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Edited Transcript of 2881.TW earnings conference call or presentation 21-Aug-20 8:30am GMT

Q2 2020 Fubon Financial Holding Co Ltd Earnings Call

Taipei Sep 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Fubon Financial Holding Co Ltd earnings conference call or presentation Friday, August 21, 2020 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

* Wey-Ting Harn

Fubon Financial Holding Co., Ltd. - President, CFO & Director

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Conference Call Participants

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* Chung Hsu

Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist

* S. Huang

JPMorgan 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 the Fubon Financial's First Half of 2020 Financial Results. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this point.

Now I'll hand the call over to Ms. Amanda Wang, IR Officer of Fubon Financial Holdings. You may now begin.

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

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Thank you. Welcome, everyone. Thank you for joining the call today. I will walk you through the key highlights of Fubon's first half results.

Please turn to Page 4 of the presentation. Fubon Financial met net profit of TWD 37.7 billion in the first half this year, which represents a 35% growth Y-o-Y in spite of the COVID-19 pandemic. And the key earnings drivers from the major 4 subsidiaries, you can see here, number one, in terms of Fubon Bank, we deliver a balance sheet growth and also the mix adjustment and the asset quality remains benign.

And we grow the sales, the investment high-growth management offerings. That offset the negative impact from a rate cut and also [slower spend in insurance]. We also delivered a high-growth rate among the peers in terms of active company cards, and that lead us to the growth in the related fee revenue.

In Fubon Life, we ranked top 2 along with the transformation in product mix. Investment side is a spotlight of the earnings growth in first half. While the recurring return and total return, net those do better than last year. And cost of liability also improved over 20 bps Y-o-Y.

In Fubon Insurance, we keep our top position with the market share gain that reached a milestone level of 25%.

In Fubon Securities, the brokerage revenue is the beneficiary area of the market turnover that up by 47% in the Taiwan market.

While we are gaining market share and also improving the capital efficiency by our capital reduction plan of TWD 6 billion in application process.

In Page 5, the overall net profit, that reached TWD 37.8 billion, which translates into earnings per share of TWD 3.36, and that helped us to rank top among the market peers.

In Page 6, in terms of the earnings by subsidiaries, Fubon Life and nonlife shows growth and lead to the earnings contribution of over 60% of the holding company. All the 3 bank subsidiaries together, that accounts for another 28% of the earnings.

In Page 7, assets. Consolidated assets reached TWD 8.8 trillion with a growth rate of over 9% while the book value also reached a high level of TWD 596 billion. It was further up to over 6 -- TWD 70 billion in July as investment assets value appreciate.

In Page 8, with the earnings growth, on an annualized basis, that brings our ROA to 0.86% and ROE to over 12%.

In Page 9, along with the new normal post the COVID-19, digital transformation plays a strategic priority in the company. To summarize what we are working on, the focuses are: number one, the online customer acquisition. As you can see in Taipei Fubon Bank, Fubon Insurance and Fubon Securities, the digital accounts or transactions amount increased meaningfully.

And number two, we endeavor to improve the user experience, the efficiency. Examples are from our patents -- numbers of patents that granted is ranked top among peers. And also, we are working on more initiatives to adopt under the API applications within the holding company. In the longer term, we are working on -- across ecosystems to create values. And examples are like the investment in LINE Pay, the blockchain adoption in insurance are the recent examples we delivered.

Next, let's move on to Taipei Fubon Bank. Please turn to Page 11. The revenue was down by 4% in first half. That mainly reflect the net treasury income was slow in Q1 while the sequential recovery take place in Q2. So it brings up the first half treasury revenue, while the core earnings from NII and fee income remain on a growth track.

In Page 12, on the loan growth of Taipei Fubon Bank at 7.2%, outperformed the Taiwan market growth rate of around 6% -- or a 10% growth Y-o-Y in the bank, excluding government-related lending.

In Page 13, in the corporate banking book, both the NT dollar and foreign currency loan growth that are driven by Taiwanese corporate clients. And as you can see here, NT dollar growth is relatively strong with 15% Y-o-Y, while in SME sector, loan growth is also decent at around 10%.

In Page 14, in terms of retail credit, the mortgage growth of about 6%, that is in line with the market performance. For other consumer credit, growth of 12%. That's primarily driven by personal secured loans.

In Page 15, from deposit side, the demand deposits improved quite meaningfully, especially in foreign currency book while the volume growth both delivered in NT and foreign currency. The loan-to-deposit ratio remains stable. As the investment asset deployment is one of the key areas to enhance yield in the bank, so we topped up the investment assets on the foreign currency LDR, that will reach the level to 73%.

In Page 16, the loan-to-deposit spread was down by 4 bps and reached to a level of 1.36%. That's mainly due to the rate cut impact. Our net interest margin was only down by 1 bps and at a level of 1.09%. That's mainly due to the efforts that we adjust the mix in asset and liability. And we aim to keep the impact on rate cut interest margin within 4 to 6 basis points down for the full year, which will be slightly better than our expectation a quarter ago. That was 6 to 8 basis points.

In Page 17, in terms of asset quality, the NPL ratio and coverage ratio are both stable and outperform market performance. And the single case of NPL we reported last quarter average rate, we provide 80% provision as of end of Q2, and we plan to fully provision by this month.

In Page 18, fee income growth of 12.5%. That primarily comes from the credit card business. While the wealth management fees flattish at 0.4% growth, that's mainly due to the insurance product mix change. Other than that, the rest of the investment-type product sales delivered growth of about 30% gross Y-o-Y.

In Page 19, the revenue from overseas branch was down by 19%. That mainly reflects Hong Kong's performance, while the performance in Vietnam and Singapore continue to deliver decent growth.

In Page 21, we move on to Fubon Life. The total premium was down by 9.6%, mainly due to a slower first year premium. However, this is in line with the market trend. The renewal premiums still steadily growth at 13%. And overall speaking, we ranked top 2 in the Taiwan insurance market.

In Page 22, FYP down by 47.5%. That reflects, number one, is impact from the COVID-19. And therefore, interaction with customers is inevitably lowered. And secondly, the product focus changed. And therefore, you can see the product mix change comes from the investment-linked policy now is 24.5% of FYP. And also, we see the health and accident type of policy also go up to 7.8% of FYP in the first half.

In Page 23, with a focus on the regular-paid product, the FYPE decline is much more mild by only 4%, in spite of FYP down over 40%. And VNB also trend down by only by 12.5% due to product mix improvement. And VNB margin, therefore, improved to 22.9% in first half.

In Page 24, in terms of the contribution by business channels, we can see the FYP impact is quite drastic across all channels and specifically to bancassurance, while the FYPE is relatively steady. And we expect the second half of the year to see gradually recovery.

In Page 25, in investment assets. We see overall asset size reached over TWD 4 trillion and up by 8% Y-o-Y. On the asset allocation, the percentage increase in domestic equity and also property. For equity, that reflects both additional position and also the market value increase. For the overseas fixed income portfolio, that was up in Q1 on back of the market timing in favor of the yield enhancement. While in Q2, we see the deployment slowdown as the market rate trend down and also due to the adjustment in the international bond position.

In Page 26, in terms of overseas fixed income portfolio, we keep a higher position in investment-grade corporate credit and also the financial bonds.

In Page 27, the investment yield, overall speaking, is improved, as you can see in the bottom 2 lines of the table. The annualized basis, our post hedge return averaged 4.2%; and before hedge, averaged 4.86%. That also marked record-high during the past years. And contribution mainly come from dividends, capital gains and also a lower hedge cost.

In the following page, the hedge cost, overall speaking, is down as the recurring cost improved. In investment -- sorry, interest spread narrowed between dollar and NT. That helped the recurring hedge cost improvement, and we expect to manage the overall hedge cost below 100 bps for the full year. And meanwhile, the foreign currency reserve outstanding reached TWD 11.6 billion as of end of July. That also will be the buffer to our hedge management.

And on your lower left-hand chart, recurring return before hedge trend down reflect the lower market rate and also NT dollar's appreciation, while on the post-hedge recurring return, that was topped up. And we expect to see increase for the full year as the dividend income will flow in during the second half.

And in Page 29, in terms of the cost of liability, it has improved by 22 basis points Y-o-Y as the new policy carry a lower cost and reached the level of 3.43%. And therefore, we also bring down the breakeven point to 2.81%.

In Page 30, the mark-to-market unrealized value recovered in the second quarter. The outstanding URCG standing at TWD 43.5 billion in June, and it was further up to over TWD 100 billion in July. The book value of the Fubon Life, therefore, also further trend up from -- over 3 -- TWD 30 billion in end of July to over TWD 4.20 billion in -- sorry, from June to July.

And next section in Page 32. In Fubon Insurance, we delivered premium growth of 4.9% and outperformed the market growth rate of 5.9%. Before the end of the month this year, we reached a milestone level of 25%. And the underwriting performance continue to be outstanding with a net combined ratio at 90.4%.

On Page 33, [Fubon] P&C China, the premium growth, specifically from accident and health line that drive up the volume, and that has mainly come from online channels of our business partners. Our net combined ratio also shows a meaningful improvement that is on back of our efforts of just the auto business and also the overall expense control.

Next section in Page 35, Fubon Securities. We benefit from the high market turnover in Taiwan stock market. And therefore, that -- we increased the brokerage revenue by nearly 50%. In the meantime, we also gained brokerage market share. In the longer term, we focus on wealth management to diversify product offerings. And the stock brokerage business, as a result, delivered growth. As you can see here, the market ranking moved up and also the market share.

In Page 37, in Fubon Bank Hong Kong, the balance sheet items all grow decently.

In Page 38, in net profit, however, it came down in first half. That reflect, number one, is the lower net interest margin due to the rate cut; and number two, due to a higher provisioning cost. That was a more conservative macro outlook. And therefore, the stage 1 and 2 provision increased. And also due to a single default case that increased the provisioning.

In Page 39, Fubon Bank China balance sheet items all grow strongly on back of our strategy of prioritizing the deposit growth.

And in Page 40, the net profit, as a result, grew along with asset growth, driven by the net interest income and also treasury income. Net interest margin is slightly down by 3 bps. The overall asset quality remain benign and NPL asset quality remain at a stable level of 0.93% NPL.

And on the growth strategy, the bank plan to receive a capital injection from Taipei Fubon Bank of RMB 1 billion before end of this year. With a branch network of 26, we are about to open one -- one more new branch in Ningbo and additional 1 to 2 branches planned every year.

So this is the end of the briefing. Thank you for your attention. Next, we'll open for Q&A and host by the President of Fubon Financial Holdings, Mr. Jerry Harn.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Chung Hsu.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [2]

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This is Chung Hsu from Crédit Suisse, and I have 4 questions. My first question is, if you look at the appendix, the financials for Taipei Fubon Bank, it looks like your net interest income growth of 15% doesn't quite match with your loan asset growth of mid-single-digit 7.6% loan growth and while your net interest margin is down. Can you just confirm that this variance is mainly because of the loss of swap business and therefore, you start to book your interest -- the gross income into interest income? Or if there's anything else that we should be -- note for just in terms of that difference in the growth rate?

Now my second question is on your OpEx. Can you give us more color how you're able to control your OpEx, given that you're investing in IT? I think Amanda mentioned earlier in the presentation that fintech IT investment is a focus for Fubon Bank this year. And also, you're growing credit card business quite aggressively and successfully. And I think in the Chinese session, you mentioned that the credit card fee income isn't net fee income. So the only thing that would be booked in the OpEx is the reward bonus point. So I just want to come check that. Does that mean that some of those reward expense will come later that we've seen with some of your competitors?

My third question is on Fubon Bank Hong Kong. Just want to get a sense. Can you elaborate a little bit more about Stage 1, Stage 2 provisioning that Amanda mentioned? Are those N0, N1? And just wonder if you can give us more color as how you've done because we do see this NPL rising. And if -- how should -- how we should look at your provisioning in second half this year for Fubon Bank Hong Kong? I'll start here first before I move on. I have 4 questions.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [3]

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Chung, maybe I can start the first question. The appendix, the 4 types of Fubon Bank actually is a consolidated basis. So the net interest income combine China in terms of growing that.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [4]

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That loan growth is just Fubon Bank?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [5]

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The loan growth is Fubon Bank, yes.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [6]

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Okay.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [7]

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The loan growth in the appendix is a consolidated basis, but in the presentation is a stand-alone.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [8]

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Okay. But the gap, I mean, in the appendix page, is the same basis, right? The loan growth and net interest income growth, it's all consolidated, right?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [9]

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Yes. It's consolidated, yes.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [10]

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And if I remember your presentation slides, Fubon Bank Hong Kong also see a margin decline so as Taipei Fubon Bank. So you have declining margin, missing conditional loan growth, but you have a double-digit net interest income growth?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [11]

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Also reflect our treasury-related net interest income contribution.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [12]

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On investment…

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [13]

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Yes, on the investment portfolio.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [14]

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On the investment portfolio. It's pretty much like the recurring income comes out in our Life business.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [15]

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I would have thought those are capturing your least interest-bearing assets, but maybe that's not the case. Because we're not looking at spread, we're looking at net interest margin.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [16]

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Yes. We -- actually, in Taipei Fubon Bank's portfolio, we have invested a little bit of our asset on the fixed income securities. Therefore, when the cost of liability decrease, it would increase our spread on these investments. So is the net-net combined result.

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Operator [17]

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Our next question comes from Steven.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [18]

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Sorry, operator, we are going to answer the second question from Crédit Suisse, so please hold on.

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Operator [19]

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Oh, I understand. I apologize.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [20]

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No problem.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [21]

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In Taiwan, similar to other markets, you have to invest on those credit card business before you can actually reap from later business. That also increased our cross-sell from our credit card customer to other business, like -- just give you an example that our conversion ratio of our credit card business into our wealth management business, pure wealth, is over 10%. Well, at least in my experience, it's not pretty bad. So when we're looking at this credit card business, we're not looking at solely on the fee-related business from credit card issuance or just the loan that generated from this card spending.

And as to the expenses control, actually, we have adopted, not just on the Taipei Fubon Bank, but rather from the entire group business, how do we manage the entire expenses. And therefore, we foresee that there will be further reduction in our overall group expenses in the next few months, yes.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [22]

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Is there a cost/income ratio target for the bank?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [23]

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Yes, we have a budget, but our last cost/income ratio, the revised target, is lower than our original budget level.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [24]

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And Chung, your third question regarding the Fubon Bank Hong Kong's provisioning…

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [25]

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The composition.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [26]

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Yes, the composition. We provide TWD 157 million of provision first half and single case represent about TWD 62 million. The remaining are basically the Stage 1 and 2.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [27]

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Stage 1 and 2.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [28]

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Okay, okay, okay. And do you have guidance for the Hong Kong -- Fubon Bank Hong Kong provisioning second half? Do you see the need to keep that percentage of provisioning or potentially increase?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [29]

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Well, on this -- on the specific provision, right now we don't see any other significant credit downgrade. As to general provision, because we are using a forward-looking model, so if the macros remains -- I won't say stable, if the macro does not deteriorate further, then our GP's provision level will remain at the current level.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [30]

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Okay, if I may ask one more question, a bit of strategy and capital allocation questions, I think if I hear correct, Amanda mentioned there's RMB 1 billion capital injection to Fubon Bank China. RMB 1 billion doesn't seem a lot for a bank that grow loan book by more than RMB 10 billion a year and asset by RMB 20 billion to RMB 30 billion a year. But then if I look at Fubon Bank Hong Kong with similar asset size as Fubon Bank China, but carries 2.5x more equity base, just wondering if there's any room or potential of how feasible is it to take some capital out of Fubon Bank Hong Kong for growth at other subsidiaries within the group.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [31]

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Well, to be very honest, by end of the year, we were doing several examination on our capital allocations amongst the group. The -- I'm not saying that we have not done that before, but we'll take this time even more seriously on capital allocation. I think you're probably aware that we are in the process of reducing the capital base of NT 6 billion from the security and will further inject it into Taipei Fubon Bank by end of the year. So part of the capital injection from -- I mean not from, to, to Fubon China is actually indirectly from the capital reduction from our security side. So am I stating that too complicated?

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [32]

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No, it was very clear. I just wanted -- that capital reallocation plan is on top of what you just mentioned the -- taking some capital from the Securities business to -- through Fubon Bank -- Taipei Fubon Bank to Fubon Bank China. So there will be more, right?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [33]

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Well, we're doing the review again by end of the year.

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Operator [34]

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Our next question comes from Steven.

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Steven Lam, Bloomberg Intelligence - Analyst [35]

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Hello. Hi, can you hear me?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [36]

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Yes, please, Steven.

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Steven Lam, Bloomberg Intelligence - Analyst [37]

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Hopefully, everyone is well and safe. So a couple on -- I'll probably start with the data-side question on the investment. So I noticed on, I believe, it's Slide 26 -- so on Slide 26, there is some shift in just the 3 months in June. For example, the share of the North American bonds reduced by 1 percentage point, and then the Asia and the rest of the region increased. Meanwhile, we see that the -- I think the government bonds rose dramatically and then the financial bonds decreased, so on and so forth. So what was basically driving that change? So that's number one. Sorry. That's number one.

I think, number two, this is a little bit longer term, also on the investment side. So I believe in the Chinese call, you guys mentioned about -- you guys brought up the discussion on U.S. elections and how that's going to change maybe the risk appetite and whatnot. So I was wondering from -- for that kind of event, what would be your fundamental hedging strategy going into the election and preparing for any sort of outcome specifically on, say, your bond exposure, equity exposure or even from the FX side of things. If you can give some color on that, that would be much appreciated.

And I think, lastly, just want to confirm on the life insurance side from VNB. So if I'm not mistaken, I think you also mentioned that you sold more longer-term policies like the 6-years products. However, obviously, maybe it's just the math, but the VNB margin did come down on FYPE basis. So I'm just curious. What would be the dynamics there? And what would be the outlook for the VNB for the rest of the year?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [38]

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Hello. Can you hear me?

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Steven Lam, Bloomberg Intelligence - Analyst [39]

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Yes. I'm here. Yes, now I can hear you. Yes.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [40]

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Okay. That would be great. I do start from the top. I would say that, when you look at the picture the left-hand side, as you can see, we have some financial balance decreased, say, from 40% to 36.4%, which is because we have allowed our global bank have closed gradually this year and have been cold. And most issuer were European financial institution. That's the reason you can see the decrease as well on the European exposure.

Then we have already reinvest. We reinvested at least a couple of months and it's and exposed to some high-yield bonds. Then as you can see, the compound increase, mostly because we invest in some higher bank with higher ratings and economics. So the reason you can see compound increase and also you can see the -- actually, the corporate. Corporate, we also increased some. So as you can see, the position also increased. So…

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Steven Lam, Bloomberg Intelligence - Analyst [41]

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Okay. So on the government bond -- on the government bond, any specific country or region you have invest -- is it mostly Asia?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [42]

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Yes. Yes, that's correct.

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Steven Lam, Bloomberg Intelligence - Analyst [43]

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Okay. Like China or some other larger market?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [44]

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Actually, it's not quite, say, all -- both the new -- equals to -- actually, should we say, actually, it's quite diverse because the (inaudible) say that 24.5% -- sorry, 24.8%. Actually, Asia and others. It does not only include Asia.

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Steven Lam, Bloomberg Intelligence - Analyst [45]

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Okay. Okay. I see.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [46]

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High-grade emergent.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [47]

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Yes. Correct.

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Steven Lam, Bloomberg Intelligence - Analyst [48]

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High-grade emergent. Okay.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [49]

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In Asia.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [50]

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I think the VNB ratio is kind of confusing because the FYPE is kind of artificial…

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Steven Lam, Bloomberg Intelligence - Analyst [51]

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I apologize. Do you mind to speak closer to the mic? I'm having trouble hearing, you.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [52]

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Yes. Okay. I think the VNB ratio is kind of confusing because FYPE calculation is kind of artificial because for 2 premium paying period product, we discount but only take 20% of the premium. And the [third] pay is 30%. But up to [sixth] pay, jumped to 100%. So FYPE the denominator kind of -- so it's really -- so if you -- I think the VNB divided by FYP seems more accurate, yes. So I recommend you look at that number.

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Steven Lam, Bloomberg Intelligence - Analyst [53]

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I see. And the outlook for the second half in terms of margin or VNB, any color you can provide?

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

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VNB margin might drop a little slightly, but it should be higher than 2019.

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Steven Lam, Bloomberg Intelligence - Analyst [55]

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For the full year?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [56]

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Yes. For the full year.

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Steven Lam, Bloomberg Intelligence - Analyst [57]

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I'm sorry. On FYP basis only? Or also FYPE basis?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [58]

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FYP basis, yes.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [59]

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I just want to make sure -- your second question. So your question is how the U.S. election would affect our hedging strategy, our investment strategy.

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Steven Lam, Bloomberg Intelligence - Analyst [60]

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Yes. Right, or how are you positioning yourself going into the election?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [61]

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Position? I don't know which way is that. I don't know, is it Trump or Biden, which one is better.

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Steven Lam, Bloomberg Intelligence - Analyst [62]

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No, no, I understand. That's the uncertainty, right? So yes, are you closer -- if I can be more direct, do you feel like you're wanting to take some money off the table, put it more in cash or do something else in terms of avoiding the volatility in the next few months?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [63]

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I mean I don't think my answer mean anything. If the market continue to rise, yes, we'll take the money off the table. If the market goes down, then we'll consider to invest more because we have a lot of liquidity on hand.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [64]

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Sorry. Maybe at this moment, we are -- we can't really comment on the U.S. election because you'd expect our investment surging, it's is really hard to say. But we can say that because we see the weakening with dollar, it will -- this trend could be maintained for a while. That is because we have, in Taiwan, I would say that our fundamental is really strong.

And because -- okay, and because the capital inflow from overseas will maybe still continue and our economy is still quite healthy. So we think the NT dollar is likely to remain at a strong position. Then under these secondary spend, actually, we will keep -- maybe increase our hedge positions and also maybe more flexible to use the price -- the hedge instrument to step in our hedge costs overall.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [65]

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But I just want to add one thing. The -- although the NT faced pretty strong appreciation pressures, but you'll probably notice that our Central Bank is also working very hard to manage the currency more stable, like the U.S. dollar index rise by almost 4% this year, but the NT dollar only rise by 2%. So well, so -- well, that is something to probably also note [today].

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Steven Lam, Bloomberg Intelligence - Analyst [66]

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Appreciate that. If I can have a quick follow-up, since we're around the investment topic. So one thing is -- I'm not sure if it -- would it be too early to talk about, inflation risk since insurance companies hold a lot of bonds in this case?

And second of all, just your own personal feel or the company's view in terms of -- from an equity standpoint, how do you see Taiwan stocks -- Taiwanese stocks market versus, say, overseas in the next maybe 3 to 6 months, for example?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [67]

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We think the inflation is not unusual this year and the next year because the pandemic influence still has a very strong pressure on the consumption side. So it won't be a factor in Taiwan, in the U.S. or even the other developing countries. And according to the Taiwan stock market, we believe it will be -- keep the current good performance last year because of the standard conductor sectors still invests a lot and we see the momentum will keep going.

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Operator [68]

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(Operator Instructions) Our next question comes from Jemmy.

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S. Huang, JPMorgan Chase & Co, Research Division - Financial Analyst [69]

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Three questions from me. The first one is, could we get the Life RBC ratio as of second quarter?

And second question is, for hedging costs, just trying to reconfirm. Amanda mentioned that our full year target is to control hedging cost below 100 basis points. Is this figure including, say, potential year-end provision for the FX reserve, like what you have done in the past 2 years?

And the final question is also on the credit cost at Fubon Bank Hong Kong. I think the first one is, I also see a pretty material increase in the impaired charges for financial assets in addition to loans. So could we get some color in terms of what kind of financial assets? Is that because of mark-to-market losses or really the default or downgrades?

And then the second question for the credit cost is, could you share a little bit more color in terms of -- on the general provision side, I believe it's more easy assumption changes for the general provision. In terms of the economic assumption changes, how significant or how materially you have changed as of first half of this year versus end of 2019?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [70]

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Okay. We'll start it from the easiest one, Life RBC and our hedging costs.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [71]

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Okay. The Life RBC is close to 270% first half end of June 30. And Jemmy, the hedge cost I just mentioned is on a normal business basis. So the top-up of additional FSC reserves that we will separately consider.

And you mentioned about -- the following question, can I have the question again, please?

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S. Huang, JPMorgan Chase & Co, Research Division - Financial Analyst [72]

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Okay. That's for the critical credit impairment charges for Fubon Bank Hong Kong. You have TWD 157 million that's for loan loss provision, but you also have another TWD 82 million for financial impairment. So just trying to figure out what's driving that. And then for the TWD 157 million credit cost, you mentioned largely is for general provision, stage 1 and 2. So presumably, that is because of your ECL assumption changes for the model changes that result in the increase in the provision for stage 1 and 2? And just trying to get more color in terms of the ECL assumption changes, how significant that be -- for example, you might change your GDP forecast or unemployment rate forecast over property price changes. How that's significant under health -- on health year in terms of the assumptions in first half versus end of 2019?

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [73]

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A couple of macro factors, a major macroeconomic factor affect our forward-looking ECL model for Fubon Hong Kong. They are GDP growth in China. Our original forecast is like 5% to 6%. And this year, we have reduced that 1% or 2% growth. And like the -- another, Hong Kong GDP growth. We're forecasting it at very, very minor growth last year. But this year, we're looking at like a 10% decrease.

And real estate price in Hong Kong, that's another one. We originally estimated to probably flattish this year, but now we're looking at like 20% increase. So that -- these are all very dramatic change throughout the ECL forecast model. And therefore, after consultation with our accountant, we decided to increase our general provision for the stage 1 and 2.

And as to your impairment for the financial assets, I…

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [74]

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That actually comes from a few areas, including investment growth trade bills and also some loans that is -- we granted the credit line, but not yet granted a loan size. So all 3 factors could get a -- come up with TWD 82 million.

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S. Huang, JPMorgan Chase & Co, Research Division - Financial Analyst [75]

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So that's also more like general provision, rather than specific defaults as a result?

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [76]

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Yes.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [77]

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Correct. Correct.

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Operator [78]

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Thank you, speakers. I just want to let you know that there are no further questions, and you may proceed.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [79]

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Yes.

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Operator [80]

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Again, speakers, there are no questions, and you may continue with your meeting.

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Amanda Wang, Fubon Financial Holding Co., Ltd. - SVP [81]

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Okay. If there is no further question from the audience, then I would like to thank you for your participation for the call today. And if there's any follow-up, please feel free to contact the IR team. Thank you. Have a good day.

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Wey-Ting Harn, Fubon Financial Holding Co., Ltd. - President, CFO & Director [82]

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Thank you.

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Operator [83]

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And that concludes today's call. Thank you all for joining. You may now disconnect.