First Financial Holding Co Ltd
TWSE:2892
Earnings Call Analysis
Q3-2023 Analysis
First Financial Holding Co Ltd
First Financial Holding demonstrated a robust performance in the first three quarters of 2023. With earnings hitting TWD 19 billion, the growth in year-over-year (Y-o-Y) earnings reached 15.8%, and the bank's earnings alone touched TWD 18 billion, marking a 12.4% growth. Different arms of the group such as securities, insurance, and trust saw considerable improvements. They met their four-year earnings prediction in just three quarters, signifying an impressive pace of growth.
The company is setting its sight on asset quality and portfolio reallocation for enhanced capital efficiency. Being selected as a Developmental Center (DC) bank, they are taking strategic steps to position themselves for long-term stability and growth.
Profitability metrics such as Earnings Per Share (EPS) improved by 15.7% Y-o-Y, while Return on Equity (ROE) and Return on Assets (ROA) grew by 9.8% and 7.1% respectively. These figures indicate an efficient use of equity and assets to generate profits.
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Thank you for waiting. The meeting will begin shortly. Good afternoon, everyone. I'm K. C. Lee. Welcome to join us for First Financial Holding third quarter 2023 webcast investor conference.Before we proceed the presentation, we'd like to disclose the following information. Starting from December 2015, in order to improve corporate governance code, First Financial Holding has set out ethical corporate management best practice principles and conducting procedures and guidelines. For more information, please refer to our website.Okay, let's start with our performance presentation. Materials can be downloaded from our website and 1-year replay will be available after today's conference. After the presentation, we will invite Ms. Annie Lee, our IR Head, to proceed the Q&A session and talk about 2024 outlook as well. [Operator Instructions]Now, I'd like to turn over to Mr. Keith Ke to begin today's presentation. Keith?
Okay. Please turn to Slide 5. This slide summarizes the group's performance of first 3 quarters 2023 and also the outlook of 2024. And later Annie would also provide some predictions for each sector in our Q&A session.Okay. First Financial Holding posted a TWD 19 billion earnings result in first 3 quarters 2023, which presented 15.8% growth Y-o-Y. Bank also reported an TWD 18 billion earnings in first 3 quarters with 12.4% growth. Among other subsidiaries, securities, insurance, and the trust all had a tremendous improvement comparing with the results the same period the last year.Overall to say, the group's earning was in line so far at the end of third quarter. As of the bank's performance breakdown, loan book grew by 6% Y-o-Y. Fee income grew by 9.6%. Both results were better than our expectation. Treasury gains improved over 150%, which was mainly contributed by swap gains performance. The earnings in first 3 quarters has already met our original 4 year prediction.Noises from macro never stopped this year. Inflation atmosphere remained high. Consumption was relatively weak, and geographical political conflicts continued still. All these issues turned the market more sensitive and promoted the risk-averse atmosphere. Global capital markets would be quite uncertain for coming quarters.Let's take a look at the outlook of 2024. Group's top concerns for 2024 would be asset quality and portfolio reallocation, which will be for capital efficiency. Especially that First Bank was selected as one of the DC banks and the capital requirement due date was getting closer.Okay, let's move to financial highlights. Please turn to Slide 7. This slide shows group's key figures. As we mentioned, consolidated net income was over TWD 19 billion, with 15.8% growth Y-o-Y. EPS increased 15.7% Y-o-Y. And ROE and ROA had 9.8% and 7.1% growth respectively. Okay, please take other figures as reference.And please turn to Slide 8. This slide presents the breakdown of group's net income. Net revenue was at similar level comparing with prior year, which was directed by insurance premium. It would show on the slide later that the bank's revenue still improved quite a lot Y-o-Y. However, with far less insurance reserves, the bottom line was still up 15.8% Y-o-Y.And please turn to Slide 9. This slide provides a picture of major subsidiaries' earnings. All major subsidiaries made contributions and had better performance comparing with the same period last year.Please move to Slide 11 for the operating results. On Slide 11, it shows group's and bank's net income and ROAE. Again, group's net income was TWD 19 billion, with 10.9% ROAE. And bank's net income was TWD 18 billion, with 10% ROAE.And please turn to Slide 12. This slide provides a breakdown of bank's earnings structure. As we mentioned, bank's cumulative net revenue of first 3 quarters, 2023, still performed well, reached TWD 44.8 billion, with 13.2% growth Y-o-Y. As of the breakdown, net interest income dropped 18.3% due to the funding shift. Fee income continued to escalate in second half. The year-on-year growth in first 3 quarters was 9.6%. And swap gains was better than our expectation, which had earned over TWD 10 billion in first 3 quarters and already reached TWD 11.5 billion at the end of October. And it helped the total gains on investment to increase 150% Y-o-Y. And among the cost part, better recovery of 55% growth helped to offset the 15% growth credit charge. And most of the credit charge was from overseas case.Okay, please turn to Slide 13. This slide shows loan book mix. Total loan book reached TWD 2.4 trillion, with 6% growth Y-o-Y. Mortgage loan book was better than expectation, with 7.7% growth. Large Corp. loan book increased 31.6%. SME loan book had 2.8% growth. Impacted by the U.S. NT dollar red cap, FX loan dropped 7.3% Y-o-Y. However, the overseas loan book still had 1.8% growth.And the next slide shows the Q-o-Q trend of loan book mix. All categories present the growing trend. Please take it as reference.Okay, let's move to Slide 15. This slide displays the trends of LDR spread and NIM. LDR was back to 70.2%, which was mainly driven by FX LDR's 47.6%. Even though it's still low, but got a little bit improvement. NT dollar LDR kept at 78.2%. Loan-to-deposit spread rose up to 1.36%, while NIM stayed at 0.76%. And the adjusted NIM of first 3 quarters was down a little bit to 1.12%.Okay, please turn to Slide 16. This slide shows the Q-o-Q trend of the NT dollar and FX spread. NT dollar spread was slightly down to 1.34%. FX spread increased to 2.9%.Please turn to Slide 17. This slide shows deposit mix. Total deposit shrank to TWD 3.43 trillion comparing with the amount at the end of first half. But it still has 10% growth Y-o-Y. NT dollar deposit increased 18%. However, FX deposit was down 7.1% Y-o-Y. And on the right-hand side, CASA rate further dropped to 62.2%.Please turn to Slide 18. This slide shows the loan book concentration of major exposures. Please take it as reference.And Slide 19 shows the mortgage yield, LTV ratios, and the new mortgage lending trend. Mortgage yield finally dropped 1 bps to 2.19% after 5 consecutive quarters trending up. And it would take time to observe the future trend. LTV ratios stayed pretty the same with the ratios of last quarter. New mortgage LTV ratio was 64.4%. Average mortgage LTV ratio was up a little bit to 46.8%. And as a bottom bar chart, the amount of new mortgage lending this quarter was up 7.7% comparing with the month last quarter.Let's move to Slide 20 for fee revenue. Cumulative net fee income of first 3 quarters 2023 came to TWD 6.7 billion with 9.6% growth Y-o-Y. As of the breakdown, wealth management fee income was the key with 17.6% growth Y-o-Y. Loan-related fee income also increased 5% Y-o-Y.And Slide 21 shows the Q-o-Q trend. Even though fee income in third quarter dropped 5.2% Q-o-Q, however, we think the momentum was still strong. Please take this slide as reference.And please move to Slide 22. Total operating expense of first 3 quarters 2023 was TWD 19.4 billion with 11.8% growth Y-o-Y. So it made the cost to income ratio rose up to 43.2%.Please turn to Slide 23 for asset quality. Coverage ratio continued to improve to 797% at the end of third quarter. NPL ratio also dipped 1 bps to 0.17%. Bottom chart shows the breakdown of NPL ratio. Individual NPL ratio dropped to 0.1%. Mortgage NPL ratio stayed the same at 0.07%. SME NPL ratio was down to 0.17%. Large corporate NPL ratio cleaned up to 0%.Please turn to Slide 24. The pre-tax profits of overseas branches over total profits further dropped to 19.5%. But we think it would be buttoned up gradually in coming quarters. Top left pie chart was still distorted. So please just take it as reference.Please turn to Slide 25. Growth CAR was 128.7%. Banks CAR and Tier 1 were 14.3% and 12.4% respectively at the end of third quarter 2023.Okay, that's the presentation. I will turn back the microphone to Annie for the Q&A session.
Okay. Thank you, Keith. Now, I'd like to host the Q&A session. The first question is from investor. In terms of loan growth, fee income revenue and swap gains, could company give us some pictures about 2024's business outlook?
I'll first start with our conclusion for this year. We would manage to reach a loan growth around 5% towards the end of 2023. So going forward next year for the whole year, following the recovery of the exporting markets, that we would see that the loan demand may gradually recover from those exporting sector, particularly the so-called AI-related and the new tech sectors. So next year loan growth, we would target around 5.5% to 6%, mainly driven from corporate and also the still booming mortgage market and the low-base period of FX lending. We also target a 10% growth next year. So as a whole, loan growth next year for 2024, we hope to reach around 5.5%.In terms of fee income, this year following the higher U.S. dollar rate and also some inheritance demand from the bank insurance business, we actually recorded a quite optimistic result that the wealth management fee grew quite substantially. So next year as the higher rate would last for around half a year and the retail clients or high net worth customers would lock in the higher return products, including the fixed income products and the leveraged insurance savings products that would help to boost the fee revenue next year.So we would predict 15% more aggressive targets for next year's fee revenue from this year's more than 10% up to 1.5%, 15% next year, mainly driven by the still quite popular overseas fixed income investments and the highly leveraged bank insurance products for the inheritance purpose.And going back to the swap business this year, most of the market analysts would see that the Fed may become more dovish next year following the slowdown in the economy. So the interest rate spread between Taiwan and U.S. may gradually narrow after Fed starting its rate easing cycle as early as from the second quarter next year. So we would project after we may record a historical high swap gains this year around TWD 12 billion to TWD 13 billion this year. We may have a 20% haircut at around just TWD 9 billion to TWD 10 billion next year. And hopefully, we will compensate that gap by dispose some of our investment portfolio from the fixed income parts to subsidize the swap falling up. So we would see the swap gains may be able to sustain its momentum in the first half prior to the Fed easing cycle.But going into the second half, the swap gains will gradually up a bit and that the swap gains may not repeat the high end that we have this year, that we conclude at around more than TWD 10 billion this year. Next year, will be less than TWD 10 billion, not as high as we did this year. So this will be the 3 major top line projection next year.
Okay. And we have a follow-up question about swap revenue, which is from Amanda Zhang of JP Morgan. Amanda wants to know that the things we just highlight that we have booked, we may book TWD 12 billion to TWD 13 billion swap gains this year. So, how about the first quarter and the second quarter and the third quarter swap gains respectively?
Well, for the first quarter this year, we recorded TWD 4 billion. In the second quarter, that would be TWD 3 billion. And then move on to the third quarter, it went up a bit to TWD 3 billion, TWD 3.2 billion. So average per month, we can record up to TWD 1 billion.So up to end of September, we have booked TWD 10.3 billion swap gains. And until the end of October, for the first 10 months this year, we have already concluded up to TWD 11.5 billion swap gains. And we would project it for every month, we will be able to record up to TWD 1 billion until the end of this year, as long as the rate gap is there.But next year, as we project the rate cycle, may no longer repeat the similar pattern. So the swap gains projection will not so aggressive. So up to the first 10 months this year, we would be able to record, booked around $1 billion per month.
Okay. And the second question comes from Mr. Eric Shih of KGI. Eric hopes to know the credit cost outlook and our name outlook in 2024. Especially, we have answered, actually we have answered the loan outlook and the fee income outlook. So we still have NIM outlook and credit cost outlook here for his answer. Okay. He's got 4 questions. So I think we just step-by-step. First one is NIM outlook and credit cost outlook.
All right. In terms of NIM projection, just like I just talked about that our major top line contribution from swap next year would not so exciting like we did this year. So the NIM projection for next year will be quite flattish after we may conclude the NIM for the whole year around 1.12%, which is slightly above last year's level around 1.09% to 1.1%. So next year's NIM projection will be not so proactive because the swap gains will no longer play the centers, I mean, that the major star to contribute to the top lines next year. So NIM projection for 2024 should be flattish like what we have this year.And talking about the credit cost, actually this year we had to suffer quite losses from our overseas lending, especially from some U.S. or European markets that some of the lending to the major CRE or other sectors like healthcare and which was significantly impacted by the higher cost of the higher borrowing cost and the slowdown of the real estate market. So we had charged off more than TWD 2.5 billion for this year. And that pretty much helped us to clean up our overseas balance sheet.So this year, we would conclude the net credit cost at around 20 basis points. But next year we would see the credit cost, net credit cost would be significantly lower to just 15 bps, which is quite a good prospect that we will no longer be dragged by the delinquent problems that we suffered this year. So next year credit cost will be much lower than that we had this year from 20 bps, 2023 down to 15 bps, 2024.
Okay. And the second question is about our CET1 ratio. Eric hopes to know that the, what's the impact of CET1 ratio on new Basel III regulation adopted in 2025? That's the first question.
After our calculation, the impact would be around the 12, 15 bps, because we had not a very huge credit cost portfolio. So the main drag may come from the, let's say the commitment fee, commitment credit line to the corporate sector. So the impact would be, let's say, quite manageable, just 12 bps lower than current level.
Okay. And the next question is about the IRB model, which is also asked by Peggy Shih, assuming that we apply the IRB model, how much can CET1 ratio increase? And which means that how much risk weight assets can we decrease?
Based on current portfolio, the total risk weighted assets can be incorporated into the Basel III. I mean, the reduction will be as high as 200 billion RWA, it will imply 200 billion IRB model. And that would translate to around 110 to 140 bps of CAR ratio. That would be a huge lift. 110 to 140 bps -- 110 to 140 bps.
Okay. So this is the benefit of our CAR and CET1 ratio or even the Tier 1 ratio?
Yes, to strengthen the capital base.
Okay. And we have a follow-up question, which is the forecast, 2023 forecast dividend policy. I think he's talking about the 2023 dividend policy, which is also a similar question asked by Ms. Peggy Shih, the dividend policy. Well management -- let me elaborate more. Okay. Will management lift cash dividend payout ratio for 2023 on our better earnings performance and less on market impact on appropriated earnings?
Well, I mean, the fact is, yes, we do record a good result this year. But still, I have to highlight that when we talked about our dividend policy, we have to come back to have a look at how much asset we're going to gross and also how far that we can comply with the DSIP requirements. And in fact, up to -- based on our projection up to the end of next year, 2024, we just merely beat the target of DSIP. So in that sense that we have to look for balance that should we retain more earnings for future growth if the recovery did come in.And another thing is that, if we can get the approval for the IRB model as soon as possible, I mean as early as end of next year, 2024, then maybe the dividend payout ratio can be more, I mean, optimistic. But based on current announcement by the regulators, it seems that it takes time to get the approval for the IRB model.So in that sense, we would see that next year for 2023 dividend payout ratio, we cannot commit a very generous payout policy due to it still takes time or effort to convey our message and communicate with the regulators as we are just slightly fit the DSIP compliance. So for next year, the dividend policy should be pretty much similar to what we had this year.
Okay. And we have another follow-up question, which is about our NPL issue. And a similar question from Mr. Jamie Huang from JP Morgan. And I'd like to read their question. How comfortable you are that overseas asset quality could be stable in 2024 instead of further new delinquent cases? And also a similar question is from Eric Hsu. He's asking about do you see any new NPL in fourth quarter -- in the fourth quarter of this year so this quarter and next year?
Okay. Well, I guess that because we still heard about the new Chapter 4 announcement from 1 Austria developers just early today. But I must say that, we actually had provided quite a amount of provisions against this exposure in the overseas market. And the major parts of this lending will be collateralized. So up to the fourth quarter, I mean coming into the November and December, yes, we do see some, let's say, substandard assets.But it looks that we can still have sufficient provision to charged off this, I mean, delinquent assets. So going into next year, we have already provided quite a provision against the exposure there. So that's why we project next year's net credit cost to be significantly lower than what we have this year, as we have charged off most of this delinquent assets.So up to now, we are still continuing to recover from the collateral that we seized at the right back up. We still continue to become the influx of our compensation for this charge-off. So that's why we are not that pessimistic about the ongoing asset quality in the overseas market, particularly when the higher-rate environment may ease or will not sustain for quite some time.So we would see that, this credit cycle may see some bottom-out at current moment. So that's why we rather become more optimistic about this credit asset quality for next year. So I have to highlight that we have, I mean, charged most of this delinquent assets up to now.
Okay. And we have another question, which is from Ms. Peggy Shih. She focuses on the CRE exposure. So let me read her question. Can we know U.S. CRE exposure in the third quarter 2023? And how much provision have we made in the third quarter? Any further provision plan in U.S. CRE loadbook? So I think her question is about our CRE, U.S. CRE exposure and issue?
All right. The total CRE exposure in our book is up to about 4%, which is around USD 3 billion in total. I mean, total CRE in the overseas market, and in U.S. alone it accounts for around 25%, 1/4. And up to now, those delinquent CRE has already provided up to more than 80% of provision against this troubled lending. It implies that we're still closely monitoring this overseas or delinquent CRE. But up to now, we have set aside significant provision against all this CRE exposure, up to 80% now, 8-0.
Okay. And let's go back to domestic provisioning. And here's a question from Mr. Eric Shih of KGI. Eric hopes to know, can you give us more color on new NPL influx of TWD 1 billion in Taiwan? Domestically, I think, new NPL influx.
For the first 3 quarters, we have seen around TWD 4.2 billion new influx in total for the first 3 quarters. And domestic NPL only represent around 30% to 40%. You can refer to our slides at Page 33. We have highlighted the asset quality of First Bank. So domestic NPL influx was around TWD 1.6 billion. And the overseas NPL was TWD 2.5 billion, which as a total generated about TWD 4.2 billion new NPL influx, which is almost the level that we had last year. Total influx around TWD 4.4 billion. The main influx from overseas, not domestic.
Okay. And we have another question is about our adjusted NIM. It's a question from Ms. Peggy Shih. She hopes to know that do we still maintain 2023 adjusted NIM targeting at 1.14%?
Well, I just highlight that we revised down the projection for this year down to, let's say, 1.12%.
Okay. Her follow-up question is, can we know the reason why the adjusted NIM of third quarter down to 1.12%?
Mainly it is dragged by higher funding costs, deposit costs. And also, you know that the cash flow rate has dropped to quite substantially, as low to 62%. And also the higher U.S. dollars funding costs. So that drags down the whole spread and the NIM. So, which means that given we have booked more swaps gains on the book. However, the adjusted NIM actually down to 2 bps from the second quarter to third quarter, which means we have rising deposit costs.
All right. And also her next question is about, can we know the reason for stronger mortgage growth in the third quarter?
Well, this is really a surprise for us as well, because as the crackdown measures adopted by the government in summer, this summer, that it may be the reason that prior to this mortgage cycle, our bank has engaged in some, let's say, construction loan. The lending to the developer. And after the completion of these construction projects, it actually generated the so-called new home sales that has led to what we call it wholesale mortgage lending. And which was also helped by the lower mortgage rate provided by the government that we call the new use mortgage lending.So that helped to boost the mortgage loan. So this would be the main reason that mortgage lending has already beat our expectation. And we still see the mortgage lending growth would sustain through our next year that we project our mortgage lending will continue its momentum at around 7% to 8% growth next year.
Okay. So another coming year for mortgage lending, we'll grow like 7% to 8%. And we have another follow-up question is about our corporate lending outlook. How do you see that the corporate lending outlook in the next coming year?
Next year, we project our lending to corporate, including Large Corp. and SMEs, will be around the mid-single digit, around 4% to 5%, which is in line with the whole loan book expansion next year. After we booked a loan base this year, that the SME lending book did not grow that much. Next year, around 4% to 5% for corporate lending.
And we have another question is from an investor. He hopes to know that, how much sales revenue in wealth management? I think he's talking about the fee revenue. How much fee revenue in wealth management is for fixed income sales and for structural no sales?
I think the main source of our fund sales would be for those high-yield overseas fixed income products. And for the first 9 months this year, the mutual fund sales grew by more than 17%. So, supposedly, it was all generated from the fixed income, but nothing much from the other products like equity or something. Because traditionally, those higher-yield fixed income products can provide more juicy commission rates than the quite popular ETF funds. So, the ETF fund commission would be much lower than most of the active fund-like fixed income products.Another source would be the bank insurance products that I just mentioned. For some high net worth customers, when they would like to engage in some inherited projects, then they would pass on their huge money via the highly leveraged bank insurance savings products to help to transfer their assets to the second generation. And that helped us to book a 20% growth for this bank insurance sales this year. And next year, we should proceed on this trend.
Okay. And we have another question for our live subsidiary. The question from the investor is, I wonder how would the recent beneficial treatment of ICS 2.0 announced would help on live capital?
Well, currently, the ICS project is still ongoing. And actually, most live players still continue to negotiate or discuss with the regulators. Based on our internal statistics, we will have to put in some more capital to boost or safeguard the capital base of the live business. But the grace period is still not confirmed yet. So, the benefit is still not certain yet, because it is not yet finalized. So, we would first announce it after all these criteria or these requirements are confirmed. Nothing much is for this -- I mean, not confirmed yet.
Okay. And we'd like to just fill in some question that we haven't answered. The first one is about our operating expense forecast. And how about the growth rate on operating expense and the CI ratio?
For cost side, apart from the credit cost, it will be down to 15% next year. We would have a pay hike next year up to 4% to 5% for the headcount cost. So, the SG&A would grow by around 7% to 8% next year. And the CI ratio may further hike to around 45% to 46% next year due to the higher operating cost next year.
Okay. And we have another combined question that. How do we see that wealth management fee income revenue next year?
We actually set a very aggressive target to grow by another 15% next year, which would view on the market trend that the clients, retail clients, would be quite keen to lock in the higher yield returns before the U.S. rate starts to fall. So, it will pretty much repeat the pattern that we have this year that both fixed income, overseas fixed income products and bank insurance products will continue to be very popular among both retail and high-news customers next year. So, next year, 14% to 15%.
Of total fee revenue?
Yes.
How about in terms of wealth management related products?
More than 20% something.
Okay. More than 20% on wealth management related revenue. Okay. I think we have had all of the questions here, and I'd like to wrap-up here. And we are happy that you joined for today's conference, and we'll see you next quarter, next year. Thank you.
Yes. Okay. That's mid next year. So we can have a more clear picture on how the market would move. Hopefully, we can continue this momentum and continue to book satisfactory results next year. Thank you. Bye-bye.