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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome, everyone, to Shin Kong Financial Holding Company's 2018 First Quarter Earnings Conference Call. [Operator Instructions] And for your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference has finished. Please visit www.skfh.com.tw, under the Investor Relations section. And now I would like to introduce Mr. Stan Lee, a Senior Vice President of Shin Kong Financial Holding Company. Mr. Lee, you may begin.
Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2018 First Quarter Analyst Call. Before we start, I would like to introduce my colleagues who are with me today. We are happy to have President Min-Yi Huang of the financial holding company to review the first quarter results with us. Also in the room are James Yuan, Chief Investment Officer of Shin Kong Life; Han Wei Lin, Chief Actuary of Shin Kong Life; Isabella, member of the IR team. We are also joined by Ophelia Au Young, principal of Deloitte's actuarial insurance solutions. Ophelia has been working closely with us over the past few months in reviewing our EV work, and she is here to help us answer any questions you may have. The presentation we are about to go through was sent out 2 hours ago. You may also download it from our website or participate through webcast. If you do not have the presentation, please let us know now. Your lines will be muted when we are presenting. If you are cut off, please dial back in, or call Isabella at (886) 921-835924 for assistance. Now please turn to Page 4. SKFH recorded a consolidated after-tax profit of $16.27 billion for the first quarter 2018. Earnings per share was $1.54. Net worth continued to grow at financial holding level. And book value per share reached $14.75, 6.3% higher than the end last year. Life insurance EV per share of SKFH was $24.9 as of the end of 2017. Core business of each subsidiary remained strong in the first quarter, which will be discussed later in the presentation. Page 10. Compared to the high base of the first quarter 2017, FYP for the first quarter 2018 declined 5.3% year-on-year to $26.73 billion, representing a market share of 7.3%. Not simply aiming for sales volume, Shin Kong Life choose to promote foreign currency policies and protection products to contain the hedging costs, facilitate ALM matching and grow value of new business. FYP of foreign currency policies for the first quarter grew 80.1% year-on-year to $15.26 billion, and sales of protection products increased 29.3% year-on-year to TWD 1.37 billion. With sufficient inflows of savings policies, cost of liabilities improved another 3 basis points to 4.2%, in line with our guidance. Page 14 presents an overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first quarter 2018 reached 5.82%, thanks to one-off disposal gains of equities and bonds before rate hikes. Breakdown of investment returns for different asset classes were: real estate, 3.3%; mortgage and corporate loans, 1.8%; policy loans, 5.9%; overseas investments, 5.2%; domestic securities, 10.8%; and cash, 0.4%. Page 15 shows the portfolio of overseas fixed incomes. At the end of the first quarter, corporate bonds accounted for the largest share, representing 45.5% of the total, followed by international bonds at 31.8%. Emerging markets government bonds slightly declined from 22.6% to 21.2% at quarter end. The chart on the upper right displays overseas fixed income portfolio by region. Shin Kong Life invested more funds in North America during the first quarter, with eyes on the rising bond yields and superior credit quality, thus the share of North America increased to 34.7%. The share of Europe edged up to 27.2%, while that of Asia and other came down to 38.1%. Annualized hedging cost for the first quarter was 1.97%, and foreign currency volatility reserve was $2.12 billion at quarter end. However, as of the end of April, foreign currency volatility reserve went up to $3.49 billion, as the NT dollar lost some ground against the U.S. dollar. Hedging ratio was 83.9%, including CS, NDF and the naturally hedged ForEx policies position. CS and NDF accounted for 60% and 40%, respectively, of traditional hedges. I will now hand over to Isabella, who will take you through the results of Shin Kong Bank.
Okay, thank you, Stan. Please turn to Page 21. Shin Kong Bank delivered a stable performance for the first quarter 2018. Consolidated net income increased 29.3% year-on-year to TWD 1.25 billion, with net interest income up 6% year-on-year and net fee income up 10.4% year-on-year. After TRF losses were fully provisioned last year, the provision expense for the first quarter decreased 30.7% year-on-year. Page 22. Total loan balance remains flat quarter-on-quarter at TWD 534.27 billion. Shin Kong Bank has been focusing on overseas lending operations over the past quarters. As of the end of March, the overseas syndicated loan balance grew 5.8% year-to-date to TWD 18.38 billion. This year, the bank will continue to expand its overseas client base and build up closer relationships with key partners to increase its offshore earnings. Page 23. As more deposits were retained to facilitate business growth, loan-to-deposit ratio for the first quarter decreased to 72.9%. Net interest margin is down 3 basis points quarter-on-quarter to 1.55%, while net interest spread was similar to the previous quarter at 1.97%. Page 29 (sic) [ 25 ]. Wealth management income for the first quarter grew 17.5% year-on-year to TWD 544 million with strong sales momentum in mutual funds and overseas securities. Sales income from these 2 categories accounted for 48.2% of the total. This year, more experienced financial consultants will be recruited to enhance average productivity. On the product side, foreign currency and regular-paid policies will be the sales focus. The growth target for wealth management income in 2018 remains double digits. Page 26. Asset quality remained stable with NPL ratio at 0.24% and coverage ratio at 555.25%. New NPL generated in the first quarter was TWD 334 million, and this only accounted for 0.06% of total loans. I will now turn over to Han Wei to talk about the updates on EV and AV.
Thank you, Isabella. Please turn to Page 28. For 2017 embedded value, the earning rate of VIF goes from 3.83% to 5.10% in 30 years for Taiwan dollar products and 4.45% to 5.62% for U.S. dollar products. The equivalent investment yield is 4.42%. For VNB, it goes from 3.50% to 5.10% and 4.43% to 5.62% in 30 years for Taiwan dollar and U.S. dollar products, respectively. The adjusted NAV increased 5%. VIF increased 16%, and COC increased 6%. As a result, our EV at the end of 2017 increased 11% to $253.6 billion. In 2017, there's a significant growth of U.S. dollar products. And VNB increased 3% to $23.0 billion. VNB margin was 20.7%. AV for 5 years of new business and 20 years of new business were $343.9 billion and $452.2 billion, accordingly. Page 29. Under a base case scenario, risk discount rate remains 10.5%. We also provide a sensitivity test of investment return and risk discount rate for your reference. Page 30. Statutory net worth increased from $73.7 billion to $90.5 billion in 2017. A main contributor came from the improvement of unrealized gains or loss on available-for-sale financial assets, which added $11.1 billion to statutory net worth; as well as the $6.9 billion profit we earned in 2017. Page 31, for adjusted NAV. The shareholder value at the end of 2017 was $90.5 billion. Unrealized gains on property added $68.2 billion. We also added $7.2 billion of special reserves of unrealized gains on property; and $1.3 billion for other items, including foreign exchange volatility reserves. Page 32. VIF grew from $138.7 billion to $160.5 billion in 2017. The biggest impact came from the new business issued, which added $27.7 billion to VIF. Assumption changes were total minus $18.4 billion. Page 33. VNB increased from $22.2 billion to $23.0 billion in 2017. Although low sales volume down 3%, a better product mix with higher percentage of high-margin U.S. dollar products result in positive $1.7 billion impact to VNB. That wraps up our results presentations. Moderator, please start the Q&A session.
[Operator Instructions] The first question is coming from Jemmy Huang from JPMorgan.
Just 2 questions from me. The first one is if you look at Page 10. I think you have the statement saying that recurring yield before hedging expected to cover cost of liability this year. Could you give us a little bit more detail in terms of your view, like cost of liability? And what's your target by the end of 2018? And also, recurring yield here, when you mentioned, is purely on recurring yield for the investment. Or that's include maturity and loading gains assumptions behind as well. This is the first question. The second question is on hedging cost. If you are still targeting 1.5% for the whole year, may I know what's your assumption on Taiwan dollar and your expectation for the FX rate this year behind the 1.5% target?
Thank you, Jemmy. Regarding the first questions, I confirm your impression that we guided the market. 2018, we will be able to break the business to even before hedge. And that is the target we are still working on, and we have confidence that we can be there. If you take a look at Page 12, you can see that, last year, 2017, our cost of liabilities was 4.23%. Our guidance internally is to at least decrease that cost by 10 basis points. And so if we play a little bit conservative, you can say 4.13% will be our target. However, as of the end of first quarter, it already went down to 4.2%. That means we are having slightly above our guidance. And if you take a look at the first 4 months until the end of April, it went further down to 4.18%. So I would say there is a good chance that we can see the cost to lower more than 10 basis points. It could be approaching to 4.1%. It could be approaching 4.1%. And based on that, if we take a better look at recurring yield, as in the Chinese sessions, we've mentioned -- that will be on Page 16, we mentioned that the cash dividend we receive domestically and overseas combined will be $1.5 billion over what we had last year. Last year was $10.5 billion. This year, we expect to be able to receive $12 billion. And that 0 -- that $1.5 billion somehow may represent around 5 basis points. If you take a look on the left-hand side, you see that the -- before hedging yield, for the first quarter, if we annualize that, that was 3.46%, about 5 basis point lower than what we had last year. But now we know that the dividend incomes will be able to mitigate that drop in the recurring yield. We have sufficient cash now. Cash on hand now is over $137 billion. That means, along with the rising yield curve, along with the rate hikes, we gradually put into -- those money, allocated into global fixed incomes, there is a good chance that our before-hedging yield for 2018 will not be lower than what we had last year. That's pretty much the rationale. If -- it could be, before hedging, 3.98%; and if the cost, could be approaching to 4.1%. Then what we still enjoyed as the expense gain and mortality and morbidity gains will be more than enough to offset the gap we currently have. I would like to hand over your second questions to Mr. Yuan to answer about hedging.
Okay, one point we have on the recurring yield side. If you look at 10 years treasury, it rose from 2.4% to now about 3%, so it's 60 basis point increases. And on top of that, you have a credit spread wide about, on average, 8 basis points. So this is in line with our reinvestment rate. If you -- if we look at now in May, the reinvestment rate rose about the same level, about 60 to 70 basis point, following fixed-income investment. On the hedging cost side, if we look at the first quarter, it was pretty high. It was 197 basis points, it was 2%, but if you group April into it and as the NT dollar softened against the greenback, and we are pretty much looking at 1.5% annualized for the first 4 months. And we -- our view on NT dollar should be stronger in the long term, but there is a certain weakness coming into the July and August dividend payout period. We will take advantage of the cost of the NDF and CS and flexibly adjust the native positions. And that's what we have been doing for the first half. If you look at first 4 months, the NT dollars actually appreciate, but we actually have gained on our native positions. And how we do it is probably a business secret. Thank you.
And next we'll have Chung from Crédit Suisse.
I just one question, if I look at Page 38 of the presentation. The RBC of Shin Kong Life dropped from 279% to 257% end of last year, while the book value of Shin Kong Life increased from $73 billion to $90 billion. Just trying to understand on the back of this RBC drop on Shin Kong Life. Is it all because of the new product sales and change in the risk weight? Or is there something else we should be aware of?
Well, it's not about new business. It's we have more -- we increased more investment on like domestic stocks, a portion or -- and also, the other main reason is also the C3 factor at the government keep rising, so rising from the [ 0.4 ] the year before to [ 0.5 ] end of last year. So that impacts about 10% of the RBC.
I just want to clarify. This is mainly international equities, domestic equities. But it looks like domestic equity is quite stable...
Okay, yes. I think, first of all, we are trying to get the return on the, like, stock dividends. So we want to have more than that, so we have kind of increased the portion of stock. And then also the foreign equity also have a little bit more.
Okay. And then just a follow-up question then. In terms of capital management for Shin Kong Life, I understand there's some CD conversion taking place at holding company level. Is there a plan to -- I guess there's still -- there's some capital available at holding company to inject to Shin Kong Life, right?
Yes. We have a few billions able to be downstreamed to Shin Kong Life. However, we don't currently have a concrete plan yet. Now if we look at the latest RBC ratio, still quite comfortably around 250%. We do have some raisings regarding to perpetual debt. And that is circulated by and even overbooked by the market, now still under the procedures by the regulatory authorities to approve the deal. Once the deal got approved, we can raised TWD 6 billion.
TWD 6 billion. Did it -- as well as how much will that increase your RBC?
About 10%.
10%, okay. Okay, okay.
I think, to sum up what Han Wei mentioned: We tend to remain the overall proportion of the stock's exposures relatively stably. However, the asset itself is spot. If you take a look at the past 5 years, CAGR of asset rose 8.5%. So somehow, we have to be able to grow the net worth to be able to grow the qualified capital. On the other hand, we do see some amendment on the capital requirement. C3 is one of it. The rules become slightly stringent. That means we have to work harder maintaining a high-enough net worth and, on the other hand, maybe some relatively smaller deals that we have to have. And now our priority is to have the subsidiaries raise the funds for themselves. If necessary, we still have a few billions of dollars sitting inside in the financial [indiscernible] pockets.
If I may ask a follow-up question. I just noted, compared your international equity allocation against the allocation end of last year. If I'm -- my rough calculation is correct, you added USD 2.5 billion in international equities. Would you able to give us some breakdown on where that's invested?
Well, sure. 70% or 75-- 3/4 of that proportion is on the ETFs mainly in the U.S. market, S&P 500. And the remaining 25% is on the leading names or household names that we all know about. And our U.S. -- our international equity portfolio tend to be very trading oriented, and it will take advantage of the market strengths and take profit. And that's part of the reason why we could pocket a certain meaningful profit in the first quarter.
[Operator Instructions]
Well, I believe that we have had very comprehensive discussions both in Chinese and both in English, so I would like to encourage you, if you have any questions, please let us know now.
Yes, we have a next question, which is from Thomas Wang from Goldman Sachs.
Just a question on the bank side. Your wealth management or your fee -- wealth management income produced quite strong growth on mutual funds, overseas securities. Just me give more color what kind of those equity fund and bond fund, or what type of securities? And also what the commission level you should get. Is it 1% or 2%? Or just roughly, around which range?
Sure. Most [indiscernible] also net, that's in-house, so I cannot particularly give you any guidance on what we prefer to sell. In the past quarter, we have seen that both then equities and global balanced funds has been very, very popular. It's been very, very popular, so -- but we have [indiscernible] global markets now have higher fluctuations. And therefore we guided the market that, in the second -- or at least starting from second quarter, we will see gradual increase in the contributions of bancassurance, which should be relatively more stable. And we're also seeing some pickups in the foreign countries, mainly U.S. dollar-denominated policies, sold by our bank, which accounted for 66% of the overall sales. We also see the increase of the regular premium products, which was only 19% last year and this first quarter already accounted for 22%. So it's not the quantity. We have seen the quality starts to improve already. And for those foreign securities, most of those are debt, straightforward corporate bonds, preferred shares. Some of those are very, very straightforward; and plain vanilla structured products. And nowadays, if you have to sell such products, most of those has to be principal protected. Thomas, does that answer your question?
Yes, got it, yes. And can I just ask a follow-up question on your cost of liabilities? The -- you're selling -- I mean, if you look at your FYP mix this year, it's much more weighted, so far in first quarter, toward U.S. dollar policies. So if -- I mean U.S. dollar policies have higher costs of liabilities, so I'm just kind of sort of trying to understand why, if you kind of annualized the 4, 5 basis point you have improvement in cost of liability in the first 4 months, that seems to be on same pace as last year. So even though you are selling slightly probably higher quality of product, can you just -- is that the way to -- can you just help me to reconcile that?
Well, compared to in force, that's still lower than overall [indiscernible] for the -- for U.S. product. That's one reason. The other is we also have renewal premiums coming in from the one we sell before. The renewal premiums also grows from last year's. So our total premium actually for this year will be approaching -- I think it's approaching about $300 billion. So that trend is keep rising. And actually, that's the total premium numbers driving the cost of liability down to this point.
Right. To give you some details: Recurrent premium itself grew at a pace of 12% year-on-year. And the total premium, including the first year and the recurrings, grew at a pace of 4.4%. So if you only look at our FYPs, you've seen a drop, but including everything, it is still in an increasing trend. And there is another factor. It's that we don't sell much investment linked, so each and every dollar [indiscernible] slightly higher-cost foreign currencies policies, it will still contribute to the dilutions of our costs.
[Operator Instructions]
Well, if there's no further questions, then let's close the meeting now.
Thank you, Mr. Lee. We thank you for your participation in Shin Kong Financial Holding Company's Conference Call. There will be a webcast replay within an hour. Please visit www.skfh.com.tw, under the Investor Relations section. Should you have further questions. [Audio Gap]