Good afternoon, ladies and gentlemen. Welcome to join us for First Financial Holding first half 2023 webcast investor conference. We will start with our presentation, including first half snapshot, financial highlights, and operating results. We will invite Ms. Annie Lee, who is currently our EVP as well as Head of IR, to proceed to Q&A session. You can raise your questions by typing at the bottom of the webcast window. Either in English or Chinese is fine with us. Today's presentation material is on our IR website, www.ffhc.com.tw. We provide one-year replay service of the webcast meeting for your convenience. I'd like to turn over to Mr. Keith Ke to begin today's presentation. Keith?
Thank you, Casey. Let's start the presentation now. Please turn to slide five. This slide summarizes the group's performance of first half and also the outlook of second half 2023. First Financial Holding posted a resilient result of TWD 13.2 billion earnings in first half 2023, presenting a solid 28.5% growth YoY. The good news was that all the subsidiaries made contributions in first half, especially for bank unit. The benefits from swap gain transactions continued given the widened U.S. Taiwan rate gap, this played as the major profit driver this year so far. Taiwan has already posted the rate tightening since the second quarter, it helped to loosen the domestic lending cost a little bit. Another spot for the second quarter was the fee revenue. Fee revenue rebounded in second quarter.
Wealth management fee income grew by over 10% YoY, which was mainly driven by second quarter's performance. We believe the trend will continue through the second half. We saw the market was boosted, especially from the AI fever and expected the export market and the related loan demand could take those advantages to recover in second half. As of the ESG related topic, we'd like to remind everybody that our 2022 sustainability report is online now. Please visit our website for the details. Let's move to financial highlights. Please turn to slide seven. This slide shows the group's key figures. The consolidated net income came to TWD 13.26 billion with 28.5% growth YoY. Both EPS and ROE had over 20% growth as well. Please take other figures as reference. Please turn to slide eight and slide nine.
Slide eight provides the breakdown of group's net income. Total net revenue increased 8.6% YoY to reach TWD 35.2 billion in first half. Credit charge of this year was a bit higher, while the insurance reserves was lower comparing with the same period last year. Net income was TWD 13.2 billion as we mentioned earlier. The next slide provides the picture of major subsidiaries earnings. All major subsidiaries made contributions and had better performances comparing with the same period last year. Let's move to slide 11 for our operating results. Slide 11 shows group and bank net incomes and ROAE. Group's net income was TWD 13.2 billion with 11.5% ROAE. Bank also generated TWD 12.3 billion with 10.4% ROAE. Please turn to slide 12. This slide provides the breakdown of bank's earning structure.
Cumulative net revenue of first half 2023 reached TWD 30.2 billion with 22.2% growth YoY. Benefited by swap gains, investment gains drove over TWD 10 billion earnings with almost a 400% increase YoY. Net interest income dropped 19%, mainly was because of the funding shift. As we mentioned earlier, net fee income started to warm up in second quarter. Turning the decrease situation into a growing situation with 4.6% growth YoY in first half. Please turn to next slide. Slide 13 provides the loan book structure. Total loan book dropped to TWD 2.34 trillion from the peak of prior quarter, but still had 4.9% increase YoY. As of the breakdown, large corporate loans still had 33.7% growth. SME increased to 3.5% YoY. Mortgage book had 7.7% growth. Only FX loan book dropped 5.2% YoY. Slide 14 shows the QoQ trend.
Please take it as a reference. Let's move to slide 15. This slide displays the trend of LDR, spread, and NIM. LDR slid a little bit to 69.7%, mainly because that TWD LDR dropped to 78.6%. However, FX LDR rebound to 45.5% this quarter. Loan deposit spread dropped 2 basis points to 1.34%. NIM also dropped 1 basis point to 0.76%. The swap gains was around TWD 1 billion each month in second quarter. The total swap gains this year accumulated to over TWD 7 billion in first half. The adjusted NIM was 1.14% for first half. Please turn to slide 17. This slide shows QoQ trend of the TWD and FX spread. TWD spread was down 1 basis point to 1.35%. FX spread widened to 2.77%. Please move to slide 17. This slide shows the deposit.
Total deposit shrank to TWD 3.37 trillion comparing with the amount at the end of first quarter, but it still had 8.7% growth YoY. TWD deposit increased to 13.1%. However, FX deposit was down 1.4% YoY. The CASA rate further dropped to 64.1%. Please move to slide 18. This slide shows the loan book's concentration of major exposures. Please just take it as a reference. Let's move to slide 19. This slide shows the mortgage yield, LTV ratios, and new mortgage lending trend. Mortgage yield continued to trend up to 2.2%, which was consistent with the rate hike cycle. The LTV ratio stayed pretty the same with the ratios of last quarter. New mortgage LTV ratio was 64.4%. Average mortgage LTV ratio was 46.6%.
The bottom bar chart shows the amount of new mortgage lending this quarter was also similar to the amount last quarter. Let's flip to slide 20 for the fee income. Cumulative net fee income for first half reached TWD 4.4 billion with 4.6% growth YoY. As we mentioned earlier, fee revenue in second quarter accelerated a little bit to turn the situation into growing trend. Wealth management fee income was the key with 10.8% growth YoY. While non-wealth management fee income still fell behind. Slide 21 shows the QoQ trend of the fee income. Both mutual fund sales and insurance had over 30% growth QoQ. Let's move to slide 22 for operating expense. Total operating expense for first half was TWD 12.7 billion with 12.3% growth YoY. However, the cost-to-income ratio still contributes well, only increased a little bit to 42%.
Please turn to slide 23 for asset quality. Coverage ratio improved to 735.7% at the end of second quarter. NPL ratio kept at 0.18% for consecutive four quarters. Bottom chart show the breakdown of NPL ratios. Individual NPL ratio dropped to 0.11%. Small NPL ratio was also down to 0.07%. SME NPL ratio decreased 7 basis points to 0.2%. Large corporate NPL ratio rose up to 0.6% for one-off case. Please flip to slide 24. The pre-tax profits of overseas branches over total profits further shrank to 20.6%, which was mainly impacted by overseas bad debts. Top left pie chart was distorted still, so please just take it as reference. Please turn to slide 25. Group CAR was 128%. G-CAR and Tier 1 were 14.3% and 12.3%, respectively, at the end of first half. Okay, that's the presentation.
I will come back the microphone to Annie for the QA session. Thanks.
Thank you, Keith. Now we'd like to proceed the QA session. As you may be aware that I will combine the similar question into one question. Okay, the first question is from Miss Peggy Shih of Morgan Stanley. Peggy hopes to know what is adjusted NIM in second quarter when adding back the currency swap gains.
Okay. Until the end of first half, our adjusted NIM slowed down to 1.14%, which was mainly due to higher funding costs. We would see that this higher funding cost will drag down our NIM to some extent. For the whole year projection, we would also see the whole year's adjusted NIM should be able to slightly higher than the end of first half, and move up to around 1.16%. After we conclude lower first half adjusted NIM at 1.14%, we still project a slightly higher adjusted NIM till the end of this year, up to 1.16%, which will be around 7 basis points to 8 basis points higher than the results of last year, around 1.09%.
Okay, a further following question is about what's the expected currency swap gains, the absolute figure for 2023, Annie?
Up to end of July, we have booked around TWD 8 billion swap gains, I mean, for the first seven months of this year. However, due to the demand for the FX hedging purpose, particularly from some insurance life player, because their influx of the first year premium actually decelerated for this year, pretty much impacted by the higher US dollar rates. The demand for the new influx of this overseas investment should slow down. We would project a much slower swap gains into the second half of this year, but we still can see that the total swap gains can climb up to more than TWD 11 billion for this year as a whole. The momentum was pretty much driven by the influx of the FX hedging demand from markets. For the whole year, we can still bid up to TWD 11 billion for the whole year.
For the first seven months, we have concluded TWD 8 billion.
Okay. Also, let's talk about the absolute figure of the first half. You just mentioned that from January until the end of July, which is TWD 8 billion swap gains. However, if we just are talking about the first half, what's the figure of that?
Well, for the first half, we actually recorded around TWD 7 billion.
Okay.
Every month, there will be more than TWD 1 billion.
Okay. Also the answer of the question from Peggy is that we actually booked TWD 7 billion for the first half of swap gains, and also until the end of July, we booked TWD 8 billion. Okay, next question is also about the loan growth. Do you think that the 2023 loan growth of 4% YoY will maintain?
Yes. We still project that we can grow our loan book by 4% due to still resilient loan demand from corporate sector and also the mortgage lending. The large corporate and the SME sector would continue to extend their demand for the loan, even though the exporting sector see some weakness in the first half. However, we should see, going into the second half, when we enter into the seasonal peak season, which would help to drive up the demand. Not to mention the recent AI boom. In that sense, the demand going into the second half should see some pickup, and that will help to drive up the loan demand from the corporate sector after we booked a moderate growth in the first half. I would like to highlight about the mortgage lending. Even though there were certain crackdown measures adopted by the government.
The so-called loan tail effect from the previous construction projects will gradually translate into the mortgage loan demand, which helped to boost our mortgage book in the first half. That should sustain for a while before it goes to the following cycle. These two areas will be the major growth driver for us to reach our original projection that we can still achieve around 4% loan growth, mainly from corporate and from mortgage lending, both with the target of 4% and around 3.5% growth for the whole year.
Also the next question is also asking about FX loan growth. We have seen FX loan growth pick up in the second quarter. Do we still maintain the whole year FX loan growth of 6% YoY?
Currently, in domestic front, the loan demand was dragged by the weakening import-export sector. For OBU, FX loan is actually dropped quite substantially. However, in the overseas market, particularly in the U.S. and North America, it continues to grow. We should see some balance between the two sides that Greater China and the ASEAN countries would see some slowdown. However, in the U.S. market will continue to lead the growth. We would project our FX loan growth can maintain a marginal growth of around 3% due to the recovery and the tech boom going forward.
Another question is still from Peggy. Can I know the CET1 ratio in the second quarter?
I think I have had the answer here, which is 10.59% for the CET1 ratio at the end of second quarter.
Also, the next following question is that related question is from Amanda. Amanda wants to know, what is the adjusted NIM in the single quarter of the second, I mean the second quarter. Do we have that figure for the extreme, the special single quarter figure?
No, sorry, we don't have the second quarter adjusted NIM. We can get back to you when we have the figures later.
Okay. Amanda, can you just email us your email address? When we get the answer, we can email you back. A related question is from Eric Shih of KGI. Eric hopes to know if no rate cut or rate hike in 2024, what the possible main trend is a higher rate environment based on history experience.
Well, at least if the rate cycle stay unchanged, we would see that the gains from the swap should sustain. Not as much as what we have this year, but still higher than two years ago. Because if the U.S. rates remain at the high end, then the long demand for FX lending would remain weak because corporates tend to borrow cheaper funding in terms of TWDs than swap into U.S. dollars financing. Because the TWDs exchange rates remain weak, and it is pretty likely that we should see some reversal trend, that the U.S. dollar may become weakened if the U.S. rates start to fall. The hedging demand from institutional investor, particularly for the live player, would resume, because currently they actually opened quite a huge exposure for their overseas investment portfolio.
In that sense, the underlying demand for the swap transactions should remain intact. That's why we would project the swap may be peak here at this year, but for next year, it should be able to sustain at, not a falling level, but at a relatively high level when we compare to prior years. I should see if the rate level remains unchanged going into next year. The swap then should remain intact but peak this year. Currently I cannot predict how high that will be, but at least this trend should sustain for another couple quarters, at least.
Okay, we have another question, is the loan demand, especially the FX loan growth demand. Actually, can we know that which market did we see the loan demand for FX loans for this year or for the future quarters?
For the first half of this year, the major growth region comes from North American markets. In terms of the YoY comparison, in the first half this year, our U.S. North American markets grew. The loan book expanded by more than 14%, so that pretty much offset the decline in the Greater China areas because actually a lot of banks reduced their exposure at the Greater China, especially in China, lending the loans. U.S. market represents a leading role that would help to boost our loan demand. That can also be justified by our loan book expansion that our two main office in New York and Los Angeles, L.A., their loan book expanded by 8% and about 4.5% in the first half of this year.
This can pretty much demonstrate that the growth driver was mainly originated from U.S. markets, and the size is quite meaningful going into next year.
Let's move to fee income. A question from Peggy and also from Wing of Goldman. Hope to know that actually the second quarter fee growth, we have seen strongly recovered on 17% QoQ, especially from wealth management fees. Do we still target 2023 growth by 5%-6% YoY? Which sector or which part will be driven by 8% YoY of wealth management growth?
After we pass on the very slow first quarter, going into the second quarter, our wealth management business actually improved quite significantly that our sales for mutual funds and bancassurance did receive quite a strong growth. Both businesses have seen some 11%-12% growth for the first half this year. However, the non-wealth management fee revenue, particularly from the FX related effects and the credit card business, we did not see good growth. In terms of the loan-related growth, it also seen some slowdown in the first half. When we enter into the second half, we should move into a seasonal peak season for the loan demand. We would see that the increase of loan demand would help to boost the loan-related fee business.
That's why we still maintain our projection for the whole fee revenue by growing 5%-6%, which pretty much reflects the fact that the non-wealth management fee revenue streams still take some time to recover going into the second half due to the slower loan demand momentum. The wealth management momentum should see strength going into the second half, which is in line with our original predictions in the first quarter.
We have another question, which is from the dividend. This question is from Yuanta of Miss Chen. May I know that any change for the future dividend policy such as above 60%, given First Bank actually recorded better earnings than prior year?
This question still takes time to make some assessment because we just mentioned that our capital base is still under the criteria set for the basic banks. We would have to recalculate until the end of the year whether we can comply with the basic criteria prior to the 2025 date set by the regulators. In that sense, I should say that at least the 60% payout ratio that we defined in the past will be the target that we try to reach. However, currently it's still not very clear to see whether we can increase our payout ratio up to 70% or more. We would have to see whether the capital management initiative reach our original target before we can decide how much that we can deliver our dividend payout. Maybe we can discuss that in our second quarter earnings release. It's still a bit early.
Let's move to provisioning and the credit cost part. A question from Miss Peggy, who hopes to know that actually the first half provisioning reached TWD 2.4 billion with credit cost of 21 basis points. Any specific default cases happened in second quarter or expect more default case in the second half?
In the first half of this year, the sizable provisioning mainly came from overseas portfolio. Two from our London offices, one from our Canada office. One is a legacy exposure, which is the OPR, and the Canada exposure was a so-called failure refinance project because this lendings was originally to be sold and repay our lending. However, because the collateral was not successfully transferred to the new buyer, that's why the original borrower defaulted on the loan. We have already charged off this unsuccessful refinance exposure. That is pledged by the collateral, we would project it can see some write-backs going into the following quarters. The major provision was actually driven by the overseas legacy exposure, one from London and the other is from Canada. The total was about TWD 2 billion.
Okay. Also we have a related question from Ms. Tina Chen and also from Jason. They hope to know in slide 23 about the large corporate NPL ratio actually went up 13 basis points from the first quarter. May I know what's the reason behind this one, and which case, and what's the exposure amount, and the related provisioning percentage, and will we still be adding up the provisioning for this case? The single case, large corporate .
The NPL for the large corporate sector was LED manufacturer, the total exposure was around TWD 300 million.
TWD 300 million.
Yes.
In domestic LED manufacturing company. What's the provisioning percentage for now?
Currently more than 60 % or 70%.
Not yet. For the single case provisioning, maybe less than 20%, we would increase our provisioning against this exposure. Because the size of this NPL was not that significant, it should be easily charged off later on. Yeah. TWD 300 million NPL was not that significant. Yeah, we would set aside adequate provision against this exposure.
Okay. Also, we have another question from Monica of SinoPac . She hopes to know what's the China-related exposure amount, and what's the percentage to the net value of holding company?
Our total exposure to China business amounted to TWD 37 billion in total, which represents 16.5% of our net worth. We are not among the higher level of peers. We are still trying to curb our China exposure gradually. The reason why we cannot lower this exposure or this level to a very low percentage was because we do have some China operations that include three branch offices and three leasing companies operating in China. We did attract certain numbers of RMB deposits. That's why we have to place out this deposit to get some return on our operation at the China business. However, our major target audience in China operation will be focused on Taiwan-based business and/or other foreign-based business. The risk should be well contained.
I should see that this level would continue to drop, but in a very moderate pace due to our existing China operation there.
Oh, okay. Also, the China exposure, what's the portion of the property related, and also what's the investment related part?
The China exposure mainly for the interbank lending and the investment, but pretty much minimum, because I just explained that we have to digest the RMB deposit that we absorbed, that to place it via the interbank lending to the so-called Big 4 financial institutions in China, and not very much to the China-based developer. We have zero exposure to the troubled China developers. It should be pretty much low risk.
Okay. Also, we have another question. It's from guest. He hopes to know what our CRE lending exposure amount, especially in the U.S., including subsidiaries. What's the amount, and also, what's the condition of their asset quality right now?
Given that we do have U.S. and North America exposure. However, in terms of the CRE exposure, which is amounted to about 4% of our total loan portfolio. The exposure can be seen quite at a very high level. Also, the state servicing from this overseas CRE exposure still remains. They still service their debt for the time being. We actually closely monitor the cash flow of this CRE lending to see whether they need to refinance or what about the value of the LTV level. We are still monitoring this CRE exposure. However, the total exposure now looks manageable for the moment. Some of the CRE had seen some delinquent problem. As I just talked about, that we have nearly charged off most of the troubled exposure, including in the first half, the exposure in Canada.
We should be able to recover from this charge-off going forward. So far, the overall CRE exposure remains manageable, and which accounts for 4% of our total loan portfolio.
Okay. We have a follow-up question. It's about the new influx. As we think that the new influx increased both domestically and overseas, can Annie Lee talk about that? What's the rationale? Is there any specific sectors, delinquency sector or special specific big case, default case? What's the provisioning condition and what's the collateral situation?
Right. Most of this overseas NPL, the new influx, was mainly collateralized by the property, including the ones that I mentioned in London and in Canada. Our strategy for the moment would be quickly charge -off this delinquent loan, and then gradually recover from the disposal of this collateral. That's why in the first half, we have seen a rising NPL level in the overseas loan book. However, we can be able to recover from this disposal of collateral, and which will become the revenue stream in the coming years. The provisioning level for this overseas NPL was above 80% or more. Which implies that we have already provided a sufficient provision against this overseas NPL up to now.
Going forward, we are still monitoring a couple of exposure at the moment, it still remains well-contained because most of these overseas lending were collateralized by the property. If we are not holding this collateral at our hand, we would also adopt a policy to sell it out to recover the exposure quicker than the following auction process. These are some of our strategies to speed up the recovery of the overseas NPL.
Okay. Also we have ended up question for the credit cost, which is from Peggy Shih. Peggy Shih hopes to know, do we still maintain 2023 credit cost at 19 basis points -20 basis points? Annie?
Yes, I think so. After we have already cleaned up the major part of the NPL in the overseas market, we still have certain recovery going into the second half of this year. The net credit cost can still be maintained at around 19 basis points or 20 basis points or even better than that. Around 20 basis points, 19 basis points- 20 basis points net credit cost can be the target of this year.
Okay. Also we have another question from Monica Wang. Monica hopes to know what's our 2024 strategy for our new office or new branch.
Currently, we are targeting a new loan office in California, which will be under our U.S. subsidiary. That would be not a very sizable operation, but mainly to capture the local opportunities to tap into the local lending businesses. This may be just a step to further expand our U.S. operation next year. That will be the current plan for next year in U.S. market.
Okay, I think we have answered all of the questions. As we have almost very close to the end of the conference, I'd like to turn the microphone to Annie. Do you want to do a conclusion to wrap up something?
Okay. I think I would like to highlight a bit about our asset quality up to the end of first half. Our policy to maintain a clean balance sheet remained intact. That's why we will continue to charge off due NPL, including domestic or in overseas market. Up to now, for domestic NPL, we remain pretty much in line. For the overseas market, we would closely monitor some areas in, let's say, in Eurozone or in the U.S. market. In terms of the China market, we have already reduced our exposure in the prior years. China's exposure should not be a headache for us. We would project for this year, the asset quality will be pretty much in line with our prior projection, and we would continue to monitor the progress or the delinquency ratio going into next year.
We were still pretty keen to maintain the sound asset quality for this year and for the future.
Yeah.
Right?
Okay, thank you everyone. We hope you enjoyed today's conference. We'll see you next quarter. See you