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

Investors and media friends, good afternoon. Thank you for participating with the topic on KGI's first quarter investor conference. I'm Jenny Huang, the CFO of KGI Financial. Here, we will talk about the financial overview of the holding company and the subsidiaries and also the 2024 EV of KGIL. The senior management including KGI Life, KGI Bank, KGI Securities and CDIB Capital are here in the call; and the actuary manager, [indiscernible]. And after the presentation, we will have a Q&A session. And we'll promote to you to raise questions through WebEx. And first of all, I will talk about the overview of KGI's blended offering. KGI Financial's net income in the first quarter is TWD 8.7 billion, a 6% growth year on year. And KGIL [indiscernible] growth. KGI Securities and CDIB, we see some losses. And their total equity on the right, due to the [indiscernible] and total expertise, likely drive to [indiscernible]. This page has the subsidiaries. And when it comes to KGI Life, Q1 profit grew 20% compared with last year. In the first quarter, the policy sales momentum was strong and FYP grew more than 70%. In earnings growth, we also see the momentum. Since KGIL adopted a new mechanism of deferred currency reserve, in the month of April, the hedging cost is relatively stable. However, in May, due to the [indiscernible], we see the challenge for KGI Life. As for KGI Bank, the Q1 net income grew 14% year-over-year. In loan and wealth management, we see double-digit growth. Especially the fee income in wealth management, there's more than 30% year-on-year. And in April and May, wealth management [indiscernible]. And in regards of corporate customers, due to the uncertainty of -- and the capital [indiscernible], because they're too conservative in the short term. However, we're also seeing the demand of fund allocation that's happening for the customer that will satisfy the needs of the customers. And on the next page, the KGI Securities. And the first quarter net income decreased 36% year-on-year. The relevant investment income in the same period last year was relatively high. And this year, when the market is more volatile, so it was impacted. However, in wealth management, in terms of the scale and revenue, they're both double-digit growth. For CIDB Capital, we reported a net loss in Q1 due to the volatility in the environment. However, CDIB still raised more than TWD 1 billion funds. In Q1, we also raised new bonds, and the target, that's TWD 8 billion. On the next page. The capital adequacy ratio of the subsidiaries are all adequate, and we are more reserved about KGI Life, mainly due to the effects of market volatility. KGI Life have been, for net worth development, are both higher than the regulatory rates. Now with that brief introduction, let's now hand over to Mandy Chang from investor management.

First, KGI Life. Please go to Slide 16. You can see premium income. Tier 1 FYP grew by 74% year-on-year with growth momentum coming from single pay and ILP. This is mainly because KGI Life fully understands the demand of different customer group and provides a complete product line, offering more options for policyholder fund allocation. For mid- to long term, our product strategy still focuses on products with high CSM and VNB. If we look at FYP product mix, all products saw growth year-on-year, and this is in line with our product strategy. Next slide, we can see the VNB. Because of the changes in product mix, VNB remains the same and because part of the VNB in Q1 last year came from deferred booking of health insurance. So it was a relatively high base. If we exclude the impact, the contribution in Q1 would be better. VNB margin, due to product mix changes, now it stands at 27.3%. For investment spread, COL is 3.1% and investment return, 3.8%, maintaining a positive spread. Page 18. Investment portfolio remains prudent in Q1 compared to the end of last year, mainly due to the adjustment in domestic stock and increase in foreign deposits in response to market fluctuations. Our overall strategy still focuses on risk management and stability. Next slide, investment performance. Pre-hedging recurring yield, 3.6%, up 15 bps year-on-year. This is also due to FX because USD was stronger in Q1 this year than that of the last. And for hedging cost, this is the figure in Q1 under the new FX reserve system. It includes hedging point cost and the provision of FX reserve. The hedging cost in Q1 is 1.27%. And our hedging structure by the end of March, our reserve balance is TWD 39 billion. Now let's move on to the EBV assumptions. On Page 20, economic assumptions. There are two main factors for the changes in NTD policy. First, because Fed cut rates and the narrowing of Taiwan and U.S. spread will reduce hedging costs. And for the long term, because of aligning with IFRS 17, this will reduce foreign investment and further reduce currencies' mismatch. And for USD policies, there are no significant changes. Next slide, yield assumption. This is for your reference. In 2024, the overall equivalent yield is 4.24%, the same as last year. And for NTD policies, the figure is 3.92%, and for USD policy, it's 4.92%. Page 22, our year-on-year comparison. First, adjusted net worth increased by 36.6%. This is reflecting the increase of net income and asset valuation. The overall EV increased 11% year-on-year. And for changes, it will be explained in the following pages. Next, adjusted net worth. From the shareholders' equity, due to the increase of FX reserve reaching TWD 30 billion, the adjusted net worth reached TWD 231.5 billion. Page 24, value of in-force. The two bigger changes, first, change of investment yield assumption. This reflects the impact of investment yield shift. Second, change of other assumptions reflect large amount of policies surrendered last year and also the onetime release of reserve to the adjusted net worth due to the application of the new FX reserve system. Page 25, VNB. The two figure changes, first, sales growth led to an increase of TWD 2.1 billion. And because of market demand for single-pay policies, changes in product mix led to a decrease of 1.2%. But overall, it still increased annually. Next, sensitivity analysis. It is presented here for your reference. Next, KGI Bank. Please look at Page 29. Net income in first quarter is TWD 4.47 billion, a 37% growth year-on-year. This is mainly driven by the loan and increase in fees. The overall net income [indiscernible] with wealth management grew by TWD 0.7 billion. Left side, you can see the deposit loan spread in the first quarter were 1.95% and 1.31%. It actually slightly dropped year-on-year, mainly due to the asset growth strategies. We see strong growth in loans and especially in the larger corporation and mortgage, rising spread in the [ income ]. On the right side, the asset quality remains stable. By the end of last year, the consumer loan, that was the year's [ developed ] ratio and NPL coverage ratio have risen to the previous level. The overall NPL loan ratio in Q1 was 0.19. If we exclude the single pay, then NPL ratio was 0.11. In the next pages, provided are the trends. And the total was the individual and corporate loans. We saw double-digit growth. On the right side, the deposit grew by 14% due to the growth in the NTD deposit. Next is KGI Securities. Please look at Page 33. And as we mentioned, in the first quarter, due to the volatile market and the transaction volume was low, the net income decreased year-on-year, including fee income, coverage and wealth income. Meanwhile, KGIS' [indiscernible] and therefore, we, in response to market demand, [indiscernible]. The AUM of wealth management grew by 31% year on year. On the right hand side, the revenue also grew by [ 50% ]. Next page. This is the overseas contribution. Benefiting from significant increase in both costs as well as volume, Q1, [ the ROIC is TWD 5 billion ]. The Q1 overseas profit grew about [ 10% ] and contributed 18.5% post-tax net profit of [ beta ] securities. In terms of profitability, in Q1, net profit was TWD 1.8 billion. And that is through the industry average, and then we take the market leading position. Next is KGI Site. Please refer to Page 37. As of first quarter, KGI Site's public fund AUM is at TWD 316.2 billion, ranking 7th in the industry. On the next page, a more detailed breakdown. In the ETF AUM, in Q1, KGI Site recorded a 7.34% growth, which is surpassing the industry average growth of 2.87%. And the number of beneficiary also is approaching 300,000, and our target is to reach 400,000 by 2025. KGI Site plans to launch Taiwan's first equity bond balance multi-asset ETF by the end of July, and this is also to meet the market's need. And this will be a 70-30 equity-to-fund asset allocation, allowing investors to long-term growth. And last but not least, the CDIB on Page 42 (sic) [ Page 36 ]. Q1, we have a new asset management business established and 3 existing business continue to raise fund. The total AUM is at TWD 59.5 billion. Although the fundraise increased by TWD 1 billion in Q1, but the overall asset management scale appear to be stable compared to the end of last year due to investment recovery change and changes in valuations. And Q1 principal investments grew 2% as this is due to the new investment program and changes to CDIB's valuations. And on the performance, the asset management fee income is TWD 180 million, representing a 33% increase. And this shows our fundraising results in markets since [ 2020 ]. Overall stability of ROI is superior to the MSCI World Index. This reflects CDIB's strategic focus on pursuing stakeholder investment return. And for private credit, the business scale continues to expand. It also consistently contributes stable interest income at CDIB. And these above are the business performance of our subsidiaries. Now we're entering our Q&A sector. We'll first invite the corporate investor to raise questions. Remember to click the raise your hand before you raise your question and also unmute yourself before you speak.

First is Jemmy from JPMorgan.

My question, firstly for the bank. The NIM quarter-on-quarter, it seems there to be a decrease. So what is the driver for your NIM growth? And in the following quarters, what would be your expectations for NIM? Is it going to be stable despite that Fed might lower the rates? And question for Life. If we look at the hedging mix, your position is actually quite high. So what is your April and May strategy in terms of the adjustments hedge? If there wasn't any, what is your FX reserve now? Do you still have any open position in your FX reserve? If you still have balance and then this is running out, what will be your corresponding measure to address that? And also, you are going to launch the participating policy in the near round. So what would it -- what impact will it bring to the interest-sensitive products? And how would this participating policy contribute to your PSM and ICS if you compare them with interest-sensitive products? And two more questions on fee. We talked about the EV equivalent investment returns year-over-year is flat. Your figure in 2023 was 4.24%, and what will be the likely expectation in 2024? And can you also provide us figures? And if I did not get it wrong, in Page 24, your assumption on actuary changes, you said there was the impact for the new FX mechanism. Does it mean that you require moving to the new FX system and there will be a decrease on the original position? So can you share with us what is the exact change on the actuarial changes and how will it impact your FX reserve?

Okay. We will invite CFO from KGIB to answer your question related to the bank.

Jemmy, the first question is about NIM of KGIB. Our full year NIM is 1.3%, and in Q1 this year, it's also about the same. And for the next quarters or even a whole year, we'd like to maintain at the current level or growth. And the main driver of the NIM is cost of capital as we're launching the One KGI strategy. And the possibility of lower interest rate by Fed, we will see the cost of the fund forecast it drives for NIM. So last years, we stalled the loan growth. In the next quarters, we'll work to adjust the constitution of loans and adjust the loan mix and try to improve the spread and also make the use of funds more efficiently. So under the two strategies, overall, we expect the spreads and NIM to maintain at the same level that was last year's or even slightly improve it.

I'm from KGI Life. Regarding hedging strategy, indeed, our hedging ratio is low because NTD was stable. However, now it has fluctuated a lot. Recently, we had increased our hedging ratio to around 55% to 60%. Our strategy moving forward, we know that NDF is very expensive now. So considering the trend, we will use traditional hedging together with the proxy hedge. This will be the tools that we use for hedging. Regarding EV assumption, last year, the equivalent rate 4.24%. After 1 year, it's 4.34%. And now it goes back to 4.24%. For VNB equivalent yield, it's around 4.6% to 4.7%. And for actuary assumption, 40% of it, because of the new FX reserve system; and others are due to other assumptions like lapse rate and also the changes in policies' assumed rates. And for CSM and ICS for participating policies, for interest-sensitive products under ICS, there is a system that can offset risk. So the impact will be offset accordingly.

Next, we'll invite [ Tina ] from [ Capital Investing ].

I want to follow up on the KGI Life's hedging strategy. Can you provide us with your FX sensitivity analysis? For example, a 1% appreciation of NTD, how would it affect your FX reserve? And also what is your FX reserve balance at the end of April? And what is your assumption of the maximum appreciation amount of NTD to totally offset your FX reserve? And are you going to increase more your reserve? And next questions are about KGI Bank. You talked about due the tariff uncertainty, you will have more conservative loan strategy. What will be our guidance for loan growth? Would it still be about 10%? And again back to Life. Your unrealized losses appear to be expanding. So what is the mix between your equity at bond in terms of unrealized losses? And what is your unrealized gain or loss on REIT?

I'm KGI Life's CFO. For the FX reserve sensitivity, our overall exposure -- for the overall exposure, if we do calculation, for every 0.1% of appreciation, it will affect TWD 1.7 billion because for FX, we need to factor the unrealized gain of hedging tools and also proxy hedge. So because of the tools, it will -- the actual amount will be less than TWD 1.7 billion. Our initial breakeven is around TWD 3 billion. Our loss is not TWD 0.1 x TWD 1.7 billion. We also need to look at investment gains and our gains in our business. We need to factor in all of these to have a more comprehensive understanding. For unrealized loss, there are two parts. Since this year, we have realized some equity gains so it is affected, and also due to market fluctuation. But now stock has rallied so the figure has gone down. And for bonds, over 90% are [indiscernible] so the impact is not as big.

To answer your question a little bit on guidance. On Page 30 of Power Point, that is the year-on-year growth, Q1 this year versus Q1 last year. You can look at the year-to-month growth. Our loan growth are 5%. The corporate and mortgage loan growth, above 5%. The loan outlook for this year, we see more uncertainty, and the volatility in the market events for the corporate. However, the first quarter, we see an outstanding number. We expect this year that we can maintain about 10% in this year without the point to sell down the number. But I'd like to emphasize. Our strategy is not only to grow the scale as well, but to increase the loan spread and the fee income growth. This is the focus of our strategy.

If you have questions, please click the raise your hand button. We'll invite [ CNA's ] correspondent.

Again to KGI Life, your FX reserve balance is TWD 21.2 billion. Is that correct? And your product mix comparing to last quarter, in your real estate position, we have seen some losses. And what is the reason? And my second question is to KGIS. As the second in the market share in your DCM and ECM, what is the cause? And are there any challenges imposed on you on your primary markets? And also, we've learned that there is a tight circulation circle where you have discussed with the [ SCF ]. Are there any progress as of now?

I will answer regarding KGI Life. Our assets reserve is TWD 21.2 billion, that's correct. And for real estate, the figure went down is because in Q1, we did revaluations. Therefore, there are some decrease, as you can see here.

I'm from KGI Securities. About the underwriting [indiscernible]. Thank you for question. [indiscernible] we maintained #1 or #2 this of year's Q1 ranking. This may be due to financial statements' submission time lapse. We're now left behind. But our internal target is to maintain the top ranking, top 1, the top 2 for our market. So we are being careful. The relevant fund, we're still doing planning and fundraising detail and structure. If we have further information, we will share with you.

Next, we'll invite another correspondent, [ Mr. Chen ].

I have several questions for KGI Life. The first, on your Slide 19, the hedging ratio of 42% here, is it representing the proxy and open -- the sum of proxy and open? And here, are you showing the ones that you're using the cover -- overlay method, that it doesn't affect the eventual number? And if that's the right assumption, so what is the figure for proxy? What is the positive amount for proxy as of March? And second question, the CFO of KGI Life mentioned that if there is the TWD 0.25 decrease, how would it impact your pretax income? If we exclude hedging costs, we look at the hedge position and their FX gain or loss and also look at the FX reserve as well as the contractual gains or loss, if we use that assumption, if there's a 1% appreciation in the NTD, how would it consume your FX reserve balance? And the April, your FX, you talked about the changes in your assumption and there would be an impact of TWD 20.2 billion coming from the surrender of rates and also your adoption of the mechanism. So among this TWD 20.2 billion, what is the ratio of this?

Regarding Page 19, hedging structure. 42%, in addition to USD, we also have other currency assets, for example, Australian dollar. It's not just unhedged USD position and proxy. And for 9% overseas equity, it's our equity product. After the transition, we need to reclassify. We take out overlay. I can put it in OCI or PBL. So that's that part. And at the end of last year and the first quarter, the proxy position, considering the effectiveness, at the end of last year and the end of Q1, the position is very small. So the position is not big. Next, regarding the FX fluctuation impact on our gain and loss. It's difficult to give you a specific number because for valuation, it fluctuates a lot. For NDF, it can go up to as high as 40% and as low as 7%. And because we increased our proxy hedge position, and so different currencies' fluctuation will have an impact. These two factors are the things that we pay attention daily, and it's very difficult to give you an exact number on how big the impact will be. And Page 24, TWD 20.2 billion, 40% of it come to the new FX reserve system and the rest comes from surrender.

Thank you, dear investors and friends from media. We are not receiving any new questions. And that marks the end of our Q1 investor call. Thank you for participating. [Statements in English on this transcript were spoken by an interpreter present on the live call.]