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Edited Transcript of 2888.TW earnings conference call or presentation 29-Aug-19 8:30am GMT

Q2 2019 Shin Kong Financial Holding Co Ltd Earnings Call

TAIPEI Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Shin Kong Financial Holding Co Ltd earnings conference call or presentation Thursday, August 29, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hanwei Lin

Shin Kong Life Insurance Co., Ltd. - Chief Actuary

* Honglong Yuan

Shin Kong Financial Holding Co., Ltd. - CIO

* Isabella Wang

Shin Kong Financial Holding Co., Ltd. - IR Project Manager

* Stan Lee

Shin Kong Financial Holding Co., Ltd. - SVP

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Conference Call Participants

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* S. Huang

JP Morgan Chase & Co, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Welcome, everyone, to Shin Kong Financial Holding Company's 2019 Second Quarter Earnings Conference Call. (Operator Instructions) For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.skfh.com.tw under the Investor Relations section.

And now, I would like to introduce Mr. Stan Lee, Senior Vice President of Shin Kong Financial Holding Company. Mr. Lee, please begin.

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Stan Lee, Shin Kong Financial Holding Co., Ltd. - SVP [2]

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Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2019 Second Quarter Analyst Call.

Before we start, I would like to introduce my colleagues who are with me today. We are happy to have Min-Yi Huang, President of the Financial Holding Company, to review the second quarter result with us. Also in the room are Sunny Hsu, Executive Senior Vice President of the Financial Holding Company; James Yuan, Chief Investment Officer of Shin Kong Life; Hanwei Lin, Chief Actuary of Shin Kong Life; Isabella and Christine, members of our IR team.

The presentation we are about to go through was sent out 2 hours ago. You may also download it from our website or participate through this webcast. If you do not have the presentation, please let us know now. Your lines will be muted when we are presenting. If you are cut off, please dial back in or call Christine at (886) 968-929-230 for assistance.

Now please turn to Page 4. SKFH sustained its positive momentum in the first half 2019, reporting a consolidated after-tax profit of TWD 10.72 billion. Consolidated total comprehensive income reached TWD 44.37 billion, TWD 53.09 billion higher year-on-year compared with a loss of TWD 8.72 billion a year earlier. Earnings per share was TWD 0.87. Consolidated shareholders' equity increased almost 29% year-to-date to TWD 186.47 billion, and book value per share at the end of first half was TWD 15.22. Core business of each subsidiary remained stable in the second quarter, which will be covered later in the presentation.

Page 10. FYP for the first half 2019 increased 16.5% year-on-year to TWD 64.38 billion, driving up market share to 9.1%. Shin Kong Life has adopted a value-oriented product strategy and promoted foreign currency policies and protection products to contain the hedging cost, facilitate ALM matching and grow value of new business. FYP of foreign currency policies for the first half grew 35.5% year-on-year to TWD 43.38 billion. Strong sales momentum and an improved product mix led to a year-on-year increase of 17.1% in VNB. In addition, annualized cost of liabilities declined 2 basis points quarter-on-quarter to 4.04%, in line with our guidance.

Page 13 presents an overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first half 2019 reached 4.1%, thanks to one-off disposal gains of equities and bonds and higher recurring income. Breakdown of investment returns for different asset classes were: real estate, 3.2%; mortgage and corporate loans, 3.6%; policy loans, 5.6%; overseas investment, 4.3%; domestic securities, 3.9%; and cash, 0.8%.

Page 14 presents the portfolio of overseas fixed incomes. At the end of the first half, overseas fixed incomes amounted to TWD 1.82 trillion. Corporate bonds accounted for the largest share, representing 44.8% of the total, followed by international bonds at 30.3%. Emerging market government bonds accounted for 24.1% at quarter end. You may see the chart of the overseas fixed incomes portfolio by region on the upper-right corner. Shin Kong Life invested more funds in North America during the second quarter with eyes on the superior credit quality, and the share of North America increased to 34.7%. However, Shin Kong Life remained focused on North America and Europe as its key investment areas.

Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of the first half, hedging ratio was 84.9%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDFs accounted for 60% and 40%, respectively, of traditional hedges. Annualized hedging cost for the first half came down to 1.39%, and foreign currency volatility reserve increased about TWD 2.7 billion quarter-on-quarter to TWD 9.8 billion.

I will now hand over to Isabella, who will take you through the results of Shin Kong Bank and MasterLink Securities.

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Isabella Wang, Shin Kong Financial Holding Co., Ltd. - IR Project Manager [3]

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Thank you, Stan. Please turn to Page 20. Shin Kong Bank delivered a stable performance for the first half 2019. The net fee income grew 6.2% year-on-year to TWD 1.7 billion on the back of growth in wealth management business. Pre-provision profits grew 0.9% year-on-year to TWD 3.76 billion, and consolidated after-tax profit was TWD 2.49 billion.

Page 21. Corporate lending remained in an upward trend with a year-to-date growth rate of 3.7%. Domestic large corporate loans and overseas syndicated loans were the fastest-growing segments, rising by 9.7% and 14.7%, respectively. The bank's total lending rose 2.6% year-to-date to TWD 582.02 billion, and the loan growth target for 2019 remains at 6%.

Page 22. Due to competition in the loan market and decrease in market yield, net interest margin and net interest spread for the second quarter came down to 1.43% and 1.82%, respectively. Given the ongoing competition in the loan market and U.S. rate cut expectation, the bank expected its net interest margin and net interest spread to fall below the level of 2018.

Page 24. Wealth management income grew 11.9% year-on-year to TWD 1.18 billion, thanks to strong sales momentum in bancassurance, which accounted for 51.7% of total wealth management income. For the second half of the year, Shin Kong Bank plans to offer deposits with preferential interest rates to attract new funds and expand its client base. On the product side, mutual funds and overseas securities will be the sales focus, along with stable performance of foreign currency policies and regular-paid products. The growth target for wealth management income in 2019 is 5% to 10%.

Page 27. Asset quality was stable with NPL ratio at 0.21% and coverage ratio at 600.29%. New NPL generated in the second quarter totaled TWD 550 million, of which one debtor accounted for TWD 170 million. However, the case was fully collateralized with no material loss expected.

Page 29. MasterLink Securities recorded an after-tax profit of TWD 0.9 billion, up 17.9% year-on-year. Brokerage market share was 3.62% with a ranking of top 6 in the industry. Proprietary trading income grew 33.4% year-on-year to TWD 1.55 billion, driven by the increased disposal gains from equities and fixed income.

This is the end of our results presentation. So moderator, please start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from Jemmy Huang of JPMorgan.

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

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Couple of question for me. The first one is for Shin Kong Life. I think that the industry foreign currency policies actually declined year-on-year. So could Min-Yi Huang comment why you could outperform the structure so much? What's the differentiating factors at Shin Kong Life in terms of the FYP foreign currency policies?

The second question is for the investment portfolio breakdown. Could we assume the quarter-on-quarter increase in the proportion of domestic fixed income is mainly from your investment in the bond ETF or there is any other driving factors? And then what's your domestic bond ETF as a percentage of total investment now?

The third question is for Shin Kong Bank. Could you remind us what's the reason for a very strong investment income growth this year, and how sustainable it would be? And then the second question is for net interest margin. If you compare the Taiwan dollar and maybe U.S. dollar portfolio, who is facing bigger pressure in terms of -- on the margin side? And then also, what's your outlook in the second half this year? I think the margin pressure looks like it is increasing on a quarter-on-quarter basis. So how low it would be in the coming quarters?

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Stan Lee, Shin Kong Financial Holding Co., Ltd. - SVP [3]

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Thank you, Jemmy. First question is on how we could outperform compared to same -- in terms of selling foreign policies. I'll give you some comments. And afterwards I would love to have our Chief Actuary share from the product designer views. First of all, I would say we have a very firm and clear mission policy, right? And that has been presented not only to our sales force, but also to the investment community. At the start of the year, we keep telling that, for 2019, the share of foreign currency-denominated policies shall account for around 70% of the overall sales. That's how we make it because we have a very clear views. We have a very dedicated team, and we do make our best out of our tied agents.

Talking about tied agents. The year before -- the couple years before, you can see that our tied agents may account for the overall FYPs for about 30%. This year, you see that tied agents have contributed to the overall sales by around 45%. And the reason that they are always better to sell the -- not only the savings but also production. And they are also to receive order more efficiently. When we want to have the very challenging goal, which for this year is 70% of sales in foreign currency products, you'd see a strong growth in our tied agent sales force. And that is our niche. Any others that has also strong tied agent sales force also can support the sales in the foreign currency products. They have their own reason, maybe because their base pay rate is higher, maybe because they want to focus more on other policies. And that, please allow me to have Chief Actuary to talk about it.

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Hanwei Lin, Shin Kong Life Insurance Co., Ltd. - Chief Actuary [4]

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I think also due to our investment strategy, we for most of our assets in '18 -- putting in ETF account. So our investment return are less volatile, and that help us to declare a stable and even higher interest rate on the U.S. dollar-denominated policies. So I think that's one reason. Another one I also echo what I think that due to our strong agency force that help us reach the target.

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Stan Lee, Shin Kong Financial Holding Co., Ltd. - SVP [5]

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Thank you, Hanwei. And your second question is on investments. I would like to have James Yuan to talk about how ETFs help us to show off the recurring cut, and what's our strategy on that.

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Honglong Yuan, Shin Kong Financial Holding Co., Ltd. - CIO [6]

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Well, we have a mixture of the NT dollar-denominated ETF. Roughly, right now, we have TWD 70 billion equivalent of fixed income ETF or slightly lower than 3% of yuan. So the increase in the domestic actually it is the increase in investment in the domestic ETF.

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Stan Lee, Shin Kong Financial Holding Co., Ltd. - SVP [7]

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Yes. And Jemmy, just to quickly add one thing to that. As of the end of second quarter, we didn't hold significant amounts of ETFs. And as James just described, around TWD 60 billion is in the ETFs, and most of those are in fixed income.

And third question is on how we can remain -- growth in the investments return? And investment return for the year from the finance point of view has increased by TWD 4.5 billion. And as far as I can share with you is that the one-off capital gain for the first 2 quarters this year is actually around TWD 4 billion. That's compared to what we had last year, the capital gains, including the realized gains and the mark-to-market gains. And how we can still increase the overall investment return is by increase the recurring incomes. So mainly from the fixed income. And also, we have seen some improvements in the credit qualities that will be reflected into the expected loss. And that accounted for around TWD 1.5 billion as well.

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Honglong Yuan, Shin Kong Financial Holding Co., Ltd. - CIO [8]

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And in addition, although that the interest rate has declined from the beginning of the year, if you compare to -- for the -- having bit more detail -- in details about the first 8 months reinvestment income, the everyday and then average reinvestment yield this year was only something like 80 basis points lower than the same period last year, mainly because both years, this year and last year, both years are lopsided. And this year's a bit high in the beginning of the year, and last year was low at the beginning of the year. So when you aggregate and then average it, it doesn't make that much big differences. So the interest rates have declined substantially.

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Stan Lee, Shin Kong Financial Holding Co., Ltd. - SVP [9]

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All right. And your last question is on the bank, bank's NIM and NIS. And I do have made it in the Chinese session that it will be very difficult for us to remain at a similar level that we achieved last year. Major reason includes, I would say, 2 factors. First, we have been adjusting the scorecards for the clients. If those clients has high risk, but cannot provide with higher or reasonable returns, both on the fee business and from the spread business, which is not to deal with them, and that is the reason why you're seeing some of the decrease, not only in the spread, but also in the loan fee incomes. And that somehow is in the middle of the procedure. And we're seeing -- we foresee that the impacts from such adjustments will decrease further in the following quarters. And the other side is the competition. The competition for making loans to the clients is very -- I would say is very competitive in the past couple quarters. We have seen also the final adjustment on the time deposits because of the rate hikes from the U.S. as well.

Well, the bad news here is that we are starting to see rate cuts from the U.S. So in the third quarter or maybe in the fourth quarter if there are further rate cuts, the pressure, well, goes up for the foreign currencies, loans and deposits. So far, I see that the NIS, net interest spread, the decrease from the foreign currencies is more substantial than the denominated ones. Foreign currencies, Q1, we still have about 2.3% as the NIS. And in the quarter -- in the second quarter, it went down to around 2.16%. PWD's portfolios remains rather stable. First quarter, it was 1.79%, second quarter, 1.77%. So it seems to me that NT dollars yield cannot go further down. So it will also stabilize the future views, but still there will be pressures on the foreign currency ones.

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Operator [10]

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(Operator Instructions) And there appears to be no further questions at this point. Mr. Lee, can we close the conference call now?

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Stan Lee, Shin Kong Financial Holding Co., Ltd. - SVP [11]

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Please, let's close the meeting now.

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Operator [12]

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Thank you. And ladies and gentlemen, we thank you for your participation in Shin Kong Financial Holding Company's conference call. There will be a webcast replay within an hour. Please visit www.skfh.com.tw under the Investor Relations section. Should you have further questions, please don't hesitate to contact the IR team of SKFH by phone or by e-mail. You may now disconnect. Goodbye.