Good afternoon, ladies and gentlemen. Welcome to join us for First Financial Holding first quarter 2023 webcast investor conference. We will start with our presentation, including first quarter 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 the 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, or you can email us your questions after today's conference. 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. Please.
Thanks, Casey. Please turn to slide five. This slide represents the overall picture of first quarter's performance 2023. Overall, to say, group posted a resilient earning result in first quarter, which was mainly driven by bank unit. Both group and the bank had over 30% growth year-over-year. Benefited by the widening interest rate gap between US dollar and TWD , currency swap gains reached over TWD 4 billion in first quarter. That's the key point to boost the earnings. Non-banks resumed their momentum in first quarter as well. We think the continuous rate hike in the past year has impacted the global economy dramatically. The global inflation was huge, but we think it would become moderate eventually. Group will continue to evaluate the market environment and adjust the business strategy.
A proposal of TWD 0.8 cash dividend and TWD 0.3 stock dividend is subjected to AGM approval on June 16th, 2023. The cash payout ratio would be about 51%. Let's move to financial highlights. Please turn to slide seven. This slide shows group's key figures. The consolidated net income of holding company reached TWD 6.6 billion with 34% growth year-over-year, as we mentioned. It also drove the EPS, ROE, and ROA. Please turn to slide eight. This slide provides the breakdown of group's net income. Total net revenue increased to 14.7% year-over-year to reach TWD 7.7 billion in first quarter. Credit charge was higher. However, the insurance reserves was lower comparing with the same period last year. The net income ended at TWD 6.6 billion. The next slide provides the picture of major subsidiaries' earnings.
As we mentioned at the beginning, bank had a 31.2% growth, while non-banks all had some improvement to support the group's earnings. Please turn to slide 11 for the operating results. This slide shows group and bank's net income and ROAE. Group's net income was TWD 6.6 billion with 11.5% ROAE. Bank also generated TWD 6.3 billion with 10.7% ROAE. Both ROAEs have reached double digits in first quarter. Please move to slide 12. This slide provides a breakdown of bank's earning structure. Cumulative net revenue of first quarter reached TWD 15.2 billion, which was 31.4% increase. This is mainly driven by gains on investment, which has over 600% growth year-over-year. As we mentioned, over TWD 4 billion currency swap gains was the key issue.
As of the core earnings, net interest income decreased to 16%, mainly because part of the funding shifting to swap transactions. Net income also dropped 4.1% year-over-year. This slowing start, we believe it was mainly impacted by some turbulent incidents globally, and we expect it to catch up in coming quarters. Please turn to slide 13. This slide presents the loan book mix. Continuation of the solid growing trend. Total loan book still had 11.6% growth to reach TWD 2.37 trillion. As of the breakdown, syndication market was still solid. Large corporate loan had a 57% growth year-over-year. SME also had a 5.5% growth. Mortgage book increased another 9.3%. Also, FX loan book was flat. Overseas still showed a strong demand with 10% growth year-over-year. Part of the reason is because the lower basis of last first quarter.
Slide 14 shows the quarter-over-quarter trend of the loan book mix. You can see the loan demand was not that strong as we mentioned for the year-over-year base. Let's turn to slide 15. This slide shows the trends of LDR, spread, and NIM. LDR dropped to 70%. New Taiwan dollar LDR slid a little bit to 81.4%, while FX LDR was down to 42%. Loan-to-deposit spread and NIM drove down quite a lot to 1.36% and 0.77% respectively. However, the adjusted NIM kept the momentum with swap gains included. We'll address more about this part later. Please turn to slide 16. This slide shows quarter-over-quarter trend of New Taiwan dollar and FX spread. New Taiwan dollar spread was down 2 basis points to 1.36%, while FX spread decreased to 2.75%. Please turn to slide 17. This slide shows deposit mix.
Total deposit reached TWD 3.39 trillion with 11% growth year-over-year. New Taiwan dollar deposit increased 12.2%. FX deposit was also up 8.3%. You can see the right-hand side, CASA rate continued to drop to 65.4%. Please turn to slide 18. This slide shows the loan book concentration for major exposures. Please move to slide 19. Slide 19 shows the mortgage yields, LTV ratios, and the new mortgage lending trend. Mortgage yields continued to increase to 2.09%. Both new mortgage LTV ratio and the average mortgage LTV ratio slid a little bit to 64.4% and 46.6% respectively. The bottom bar chart shows that the new mortgage lending was trending down a little bit quarter-over-quarter. Please turn to slide 20 for the fee income.
Cumulative fee income for first quarter 2023 was TWD 2 billion, which was lower than the fee revenue earned at the same period last year by 4%. Wealth management dropped 7.7% with the bank fee, which we had addressed some reasons earlier because of the slowing start. Slide 21 is the quarter-over-quarter trend. Please take it as reference. Let's move to slide 22 for operating expense. Total operating expense of first quarter was TWD 6.2 billion with 12.7% growth year-over-year. However, with even higher net revenue improvement in first quarter, the C/I ratio still dropped dramatically to only 40.9%. Let's move to asset quality. Please turn to slide 23. Top chart shows the coverage ratio continued to improve to 731.1%. NPL ratio locked at 0.18% for consecutive three quarters. Bottom chart show the breakdown of NPL ratios. Individual NPL ratio increased to 0.13%.
Mortgage NPL ratio increased to 0.09%. On the other side, SME NPL ratio dropped to 0.27%. Large corporate NPL ratio was down to 0.03%. Please turn to slide 24. The pre-tax profits of overseas branches is over total profits, shrank to 23.6%, which was mainly because the domestic swap gains increased too fast, while overseas P&L didn't go too well in first quarter because of some of the one-off bad debt case booked in London and the OBU book. These two reasons distorted the overseas profits to only 23.6% this quarter. The top left pie chart, it also shows kind of distorted, which you can just take it as reference. Please turn to slide 25. Group CAR improved to 129%. Bank's CAR and the Tier 1 also rose up to 14.2% and 12.3%, respectively, in first quarter. The next slide. It shows the trend of our dividend payouts.
As we mentioned at the beginning, the group would pay TWD 0.8 for cash and TWD 0.3 for stock. Okay, that's the presentation today. I will come back the microphone to Jenny for the conclusions and the QA session.
Thank you, Keith. We'd like to proceed the QA session. Our first question is from Peggy Shih of Morgan Stanley, her first question is, the reporting NIM decreased by 22 basis points to 0.77% in the first quarter. How much is from currency swap business?
Well-
The follow-up question is, if we add back currency swap gains, what will be the adjusted NIM for the fourth quarter of 2022 and the first quarter of 2023?
I think Keith just talked about this NIM expansion for our first quarter this year. The actual figures that we booked for our currency swap gains was up to around TWD 4 billion. For the whole year of last year, the currency swap gains was similar to that numbers, around TWD 3.9 billion. The adjusted NIM for the whole year last year was 1.1%, and for the first quarter this year, we actually see NIM further expanded by 11 basis points, which helped to boost the adjusted NIM up to 1.21%. That was quite tremendous.
Okay. Since we already knew that currency swap gains was TWD 4 billion in the first quarter, a follow-up question is, will we still maintain 2023 adjusted NIM target around 1.19% at the end of this year?
Yes. Supposedly, if the interest rate gap between the two nations persisted throughout the year, which implies that the U.S. rates should stay unchanged, hopefully we can continue to translate this interest rate gap into our swap transaction, that will help to maintain our NIM expansion at this 1.2%- 1.21% level.
A follow-up question about currency swap gains is, do you think that, first, currency swap gains will decrease in the coming quarters? What's the target of the currency swap gains in 2023?
Based on our current transaction volume, we actually would like to revise up our whole-year projection for the swap transaction gains from original around TWD 9 billion up to TWD 11 billion-TWD 12 billion, which can be quite optimistic because up to end of April, we actually booked nearly TWD 5 billion swap gains. As I just talked about that, as long as the rate gap persists, this swap gains can continue to be further translated into our top line until the end of this year. That is pretty much subject to that the U.S. does not cut rates toward the end of this year, but until early next year.
Okay. I'd like to jump to another related question from Mr. Jimmy Huang. Jimmy hopes to know that what's the adjusted NIM in the first quarter 2023?
First quarter.
Yeah.
It's a duplicate question.
What adjusted NIM?
Adjusted NIM, 1.21.
Okay, 1.21. Also, we have another related question about NIM, is from Gurpreet. Gurpreet hopes to know if we adjusted back for TWD 4 billion swap gains in the first quarter, it seems that underlying NIM fell 2 basis points quarter-on-quarter. Why is that?
Sorry, I can't catch it. One more time.
I think his question is that if we added back the TWD 4 billion swap gains, it seems that your underlying NIM still fell by 2 basis points quarter-on-quarter. It means that we still have a lower NIM comparing with last quarter. He's wondering why will that be?
You mean the incremental parts, but not the-
Right.
-whole interest.
Yeah.
Well, this is pretty much because that funding cost from our deposit side also move higher. That would pretty much offset the swap impact. I think this may-
Okay.
Yeah. I think it will actually move higher.
I think since the Fed and the Taiwan Central Bank actually raised the rates in the fourth quarter at the end of March, I think it kind of thwarted our NIM-
Calculation.
Yeah, the calculation of NIM also. If we compare it quarter-on-quarter, I think it will be kind of thwarted. It's thwarted.
Yeah.
It should be smoothed out for the coming quarter.
Okay. I think I'll add up one more thing, that if we would like to really look into the general feature of this NIM impact, if we can actually add up the net interest income and the swap gains together, then you can see the whole actual numbers increased by nearly 30%. That also translate into our net revenue. In that sense, this swap transition, you cannot just look into its individual items, but you have to combine these two items together, and you can see that because the falling LDR in the US dollars lending, so much of this US dollar deposits have been channeled to the swap transaction. I guess this would help to explain some of the shortfall between the adjusted NIM and the nominal or reported NIM.
Yeah, you combine the two accounts together, and you can see this will be the general influence over this rate gap.
Okay. Now we'd like to come back to loan book question from Peggy Shih . Peggy hopes to know what the target of our loan book growth for the full year of 2023. Will we still maintain at 5% growth?
Well, given that the sluggish export sectors in the first quarter, that we still think that we may not be able to reach our targets at around 5% or above. Also the GDP growth also has been revised down to 2% something. We would actually like to set a lower target for our loan growth around 4%. Among all the sectors, the corporate lending, including large corporation, SME, would still remain resilient, that we are still targeting a 4% growth. However, due to the slowdown of the mortgage lending, we would set not a very aggressive target to lower our mortgage book expansion by just 3%. In terms of the overseas lending, which still remain quite robust, that the overseas lending book expanded by nearly 10%, and the fall of the total FX lending was mainly driven by the domestic FX lending.
We would revise down our FX lending books by about 3% and lower it down to just 6% from original 9%, which is still pretty much a lag due to the slower exporting markets. The total loan book will grow by just 4%, and we revised down the mortgage lending price to 3%, and FX lending to 6%.
Okay. Let me repeat. The conclusion will be, actually, we revised down our total loan book target to 4% for the full year of 2023, in which the FX loan book will remain 6%. Right? 6%.
Lower to 6%.
Lower from 9%. From 9% to 6%. Also, mortgage lending remains at 3%.
3%, yeah.
3%, which is an organic growth for us. Okay. Another follow-up question will be the fee revenue. Actually, the first quarter of fee revenue decreased by 4% year-over-year. Will we still maintain a fee revenue growth like 5%-6%? Where does the momentum come from?
We actually see the slowdown for the fee revenue mainly impacted by the headwinds in the financial markets, especially in the U.S. markets, the failure of the US SVB Bank and also the bankruptcy, or the failure of the Credit Suisse Bank. This eroded the confidence of investors, which really deter us to propose adequate products to our customers. After the market calmed down a bit and moved into the second quarter, we have witnessed the demand for investment products resumed. At the end of April, our wealth management business gradually recovered a bit. We would still like to maintain our total fee revenue target at around 5%-6%, which should be mainly driven by the wealth management.
After maybe the US rate starts to move higher, that the demand for some high yield fixed income product is still quite attractive, and that's also being justified by our strong sales from the FX loan portfolio. This would help to boost our fee revenue from wealth management. We set a target to grow our wealth management business by increasing the fee revenue by 7%-8%. Apart from the wealth management revenue, we also see some demand from the FX . Sorry, from the loan parts, that our loan-related fees continue to remain quite strong. That in the first quarter, the loan-related fee actually grew by around 4%-5%. All this would help us to achieve the whole year's target that the fee revenue can beat our projection around 5%-6%.
The two stories will be 8% growth for wealth management fee, which will be mainly driven by the investment product appetite to lock in the high yield overseas loan portfolio. For the non-wealth, will mainly be driven by the still resilient loan-related fee, which should be around 4%-5% growth this year.
Okay. Another topic for the investors are the credit costs. We have Tina Chen, Jimmy Huang, Jess, Eric, Jimmy Huang, Godfrey, Peggy. The first question, what are the major delinquent cases for credit costs in the first quarter of 2023?
The main delinquencies portfolio came from our European markets, which was related to, we already mentioned, the Orpea exposure and also another lending to the property developer. These two exposures actually cost us around nearly TWD 800 million-TWD 900 million. We have already charged a set aside around up to 40%-80% provision against these two major exposures. One is the Orpea and the other is property developer. Out of the around TWD 2.1 billion gross provision in the first quarter, the European market was the major source of this portion. The rest part will be because in the first quarter, our loan book also expanded quite dramatically. We have to set aside additional general provision, which was around TWD 400 million-TWD 500 million. The rest part will be our strategic move to boost our coverage ratio.
You can see that the coverage ratio actually moved higher after we conclude our first quarter result. The total provision includes about 45% for our provision set for the European exposure. About 20% is for the new lending, and another 30% will be for our plan to boost our coverage ratio.
Okay. Another question is, when we talk about the European exposure, Eric wants to know what's our U.S. commercial property exposure situation? Will we revise up our forecast credit costs in the full year, can we give them more color for new NPL on page 34 of our presentation slides?
Well, in terms of our exposure in the U.S. market, up to now, we have two surveillance exposure. One is in New York, that we have some lending to the commercial real estate. However, because the LTV still remains not very high, that the loss ratio should remain manageable, which implies that as long as its exposure in the U.S., in New York, can be refinanced smoothly, the repayment can be in place, because all these exposure are fully collateralized. We're not particularly worried about it. The other exposure is in Canada, this exposure was also fully collateralized. The loss ratio in these two cities would be not so huge. We would not be so worried about the exposure in the North American market, because most of these lendings are fully collateralized, and also the LTV still remain manageable.
Okay. We have another follow-up question is about the core question. That is the new NPL comparing with the fourth quarter of 2022, why, and what are the delinquent cases? Core sector, related sector, which sector do they belong?
Part of the sectors are for the property developer, part of that will be some service sector like Orpea. Orpea is for kind of a service sector, right?
Medical care. Medical care service.
Yeah, service sector. In the prior cycle, the delinquent sectors, part of that will be for manufacturer or like Marelli. Marelli in Tokyo last year is pretty much for the manufacturer.
Right.
Yeah. In the prior cycle or last year, this delinquent source originated from manufacturer sector. In the follow-up cycle now will be pretty much for the property developer, mostly will be service sector. Like property developer, that will be not for manufacturer, but for service sector. It kind of rotates then from manufacturer sector to service sector. It's pretty much impacted by the COVID.
Okay. Now we'd like to wrap up the credit cost question.
Let me highlight that the projection for this year's
Right.
Yeah.
Excellent.
It will be 19 basis points-20 basis points.
Okay.
Unchanged.
Unchanged projection for the credit cost of this year, still maintain 19-20 basis points.
Basis points, yeah.
For the full year of the net credit cost.
The reason was because most of these exposure are fully collateralized. It takes time to dispose or to refinance this lending that eventually it can be recovered by the disposition of collateral or have adequate refinancing plans.
t's all secure lending, so we are not particularly worried about the actual losses will be too high.
Okay. Apart from that, we have another follow-up question. How about domestic? Are we worried about domestic credit costs or the quality of asset quality?
Any deterioration?
Right.
No, not really.
Domestically.
Not really. Actually, post the pandemic markets, in the domestic market, we can see that the private consumption sector and service sector all recovered quite strongly. It should be pretty much attributed to the bailout package from the government, that it actually helped to underpin some SME sector or the manufacturer sector in domestic markets. This exposure that we actually lend out in the pandemic years, it all would have been covered by the credit insurance guaranteed by the government.
Okay.
Yeah. The losses have-
No worry.
Minimum. Yeah.
No worries on domestic asset quality.
Yeah.
Another question we have here is from Jimmy Huang. Jimmy hopes to know that if syndication momentum is good, why are the loan-related fees not showing strong growth any?
We actually tightened our lending standards against the corporate sectors due to some of the cooling measures imposed in the property sectors. Still, that's because the prior lending limit has been extended to the borrowers. It will only impact the new lending in the future. For the existing credit limits, it will still be drawn down by the prior transaction. We should see that the lending momentum would decelerate gradually. Yeah.
Okay. Let's shift to the dividend. Another question from Peggy. She wants to know the reason why our 2022 cash dividend payout ratio decreased. Will it turn back to 65%-70% level for the coming future?
This question would have to have some relation to how much profit that we can generate this year. If we can boost our profits by this level, up to, let's say, 30%- 40%, hopefully we can contribute more to our bottom line and help to underpin the overall capital base. Another factor would be how fast our valuation on the OCI account can recover. Because now the U.S. rate hiking see some halt and the recovery from the investment portfolio gradually resumed. These two factors, one is the current profit level, then the recovery space from the OCI accounts would determine, can we move back to a higher payout ratio? We should work hard, but it's still subject to how about the market rate level.
If U.S. market, the rate goes down as early as next year, then maybe the recovery in the OCI account can be sooner than our expected.
We have another question, which is from Gurpreet. That's about our capital, he hopes to know what is bank's core CET1 ratio at the first quarter, what are actions to move to target as we are one of the D-SIBs now, what should be the targeted CET1 and CAR ratios? Thank you.
At the end of first quarter this year, our CET1 reached 10.57%, which is gradually close to the statutory level around 11%. The total CAR level also rose up to 14.21% at the end of first quarter. The main issue is how much earnings that we can contribute or generate to buffer our CET1. Also, like I just talked about, how fast our OCI accounts can recover.
Yeah.
Prior to the rate hike cycle, we almost reached the basic criteria.
Okay, another follow-up question is about the overseas profit. What do we expect overseas profits contribution this year?
Due to the huge charge-off in the first quarter, I suppose we would have to gradually improve our overseas profit. To move up to more than 40% may not be so easy. Hopefully, up to at least 30%. Yeah.
Okay. Far, it's still not so clear for the overseas profit.
Of the charge-off
contribution. The charge-off will happen in the beginning, and then the recovery will happen.
Later
later. There's going to be.
Time
Time. I think we have answered all of the questions here, and we'll just see if Let me check if we have some question we did not answer. Okay, we have another question, which is from Guest. His question is, do you think that First will have more provisioning in the coming quarters in overseas market?
If you say more provisions, I must say that,
I think his question is to have more provision than expected.
Not more provisioning. Yeah, his question should be more than expected provisioning in overseas markets.
Oh, okay.
That would be more precise.
Not really. Up to now, we have almost provided provision against our exposure. We actually provided more provision against this exposure. Like I mentioned, normally in the past, the loss ratio for the overseas lending was up to around just 50%. Actually, we have set aside more than 50% of the provision against this exposure. I don't see we have the urgent demand to further increase our provision or charge-off against this exposure. Don't forget, we can still recover from our legacy pool that we charged off in the past. For instance, like our exposure in China.
Right.
Dongfeng Yulon. Which may also see some recover.
Okay.
It depends on how fast we can recover from the disposition of this collateral.
Okay, we have the final question, which is from Guest.
Yeah.
His question is about operating expense. Question, what's the reason that the first quarter actually, we booked more operating expense? What's the target of C/I ratio for this year?
In the first quarter, the increase of the SG&A was mainly due to more VAT and the impact cost because our revenue increased quite significantly. We have to pay more taxes for the VAT and stamp tax. That would be up to about nearly TWD 300 million.
Okay.
Yeah.
Okay. Thank you, everyone. I think we have answered all of the questions that we had on our screen. If you just happen to have more questions, you're welcome to email us after today's conference. Thank you for joining us.
Okay. I think I missed the last question about CI ratios target.
Oh, okay. The CI ratio target?
Around 45%.
Still around 45%. Okay. Thank you. Do you have anything to add?
Nothing. I think we have answered most of the previous questions. We should see you next quarter.
See you. Bye bye.