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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen. Everyone, welcome to join us for First Financial Holding's First Half 2018 Webcast Conference. We will start with our presentation, including first half snapshots, financial highlights and operating results. Then we will invite Ms. Annie Lee, our IR Head, to proceed the Q&A session. You can raise your questions by typing at the bottom of the webcast window, either in English or Chinese is fine with us.
If you don't have today's presentation, you can download it from our IR website, www.ffhc.com.tw. Also, we provide 1-year replay service of the webcast meeting for your convenience, right after today's conference. Now I'd like to turn over to Mr. Keith Ke to begin today's presentation. Keith?
Thank you. Okay, please turn to Slide 5. Let's take a quick review of group's performance in first half 2018. As for bank's top line, fee income and treasury gains bolstered total revenues, while net interest income stayed flat Y-o-Y. Widening interest rate gap between U.S. dollar and NT dollar continued, and it drove bank's excess liquidity to shift from interbank lending to SWAP, which we just mentioned last quarter. It also caused the bank's NIM about 6 bps to go down to 1.21% in first half. We believe NIM would be 1.27% to 1.28% something to original conditions. Overall to say, bank's total net revenue increased to 8.8% Y-o-Y in first half 2018. As for the loan structure, strong overseas loan demand kept the FX loan increase by 12.5% Y-o-Y. Mortgage lending also drove another 6.8% loan growth, seeing the price correction and real estate through most phase of the market. SME loan book slowed down due to softened local macro and the increase is only 2.8% Y-o-Y. However, we were still among the top in SME loan book. Let's talk about the asset quality. Since the coverage ratio was still below peers' average, bank's deals [ practically ] provided more than usual each month. There was probably about TWD 4.1 billion growth provisionings in first half. However, we believe it should normalize in second half 2018 gradually. Okay, let's move to next part, financial highlights. Please turn to Slide 7. On this slide, it shows group's key figures. Even though net income was flat, net revenues still had 28.5% growth Y-o-Y. That's because of higher reserves from both insurance and bank units to add the bottom line. EPS stayed the same at TWD 0.78, comparing with the EPS first half last year. Sales book value per share increased to TWD 16, so this caused the ROAE to drop 4.7% Y-o-Y. Please turn to Slide 8. This slide shows the breakdown of group's net income. As we mentioned, net revenue increased 28.5% and the total net income was flat Y-o-Y. Slide 9 shows the net income from major subsidiaries. Bank's earnings decreased to 2.5% Y-o-Y, mainly because of the higher reserve to lift the recovery ratio. Other major subsidiaries all made a progress comparing with the performance last year. Please turn to Slide 11. Let's move to operating results. On this slide, it shows the group and bank's net income and ROAE. Group's ROAE was 9.66% with TWD 9.6 billion net income, and the bank's ROAE was 9.34% with TWD 9.2 billion net income. Please take it as reference.
Now please flip to Slide 12, the breakdown of bank's earnings structure. Net revenues grew by 8.8% Y-o-Y in first half 2018. Fee income and the treasury gains were the main driver to underpin the growth. Net fee income increased to 5.6% Y-o-Y. Despite the Y-o-Y increased ratio slowed down comparing with first quarter, wealth management still maintained its steam at 11.5% growth, especially for mutual fund sales, which had almost 20% growth Y-o-Y. Treasury gains boosted another 51.3% growth. The transaction from interbank to SWAP was still one of the reasons to get the result. Please move to Slide 13 for loan book overview. Total loan book reached TWD 1.63 trillion, growing by 5% Y-o-Y. FX loan had a 12.5% growth. Overseas branches drove 14.7% growth Y-o-Y. ASEAN countries continued -- contribute almost 30% growth; and North America and the Great China both had over 9% growth for loan book. Mortgage lending increased another 6.8%, which we mentioned earlier, too. Please turn to Slide 14. This slide provides the quarterly trend of loan book breakdown. Please take it as reference.
And the Slide 15 presents the bank's LDR, spread and NIM. LDR dropped to 76.6% at the end of second quarter, mainly because of the strong NT dollar deposit demand. NT dollar LDR decreased to 80.1%, while FX LDR improved to 66.1%. Spreads hit at 1.63% and NIM was down another 1 bp to 1.21%, which we had explained the situation already. Please turn to Slide 16. This slide shows the breakdown of NT dollar spread and the FX spread. NT dollar spread continue to -- down to 1.45%, while FX spread improved to 2.43%. There is almost a 1% difference between NT dollar and the FX spread now. Please turn to Slide 17. This slide shows the deposit structure. As we mentioned, NT dollar deposit demand was quite strong, and it boost the total deposit to grow by 9.7% Y-o-Y. On the other hand, CASA rates continue to rise to 69.2% at the end of June. Slide 18 shows the major exposures breakdown. There is not much different comparing with last quarter, so please take it as reference.
Now please turn to Slide 19. This slide shows the mortgage book. Mortgage yield also dropped another 1 bp to 1.81%. LTV ratio is still pretty benign. New mortgage LTV ratio was 64.8%. And our average mortgage LTV ratio was only 45.3%. There will be no immediate early risk for real estate market. Top left shows the NPL ratio by location, and the bottom bar chart shows the new mortgage lending trend. Okay, please turn to Slide 20. Let's move to fee income. Net fee income grew by 5.6% Y-o-Y in first half 2018. Wealth management had 11.5% growth, was still the main driver to boost the fee revenue. And Slide 21 shows the Q-o-Q trend of fee income breakdown. Please flip to Slide 22. The total operating expense increased to 2.7% Y-o-Y, and the cost-to-income ratio stayed at 42.2%, thanks to solid net revenue performance. Let's talk about the asset quality, please turn to Slide 23. Coverage ratio improved to 322% after putting efforts on extra provisionings in first half. NPL ratio was down to 0.37%, and LLR ratio increased to 1 bp to 1.2%. Slide 24 further provides a breakdown of NPL ratios. Breaking apart of the individual and the mortgage NPL, made [indiscernible] 2 NPL ratios down to 0.22% and 0.21%, respectively. SME NPL ratios continue to rise to 0.7%, and that we need to be more cautious on this sector. Large corps. NPL ratio dropped to 0.37%, however. Overall to say, domestic NPL ratio slightly decreased to 0.45%, while overseas NPL ratio kept low at 0.08%. Please turn to Slide 25. This slide shows the new NPL influx and the bad debt recovery. New influx of second quarter was down to TWD 1.5 billion, and most of them was still from the SME sector. Please turn to Slide 26, overseas profits. The pretax profits of overseas branches over total profits reoccupied 40% again. Upper-left pie chart shows the profit mix. OBU occupied 41.2% of total profits, which was similar to last quarter. Hong Kong, North America and the ASEAN were the 3 other major profitable regions. Please turn to Slide 27. Group CAR decreased a little bit to 121.4%. Bank's CAR slid to 13.2%, and Tier 1 stayed at 11% at the end of first half. There is no big concern for capital issue right now. Okay, that's the presentation today. I will turn back the microphone to -- back to K.C. for the Q&A session.
Thank you, Keith. Yes, after today's question, I'd like invite our IR head, Ms. Annie Lee, to proceed the Q&A session. For participants, you can type at the bottom of the window. And we do see some questions coming in.
So the first question is from guest. The first question from guest is what's the target coverage ratio at the end of this year? Annie?
For the first half of this year, we remain quite keen to try to replenish the falling loss reserves due to the Ching Fu impact the end of last year. So we just managed to lift our coverage up to more than 300% to cover the existing NPL pool. And we will continue to do so in the second half of this year in order to further improve our asset quality and also provide a sufficient buffer for further deterioration in anything coming in the future. So we may target a coverage ratio at around 350% toward the end of this year, continue to provide more provisions against the potential downside going forward.
Okay, thank you, Annie. And following, a serious question from Ms. Nora Hou of Daiwa. The first question from Nora is what's your NIM outlook for the rest of 2018 and also for next year? Annie?
We have witnessed a very strong liquidity flow into our system, that our deposit actually grew nearly 10% in the first half. We recorded about 9.8% deposit growth in the first half. Part of the reason is to support our expansion in the mortgage lending. So in that sense, that will actually drove up the cost of our liability deposits. But on other front, we also think that the SWAP transaction that we engaged in the first half bring us very attractive yield. So we booked a very good results on our treasury book. Actually, the results -- the profit divest by more than 50%. So in that sense, the so-called nominal NIM will remain low due to this higher deposit costs and the liquidity being channeled to the SWAP transaction. So the actual NIM -- I mean, the adjusted NIM will continue at current level, around 1.28%, which is slightly higher than the level that we had last year. And for next year, as we follow the pace that the -- set in the states, continue to hike rate, and we do not foresee any imminent possibility that our central bank will follow or hike rate anytime soon at the end of this year. This SWAP activity should continue and continue to bring in more juicy spread for us. So the outlook for NIM next year will still be quite positive. And it will, to some extent, being booked as the treasury gains instead of the traditional net interest income. But we will foresee -- the overall market rate should continue to be more in the bright side, as a lot of the -- our corporate clients, they will manage to borrow ahead in order to lock in lower funding costs. So in that sense, the NIM outlook for next year should be – continue to move higher. But should be at lower pace as we original projected due to the slow motion from our central bank. They actually hold back to wait for a signal before they move ahead.
A follow-up question is about the SWAP trading. We do see that First Financial continue to do SWAP very aggressively in the first half. Do you expect it to be – do you expect us to do SWAP as aggressively as what we have been doing this year?
Yes. Yes, we would project that this transaction will continue as we have witness in the first half due to the interest rate gap continue to become widened between Taiwan and the U.S. So that will – also another sort – another vehicle for us to digest this very important liquidity that we have absorbed this year.
Okay. So what's your view at the [ intra day ] rate movement for the second half of this year?
Well, U.S. dollars market ratio continue to move upward. Under dollars, it would be more cyclical type. After the so-called [indiscernible] season in the third quarter this year, we were project to be [indiscernible] dollars in different market will continue to go lower until the end of this year and also the lunar new year next year, to become higher. Or if there is any, I mean, gesturing demonstrated by our central banks that they have decided to follow the rate hike movement next – early next year.
Okay. And also, what's your First Financial's view on Taiwan's property market so far? And we do see that the mortgage went up. And what's your view for the second half?
We did notice that the price correction in the domestic market, it boosted the [ rent] from those [indiscernible] fire. So this also can translate to our very strong mortgage book growth in the first half. And based on some statistics, the real estate price is actually seeing some correction amount, different regions, in fact for the pretty liquid market in the northern part of Taiwan, the price correction is about 10% to 15%. So we should see the property market remain, correction should continue. But it will become more stabilized. I mean the whole price correction will see in different areas. In the Taipei metropolitan areas, the price correction will be much more minor than the rest part of the other region where the inventories still remain low outside of Taipei or other rural areas.
Okay. Next question is consolidate question from channel live, Ms. Huang and JP Morgan. Mr. Huang. And they are concerned about our SME NPL ratio going up. From Jemmy, he wants to know, will you expect SME NPL ratio to go further up? From which industry and which part of Taiwan? And from China Life, [ Ms. Huang ], she ask it seems like that the SME NPL is going up. And what's the highest amount for the new influx NPL for SME?
I remember that I remind our investor about our perspective about NPL in the prior quarters. I mean in the – in earlier this year and the end of last year after we witnessed the slowdown in domestic market, particularly for some, what we call the tourism related or other wholesale retail part of Taiwan, which is pretty much a high correlation to the pure domestic consumption sectors. The truth is that this slowdown of domestic consumption did hurt the momentum and also the investment confidence of the SME sector where it is much more vulnerable than the large corporate other blue chip company due to their concentration in local markets. So I must say that the deterioration in our SME book was also a part of the reason that our SME book expansion in the first half, I mean, decelerated because of this rising NPL trend. But in terms of this -- which particular sector or any part of Taiwan that demonstrate the deterioration of the SME, it's quite scattered, not in any specific sector or areas. But for the first half of this year, we did witness some local connected sector like the real estate developer, the paper company, 1 diaper manufacturer or some base metal or tech sector also, some oversupplied IT company. In -- as for the so-called highest influx, I suppose this -- I mean, the first half this year should be one of the peak season that we have witnessed during this credit cycle. And I must say that we still closely monitor the influx of this SME book. So that's why we turned more cautious about this SME lending, everything is -- the impact of the so-called cooling cross-trade ties in -- about 2 years ago. So that was pretty much so-called after-shake wave impact. So we're still monitoring the whole, I mean, aftermath of this domestic cooling market.
Okay. Another related SME question is that, we saw First Financial actually booked 2.8% SME loan book in the first half. Is this because that you expect the NPL ratio to going further up or is it normal? What's your view on your SME book expansion?
I mentioned about the slowdown of our SME lending. For the first half, part of the reason was because of the rising or the higher delinquency that we have witnessed. But the higher coverage ratio is not particularly for SME book or whatever because the general provision is about 1%, and we set special reserve for real estate and also the China exposure. For SME, it's pretty much linked to the so-called cyclical factor about the credit cycle. So I suppose we have to, I mean, experience this slowdown of economy and then provide the adequate provision against the credit cycle instead of particularly target any, I mean, customer segments. So I don't see that will be our strategy. As we have set aside above 300% NPL coverage ratio, I suppose this provisioning should be in a more dynamic sense instead of target any specific, I mean, customer segments for us.
And also, in terms of the new NPL influx, will you consider that the first quarter -- the second quarter, we had a new NPL formation of TWD 1.5 billion, around? Do you think it's normal or it's still relatively high? This is a question from Mr. Jemmy Huang of JPMorgan.
For the first half, the TWD 1.5 billion -- it should be more than that.
You mean for the second quarter?
Second quarter, well, that one is -- should be a peak, a peak for us because we haven't witnessed such a huge influx in this credit cycle. So going into the second half, I suppose this influx should -- we'll close monitor. Yes, as we haven't seen, what we call, the bottom, the bottom of this credit cycle. Yes, as we just enter into, the so-called, the pension reform and the price correction on the real estate market is still ongoing, so we should be quite prudent and cautious against any potential influx in [indiscernible]. I must say we do not rule out the [ peak ]. That's already behind us.
Okay. And another question from guest, that is about -- what's the adjusted NIM if we reverse back in the SWAP trading into NII? What's the reverse, the NII? I guess it's 1.27%, okay? Okay. We have highlight that if we reverse back the SWAP trading in our NII, our annual NIM will be 1.27%, a 6 bps improvement. Okay. Next question is from Jemmy Huang of -- do you still target double-digit fee income growth for the second half? Or in which part of the fee momentum will pick up, in addition to wealth management? I think he means that on top of the wealth management, what's the other part of the fee income?
Yes. Any other growth driver?
Yes.
Yes, sure. We did see the slowdown in the so-called, the non-wealth fee revenue. The major source used to be 3 parts: one is the so-called, the loan-related; and the second will be the FX; and then the third one will be the credit card and also the -- what we call it, the operation, the channel fee. We did see this contraction in the loan-related fee income due to the impact of this corporate failure for Ching Fu last year and also the downsize of our SME growth. So that's why the loan-related fee did shrink for the first half. For FX fee income, we have seen some recovery trend in the first half. So this may be the bright spot to that. We can have the -- we assume it's going to in the second half, thanks to the still booming exporting sector. In terms of the third one, will be the -- for the channel service and the credit costs, that now remain just marginal growth. So the major non-wealth fee revenue should be mainly driven by FX business. But in terms of wealth management, it still looks quite good. In the first half, we managed to grow by about 10% to 11%. So and going into the second half, this part can still be pick up. So we are still targeting the fee revenue to book around 6% to 7%, mainly by our still quite strong wealth management momentum. 6% to 7%?
Okay.
Fee revenue, yes.
6% to 7%, okay. And another question from China Life, [ Ms. Huang ], is do you expect that how much more provision expense to achieve the coverage ratio, 400%, till the end of this year?
I'd just highlight that we may not be targeting a 400% coverage ratio this year. 350%-something maybe our short-term target as we still have some NPL that takes time. It takes time to disburse the collateral that we see in our legacy NPL pool. So in that sense, we will still manage to set aside provision for, I mean, potential NPL or influx in the future. So if we would recover that so-called 400% based on current NPL pool, which stands at TWD 6 billion, we would need another TWD 4 billion provision toward the end of this year. But we don't see that will be achievable currently. So supposedly, I actually lowed our coverage target to around just 350% instead of 400%.
Okay. And a follow-up question is about the NPL influx. Is there any amount entering the structured impairment loss negotiation right now?
Yes. Yes, we do have this restructure. But that is about little less...
[indiscernible]
Yes, maybe less than 10% of -- a little bit less than 10% of the current NPL operation, including NPL. So it mean the so-called surveillance loan.
Surveillance loan.
Yes. We have some surveillance, but the overdue NPL or delinquency ratio is not that evident. Now we actually still monitor the whole influx trend.
And another question from Ms. [ Tina Chen ] is how much of NPL -- how much of the balance amount that belonging to Ching Fu not transfer into NPL account for Ching?
You mean the existing NPL pool?
I think she means how much loan balance -- remaining loan balance for Ching Fu not yet transferred.
0.
0? Okay.
We have already booked the Ching Fu completely as NPL. Yes, but we haven't completely written off the whole exposure of Ching Fu. We just wrote off TWD 4.5 billion. And TWD 2.5 billion will be the collateral that we seize. So TWD 4.5 billion has been written off, and TWD 2.5 billion remain as NPL.
NPL, okay.
The collateral, we still need time to dispose.
Okay. So [indiscernible] there's 0 amount for the -- for transferring to NPL. But NPL amount -- accounts, that we still have TWD 2.5 billion waiting for written off.
Yes.
Okay. And other question is to update the targets of this year, including loan book. Can Annie give us some outlook for the loan book expansion of this year, first of all, SME?
Total loan book, we will still target 4.5% to 5% after we achieve a 5% growth in the first half, mainly sourcing from mortgage and overseas lending. SME book should remain quite moderate. I guess 3% may be our target this year. It still takes time to monitor the asset quality into the second half.
Okay.
Mortgage should continue to become our focal point, that we will manage to grow our mortgage book due to the lower risk-weighted factor and also the fully collateralized nature, it will help to lower the potential loan loss. FX book will continue to be quite strong going into the second half, double-digit, 12% to -- I mean, 12% to 13% or 14%.
12% to 13%?
May be the norm, yes. Loan book would maintain its pace similar to the first half of this year.
For NIM, we already highlight. And for the fee income, we have highlight. And for the credit costs, Annie, is there any target for the net credit costs of this year?
Yes. If our NPL influx can be controlled, or I mean, stop here, we would project our net credit costs incorporate the recovery, which is target at around 2.4 -- TWD 2.6 billion to recover from the disposition of the collateral. We can -- we may achieve the net credit costs around 27% to 28%, yes, which is slightly lower than first half figures, which was above 30, 31 bps lower, yes. But continue to still -- I mean, to improve the asset quality, try to set aside more provisioning to weather any potential downside risk.
Okay, okay. And our next question is about our dividend policy. And what's our expecting dividend policy for 2019? A question from Ms. [ Huang ] of China Life.
We always maintain a stable and a quite generous dividend policy. In terms of the first half results this year, we managed to achieve EPS around $0.78. So if we could achieve an EPS target around -- I mean, double this level. And I suppose that the 60% to 70% dividend payout ratio should be achievable next year, yes, if we manage to grow our P&L following the kitchen sinking for Ching Fu impact last year. So next year, hopefully, we can deliver more dividend to the shareholders, yes.
Thank you, Annie. And so far, we still have one more question. And let me remind our participants, if you have more questions, please type at the bottom of the webcast window.
Another question is about our overseas market expansion. I know that many of the competitors are focusing on overseas markets. And what's First Bank's difference, I mean, between you and the competitors? Can Annie elaborate more on this issue? Annie?
It would typically, would follow the economic growth, and also our Taiwan business expansion pace, to set up the overseas connect network in order to serve an expansion project that will help us to capture this growth momentum and the loan demand in the overseas market, in particular, that margin in the overseas market is more attractive. After we have deployed quite extensive overseas network in the prior cycle, we now can achieve a quite efficient and quite -- I mean, with [ more the ] balanced model for the moment. I have to particularly point that up to this year, we have seen the quarterly pretax profits from our overseas operation can produce more than TWD 2 billion of profits, which is higher than our original level, which was less than TWD 2 billion. So this justify our strategy, that to capture the overseas markets would help to boost our overall margin and also the loan demand in markets outside Taiwan, where in Taiwan, the loan demand is quite benign, also the margin is quite tight. So we should follow this model and continue to replicate the successful improvement model to continue to expand our overseas platform. We would target the Eurozone market to set up a Frankfurt office after we quit the market about -- more than a decade ago. And also, we managed to set up a Jakarta rep overseas in order to enter into this booming market. In the North America, we've managed to seek the chance to set up a loan office in the southern part of U.S., which we are now targeting Houston. So this would help us continue to grow our overseas operation and help us to further generate more decent and capture higher growth opportunities.
Before we wrap up today's conference, I'd like to give everyone a summary of the guidance because one of our guests do hope to have a whole summary of today's guidance. Okay. Let's go from the top of the revenue. And for the NIM, it's -- for the NIM, guidance is 2 point -- we're still targeting...
Adjusted.
Adjusted NIM of about 1.27% to 1.28%.
Yes. Higher than last year.
Yes. Given that SWAP trading continues. Okay. Next will be our fee, we're still targeting 6% to 7% for the full year. And for the trading gains, absolutely double-digit is the norm, and it's now 51%, I know. So it's kind of we don't need to...
Worry about it.
Yes, worry about it. Okay. And the next part will be our expense. And how about our CI ratio about this year, Annie?
This year is quite an amazing year, that the net revenue grew quite substantially. I mean, net revenue grew quite -- yes, nearly 10%. Up to July, it's more than 10%. So the cost remain quite low, less than 3% up to July. So it helped to boost our pretax -- pre-provision profit, more than 14%, 15%. So this is quite a good figures for us. So that's why the cost-to-income ratio remains relatively low, less than 41%-something. So this is very amazing numbers for us. We actually achieved a 39% CI ratio more than 10 years ago. And now we are now approaching this...
Under 40%.
Yes, nearly approaching 40%. We just booked a 41% CI ratio due to -- well, it's 42%, yes.
And for the loan book expansion, we expect 5% to 6% this year. And in terms of the SME, we'll be 2 point -- 2% to 3%. And for FX, double-digit loans growth will be expected. And for mortgage, we'll -- until now, it's 6.8%. So it will be quite optimistic, yes, optimistic view for the mortgage growth. And for other lending, I think we will remain positive for the rest of the year. And the last part will be the credit costs. We remain 27 to 28 bps of this year, same as the beginning of the year outlook. And for the last part, tax, it will be the same, right?
Yes.
Okay. So I'd like to thank you for all the participants, and we'd like to wrap up here. And we hope that you join us for the next quarter. And thank you for coming today, and we'll see you next quarter. Bye-bye.
Bye-bye. Have a nice weekend. See you.