Thank you for standing by, welcome to the Fubon Financial's first nine months of 2020 financial results. All participants are in a listen-only mode, after the presentation, we will conduct a question-and-answer session. To ask a question, you may press star followed by the number one. This call is being recorded. If you have any objections, you may disconnect at this point. I'll turn the meeting over to Amanda Wang. You may now begin.
Thank you. Welcome everyone. Thank you for joining the call today. I'm Amanda Wang from Fubon's Investor Relations. I will walk you through the key highlights of Fubon's first nine months results, followed by Q and A from the management. Please turn to page four of the presentation. Fubon Financial made a net profit of TWD 68.2 billion for the first nine months. That represents 27% growth year-over-year in spite of the COVID-19 pandemic. The key highlights, firstly, in Taipei Fubon Bank, we continue to deliver balance sheet adjustment, and the asset quality remains benign. We grow the investment type of investment management offerings, and also we have the highest growth among peers in terms of active credit cards that help us to offset the negative impact from the rate cut impact, and also a slower bank insurance.
In Fubon Life, we rank top two along with the transformation in product mix.
In the investment side, that is the spotlight of the earning growth in the first nine months. The return and the total return both deliver a better result compared to the same period last year. While in the cost of liability, the improvement is over 20 basis points year-over-year. In Fubon Insurance, we keep our top position with a market share of 24.7%, while the underwriting results continue to improve. In Fubon Securities, the brokerage revenue is the beneficiary of the strong market turnover in Taiwan. They're up by more than 15%, that leads to a very strong revenue growth as well as the bottom line growth. In page five, the overall net profit that reached TWD 68.2 billion, that translate into over TWD 6 per share and top ranked among the market peers.
A further update for you is that the first 10 months that reached TWD 74.6 billion. EPS that reached TWD 7 per share. Again, that stood at the top position among peers. In page six, in terms of the earnings by subsidiaries, Fubon Life and the P&C shows the growth, the key earnings contribution from the insurance subsidiaries that therefore contribute over 60%. The banking stock together also accounts for another 24% of the group earnings. In page seven, in terms of the asset growth that reached TWD 8.9 trillion, with a growth rate of 8.6%, while the book value also reached a record high of over TWD 659 billion. In page eight, along with the earning growth, the ROA reached 1.04% and ROE reached over 14%. As a reminder, this is on an annualized basis.
In page nine, since Fubon's investment in Xiamen Bank back in 2008, the growth has been quite strong over the past years. As you can see, the assets grow over 15 x since then, and the profitability also grow along the way, while the capital and asset quality continue to improve. As you may aware that Xiamen Bank is successfully listed in Shanghai's stock market in October, and in the long run, it continue to be a meaningful strategic investment for Fubon. Let's move on to Taipei Fubon Bank. In page 11, the revenue declined by 3.8%. That reflects a softer syndication market and also the insurance product mix change. The core earnings from NII remain on the growth track of over 10%. In page 12, in terms of the credit growth, the bank delivered 8% compared to the market growth of about 5%.
From the right-hand side, you can see that we continue to focus on the structural adjustment. The retail lending has gradually increased, and we are moving toward to a more balanced portfolio between retail and corporate credit. In page 13, the corporate banking book from both NT and foreign currency loan growth are driven by Taiwanese corporate clients, while the NT dollar book is relatively stronger with growth rate of 16.8%. For the SME sector, that is also another key area for us that also deliver a 16% growth. In page 14, the retail credit mortgage grows at 8.4%. That is slightly ahead of the market average of about 7%. While the other consumer credit grows at a slightly higher pace, that primarily driven by the personal consumer loans. In page 15, from the deposit side, the demand deposit ratio improved quite meaningfully, especially in the foreign currency book.
While the volume growth from the NT and foreign currency book above 29% . From the right-hand side that we can see the structural improvement over the past three years also consistently to increase in terms of the demand deposit growth, through both the retail and also corporate clients. In page 16. In terms of loan to deposit, the NT book is improved to 87.3%, while in the foreign currency book, the ratios are declined, mainly reflect a higher deposit growth. While if we top up the investment asset on the foreign currency LDR, it will reach 64% or 72% on average basis. In page 17. In terms of our interest rate spread and margin, the loan deposit spread was down by six basis points, mainly due to a rate cut impact.
While the NIM that shows a better result of down by 3 basis points at 1.08%, that mainly reflects the effort in our asset liability mix adjustment and also our treasury activities. We aim to keep the rate cut impact on net interest margin within 2 basis point to 3 basis points for the full year. That will be slightly better than our expectation a quarter ago, which we expect as 4 basis points to 6 basis points down. In page 18, in terms of asset quality, the NPL ratio, coverage ratio are both stable and outperform the market average. Page 19. In terms of the fee income, for the whole bank, the decline is about 2.9%, that mainly reflect a softer syndication business as a result of COVID-19's impact, and also a wealth management business from the insurance.
From the right-hand side, we can see that, for insurance is the main drag for the wealth management fees decline of 4%, while other than that, the rest of the investment type product sales fee remain at a decent growth momentum. In page 20, the revenues of Taipei Fubon Bank from overseas branches, that is Hong Kong, Singapore, and Vietnam, altogether, they're down by 24%. That mainly reflect the Hong Kong branch's softer top-line performance. While in Vietnam and Singapore, we see the loan and deposits continue to grow. Given the slow momentum in Hong Kong branch and also in Singapore's special provision earlier this year, therefore the profit contribution came down to 11% of the whole bank. Next in page 22, we move on to Fubon Life. The total premium was down by 9.6%, mainly due to a softer FYP.
However, we see the renewal premium steadily grow at over 10%. In page 23, the FYP down by 44.6%, that reflects the product focus of moving more toward regular pay policy, as well as the impact from COVID-19 and also the new regulation on product offerings. The product mix that we can see, the investment link now account for over 27%, and also the higher margin type of product, including the health and accident policy, they go up to 8% of the FYP. With the focus on the regular pay product, FYPE declined actually much milder at 17.2%. On the right-hand side, the VNB also trend down by 16% down compared to the FYP, therefore you can see the margin improved to over 20%. In page 25.
In terms of the contribution by business channels, the FYP's impact is actually more drastic to bancassurance, but as we can see, the contribution from Taipei Fubon Bank is relatively more stable compared to external banking channels. That reflects the value of the cross-sell synergy. Well, from the right-hand side, the internal channels, including Fubon Bank and agency channel, now is at 60.8%. That is higher than the level a year ago at 56%. In page 26, on the investment side, the overall assets outstanding reached TWD 4.2 trillion. That is a 6.9% growth year-over-year. In terms of the asset allocation, the percentage in domestic assets increased in Q3, mainly reflects, number one, a higher cash position to avoid the market uncertainty at that time. Number two is the slightly higher allocation into properties, mainly into Taipei market, and also the market value increase in domestic equity.
From the fixed income side, it actually slightly came down mainly due to the adjustment in the international bonds acquisition. Another thing to highlight is for the mortgage. We made an announcement that stopped writing the new mortgage in Q3. That's mainly to better manage our asset liability, while the customers' right remain intact. In page 27, in terms of the overseas fixed income assets portfolio, we continue to overweight into the investment-grade type of corporate credit and financial bonds. While in page 28, the investment yield on an annualized basis, that reached 4.51% post-hedge, and 5.13% before hedge. Both results mark a record high compared to the past three years. The contribution, as you can see in this table, comes from the dividend income, capital gains, and also a lower hedge cost.
On page 29, the overall hedge cost was down as a result of the recurring hedging cost improved from the narrower interest rate spread. We expect to manage the overall hedge cost at below 100 basis points for the full year. Meanwhile, as the NT dollar appreciation, we prepare with FX reserve, that is at around TWD 9.4 billion as of September. That will be a buffer for us to manage the hedge activities. Also on page 29, in your lower left-hand side, the recurring return before hedge trend down mainly reflects the lower market rate and also the NT dollar's appreciation, while in the post-hedge recurring return that shows improvement to 3.23%, that reflects a better recurring hedge cost. On page 30, in terms of cost of liability, it improved by 23 basis points as the new policy carries a lower cost.
That also help us to bring down the breakeven point to 2.79%. If you compare the breakeven point, 2.79%, versus the recurring return or the cost of quality versus the total return, both indicators show a positive spread. On page 31, the mark-to-market unrealized value further trend up by end of Q3. The outstanding unrealized gain is TWD 78.9 billion. That is about 60% comes from fixed income and about 40% from equity. On page 33, let's move on to Fubon Insurance. We deliver a premium growth of 7.8% year-over-year growth and gain the market share to reach 24.7%, while the underwriting performance has continued outstanding at around 90%, you can see that we slightly improved to 91.2% compared to the level a year ago. On page 35, in Fubon Securities, we benefit from the strong market turnover in Taiwan and increase our brokerage market share.
You can also see that the top line and bottom line are both improved along the way. While in the longer term, we focus on the wealth management business and further diversify the product offering. The most recent achievement is that you can see the sub-brokerage business achieve a market share of slightly over 10%. In page 37, in Fubon Bank (China), the balance sheet item, you can see that the loan and deposit both deliver strong growth on back of our strategy of prioritize the deposit growth. In page 38, therefore we can see the net profit increase along with the asset growth, mainly driven by the net interest income. While the net interest margin also shows 4 basis points improvement, mainly due to the asset liabilities mixture improvement.
On the asset quality side, it remains at a benign level, while the NPL ratio improved to 0.93%. On back of the growth strategy, the Taipei Fubon Bank plan to inject capital of RMB 1 billion, is expected to complete by early next year. With the branch network of 27 now, that includes, most recently, newly opened one in Ningbo. We plan to have additional one to two branches every year as our goal. This is the end of the briefing. Thank you for your attention. Next, we would like to open the floor for Q and A and host by the President of Fubon Financial Holdings, Mr. Jerry Harn. Thank you.
Participants, we will now begin the question and answer session. If you'd like to ask a question, you may press star followed by the number one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. Star two to withdraw your request. One moment please, as we wait for questions. Okay, we have one question in queue. Let me just get the name of the participant. Thank you. Our first question comes from Jemmy. Your line's now open.
Yeah, hi. Thanks for the presentation. There are three questions from me. First one is, for Fubon Life, for the 22 basis point decline on the pre-hedged recurring yield, could you give us some colors in terms of how much of the decline is due to lower new money yields? How much is due to the realization of the trading gains? Just try to figure what is the downward pressure into 2021, whether we would expect a smaller decline on the pre-hedged recurring yield or a bigger decline compared to this year. Second question is, in terms of the capital position, I think the President previously mentioned that if the Taipei Fubon Bank has sufficient capital position, there is possibility that the earnings payout or the upstream earnings to the financial holding level could be increased.
Given your BIS ratio is over 14% and CET1 ratio is over 12%, would you consider current level is sufficient or internally you are still targeting higher ratios? Also, what is the potential impact on the bank stand-alone CET1 ratio after your capital injection into Fubon Bank (China)? The final question is, could you also give us some color in terms of the operating condition at Fubon Bank (Hong Kong) in the third quarter? How does sequential trend compare to the first half this year? Thanks.
Okay. You want to answer the yield?
I first answer your question about the pre-hedge recurring yield drop about 10 to 2 basis points. The breakdown will be roughly is for the New Taiwan dollar appreciation and also the decline in the bond yield, each contribute about 7 basis points to the decrease. Now it's total 14. Another one is about because we allocate our stock from, say, dividend drive stock, and we allocate to potential, we have some upside potential stock, which is the growth stock. It also, because we balance, the stock dividend decrease contribute about 5 basis points. The others are minors, contribute some real estate or property. It's the first question about the drop about 20 basis points. The second one is about the recurring yield.
Now we talk about the 2020 first. Under full year basis or the guidance of better after-hedged recurring yield than 2019, has not changed. Although the pre-hedge recurring yield remain low compared t o years before.
Average hedge will be likely to be high due to the significant increase in the hedge cost. About the outlook about 2021, as we can see the COVID-19 outbreak's not likely to subside in the short term, lower interest rate environment is likely to persist and continue to weigh on our recurring yield in this year. However, the hedge year cost is still expected to be further improved, just we mentioned we can hedge away it come under, say, maybe 100 basis points. That will compensate the decline in the recurring yield. As a result, overall average recurring yield, we should be able to remain at the same level as this year.
Capital. On the stand alone, we have-
Excuse me, speakers. Should we proceed to the next question?
Hold on, operator. Yeah, the management will reply the second question. Thank you.
On the focus of the standalone CAR ratio, we have 15.8% on the estimation of CAR after the capital injection to Fubon China.
Okay, the capital injection into Fubon China will not affect our Taipei Fubon Bank's CAR ratio a lot. We're also applying to the Financial Commission.
FSC.
FSC, to apply the LTV method to measure the capital requirement for our mortgage portfolio. If approved, that would probably increase our CAR ratio by roughly around 1.5%. Based on all these statistics, we're still in the process of fine-tuning all this number. Based on current forecast, Taipei Fubon Bank's capital is more than enough at current moment. Okay, we are expecting Taipei Fubon Bank could probably dividend up more than we originally planned.
Fubon Bank Hong Kong. Yeah. I think for Fubon Bank Hong Kong, well, typically we don't disclose on the quarterly basis, but on a half-year basis. I think the general comment is that the third quarter slightly better than the first half, that reflect in the net income. The trend is trending better.
Okay?
Yeah, that's clear. Thank you.
Yeah.
Thank you. Again, participants, if you wish to ask a question, please press star one and remember to record your name when prompted. Our next question comes from Chung Hsu in our line now open.
Hi, this is Chung Hsu from Credit Suisse. I have three questions. My first question is on the bank's net interest margin. I think in earlier Chinese session, management revised up full year 2020's net interest margin guidance. Just want to get more color that I understand that your LDR increased in 2020, and also your loan mix shift helped to offset some of the margin pressure. I just want to get a sense of a bit better color, that if we just look at loan spread or look at the competitiveness gap within Taiwan's lending market, what would have been your net interest margin if we removed those effects, those two effects on LDR and also shift in loan mix? When we look at your net interest margin for 2021, will those factors still be mitigating factors? That's my first question.
My second question is, I also want to clarify, on the Chinese session, whether management said that you will be prepared to increase your total equity allocation to 17% of portfolio, and that is domestic equity and international equity, to compensate for a lower market rate and also more narrow credit spread on a fixed income market. My last question is a follow-up to Fubon Bank China's capital injection. I understand you have a TWD 10 billion, correct me if I'm wrong, capital injection plan for Fubon Bank China. Can I get more color on your longer-term capital plan for this subsidiary? I understand that this facility is growing quite quickly, and probably going to need more capital support going forward. Thank you.
Okay.
Because-
As a net interest margin, the outlook.
Firstly, on the question of our bank's NIM, current level is around 1.08%, and this after adjustment on our loan portfolio and also our deposit portfolio. I think although the risk-off situation will remain, I think towards this adjustment, our guidance on the sustainability of the NIM of this level is still the same. I think we will continue to maintain this NIM level in our forecast.
Mm-hmm. Yes. Can I just ask if your guidance for net interest margin at this level in 2021, is that based on the assumption that your loan growth is going to maintain a similar growth pace as in 2020?
No. Our loan growth, well, guidance is probably mid-single digit.
Mid-single digit. Okay.
With the margin intact.
Got it. Okay. Thank you.
Okay.
I would like to clarify about the 70% of equity exposure. This is the mark-to-market basis. Also that accounts for the price appreciation. It's not a cost expectation .
Right. It's currently 15.7%, sorry, percent.
Excuse me?
Yeah, I said it's currently 15.7% allocation if we add domestic equity and international equity. I just want to make sure if I hear wrong, that you may be willing to raise it to 17% to offset.
Correct.
Okay. Got it. Thank you.
Okay. On Fubon Bank China's capital position, our plan or our expectation on Fubon Bank China is, after this capital injection, we are expecting the Fubon Bank China to improve its ROE. In two, three years, we can improve it up to around 10% ROE. We do not expect any capital increase requirement from Fubon Bank China in the next two, three years.
Okay.
Okay?
Yeah. Okay. Got it. Thank you.
Once more, participants, if you wish to ask a question, you may press star one. Please remember to record your name when prompted. Speakers, let's give it 10 seconds to see if there will be questions. Excuse me, speakers, there are no questions. You may continue. Excuse me.
Operator.
Sorry.
Do we have further questions on the line?
Yes, ma'am, there's actually one that popped up. Let me just get the name of the participant, okay? Hold on, please.
Thank you.
Our next question comes from Steven Lam. Your line's now open.
Hi. Good afternoon, management. Thanks for the presentation. Can you hear me okay?
Yes.
Yes. It's clear.
Okay. Yes. Thank you. I realized that you mentioned earlier your life insurance investment topic. The cash position went up before the election, and you have probably deployed some of the cash after September. What should we expect the sort of asset mix by end of this year, for example? What will be your take, if you sum up the views on the vaccine development plus Biden, whether it's blue wave or not, because that's still up in the air. How would you sort of take those expectation and reflect those on your investment outlook, per se, let's say, for the first quarter or first half of 2021? That would be a question on investment. Actually, specifically, I want to hear your view on your U.S. corporate bond market, investment-grade corporate bond appetite.
Are you willing to take more, increase more investment in those? That's the investment side. Then just quickly on the life insurance side, just to underline, I realize there's some guidance on the VNB and then some on FYP next year. Just on the product mix, nice increase in the share of the health insurance and accident insurance. Could we get some color on what was driving that? Was it because there's some change in terms of product design or just general customer demand, or actually agents are better in terms of selling that? Can we also expect similar trends at least to be continued maybe in early part of next year so that we can have a nice increase in margin, just what you had so far in the first nine months? Thank you.
Okay. We'll have Lo Wei to brief you our macro view on economics first.
First of all, we think Biden take care and active t reasury. Second, t he financial market welcomed this appointment because the U.S. government has here for the dollar, and all the future is much more clear. According to the epidemic, we believe that even include the vaccine and the medicine, the development procedure is much faster than all expected. The global economy will be much better next year. We were , it will depends on when the global advance economy will get the first indication . If you can reach in the first quarter, then the global economy will start recovering in the second quarter. Then the situation is slower, the global recovery will start at the end in the second half of the year. If we refer to the financial market, we believe as soon as the Americans start recovering, and the bond yield will increase slightly and even much faster.
The stock market will perform much better, because right now it depends on the tech stocks, the tax part. If the vendor and If when the epidemic is under control, other sectors will have the chance to reform.
Yes, I see. Can I take it as in terms of your stock allocation, you also agree that there's a certain switch into cyclicals and/or even back to some value stocks and high dividend stocks so you can kind of recoup some of the loss in dividends per se for next year. Does that make sense to you?
Yes. Correct.
Okay. Thank you.
On corporate bonds? Yes. Corporate bonds.
Oh, corporate bond. Okay. I would say actually the corporate bond, we still keep it neutral. In terms of advertise, I don't think that we will have big change. It's because we still have to measure our asset liability management issue. I think as long as the yield can just fall into our target range, then it will be the first priority. Also we will consider about diversification. It's really hard to say that what will be our reference in terms of industry or even in terms of country. I think the credit issue will be the key that to maintain our portfolio still at around, say maybe a single A average rating. It will be the key.
Okay.
Thank you.
Thank you.
Position with the cash?
Cash position. I would just mention that we have decreased the cash position now below, say, TWD 200 billion currently. Eventually, as we just mentioned, we are quite cautiously confident about our stock market, no matter offshore or onshore, that we have gradually step up our investment in equity position. Part of the cash flow grow into, also we buy some bonds and when has some recent yield peak, then we increase some. I think basically we still will suit the opportunity for profit-taking when bond yield becomes volatile. Also we will reach a relative low point and when we will buy bond yield when U.S. rebounds.
Okay, product strategy?
For the FYP guidance next year, we expect high single-digit growth and VNB growth, we expect to strive for the single digit growth. Talk about the product mix. We think the product mix will be really similar to this year. For the health product, we have very good sales this year. Some of the reason are from the COVID-19 because the health caution for the public, also for the company strategy to strive for more sales higher VNB product. Health product is one of the product that is encouraged by our agent to sell to the customers. When we look at the next year product mix outlook, we still focus on the regular pay and high VNB margin product. Since the FYP grows by high single digits, we also expect the premium for each product group will be increased. It's quite balanced.
The VNB margin will be also similar to this year for our expectation. Thank you.
Okay?
I see. Sorry, just a quick follow-up. For health insurance, is there anything specific in terms of, can you talk about critical illness or medical products that are selling well? Just finally, what's the outlook for, say, investment-linked product for 2021? Thanks.
Currently, the popular health product in the market would be the medical insurance product. We think this is the very basic demand for the customers. Mostly, we think the health product will be pretty similar this year and next year.
I see. The investment-linked product? Yeah.
Yeah. Investment link is also one of the key products for our company. We have very good sales investment-linked product this year, mainly due to the very promising stock market performance this year. For our customers, generally speaking, when the stock market is good, the investment-linked product generally will be sold better. Next year, we also have the investment-linked product, it also contributes quite a big portion for the company. The expectation of the mix is also similar to this year.
Okay. That's very clear. Thank you.
Thank you.
Okay, any more questions?
Speakers, at this time there are no further questions and you may continue.
Okay, if there is no further questions, then I will thank you for all to join the call today, and we'll end the session here. We welcome if you have any further follow-up questions, please feel free to contact the IR team in Fubon. Thank you and have a good day.
Thank you.
That concludes today's call. Thank you all for joining. You may now disconnect.