Welcome everyone to Shin Kong Financial Holding Company's 2021 third quarter earnings conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask the question. For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.skfh.com.tw under the Investor Relations section. Now I would like to introduce Mr. Stan Lee, the Senior Vice President of Shin Kong Financial Holding Company. Mr. Lee, please begin. Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2021 third quarter analyst call. Before we start, I would like to introduce my colleagues who are with me today. Here in the meeting room are Han- Wei Lin, Chief Actuary of Shin Kong Life; Ying-Feng Liao, Head of the Investment Team of Shin Kong Life; Isabella and Christine, members of the IR team. The presentation we are about to go through was sent out two hours ago. You may also download it from our website or participate through webcast. If you do not have the presentation, please let us know now. Your lines will be muted when we are presenting. If you are cut off, please dial back in or call Christine at 886-9689-29230 for assistance. Now, please turn to page 4. SKFH recorded consolidated after-tax profit of TWD 21.66 billion for the first nine months 2021, up 22.3% year-on-year. Earnings per share was 1.62. Consolidated shareholders' equity reached TWD 249.76 billion, and book value per share at the end of September was 17.39. The subsidiaries also delivered strong results for the first 9 months, which will be covered later in the presentation. We would like to highlight that the company's efforts on ESG matters were recognized by being included in the DJSI World Index earlier in this month. As ESG ratings methodologies continue to evolve, we know there is still work to do, and we will work hard to meet expectations. Page 10. Not simply aiming for sales volume or market share, Shin Kong Life choose to promote foreign currency policies and value focused products for stable interest spread, better asset liability matching, and CSM. Despite the decline in FYP, the sales of foreign currency policies for the first nine months amounted to TWD 27.91 billion, accounting for 78.8% of the total. FYP of health insurance for the third quarter also grew 76.3% quarter-on-quarter as the COVID-19 pandemic came under control and sales activities pick up pace. FYPE reached TWD 12.5 billion, and FYPE over FYP was 35.3% higher than the industry average. As for cost of liabilities, it decreased 6 basis points year to date to 3.77%. Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first nine months was 3.86% as investment income grew 1.6% year-on-year. Breakdown of investment returns for different asset classes were real estate, 4.2%; mortgage and corporate loans, 1.7%; policy loans, 5.4%; overseas investments, 3.7%; domestic securities, 5.3%; and cash, 0.2%. Page 14 shows the portfolio of overseas fixed incomes at the end of September. Overseas fixed incomes topped NT 2 trillion. In the third quarter, the funds were predominantly deployed in investment-grade corporate bonds. As a result, corporate bonds accounted for the largest share, representing 48.3% of the total, followed by international bond at 26.6%. Emerging market government bonds accounted for 24.7%. About 90% of the overseas fixed income position was deployed in US dollar denominated bonds. You may also find a chart of the overseas fixed incomes portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed incomes, showing a combined share of 61.2%. Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of the first nine months, hedging ratio was 79.7%, including CS, NDF, and naturally hedged foreign currency policies. CS and NDF accounted for 53% and 47%, respectively, of traditional hedges. Annualized hedging cost was 1.75%, and foreign currency volatility reserve was TWD 2 billion. As the cost of traditional hedging tools continue to decrease and Taiwan dollar remained largely stable versus US dollar, the company is confident to keep the full year hedging cost below 2% as expected. I will now hand over to Isabella, who will take you through the results of Shin Kong Bank and MasterLink Securities. Thank you, Stan Lee. Please turn to page 20. Shin Kong Bank achieved a strong quarter on many fronts. Cumulatively, net interest income grew 11.9% year-on-year with stable loan growth. Net fee income increased 2.5% year-on-year to TWD 2.56 billion. Pre-provision operating profit reached TWD 6.77 billion, which was 9.7% higher from a year earlier. Consolidated net income grew 9.3% year-on-year to TWD 5.16 billion. Page 21. The bank's loan balance rose 7.2% year to date to around TWD 700 billion. Consumer lending grew 11% year to date and represented the largest segment of the loan portfolio as mortgage and other consumer loans increased 11.4% and 15.7% year to date, respectively. The full year loan growth is expected to exceed 8%, which is higher than the original targets. Page 22. Fierce competition and abundant liquidity in the market put downward pressure on the bank's average lending rates. As a result, net interest spread for the third quarter decreased 2 basis points quarter-on-quarter to 1.65%. Net interest margin decreased 1 basis point quarter-on-quarter to 1.23%. Page 24. Wealth management income for the first nine months increased 6.8% year-on-year to TWD 1.94 billion, which was boosted by stronger sales momentum in investment products. As for product strategy, investment products are expected to draw more demand from clients in the fourth quarter. In the meantime, Shin Kong Bank will promote foreign currency policies and regular pay products. The growth target for wealth management income for 2021 is 5%-10%. Page 25. Asset quality was benign, with NPL ratio at 0.17% and coverage ratio at 764.82%. Both ratios were better than the industry average. Page 27. MasterLink Securities generated a brokerage fee income of TWD 4.39 billion for the first nine months, which was 66.7% higher year-on-year. Proprietary trading income amounted to TWD 2.52 billion, driven by the disposal gain from equities, which was TWD 900 million higher year-on-year. Consolidated net income increased more than 150% year-on-year to TWD 3.03 billion. This is the end of result presentation. Moderator, please start the Q&A session. Yes, thank you. Ladies and gentlemen, we will now begin our question and answer session. If you wish to ask the question, please press zero one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. Should you wish to cancel your question, you may press zero two. Thank you. Now, please press zero one to ask the question. Thank you. Our first question is coming from Kate Chen of Morgan Stanley. Go ahead, please. Yes. Hi. Thank you management for the presentation. I got three questions over here. The first one would be, Shin Kong has been raising capital in the past three years. TWD 30 billion was raised and injected into Shin Kong Life. Do you plan to do another fund raising next year and invest it in Shin Kong Life again for IFRS 17 adoption? If so, what would be the size and what kind of instrument will we be considering? That's my first question. The second question would be on Shin Kong Life. Cash accounted for around 4.2% for Shin Kong Life investment portfolio this quarter. Is this a comfortable level? Do you expect to see further decline in cash in the coming quarter? My last question would be on the bank. We've seen both the net interest margin spread have declined in this quarter compared to last quarter. I would like to ask, what would be the management's expectation of both U.S. and Taiwan rate hikes for next year, and how should that be improve our net interest margin for next year? That would be my question. Thank you. Thank you, Kate, for the questions. About capital raising, you are right that we have been raising capital mainly for Shin Kong Life. As I discussed with investment community before, my thinking on why we raise capital is not because we want to have a very large amount of money in one shot kitchen sinking the capital needs. Well, 'cause theoretically that's not the most efficient way. Our way is to grow valuable product. As I mentioned, both in English and Chinese session, now the company's product strategy, particularly for insurance product, we are trying to accumulate as much CSM as possible. Apparently, you see that our FYP declined by 40% year-on-year for the first three quarters, and we are okay with it. It doesn't mean we are comfortable with it, but we are okay with it. If that produce enough value, enough CSM, and that will be the key for us to adopt the new accounting rules and maybe the new capital adequacy rules. That's the key. To facilitate the products we want to sell, to facilitate the general account book we are growing, we need capital to absorb the related assets and liabilities, risks generated from the growth. That's why we're raising capitals. Are we confident that Shin Kong can adopt IFRS 17 smoothly? Yes, of course. As Cathay, I think it's CK, right, discussed with the investors before. He mentioned 2023 will be an important mark that insurance company shall be able to adopt preliminarily the IFRS rules. Same here for Shin Kong. We keep the same pace. However, that also means maybe we need some support from capital to grow such policies that can generate CSM, as I mentioned. I cannot rule out the possibilities for us to raise another round of capital next year. I cannot give you a very solid and clear plan now because nothing has been approved by the board yet, and I cannot give you any expectations of my own, because that would be kind of irresponsible. I can show you the same logic, the same thinking here, that we are heading to the way of adopting the new accounting rules and the new capital equity rules, and that means some capitals may be raised. I'm not seeing a kitchen sinking. I'm not seeing a huge amount of capitals being raised on a yearly basis. There may be capital needs in the future. No matter what the solid number will be, and it will be more inclined to be common equities. Again, any solid concrete information will be disclosed after the board has a resolution. For cash, yes, we are now still seeing 4.2% as the proportion of the cash level. There's a chance for us to make the investment more efficient, and there's a chance that 4.2 will be even lower in the coming few quarters. Again, I think now it's very costly to hold cash, particularly in NT dollar, 'cause the NT dollar cash yield is only 0.2%. 0.2 is not even enough for new money, not to mention the overall cost of liabilities. For net interest margin, I do believe if there is a chance for the interest rate, benchmark interest rate to be hiked in Taiwan, there is a likelihood that we will benefit from that. However, personally, I don't think chance for we to see the Central Bank to hike the rate will be very, very high in the recent periods. There's a chance, and we're looking forward to it, but I just personally don't think it will happen very fast. For the Fed or for the US dollar-denominated bonds yield, I am a little bit more optimistic, particularly for the bond yield. If the bond yield climbing higher and the bank now has slightly below 70% of the loan to deposit ratio, right? That means we have to utilize certain amounts of money and deploy those not only for loans but also in the capital markets, right? If the new money and the reinvestment can enjoy the higher bond yield, that helps. That helps NIM a bit. That is also why in the Chinese session, the bank's president, bank CEO, Mr. Xie, talked to the market in saying that there's a chance that we can stabilize NIM in the following quarters. I believe what he mentioned, what he's more optimistic about is to the loan growth and also the investment yield, not the domestic yield height. Thank you. Yeah. Great. Thank you, Stan. One follow-up question is regarding what you mentioned that you're quite positive on the bond yields, especially those in the U.S. will reach a higher level for next year. What kind of level are you guys expecting? And if the 10-year or 30-year bond yield really did go into a higher level, should that benefit our pre-hedge or after-hedge recurring yield for Shin Kong Life in next year? Do we expect a better recurring yield in 2022 compared to this year? Thank you, Kate. We are more keen to see the term structure to be steepening or to raise in the longer end of term structure. Saying 30-year U.S. dollar Treasury now is still below 2%. We think there's a chance for the 30-year bond yield Treasury, of course, to be higher than 2% or maybe to 2.2%. What will be the impact? I cannot give you a very, very detailed number. I can share with the logic here. Reinvestment and new investments for us retired about 1/10 of the bond portfolio every year. About 1/10. If there is a 20 basis points yield pickup, and on average, 'cause that 20 basis points may not happen for the whole year, or maybe if we make it, if we overly simplify it, saying that the overall yield is 20 basis points higher than the overall yield this year, 2021, then we can enjoy probably 2-3 basis points for our current bond portfolio. 2-3 basis points, would that mean a lot to recurring? I think still means 1-2 basis points higher. In this year, in 2021, you see that it's still in the declining trend. Our overall before hedging yield is still in the declining trend. Just as I mentioned before, the decline compared to the year before, 2021 over 2020, it shrank significantly, cut in half. For 2022, I believe there's chance for us to have a more stable number, maybe still decline a bit, but not as much. If the yield pick up enough, saying much more than what I guided, 20 basis point, there's chance for us to level it. Shall we be very optimistic? I wouldn't suggest so, though. But for the after-hedge recurring yield, I have confident, I have more confident. 'Cause even in 2021, when we see the before hedging yield is declining, our after-hedge recurring yield is already 8 basis point higher than the year before. The next year, I cannot be too optimistic about the further declining hedging cost. I think it will be stable, but there's a chance for the yield to pick up, right? after hedge, I think I am rather confident compared to the before hedge one. Got it. Got it. Yeah. Thank you very much, Stan. That's very helpful. Thank you. Thank you, Kate, for the questions. Thank you. As a reminder, please press zero one on your keypad if you would like to ask the question. Thank you. Next we'll have Frank Fang of Daiwa Capital Markets for questions. Go ahead please. Good afternoon management team. I have three questions here, mostly on Shin Kong Life. The first one is on the cost of liabilities. I understand that for the past few years, you've guided for a 5-10 pips decrease year by year. Do we foresee that trend to continue in 2022 or even down to 2023? That's the first one on the cost of liabilities. The second one is, I know that it is still in the budget season, but I'm asking if you have seen any trend on your recurring yield for next year, especially when rate hike is gonna happen for the next maybe 12 to 18 months. On the third one is regarding hedging cost. I've noticed that the hedging cost this year compared to peers is a little bit higher. Have you considered shifting some of your NDF positions maybe to a currency swap? As you may have known that the currency swap is actually relatively cheaper than NDF as of end of this month or maybe today. Now those are my three questions. Thank you. Thank you, Frank Fang, for the questions. I would like to have our Chief Actuary to answer your first question. Yes. I think this year cost of liability has been down about 6 basis points so far to quarter three. I think 5-10 basis points is right for this year, maybe close to about 9 basis points at the end of the year. I think next year we'll still go with a similar product strategy to accumulate our CSM and, of course, depending on the market, but I think 5-10 basis points can still continue. Frank, did we answer your question for the first one? Yeah. Very clear. Thank you. Thank you, Frank. Let me answer your second question on the recurring yield. I think Kate and I have a quite comprehensive discussion for the last few minutes. Let me try to have some conclusions. Right? First of all, I say that I'm more confident in the after hedging yield. After hedging recurring yield, to me, I think it will further improve. That's what I'm thinking. It will further improve. Mainly driven by not as this year the hedging, but driven by a rather stable, relatively more stable before hedging yield and also continuously slightly improved hedging cost. That's one thing. As for before hedging, I would rather be relatively more conservative. 'Cause the overall bond here still provides supports for the overall profitability. Although we are selling less, much less than before, we have to somehow dispose some higher yield bonds that we had before. Those bonds, somehow, if we dispose it put on some pressures on us. The new bonds, the new money yield, even if in U.S. or other long-dated bonds, of course, those have credit risk, can give us only 3.3%-3.4%. It's lower than the older bonds that we are holding. Right? I see there's still likelihood that before hedging yields go down a bit. Again, it really depends on the market. As I mentioned in the Chinese session, inflation is a good friend. It's a dear friend of insurance company. 'Cause without inflation, we cannot see any steepening, any parallel move of the term structure. That will be a true issue, a real problem for insurance company. We need a healthy inflation. We need a healthy term structure, a good slope of term structure. We can operate the company more comfortably, more consistently. That's what I'm saying. Overall, I've seen a rather optimistic result expectations for next year's before-hedge recurring yield. I'm rather conservative, but again, will be more benign compared to 2021 in the decline of the before-hedging recurring yield. Third question is on hedging. Yes, we would, in theory, in our minds, we would love to be free to transfer the NDFs to CS now. Because CS nowadays costs us less than 50 basis points for the six-month per period of contract. If we annualize the cost, still lower than 50 basis points. For NDFs, although it's much cheaper than before, still cost us more than 2%. Right? You can see almost 10x of differentials in the cost. We would love to move it. There, there's a reason. There must be a reason why not everybody trying to unwind the NDFs and redeploy into the CS is because that instrument is still highly regulated. Right? Although the hedging itself is not going to affect the Taiwanese local spot rate. If the swap bank, they want to hedge themselves, somehow still has an impact on the local spot rate. That is why Central Bank has to control such a trade. If there's any new money, nowadays, we use CS to hedge. We use CS to wire the money out. But for the original existed portfolios, there's not such a flexibility. So we have to somehow make some mitigations based on our current portfolios. First, we use proxy hedge, and secondly, we have to manage the hedging ratios more dynamically. That's what we are doing now. That's also why we're delivering TWD 7.5 billion less of cost for hedging in 2021 so far than 2020. Okay. Understood. Thank you. You're welcome. We are now in question and answer session. Please press zero one on your telephone keypad. Thank you. Next we'll have Michael of Cathay Securities for questions. Go ahead, please. Hi. Thank you. Thanks for the time. I have two questions here. The first is regarding the cash payout, and I noticed that the unrealized losses on the financial assets had been widened to about TWD 11 billion by the end of the third quarter. Will this affect the holding company's cash payout that are for in year 2022? Another question is on the FYP that we noticed that the FYP sales was quite sluggish year to date, down somewhere roughly 40% year-over-year that. We also noticed that some of your peers are selling a lot of investment link products. So, will Shin Kong change the product strategy and also can I know the management's view for the FYP sales in 2022? Thank you. Thank you, Michael. It's good to hear from you. It's been a while. For the first question on cash payout, I think we have some discussions in Chinese session as well. Let me reflect on that and give you a conclusion. Of course, we have more than enough in the retained earnings. Those are undistributed earnings from before, and now the number is about TWD 49 billion. Yes, as you said, if there's a negative number on the unrealized gain or losses caused by OCI or P&L positions, we have to set aside a reserve for that, which is not a significant issue. 'Cause I said before providing on those unrealized loss, there was more than enough TWD 49 billion, right? If we even if we take out a portion of that, still well above TWD 30 billion. That shall be enough for us to be stable to pay dividends for next year. As for what is stable, as I mentioned, I think, also as you ask, you know that in the past years, not every year Shin Kong was able to pay out dividends. But since we offer preferred shares, I think being able to pay out dividend is very important for us. That's one thing I mentioned as stability. I think now to remain the payout ratio to be stable is still a little bit too luxurious for us. Now I would rather be more realistic. Being able to pay out at a reasonable level that everybody think is reasonable, acceptable, yield is rather stable, and that is what we're looking for now. Also I mentioned in the Chinese session that our audience should be relatively confident, and we are relatively confident that we will be able to pay out dividends for 2022. Next question is on FYP and product strategy. I would like to have the Chief Actuary answering that. I think our product strategy will not change a lot. As we said before, CSM is still our target. We'll also put a little more focus on investment products next year, as we said before. I think next year our FYP will grow a little bit, I think, because we are now thinking about putting more focus on the investment products. Okay. Thank you. Sorry, can I have two more follow-up questions? Of course. Okay. Please. Thanks. Thanks, Stan Lee. The first one is on the bank. I noticed that the investment income for the bank in the third quarter is quite impressive, reached about TWD 1 billion. The number is actually was quite stronger than the previous two quarters, which was only like TWD 400 million something. Uh-huh. May I know that your investment portfolio for the bank right now is major in the bond or in the equity market? Also, another question is regarding the life insurance that I saw that the company reported a tax benefit of about TWD 1 billion in the third quarter and about TWD 3 billion in the second quarter. May I know why that and if that's as far as I remember, it is mainly from the unrealized losses on the hedging position or something. This is going to happen again in the fourth quarter or not? Thank you. Thank you, Michael. First question is on the bank. The bank also similarly to what I've seen for life insurance, although the majority of their investment portfolio is in bonds, and larger share is in NT-dollar ones. Foreign is slightly slower when we are expanding the book. But again, in the third quarter, even it's a rather relatively smaller position, we received dividend cash from the local market. That's the main driver for us to see a strong growth in the overall investment. Some bonds that have been disposed by... I don't think that is a main fluctuation 'cause the disposal of bonds happens almost every quarter. Okay. Mainly because we have relatively small, but it's very concentrated in terms of dividend payouts in the third quarter. Okay. Understood. For the tax benefit, this is a very good question, very important question, but I have to apologize firsthand that even I cannot give you a very, very accurate projections on whether it will happen again in the fourth quarter. I think you are definitely right that most of the tax benefit is from the unrealized loss on the hedging strategies, right? Whenever that happens, we credited ourselves with tax benefit. When it got reverted, then we have to mark tax expenses again. Not really that stable. Just in the recent years, particularly when we don't have a lot of tax expenses from the other assets we're holding. That somehow show up in the book. After all, we have over TWD 2 trillion, not billion, TWD 2 trillion assets sitting in US dollar mainly denominated assets. Hedging ratio is not 100%. Even if it's 100%, we have some unrealized gain or losses fluctuated on quarterly basis, and that is why you're seeing this. In the fourth quarter, I think there's still likelihood that if you see a relatively stable spot rate, you see a relatively stable proxies versus US dollar, chance for us to have a huge amount of unrealized gain or losses will be slightly lower, right? Hence also, theoretically for tax benefit, numbers should be smaller. If that's your theory, that's your expectation in the fourth quarter, that will likely to be the case. Okay. Got it. Thank you. Thank you, Michael. Thank you. Ladies and gentlemen, we are now in question and answer session. Okay, there appears to be no further questions at this point. Mr. Lee, can we close the conference call now? Of course, moderator. Thank you everybody for joining our analyst call. If you have any further questions, please, contact our IR team or myself. Thank you. Thank you, Mr. Lee. Ladies and gentlemen, we thank you for your participation in Shin Kong Financial Holding Company's conference call. There will be a webcast replay within an hour. Please visit www.skfh.com.tw under the investor relations section. Should you have further questions, please don't hesitate to contact the IR team of SKFH by phone or by email. You may now disconnect. Goodbye.