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Edited Transcript of 2881.TW earnings conference call or presentation 23-Aug-19 8:30am GMT

Q2 2019 Fubon Financial Holding Co Ltd Earnings Call

Taipei Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Fubon Financial Holding Co Ltd earnings conference call or presentation Friday, August 23, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Amanda Wang

Fubon Financial Holding Co., Ltd. - SVP

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Conference Call Participants

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* Edwin Lu;HSBC;Analyst

* S. Huang

JP Morgan Chase & Co, Research Division - Financial Analyst

* Steven Lam

Bloomberg Intelligence - Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to Fubon Financial's First Half 2019 Financial Results. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this time.

Now to hand the call over to your host, Ms. Amanda Wang, IR Officer of Fubon Financial Holdings. You may begin.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [2]

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Thank you. Hello, everyone. Welcome to Fubon Financial's investor conference call today. This is Amanda Wang, the IR Officer of Fubon. And in this call, we've prepared to update you Fubon's first half '19's interim results, and your question will later on be answered by our management team.

So please turn to the presentation slide Page 4. In Fubon Financial Holding, the key highlights for the 4 subsidiaries, as you can see in this page, overall speaking, we see the net profits came down the first half largely due to Fubon Life, while banking and securities continue to deliver earnings growth.

In Taipei Fubon Bank, there are 4 operational highlights. Net interest margin and spread both improved, and that shows in our net interest income increase. Secondly, the fee revenue also grew, mainly driven by wealth management and syndication. In the business development, we see the investments in the virtual banking license of LINE Bank is granted. We see this as a very positive development. And the other thing is the appointment as a domestic systematic important banks. How are we going to respond? We are going to share with you our plans later on in the presentation.

In Fubon Life, the net profits came down in first half, but it's largely due to the underwriting cost increase as the first year premium grew 22%. And in the meantime, the capital gain is lower due to a higher base last year, and also we have the tax benefit one-off effect in first half of '18. In the core earning drivers, the recurring return and also our cost of liability, both still shows improvement.

In Fubon Insurance, we see the overall business momentum continue strong. We are #1 in the market with expansion in our market share, while the combined ratio remain at a very healthy level of 90%.

In Fubon Securities, we achieved the top 3 position in brokerage and the emerging stock trading business, while the ETF continue to be our focus in the Securities side.

In Page 5, the overall net profit reflect the decline, as we mentioned, while the EPS continue to rank top 1 among local peers.

In Page 6, we can see from the right-hand side the earning contribution from our banking subsidiaries: Taipei Fubon Bank, Fubon Bank China and Hong Kong. Together, that accounts for roughly half of the earnings contribution.

And in Page 7, we can see the asset and also the equity both shows sequential improvement and also both reached a historical high.

While in Page 8, the ROA and ROE came down due to earnings volatility we mentioned, while the ROE level remained at a benign status of about 10.9%.

Our next section will update you the performance of Taipei Fubon Bank. In Page 10, we show you the revenue composition. There you can see the growth actually come from all across the line items and delivered a total revenue growth of 9.5%.

In Page 11, the growth driver of net interest income firstly come from the volume growth. The credit growth, overall speaking, is 5.1%, and the corporate loan and retail loan both show a healthy growth development.

In Page 12, from the corporate banking side. The foreign currency loan of 6.3%, that remain our key growth focus, and we see the momentum for overseas branches remain a strong momentum, while the SME contribution also is another focus area. You can see on the right-hand side that it grew at 6.8%, and contribution to the total corporate credit is 43%.

In Page 13, the overall margin improvement is 9 basis points in first half '19. And in the meantime, the loan deposit spread also expanded by 14 basis point. This is on back of the expansion in our foreign currency's asset and also the liabilities side's adjustment.

As you can see in Page 14 regarding the liabilities side, the NT dollars or deposit mix shows the improvement from the demand deposit contribution that is 59.8% and while the volume continue to grow as the beneficiary from our retail and also corporate clients are contributing into the demand deposit. While the foreign currency's LDR also improved up to 40% and with our deployment into investment, the overall utilization of foreign deposits now reached at 72.8%, which is nearly 10% increase Y-o-Y.

On the asset quality side in Page 15, we remain to deliver a very steady performance and also outperformed the industry average.

In Page 16, another growth driver comes from the fee income. The overall fee income growth is 14%, and it's driven by double-digit growth in wealth management and also syndication business. While on the right-hand side, the wealth management contribution largely come from insurance and also fixed-income product that drives the overall growth momentum to also 14% growth.

In Page 17, we see the earnings from overseas branches in Taipei Fubon Bank emerging as a growth driver. There you can see the overall revenue growth is 22%, and also contribution to Taipei Fubon Bank's profit now reached 17%.

In Page 18, the investment in the LINE Bank through Taipei Fubon Bank is 25% stake investment, and the business itself is aimed to start in first half of next year. And we expect the overall ecosystem from LINE is 21 million customers and 140,000 merchants that would help to pave the foundation for the bank's growth.

In Page 19, another highlight for this quarter is that Taipei Fubon Bank is appointed as one of the domestic systematically important banks. And as you may know, the requirement is gradually increased capital requirement year-over-year in the next 4 years. While Taipei Fubon Bank is current status quo is already exceed the minimal requirement for the year '21's requirement as you can see in this table. But going forward, we expect to accelerate the capital's requirement and within the 4-year period that we would like to achieve the requirement as soon as possible.

So what are we going to do to prepare for this progress? Number one is that we prepare for the more advanced capital calculation, the so-called AIRB approach, and also in the meantime, we will adopt the new loan-to-value methodology in the standard approach in mortgage calculation for a risk-weighted asset calculation. And secondly, we target to maintain the steady ROE. So by doing that, we would like to improve the overall asset allocation efficiency and also focus on more capital-light business. And thirdly, we plan to accumulate the overall capital through earnings, and also, we will balance the needs for earnings upstream and also the capital accumulation.

Okay. Next section, in Fubon Life. In Page 21, we can see the total premium growth at 13.9%, while the key growth come from the first year premium strong growth of 21.7%. And that leads us to our #1 position in first year premium and top 2 in total premium.

In Page 22, the driver for this FYP growth, as you can see here, is largely from the regular-paid policies.

And in Page 23, the growth of FYPE led to the VNB's growth at 25%. And again, the growth is largely due to the regular-paid policies contribution increase. And therefore, the VNB/FYP ratio also shows some increase.

In Page 24, the channels' contribution. There you can see that the external bank's share actually increased and also led to spread the demand for the market; while the internal channels, including Taipei Fubon Bank, tied agents and also our insurance workers contribution shows over 50% contribution from both FYP and FYPE.

In Page 25, the investment portfolio growth is at about 8%, while the allocation, you can see that we increased slightly more into domestic investment assets, that includes both the equity and also the fixed income.

In Page 26, the overall asset allocation still predominantly is in the corporate credit and financial bonds in the overseas fixed income and while in North America is still predominantly in the overseas fixed income's geography exposure.

In Page 27, in terms of the investment income's composition, you can see, primarily it comes from the recurring investment income and while the interest income from the bond and also dividend income from mutual funds are the key growth drivers. And other than recurring, the capital gains from equity slightly came down while the fixed income contribution increased, nearly doubled. So the total results, they contribute to the investment return at 3.65% after hedge in first half.

In Page 28, the hedging costs actually came down along with interest spread narrowing between NT and USD. And we also see that because of the dollar's strengthening trend, and therefore, our hedged position actually slightly increased quarter-over-quarter. In the meantime, our accumulation for FX reserve also increased. Finally, the investment returns on the recurring side, you can see that the before and after hedge both shows improvement.

In the next page, in cost of liability, that you can see shows a 3 bps improvement in the first half, largely because of a new business. Average peak is still lower than the blended average of 3.65%, while the breakeven point slightly go up to 2.89% largely due to the higher FYP growth and also the contribution from regular-paid product, and therefore, leading to a stronger first year strain.

In Page 30, the unrealized position actually shows a sequential improvement quarter-over-quarter. So the latest outstanding in June is TWD 26.4 billion unrealized gains. And with this recovery, we also see our shareholder's equity outstanding also increase to TWD 292.5 billion.

Next section is Fubon Insurance. So in Page 32, the overall premium growth remain at very even level at 8.6% and keep our #1 position with 24.5% market share. While in the combined ratio, it go up slightly largely due to a claim from some specific commercial line business.

While in Fubon P&C China in Page 33, the premium slowdown are largely due to the auto business line and also the loss ratio control reasons. So we are getting more selective in growing our business. On the expense side, we continue to be very cautious, and therefore, the variable expense rate came down to 20%.

In Securities in Page 35, the market share and ranking continue to be decent. In the AUM for the asset management business grew at 60% Y-o-Y. That's one of the spotlights for this first half. While the revenue for overall Fubon Securities performance grew at only 1.6%. It's largely because of the [daily] turnover and also the brokerage business impact. While the gains from capital market still supports the overall revenue growth, the net profits increase is largely due to the one-off credit loss recognition in previous year and led a lower base effect.

In Page 37, regarding Fubon Bank (Hong Kong). You can see here, the balance sheet items are largely at a benign growth level of -- in the range of 4% to 5% growth. While going forward, we will be -- continue to be more active in growing deposit in response to the market liquidity.

In Page 38, in the P&L side. The net profits came down in Fubon Bank (Hong Kong), largely due to earning recognition of Xiamen Bank because it's still accounted under Fubon Bank (Hong Kong)'s investment back in '18, while in year '19, this investments moved to the whole core level. So our core earning actually still remains at a stable level if we exclude some one-off items.

In net interest margin, it came down also by 5 basis points, largely due to the HIBOR's volatility, and therefore, higher deposit costs. While you can see the asset quality, overall speaking, remain at a healthy level, 0.45%.

And in Fubon Bank (China), the balance sheet item here you can see actually grew a very strong level compared to past years. And we delivered over 20% growth in loan, over 40% in deposits. With a stronger deposit growth, it will continue to be our strategy as a foundation to expand our asset scale going forward in the longer term.

In Page 40, the net profits also increased substantially at 81%, largely due to -- one is NII and secondly is treasury activity. While the net interest margin grew at 2 basis points, largely due to the deposit expansion strategy that offset our increase in the lending rate and also loan balance. While in the meantime, the asset quality remain at stable level.

And from a business development perspective, Fubon Bank (China) currently is already granted with the approval to issue a credit card, and we plan to start the business next year. For the new branch expansion side, well, currently, we have 26 branches and subbranches, with Guangzhou and Chongqing just opened in recent 2 months. Going forward, we plan to open 1 to 2 new branches in a year.

So I will stop my presentation here. And operator, could you please start to take questions from the floor and let us know the investor's name and company name. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Speaker, we have a question from Jemmy Huang from JP Morgan.

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S. Huang, JP Morgan Chase & Co, Research Division - Financial Analyst [2]

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I have 2 questions for the Taipei Fubon Bank. First one is if we look at the second quarter credit costs versus the first quarter, the quarter-on-quarter increase is down mainly because of the general provisioning for the loan growth or have you made any provisions for specific cases? And then what's your latest guidance for the credit costs for the whole year?

And second question is -- just trying to understand how likely you think you can be allowed to adopt advanced IRB because I think what regulators are mainly talking about still the loosening on the mortgages side. And if the advanced IRB could be allowed, what kind of magnitude of improvement on the CET1 ratio you would expect?

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Unidentified Company Representative, [3]

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Okay. Good question. I think the credit costs for the first half and even looking forward for the next half, I think the major -- primarily came from the general provision. We don't see a big change on the special provision because our asset quality remain healthy at this point of time.

Regarding to the AIRB, we had a discussion -- preliminary discussion with the regulators, and they're asking us to become prepared for the D-SIBs. We raised this question because we want -- we appreciate that they appoint Taipei Fubon Bank as one of the D-SIBs, but we require apple-to-apple comparison and because based on our knowledge that most of the D-SIBs in other country, most of them adopt to AIRB. And they now even talk about the AIRB. And when we see the mortgage loans, for example, if you adopt the Basel III loan-to-value approach -- standardized loan-to-value approach, preliminary calculation, Taipei Fubon Bank or the capital charge numbers will increase by 2%, if we just adopt AIRB standardized loan-to-value approach under the Basel III. If we're fully in line with the Basel/AIRB approach, our capital CAR ratio can be improved something like 6%. But this is just a preliminary calculation. But back to your question whether we have the opportunity to adopt the AIRB? Based on what the regulators told us, yes, that's open for discussion.

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Operator [4]

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(Operator Instructions) Speakers, we have a question from Edwin Lu from HSBC.

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Edwin Lu;HSBC;Analyst, [5]

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I have 2 questions. The first one is on the yield curve impact on Fubon Life. Recently, the U.S. yield curve has inverted a bit, so just wondering what would be the impact on the financial performance. Because I think on the short end, the yield will impact your hedging cost, but the long end, it will also impact your backdoor investment. So I just wanted to know what would be the net impact on your financial performance. And also could you update on the duration of your assets and liability?

And the second question is on capital raising because I think you mentioned in your Chinese call that there will be no plan in terms of common equity capital raising. I just want to know if -- do we plan to issue more preference shares? Or I'm guessing there's a quota in terms of how much can you issue. Would you share with us -- is there still room for you to issue preference shares?

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Unidentified Company Representative, [6]

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Okay. Now we're talking about the curve and also the impact on our investment performance. I will say that actually, the interest rate could have -- for the (inaudible) and also impact our new money rate. But actually, I will say, new money rate right now is rather low at this moment. And our new investment compared to our overall position actually is considerably small. So the future cash flow is said to be stable and also new investment will safely pass. That means the foreign interest rate decrease our hedged cost, which were also beneficial to our after hedge investment returns.

Furthermore, the cost of liability have been also improved as we have lowered our declaration rates for our policy. Therefore, lower new money rates actually will not have a significant impact on our total investment return. This is about new money rate. And also about the recurring, I would say both prehedge and also post-hedge recurring yield is also expected higher than the 2018. And higher recurring yield will be achieved through -- we'll invest in higher dividends and also the NT denominates each year. And for the post-hedge recurring yield, will also improve by the lower hedge costs, which will result from low foreign interest rates. Here's my answer.

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Unidentified Company Representative, [7]

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And regarding the duration, our asset duration is -- for the fixed income position, is around 10. And for liabilities, it's around 10 to 11, so it's pretty close. Thank you.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [8]

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And regarding the capital planning, yes, I think pref share is one of the instruments we will also consider. For the quarter, we can issue actually 1/3 of the net worth of the holding company. While this so-called the quarter is -- regulator's soft guidance, so we continue to discuss with the regulator this so-called outstanding amount, if there is room to make any adjustments. While, I think, other than pref share, we also consider all sorts of capital market instruments and also the timing.

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Unidentified Company Representative, [9]

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Edwin, did we answer your question?

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Edwin Lu;HSBC;Analyst, [10]

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Yes.

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Operator [11]

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Our next question is from Steven Lam from Bloomberg.

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Steven Lam, Bloomberg Intelligence - Analyst [12]

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A few from me. One -- firstly, I want to talk about on the investment side. I understand that the increase in the domestic fixed income portion partly was driven by the NT dollar-denominated ETF, and I suppose those are invested in overseas bonds. So I'm just curious, do you have a number that you can share with us in terms of the amount of those? Because we just want to take a look at -- if we strip that out, did you actually increase the domestic bonds in Taiwan?

Secondly, I also noticed that the increase in European fixed income, there's quite a bit of increase in that portion. So I'm curious how much of that is because of your intentionally adding position in that part or it's because of price gains?

And then on the -- also in Life Insurance, just curious what was the -- we've seen very strong regular-paid FYPE growth in both first quarter and second quarter. Can you remind us what was the main drivers of that? And then what do you think in terms of -- in third quarter or fourth quarter?

And lastly, for the bancassurance, so we noticed that the bancassurance is very strong, it's very important for the bank. And I'm curious, is there any particular reason why, I think in the first half or in the second quarter, that the sales generated by Taipei Fubon Bank seems to have declined, while for the external partners, it increased very dramatically? So I just want to understand the dynamics there.

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Unidentified Company Representative, [13]

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Okay. As far as the NT-dominated ETF, I would say that actually, I have no -- I don't have actual number on hand, but I will say the weight of our AUM is roughly about 4% to 5% and maybe in the mid-level, and that is our current position. And also about the...

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Unidentified Company Representative, [14]

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The total increase of domestic fixed income position, right?

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Unidentified Company Representative, [15]

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Yes, yes.

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Unidentified Company Representative, [16]

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Okay. So it's not entirely for the -- yes, foreign currency ETF.

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Steven Lam, Bloomberg Intelligence - Analyst [17]

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I'm sorry, is that 4% to 5% within the domestic fixed income or the 4% to 5% of the whole TWD 3.8 trillion?

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Unidentified Company Representative, [18]

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Of AUM, I will say, AUM...

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Unidentified Company Representative, [19]

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Entire AUM.

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Unidentified Company Representative, [20]

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Yes.

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Steven Lam, Bloomberg Intelligence - Analyst [21]

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Okay. Okay. So it's 4% to 5% of the TWD 3.857 trillion. Okay. Got it.

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Unidentified Company Representative, [22]

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That's correct. And about the -- you mentioned about exposure increase in European euro. I have no exact number, but my guessing is, majority will come from the market value increase. But detail maybe we can give to you after the meeting.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [23]

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For the European's increase, that reflects basically the position we increased in the financial bond. Yes.

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Unidentified Company Representative, [24]

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Denominated...

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [25]

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Yes. Denominated in dollar -- in U.S. dollar.

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Unidentified Company Representative, [26]

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Not in euro.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [27]

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Not in -- no.

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Unidentified Company Representative, [28]

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It's euro positioned, denominated in U.S. dollar.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [29]

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In U.S. dollar, yes.

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Steven Lam, Bloomberg Intelligence - Analyst [30]

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Oh, denominated in U.S. dollar, okay. So these are dollar bonds but with European exposures. Okay.

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Unidentified Company Representative, [31]

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Correct.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [32]

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Yes.

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Steven Lam, Bloomberg Intelligence - Analyst [33]

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Interesting, interesting. Okay. Okay. So there, I can assume also a little bit of FX there as well because dollar went up. Okay. That's interesting.

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Unidentified Company Representative, [34]

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And next one....

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Steven Lam, Bloomberg Intelligence - Analyst [35]

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Yes. FYP...

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Unidentified Company Representative, [36]

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Okay. In January this year, we stopped the sales of single premium NT dollar policies because of the high hedging cost. So a lot of sales shifted to 2-pay, 3-pay, 4-pay, these kinds of product, especially in bancassurance channel. So we expect that the churn will continue for the second half of this year.

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Steven Lam, Bloomberg Intelligence - Analyst [37]

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Right. And sorry, on that one, I'm just curious, with the interest rate and bond yields kind of falling very rapidly, do you sense that the clients have more demand in terms of locking in the yield that they can get a hold of, and hence, insurance companies, including yourself, can capture that demand?

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Unidentified Company Representative, [38]

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Yes. But the problem is the fixed interest rates depends on the reserve interest rate. And right now the reserve interest rate is very low. And if we issue too many fixed rate policies, the return may not be that attractive to client. So most of our sales is still interest rate-sensitive product.

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Steven Lam, Bloomberg Intelligence - Analyst [39]

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I see.

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Unidentified Company Representative, [40]

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So that we can manage our cost better, right?

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Unidentified Company Representative, [41]

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Yes.

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Unidentified Company Representative, [42]

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Yes, yes.

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Unidentified Company Representative, [43]

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Yes. I'm just stating that we can manage our interest rate exposure better by selling the interest rate-sensitive product.

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Steven Lam, Bloomberg Intelligence - Analyst [44]

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I see. I see. So those are also denominated in NT dollar, right?

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Unidentified Company Representative, [45]

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Both NT and U.S. dollars.

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Steven Lam, Bloomberg Intelligence - Analyst [46]

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Okay, okay. NT and U.S. Okay. Okay. I see. And lastly, on bancassurance?

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Unidentified Company Representative, [47]

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And that's because we have some credit card campaign with external banks, so this was the sales and that just shows figures for the strong growth from the external banks.

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Unidentified Company Representative, [48]

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Yes.

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Unidentified Company Representative, [49]

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So we increase the number of external banks to work with, right?

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Steven Lam, Bloomberg Intelligence - Analyst [50]

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Okay. Okay. But from the -- so those campaign, can I assume the cost of acquisition is slightly higher as well?

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Unidentified Company Representative, [51]

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No. No. Actually, it's the same. The cost was shared by the external bank's credit card division under the wealth management division.

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Unidentified Company Representative, [52]

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By law, Fubon Life, if they do any deal with others, it has to be based on the same terms and condition as they pay to Taipei Fubon Bank. Because the external deals' terms and condition has to be the same as the related party transaction. It has to be the same.

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Operator [53]

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Speakers, there are no questions in queue at this time. (Operator Instructions) Speakers, we show no further questions at this time.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [54]

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Thank you for your time today. We welcome your follow-up questions with the IR team. So we will conclude our conference call today. Thank you.

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Operator [55]

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And that concludes today's conference. Thank you for your participation. You may now disconnect.