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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 Third Quarter Earnings Conference Call. [Operator Instructions]
Today's host will be Ms. Ya-Ling Chiu, Executive Vice President and Spokesperson of CTBC Financial Holding Co.; and Mr. Pai-Hung Yeh, Executive Vice President of Taiwan Life Insurance Co. And the presentation will begin now.
Thank you, everyone, for joining CTBC's 3Q '19 Earnings Call. Please turn to Page 3 on key financial highlights.
Overall, at the holding level, revenue in the first 9 months reached TWD 81 billion. Holding maintained sustainable revenue growth Y-o-Y excluding Life, attributing to solid core NII and fee income, which combined constitute 85.1% of revenue with 9.1% growth. For CTBC Bank, total loan grew 2% Q-o-Q and 8.1% Y-o-Y and total deposits grew 3% Q-o-Q and 9.7% Y-o-Y. Taiwan Life's after-tax net profit increased 39% Y-o-Y due to improved product mix, higher investment yield from its diversified investment mix and lower liability costs.
Operating expense growth excluding Life was moderate Y-o-Y and cost-to-income ratio was lowered to 57.6% in the first 9 months in 2019 versus 60.1% in the first 9 months in 2018. CTBC's asset quality remains benign with stable NPL ratio of 0.4% and NPL coverage ratio of 318% as of September 30, 2019. Credit costs were 3 bps in 3Q 2019 and 14 bps in first 9 months 2019. CTBC maintained strong capital with CAR ratio at 118.1% and maintained decent double leverage ratio of 115.7%. Bank CAR ratio was at 13.5%. Tier 1 ratio was 12.1% and common equity Tier 1 ratio was 11% as of September 30, 2019. Taiwan Life's capital remained superior with an RBC ratio of 346% as of September 30, 2019. CTBC Holding is also a constituent stock of the MSCI Taiwan ESG leaders, DJSI Emerging Markets Index, FTSE4Good Index Series and Taiwan Stock Exchange Corporate Governance 100 Index for its outstanding performance in ESG. Page 4 on profitability. Third quarter net profit was TWD 17.8 billion, increased by 90.7% Q-o-Q. First 9 months' net profit was TWD 38.2 billion, up 22.2% Y-o-Y. EPS was TWD 1.92.
Page 5. Group ROE was higher at 15.63% and ROA was 0.84%. Page 6 on capital ratio. We remain well capitalized with group CAR at 118.1%, bank CAR at 13.5%, Tier 1 ratio at 12.1% and CET1 ratio at 11.03%. Life RBC ratio was 346%. Page 7 on profit breakdown by legal entities. In 3Q, bank profits reached TWD 9.9 billion, up 42.2% Q-o-Q. Life profits reached TWD 8 billion, up 158.9% Q-o-Q. Holding profits reached TWD 17.8 billion, up 19.7% Q-o-Q. In terms of profit breakdown, bank and Life contributed 56% and 45%, respectively.
On the bottom, in the first 9 months, bank profits reached TWD 25.2 billion, up 10.5% Y-o-Y. Life profits reached TWD 13.9 billion, up 39% Y-o-Y. Holding profits reached TWD 38.2 billion, up 22.2% Y-o-Y. In terms of profit breakdown, bank and Life contributed 66% and 36%, respectively. Page 8 on net profit movement. Operating revenue in the third quarter was up 9.6% Q-o-Q, reflecting growth of net interest income, fee and capital market gains. Provisions were down 85% Q-o-Q; expenses, down 0.4% Q-o-Q. C/I ratio decreased to 55.9%. Insurance pretax profit was up 153.6%, attributing to increase in dividend income and lower hedging costs. Cost of liability continued to decrease. Overall, net income reached TWD 17.8 billion, up 90.7% Q-o-Q.
On the bottom, for the first 9 months, operating revenue was up 9.4% from increased core earnings of net interest income and fee income. Provisions decreased 19.8%. Expense was up 5% Y-o-Y as cost-to-income ratio decreased to 57.6%. Insurance pretax profit was up 50.9%, benefited from higher investment yields from its product strategy adjustment, additional investment mix and declining cost of liability. Overall, holding net income reached TWD 38.2 billion, up 22.2% Y-o-Y.
Page 9 on revenue breakdown excluding Life. Total revenue was up 9.6% Q-o-Q and 9.4% Y-o-Y, attributing to solid core NII and fee income, which combined constitute 85.1% of revenue and 9.1% Y-o-Y growth. Net interest income was up 4.3% Q-o-Q and 8.8% Y-o-Y on loan growth and NIM improvement. Fee income was up 9.8% Q-o-Q on growth of wealth management, lottery, overseas subsidiaries and credit card fees and was up 9.6% Y-o-Y on growth of credit cards, wealth management, lottery, corporate, retail and overseas subsidiaries fee.
Combined derivatives, FX and trading gains were up 7.1% Q-o-Q, benefited from equity securities gains and up 8.8% Y-o-Y from equity and debt securities gains. Long-term investment and others were up Q-o-Q and Y-o-Y due to gains in disposal of TSB's branch. Please see profit mix on the right, where NII accounted for 52%; fee, 33%, which combined, constitute 85.1% of revenue; trading, derivatives and FX, 15%.
Page 10 on bank's loan breakdown. Total lending of credit card revolving at the end of September was TWD 2.5 trillion, representing a growth of 2% Q-o-Q and 8.1% Y-o-Y. NT dollar corporate loan was up 4.9% and up 13.4% Y-o-Y from demand in working capital, driving the growth in the lending and manufacturing, construction and real estate, derivatives and financial industries and public enterprises. Foreign currency loan was up 0.5% Q-o-Q and up 4.7% Y-o-Y, which will further be explained on Page 11.
Mortgage continued to grow 4.9% (sic) [ 1.9% ] Q-o-Q and 9.2% Y-o-Y due to recovery of property market. Unsecured lending was up 2.9% Q-o-Q and up 9.2% Y-o-Y. Credit card revolving was up 1.8% Q-o-Q and up 3.3% Y-o-Y on increased consumptions. Please refer to the graph on the right for our lending portfolio mix, where foreign currency loan accounted for 43%; entity corporate loan accounted for 23%; mortgage, 27%; unsecured lending, 5%; and credit card revolving and others together accounted for 2% of the total lending.
Page 11 on foreign currency loan breakdown. Total foreign currency loan balance was TWD 1.07 trillion and accounted for 43% of total loans. Overseas subsidiaries accounted for 57.6% of total foreign currency loans with TSB being the majority. Overseas branches accounted for 30.7%. OBU plus DBU was 11.8%.
On the right, overseas subsidiaries loan grew 4.9% Y-o-Y, supported by growth at U.S., Canada, Philippines and TSB subsidiaries. Overseas branches loan was up 6.7% Y-o-Y as loan growth flattened in Greater China due to U.S.-China trade war while Southeast Asia maintained double-digit growth. OBU plus DBU loans was flat Y-o-Y due to decreased loan demand for working capital affected by U.S.-China trade war in the first quarter.
Page 12 on bank deposit mix. Total deposit as of September reached TWD 3.45 trillion, of which NTD accounted for 54% and foreign currency accounted for 46% of the deposit. On the left, total NTD deposits were up 3.6% Q-o-Q and 13.6% Y-o-Y. NT dollar time deposit accounted for 43.1% of NTD deposits versus 44.2% in the second quarter.
On the right, total currency deposits were up 2.4% and 5.4% Y-o-Y, I mean 5.4%. Foreign currency time deposit accounted for 48.9% of foreign currency deposits versus 50.7% in second quarter.
Page 13 on loan-to-deposit ratio. Overall, LDR was 73.9%. NT dollar LDR was 77.26%. Foreign currency LDR was 69.94%. LDR slightly decreased in third quarter due to stronger deposit growth, which surpassed lending growth.
Page 14 on NIM and spreads. In the third quarter, foreign currency spreads were down 3 bps Q-o-Q to 2.32% due to U.S. rate cut. NT dollar spreads were down 1 bp to 1.57% due to market competition, which caused lending rates to fall. Overall, spreads were 1.89%, down 2 bps from last quarter. NIM was flat Q-o-Q due to improved sales on marketable securities. First 9 months 2019 NIM was 1.51%, up 2 bps from first 9 months 2018. Page 15 on fee breakdown. Total fees were up 9.8% Q-o-Q and up 9.6% Y-o-Y. Wealth management fees showed decent growth at 13% Q-o-Q and 5.5% Y-o-Y. Credit card fee was down 3.7% Q-o-Q and up 25% Y-o-Y as consumptions continued to grow. Retail business was down 4.4% Q-o-Q due to a decrease in ATM fees and up 6.2% Y-o-Y, driven by loan-related and ATM fees. Corporate business was down 7.3% Q-o-Q due to shrinkage of syndication loan fees and up 4.2% Y-o-Y mainly due to increased fee income from syndication loans and CTBC investment. Overseas subsidiary fee was up 36% Q-o-Q and 6.4% Y-o-Y due to increased corporate lending fees at TSB. Lottery fee was up 27.6% Q-o-Q due to higher award and sales of new products and scratch cards and up 16.7% Y-o-Y. Page 16 on wealth management fees. Wealth management fee was up 13% Q-o-Q and up 5.5% Y-o-Y. In 3Q, mutual fund fee was up 23.9% Q-o-Q and bancassurance was up 3.9% Q-on-Q as global stock market recovery attributed to the U.S.-China trade war tension easing the U.S. rate cut. Custodian and trust were up 15.6% Q-o-Q as we continue to provide diversified products. [ Our share of ] 51.8% Q-o-Q, mainly benefiting from bond sales-related income growth. In first 9 months in 2019, wealth management fee was up 5.5% Y-o-Y, driven by bancassurance growth due to deepened customer relationship by launching a variety of products that met customers' needs. On the right, bancassurance accounted for 57% and mutual funds accounted for 32% of total wealth management fees.
Page 17 on cost/income ratio. Cost/income ratio in 3Q '19 decreased to 55.9% from 61.5% in 2Q '19 as revenue increased 9.6% Q-on-Q, driven by core business and growth in operating expense remaining moderate. Cost/income ratio decreased from 60% to 57.6% in the first 9 months of 2019.
Page 18 on asset quality. Asset quality was benign with NPL ratio at 0.4%, increased 2 bps from last quarter and NPL ratio increased to 300 -- NPL coverage ratio increased to 318%. Page 19 on credit card. 3Q '19 credit cards was 3 bps down 17 bps Q-o-Q due to loan loss reserve of funds for specific case and decreased general provisions. First 9 months' credit cost was 14 bps, down 5 bps Y-o-Y due to loan loss reserve of funds for specific case and decrease in loan loss reserves by TSB.
Moving to Life business. Page 20 on total premium. To create a sustainable business model, Taiwan Life adjusted their product strategy to focus on regular-paid, unit-linked and foreign currency policies. We stopped selling NTD single-paid products in 3Q '18 and gradually stopped selling short-term regular-paid NTD policies in the first half of 2019. Thus, total premiums were TWD 49.8 billion in 3Q '19, down 0.3% Q-o-Q. First 9 months total premiums were TWD 168.4 billion, down 20.3% Y-o-Y. Market share was 6.5%, ranked #6 in the industry.
Page 21 on first year premium. FYPs reached TWD 13.4 billion in third quarter, down 24% Q-o-Q due to aforementioned change of product strategies. First 9 months FYPs were TWD 62.9 billion, down 41.2% Y-o-Y. Market share was 6.3%, ranked #6 in the industry.
Page 22 on FYP breakdown by types of payment and products. On the left, mix of investment-linked products was 24.6%. Regular-paid products has increased from 29.3% to 47.5% of FYP. And single-paid products have dropped from 43.7% to 27.9% of FYPs. On the right is the breakdown by products. Interest-sensitive policy accounted for 67.9%; investment-linked accounted for 24.6%; traditional for 2.4%; and others were 5.1% of FYPs. Page 23 on FYP breakdown by channels and currencies. In terms of channel, contribution was mainly from bancassurance with 43% from CTBC Bank and 28.3% from external banks. Tied agents contributed 20.3% of FYPs; insurance brokers, 7%; and others, 0.9%. On the right, investment-linked products accounted for 24.6%. Foreign currency policy accounted for 38.1%. And NT dollar policy accounted for 37.3% of the currencies. Page 24 on FYPE. 3Q '19 FYPE was TWD 4.2 billion. First 9 months FYPE was TWD 15.9 billion, increased Q-o-Q and Y-o-Y due to increased regular-paid policies from adjustment in product strategy. Market share was 5.6%, ranked #6 in the industry. On the right is the FYPE mix for your reference.
Page 25 on investment asset mix. Total investment asset reached TWD 1.8 trillion. Proportion of equities and mutual funds increased in third quarter. In terms of portfolio breakdown, cash accounted for 4.5%; domestic fixed income, 9.6%; overseas fixed income, 60.7%; equities, 8.7%; mortgage, 1.5%; policy loans, 1.4%; and real estate, 4.8%. Mutual fund increased due to stable portfolio to account for 8.8% of total investment.
Page 26 on investment yield, cost of liability and hedging mix. First 9 months 2019 investment yield was 4.27%, up 33 bps Y-o-Y. Recurring yield before hedging was 3.98%, increased 18 bps Y-o-Y. Hedging cost was 1.25%, flat from last year due to enhanced valuation of fund and equity. Cost of liability was 3.54%, down 9 bps from last year. In terms of hedging, 39% of overseas investment assets were foreign currency policies, so 51% of overseas investment assets were NT dollar policies, of which 66% were fully hedged, 12% were OCI-positioned and 22% were unhedged.
The presentation will stop here. We'll now open for Q&A.
[Operator Instructions] Our first question is coming from Jemmy Huang of JPMorgan.
I have two questions. First one is on fee income. Obviously, your credit card fee performance this year has been very good. In addition to the decline on the marketing-related expenses, how do you see the consumption momentum? And then how do you expect this kind of fee growth would be sustainable into the next 6 to 12 months? Also, could you highlight your credit card business' strategy as well? The second question is, I think, that during the Chinese session, you also mentioned the reason for lower credit cost in the third quarter was due to some relocation of the TRF-related provision. Could you give us the numbers? And then in terms of the relocation, is that become relocated to part of the operating expenses? Or were any other accounting items?
Regarding the TRF reversal in third quarter, it's about TWD 300 million. As for the relocation of TSB, well, actually is not a branch, it is the operations center. And that's purely the gain on sales. And the -- I'm sorry. Please hold on a second. I'm sorry about that. About the reversal of TRF, it's reversal for the provision account. But it was the -- it was reflected in the loss account, it's other revenue. In terms of the fee income from credit card, in addition to the reward scheme change for LINE Pay Card, we also see the momentum of the spending. So we thought this LINE Pay corporate card is quite a success because when we brought down the reward, but the momentum is still there, either on the new issuing card or on the spending. If you see the total spending -- I mean the consumptions on the credit card, it's about 7% growth year-on-year. It's high single digits. For the LINE Pay Card, it's about mid-single-digit growth.
But you see the growth rate is not very high. But the structure has changed. Because last year, part of the -- I mean many large portion of the spending is from tax and the insurance -- I mean bancassurance payments billed to cards. But from this year, this portion, the tax and the bancassurance payment is quite low compared to last year. But the general spending from LINE Pay Card is -- has grown by 26%. And this part, we
[Audio Gap] this part, while the tax and bancassurance payment is very low in fee income. So we see the momentum will continue because the convenience that this card bring to our customers. And our strategy going forward is to use either LINE Pay Card or other credit card to connect with other merchant, we call it, ecosystem. So we can provide the service whenever our clients buy things or they have consumptions anywhere. So now we will have the alliance with some merchants, for example, like the department store or some convenience stores or some travel agency. That's the strategy for our credit card business.
I have two follow-up questions. First one on credit card. So should we assume the fee income growth on the credit card into 2020 to be more aligned with the total consumption growth? Or you think that the so-called general spending, there is room for further increase in terms of proportion to the total consumption?
And then the second question is, as you also mentioned, is it possible to get a look at the figure for the Tokyo Star Bank branch divestment gains?
The gain from the TSB disposal -- the property disposal is about TWD 800 million. And we go back to the credit card strategy, we see the growth momentum will be pretty much in line with the general consumption and probably some upstart opportunity because the ecosystem strategy I just mentioned. So if our clients, our customers, they use card very convenient, then I think they will stick to our service going forward.
And the next question is coming from Michael of Templeton.
Can you hear me?
Yes. We can hear you.
Okay. I just want to clarify on the -- first, on the fees. On the wealth management part, I saw that the structured and others category is quite large. Can we just touch a bit on that? What's the underlying business for that part? And the other thing is for the Life business, it seems that our distribution channel is relying more on the bank. And the bank has distributed also less insurance policy from external -- for external insurers. So can I just check if this will be the ongoing strategy for the insurance business. And then finally, on the cost, it seems that cost control had been quite strong. Do you think that's sustainable?
Regarding the wealth management growth in third quarter is from bank. We sell bank in this year. Starting from this year, we focus on the other products in addition to mutual fund and bancassurance. And given the falling bank yield trend, and the value of the bank increased, so that's a good opportunity for us to provide more diversified service or product to our wealth management clients. And for the cost, that's our target to maintain our cost/income ratio between 55% to 58%. So we are working on that. And hopefully, we can keep improving our cost/income ratio. But we still want to invest in more -- more in overseas operations and digital fintech areas. So our C/I ratio improvement will come from both revenue growth and cost control.
For the FYP breakdown by channel, you've seen that the percentage from CTBC Bank increased to only 3% compared to last year, 37.6%. The major reason is that we stopped selling premium in the short-paying period NTD policy [ were comparatively ] for CTBC Bank. It's more -- it's better, so they can adjust their strategy to sell more investment-linked and some regular-paid product. That's why the percentage increased.
Can I just follow up on the investment portfolio as well for the Life business? It seems that we have been in -- continued to increase the mutual fund mix in the portfolio. So can you just give a color here -- give a bit of color on what the exposure is and whether that's related to the product mix change that we had in the sales price?
The mutual bond increase is a kind of -- the substitution of -- for foreign investment especially for funds. The reason is that when at -- at the end of last year, we saw that the hedging cost is quite high. So we moved foreign bank portfolio to bank ETF -- for bank ETF, it's not necessary to consider the hedging because for bank ETF, they calculate the fair value, including currency and the market price -- bank price together. So that's our strategy to reduce the hedging percentage. So we moved foreign bank to mutual fund portfolio.
[Operator Instructions] There appears to be no further questions at this point, and we thank you for all your questions. That would be the end of the conference. We thank you for your participation in CTBC Financial Holding Co.'s conference call. You may now disconnect. Goodbye.