First Financial Holding Co Ltd

TWSE:2892

Earnings Call Transcript

[Keith Ke, executive]

Thank you for waiting. The meeting will begin shortly. Good afternoon, ladies and gentlemen. Welcome to joining us for First Financial Holding's Third Quarter 2024 Webcast Investor Conference.

We will start the investor conference with the presentation, which includes the snapshot, financial highlights and operating results. Then we will invite Ms. Annie Lee, our EVP and IR Head, to proceed to the QA session. You can type your question at the bottom of the webcast. The presentation material will be put on our IR website, and we would provide 1-year replay service for your convenience.

Before we proceed to the presentation, I'd like to disclose the following information. Starting from December 2015, in order to improve corporate governance code, First Financial Holding has drew up management best practice principles and conducting procedures and guidelines. For more information, please refer to our website.

Okay. I will turn the microphone to [ Ms. Yatin Zhang ] to start the presentation.

[Unknown Executive]

Thank you, Keith. Greetings to everyone online on the first working day of December. In about next 10 minutes, I'll bring you the 9-month update of First Financial Holding.

Let's kick off on Slide 3 (sic) [ Slide 5 ], our prepared commentary. We registered a good year so far and is on course to achieve another good yearly results. As of September 2024, our net income amounted to TWD 20.8 billion, an increase of 9.4% year-on-year. Earnings per share was TWD 1.48. Bank subsidiary reported a net income of TWD 19.4 billion, up by nearly 8% year-on-year while other subs net income totaled TWD 1.8 billion, up by 12.8% year-on-year.

For the year through September, bank's decent fee income and outperformed SWAP gains pushed up the earnings growth, though the net interest income contracted due to heightened funding costs.

Loan book increased was fueled by mortgage and large corp. lending. SME and USD credits remained muted. We'll post earnings more with financial data later.

Looking back at the year from December now. The themes we compete and operate in Taiwan include a listed housing market and a subsequent cooling measurement enacted by Central Bank, an economy propelled largely by artificial intelligence and consumer spending, an equity market reaching record high and then corrected, a generation looking for defending wealth against inflation and preparing for wealth transfer, plus the late coming U.S. Fed rate cuts.

The theme should stretch into 2025 in the context of decoupling, trade wars, decarbonization, geopolitical tension and volatile capital and financial markets. All present opportunities and strengths affecting our business plan and beyond. Our IR Head, Annie, will address group's operating strategy and 2025 outlook in the Q&A session.

Now let's move on to post earnings. In Slide 7, we highlight group's key financial data for the first 3 quarters this year. ROE was 10.8%. Book value per share was 18.9. ROA was 0.61%. Group CAR was 128.5%. Double leverage ratio was 112%. Our assets grew steadily at an annual rate of 6.5%, and it was TWD 4.6 trillion. As shown in the pie chart, bank subsidiary drove total profit the most. It accounted for over 9/10 of group's profits.

Next in Slide 8, key elements of group's consolidated P&L statements are listed in the bar chart. For the first 3 quarters 2024, group's consolidated revenue was about TWD 55 billion, up by 7% year-on-year. Meanwhile, income tax was down about 5% due to the timing of tax benefits recorded. In a nutshell, First Group reported a net income of TWD 20.8 billion as of September 2024, up by 9.4% year-on-year. Major subs' net income numbers for the first 3 quarters this year and last year are given in Slide 9.

Coming up, we zoom in, looking at bank's operating results, starting on Slide 11. Bank's ROE was 9.84% as of September 2024, down by 0.08% on back of a net income of TWD 19.4 billion, which was up by 8% year-on-year.

Next, we discuss pretax profit in Slide 12. Year-on-year top line growth was around 8%. Net revenue was TWD 48.4 billion. Split it into main revenue categories, fee income was decent and was TWD 88.8 billion (sic) [ TWD 8.88 billion ], up by 33% year-on-year. Within the fee, wealth management generated TWD 5.3 billion, up by 41% year-on-year. Gains on financial products was close to TWD 18 billion, up by 14.5% year-on-year. In category, SWAP gains brought in about TWD 12.1 billion versus TWD 10.3 billion made for the same period last year. Net interest income was TWD 20.9 billion, down by about 5%.

Turning to expense categories. Gross provision was TWD 6.4 billion, down 5% year-on-year as CRE loan loss was behind us after first quarter. The provisioning set aside for the past 2 quarters was general provisions. Operating expense was TWD 20.6 billion, up by 6.5%, reflecting bank-wise pay hike this year.

Now we discuss key items affecting net interest income reviewed in Slide 13 to Slide 17. Firstly, the loan growth. In Slide 13, the total loan book grew 7% annually to about TWD 2.6 trillion. It was fueled by mortgage and large corp. lending. Mortgage was up by 15.7% year-on-year to about TWD 700 billion. Large corp. was up by 15% year-on-year to about TWD 340 billion.

In Slide 14, quarter-by-quarter loan book breakdown is presented. Next, we look at bank spread and loan-to-deposit ratio over time in Slide 15. By September 2024, spread and the NIM both inched down fractionally by 0.02%. Spread was 1.18%. NIM was 0.68%. To add on, adjusted NIM was 1.08% after taking SWAP gains of TWD 12.1 billion into consideration. As shown in the slide, loan-to-deposit ratio was up to 71%, mainly because of the growth of NT dollar loan book. Currently, NT dollar's loan-to-deposit ratio was 82% versus 80% from the prior quarter. U.S. dollar's loan-to-deposit ratio was around 41% now.

Slide 16 is the data of NT dollar loan spread and U.S. dollar loan spread. Quarterly average lending rates, quarterly average deposit rates and the spreads are provided.

Slide 17 is our deposit data. Total deposit was about TWD 3.6 trillion by end of September 2024, up about 6% year-on-year. When comparing to the same period, U.S. dollar deposits grew at a pace of 14% to about TWD 1 trillion NT dollar equivalent. NT dollar deposit, on the other hand, was up about 3% year-on-year to about TWD 2.6 trillion, with CASA ratio at 63 -- sorry, 63.37%.

So circling back to talk a bit more about our loan book in Slide 18. Our loan concentration data is supplied.

Turn to Slide 19. We show our mortgage business details. Let's first look at the mortgage volume we underwrote in the third quarter. Monthly mortgage volume, given in the bottom graph, were down sequentially as expected since Central Bank's tightening measurement kicked in, in July. Total mortgage underwritten for the third quarter was close to TWD 50 billion, down by about 7% versus the volume in the second quarter.

Regarding the location of the mortgages, they were categorized into 6 regions as shown in the pie chart. The proportion is the same as previous reporting. Data on new mortgage loan-to-value ratio, the average mortgage loan-to-value ratio and the average mortgage yield were in the upper left graph.

In the next 2 slides, we drill down on bank fee revenue of TWD 88.8 billion (sic) [ TWD 8.88 billion ], which was about 18% of bank's net revenue.

In Slide 20, in addition to a 41% increase in wealth management fees, loan-related fee lifted up by 42% year-on-year to TWD 2.3 billion. A number included a one-off fee of TWD 0.57 billion. It was about high-speed rail syndication case recorded in the first quarter.

In Slide 21, we provide quarter-by-quarter fee breakdown. Particularly, wealth management fee was further divided into 3 sublines. They are custody business, bancassurance and the fund sales. Though the latest quarterly growth rates for bancassurance and fund sales were down slightly, year-to-September, the accumulated income from bancassurance was TWD 25.5 billion, up by 46% year-on-year. The accumulated income for fund sales was TWD 22.7 billion, up by 40% year-on-year.

Moving on to Slide 22, bank's cost-to-income ratio on cumulative basis. It was 42.56% by September 2024. The bar chart shows bank's net revenue and operating expenses on a quarterly basis.

Slide 23, we show coverage and NPL ratios. Coverage ratio inched up to nearly 770%. Overall, NPL ratio kept at 0.18%. NPL ratios on personal, mortgage, large corp. lending and SME financing are shown in the bottom graph. Asset quality at the bank, in conclusion, remained intact.

In Slide 24, we review bank's overseas operating results. Quarterly pretax profits and debt from overseas operations are listed in the bar chart. In the first quarter, contributions from overseas operations was down because of CRE bad debt charge-offs. In the second quarter, it increased because of one-off bad debt recovery mainly, which was about TWD 0.73 billion. For the first 3 quarters 2024, accumulated pretax profits from overseas operation was about 23% of bank's total pretax profits.

Lastly, in Slide 25, we show bank's capital strength. Bank's CAR was 14.68%. Tier 1 was 12.47%. For your info, CET1 was 10.88%.

Back to Keith now.

[Keith Ke, executive]

Okay. Thanks, [ Yatin ]. And we already have several questions coming in and are from Yuanta, Eileen; Morgan Stanley, Peggy; KGI, Eric; and Uni President, Tina. They all want to ask the same question about our SWAP.

So far, till the end of September, for first 3 quarters, what's the amount of our SWAP gains so far? And under the rate cut from the Fed, what's our expectations for the outlook of the 2025 SWAP gain?

[Annie Lee, executive]

Okay. For this year's SWAP gains up to the end of first 3 quarters, we have generated about TWD 12.1 billion SWAP gains. And up to end of October, we still managed to book accumulated -- about TWD 12.9 billion SWAP gains. So in total, for this year, we would see our SWAP gains will still manage to beat our expectation that we may reach around TWD 14.2 billion or TWD 14.5 billion, which is quite similar to the level that we achieved last year.

Even though the U.S. has started its rate cut cycle, but still, the portfolio that we managed up to now continue to generate decent gains out of our strategic, prolonged the SWAP transaction. So after we book a whole year, SWAP gains around TWD 14.2 billion to TWD 14.5 billion SWAP gains. Next year, we would manage to project SWAP gains about 10% to 15% lower than this year's level at around TWD 12.5 billion to TWD 12.8 billion next year as we will continue to manage a decent SWAP portfolio during the rate cut cycle.

So for next year's SWAP projection 2025, we would still project slightly lower SWAP gains next year, around TWD 12.5 billion to TWD 12.8 billion for the whole year, next year. And this year will be TWD 14.2 billion to TWD 14.5 billion.

[Keith Ke, executive]

Okay. So let me repeat it. For this year, the projections for our SWAP gain till the end of this year, it might be reached about TWD 14.2 billion to TWD 14.5 billion. And next year, under the Fed rate cuts, so far, our projection is about TWD 12.5 billion to TWD 12.8 billion.

So the following question is the -- so under those amount of the SWAP gains, what's our expectations of adjusted NIM for -- so far this year, the first 3 quarters and the end of this year and then the projection of next year?

[Annie Lee, executive]

Well, until the end of third quarter, our adjusted NIM reached 1.08%. However, due to the starting of the rate cut in U.S. dollars, our average NIM actually dropped to 1.05% for the first 10 months of this year. And as we still expect there will be more rate cuts in -- I mean, going forward. So for this year, we would try to maintain a NIM around 1.04% amid a rate cut simulation.

And going into next year, as we would shift the part of our focus to the investment to some higher investment grade and high-yield portfolio in the foreign bond. So that would, to some extent, compensate for the gap left behind by the rate hike and the falling SWAP gains. So next year, we would continue to project our NIM would maintain around 1.03% based on a moderate rate cut cycle in the next year.

We would focus more on to boost our FX loan expansion and also the investment into the fixed income products, which will help to produce some decent capital gains when the rate becoming cheaper and that we can dispose this portfolio that generate some decent gains. So for this year, the NIM projection will be 1.04%, and next year, just slightly lower than this year's level, around 1.03%, just a marginal decline for next year.

[Keith Ke, executive]

Okay. Thanks, Annie. And I think because the SWAP gains will reduce a little bit next year, but our adjusted NIM will continue to maintain similar level to this year. So I think that's because our original NIM might be improved a little bit.

So the following questions like -- Peggy like to know is our loan growth project for this year and also the next year.

[Annie Lee, executive]

This year, the main boost is from our loan book expansion, mainly driven by the mortgage book and also the large corp. lending. And for the whole year, this year, actual growth from higher-margin SME and FX loan remained quite flattish. SME only grew by less than 2% and FX lending, quite flattish. But the good thing is that as the U.S. rate has already entered into a more softened phase, so the borrowing from -- of the -- borrowing of the FX loan will gradually accelerate.

So we would see for this year, the loan book may end at around 6.5% this year after we posted more than 7.5% growth in the first 3 quarters. And going into next year, our loan book would mainly focus on our niche market, including SME and FX lending, particularly in the overseas market. So that will help us to make a comeback for the higher-margin products that will help to improve our lending spread as currently that the FX lending spread normally would enjoy more than 100% basis point spread than the NT dollars lending.

So after we book a very flattish loan book expansion in the FX lending, next year, we are targeting a loan book at around 5.5% to 6% for the whole year next year. And the main growth driver will come from SME. We managed to grow by about 3% to 4% after we only booked a 2% growth this year. And the FX lending would manage to achieve 12% next year after a flattish growth this year. And on the other side, that the lower margin mortgage lending would decelerate to slow down its growth to just around 7% next year.

So as a whole picture to see, our strategy next year would be back to normalized lending momentum that we would focus more on higher-margin SME and FX loan, and we would target a 5.5% to 6% loan book growth for the total portfolio.

[Keith Ke, executive]

Okay. So let me wrap out the conclusions for our projection of next year's loan growth. The total loan growth should be around 5.5% to 6% growth. And we have slightly adjusted our loan book structure. So the higher margins, like SME, we expect to grow by about 3% to 4%, and FX, because this year is kind of flat, so we have a low basis this year. And we expect next year, it would have a double-digit growth, maybe around 12% growth. And for the mortgage, it might slow down a little bit. So our projection with mortgage is about 7% growth.

And let me see the following question. Yes. Like -- yes, Peggy just have to learn more about the mortgages. So it's about 7%.

And let's move to the next part, the wealth management fee. Since 2024, the wealth management fee income was kind of a high base growth. So what's our expectations for next year, our outlook for our wealth management and the total fee income?

[Annie Lee, executive]

This year, we really booked a very -- I mean, record-high growth on our fee revenue growth to grow at least to 30%, including wealth and non-wealth and thanks to a very booming demand from both the mutual fund sales, which is more concentrated on the foreign bond investment -- high-yield bond investments. And the other products -- popular products would be the bancassurance products, both recorded more than 30% growth.

Next year definitely will be a slowdown due to a high base period. So we only target a slower growth for wealth management around 16% to 17% next year, including mutual and bancassurance. And for fee revenue in total, we would target around 8% to 9% growth after we book more than 30% growth this year.

[Keith Ke, executive]

Okay. So I think our wealth management fee income still has a strong growth next year, even though it's kind of slowly comparing to the growth this year because this year is stronger, of course. Yes, historical high, but we think next year still, we can still maintain at -- yes, 16% to 17% growth for wealth management.

[Annie Lee, executive]

Yes. For fee, 8% to 9%, high-single digit.

[Keith Ke, executive]

Okay. Total fee income is 8% to 9% growth. Okay. Sorry, back to the previous questions because Tina wants to know because I think he -- she has followed our Slide 15 because she saw that our -- both spread and the original NIM are still under the trend to trending down. So she was wondering, when will this trend to turn around to have a growing trend for both spread and our NIM?

[Annie Lee, executive]

Well, I guess that will wait until when more U.S. dollars borrower coming into the markets that actually boost our FX lending that will help to improve the total loan spread. As you can see that the FX LDR remained relatively low, below 50%, which is also historical low because most of the borrowers actually place their money into higher-return U.S. dollars deposits or other fixed income investments, but they're actually funding by more cost-efficient NT dollars borrowing.

So I suppose that as we boost our FX lending next year to double-digit growth, then that will help to also improve or expand our total lending spread, if we manage to grow our loan book in the projection that we planned. But next year, because we're only in the early stage of rate-easing cycle, that maybe wait until to the second half or even the year after next one that the spread expansion will become more evident as maybe some of the borrowers will wait until when the rate-easing cycle move into an end that they can actually have more cheaper funding after that.

[Keith Ke, executive]

Okay. Thanks, Annie. And I think we jump to the cost part of the [ income ] statement. So what about our credit cost for this year 2024 and also the projection of 2025 credit cost?

[Annie Lee, executive]

For this year's credit charge, we would strategically heighten our coverage ratio after we charge off most of our overseas exposure in the first quarter this year. So you can see that our coverage ratio actually moved upward, approaching 800%. So I remember that I project this year's at -- the projection for whole year's net credit cost would be around 15, 1-5, bps in the first half conference.

But now as we managed to boost our coverage ratio to a higher level that the overall net credit cost would also rise up to around 17, 1-7, bps this year, mainly to improve our coverage ratio that we can catch up with the level of our peers as most of the -- our bank peers, their coverage ratio maintained above 800%. So that will be this year's target, around 17 bps, for net credit cost, yes.

And going into next year, we would still continue to maintain a quality asset that we would target around 19 bps net credit cost in order to further boost our coverage ratio that to safeguard our asset when we expand our business in the overseas market.

[Keith Ke, executive]

Okay. So for this year, our projection is about 17 bps for credit cost in the next year because we still want to make sound of our coverage ratio. So even without any [ deterior ] case, so we still think a higher projections of 19 bps credit cost next year.

[Annie Lee, executive]

Yes, still below 20 bps, lower than our previous level. I mean our historical average level, around 20 -- normally 20 to 22 bps. But for this year, actually, it's lower than the prior level, less than 20 bps. This year, only 17. Next year, slightly higher, up to 19 bps, but still lower than the previous cycle after we charge off most of the delinquent portfolio.

[Keith Ke, executive]

Thanks, Annie. So another question is about our asset quality from Eric. He'd like to know even though we think we don't have a [ deterior ] for the CRE exposures since first quarter. However, he still want to know our U.S. CRE exposures and LTV ratios so far for our CRE. So can Annie update a little bit of our CRE situation?

[Annie Lee, executive]

Well, our overseas [ CI ] exposure accounted for less than 4%, around 3.9%, and the amount, around USD 3.1 billion. Actually, we have set aside, I mean, not just sufficient, but we have overprovisioning against this exposure as we did not engage in any fresh exposure in this portfolio. And the average LTV for the existing portfolio will be somewhere around 20% to 16%, which can be regarded as -- should be decent for the moment.

So even though the rate-easing cycle will not be so aggressive as most people projected it, but as the LTV remain, I mean, not so high. And also, we have already provided more provision against this potential exposure that we actually increased our provisioning for more than 3 billion this year that can be reflected in our net credit cost, about 2 bps higher than our original projection. So that would help us to safeguard any potential downside for the [ CI ] exposure. And we don't see any imminent, I mean, risk for the moment as there's no more fresh delinquent losses for the moment.

Yes, so 2 points. One is that no more fresh NPL risk, and the other thing is that we have provided overprovision against any potential downside for the overseas CRE exposure. Yes, 2 ways to protect.

[Keith Ke, executive]

Yes. So I think our CRE situation is nothing to worry so far, yes.

[Annie Lee, executive]

LTV is not so high, 20% to 60%.

[Keith Ke, executive]

Yes. Okay. CRE situation is controllable.

So several of the analysts and investors, they all have the interest about the questions about our dividend policy for...

[Annie Lee, executive]

Definitely.

[Keith Ke, executive]

That's -- yes. So okay.

[Annie Lee, executive]

The thing is that as we would implement the D-SIB compliance end of next year, and we have to meet the requirements from the regulators, and we are merely meet the target, if we maintain this loan book expansion and the investment guidance at the moment. But we still have to retain some earnings to finance any potential downside or the expansion of our assets.

So I must say that we will have to, I mean, adopt a more prudent dividend payout ratio that is quite similar to the level that we have announced this year. So I guess the payout ratio will be somewhere around 50% for -- I mean, for next year's dividend policy. 50, 5-0, yes. But good news is that we have applied for the IRB model to the regulators.

And hopefully, until the beginning of -- I mean, 1 year later, 2026, we are allowed to implement this new IRB model that we would be able to release more than TWD 400 billion risk-weighted assets and our total capital adequacy ratio can be hiked to as high as 2 more -- I mean, 2.9% extra, and that will help us to release from this restraint of dividend payout. So I mean next year will be much more prudent and conservative dividend payout policy anyway. But after that, if we get the approval for IRB, then everything can be different. That's the truth.

[Keith Ke, executive]

Okay. So for the next year, for the dividend payout for this year's earnings, we still might be about -- for a cash dividend, payout ratio might be still just 50% something. However, maybe after applied for the IRB, we can have...

[Annie Lee, executive]

A more generous...

[Keith Ke, executive]

Yes, a generous payout ratio, maybe back to our original ratios before.

[Annie Lee, executive]

Yes.

[Keith Ke, executive]

Okay. So, so far, there is no more questions coming in. So if you have any further questions, you may raise it -- type the questions in the box and raise your questions. And in the meantime, maybe Annie can address something more about the outlook for next year because we have already project for some questions that -- yes. But...

[Annie Lee, executive]

Let me just go through our projection for next year's top line and the cost side. Our loan book would manage to grow by 5.5% to 6%, mainly driven by SME and FX lending, which would grow by SME 3% to 4%; FX lending, 12%, while for mortgage book would decelerate to less -- I mean, around just 7%. And in terms of NIM projection, it will be pretty much flattish, similar to this year's level to around 1.03%, slightly lower than this year's level, 1.04%.

And going -- move on to the fee business. Next year, we plan to grow our fee revenue by 8% to 9% and mostly come from the wealth management business, which would target 16% to 17% by both mutual and bancassurance. However, the non-wealth would maintain flattish.

In terms of the treasury business, due to slowing SWAP gains next year, which we are targeting SWAP gains around TWD 12.4 billion to TWD 12.8 billion next year. So the total treasury gains would contracted by about 8%, hopefully, can be compensated by the trading or the disposal gain from the fixed income portfolio.

And move on to our cost side, the SG&A operating cost would manage to grow by around 5.5% due to a pay hike -- projected pay hike around 3% next year. And for the credit cost next year, we would manage to target a 19%, 1-9 bps -- 19 bps, 1-9 bps, for the net credit cost in order to further boost our coverage ratio and improve and safeguard our asset quality. And for CI ratio, the efficiency ratio would stay similar level around 45% next year, which may be slightly higher this year's 44%. Yes, that would basically wrap up my projection for next year.

[Keith Ke, executive]

Okay. Thanks, Annie. I think Annie has give -- gave you guys more than your questions for projections next year.

[Annie Lee, executive]

A clear picture for you also.

[Keith Ke, executive]

And so far, there is no more questions coming in. So maybe we'd like to stop our conference today here and maybe hope to -- hope you to have a great week, and join us for our conference meeting next time.

[Annie Lee, executive]

Next year.

[Keith Ke, executive]

Yes. Next...

[Annie Lee, executive]

We wish you a Merry Christmas and Happy New Year, and everybody has some prosperous and fruitful results for this year and in the coming years. Thank you all. See you then. Bye-bye.

[Keith Ke, executive]

Okay. Thank you. Bye-bye.