KGI Financial Holding Co. (2883) Q3 FY2025 Earnings Call Transcript & Summary

Investors, media, representatives, I am Jenny Huang, the CFO of KGI Financial. Thank you all for taking time to attend our Q3 investors' call. Today, there are 2 parts. First, the IR Head Mandy Chao will give us a briefing on the performances. Second, it's the Q&A session. The finance, actuary and investment team from our subsidiaries will answer your questions. Next, I would like to pass the floor to IR, Mandy.

Next, I would like to talk about the key performance of the first 3 quarters. Page 9. The net income in the first 3 quarters was TWD 19 billion, with EPS at TWD 1.09. The difference is mainly due to FX loss incurred by KGI Life. By the end of September, the total asset is around TWD 4 trillion. Next, Page 10. For KGI Life, the first 3 quarters' net income reached TWD 9.26 billion, with Q3 accounting for TWD 8.19 billion, a significant rebound in profit momentum if we exclude one-off FX losses in Q2. The profit this year is actually better than the last. Premium momentum continues to pick up with FYP up 22%. For KGI Bank, the net income reached TWD 5.29 billion, up 20% Y-o-Y. Wealth management fee income increased by 25% Y-o-Y. The overall deposit structure has continued to optimize with CASA ratio rising to 43%. In terms of business development by the end of October, KGIB has opened a branch in Kaohsiung's Asia New Bay Area, and has signed an MOU with Tether, a world's leading stablecoin issuer to jointly promote transborder finance and virtual asset application. Page 11 for KGIS, net income of TWD 8.16 billion remains the same Y-o-Y with an ROE of 16.9% higher than industry average. Driven by market momentum in Q3, the net revenue in Q3 jumped by 70% compared to the prior 2-quarter average. And for Wealth Management, the revenue continues to grow up 9% Y-o-Y. For CDIB, the net profit in the first 3 quarters is TWD 520 million. CDIB is gradually transforming into an asset management business model with its AUM continuing to grow, management fee income increased by 13% Y-o-Y. Next, capital adequacy, Page 12. KGIF maintained a stable double leverage ratio at 119% And for subsidiaries, KGIL, KGIS, KGIB all maintain an adequacy ratio. Page 15 for KGI Life. First, premium income. The FYP in the first 3 quarter grew 22% Y-o-Y. And as you can see on the upper right. The single pay, regular pay ILP all grew Y-o-Y. And lower left for different channels, premium income all increased and the contribution are also growing steadily. Page 16. As you can see for our VNB in the first 3 quarters reached TWD 13.5 billion with VNB margin standing at 25.6% compared to the same period last year because the base period was relatively high due to the impact of sales suspension caused by changes in health insurance regulation. KGI Life overall will continue to focus on protection type and high CSM products to optimize product mix and improve overall profit margin. And for our spread by September, COL was 3.12% and the investment return is 2.94%, mainly affected by FX losses this year. Page 17. for our portfolio by September, we remain prudent. And in Q3, we capitalized market opportunities to generate profits. We continue to focus on ALM and lower currency mismatch. Therefore, we increased domestic investments in Q3 and the returns of each asset are stated here for your reference. Page 18, we see our pre-hedging recurring yield for the first 3 quarters, which was 3.76%, slightly dropped Y-o-Y, mainly due to FX factors. And the hedging cost for the first 3 quarter is 2.53%. It has improved from the first half of the year. And by the end of September, our FX reserve balance is around TWD 30 billion, and our hedging structure is also stable. Turning to KGI Bank. Please turn to Page 21 for profitability. The net revenue for the first 3 quarters amounted to TWD 13.46 billion increased by 10% year-on-year, mainly due to 41% growth from loan and 16% growth from net fee income. On the upper right, you can see fee income coming from wealth management grew by 0.5% year-on-year, among which contributions from funds and insurance grew by about 40% year-on-year. On the lower left, you can see the spread and NIM. The spread for the first 3 quarters was 1.94%, which is lower than last year due to KGI Bank's growth in loans, especially large corporation loans and mortgage, and that has reduced the spread. For NIM, NIM grew by 1.36% in the first 3 quarters, and that is higher -- 6 bps higher than the same period last year due to a narrow negative spread and optimized deposit mix. And also, you can see here, we have maintained good asset quality. NPL by September was 0.19%. If we exclude single case, then the number will be 0.12%. Page 22 loans and deposits by the end of September. Total loans increased by 13% year-on-year with 2-digit growth for both corporate and retail loans. Total deposit grew by 5% year-on-year due to TWD deposit. And turning to deposit mix at the end of September, CASA ratio reached 43%, and that is an opportunity for us to optimize our fund cost. Please turn to Page 25 for KGI Securities. In the first 3 quarters, the revenue remained broadly in line with last year due to transactions declining in the first half. So the commission in the first half was not very good. However, with an active market in the third quarter, the average daily volume turned to TWD 540 billion, benefiting every business line. And the third quarter alone is 70% higher than the number of last year. And also, you can see here the wealth management. In addition to securities, we provide diverse products for customers, and we can see a double-digit growth every year. By the end of September, the AUM amounted to TWD 32.8 billion, growing by 16% year-on-year. And revenue from this pipeline amounted to TWD 2.35 billion in the first 3 quarters, growing by 9% year-on-year. Page 26 profitability and business achievements in the first 3 quarters, net income and ROE amounted to TWD 8.16 billion and 16.9%, respectively, for the first 3 quarters. And due to the recovery of Hong Kong subsidiary, overseas business has contributed 14.5% to the total profitability and the profit -- overseas profit grew by 9% year-on-year. And on your right, you can see the market share. In terms of the market share of brokerage and equity underwriting, KGI was ranked #2 in the market. Please turn to Page 29 for KGI SITE. By the end of this September, the total AUM was -- had exceeded TWD 300 billion, ranked #8 in the industry. Page 30, you can also see here in the third quarter, the ETF AUM as well as beneficiary unit achieved high single-digit growth better than the industry. And in the third quarter, we took the lead to launch 2 balance ETFs to balance equity and debt and offering more options for our customers. Please turn to Page 34 for CDIB. Let's look at the asset management. In the first 3 quarters, new fund raised amounted to TWD 7.4 billion and AUM continues to grow to TWD 59.7 billion, and that was a 15% growth year-on-year. And upfront fee income amounted to TWD 530 million year-on-year in the first 3 quarters. And for Principal Investment, please turn to Page 35 and the number remained around TWD 35 billion, and we also continue to invest in private credit. In the first 3 quarters, the interest income amounting to TWD 250 million. And that ends the presentation, and I'll pass the floor back to CFO.

Thank you, Mandy. There are some additional information that I would like to share. For KGI Life, our premium income showed growth this year. And as you can see, whether it's internal or external channel, we see growth momentum picking up. And for the adopting of IFRS 17, we will continue to optimize our product mix focused on USD policies to lower currency mismatch and also protection type product to accumulate CSM and also ILP. ILP has a lower capital consumption. These 3 are our core products. And after adopting IFRS 17, the opening CSM has reached above TWD 200 billion. And each year, our target is to increase TWD 30 billion to TWD 35 billion. So the predictability of product profitability will increase in the future. And for hedging, our FX balance has continued to grow. By the end of September, it has reached nearly TWD 30 billion. If we look at the current exchange rate and also the mandatory deposit by the end of the year, it is expected that the balance will go to nearly TWD 45 billion by the end of the year. So we will have greater resilience to FX fluctuation. For KGI Bank, the wealth management businesses' fee income increased by 25% in the first 3 or 9 months, and we have maintained a high growth rate of more than 20% for 3 years in a row, demonstrating our commitment to the business. For optimized deposit mix, both Taiwan dollars and foreign currency demand deposits saw double-digit growth. And thanks to the KGI -- ONE KGI strategy and the collaboration with KGI Securities, the account opening from KGI Securities increased 100% and the settlement balance increased by 35%, driving the CASA ratio up to 43% to optimize our fund cost. For KGI Securities, our profitability mix 70% to 80% of KGI's incomes from scale up business, including brokerage commissions and interest as the second largest securities firm within an active equity market, the revenue is expected to grow. Our capital utilization is very efficient. Our ROE is the highest among the major security firms, and we are one of the few companies with scale, with remarkable overseas deployment and the wealth management business increased by 9% in this area. For our performance in the first 10 months, our profitability increased by 25%. Although our KGI Life was impacted by ForEx, we still have growth coming from securities and bank. And KGI Bank's revenue achieved a record high with a 7% increase year-on-year. And also, these companies are the main sources of our dividend payout. For example, more than 80% of our dividend payout came from securities and bank. And so these companies will lay a solid foundation for KGI Financial's dividend policy. And this is my supplement followed by a Q&A session.

We invite you to your question first, JPMorgan, Jemmy from JPMorgan.

I have a few questions. For KGIB, the third quarter NIM is better than the second quarter. What's the figure for Q3 alone? Because just like what Jenny said, is it because of CASA ratio increasing or there are other factors at play? And the fourth quarter, will it maintain the same level compared to Q3? Second question, OpEx among banks has increased for banks. Is there any one-off incident that you can tell us? And cost/income ratio for the entire year, what's the figure? And what's the level? And for life insurance, there are some guidance provided by industry peers after aligning IFRS 17, the financial figures for potential cost of liability, what's the level at? For KGI Life, can you give us an update on the current -- most current update? [ Motility and loading gain ] release, what's the figure each year? And also the opening figures, are there any guidance? And for another question regarding IFRS 17. Next year, liability reserve will you release to FX reserve in addition to the mandatory contribution by the year-end, are there any additional release to FX reserve? And for pro forma book, what's your take on this? And for currency mismatch, you mentioned to increase stock position in terms of investment to increase stocks to increase domestic investment. But is this sustainable because stocks, the risk coefficient is higher. So can this really reduce currency mismatch because now domestic stock is high single digit. What's the goal midterm and long-term goal? And for hedging, based on the legal cap, what is your cap according to the regulation?

I will ask Chris, the CFO of the bank to answer your question.

Just like what you said, in Q3, the NIM is better than that of the second quarter. In first half, it's 1.33%. Now it's 1.36%. If we look at Q3 alone, it's higher than 1.4%. So every month, we are improving our NIM. The reason like what we said, because of the negative spread improving and also loan structure improving. At the same time, the cost of loan is also decreasing. And we think the Q4, the trend will continue. Second, for OpEx, the OpEx is higher this year compared to last year. It's all related to business, for example, human resource and also tax and administrative cost. Human resource increase reflects the expansion of our team, our FA. So there are no one-off events. But because we continue to expand our business, our expenses will continue to increase. It will remain at around 50%, and it is the same compared to industry peers. Next, let's welcome KGI Life. Regarding IFRS 17, just like what Jenny said, next year, our opening CSM will be higher than TWD 200 billion and the amortized rate will be around 6% to 7%, and this is the main source of profit for us. If we look at the current situation, it will have a positive impact on our net worth. If we look at assets, the COL will be lower than 2.3% next year. For new business trend, it will be reflected in our new business CSM. Just like what Jenny said, every year, our target is TWD 30 billion to TWD 35 billion. Next, regarding currency mismatch, increased stock position. It's not to solve currency mismatch because this year, in the third quarter, we are optimistic about the stock market. Therefore, we are more active. And for capital gain, we also made some efforts. So in line with market expectation, we increased our stock position. For currency mismatch, when our fund comes back to Taiwan, whether it's bond or other public utilities, these are all investment targets to us. And based on the applicable targets, we will allocate our allocation. And for FX reserve cap, it's around TWD 80 billion.

[Operator Instructions] There are no further questions. We have seen [indiscernible] from Economic Daily.

Can you hear me?

Yes, we can hear you.

I have 2 questions. next year, IFRS 17 for CSM accumulation for ICS percentage after the adoption because 150% is the goal. Is that the goal the same? And for next year's dividend payout, can you talk about the strategy? Do you still focus on cash dividend? So these are my 2 questions.

For ICS, let's welcome Rochelle.

For RBC is higher than 300%. So based on the new system, I think it's no problem to maintain 125%. If it's higher than 125% after trial calculation, if we want to accelerate amortization, then we will be able to pay back successfully. So it's -- the possibility is between 125% to 150%. And for dividend, just like what I said, for KGIF, the source is from the upstream from subsidiaries. The bank, the securities are very vital, like I said. And this year, the profit from 2 subsidiary has increased. So after this year, we will discuss formally. But for stock or cash dividend, we will focus mainly on cash dividend.

Next, [indiscernible] is from [indiscernible] Media.

I have 2 questions. First, for CSM from new business, can you give us the figure to September and October? And also previously, you mentioned the goal of CSM is TWD 35 billion to TWD 40 billion. Is the target the same? And if it remains the same, you mentioned next year, the new CSM is around TWD 30 billion to TWD 35 billion. Why is there a decline? And also, Jenny, you mentioned that you will focus on cash dividend in terms of dividend policies. Like this year, over the past few years, there will be some stock dividend. Is that the case?

For CSM, I will pass the floor to Rochelle.

Good afternoon. The CSM each year will be affected by FX. And just like we mentioned, every year, the annual target is TWD 30 billion to TWD 35 billion, and it is in line with our expectation. And for cash dividend, whether it's cash or stock dividend, they are all profit distribution. Well, we consider it both are within our option, but we will mainly focus on cash dividend. Whether there will be stock dividend, these will be considered thoroughly together.

I want to confirm one thing. Rochelle said the new business is in line with expectation. For other peers, if we use TWD 30 billion to TWD 35 billion 2 times 3 quarters, then that's the figure for this year, right? Is my calculation right?

Every year, it will be different because this is the average figure. Just like I said, this is in line with our expectation. Thank you all. I think there are no further questions. So that's all for today. After the call, you can contact our IR and PR team. Thank you all for your participation. Thank you.