First Financial Holding Co Ltd
TWSE:2892
Earnings Call Analysis
Q4-2023 Analysis
First Financial Holding Co Ltd
First Financial Holding announced a record net income for 2023, reaching NT$22.5 billion, a 9% increase from the previous year. The performance was underpinned by impressive growth across its key subsidiaries. The bank's own net income saw a modest 6% annual growth at NT$21.5 billion. Remarkably, the securities and other divisions soared, with earnings up over 130% at approximately NT$1.79 billion.
Despite the fall in net interest income reflecting lower demand for the U.S. dollar, the bank still managed to grow its total loan book by 4% in 2023, with a notable 8% increase in mortgage lending. This resilience occurred even with a flattening in SME loans, highlighting the bank's adaptability in a challenging export market. Amid these factors, First Financial Holding remains cautious, prioritizing credit risk control and asset quality as ongoing geopolitical tensions and the U.S. presidential election loom large.
First Financial Holding exhibited financial soundness with a return on equity (ROE) of 9.51% and a return on assets (ROA) maintained at 0.52%. The capital adequacy ratio (CAR) exceeded the bar at 130.05% with a leverage ratio of 110.73%. These figures reflect a well-maintained financial buffer, vital for operational sustainability and fulfilling regulatory requirements.
For 2024, the lending forecast is cautiously optimistic, targeting a growth rate of 5.5% to 6%, driven primarily by a strong mortgage sector. The bank also aims for a modest 4% growth in SME loans. Navigating a potential U.S. rate cut and a possible economic slowdown, First Financial Holding anticipates a slight dip in the adjusted net interest margin (NIM) from 1.15% to around 1.1%. Despite these market dynamics, the bank projects stable lending spread and leverage from positive swap transactions.
Boosted by robust capital market activities, fee revenue increased by around 10% in 2023. Looking ahead, the bank aims to grow its fee income by 15% in 2024. This growth is expected to be fueled by sustained demand for overseas fixed income products and bancassurance offerings, particularly among high net-worth clients looking to optimize for higher yields and inheritance planning.
The bank has proactively managed its exposure to credit impairment events (CIE) with preemptive provisioning. The total CIE exposure is around 4% of the loan portfolio, with office-related CIE at about USD 500 million. To mitigate risks, First Financial Holding has allocated considerable provisions, exceeding the influx of non-performing loans (NPLs) from last year, setting aside up to NT$5.5 billion against an influx of around NT$5.3 billion. Such prudent measures signal the bank's commitment to solid asset quality and its ability to weather potential financial storms.
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Good afternoon, ladies and gentlemen. Welcome to join us for First Financial Holding Full Year 2023 Webcast Investor Conference. We will start with our presentation, including the full year snapshot, financial highlights and operating results. Then we will invite Ms. Annie Lee, our EVP and IR Head, to proceed the Q&A session. [Operator instructions], either in English or Chinese. The presentation material is on our IR website, www.ffhc.com.tw. Also, we will provide 1 year reply service of the webcast meeting for your convenience. Before we begin today's conference, I'd like to introduce you our new IR team member, Mr. Yang Chi-Tsai. Some of you might get to know her before because she has been around the financial area for quite a while. Okay. Now I would like to turn over to Mr. Yang Chi to start the presentation.
Thank you, Keith. Let's get started. Please turn to Slide 5. This slide shows first net income over past year. In 2023, we reported a record hitting NT$22.5 billion. That was up by 9% a year ago. In the following slide, we wrap up the group's performance last year. First, earnings grew across key subsidiaries. Banks reported a net income of NT$21.5 billion, that was an annual growth of 6%. Securities, leverage, among others, together earned about NT$1.79 billion. That was an annual growth over 130%. Overall, in 2023, we reported earnings per share of NT$1.65. Second, last year was highlighted by strong earnings in bank. Net revenue from bank grew to a new high of NT$58.7 billion. That was mainly due to gain on forex swap is surged by 82%, boosting total treasury gain to about NT$20 billion. Net fee income was another bright spot, it grew by 10% annually because of wealth management momentum. Third, reflecting lower demand on U.S. dollar. Net interest income decreased but still total loan book grew by 4% year-on-year in 2023. Thanks to mortgage lending, it grew by 8%, making a flattish SME loans, a business hit by weak exports. Stepping into 2024, Taiwan economy is projected to expand for exports and private consumer consumption are expected to rebound. We, however, remain cautious about the outlook for lending, but macro uncertainties linger including geopolitical tensions and intensifying U.S. presidential election. Ultimately, credit risk control, asset quality and provision buffers are our key to lending profit. This year, we continue to be optimistic about wealth management momentum given that the U.S. Fed indicates record in 2024 and AI spending boon could send stock markets higher. Let's discuss more in detail. In Slide 8, we show first key financials. We just mentioned net income and [Indiscernible] the year. Here to bring to your attention that in group's ROE increased to 9.51%. ROA kept at 0.52%. The [Indiscernible] good. CAR reached 130.05%. Double level ratio stood at 110.73%. In next slide, we show key items of the group's consolidated income. Consolidated net revenue was about flat with less charge and less reserve in insurance. Consolidated net income ended NT$22.5 billion. Coming to Slide 10, we provide net income numbers of key group companies. But showing in the graph, bank remains the profit engine -- all right, starting from Slide 12 on, we discussed Bank's operating results in 2023. This graph shows that since 2021, the profitability at the group and bank was inched up by 2023 year-end, bank's ROE [Indiscernible] 8.89%. Coming to Slide 13, we discuss components of bank's pretax profit. We touched upon top line items earlier to add on why interest income decreased by 16%. We consider excessive dollar balance used in swap had a negative impact on it. As to expense side, provisioning was higher than expected. It was driven by concerns over potential loss in [Indiscernible]. While recovery was good, credit cost was managed [Indiscernible] basis points last year. Operating expense rose by 8.8% in 2023. It was because that to normal business activities after the pandemic plus more value-added tax to pay. Now let's move on to discuss bank's lending assets. Slide 14 shows bank's total loan book and its mix. Total loan was NT$2.4 billion at last year-end. Mortgage lending was the key driver. Mortgage underwriting was buoyant since last summer when the government's new sponsored housing program for the [Yankin]. SME lending was about flat. FX loans dropped by 7.5%. This is a segment that high dollar borrowing rate largely declined [Indiscernible] corporate demand. Next slide, we provide loan data on a quarterly basis. Last quarter, we had a moderate loan growth at 0.04%. Loan-to-deposit ratio were available in Slide 16. Overall loan-to-deposit ratio contracted to 69% in the end of 2023. NT dollar loan-to-deposit ratio was at 78%. FX loan-to-deposit ratio was at 43%. Bank's spread kept at 1.34%, NIM was 8.76%. If taking gain on 4x was into consideration, bank's adjusted NIM was 1.15%. Coming to Slide 17, we provide quarterly spread data on NT dollar pool and foreign currency pro for your reference. And in Slide 18, we showed deposit inflow. Bank deposit grew by 6% annually to NT$3.5 trillion. Total ratio slid. This was because money was moving into [Indiscernible] deposit accounts which offer attractive interest rates. Next, Slide 19, we provide data on loan concentration of some industry sectors for your reference. In Slide 20, we show mortgage business in more detail. The bottom graph displays monthly new mortgage volumes and it shows an upward trend. This echoes what we discussed earlier, the first-time homebuyers [Indiscernible]. And the upper left graph shows mortgage yield and loan to value ratios. Mortgage loan-to-value ratio for new lending was about 65%. The average was a bit above 47%. We move on to discuss bank's fee business in Slide 21. This slide shows net income breakdown. The main contributor was fee from wealth management, as I said earlier, contributing nearly 60% of net fee revenue. It grew by 20% year-on-year from NT$4.3 billion to NT$5 billion. The second contributor was loan-related fees. It contributed about 14% of net fee revenue and generated NT$2.1 billion last year. Next slide. we show quarterly net fee income data. It also identifies fee from bank assurance and forces, which we aggregate under wealth management in previous slides. Bancassurance had a good year. In 2023, total net fee from bank assurance grew by 26%. It closed at NT$2.5 billion, mainly driven by the sales of mortgage life insurance. Turning to Slide 23. Bank's quarterly operating expense and cumulative cost-to-income ratio are given in this slide with yearly operating expense of NT$26.3 billion and net revenue of NT$58.7 billion. Cumulative cost-to-income ratio was 44.8% in the end of 2023. I Next, we show bank's asset quality in Slide 24. NPL ratio was 0.17% in 2023 versus 0.18% in 2022. Coverage ratio rose again to 827%. NPL ratios in different businesses display in [Indiscernible] for your reference. These ratios were kept at healthy levels. And in Slide 25 is an overview of bank's profit from overseas operations. In 2023, pretax profits from overseas operations was about NT$5 billion. It contributed about 19% of bank's total pretax profit. Take a look at upper left graph. OBU and Greater China looked contributing over 90% of our overseas profits. We would like to say that this was not a general case. It was an outcome after we strategically charged of delinquent loans in other countries. Finally, Slide 26 shows our capital strength. Bank's CAR increased to 14.56% by year ended 2023. Tier 1 was up 12.1% and CET1 was at 10.91%. As a decent Bank, we have met additional capital requirement for CAR and Tier 1. We are a step away from the requirements for CET1, which is at 11%. I'm ending my presentation here and give the microphone back to Keith.
Okay. Thanks, Yatin. And now we have several questions raised in our screen. First of all, Peggy from the Morgan Stanley had several questions. First one is, can Annie address again for our 2024 target for each aspect? First, we start from our loan growth.
All right. When we move on to our loan target this year, it's pretty much stay at a slightly higher level from a year earlier. We target our loan growth at around 5.5% to 6%, which was mainly driven by still booming mortgage sectors and the low base FX loan book. In terms of our niche market like SME sectors, we have witnessed a recovery in the exporting sectors. Therefore, we also set a moderate growth target for SME loans by growing around 4% and all of this can compose health growth around 5.5% to 6%. After the government agency actually just revised up its GDP growth up to about 3.4%, just about 1 day ago.
Next one, she wants to know about our original NIM and adjusted NIM target. But before that, because Jamie and Tina both have the questions related to NIM, but they want to know the NIM about the 2023 last year. So we start from 2023 and then maybe we will move on to the 2024. 2023, Tina wants to know why our in fourth quarter the loan-to-deposit spread and loan-to-deposit ratio, both are slid a little bit, but the NIM can stay stable.
Well, actually, last year, the NIM expansion mainly boosted by a very, I mean, prosperous swap transaction. And in terms of our lending spread, I guess investors would understand that the deposit cost for attracting U.S. dollars actually increased due to the supply of the deposits shifted from NT dollars to convert to U.S. dollars. So our lending spread actually remain quite -- I mean, quite -- should be stable. So the major help still come from our swap again. So last year the original NIM stay stable around 0.76% throughout the whole year. However, the actual NIM was significantly boosted by very buoyant swap transaction, which we ended the swap gains in total around NT$15.15 billion for the whole year last year, which pretty much -- I mean, translates into the adjusted NIM up to 1.15%, that will be the conclusion for last year. It means that even though the lending spread remained flattish, however, the adjusted NIM was boosted by the swap gains up from 1.12% for the first 9 months to end up with 1.15%. And as we move on to this year's projection, frankly speaking, as market would expect the U.S. rate would gradually -- I mean, [Indiscernible] going into the second half of this year. So the market would definitely factoring falling swap gains this year. That's why we would set the target which is -- which will not be so aggressive this year and normally we would see that the swap gains will gradually ease. But as the rate cut -- I mean, the timing for the rate cut may be rolled out into the second half of this year. So we would project for the whole year that our adjusted NIM may have dropped a bit, but that would still stabilize around 1.1%, and that would still help us to generate some decent gains from the swap transaction. So for this year's NIM expansion -- I mean, the expansion for NIM may no longer exist, we should see some contraction on our NIM prospective. So it would fall from 1.15% to around 1.1% this year. That will be our expectation for this year's adjusted NIM. But the lending spread should stay still flattish due to -- we do expect the Central Bank in Taiwan would remain our rates unchanged.
Okay. So I think Annie has already answered both the 2023 NIM questions and the forecast of our 2024 NIM. So I think that's already finished both either Peggy, Tina and Jamie's question. But Tina also had one more question related to NIM, which is -- because Annie has said 2023, the adjusted NIM was about 1.15% and Tina wants to know comparing to the 2022, that's the year of previous, so what part adjusted NIM of 2022?
Right. Actually, the adjusted NIM in 2020 -- I mean 2 years ago was not that evident. It stays pretty much in line with this year's projection around 1.09% because at that year, the swap gains only amounted to less than NT$4 billion. But this year, we still project our swap gains would reach up to, let's say, NT$10 billion to NT$11 billion is pretty much subject to how fast the rate cut in U.S. and also how far the Fed would move on? Would it be an aggressive cut or just a very mild cut that would impact the whole projection for the swap gains. But for us we normally would maintain around NT$1 billion, NT$1 billion swap gains per month based on our existing portfolio. So in that sense, that if we project around NT$10 billion to NT$11 billion swap gains for this year, it might be quite meaningful.
Okay. I think it's very clear that Annie has answered the NIM related questions. So let's move to next 2024 target for our fee income.
All right. Last year, thanks to a very booming capital markets, especially for the overseas fixed income investments and also the bancassurance products. We concluded our fee revenue up by around 10%. And this year, we will continue to move on the momentum to further drive up our fee revenue to grow by 15% as the demand for the overseas fixed income products still remain quite popular. And investors tend to lock in the higher yield and good rating targets to actually fix up their further yield that would safeguard their return in the coming years when the rates start to fall. So the -- I mean, the foreign bonds or fixed income products still remain quite hot. And another side for the bancassurance products that the so-called savings products with some leverage protection that will help the high net-worth to finalize their inheritance purpose, what would also maintain a hard part for this special clients. So these 2 sectors would still maintain their momentum to record double-digit growth like it were last year. So we would see our wealth management fee revenue can maintain its momentum to grow our target at around 20%, which is higher than last year's level. And in terms of the FX lending related or FX transaction fee revenue, we would also target a 7% growth rate due to the low base period, which the sluggish exporting sectors actually recover from the trough and we would capture the opportunities to translate into our FX transaction fee revenue to grow by 7%. So as a whole, the total fee revenue would target a 15% growth, which is still highlighting and outperform than what we had last year at around just 10% growth in 2023.
Okay. Thanks, Annie. Let's move to next topic. Several investors or always they like to know more about our asset quality for last year and also the coming year. So for Morgan Stanley, Peggy Shih, she would like to know what are our CIE and office-related CIE exposure and the delinquency amount?
Well, for the total CIE exposure, which is amounted to around 4% of our total loan portfolio. And in terms of the office-related CIE, which stands at around USD 500 million. But given that we had already taken preemptive move to provide excessive provision against these exposures. Actually, last year, the total influx of the overseas NPL was amounted to around NT$5.3 billion last year. We have already set aside up to NT$5.5 billion, which was accessed to the total influx last year. So we did provide the sufficient provision against all this potential delinquent cases. And not to mention that actually, for those CIE, we do have some decent write-back, which will be more than half of the exposure. So this can help us to further weather the potential downside when we provided excessive reserve against this exposure. But going into this year, we reckon that after we have disposed most of this troubled exposure we would see as the rates turn to -- not so burdensome for those CIE borrowers. We would see our CIE influx will be gradually improved. So we project our -- I mean, our credit cost for 2024 dropped from the high of 24 basis points last year to as low as 15. basis points this year, which is pretty much thanks to what we have provided the excessive provision against this CIE exposure. And we do see that the recovery from the disposed exposure will help us to recover from these losses and help us to weather the potential CIE losses.
Okay. Thanks, Annie. So Annie also has answered the Peggy's another question that our prediction of our credit cost of 2024, which was -- which will be around 15 bps. So Annie has answered the questions as well. And also, Annie has answered Jamie Huang's questions about the CIE related questions. But Jamie Huang also want to know why since Annie has mentioned about our recovery for update. But while the loan loss recovery up so much in 2023?
Well, the thing is that due to the nature of the CIE lending, which are of, let's say, over-collateralized. As we did charge off more than the haircut that we actually suffered. For instance, in the past, when we had some exposure into the syndication lending in overseas market, we normally charge of 50%, half of the exposure and then the recovery rate will be less. But now the CIE are all guaranteed by collateral and we actually charge of more than 80%, we provided 80%. So that's why the recovery rate will be higher because this collateral can be recovered from the disposition of this collateral. So that will be the main difference between our past legacy without sufficient collateral but now all the CIE are collateralized. As long as their valuation rebound or they can have a decent refinancing chances this recovery could be much more expected. I'll take one example because the legacy port of the CIE lending would take time to recover because you -- we have to wait for the new -- I mean, investor to get involved with the investments of the CIE. So it normally would take more than -- I mean, takes years, we actually recovered one single case in China which was related to auto-makers that we nearly recover 90% of the exposure. So that would be part of the reason that last year's recovery rates moved up so dramatically. So I would like to highlight that the recovery rate can be much more significant than we can imagine because we charge off more, we charge more than what we had before from 50% to 80%. So that's why the recovery rate will be higher than the past.
Okay. Thanks, Annie. And let's move to another topic about our dividend payout ratio. So both Peggy and Jamie Huang, they'd like to know for the 2023 to 2024 this year, where we maintain a lower cash dividend payout to meet this through requirements?
Yes. Yes, we would follow our -- this criteria to meet the regulators' requirements. So we would manage to maintain a similar payout ratio for last year's earnings and hopefully, we can achieve the requirements. So that would imply that our cash payout ratio will be around 51% to 55%. It's still subject to the final approval for the Board.
Okay. There is one more question coming in, which was from the Morgan Stanley's Lucas. He wants to know why the tax rate was so high in 2023.
All right. Actually, that was mainly because the -- you mean the income tax, right, income tax?
He just mentioned the tax.
Okay. There are 2 parts. Okay. For the VAT actually incorporated into our SG&A, which was mainly attributed to -- we have received more net revenue so we pay more for VAT. And in terms of the income tax which was impacted by the falling OBU earnings last year. I guess most people would know that our LDR for foreign currency lending dropped quite substantially due to the higher rates that our net interest income, NII booked in OBU actually dropped substantially. So the OBU lending did not provide the so-called tax-free income that help us to reduce our income tax last year. So that's why we pay more on our income tax last year, mainly impacted by falling OBU lending and earnings last year. So OBU can be a very good tax shield for our business model. But last year, unfortunately, because the higher yields deter the clients to borrow more U.S. dollars that the does lending dropped substantially.
Okay. So no matter if the VAT tax or the income tax Annie has answered all the questions.
Yes, we contribute a lot to the government.
Okay. So, so far there is no more questions on the board. So if you want to have some questions, [Operator instructions]. So we just wait maybe 1 minute, anybody who has some more questions?
Or maybe I can also [Indiscernible] some prospects for this year. Many analysts do project that this year the growth or the economy would recover gradually and we would see our lending book continue to expand. However, the spread or the margin would remain stable. So we would see the major growth momentum would come from -- I mean, there's still booming mortgage lending or the fee-related income, but as long as the economy continues to recover we would expect our bottom line can gradually also gradually recover after we have cleaned up our balance sheet in the overseas book. So for this year's growth momentum will mainly come from a falling credit cost. But for top line, would remain slightly growing model, not so aggressive like we had booked in the FX transaction or FX swap.
Okay. Thanks, Annie, and there is still no more questions coming in. So maybe we just finish our conference call here or Annie still has some conclusion or just stop here.
All right. Maybe let's stop here. If anyone's -- speaker has any more question you can just contact our team. So we are more than happy to reply. All right.
Okay. Thank you, everybody, for coming with you next season.
Okay. So next quarter. Have a nice weekend. Bye.