CTBC Financial Holding Co Ltd
TWSE:2891
Earnings Call Analysis
Q4-2023 Analysis
CTBC Financial Holding Co Ltd
The examined company highlighted a stable trend in the loan-to-deposit ratio (LDR), with an overall LDR of 72.4%. In detail, the NT dollar LDR was 84.3%, while foreign currency LDR stood at 57.1%. Interestingly, despite a shrinkage in the overall spread, attributable to higher funding costs from an increased time deposit mix, the net interest margin (NIM) for Q4 remained unchanged quarter-over-quarter at 1.47% because of rising asset yields in interbank lending and securities, along with SWAP income contributions. Impressively, total fees surged by 12.7% year-over-year, primarily driven by Wealth Management, Credit Cards, and Corporate Business. In particular, Wealth Management fees leaped by 20.3% due to improved sales of mutual funds, structured products, and bancassurance, assisted by Fed rate hikes that bolstered bond sales.
The cost-to-income ratio has edged up to 55.2% in 2023, reflecting a rise in operating expenses, which kept pace with increased operating revenue and higher Employee Stock Ownership Plan (ESOP) valuations. Non-performing loan (NPL) ratio rose marginally to 0.52% in Q4, attributed to increased retail and overseas overdue loans but was counterbalanced by a robust NPL coverage ratio of 310%. Credit costs experienced a slight uptick by 2 basis points quarter-over-quarter, resulting in a 32-basis-point cost in Q4. Nonetheless, annual credit costs were stable at 25 basis points.
Taiwan Life experienced a decline in first-year premiums (FYP) year-on-year, influenced by interest rate hikes and volatile capital markets impacting interest-sensitive and investment-linked products. However, by focusing on long-term value products, Taiwan Life saw a significant 26.4% increase in FYP from these products. The mix of investment assets reached TWD 2 trillion, with increases in cash positions to adjust funding allocations. Investment yields improved, with overall yields after hedges at 3.49% and recurring yields before hedges at 3.64%. Hedging costs increased to 74 basis points in 2023 due to the exchange rate situation.
The company emphasized its commitment to achieving net-zero by 2050 and had its Science-Based Targets (SBT) reviewed and approved in 2023. With a focus on sustainable development, the company aims to work with customers and suppliers to move towards lower-carbon operations. In terms of financial outlook, there's a cautious optimism, especially for CTBC Bank, with notable growth in Wealth Management above 20% and a strong expectation for sustained international business growth, particularly in Southeast Asia and Japan. Security and investment sectors are also anticipated to perform well, paralleling the positive trend in Taiwan's stock market. Taiwan Life's outlook also appears positive, given the favorable stock market environment, but it's marked by the uncertainty of potential foreign exchange losses related to USD depreciation and NTD appreciation.
The company plans to continue its stable dividend policy, with expectations to increase the dividend from last year's TWD 1.25, potentially to TWD 1.3 or TWD 1.4, depending on the needs for business development. This strategy underscores the company's commitment to provide shareholders with consistent returns, particularly as it achieved a historical high in profits during the last year.
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Good afternoon. Welcome to CTBC's Q4 2023 Earnings Call. Today's call will be chaired by James Chen, President of CTBC Holding; Rachel Kao, Spokesperson of CTBC Holding; Megan Hsu, CFO of CTBC Holding; and Pai-Hung Yeh, CSO of Taiwan Life; and Justine Shen, Head of IR, CTBC Holding. [Operator Instructions] Now the floor is given to President, Chen.
Dear investors and analysts, good afternoon. Welcome to CTBC's Q4 2023 Earnings Call. Q4 to Taiwan's Life companies was not good due to [ NTD ] appreciation and dividend distribution was over in Q3. So Taiwan Life had a loss of TWD 2.1 billion in Q4. So Holding's profit in Q4 was TWD 7.5 billion, much less than Q3. But if we look at the whole year, CTBC Holding net profit was TWD 56.1 billion, a growth of 79% Y-o-Y. EPS was TWD 2.82, ROE was 14.6%, which is probably the best among all the financial order holding tiers, TWD 2 billion out of it comes from P&C loss credit. If we use it -- if we look at it as a one off situation, then the ROE amounted to 14.1% still, which is still leading in this industry.
In our profit composition in the TWD 56.1 billion, it mainly comes from CTBC Bank contributing TWD 41.3 billion, accounting for 74% and Taiwan Life accounts for TWD 12.4 billion, which is 21% and the other subsidiaries include securities, venture capital, investments and Taiwan Lottery contribute to the rest -- the remaining 5%. So this profit mix should be very good, and that corresponds to our expectations. We are a bank-oriented holding company.
So bank contributes to about 30% as you saw. So this is better than Life-oriented holding companies. What's also worth noting is that last year, bank's profit was -- net profit was TWD 41.3 billion, which is a historic high and the pretax number was TWD 53 billion, full year pretax profit TWD 53 billion. So in bank's profit, international business in 2023 grew significantly. This excludes OBU. So this means profit made outside of Taiwan, the full year amounted to TWD 19.45 billion, which is a historic high, that contribute -- that accounts for 37% of the bank's profit. So CTBC Bank now can be considered a regional bank because more than 35% of its profit comes from overseas. If we look at the distribution, it mainly comes from Greater China region, including Hong Kong and Mainland China that contributes 44% and the second best region is Southeast Asia, which accounts for 31%, as for North America and Japan, each of them contributes 12.8%, respectively. What I'm trying to say is that the profit regional distribution, if we look at the distribution, Taiwan accounts for 63%. Greater China, Southeast Asia, North America and Japan account for the rest and the distribution is quite even. If we look at different businesses, retail bank accounts for 50% and corporate business plus capital market account for roughly the other 50%. So the business distribution is also quite balanced. Our fee income is also leading in the industry, contributing 28% roughly. So CTBC Bank in 2023 performed very well. The profit structure and profit quality were also very good. In addition to Bank, Venture Capital, AMC, Lottery, Investments all performed very well last year. So these are some performance highlights from 2023. Now I'd like to invite IR to give you more detailed presentation, and we will open the floor for questions later.
Thank you, everyone, for joining CTBC's Fourth Quarter 2023 Earnings Call. Please turn to performance highlights on Page 4. CTBC Holding and CTBC bank both reached record high profits in 2023. CTBC Holding's net profit reached TWD 56.1 billion, up 79% Y-o-Y. EPS was TWD 2.82, Holding's ROE was 14.6% ranked #1 among peers. CTBC Bank's net profit was TWD 41.3 billion, up 11% Y-o-Y in 2023. Bank's asset quality was stable and capitalization remained solid. Taiwan Life reported net profit of TWD 12.4 billion in 2023, driven by improved recurring yield and showed a strong rebound from one-off COVID loss in 2022. Capitalization was sufficient with RBC ratio at 305%. Other subsidiaries including Securities, Venture Capital, Investments and Taiwan Lottery also performed well in 2023.
Page 5, 2024 strategic focuses. On banking business, CTBC bank targets to further expand high-net-worth individual, wealth management and SME customer segments. Through integrating overseas platform, we continue to cultivate cross-border business and fulfill customer needs for cross-border financing and the supply chain relocation trend. At the same time, we aim to improve overseas profitability by focusing on target segments, adjusting loan mix and strengthening infrastructure and risk management.
Unlike insurance business, Taiwan Life will develop business models focusing on value-driven products and strengthened asset liability management in order to ensure earnings stability and smoothly adopt IFRS 17 and ICS2.0. We will scale up the agency force and boost the productivity of agents. In addition, we adopt dynamic investment strategies by balancing capital allocation and investment returns.
On Securities & SITE business, we aim to improve profitability and market share by leveraging banking channel and cross-selling capabilities to expand the economies of scales and developing niche products. For the SITE business, we target to solidify competitiveness in equity and bond ETFs, active funds and offshore funds in order to strengthen our market position.
On Digitalization, we will scale up and redesign customer journey digitalization, aiming for customer experience differentiation and cost efficiency. We will continue to modernize technology architecture to support digital transformation. Page 6, profitability. Holding's 2023 EPS was TWD 2.82, Group ROE was 14.6% and ROA was 0.72%.
Page 7, capital ratio. We remain well capitalized with group CAR at 119%, Life RBC ratio at 305%, Bank CAR at 13.5% and CET1 ratio at 10.7%.
Page 8, profit breakdown by entities. In Q4, Bank net profit reached TWD 9.6 billion, down 11% Q-o-Q. Life made a loss of TWD 2.1 billion, mostly due to higher hedging costs that NTD appreciated in Q4 and a higher base for cash dividends in Q3. Holding's net profit was down 62% Q-o-Q. In 2023, Holding's net profit was up 79% Y-o-Y, driven by resilient operating performance at CTBC Bank. Bank net profit reached TWD 41.3 billion, up 11% Y-o-Y, mostly due to increased net interest income, fee income and trading income. Life net profit reached TWD 12.4 billion, up 463% owing to higher recurring income and the Bank's effective COVID loss in 2022. Other subsidiaries was up 88%, benefiting from better capital markets performance last year.
Net profit movements on Page 9 is provided for your reference. Page 10, revenue breakdown, excluding Life. Total revenue was up 18.1% Y-o-Y, largely driven by decent operating results at the Bank. Net interest income was up 3.8% Y-o-Y. Fee income was up 14.4% Y-o-Y. Combined derivative, FX and trading gains increased Y-o-Y, driven by swap income and trading income from bonds, commercial paper and equities. Let's go to our banking business starting with loan breakdown on Page 12. Total lending with credit card revolving was up 7.6% Y-o-Y. NT dollar corporate loan was up 7.4% Y-o-Y, driven by growth in the government sector. Mortgage was up 14.7% Y-o-Y supported by stable business momentum. Unsecured and other loans increased as we continue to expand our customer base for unsecured consumer loans. Foreign currency loan was up 1.7% Y-o-Y. Page 13, foreign currency loan breakdown. TSB accounted for 26.3% and LH accounted for 17.4% of foreign currency loans. Other subsidiaries accounted for 16.7% and overseas branches accounted for 29.8%. Overseas subsidiaries loan was up 3.7%, driven by double-digit loan growth at LH and Indonesia subsidiaries and also single-digit growth at the U.S. and Philippine subsidiaries. Overseas branch loan was up 5.8% Y-o-Y as most overseas branches observed loan growth to sustain except Hong Kong and Singapore branches, China, Tokyo, Vietnam and India branches, especially reported double-digit loan growth. OBU plus DBU loan growth declined as high interest rates led to lower demand for loans.
Page 14, bank deposit mix. Total deposits reached TWD 5 trillion, up 8.4% Y-o-Y. On the right, CASA ratio in NT dollar deposits has been relatively stable accounting for 59.3% of total NTD deposits. Time deposit ratio in foreign currency deposits increased to 61% as customers were attracted by higher U.S. dollar interest rates. However, the trend has been stabilized.
Page 15, loan-to-deposit ratio, overall LDR, 72.4% NT dollar LDR 84.3%, foreign currency LDR, 57.1%.
Page 16, NIM and spread in Q4, overall spread narrowed due to higher funding cost, driven by increased time deposit mix. However, Q4 NIM was 1.47%, flat Q-o-Q due to increased asset yields for interbank lending and securities including SWAP income, NIM was 1.71% for the full year.
Page 17, fee breakdown. Total fees were up 12.7% Y-o-Y, driven by improved momentum in Wealth Management, Credit Cards and Corporate Business. Wealth Management fee was up 20.3% Y-o-Y as sales momentum improved, driving mutual funds, structured products and bancassurance fees to increase. In addition, Fed rate hikes also supported sales of bonds, corporate business fee growth reflected increased business volumes in syndication, M&A and airplane lending. Credit Card fee was up 6. 2% Y-o-Y due to increased consumption supported by increasing travel, transportation, department stores and hypermarkets and leisure activities.
Page 18, Wealth Management fee. For Wealth Management fee breakdown in 2023, the proportion of bonds increased reflecting the impact of rate hikes. In addition, the proportion of mutual funds increased underpinned by better capital market performance. Cost-to-income ratio on Page 19. Cost-to-income ratio increased to 55.2% in 2023, reflecting increased operating expense along with growing operating revenue and higher ESOP valuations. Page 20, Q4 NPL ratio rose to 0.52% due to increased retail and overseas overdue loans. NPL coverage ratio was 310%. Q4 credit cost was 32 bps, up 2 bps Q-o-Q due to increased specific corporate provisions, 2023 credit costs with 25 bps remained benign Y-O-Y. Now moving to Life business. Let's go to Page 22. 2023 FYP declined Y-o-Y as the rises in interest rates and the movements of capital markets affected sales of interest-sensitive and investment-linked products. However, Taiwan Life has been focusing on long-term value products resulting FYPE to increase by 26.4% Y-o-Y.
Page 23. On the left is the product breakdown. We can see the proportion of value products, including health and PA and traditional policies notably increased reflecting Taiwan Life's focus on long-term value products. The proportion of investment-linked products declined as customers turn to other financial products. On the right, in terms of channels, the proportion of bancassurance channel was lower, reflecting declined sales of interest-sensitive and investment-linked policies. On the other hand, the proportion of insurance brokers and tide agents increased. Page 24. On the left portion of regular paid products has increased. On the right, foreign currency policy accounted for 45.8% and NT dollar policy, 42.7% of FYP.
Page 25, investment asset mix. Total investment assets reached TWD 2 trillion. In terms of portfolio breakdown, cash position increased Q-o-Q as Taiwan Life adjusted funding allocation. The proportions of other types of assets remained relatively steady.
Page 26, investment yield, cost of liability and breakeven point. In 2023, overall investment yield after hedge was 3.49%, recurring yield before hedge was 3.64%, both improved Y-o-Y reflecting a low base due to COVID loss in 2022 and improved recurring income in 2023. Taiwan Life continues to maintain positive investment spreads against rising cost of liability and breakeven point. Page 27, hedging mix. On the left, 42% of overseas investment assets were foreign currency policies, 30% were fully hedged, 18% were unhedged and the rest was OCI position. On the right, FX reserve amounted to TWD 6 billion as of Q4. Hedging cost was 74 bps in 2023, increased Y-o-Y largely due to the exchange rate situation.
Turning now to ESG highlights. CTBC Holding is committed to 2050 net zero. Our SBT target has been reviewed and approved in 2023. We are keenly aware that the financial industry has a responsibility to lead the sustainable development of society and the environment.
CTBC Holding will continue working with our customers and suppliers to move towards low-carbon operations through practical solutions. Okay. So this concludes the presentation. We are now open for questions and answers.
This concludes the presentation given by IR, the performance highlights. Well before your questions, let me answer 2 commonly asked questions that everyone is concerned with. After that, we will open the floor for questions. First of all, our dividend payout ratio this year, our dividend policy has always been a stable policy because we know that many investors they look at our dividend as part of their income. So in the past, we only distributed cash dividend and this year will be the same. We hope -- well, when the situation -- we don't want that -- when our performance is good, we distribute a lot. And when the situation is not good, we distribute very little. Last year despite the situation, we still distributed decent dividend.
Our profit last year was a historic high. And In 2021, the performance was also good, and the dividend was TWD 1.25. So this year, it should be higher than TWD 1.25. Will it be TWD 1.3 or TWD 1.4, where we have to do some math and we have to look at our business development needs because CTBC Bank and Taiwan Life are capital intensive segments. So we will put forward a proposal for the Board to make the decision. So this is a brief comment on our dividend distribution. Second, you asked about our outlook for this year. Well, we cannot tell you very clearly our targets, but I can tell you that we are cautiously optimistic, especially in terms of CTBC Bank. Last year, our core business, Wealth Management grew by more than 20%. And this year, in the first 2 months, it grew also significantly. The capital market performed very well. So fund investment was very strong and also bonds also reached new highs. And then also the demand for structured products has also been strong. So we expect this business to continue to grow. And our international business amounted to TWD 19.4 billion. It grew by more than 30% last year as supply chain relocates when we look at Southeast Asia and Japan. In the future, people are optimistic about these regions in the future. So our international -- our overseas business should continue to grow quite well. So we are cautiously optimistic about our banking business. As for security and investments, the capital market is quite good this year. The stock market in Taiwan reached 20,000. So they should grow well. As for Taiwan Life, on the one hand, the stock market is good. So in the first 2 months of the year, big insurance companies profited a lot. Second, in Q3, interest rates can go down, then the hedging costs will go down for insurance companies. If interest rates go down, then bonds profit will also go up.
The only uncertainty is if the USD depreciates, if NTD appreciates relatively then insurance companies may have FX losses. This is one uncertainty that we cannot predict right now. Simply put, outlook for this year should be pretty good. Cautiously optimistic. So this is my explanation for the outlook. So do you have any questions, our analysts?
Thank you, President Chen. Now we open the floor for questions. [Operator Instructions] The first question comes from JPMorgan, Jemmy Huang.
Hello, I have 3 questions to ask. First of all, in the company internally, when you look at interest rate going down, what is your expectation? And in terms of NIM trend, what is your judgment in CTBC Bank? When we look at reported NIM, it was 1.49% last year. And what will be the trend this year and SWAP revenue last year was more than TWD 10 billion so what about this your -- what is your projection for the income there? The President mentioned a while ago that in terms of Taiwan Life, hedging costs may be affected, but compared to 2023, will it go up or go down the hedging cost? Do you have a basic assumption? This is my first question.
Second, Credit costs and asset quality. Last year, the credit cost finally was about the same as the guidance. If we look at this year, will it be relatively stable outlook. Investors recently worry about CRE in the U.S. Last -- in H1 last year, you had some information. So could you update us as of the end of last year, the outstanding balance and NPL ratio -- coverage ratio? What's the situation in CRE in the U.S.? Will it impact the credit cost this year?
My last question is this. This Is related to Taiwan Life. When we look at peers, they continue to issue long-term bonds for 2026 ICS. Last year, Taiwan Life issued TWD 13 billion. And this year and next year, in your projection, how much is still needed in order to meet ICS needs? Thank you.
Thank you for your questions. The CFO later will answer your first question. As for the second and the third question, let me briefly answer you. In terms of credit cost, last year, it was 25 bps, slightly lower than the previous year. And this year, it's probably the same, more or less the same level. Currently, we don't see any major change possible. As for CRE in the U.S., let me put it this way. There are a few types of CRE and offices are now in a worse situation because many people -- some people are working from home in the U.S. So the demand for offices has gone down significantly. As for hypermarkets, they are less stores, they are less affected. Our total loan in the US is USD 4.5 billion, CRE accounts for 47% and offices account for 16% only. So the exposure is relatively limited.
In addition, our asset quality right now is relatively good. The NPL ratio right now is 0.88%, coverage ratio 127% over to 30 to 90 days CRE loans. Currently, it's 0. Well, when we do underwriting, loan-to-value, we set it lower, and we have regular review. We use the rent revenue divided by -- so every 6 months, we had this kind of review and calculation. And most CRE loans are [indiscernible] to CRE owners. And on average, the loan amount is USD 4 million only. So right now, when I look at the asset quality there, I think it's under control. So the full year credit cost should be okay.
As for Taiwan Life, our RBC calculation right now is fine. And in terms of ICS and IFRS connections, we have a task force monitoring the situation. This year, we are not urgent to issue such debt. But in the future, if there is such a need, we will consider that the FSC now allows insurance companies to raise fund abroad. So if there is such a need in the future, we may consider this pathway. As for the impact on NIM of lower interest rates, the CFO is going to answer your question.
Okay. Before talking about the outlook, let me give you some information. In December last year for unsecured and credit card amount surpassing the capital, we put it in provisions. And last December, we categorized it and the amount was [ TWD 770 million ] and the provisions would increase. So the impact on our NIM is 1.72% with SWAP. And after adjustment, it will be 1.665%. So with this information in mind, when you look at the NIM this year, probably it won't feel too strange and distorted with this information in mind. Now looking at the outlook this year for NIM, we hope that the range this year, including SWAP will be between 1.63% and 1.66%. The trend this year in Q1will go down a little bit before going up. The reason for going up is because we are seeing foreign currency deposits, the momentum for that is better than last year. This has to do with inventory reduction from our clients. So there's more demand for capital and in terms of new customers, including Southeast Asian customers and cross-border customers, our foreign currency loans will enjoy a stronger momentum.
And when our bonds mature and the fixed interest rate loans will have more earnings. As for loan book, this year will also be high single-digit growth as previous years. And this year, we think that there will be -- well, in terms of Wealth Management, the momentum is still very strong. The reason is because the recovery of the stock market and the bond market. So investment policies, mutual funds and bonds this year will also be better.
And we will also issue exclusive bonds for operating with capital market. Credit card this year, we will have some adjustments, so the spread will enlarge. So the fee income from Credit Card this year is expected to grow as well. As for cost income for bank, we don't have the [indiscernible] any more. So the guidance for C/I ratio is between 53% and 54%. You also asked about credit -- hedging cost for Taiwan Life. This year, we think that it will be 1% hedging cost. Sorry -- yes, please.
The CFO at the beginning, explained the NII adjustments a little bit. I want to ask you. So when we exclude [ TWD 770 million ] impact, the NIM becomes 1.664%. The full year is 1.69%. On the slide, it was 1.71%, right? Okay. Understood.
Well, let me add a few points. You asked about how we internally look at lowering interest rates. It's very difficult to make projections even -- it's even difficult for JPMorgan. So we think that it will start from Q3 by 3 to 4 units. It will not be that significant. Well, it's very unlikely for interest rates to go up. So it's also unlikely for NIM to widen.
But as the CFO said, it will be between 1.66% and 1.63% because last year, the USD appreciated a lot. So a lot of customers shifted their savings into time deposits. And for Taiwanese customers, the demand for working capital reduced due to inventory; and second, USD interest rates were significantly higher than NTD. And in Taiwan, the liquidity is strong. So people would rather borrow in NTD rather than in USD. So after inventory reduction, the demand for working capital will start to go up, we believe. And so if loans in USD go up, the NIM will widen a little bit. So if you look at our report, Taiwanese OBU and DBU actually declined from last year. Another point is that our treasury has made some fixed income investment, a big part of it was 5-year bonds. And the loan-to-deposit ratio was low. So the liquidity was very high and a lot of it was put in 5 years. Of course, the earnings were very different from what it is nowadays. And part of it will mature with repricing. So the NIM will go up. This is why the CFO said that the range will be between 1.66% and 1.63%.
Morgan Stanley, Peggy Shih. Hello, dear managers, I have 3 questions. First, about Taiwan Life, the recurring yield before hedge last year. But if we exclude COVID loss, it grew by 22%, which was the same as the sector. So how do you look at the growth of recurring yield this year? Because you have now less FYP income, how do you look at the recurring yield growth this year? As for [ WD ] cost, last year, it grew and what is your target for liability cost? This is my first question.
The second question is hedging cost for Taiwan Life. The CFO said 1%, which is higher than 0.7% from last year. Like said that they wanted to talk about hedging costs with the regulator. They wanted to talk about some methods to reduce the number. So what is the current discussion direction? Could you share that with us? This is my second question. The third question, it's also related to Taiwan Life. The FYP this year was the target for the growth. And last year, FYPE grew by 26%.
And this year, when we -- what was the growth extent and the strategies for product development?
First of all, recurring yield. This year, it will be more than last year by 8 basis points. As for cost of liability, we have some new policies and in terms of foreign currency policies, the declared interest rates are higher, so the cost of liability will continue to go up. By the end of this year, it will increase by 10 EPS. As for FX valuation reserve discussion, we haven't received any formal proposals, but if we look at the possible directions, one is to, in large, the reserve pool for it to be able to absorb more fluctuations so that the hedging proportion for each company can be reduced, hence, lowering the hedging cost. I think you have all seen this.
One major difference when it comes to the new accounting regulations is that whether or not the bonds held by insurance companies, that -- whether or not it can have less impact on the balance sheet. But in terms of the promotion directions in the future, I think it will take some time and effort. So this is the direction that we have understood. As for product development in H2, there is a possibility of lowering interest rates. We will continue to focus on USD policy as a result. Last year, regular paid grew well. So this year, we will continue to promote protection and inheritance. So USD regular pay policies will be our focus. As for investment-linked policies in order to -- we will convey the benefits of investment-linked policies. So this year, we will also continue the promotion of such policies and also GMDB products. It's also on our agenda for this year. Our thoughts on the premium this year, we target a double-digit growth this year.
Sorry, double-digit growth, do you mean FYP or FYPE?
For both of them.
[Operator Instructions] Invesco [indiscernible]
I have 2 questions. First of all, on Page 7, on the right, CET1 on Page 7, it was 10.7% only. I thought that you would want to target 11%, if I remember correctly, or maybe this target is no longer valid. And as I know, in the past, the spread was large between Taiwan and U.S. So a lot of money was used through SWAP. If we look at the next one year, the spread reduces. So the liquidity will be used for loans so the capital charge will be larger than SWAP? And what is the implication for your capital?
My second question is on NPL formation, President Chen talked about overseas subsidiaries NPL and also retail banking. Could you give us a bit more details which subsidiaries overseas, Thailand or retail? Does that mean Taiwan domestically? Could you give us more details?
And Q4 provisions, it's less than NPL formation. Is it a bit different from a usual -- a novel pattern. So I want to know a bit more details on that. And the full year credit cost guidance, do you already consider Q4 NPL formation? Thank you.
We are a [indiscernible] bank. So by 2025, CET1 needs to be higher than 11%, and the combined report has to be higher than 9%. We have to follow these rules. We saw 10.7%. That's a combined report, which is far higher than 9%. In our single report, now it's 11.6%, which already meets the requirement for 2025. So there shouldn't be any problem, any concern with that.
In terms of SWAP, our USD deposit is far larger than loans. This is also true for many major banks in Taiwan. And there are many different usages of the remaining capital. Loans are one and your capital charge is larger as a result, but the spread is also larger. Of course, that's the bank's expertise, if we find the right clients and the right deals, then the retention should be higher, but you cannot loan however. Of course, you can also invest in bonds and there are interest rate risks that may be incurred. This is treasury expertise. Each investment has its own limits. So we regularly invest money in fixed income target to have fixed spreads because bank has a lot of foreign currency savings deposits.
As for your second question, the distribution is quite even among our subsidiaries. There are -- in Q4, usually, we haven't reviewed in more detail. As for unsecured loans NPL was during the pandemic, the government had some leeway policy. For example, if some clients couldn't pay back the money then our bank would accept it, and it wouldn't be considered as NPL. But this policy was over at the end of 2023. So after that, it has to be considered as NPL. So starting from 2023, we started to manage this portfolio. So the NPL went up because of that. But apart from that, we don't see any anomaly. Last year, mortgages and credit growth was significant. So this is the reason behind that. So is there anything that the CFO wants to add? No.
One quick follow-up. When we look at the next 1 to 2 quarters, the NPL will stabilize. Will it go up slightly?
It will be stabilized for 2 quarters. And starting from the third quarter, it will start to go down into -- after the end of June, that will be the end of it. And starting from Q3, it will start to go down.
[Operator Instructions] Michael Zhang from Citi.
I have 2 questions. The first one is that I want to confirm Q4, [ TWD 770 million ]. That's a one-off adjustment or in the future accounting, it will always be like that. I want to understand the guidance -- so this is my first question.
As of the end of February, the unrealized gain for Taiwan Life, how much was that? And what was the distribution between stocks and bonds. This is my second question.
Okay, let me explain once again the classification. This is a one-off adjustment. After that, it won't happen again. So the guidance on NIM, 1.63% to 1.66%. This is based on the post adjustment range. I have the unrealized position as of the end of January. If we look at fixed income, it was negative TWD 14.2 billion [ import stocks ] , it's TWD 6 billion, I'm talking about OCI position. Any further questions?
We have one more question coming from UBS, Alex Yi.
I have a few questions for bank, CET1. You said that at the end of the year, it's 11.7%. I remember seeing 11.14%. So it increased quite a lot. What are the reasons behind -- you talked about one factor, which is regulatory operational risk charge. Is it part of the reason?
Second, U.S. dollar bond portfolio. Could you talk about the average duration you said that part of it is 5-year, which is going to mature. What is the proportion and what's the average situation? Finally, you talked about the expectation of lowering interest rates. What about in Taiwan, if the electricity fees are going up, there's inflation pressure? Would there be pressure for higher interest rates?
So in Q4, CET1 was 11.6% because the profit accumulated. So the CET1 went up naturally as a result. And the operational risk is not counted yet. We think that between June and December this year, it will be dealt with, and it will help our CET1 as a result. As for electricity fee in Taiwan, our analysis -- our analysts are still looking at the situation, the impact on prices shouldn't be that big. If there is an impact, basically, in Taiwan, prices are under control in general. So the Central Bank in Taiwan probably won't raise interest rates. This is what many people think. As for the duration, I don't have the data with me right now, maybe after the meeting, IR will answer your question on this.
Operational recharge, what's the implication for CET1 ratio when an increase of 0.4%.
Thank you for your questions. This concludes our Q&A session. Now we are going to answer the questions posed online. There are a few questions. One comes from Goldman. Interest rate sensitivity analysis per USD 100 interest rate change was the impact on the revenue for Bank and Taiwan Life.
Okay. In terms of Bank, the sensitivity liability is higher than sensitivity assets right now. So if we do a simulation based on the current situation, our NIM decreases 0.7 basis points per interest rate increase. As for net profit -- well, in Q4, if the interest rates go down, it's beneficial for our book. That includes our time deposits proportion, this is more sensitive due to customer behavior. So per decrease 100 points was the [indiscernible] more complicated. There are a few different aspects. In terms of consumption, per 100-point decrease based on our previous experience, the USD policy still went up by 20%. And bond position is also an impact on our reports. That [indiscernible] amount to TWD 200 billion, so per 100-point decrease would lead to roughly TWD 20 billion.
We have another question from an online investor, who wants to understand 2023 SWAP and also 2024 strategy for Taiwan Life. 2023, the answer is TWD 11 billion. SWAP is one way to use additional capital. We have to look at it together with NII. The 2023 environment was beneficial to SWAP. So as for the number in 2024, it's difficult to project it right now, if we look at it, along with NII, but if our NIM can stay, then our NII will be able to go up as for Taiwan Life's investment strategies this year. But in terms of stock, Taiwan stock market is close to 20,000 points.
So over the past few months, people have invested more in stocks. As for bonds, people in general believe that bonds are at a higher level. So investment team suggest to have longer duration. So they sell short bonds, and they buy longer bonds in order to fix the spread [ many ] bond position. Now when we look at the bond position right now, we can invest more in long bonds while selling short bonds. Hedging costs is very expensive. So between 45% and 60% will -- is the guideline from the Board, depending on entity. If entity appreciates a lot then we will have to hedge a bit less, it depreciates more than we hedge more. So there's dynamic adjustments depending on the situation. Any other questions? If not, this concludes our Q&A session. Thank you for your participation. Thank you so much. If you have any further questions, please contact our IR. Thank you.
Thank you, President. Thank you so much for your participation. This concludes our call. You can now log out. Thank you. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]