Thank you for standing by, welcome to the Fubon Financial first half of 2020 financial results. At this time, all participants will be in listen-only mode. Questions will be taken at the end of the presentation, this call is being recorded. If you have any objections, you may disconnect at this point. I'll hand the call over to Ms. Amanda Wang, IR Officer of Fubon Financial Holdings. You may now begin.
Thank you. Welcome everyone. Thank you for joining the call today. I'll walk you through from the key highlights of Fubon's first half results. Please turn to page four of the presentation. Fubon Financial made 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. The key earning drivers from the major four 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. We grow the sales in investment type of management offerings that offset the negative impact from the rate cut and also slower bancassurance. We also deliver a high growth rate among the peers in terms of active credit cards, and that lead us to the growth in the related fee revenue.
In Fubon Life, we ranked top two along with transformation in product mix. Investment side is the spotlight of the earning growth in first half. While the current return and total return, let those do better than last year. Cost of liability also improved over 20 basis points Y-o-Y. In Fubon Insurance, we keep our top position with the market share gain that reach a milestone level of 25%. In Fubon Securities, their brokerage revenue is the beneficiary area of the market turnover that up by 47% in entire market, while we are gaining market share and also improving the capital efficiency by a capital reduction plan of TWD 6 billion in the application process. In page five, the overall net profit that reach TWD 37.3 billion, which translate into earning per share of TWD 3.36, that help us to rank top among the market peers. In page six.
In terms of the earnings by subsidiaries, Fubon Life and Non-Life shows growth and leads to the earnings contribution of over 60% of the holding company. All the three bank subsidiaries together, they account for another 28% of the earnings. In page seven. Assets. Consolidated assets reach TWD 8.8 trillion, with a growth rate of over 9%, while the book value also reach a high level of TWD 596 billion. It was further up to over TWD 670 billion in July as the investment assets value appreciate. In page eight. With the earning growth on annualized basis, that bring our ROA to 0.86% and ROE to over 12%. In page nine. Along with the new normal post the COVID-19, digital transformation plays the 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. Number two, we endeavor to improve the user experience and efficiency. Examples are from our patterns, numbers of patterns that granted it is ranked top among peers. 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. Let us move on to Taipei Fubon Bank. Please turn to page 11. The revenue was down by 4% in the first half. That mainly reflects the net treasury income was slow in Q1, while the sequential recovery took place in Q2.
It bring up the first half of treasury revenue, while the core earnings from NII and fee income remain on growth track. In page 12, the loan growth of Taipei Fubon Bank at 7.2% outperformed the entire market growth rate of around 6%. 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 are driven by Taiwanese corporate clients. As you can see here, the 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 is primarily driven by personal unsecured loans.
In page 15, from the deposit side, the demand deposit improved quite meaningfully, especially in the foreign currency book, while the volume growth both delivered in NT dollar and foreign currency. The loan-to-deposit ratio remains stable. Actually, investment asset deployment is one of the key areas to enhance yield in the bank. We talk about the investment asset from the foreign currency LDR, that will reach the level to 73%. In page 16, the loan-to-deposit spread was down by 4 basis points and reached a level of 1.36%, that is mainly due to the rate cut impact. Our interest margin was only down by 1 basis point, and at a level of 1.09%. That is mainly due to the effort that we adjust the mix in asset and liabilities.
We aim to keep the impact from rate cut on interest margin within 4 basis points to 6 basis point down for the full- year, which will be slightly better than our expectation a quarter ago. That was 6 basis points 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. The single case of NPL we reported last quarter on Agritrade, 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 61.5%, that primarily come from the credit card business, while the wealth management fee flattish at 0.4% growth. That is mainly due to the insurance product mix change. Other than that, the rest of the investment type product sales deliver growth of about 30% growth Y-o-Y.
In page 19, the revenue from overseas branch was down by 19%. That mainly reflect 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 premium still steadily grows at 13%, and overall speaking, we rank top two in the Taiwan insurance market. In page 22, FYP down by 47.5%, that reflects, number one, its impact from the COVID-19, and therefore, the interaction with customers is inevitably lowered. Secondly, the product focus changed, and therefore, you can see the product mix change come from the investment-linked policy now is 24.5% of FYP.
Also, we see the health accident type of policy also go up to 7.8% of FYP in the first half. In page 23. With the focus on the regular paid product, the FYPE decline is much more mild by only 4%, in spite of the FYP down over 40%. VNB also trend down, but only by 12.5% to the product mix improvement. 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. We expect the second half of the year to see gradually recovery. In page 25, in investment assets, we see overall asset size reach over TWD 4 trillion and up by 8% Y-o-Y.
For the asset allocation, the percentage increase in domestic equity and also property. For equity, they reflect both the addition of 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 slow down 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 two lines of the table. Annualized basis, our post-hedge return, that reached 4.2%, and before hedge, that reached 4.86%. That also marked a record high during the past years.
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. The interest spread narrowed between dollar and NT dollar. That helped the recurring hedge cost improvement. We expect to manage the overall hedge cost to below 100 basis points for the full- year. Meanwhile, the foreign currency reserve outstanding reached TWD 11.6 billion of end of July. That also will be the buffer to our hedge management. On your lower left-hand chart, recurring return before hedge trend down reflect the lower market rate and also the NT dollar's appreciation. On the post-hedge recurring return, that will top- up, and we expect to see increase for the full- year as the dividend income will flow in during the second half.
In page 29, in terms of the cost of liability, it is improved by 22 basis points Y-o-Y as the new policy carry a lower cost and reach the level of 3.43%. Therefore, it also bring down the breakeven point to 2.81%. In page 30, the mark-to-market unrealized value recovered in second quarter. The outstanding URCG standing at TWD 43.5 billion in June, 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 TWD 330 billion in end of July to over TWD 420 billion from June to July. Next section in page 32. In Fubon Insurance, we deliver premium growth of 4.9% that outperform the market growth rate of 5.9%. We further gain the market share and reach a milestone level of 25%.
Underwriting performance continue to outstanding, with the net combined ratio at 90.4%. In page 33, Fubon P&C China, the premium growth specifically from the accident and health line that drive up the volume. That is mainly come from the online channels of our business partners. For the net combined ratio also shows a meaningful improvement that is on back of our efforts of adjust the auto business and also the overall expense control. Next section in page 35, in Fubon Securities. We benefit from the high market turnover in Taiwan stock market, therefore, that we increase the brokerage revenue by nearly 50%. In the meantime, we also gain brokerage market share. In the longer term, we focus on wealth management to diversify product offerings. The sub-brokerage business, as a result, deliver a growth.
As you can see here, the market ranking move 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 the first half. That reflects, number one, is a lower net interest margin due to the rate cut. Number two, due to a higher provisioning cost, that was a more conservative macro outlook, therefore Stage 1 and 2 provision increase. Also due to a single default case that increased the provisioning. In page 39, Fubon Bank (China)'s balance items all grew strongly on the back of our strategy of prioritizing the deposit growth. On page 40, the net profit as a result grew along with the asset growth, driven by the net interest income and also treasury income.
Net interest margin is slightly down by 30 basis points, while the overall asset quality remained benign and NPL asset quality remained at a stable level of 0.93% NPL. On the back of the growth strategy, the bank plans to receive a capital injection from Taipei Fubon Bank of CNY 1 billion before the end of this year. With a branch network of 26, we are about to open one more new branch in Ningbo and additional one to two branches are planned every year. This is the end of the briefing. Thank you for your attention. Next, we'll open for Q&A and hosted 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. To cancel your request, you may press star two. One moment please, as we wait for questions. Excuse me, speakers. We have a couple of questions in queue, our first question comes from Chung Hsu. Your line is now open.
Hi. Thanks. This is Chung Hsu from Credit Suisse, I have four questions. My first question is, if you look at the appendix on 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 missing the digit, 7.6% loan growth, while your net interest margin is down. Can I just confirm that this variance is mainly because of the loss of swap business, and therefore you start to put your interest, those income into interest income? If there's anything else that we should note for, just in terms of that difference in the growth rate. 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, you're growing credit card business quite aggressively and successfully. I think in the Chinese session, you mentioned that the credit card fee income is a net fee income. The only thing that'll be booked in the OpEx is the reward bonus points. Just want to check that. Does that mean that some of those reward expense will come later, like 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? Just wonder if you can give us more color as are you done?
If we did see this NPL rising, how we should look at your provisioning in second half this year for Fubon Bank (Hong Kong)? I'll stop here first before I move on to the fourth question.
Sure. Maybe I can start the first question. The appendix for Taipei Fubon Bank actually is a consolidated basis. The net interest income combines Fubon China and Taipei Fubon Bank.
That loan growth is just Fubon Bank?
The loan growth is Fubon Bank, yes.
Okay.
The loan growth in the appendix is a consolidated basis, but in the presentation, it's a standalone.
Okay. The gap, that means on the appendix page is the same basis, right? The loan growth and net interest income growth, it's all consolidated, right?
Yes. It's consolidated. Yes.
If I remember your presentation slides, Fubon Bank (Hong Kong) also sees a margin decline, so is Taipei Fubon Bank. You have a declining margin, missing the digital growth, but you have a double-digit net interest income growth.
That also reflects our treasury-related net interest income contribution.
From investment portfolio.
Yeah, from the investment portfolio.
From investment portfolio.
Right. Okay.
It's pretty much like the recurring income concept in our life business.
I would have thought those are captured in your interest-bearing assets, but maybe that's not the case. Because we're not looking at spread, we're looking at net interest margin.
Yeah. 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 investment.
It's a net-net combined result.
Okay. Got it. Thank you.
Thank you. Our next question comes from [Steven]. Your line is now open.
Sorry, operator. We are going to answer a second question from Credit Suisse. Please hold on.
I understand. I apologize.
No problem.
In Taiwan, or 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, to 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. When we're looking at this credit card business, we're not looking that solely on the fee-related business from credit card issuance or just the loan that generated from this card spending. 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?
Therefore, we foresee that there will be further reduction in our overall group expenses in the next few months. Yeah.
Is there a cost- income ratio target for the bank?
Yeah, we have a budget, but our last cost- income ratio, the revised target is lower than our original budget level.
Okay.
Chung, your third question regarding the Fubon Bank (Hong Kong)'s provisioning.
The composition.
Yeah, the composition. We provide TWD 157 million of provision first half, and a single case represent about TWD 62 million. Yeah, the remaining are basically, primarily the Stage 1 and 2.
Stage 1 and Stage 2.
Yeah.
Okay. Thank you. Do you have guidance for the Hong Kong Fubon Bank in Hong Kong provisioning second half? Do you see need to keep that same pace of provisioning or potentially increase?
Well, on the specific provision, right now, we don't see any other significant credits downgrade. As to general provision, because we are using a forward-looking model, if the macros remains I won't say stable. If the macro does not deteriorate further, our GP provision level will remain at the current level.
Okay. Thank you. If I may ask more question on the business strategy and capital allocation question. I think if I hear correct, Amanda mentioned there's a CNY 1 billion capital injection to Fubon Bank (China). CNY 1 billion doesn't seem a lot for a bank that grow loan book by more than CNY 10 billion a year and asset by CNY 20 billion to CNY 30 billion a year. If I look at Fubon Bank (Hong Kong) with similar asset size as Fubon Bank (China), but carries two and a half times 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?
To be very honest, by end of the year, we were doing a thorough examination on our capital allocations amongst the group. 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 TWD 6 billion from Fubon Securities, and will further inject it into Taipei Fubon Bank by end of year. Part of the capital injections from, I mean, not from, to Fubon Bank (China), is actually indirectly from the capital reduction from our Fubon Securities side. Sorry, am I saying that too complicated?
No, it's very clear. I just wondered, that capital reallocation plan is on top of what you just mentioned, the taking some capital from the securities business through Taipei Fubon Bank to Fubon Bank (China). There will be more. Right.
We're doing the review again by end of the year.
Okay. Thank you.
Excuse me, speakers. Is it okay if we proceed with the next question?
Yes, please.
Thank you. Our next question comes from [Steven]. Your line is now open.
Hello? Hi, can you hear me?
Yes, please, [Steven].
Yes, hi. Good afternoon, management. Thank you for the opportunity, and hope everyone is well and safe. I'll probably start with a data side question on the investment. I noticed on, I believe it's slide 26. On slide 26, there's some shift in just the three 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, I think the government bonds rose dramatically, and then the commercial bonds decreased, so on and so forth. What was basically driving that change? That's number one. Sorry. That's number one. I think number two, this is a little bit a longer- term, also on the investment side.
I believe in the Chinese call, you guys brought up the discussion on U.S. elections and how that's going to change maybe the risk appetite and whatnot. I was wondering 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'd be much appreciated. I think lastly, just want to confirm on the life insurance side, from a VNB. If I'm not mistaken, I think you also mentioned that you sold more longer term policies, like the six years products. However, obviously, maybe it's just the math, but the VNB margin did come down on FYPE basis.
Just curious, what will be the dynamics there, and what will be the outlook for the VNB for the rest of the year? Thank you.
Excuse me, speakers. This is a [inaudible] operator.
Hello?
Okay. Hello? Can you hear me?
Yeah, I'm here. Yes, now I can hear you. Yeah.
Okay, that would be great. I do some from the top list. I would say that when you look at the picture at the left-hand side, as you can see, we have some financial bonds decrease, say, from 40%-36.4%, which is because we have a lot from CoCo Bond have closed gradually there and have been called. Most issuer were European financial institution. Another reason you can see the decrease as well on the European exposure. We have already reinvest. We have reinvest our [least costly CoCo amount], and exposed to some higher bonds. As you can see, the government bond increased most because we invest in some higher bond with higher ratings and economics. The reason you can see government bond increase, and also you can see actually the corporate. Corporate, we also increased some.
As you can see, the position also increased.
Okay. On the government bond, right? On the government bond, any specific country or region you have invested? Is it mostly Asia?
Yes. That's correct.
Okay. Like China.
Actually, it's not quite, say, all exposed to Asia. Actually, it's quite diverse because the proportion would say that 24.5%, sorry, 24.8% actually is Asia and others. It's not only to the Asia.
Okay. I see.
High grade in margin?
Yeah, correct.
High- grade margin. Okay.
I think the VNB ratio is kind of confusing because the FYPE is kind of artificial.
I apologize. Do you mind to speak closer to the mic? I'm having trouble hearing. Yeah.
I think the VNB ratio is kind of confusing because the FYPE calculation is kind of artificial because for two premium paying period product, we discount by only pay 20% of the premium, and the three- pay is 30%, but up to six- pay jumps to 100%. FYPE, the denominator, kind of misleading.
Okay.
I think the VNB divided by FYP seems more accurate. Yeah. I recommend you look at that number.
I see. The outlook for the second half, in terms of margin or VNB, any color you can provide?
VNB margin might drop a little or slightly. It should be higher than 2019.
For the full- year?
Yeah, for the full- year.
I'm sorry. On FYP basis only or?
FYP basis.
Okay.
FYP basis. Yeah.
Okay.
Just want to make sure your second question. Your question is how the U.S. election would affect our hedging strategy or our investment strategy.
Right. How are you positioning yourself going into the election?
The position?
The kind of—
I don't know which one is better. I don't know if Trump or Biden, which one is better.
No, I understand. That's the uncertainty, right? Yeah. If I can be more direct, do you feel like you're going 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?
I don't think my answer means anything. If the market continue to rise, yes, we'll take the money off the table. If the market goes down, we'll consider to invest more because we have a lot of liquidity on hand.
Okay.
Sorry. Maybe at this moment, we can't really comment on the U.S. election because it's based on our investment strategy, and it's really hard to say. We can say that because we see the weakening of the NT dollar. This trend could be maintained for a while, that it's because we have in Taiwan, I would say that our fundamentals are really strong and because the capital inflow from overseas will maybe still continue and our economy is still quite healthy. We think the NT dollar is likely to remain at a strong position. Under this circumstance, actually we will keep, maybe increase our hedge positions and also maybe more flexible to use the proxy as the hedge instrument to step in our hedge costs promo.
I just want to add one thing. Although the NT face pretty strong appreciations pressures, you probably noticed 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, the NT dollar only rise by 2%. That is something you probably also noticed.
Appreciate that. If I can have a quick follow-up since we're on the investment topic. One thing is, I'm not sure if, would it be too early to talk about inflation risk? Since insurance companies hold a lot of bonds in this case. Second of all, just your own personal view or the company view in terms of from an equity standpoint, how do you see Taiwan stocks, Taiwanese stocks market versus, say, overseas, in the next maybe three to six months, for example?
We think the inflation is not that unusual this year and the next year because the pandemic influence still has a very strong pressure on consumption side. It won't be a factor in Taiwan, in the U.S., Europe, or even all the developing countries. According to the Taiwan stock market, we believe it will keep the current good performance last year because of the semiconductor sectors is still invest a lot, and we think it's the momentum will keep going.
Okay. Great. Thanks so much. Really appreciate that.
Thank you, Steven. I just wanted to remind our participants that if you have a question, please press star one and remember to record your name when prompted. Our next question comes from [Jimmy]. Your line is now open.
Hi. Thanks for the presentation. Three questions from me. The first one is, could we get the Life RBC ratio as of second quarter? Second question is, for hedging costs, just trying to reconfirm, Amanda mentioned that our full-year target is to control hedging costs 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 two years? 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. 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?
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 ECL 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? Thanks.
We'll start it from the easiest one. Life RBC and the hedging cost.
The Life RBC is close to 270% at first half, end of June 30. Jimmy, the hedge cost I just mentioned is on a normal business loan basis. The top-up of additional FX reserves that we will separately consider.
Okay.
You mentioned about the follow-up question. Can I have the question again, please?
Okay. That is for the credit cost, credit impairment charges for Fubon Bank (Hong Kong). You have TWD 157 million, that is for loan loss provision, but you also have another TWD 82 million for financial asset impairment. Just trying to figure out what is driving that. For the TWD 157 million credit costs you mentioned largely is for general provision Stage 1 and 2. Presumably that is because of your ECL assumption changes for the model changes that result in the increasing provision for Stage 1 and 2. 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 or property price changes. How that is significant on the half-on-half year in terms of the assumptions in first half versus end of 2019?
A couple of macro factors as a major macroeconomic factor affect our forward-looking ECL model for Fubon Bank (Hong Kong). They are GDP growth in China. Our original forecast is 5%-6%. This year, we have reduced that to 1% or 2% growth.
Another Hong Kong GDP growth. We are forecasting at a very minor growth last year. This year, we are looking at a 10% decrease. Real estate price in Hong Kong, that is another one. We originally estimated it will probably flattish this year, but now we are looking at like 20% decrease. These are all very dramatic change to the ECL forecast model. Therefore, after consultation with our accountant, we decided to increase our general provision for the Stage 1 and 2. As to your impairment for the financial asset,
It actually comes from a few areas, including the investment growth trade bills and also some loans that we granted a credit line, but not yet granted a loan size. All three factors put together, they come up with the TWD 82 million.
That's also more like General Provision, rather than specific defaults-
Yeah
as a result.
Correct.
Okay. Thank you.
Excuse me, speakers. Just want to let you know that there are no further questions, and you may proceed.
Yes.
[audio distortion]
Yeah. I have no further questions. Thank you.
Oh, thank you, Jimmy. Again, speakers, there are no questions, and you may continue with your meeting.
Okay. If th ere is no further question from the audience, I would like to thank you for your participation for the call today. If there's any follow-up, please feel free to contact the IR team. Thank you. Have a good day.
Thank you.
That concludes today's call. Thank you all for joining. You may now disconnect.