1.         Business Report for 2016

Changes in the Financial Environment

During Year 2016, the economy of the United States of America was not recovered as robustly as expected, the economic revival of Japan and Europe slowed down and China’s economy faced rebalance, global economy was therefore impacted and the economic growth rate was lower than the previous year. Meanwhile, U.S. Federal Reserve System announced to raise the interest rate again by 25 basis points in December 2016 and optimistically expected that interest rates would be raised faster in 2017. These clearly indicate that the U.S. is significantly confident toward its buoyant domestic demand. Nevertheless, such factors as the highly uncertain trade and protection policies of the newly inaugurated U.S. President Donald Trump, the rising potential of global populism and the widespread trade protectionism is going to influence global economy..

The domestic economy gradually showed positive development from the 2nd quarter of 2016 because exports surpassed expectation, Industrial Production Index turned positive and the dynamics of domestic demand slowly grew. After signaling the tenth consecutive Blue Light, Monitoring Indicators turned into Yellow-Blue during April – June period and further into Green Light during July – December with scores ascending monthly. This utterly reflected a slow recovery of domestic economy.

The operation of Taiwan’s banking sector, struck by international economic changes and uncertain cross-strait policies, the sliding numbers of real estate transactions, the descending usage and construction licenses of property builders, is expected to suffer from a sluggish loan growth domestically. In addition, Central Bank reduced interest rates four times in a row from September 2015 and thus the interest rate spreads in domestic banks incessantly fell. In 2017, although the pressure of risk exposures to mainland China and provision of mortgage risks is eased, macro-economy is still so largely unpredictable that investment in domestic and foreign markets is relatively tricky. Furthermore, interest rate spreads will not be widened soon. Hence, profit growth is expected to be impacted.

Organizational Change

(1)     To elevate the consistence within Yuanta Financial Holdings (YHF) and objectivity of risk management, Risk Management Dept. and Risk Management Committee were restructured to report to Board of Directors in May 2016.

(2)     To utilize the development of digital finance, E-Commerce Dept. is dedicated to promoting the development of digital finance business with additional new duty of credit card acquiring service.

(3)     To advance the protection of consumers’ rights, the competent authorities lifted bans on the establishment of the insurance departments and concurrent operation of insurance agency service within banks. In September 11th, 2016, the Bank established Insurance Agency Dept. and merged “Yuanta Life Insurance Agent Co., Ltd.” and “Yuanta Property Insurance Agent Ltd.”

(4)     Demanded by the expansion of the overseas service network, the Bank officially commenced the operation of Overseas Business Dept. in November 2016, exclusively dedicated to the management of overseas service network.

(5)     (5) In January 2017, the Bank separated and transferred the duties of Treasury Marketing Dept. into Financial Trading Dept., Trust Dept. and Financial Trading Supporting Dept.

Actual Accomplishments in 2016

The Bank’s merger with Ta Chong Bank acquired approval from Financial Supervisory Commission (FSC) on January 17^th, 2017. The two banks will be officially merged upon the completion of according procedures and system consolidation. In consideration that the scale of the bank after merger will skyrocket to over NT$ 1.2 trillion, the Bank actively implemented operation strategies of “balancing the business structure, diversifying profit sources and enhancing efficiency of capital utilization” in the second half of 2015 and hence exhibited a remarkable advancement of comprehensive performance as the following highlights:

(1)   Actively adjusted the credit practices and fully implemented the “Cost, Fee, Risk and Compensation” principle. In contrast to the considerable slides of general interest rate spreads among domestic banks due to Central Bank’s continuous reduction of interest rates, the Bank embraced rising interest rate spreads and net interest income and delivered the overall performance better than those of most large-sized private banks.

(2)   Elevated profitability of capital operation by optimally allotting financial asset positions.

(3)   Facilitated the comprehensive financial management and fortified collaborations between financial management and such services as deposits and remittance, corporate finance and consumer finance in order to break through the bottleneck of service fee growth. Meanwhile, the Bank also proactively raised credit-related service fee to diversify sources of fee income.

As of December 31^st, 2016, the consolidated asset of the Bank amounted to NT$ 866.9 billion, a growth of 6% from NT$ 818 billion in 2015. Yearly accumulated net income after tax reached NT$ 5,595 million with EPS of NT$ 1.35, a growth of NT$ 651 million or 13% from NT$ 4,944 million of accumulated net income after tax in 2015. NPL Ratio, NPL Coverage Ratio and Loan Coverage Ratio are 0.21%, 664.79% and 1.36% respectively. The Bank successfully sustained quality asset while enjoying continuous profit growth.

The changes in major services are as follows:

Budget Implementation, Financial Status and Profitability

In 2016, the Bank’s net revenue achieved NT$ 14.00 billion. Compared with the net revenue in 2015 at NT$ 12.93 billion, net revenue increased by NT$ 1.07 billion. Meanwhile:

(1)   Net interest income amounted to NT$ 8.60 billion or an increase by NT$ 0.85 billion from 2015 which was caused by increase in interest rate spread and interest revenue from security investment.

(2)   Net non-interest income was NT$ 5.40 billion and grew by NT$ 0.22 billion from 2015 because of the increase in net fee revenue and commission income.

(3)   Bad debt expense in 2016 amounted to NT$ 1.01 billion, an increase of NT$ 0.12 billion from 2015. Operating expenses in 2016 was NT$ 6.64 billion or an increase of NT$ 0.24 billion from 2015.

(4)   In conclusion, the Bank’s net income before tax in 2016 was NT$ 6.35 billion. After deducting income tax at NT$ 0.76 billion, the net income was NT$ 5.59 billion with the budget achieving rate as 100%, or an increase of NT$ 0.65 billion from NT$ 4.94 billion in 2015.

Research and Development

(1)   In response to “Establish a Digital Financial Environment 3.0 Program (Bank 3.0),” launched by FSC, to ride on the financial digitalization trend, the Bank not only launched “Yuanta E-Counter” in 2015, but also persistently provided new functions according to deregulation. With these new functions launched in 2016, current customers can open digital deposit accounts online and new customers can open an account online with citizen digital certificates accompanied by real-time video.

(2)   Completed the establishment of the new version of the mobile bank to further upgrade its functions and the user interface and persistently. Also, the Bank held promotions on digital channels. Through online lottery, word of mouth marketing, and social media management, the Bank aimed to market and promote the Bank’s business, raise customer adherence and interaction, meet user’s demands and therefore maximize customers’ transactions and usage.

(3)   Risk Management:

A.    Credit risk: Persistently advanced the credit risk data mart and the statement analysis platform, the large exposure management system, credit risk warning system in order to perfect comprehensiveness and instantaneity of the credit risk control.

B.     Market and Liquidity Risk: Performed the procedure and calculation of stress test and conducted evaluation on capital charge for interest rate or equity security options through Delta-plus approach in order to perfect the market risk management structure and mechanism.

C.    Operational risk: Advanced the ability of the Bank to monitor and improve operational risk through integration and application of managerial instruments such as the self-assessment system for operational risk and control and the operational risk reporting system.

(4)   IT system R&D and upgrade: To support the Bank’s operation strategies and business development, the Bank established new systems and projects, such as new generation Cross-Platform Teller System, the first phase of CTI (Computer Telecommunication Integration) and New-Generation ATM Replacement, in addition to the upgrade of the operation system and the hardware for mobile bank revision and push service, new Electronic Media Messaging System and Core-Banking System in order to raise the efficiency and security of the system operation.

2.     Impacts of External Competitive, Regulative and Overall Business Environment

The most vital functions which the traditional banking sector renders lie in its capital intermediation which economic development necessitates and its convenient and secure financial services. Recently, domestic banks have been deeply influenced by the development of FinTech and therefore actively devoted to the development of digital innovative services.

Because many mistakes in internal control happened in domestic banks during 2016, FSC, in 2017, oriented its major policies toward strengthening the banking structure and risk management, where anti-money laundering and countering terrorism financing are the focuses of financial supervision. FSC demanded every bank to invest more resources in fortifying its managerial mechanism in order to ensure the effectiveness of legal compliance and internal control.

In addition, the impacts of critical legal changes are described as follows:

(1)   FSC revised “Regulations Governing Internal Operating Systems and Procedures for Banks Conducting Financial Derivatives Business”

After FSC discovered in 2014 the flaws which the banking sector made when engaging in RMB Target Redemption Forward, FSC took enhanced managerial practices on highly complex and risky derivatives. Also, and FSC announced the amendments of Article 7 and Article 8 of Regulations Governing Internal Operating Systems and Procedures for Banks Conducting Financial Derivatives Business on September 9^th, 2016. These amendments focused on the addition of the examination procedures on highly complex and risky derivatives and the stipulation revision on required documents when banks apply for approval from FSC on providing derivatives services, including Meeting minutes containing a resolution adopted by the board of directors (council members) or the board of managing directors. The Bank rectified its internal procedures according to regulations of the competent authorities and solidify employee training on legal compliance in order to expand the Bank’s business in conformity with stipulations.

(2)   FSC and Central Bank developed “Standards Implementing the Net Stable Funding Ratio of Banks”

In order to fortify management on liquidity risks, Basel Committee on Banking Supervision proposed Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) in 2010 as the universal quantitative liquidity index across the globe. In 2014, it issued the calculation approach to NSFR and advised every country to implement it from 2018. In order to keep Taiwan’s quantitative liquidity index consistent with global standards, FSC and Central Bank jointly announced Standards Implementing the Net Stable Funding Ratio of Banks and The Methods for Calculating the Net Stable Funding Ratio and Related Forms on December 26^th, 2016, requiring banks hold sufficient long-term stable fund sources to support business development and ease the pressure on capital needed in the future. This implementing standard, which will take effect from January 1^st, 2018, stipulates that the net stable funding ratio of banks calculated in accordance with the preceding article not be less than 100 percent. The Bank will comply with the regulations to calculate report and announce net stable funding ratios and maintain the ratios above legal standard.

(3)   Amended “Directions Governing Anti-Money Laundering and Countering Terrorism Financing of Banking Sector”

In order to raise the attention and ensure the complete execution of the banking sector to Anti-money laundering (AML), as well as respond to the decision of Asia/Pacific Group on Money Laundering (APG) to conduct the peer review on AML and countering terrorism financing in Taiwan during the 4^th quarter, 2018, FSC made reference to the latest global standards and international legislative instances and announced the amendment of Directions Governing Anti-Money Laundering and Countering Terrorism Financing of Banking Sector on December 2^nd, 2016. In order to fully execute the corresponding procedures to anti-money laundering and countering terrorism financing, the Bank’s domestic headquarter previously set up AML/CTF Group, a cross-department project team, and planned on establishing a dedicated department and supervisors in accordance with policies of the competent authorities to ensure full legal compliance. In terms of managing overseas branches, branches in Philippines has established and introduced AML to the core system in order to support AML/ CTF procedures while branches in Korea, whose managerial measures comply with local regulations, engaged in the share system among local banks.

(4)   The banking sector appropriated special reserve for employee’s training for financial technology development

Financial Digitalization has turned into the trend in the future financial industry. To urge the banking sector to value the rights of existing employees during digitalization, FSC required banks to appropriate 0.5%-1% from net profit from 2016 to 2018 as special reserve for expenses on employee’s training for financial technology development. Through enhanced and persistent on-the-job training, it is expected to polish employee’s expertise in financial technology so that this expertise can boost the momentum when the Bank develops its financial technology. The Bank has been valuing employee’s multifunctional development and will persist in talent nurture programs aside from compliance with the policies.

(5)   Security Finance Enterprises can provide security-collateralized loan services

On January 28^th 2016, FSC deregulate the security-collateralized loan service conducted by security finance enterprises. Because such service is considerably similar to the financial loan service of the Bank’s retail banking and the customer segment of these two services shares a lot in common, the Bank has turned its focus of the loan service in retail banking in order to sustain the stable growth of the comprehensive scale.

3.     Latest Credit Ratings

4.     Business Plan in 2017 and Outlook

During 2017, the Bank will continuously devote to keep the business and profit structure in the balanced manner as well as to fully implement the risk control and legal compliance mechanism. In addition, the Bank's integration with the Ta Chong Bank is also one of its important tasks. Retaining the characteristics and competitive advantages of the two banks is the principle for the Bank to plan the post-merger system and principles to create the greatest synergy. The Bank's operation plans are summarized as follows:

(1)   Business Development

A.    Credit service will focus on services with higher profitability under manageable risks, such as SME loans, lead arrangers of the domestic syndicated loan, OBU syndicated loans, saving equity mortgages, auto loans and credit loans. Reasonable interest rates for loans will be set in consideration of the Bank’s capital cost and clients’ overall contribution so as to maximize profits.

B.     Wealth management business will focus on One Banking as the main concept, sustain the diverse product range and advance the professionalism and stability of financial advisors in order to maximize the client base and maintain the stable growth of the fee income.

C.    For the customers of credit cards, the Bank will continuously launch card-using promotion events to escalate the volume of active cards, retail sales volume and revolving balance. Also, through cross-sale to credit card customers, the Bank will maximize client loyalty and contribution.

(2)   Channel Development

A.    In response to the popularization of mobile communications and Internet, the Bank, according to client needs, enhance its functionality and security of mobile bank and electronic payment business so as to maximize number of customers and volume of transaction.

B.     Seize the business opportunities arising from the approval of electronic payment services and strive to enter into partnership with collaborative shops in hope for becoming the best platform for clients’ product sale and payment services.

C.     Guide clients to make transactions or inquiries through digital channels to ease off the stress on the customer representatives and reduce operational costs.

D.    In terms of physical channels, the Bank embraces 152 domestic branches after the merger with Ta Chong Bank that will advance the deployment and flexibility. The Bank also continues to introduce digital services to better operating procedures in branches and further customer satisfaction.

E.     In terms of the oversea market, the Bank provides services through the subsidiary banks in Philippines and Korea as well as the offices in Hong Kong and Myanmar. The Bank will dedicate its full effort to the management and operation of the Bank’s overseas business offices in order to boost its contribution to profit year to year.

(3)   Risk Management

A.    Solidify the Bank’s managerial capability in credit, market and operational risks through risk models and databases construction and develop insights in trends of industrial and national risks in order to establish risk warning mechanisms and further effectively minimize risks.

B.     Set up a dedicated unit and supervisors according to regulations in “Directions Governing Anti-Money Laundering and Countering Terrorism Financing of Banking Sector,” developed by the competent authorities, for the development of managerial mechanisms, training and system establishment.

C.     Fortify the Bank’s risk control, legal compliance, management of internal audit and internal control of overseas business offices.

(4)   Personnel Training

Utterly perform employee orientation and on-the-job training. Through job rotation, the Bank plans to cultivate multi-functional talents and intensify trainings on managers, international professionals and digital finance professionals to well prepare the Bank for future developments and demands for internationalization and thus lay the foundation for sustainability of the Bank.