Welcome everyone to CTBC Financial Holding Company’s 2022 third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at the time if you would like to ask a question. Today’s host will be Ms. Rachael Kao, Spokesperson of CTBC Holding, Ms. Megan Hsu, CFO of CTBC Holding, and Mr. Bohong Ye, Executive Vice President of Taiwan Life. Now I would like to turn the call over to Ms. Rachael Kao, Spokesperson of CTBC Holding. Ms. Kao, please proceed.
Hi. Good afternoon. This is Rachael. Since I’m the first participant, I mean, the new participant to the IR meeting, let me introduce myself briefly. My name is Rachael Kao, I have been working at CTBC Holding for 26 years, I was relocated from Tokyo Star Bank this August. Before my experience at Tokyo Star, I was also doing IR and also CFO at the holding company and the bank. Maybe some of you are quite familiar with me. Today we also have a new participant, is the CFO of the holding company and the bank, her name is Megan Hsu. She has been working at CTBC, especially in finance area, for more than 20 years.
She is very experienced, we try to have the new management to be younger and try to promote more managers at the bank and the holding company. Let’s start today’s earnings meeting. Thank you.
Thank you everyone for joining CTBC’s third quarter 2022 earnings call. Please turn to page four on performance highlights. CTBC Holding’s net profit was TWD 7.9 billion in 3Q and TWD 32.2 billion in the first nine months, down 1% QoQ and 31% YoY respectively. ROE reached 12%, with EPS of TWD 1.60 in the first nine months. CTBC Bank’s net profit increased 45% QoQ and 27% YoY, attributable to strong loan growth and margin expansion. Taiwan Life’s net profit dropped QoQ and 77% YoY due to COVID policy related claim costs and subdued investment gains. Overall, the group’s capitalization remains sufficient. CTBC Holding’s CAR was at 123.1%, while double leverage ratio was contained at 123.9%. CTBC Bank’s capitalization was strong, with CAR at 14.2% and CET1 ratio at 11.1%.
Asset quality was sound, with NPL ratio at 0.5% as of 3Q, and benign credit costs of 22 basis points in the first nine months. Taiwan Life's RBC ratio stayed sound at 305%. Taiwan Life announced it would reclassify partial financial assets in October according to IFRS 9, in order to further strengthen its equity asset ratio and better withstand market volatility in the future. Holding continue its commitment in ESG and was selected to join FSC's Coalition of Movers and Shakers on Sustainable Finance in September. Page five, on profitability. Holding's first nine months net income was TWD 32.2 billion. EPS was TWD 1.60. Group ROE was 12% and ROA was 0.6%. Page six, on capital ratio. We remain well capitalized with group CAR at 123%, Life RBC ratio at 305%, Bank CAR at 14.2%, and CET1 ratio at 11.1%.
Page seven, on profit breakdown by entities. In Q3, Bank net profit reached TWD 12.7 billion, up 45% quarter-over-quarter, supported by growth in net interest income, fee income, and trading gains. Life made a loss of TWD 3.7 billion, mostly due to claim costs and reserves related to COVID policies. Other subsidiaries, including securities, venture capital, and Taiwan Lottery, all reported earnings growth. Holding's consolidated net profit was TWD 7.9 billion, down 1% QoQ. In the first nine months, Bank net profit reached TWD 28.9 billion, up 27% year-over-year, driven by increases in net interest income and trading gains, and contained growth in operating expense. Life profit was TWD 5.2 billion, down 77% YoY, mostly due to COVID policy related claims and lower investment income on base effect. Holding reported consolidated net profit of TWD 32.2 billion, down 31% YoY.
From the table on the right, Bank and Life contributed 90% and 16% to Holding's first nine-month profit respectively. Page eight on net profit movements. In the chart above, operating revenue was up 14% QoQ, driven by growth in net interest income, fee income, and trading gains. Provisions were flat QoQ, and credit costing in 3Q was 25 basis points. Expense was up 4% QoQ. As for Life, 3Q pre-tax profit declined mostly due to claim costs related to COVID policies. On the bottom, operating revenue was up 10% YoY as loan growth and widened net interest margin underpinned increase in net interest income. Provisions were up 19% YoY, mostly due to impact from LH. Credit costs remained benign at 22 basis points. Expense was down 2% YoY on lower ESOP valuation.
Life pre-tax profit was down 63% YoY on COVID policy related claim costs and subdued investment income. Holding's pre-tax profit reached TWD 46.8 billion, down 12% YoY. Overall, Holding's net income reached TWD 32.2 billion, down 31% YoY. Page nine on revenue breakdown excluding Life. Total revenue was up 14% QoQ and 10% YoY. Net interest income was up 9% QoQ as loans increased and net interest margin widened due to rate hikes and changes in loan mix. Net interest income was up 26% YoY as loans grew and net interest margin widened due to changes in loan mix and higher yields on marketable securities benefiting from rate hikes. Fee income was up 5% QoQ, probably due to increased wealth management fees, as rate hike movement spurred sales of bonds. In addition, corporate, credit card, retail, lottery, and investment trust fees increased.
Fee income was down 6% YoY as volatility in capital markets led wealth management and securities fees lower. Corporate, credit card, retail, and investment trust fees increased. Combined derivatives, FX and trading gains was up 95% QoQ, driven by higher trading income from FX related products, in addition to dividend income and mark to market gains on securities. Combined derivatives, FX and trading gains was down 7% YoY due to lower trading income at securities and venture capital subsidiaries. Long-term investment and other income was down 29% QoQ due to higher lottery rebates to MOF, and was down 67% YoY as the bank no longer books long-term investment income from LH after consolidating the entity. Page 11 on bank's loan breakdown. Total lending with credit card revolving was up 7% QoQ and 17% YoY. The bank consolidated LHFG in 4Q 2021.
Excluding the impact from LH, total lending was up 11% YoY as of 3Q. NT dollar corporate loan was up 15% QoQ, driven by working capital needs. NT dollar corporate loan was up 13% YoY, driven by higher investment demand, working capital needs, and property development. Foreign currency loan was up 6% QoQ and 27% YoY. Excluding the impact from LH, foreign currency loan was up 9% YoY. Mortgage was up 3% QoQ and 13% YoY, supported by stable business momentum and our participation in lending to civil servants. Unsecured and other loans were up 2% QoQ and 6% YoY, mostly on growth in unsecured consumer loans as we continue to expand our customer base. Page 12 on foreign currency loan breakdown. Foreign currency loan accounted for 37% of total lending. Overseas subsidiaries accounted for 57% of foreign currency loan, with TSB and LH being two larger subsidiaries.
Overseas branches accounted for 31%, OBU plus DBU was 12%. Looking at the foreign currency loan breakdown by region, Japan accounted for 30%, Southeast Asia 28%, Greater China 15%, and North America 15%. Overseas subsidiaries loan was up 34% YoY, driven by the consolidation of LH and solid business momentum at U.S., Indonesia, and Philippine subsidiaries reporting double-digit loan growth. Excluding the impact from LH, overseas subsidiaries loan was up 1%. Overseas branch loan was up 17% YoY, as Hong Kong, Singapore, New York, and India branches observed double-digit growth. OBU plus DBU was up 25% YoY, driven by growth in trade finance and syndicated loans. Page 13 on bank deposit mix. Total deposit reached TWD 4.5 trillion, up 6% QoQ and 15% YoY. On the right, total NT dollar deposits were up 5% QoQ and 10% YoY. NT dollar savings accounted for 62%.
Total foreign currency deposits were up 6% QoQ and 22% YoY. Foreign currency savings accounted for 51%. Page 14, on loan-to-deposit ratio. Based on average loans and deposits, overall LDR was 70.5%, NT dollar LDR was 77.6%, foreign currency LDR was 61%. Page 15, on NIM and spread. In 3Q, foreign currency spread was 2.7%, up 17 basis points QoQ due to rate hikes and changes in loan mix. NT dollar spread was 1.77%, up 8 basis points QoQ, driven by rate hikes and favorable changes in loan mix. Overall spread was 2.1%, up 9 basis points QoQ. In addition, rate hikes led higher yields for marketable securities. 3Q NIM was up 5 basis points QoQ at 1.62%. Excluding impact from LH, NIM was 1.58%, up 5 basis points QoQ. NIM in the first nine months was 1.55%, up 16 basis points YoY, benefiting from rate hikes.
Page 16, on fee breakdown. Total fees were up 6% QoQ and down 7% YoY. Wealth management fee was up 6% QoQ, driven by increased sales of bonds as rate hikes triggered rises in bond yields and prompted customers to invest in bonds. Wealth management fee was down 24% YoY as volatility in capital markets impacted customer demands and caused sales of bancassurance and mutual funds to weaken. Credit card fee was up 4% QoQ due to higher consumptions driven by traveling and sale season in summer. Credit card fee was up 15% YoY due to recovery consumptions supported by expanded customer base and business ecosystem and further penetration of mobile payments. Retail business was up 7% QoQ and 15% YoY due to increases in ATM and loan-related fees.
Corporate business fee was up 5% QoQ on higher syndicated loan and trust fees, and up 26% YoY, driven by syndicated loan, trust, and loan-related fees. Overseas subsidiary fee was up 3% QoQ as corporate fees increased at TSB, and up 15% YoY mostly due to the consolidation of LH. Lottery fee was up 8% QoQ due to higher lottery sales and relatively flat YoY due to lack of high price this year. Page 17 on wealth management fee. For wealth management fee breakdown in 3 Q, bancassurance contributed 58%, mutual fund 22%, custodian and trust 4%, and others 15% to total wealth management fees. Page 18 on cost income ratio. Bank operating revenue increased 12% QoQ while operating expense was up 4% QoQ, leading to a lower cost income ratio at 46.5% in 3 Q.
In the first nine months, cost income ratio was 52.2%, lower compared to the same period last year, mostly due to growth in operating revenue and decreased ESOP valuation. Excluding ESOP impact, cost income ratio would be 53.8% in the first nine months, which is lower compared to 56.5% in the same period last year, indicating contained growth in operating expense. Page 19 on asset quality. Asset quality remains stable with NPL ratio at 0.5%. NPL coverage ratio was 322%. Excluding impact from LH, NPL ratio was 0.36%, and NPL coverage ratio was 378%. 3 Q credit cost was 25 basis points, down 1 basis point QoQ. First nine months credit cost was 22 basis points, up 1 basis point YOY, mostly due to impact from LH. Excluding impact from LH, first nine months credit cost would be 16 basis points. Moving on to Life business.
Page 21 on total premium and first-year premium. Total premiums were TWD 32.5 billion in 3 Q, up 2% QoQ. First nine months, total premiums were TWD 106.9 billion, down 32% YoY. FYPs were TWD 12.5 billion in 3 Q, down 6% QoQ. The sales of US dollar single-pay interest-sensitive policies declined, but sales of health and investment-linked policies increased. First nine months FYPs were TWD 48.2 billion, down 43% YoY as volatile capital markets affected sales of investment-linked products and customers turned to interest-sensitive policies that capture rate hike trend. FYP market share was 7.7%, ranked number five in the industry. Page 22 on FYP breakdown by products and channels. On the left is the product breakdown. Investment-linked products accounted for 17%, interest-sensitive policies, 78%, health MPA, 5%, and traditional, 1% of FYPs.
On the right, in terms of channels, 51% of FYPs came from CTBC Bank, 33% from external banks, 9% from tied agents, and 7% from insurance brokers and others. Page 23 on FYP breakdown by type of payment and currency. On the left, regular-pay products accounted for 42%, and single-pay products accounted for 41% of FYPs. On the right, foreign currency policy accounted for 69%, and NT dollar policy, 15% of FYPs. Page 24 on FYPE. First nine months FYPE was TWD 13.8 billion. On the right is the FYPE mix for your reference. Page 25 on investment asset mix. reached nearly TWD 2 trillion. Taiwan Life took suitable opportunities to realize some profits and increase its cash holding. In terms of portfolio breakdown, cash accounted for 5.1%, domestic fixed income, 9.4%, overseas fixed income, 60.1%, equities, 9.6%, mortgage, 2%, policy loans, 1.3%, real estate, 4.7%, and mutual funds, 7.8%.
On the right is the pre-hedge return for each type of investment assets for your reference. Equities position generated a negative return of 3.2%, largely due to loss at P&C. Page 26 on investment yield, cost of liability, and breakeven point. In the first nine months, Taiwan Life still maintains a positive investment spread. With impact from P&C, overall investment yield after hedge was 3.31%, and recurring yield before hedge was 2.51%. If excluding impact from P&C, overall investment yield after hedge was 4.26%, and recurring yield before hedge was 3.47%. Cost of liability increased four basis points YoY to 3.09%. Breakeven point continued to improve at 2.71%. Page 27 on hedging mix. On the left, 43% of overseas investment assets were foreign currency policies, 33% were fully hedged, 10% were OCI position, and 14% were unhedged. On the right, FX reserve amounted to TWD 14.9 billion as of 3Q.
NT dollar depreciation resulted in hedging gains of 40 basis points in the first nine months. Overall hedging costs declined 158 basis points YoY from the same period last year. Next section is the ESG highlight for your reference. That concludes the presentation.
Thanks, Megan. Before we move into the Q&A section, I would like to have a highlight of the performance for the first nine, 10 months. First of all, for the CTBC Insurance, in October, in our model that we took the infection rate up to 46%. For year- to- October date, we now book TWD 14.3 billion loss on the COVID policy. The one thing to remind is it's about TWD 5 billion additional loss that we took in October that in our financial statement is going to reflect it in the third quarter financial report. Since the CTBC Insurance loss, we don't think they're going to repeat again.
If we look at the overall financial holding company earnings at the after-tax basis for the three quarters is TWD 32.2 billion, which was down about 30.7% compared year-on-year to 2021, with ROE at 11.9% and EPS at TWD 1.60. If we took the COVID policy excluded, our earnings was actually TWD 44.4 billion and slightly declined compared to last year at 4%, and now we're going to stand at 16% with EPS at TWD 2.22. In the sense that we hope that for 2023, that we can get away with COVID policy issues and then have a brighter future going forward. Before we move in, I would like to cover some of the questions that are recently frequently asked by investors. One is whether we're going to do additional recapitalization at the holding company.
As you heard about the presentation that currently for the holding company, the bank, and our life insurance, the capitalization is actually at a very sufficient level. Even though we are considering a recapitalization at CTBC Insurance, but its parent company, Taiwan Life, is going to do the recapitalization. Currently, for the holding company, we don't consider there's a need for recapitalization in the near future. Another question that is our dividend policy. For the three quarters, the after-tax income is TWD 32.2 billion. Although there we have some mark-to-market loss at the book. So far, we still have undistributed earnings at the book, and they're still available for distribution for our dividends. We do think that we have the payout capacity, and we also intend to maintain a stable dividend payout policy.
However, the final numbers there we still need to confirm with the regulators, and also, were subject to the board's confirmation. Since the bank gonna book a record high earning this year, the bank earning gonna upstream to the holding company, I think that can support the holding company to pay out dividends for the investors. Let's summarize some key questions from investors. Before we move into the Q&A, I have Bohong to maybe summarize some of the questions related to insurance or life parts. Thank you.
For COVID policy, we already recognized TWD 14.3 billion on our P&L. For claim application, up to the end of October, was 12.4 million, which was an infection rate around 38%. We use the assumption of 46% on our P&L. Since we already recognized the loss, the RBC and the net worth was negative for P&C company.
We into the third time capital injection to P&C from Taiwan Life. Even we need to capital injection to P&C. For life, RBC still around 300% and above, and the net worth is 4.58%. For accounting reclassification, our net worth ratio from 3% up to around 5%. We move around TWD 100 billion OCI positions to AC and the net worth impact was TWD 33 billion. Thank you.
We open up the floor for questions. Thank you.
Yes. Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you wish to ask the question, please press 01 on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. Should you wish to cancel your question, you may press 02. Thank you. Now, please press 01 to ask the question. Thank you. Our first question is coming from Jemmy Huang of JP Morgan. Go ahead, please.
Yeah. Thanks for the presentation and take my questions. Two questions from me. First one is for the bank. Based on your numbers in the Chinese session on the ESOP impacts, if we exclude that, the year-on-year OpEx at the banking side is actually up roughly around 10% year-on-year. Just try to understanding for this 10%, how should we do this number? Where is the OpEx growth coming from, and should we expect the high single digit to maybe 10% OpEx growth to be a more normal base? That's the first question. Second one is still on the COVID policy impacts. I think what Bohong just mentioned, your total pool, the implied infection rate is roughly around 38% based on the claim application. I think the nationwide infection rate was roughly around 32% by the end of August.
Based on your understanding and analysis, what are the key reasons the pool of your infection rate is actually higher than the nationwide levels? Thanks.
Hi, Jemmy. Thank you for your question. Regarding your question on the OpEx expense and the reason that you see a high single digit or to 10% increase is because this year, we actually consolidated LH. Last year, actually, the LH was consolidated in the fourth quarter. When you look at the third quarter number, it's actually not apple to apple. That's the reason that you see a bigger increase in the OpEx.
For COVID policy, we did some analysis. We found that for our customer pool, more concentrate on city rather than southern. That's one of the reason. Another one is that I heard that some people, the symptom, maybe some people have infected, the symptom, it's very light. They would not go to clinics. That's why. If the people have the COVID policies, they will do that. I think it's another reason. Currently, at the end of October, the nationwide is 33% infection rate. For our P&C is 38.
May I have a follow-up question on OpEx? If we exclude LH impacts, what's the underlying OpEx growth that we should look at on a more recurring basis? Thanks. Hello?
Hi. For the bank, if we are now considering the ESOP impact and also we take out the LH impact, the overall operating expenses grew about 3%, mainly driven by the credit card promotion campaigns.
I see. Thank you.
Bye.
Thank you. We are now in question and answer session. If you would like to ask the question, please press 01 on your telephone keypad. Thank you. This question is coming from Gurpreet Sahi of Goldman Sachs, Hong Kong. Go ahead, please.
Thanks for the presentation and taking my question. I just wanted to check on the regular guidance regarding the growth target into next year and also what kind of margin we can expect NIM for next year. Thank you.
Thanks for your questions. Actually, we are now still compiling our internal budget. I think I will wait until maybe next meeting with you, then can give you more highlights on our growth target and also NIM. Currently, so far, we see the NIM is increasing since the major financial market is still increasing the rate. We still see strong loan growth from the market, especially post-COVID. We see more demands from especially Greater China and Southeast Asia. We'll hope that going forward, that the loan growth will still maintain its current level. Thank you.
Okay. Can I quickly check on this insurance asset reclassification? Given that this has happened in the fourth quarter, should we expect, excluding this one-off impact, like the 5% equity to asset. Now whatever the yields do, we should expect no impact, so equity to asset should be stable at around 5%? Is that the way to think about it?
After reclassification, the net worth rate ratio, we do some sensitivity test. If the equity dropped 50% and the interest rate goes high 50 basis point, we still can maintain the net worth ratio of 3% and above, for your reference.
Okay. Just checking, equity dropped 50%, five, zero, and interest rate rise by 50 basis points, five, zero. That's correct?
Yes, that's correct.
Okay, cool. Thank you very much.
Thank you.
If you would like to ask the question, please press 01 on your telephone keypad. Thank you. We are now in question and answer session. Please press 01 on your telephone keypad if you would like to ask the question. Thank you. Now, please press 01 on your telephone keypad if you would like to ask the question. Thank you. There appears to be no further questions at this point. Ladies and gentlemen, we thank you for all your questions, and that will be the end of the conference. We thank you for your participation in CTBC Financial Holding Company's conference call. You may now disconnect. Goodbye.