. We continue to reposition our brand and remain committed to your prosperity. And you'll hear shortly a quick update on where we are with the China Life rename to KGI Life. We remain focused on driving growth, and our AUM is now TWD 4.3 billion for the group, on target towards our goal of TWD 5 billion by 2025. We continue to focus on transforming our IT infrastructure and a lot of work continues on building open AIs and shifting more of our applications to the cloud. And as you saw a few moments ago, we continue to maintain very strong ESG leadership. And if you go to the next page, I'll only touch on a few examples of what's been occurring in our businesses. China Life has launched over 100 new functions in our customer app, and the percentage of self-service ratio has increased from 9% to 17%. We will complete the rebrand of China Life to KGI Life in January 1 of this year, and there will be a press conference in December to announce this in more detail. We remain focused on driving foreign currencies, and our market share is now #1, with FYP reaching TWD 21.2 billion. And we remain ranked #2 in protection-type products, with FYP reaching TWD 15 billion, a 30% year-on-year growth. For KGI Bank, we continue to expand our alliance networks to now 11 partners. We launched KGIB/KGIS consolidated onboarding process, which, by automating over half the information, continues to optimize the customer experience. The number of mobile app logins also continues to increase, up 20%, and now, 87% of all our transactions are digital. And in terms of industry-leading deposit collaboration with nonprofit organizations, we reached TWD 600 million during the first 9 months of this year. For CDIB Capital, we continue to explore new asset management products, for example, fund of funds and our corporate ventures. We also kicked off a Beneficiary Note program with a target size of USD 33 billion, which is off to a very strong start. And our green asset investments reached TWD 2.8 billion, up 7.4% on last year. KGI Securities also continues to increase their share of straight-through processing transactions up to 50%, compared to 23% at the end of last year. We strengthened our TCF and launched toll-free hotlines for elderly customers. We've now trained over 1,000 China Life agents who have passed the Securities Specialist License exam. And we launched a new financial podcast, which was ranked top 15 for business programs during the first week. I'll now turn it over to Jenny to give you an update on our financials.

Thank you, Steve. [Foreign Language]. [Interpreted] Thank you, investors, now I will cover the 9 months 2023 performance. Please go to Slide 13. Our 9-month net income is TWD 17.51 billion. KGIS profits had doubled compared last year. And China Life, due to hedging costs, they have seen some decline in their profitability. In terms of the consolidated net income, we have climbed up to 5% to TWD 3.7 trillion, and our net worth has also grown from TWD 209 billion to TWD 235 billion of this year. Next page. The first 3 months net income is TWD 4.2 billion, down 11% comparing to last year. This is because of the negative carry from the bond position. However, since we expect the rates will begin to ease and we believe our negative carry situation will be eased. On the upper right chart, CDIB's 9-month profit, due to the recovery of valuation, and we have picked up our loss and then gained TWD 1.4 billion by the first 9 months. And KGIS net income is TWD 5.4 billion, which has doubled from the previous year. For KGIS, in terms of traditional brokerage, wealth management business, and other business have seen great increase comparing to the last year. And this is the capitalization of our subsidiaries. If we look at CDF, our double leverage ratio has dropped from 128% to -- last year to 124% this year. For the first 3 quarters, performance and the recovery in our OCI, they have both benefited in our capitalization in the holdings, and we believe we can maintain our double leverage ratio at regulatory centers. And you can also see the 3 subsidiaries' capital adequacy, they are all on a very sound basis. And now, I'll hand over to Mandy to talk about the subsidiaries details. Thank you.

[Interpreted] Page 17, China Life. As you can see in the slide, for the premium income, the FYP in the first 9 months, the decline is because of rapid rate hikes. And China Life continues to focus on fixed-pay products, including foreign currency products. As you can see on the upper right, the product mix, traditional regular pay have increased 36% Y-o-Y, accounting for 53% of the FYP. To strengthen the matching of asset and liability, China Life also focuses on the south of USD policies. And in the first 9 months, the market share of USD policy rated #1 in the industry, making up more than 50% of FYP. And for distribution channels, China Life maintains a balanced approach and continues to increase the FYP contribution from its own channel, now at 29%. And also focused on regular pay product and [ A&H ]. And if you look at FYPE, although FYP declined, FYPE is roughly the same compared to last year. And regular pay takes up nearly 90%. Page 18 for VNB, value of new business, due to weaker premium momentum, VNB dropped around 9% Y-o-Y. However, because we focus on high-value products, as you can see on the slide, VNB margin reached 35.3%, which is much higher compared to last year. And for spread, due to the increase in hedging costs, the investment return is 3.57% and COL is at 3.02%, maintaining a positive spread. And Page 19, our portfolio, we value ALM and focus on long-term and stable income. With fixed income as the main allocation, China Life sees investment opportunity amid rate hike. The asset allocation remains the same compared to last year. Part of the way changes from the changes in investment valuation. And the investment returns of each asset are as listed, and the figures for our investment are pre-hedged figures. Next, Slide 20. Our recurring yield, due to the increase in return from new money, the recurring yield in the first 3 quarters increased 10 bps Y-o-Y. And hedging cost, the percentage is 1.27%, which is much better than the first half of the year. And for the hedging structure, the hedging ratio is around 65%. It has been lower slightly. And for our FX reserve, by the end of September, we have reached TWD 16.53 billion, reaching the legal cap. Next, KGI Bank. At least '22, the net revenue due to rate hike, the financial asset-related income increased by 70% Y-o-Y. However, due to rising funding costs, interest income has declined slightly, but the overall net revenue is the same as last year. Fee income grew by 6% Y-o-Y, while management-related fee income grew 30% Y-o-Y. For NIM and spread, due [indiscernible], the spread has reached 2.1%, and NIM was affected by rising funding costs the first 9 months. It has remained at 1.33%. Continue to maintain sound asset quality for NPL, although the ratio went up slightly, but it's due to a single case. And this case has, however, a sufficient guarantee, and now, it has a bunch of disposable assets. If we exclude that, the figure is 0.21%. So we continue to maintain a solid asset quality moving forward. Next slide, as you can see on the slide, the loan mix, which is the same as last year. However, we continue to optimize the mix. As you can see for SME, it grew by any 26%. Consumer loan grew by 17%, among which personal loans increased by 24%. On the other side, for deposit mix, compared to the same period last year, the change in deposit balance was mainly due to the increase in foreign currency and time deposit by 37%. Next, CDIB.

[Interpreted] Please go to Page 25. Here, maybe in terms of asset management business, it closed our first round of Kunshan Taiwan Business bond, and AUM increased to TWD 52.7 billion. In terms of principal investment composition by geography, China and global positions are both increasing, mainly due to fund disbursement and valuation growth. And the overall asset is TWD 33.9 billion. In the next page -- in the top right, the fee income -- the CDIB continues to strengthen the asset management business through stable fee income, and the first 9-month fee income is TWD 420 million. On the top right, return is compared with the MSCI volatility, CDIB's investment position is more stable than the market. On the bottom left -- bottom right, in terms of the PE business, since 2020, this a new business, Private Credit. And this scale has picked up year-on-year, and it also contributes more interest income and fee income. And it contributes to more perceivable profit for the company, and the first 9 months revenue reached TWD 240 million. Next, KGIS. Please go to Page 28. The first 9 months ROAE is 13% and outperforming the industry average. Now, the key strategy including the overseas expansion and wealth management growth. In the overseas, the contribution accounted for 14.4%, compared with 11% last year, a significant growth. In terms of AUM, including wealth management, both take up 22%. On the bottom right, the wealth management-related revenue increased 42% compared with the same period last year. In Page 29, the net revenue in the first 9 months, KGIS first 9-month revenue amounted to TWD 11 billion, increase of 33% compared versus same period last year, and mainly benefiting from the capital market stabilization and successful investment strategies. Interest income also increased 18%. And on the right chart, we can see the reposition of KGIS in the market. And that's the performance overview of the 4 subsidiaries in the first 3 quarters. Next, we're going to move to the Q&A session.

[Interpreted] Thank you for your explanation. Now we move to the Q&A. We will invite institutional investors and analysts to raise questions. Please remember to press the Wave Your Hand button to raise questions. The first question, Jemmy from JPMorgan. Yes, can you speak louder?

[Interpreted] Yes, okay. I have 2 questions. For KGIB, it seems the NIM quarter-on-quarter is flat. It is an adjusted number for NIM. It is in reported NIM. What is the quarter-on-quarter trend? And secondly, for the management, do you expect in the future quarters, the outlook will be flat? And second question, NPL. The NPL price is due to a single case. I don't know if you can share more detail about the case, about the region or the industry of the case. You mentioned you have full regard to rights of the case, so does that mean we don't have any extra provision for the case and we'll rely on the collateral disposal? As for China Life, can you share with us the recurring yield? In this interest backdrop, if we look into the future for the next 12 months, how much there is for further intrinsic hype? Another question is about hedging costs, you already reached the optimal limit of the FX reserve, so I don't know the exact number of the limit. If you really reached the limit, so in Q4, are there any benefits to the recurring yield in Q4? Second question about China Life. The FSC made an announcement about ICS intermediate metrics, the interest risk in RBC and ICS transition, how much percentage in calculation [Technical Difficulty]. And the last question about CDF, your dividend yield, some of your peers mentioned, based on what I understood, this year, whether there is a huge growth over the last 3 quarters [indiscernible], or rather, it depends on the location and the other equity. Last year, if you had any deficiencies, you don't need provision. I believe you're facing the same issue. Based on what you may understand, are you going to follow the same approach as the peers? That means this year, based on the variation under shareholders' equity and reclassification, so far, the distributable reserve is still better than the reported earnings.

Thank you, Jemmy, for your questions for KGIB, China Life, and CDF. For KGIB, we'll invite CFO from KGIB to answer.

[Interpreted] About the main question, now 1.23% is swap included. If we exclude swap, this figure is at 1.13%. There will be a 20 bps difference before and after considering swap. And this NIM spread is actually increasing the swap effect. In the year -- at the beginning of the year, it's about 15 bps. And for the single case that affects our NPL, this is a case of business building in London. Now, we are making the reserve based on the regulation. The current valuation of this real estate, we believe, it will fully cover our exposure in the real estate position. And for China Life, you asked about recurring yields and other questions. And I will hand over to Lauren.

[Interpreted] For hedging costs and recurring yield, for the next 12 months, the increase of recurring yield, if the rate remains high, new money can be benefited. We think it's possible to go up. However, we need to look at the overall position. [Foreign Language] We continue to need bigger funds. So I think it's about 5 to 10 bps, but it depends on the rates moving forward. For hedging cost, we have reached a limit in September. The figure is TWD 16.5 billion. And how -- what benefits will it bring? Because FX fluctuates a lot, and it will affect hedging costs, we will continue to adopt a stable approach. And then I will pass the floor to [ Rochelle ].

Jemmy, based on current calculation, our interest rate risk under RBC and ICS is roughly the same. Starting from last year, Insurance Bureau has a weighted approach. The purpose is to bridge the gap between the 2 themes. Last year and this year, we do not fall in that category. And for the transition, we won't fall into that category as well. So this is my response to that. Now, I will pass the floor to Jenny.

[Interpreted] You asked about the dividend-related issue. Our view is the same as our peers. About the distributable dividend or revenue, meaning that if our OCI and our reclassification mark-to-market does -- do not pose any further unrealized loss, then we will be able to use the revenue of the quarter -- or of the period. But we also need to make a reserve of 10% for capital. And I hope I answered your question.

[Interpreted] I have a follow-up question. Based on what we've seen end of September, end of October on unrealized loss valuation, if we include the shareholders' equity or reclassification, then is the net impact positive or negative?

[Interpreted] Now based on the end of September's figure, we have already had the statement that result is a positive impact.

[Interpreted] Okay. Understood.

[Interpreted] Are there any other questions? And now Peggy from Morgan Stanley.

[Interpreted] Yes, okay. My question is that we see that the double leverage ratio, by the end of September, you maintained at a level of 124%. And is the -- this is still relatively high since the regulatory limit is 125%, would this affect the dividend payout of the next year? And what is your view or your strategy over the high DLR ratio? And how will you -- what will you do to lower that? And also the ADT view on the Taiwanese stock, I would like to hear from the management.

[Interpreted] We will hand over to Jenny to answer the double leverage ratio issue.

[Interpreted] Regarding whether DLR affects the dividend payout, we need to maintain a stable financial status to give dividend. Although the regulation did not say if we exceed management, we cannot pay the dividend. But we still concern our soundness of financial status, figures. And now, the ratio is at 124%. We maintain a close control to the risk and capital under the holdings. So our view for next year is still positive. We are -- we have a level of confidence to maintain at the regulatory threshold of DLR. Peggy, your second question, we...

[Interpreted] I asked about the Taiwanese stock question. Can you elaborate the ADT transaction volume? What is your view?

I'll talk about the market. I mean, obviously, the market has continued to improve. I mean we're seeing inventory levels being replenished. So our view is that the market trend will remain positive, at least during the first part of next year.

[Interpreted] Are there any other questions? Now we'll hand over to Ms. Wang from Bloomberg.

[Interpreted] [Technical Difficulty] and will you be adding more position on that?

[Interpreted] Thank you. I'll hand over to Lauren.

[Interpreted] We talked about this, the portfolio remains the same. The changes comes from valuation. As you can see for foreign investments, this insight appears overrated. However, because of rate changes and TWD depreciation, it seems like we have increased foreign investment. That's not the case. And for the overall portfolio, we only do a minor adjustment. For our bond ETF, the percentage is not very high. It is around 4% to 5%. This is my response. Thank you.

[Interpreted] We will continue to increase position. Our product strategy, as we mentioned, we will focus on USD policies. For USD coming in, we will make for investments. With new funds, we will continue to make [Technical Difficulty] we use for investment.

[Interpreted] For question, Tina from [indiscernible] President Holdings.

Can you hear me?

Yes, the floor is yours.

[Interpreted] I have a few questions. First is to KGIB, you mentioned the FX for new. What is the amount for the first 3 quarters? And what is your outlook for Q4? Will you be turning on the momentum for FX on -- all the way until Q4? And also, I want to ask about the single case in overseas of the real estate, will you be adding more reserve for that? And what is your cost of credit, because your -- whether your cost of credit will be at a low level? And I will also like to know about the loan and the fee strategy of KGIB, because the fee maintains a long strategy to maintain flat and fee is also not increasing. So I would like to know your view for the next year. And the second question goes to China Life. For FYP, VNB, and hedging costs, what will be your guidance for next year? And the third question has to do with venture capital. I know that you are a big shareholder of [indiscernible]. [indiscernible] might go to IPO in the next year? And after IPO, would it bring any more benefits to your holdings? And then what is the valuation of [indiscernible] on your book? That will be all.

[Interpreted] Tina, thank you for your question. For bank's question, we'll hand over to Chris.

[Interpreted] Regarding the first 3 quarters as a swap income, it's considered stable. The 9-month figure is about TWD 1 billion. And we said that in Q4, the momentum will continue, will even be better. But for next year, if we are looking forward, I don't think it's a good timing for us to determine because we still need to rely on the real life and the market situation. And the single case impact to our NPL, our credit cost is still maintained at 3 to 5 bps. So we believe that it wouldn't strike a big impact to our NPL. In terms of loan and fee [indiscernible] flat. The composition or the mix of the loan and fee has [indiscernible]. We have reduced decision coming from large corporation and increased percentage coming from [indiscernible], and they have all seen good momentum. Although the overall fee is [Technical Difficulty], wealth management-related fee increased by 30%. What have come down is the fee income coming from the large corporations. And we believe our growth momentum will continue, and we will be briefing you on the latest in the next year. For China Life, we'll turn over to Rochelle.

[Interpreted] Next year, with less market fluctuation, our VNB ext year will grow by 10% to 20% our target. And for our hedging costs, I will pass the floor to Lauren.

[Interpreted] Next year, because the spread between Taiwan and U.S., if the situation won't be resolved soon, the hedging point costs will remain high at swap in NDF. On the other hand, if we look at TWD exchange rate, it really fluctuates a lot. Next year, we think it is possible to maintain the same level as this year. It really depends on the market condition.

[Interpreted] No questions? We'll open for the question session for the media. Now, we'll invite Susan. Can you speak louder, please?

[Technical Difficulty].

[Interpreted] Thank you, Susan. We'll invite our CFO to answer your question.

[Interpreted] Yes, what you mentioned is correct. And this year, by the end of September, we've mentioned our OCI across the reclassification positions. It is a [Technical Difficulty] bigger. So in this situation, when we consider our dividend policies, we can consider our current earnings, and that's all.

[Interpreted] Any other questions? So Jemmy from JPMorgan, you can ask questions, please.

[Foreign Language].

[Interpreted] Jemmy, you have more questions?

[Interpreted] Yes.

[Interpreted] You can speak out.

[Interpreted] I would like to confirm with Jenny's answer. Can you hear me?

[Interpreted] Yes. Yes, we can hear you.

[Interpreted] Jenny's answer, do you mean now in the other equities we see negative numbers and those numbers will not impact the dividend payout next year? I just want to confirm.

[Interpreted] Yes. Because we only look at the current valuation, you look at the accumulation number.

[Interpreted] Are there other questions? Thank you for your questions. And that's all for today's investment conference. And we received a question. [Foreign Language].

[Interpreted] [Technical Difficulty] 30 billion reserve.

[Interpreted] Yes, according to the regulation, it is a [Technical Difficulty]. Thank you.

[Interpreted] Okay. So no further questions. And that's all for today's investment conference. And later, you can find today's recording in the investment conference area in our website. You can also download the PowerPoint. If you have further questions, you can call or email us. Thank you for joining today, and wish you all well. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]