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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 CTBC Financial Holding Co.'s 2019 Second Quarter Earnings Conference Call. [Operator Instructions] And today's host will be Ms. Ya-Ling Chiu, the Executive Vice President and Spokesperson of CTBC Financial Holding Co.; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Company. The presentation will begin now.
Thank you, everyone, for joining CTBC's Q2 '19 earnings call.
Please turn to Page 3, our key financial highlights. Overall, at the holding level, revenue in the first half of 2019 was TWD 25.8 million. Total [ '19 ] sustainable revenue growth Y-o-Y excluding Life, attributing to solid core NII and fee income. For CTBC Bank, total loan grew 2.5% Q-o-Q 7.2% Y-o-Y, and total deposits grew 2.9% Q-o-Q and 8.1% Y-o-Y. Taiwan Life's earnings [ are trending up ] Q-o-Q attributing to better investment income and lower hedging costs.
Operating expense growth, excluding life was moderate Y-o-Y and cost-to-income ratio was 58.6% in the first half of 2019. CTBC's asset quality remained in line with NPL ratio and remains stable at 0.41% and [ high ] coverage ratio of 314.5% as of June. Credit costs were at 20 bps in the first half of 2019.
CTBC [indiscernible] CAR ratio [indiscernible] [ 116.6% ]. Holding remained well capitalized with decent [indiscernible] leverage ratio at 116%. Bank's capital position remained strong with CAR ratio at 13.4% and Tier 1 ratio at 10.88%. Taiwan Life's capital remained superior with an RBC ratio of 322% as of June 30, 2019. CTBC Holding [indiscernible] is constituent stock of the MSCI Taiwan ESG Leaders, DJSI Emerging Markets Index and FTSE4Good Index series and Taiwan Stock Exchange Corporate Governance 100 Index for its outstanding performance in ESG.
Page 4 [indiscernible] on profitability. First half '19 net profit was TWD 20.4 billion and 6.9% Y-o-Y. EPS was TWD 1.01. Holding reported high earnings in July. [indiscernible] July, net profit was [ TWD 29.1 billion ] [indiscernible] ROE was [ 12.76% ] and ROA was [ 0.68% ]. Next page on capital ratio. We remain well capitalized with group CAR at 115.6%, bank CAR at 13.4%, Tier 1 ratio at 10.88% and CET Tier 1 ratio at 11.9%. Life RBC ratio was 322%.
Page [indiscernible] profit breakdown by legal entities. In Q2, same profits reached TWD 6.9 billion and Life profit reached [ TWD 3.9 billion ] holding profit reached TWD 9.3 billion. Bank and Life contributed 75% and 33%, respectively.
On the bottom. In the first half of 2019, bank profits reached TWD 15.3 billion and Life profit reached TWD 5.9 billion. Holding profit reached TWD 20.4 billion. In terms of [indiscernible], bank and Life contributed 75% and 29%, respectively.
Page 8 on net profit movements. [ Operating ] revenue in the second quarter was down 3.9% Q-on-Q. This reflects [indiscernible] seasonal effect on lottery. Provisions was about 19.5% Q-on-Q and credit costs increased [ 1 bp to 20 bps]. Expense was about 6.5% Q-o-Q [indiscernible] valuation. Insurance pretax profit was up 18.2% [indiscernible] investment income [indiscernible]. Overall, net income reached TWD 9.3 billion [indiscernible] Q-o-Q.
From the bottom. For the first half of 2019, operating revenue was up 5.4% from increased net interest income, led by loan growth and loan improvement as well as increased fee income and trading income. Provisions increased [indiscernible] specific provisions and credit cost increased 2 bps Y-o-Y to 20 bps. Expenses, up 7.4% Y-o-Y and cost/income ratio was 58.6%, which was 57.5% in the first half of 2018. Despite increased recurring investment income, it declined cost of liability ratio.
Insurance pretax [indiscernible] was down 10.4% Y-o-Y due to higher net income in the first half '19 compared to previous years. [indiscernible] tax profit was TWD 25.7 billion, down 1.9% Y-o-Y. Overall, holding net income was down 6.9% Y-o-Y due to income tax benefits under tax reform in 2018. However, holding company’s higher earnings in July benefited from substantially increased Taiwan Life [indiscernible] income. [indiscernible] July after-tax profit reached TWD 29.1 billion, 28.4% Y-o-Y.
Page 9 on revenue breakdown, excluding Life. Total revenues decreased 3.9% Q-o-Q and increased 5.4% Y-o-Y. Net interest income was up 2% Q-o-Q with an 8.4% Y-o-Y on loan growth and [indiscernible] improvement. Fee income was down 11.4% Q-o-Q due to first quarter seasonal effect of lottery.
Fee income from Wealth management, corporate and e-club [indiscernible] remain stable growth. Fee income was up 6% Y-o-Y on fee income from Wealth management, borrowing, credit card and corporate and retail banking. Combined derivatives, FX and trading gains were down 15.9% due to decrease in derivatives gain and equity mark-to-market gain. Combined derivative FX and trading gains were up [ 2% ] Y-o-Y from FX and liquidity trading [indiscernible]. Long-term investment and others were [ up 77.4% ] Q-o-Q and down [ 2,251% ] Y-o-Y due to [indiscernible] lottery-related [indiscernible]. Please see profit mix on [indiscernible] for 53% [indiscernible] Trading derivatives and FX, 15%; long-term investment and others, minus 1% of the total revenue.
Page 10 on bank's loan breakdown. Total lending with credit card revolving at the end of June was TWD 2.4 trillion, representing a growth of 2.5% Q-o-Q and 7.2% Y-o-Y. NT dollar corporate loan was up 3.2% and up [ 9.5% ] Y-o-Y from demand and working capital and real estate. Tracking the growth in the lending and manufacturing construction and real estate financial [indiscernible] financial industry.
Foreign currency loan was up 2.7% Q-on-Q and up 4.1% Y-o-Y. This will be further explained on page 11.
Mortgage continue to grow 2.4% Q-o-Q and 10.2% Y-o-Y due to recovery of [indiscernible] market. Unsecured lending was up 2.6% Q-on-Q and up 7.8% Y-o-Y. Credit card revolving was up 0.2% Q-o-Q and up 4.8% Y-o-Y on increased consumptions [indiscernible] resulting balance growth. Please refer to the graph on the right for our lending portfolio mix where foreign currency loan accounted for 44% [indiscernible] accounted for 23% [indiscernible] 27%; unsecured lending 25% and credit card revolving and others accounting for 1% of the total lending. Page 11 on foreign currency loan breakdown. Total foreign currency loan balance was TWD 1.06 trillion and accounted for 44% of the total loan. Overseas subsidiaries accounted for 57.8% of total foreign currency loan, TSB being the majority. Overseas branches accounted for 31%. OBU plus DBU was 11.3%.
On the right, overseas subsidiaries loan grew 3.8% Y-o-Y, supported by growth at Europe, Canada, TSB and Philippine subsidiaries. Overseas branch loan was up 8.9% Y-o-Y due to further client penetration and expansion in trade finance visits, driving the growth of Singapore, Tokyo, Vietnam and China benefits. OBU plus DBU was down 3.2% Y-o-Y affected by U.S.-China trade war in first quarter, resulting in earlier payment and decreased loan demand for working capital. Page 12 on bank deposit mix. Total deposit as of June reached TWD 3.35 trillion, of which foreign currency accounted for 46%. On the left, current deposit accounted for 44.2% of total NT dollar deposit. On the right, time deposits accounted for 50.7% of total foreign currency deposits.
Page 13 on loan-to-deposit ratio. NT dollar LDR was 77.33%. Foreign currency LDR was 71.1%. NT dollar deposit growth surpassed NT dollars loan growth, plus overall LDR decreased to 74.47%.
Page 14 on NIM and spreads. In the second quarter, foreign currency spreads was down 3 bps Q-o-Q to 2.35% due to year-end trade cut expectation resulting in market competition and caused foreign currency lending rates to drop. NT dollar spent was flat at 1.58%, overall spreads were 1.91%, down 1 bp from last quarter. Also, overall LDR decreased [indiscernible] down 3 bps Q-o-Q to 1.5%. First half '19 NIM was 1.51%, up 3 bps from first half '18.
Page 15 on fee breakdown. Total fees were down 11.4% Q-o-Q [indiscernible] lottery, but up 1.7% Q-o-Q if excluding lottery. Total fees were up 6% Y-o-Y. Wealth management fee was up 2.1% Q-o-Q, Mutual fund fee grew 9.5% Q-o-Q as U.S. China trade war [indiscernible] and [indiscernible] condition improve. Bank insurance fee was down 4.5% Q-o-Q due to first quarter seasonal effects. Overall, Wealth management fees [ increased ] 2.1% Q-o-Q. Wealth management fee was up 2.2% Y-o-Y driven by bancassurance. Bancassurance fee was up 17.9% Y-o-Y due to deepened customer relationships by launching a variety of products that met customers' needs. Although market rallied in the first half '18, customers [indiscernible] was affected by U.S.-China trade war and was relatively conservative. Mutual funds fees declined 13.5% Y-o-Y. Overall, first half ''19 Wealth management fee was up 2.2% Y-o-Y. Credit card fee was down 2.5% Q-o-Q due to first quarter seasonal effect on constructions. However, credit card fee was up 16.3% Y-o-Y due to increased consumption. We had continuously increased consumption to [indiscernible] [ growth ] momentum. Retail increase was up 13.6% Q-o-Q and 5.5% Y-o-Y driven by loan-related ATM fees. Corporate business was up 1.7% Q-o-Q, up 8.8% Y-o-Y driven by syndication loans, securities, brokerage fee income and CTBC investment fee income. Overseas subsidiary fee was down 5.8% Q-o-Q and 5.8% Y-o-Y due to decreased loan related and Wealth management fees at TSB. Borrowing fee was down 59.3% Q-o-Q due to first quarter seasonal effects on lottery and up 10.4% Y-o-Y. Page 16 on Wealth management fee. On the right, bancassurance accounted for 62% and mutual funds accounted for 29% of total Wealth management fees.
Page 17 on cost/income ratio. Cost/income ratio was at 61.7% in Q2 '19 [indiscernible] Q-o-Q [indiscernible] 3.9% decrease. In second quarter, operating income affected by first quarter seasonal effect outliers. Expense was up 6.5% due to ESO consolidation.
Page 18 on asset quality. Asset quality was benign with NPL ratio was at 0.41%, decreased 2 bps from last quarter and NPL coverage ratio was increased to 314.5%. Page 19. [ 3Q ] credit card cost was 20 bps. First half '19 credit cost was 20 bps, up [indiscernible] specific provision. Moving on to Life business. Page 20 on total premium. We create a sustainable business model. Taiwan Life adjusted product strategy [indiscernible] and foreign currency policy. [indiscernible] products in 3Q '18 and gradually stopped selling short [indiscernible] to repay NTP policies in 2Q '19, thus total [ accruals ] were TWD 49.9 billion in Q2 '19, down 27.2% Q-o-Q. First half '19 total accruals was TWD 118.6 billion, down 9.8% Y-o-Y. Market share was 6.7%, ranking #6 in the industry.
Page 21 on first year premium. FYP reached TWD 17.6 billion in 2Q, down 44.8% due to the aforementioned change of product strategies. First half '19 FYP were TWD 49.5 billion, down 27.9% Y-o-Y. Market share was 7%, ranked #6 in the industry. Page 22 on FYP breakdown by channels and products. In terms of channels, contribution was mainly from bancassurance at 43.2% from CTBC Bank and 30.8% from external banks. Tied agents contributed 18.6% of FYPs; insurance brokers, 6.1%; and others, 1%. On the right is the breakdown by products. Interest sensitive policy accounted for 71.3%, investment linked accounted for 22.5%, traditional for 2.4% and others for 3.8% of FYPs. Page 23 on FYP breakdown by types of payment and currencies. On the left, mix of investment-linked products was 22.5%; regular paying products have increased from 30.4% to 49.6% of FYPs and single paid products have dropped from 39% to 28% of FYPs. On the right, investment-linked products accounted for 22.5%, foreign currency policy accounted for 36.4% and NT dollar policy accounted for 41.1% of FYPs.
Page 24 on FYPE. 2Q '19 FYPE was TWD 4.9 billion. First half '19 FYPE was TWD 11.7 billion. Product strategy was adjusted, thus regular paid product increased and FYPE decreased in Q-o-Q, Y-o-Y [indiscernible]. Market share was 6%, ranked #6 in the industry. On the right is the FYPE by [indiscernible] breakdown. Page 25 on investment asset mix. Total investment asset reached TWD 1.82 trillion in second quarter [indiscernible] to adjust our asset allocation and decreased [indiscernible] fixed income to 9.2%. Overseas fixed income grew 63.8%. Further, [indiscernible] continue to build high yield portfolio and increased equities that account for 8.5% of total investment assets and increased mutual funds [ who have ] stable dividend portfolios that account for 6.8% of total investment. Total [indiscernible] high earnings in July, benefited from sequential [indiscernible] fees in Life dividend and investment income in July. Page 26 on investment yield, cost of liability and hedging rates. First half '19 investment yield was 3.09%, decreased 23 bps due to higher hedging cost in first half '19. Recurring yield, before hedge, increased 18 bps Y-o-Y to 3.66%. Profit, liability increased 5 bps to 3.59%. In terms of hedging, 38% of overseas investment assets were foreign currency policies, while 52% of overseas investment assets were NT dollar policies, of which 66% were fully hedged, 11% were OCI acquisitions and 23% were unhedged.
The presentation will stop here. We'll now open for Q&A.
[Operator Instructions] And the first question is coming from Gurpreet Sahi of Goldman Sachs, Hong Kong.
I have 2. First is on [indiscernible] asset allocation [indiscernible] increased allocation to equity [indiscernible]. Can you talk a bit around where that [indiscernible] in terms of what kind of equities you're buying? And then second is on the bank. Your Core Tier 1 card is now below 11%, so what is the level that you would think about injecting your capital into the bank?
This is Ya-Ling Chiu. I answered the Tier 1 capital for bank, first. The Tier 1 capital in June is a little bit lower than 11%, that's because we upstream the dividend to holding company. So if we accumulate a profit for the second half year, it would be back to 11%. So going forward, we would like to maintain our Tier 1 capital at 11%.
[indiscernible] mutual fund increased mainly found in [indiscernible] TWD 58 billion.
And then equity? [indiscernible]
Equity provision increased about [ TWD 10 billion ] mainly high-yield -- high dividend stuff.
And the next question is coming from Ben Wong of Citi Research.
I have a question on the revenue outlook. We think the July numbers are very strong, what are the key drivers and whether they are sustainable? And could you please remind me of your latest loan growth as well as fee income growth guidance?
On the revenue for July is mainly from -- on bank side, is from the dividend income. Then, from Life side, it's also dividend income and also the capital gain from bank and equity. If you are talking about sustainability, I believe this can sustain going forward. But in Taiwan, the dividend distribution is mainly focused on July and August. So it's not recurring on a monthly basis, but it's recurring on a yearly basis. So next year, you might see the same revenue for this dividend income. And for the fee income guidance, we maintained the same guidance as we get out in the beginning of the year. It would be around mid-single-digit for the total fee income growth.
All right. Can I just confirm, did you say that the strength in bank's earnings in July was also driven by dividend income?
Yes. We also had some investment portfolio on equity on the bank side.
[Operator Instructions] And the next question is coming from Jemmy Huang of JPMorgan.
I have 2 questions. First one is on the banks. In terms of credit cards, is there any chance that we can see the credit cards to be relatively lower in the second half compared to first half? And then the second question is on the recurring yield at Taiwan Life. It looks like, this year, we can still achieve year-on-year improvement. But under forward-looking basis, how do we see the sequential trend in terms of the new money yields and then I think on the next 12 to 18 months' point of view, how should we expect the portfolio mix will change compared to the current status?
In terms of credit cost, there was some specific cases with provision in the first quarter and second -- and [indiscernible] for second quarter. Up to now, we didn't see any potential high-risk cases, yet, for the second half year. But overall, we still foresee the credit cost remains at around 15 to 20 basis points.
The recurring [indiscernible] due to the yield increasing about 18 basis points for inbound, our expectation about the recurring yield could be lower than current. But right now, we feel to increase the [ projection ] for high dividend stock mainly has [indiscernible] offset effect [indiscernible]. But for the loans -- for the longer term, the recurring yield may drop, but just a little bit.
Can I get one follow-up question? I think that you want to increase the equity position, then that will eat up your RBC ratio. So should we expect to target to maintain RBC ratio above 300% or 250%?
For internal target, we will [ into ] RBC average ratio about 300%, not above, just close -- around 300%.
Yes. Our target is to maintain RBC ratio above 250% and the range of between 250% and 300%. Hopefully, we can maintain close to 300% of RBC.
[Operator Instructions] And next we'll have Gurpreet Sahi of Goldman Sachs, Hong Kong.
A follow-up on net interest margin on foreign currency spread. Can you give us some [indiscernible] security on the impact from the Fed rate cuts in the second half, I mean one has already been done. So how do those rate cuts translate to the strength on this part? And then related to that, you did mention that there was more competition in the second quarter, and hence, the spread contracted a bit. Can you talk a bit more on that, please?
In terms of the impact of spread cut, every 25 basis points of rate cut from U.S. [ data ] will translate to around 0.7 basis point of our total NIM, less than 1 basis point every 25 basis points of U.S. rate cut. So for the second half, second quarter -- NIM of second quarter already down to 1.51 and in July, NIM still maintained at 1.51. So if there's another further rate cut, we anticipate the NIM will maintain at this level. And for the competition, I think competition is always in there. But what I was talking about is the expectation of further rate cut as clients will come to negotiate lower lending rate and they want to lock in their time deposit rate for a longer term. So that's why you see the foreign currency spread has been squeezed in second quarter.
[Operator Instructions] And the next one is coming from [ Michael Wen ] of KGI Securities.
Okay. My first question will be on the insurance side. How's the overseas fixed assets recurring yield at the moment and how is it compared to last year? And can you give us a quick update on your investment yield on different assets as a cash in the second quarter or in the first half? And also, I'd like to know about the hedging cost in the first half and how's the FX reserve changed over time from last year? And my last question will be on the capital side. I know that you recently had a capital injection on the Taiwan Life, and I would like to know that is there any update on the interpretation for the IFRS 17 that is there -- how's the capital shortfall you expect in the next couple of years? And recently that the FSC in Taiwan just released a draft on the [ D fibs ] that domestically, since the [ medical ] important banks that are asking for 5 major banks in Taiwan to have a higher CET1 requirements of 11%, so CTBC is also included. How is your comment on this?
Regarding the [ D fibs ] I think that, that is going to be a burden to us. But so far, we are okay, except for June. I just mentioned that -- because we upstreamed our dividend to holding, so our CET1 is lower than 11%. But going forward, that's our target to maintain at 11%. So, so far, we think we are pretty okay with this [ D fibs ] requirement.
We do not -- because asset class investment yield and, therefore, the hedging cost for the first half of '19 is 1.35% and with [indiscernible] foreign currency result is against a [indiscernible] [ TWD 12.9 billion ], it increased TWD 0.6 billion from at the end of last year. According to the current tender, we do not have any shortfall for our reserve. That's all.
[Operator Instructions] [ Michael ], you're on the line.
Just follow-up questions on IFRS 17. According to my understanding that basically, they will calculate on the liability side a risk-free rate that was liquid -- your liquid premium. So what's the current requirement? And is the authority will ask higher requirement over time until year 2050?
The insurance yield of every company to cater the fair value of liability and it's based on the different [indiscernible] insurance bureau, they provide the yield curve from the -- they provide the yield curve and the best answer is yield curve to cater as the fair value of liability. The liquidity based on the tender they classified as the different soft product line with the different liquidity. According to [indiscernible] right now, the fair value on liability is smaller than the reserve, our book. That's why I said that we don't have any shortfall on that.
Okay. Sorry, can you roughly just give me a wide range would be fine, what's the yield liquid premium for the first half in Life, was required for the moment?
Currently, our liquidity premium is smaller than 0.65%.
0.65%?
Yes.
[Operator Instructions] There appears to be no further questions at this point. We thank you for all your questions and that would 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.