1.     Business Report for 2017

Changes in the Financial Environment

Among major world economies in 2017, the United States based on President Trump’s “America First” philosophy developed economic and trade policies, such as tax overhaul, weak U.S. dollar to eliminate trade deficits, dovish monetary policies, etc., to encourage U.S. private investment and exports, and to provide sustained economic growth momentum. Except for the UK’s slow exonomic growth due to Brexit, the economic performance of the Europe in 2017 escaped from the deflation predicament of the past two years. After the consolidation of central authority in the 19th National Congress of the Communist Party of China, the Chinese government established economic policies such as deleveraging and cutting excess production capacity, etc. Looking forward to in 2018, the approval of the sweeping tax overhual in the United States is expected to raise corporate investments and private consumption. Also, the growth of domestic demand in emerging markets shall promote global trade activities, and the global economy is expected to continue its steady recovery. However, it is still necessary to pay attention to the political factors in the European region, and the geopolitical crises in the Middle East and the Korean Peninsula which may have negative impacts on the global economy.

Taiwan’s economy was benefited from the export growth fueled by the steady recovery of the global economy in 2017, and the performance was better than expected. According to statistics from the Directorate-General of Budget, Accounting and Statistics, Executive Yuan, the economic growth rates in the first three quarters of 2017 were 2.64%, 2.28% and 3.10%, respectively, which, however, were mainly driven by external demand. There was still room for growth in domestic demand especially in theprivate consumption and investment which remained low. Looking forward to in 2018, it is expected that the export momentum will continue, the Executive Yuan’s launch of the Forward-looking Infrastructure Development Program will increase domestic investment, as well as the raise of wages will favor consumption expenditure to grow. It is estimated that the economic growth rate in 2018 may exceed the level in 2017.

Taiwan’s banking industry, which is impacted by the external cyclical change and the vague cross-strait policies, should discreetly implement the risk control. The Central Bank terminated the cycle of interest rate cut since September 2016; however, it is expected that the domestic lending market could not be relieved from price competition due to the excessive capital on the market. Therefore, the improvement of the overall interest rate spread can only rely on the loan position of the U.S. dollar to affect the overall interest revenue. In addition, with the new opportunity for the vigorous development in the mobile payment market, the domestic banks actively invest in the expansion of related R&D and marketing expenses. Together with the added cost for the establishment and improvements of information security and compliance systems, it is expected to be a challenge for the banking sector to show growth in their 2018 profitability.

Organizational Change

(1)          In response to the Financial Supervisory Commission's revision of the "Directions Governing Anti-Money Laundering and Countering Terrorism Financing of Banking Sector," the Bank set up an independent, special AML/CFT unit under the “Compliance Affairs Department” in March 2017. The Board of Directors assigns a senior executive to serve as the dedicated supervisor of the unit.

(2)          Based on the resolutions of the Financial Supervisory Commission’s Discussing the Domestic Banks’ Establishment of Dedicated Information Security Units and Supervisors and Information Security Related Issues meeting, domestic banks need to set up dedicated information security units within 6 months depending on the bank size, business complexity, operational risks, and so on. The Bank added the “Information Security Management Department” in August 2017 to draft and implement the information security policy, and to execute the Bank’s information security plan and information security protection. In addition, the “Information Techonology Department” was renamed as “Information Techonology Development Department.”

(3)          In response to the business operations and development after the Bank’s merger with Ta Chong Bank, the Board of Directors approved the five newly added business divisions: Wholesale Banking, Retail Banking, Personal Financial Services, Financial Markets, and International Business in October 2017, and newly established Credit Management Department, Project Finance Department, Personal Loan Department, Personal Loan Credit Department, Financial Product Department, Financial Markets Administration Department, etc. At the same time, Secretariat was renamed as Board Secretary Office, Credit Management Department was renamed as Corporate Credit Department,  and Consumer Credit Management Department was renamed as Consumer Credit Department. The new organization started operation on January 1^st, 2018.

Actual Accomplishments in 2017

The Bank and Ta Chong Bank devoted much manpower into the integration to accelerate the preparation of the merger for system, personnel, operations, customers, organization, and management in 2017. The merger was successfully completed on January 1^st, 2018. In terms of business development, the Bank continued to uphold the operating principles of “balancing the business structure, diversifying profit sources, and enhancing efficiency of capital utilization,”  and hence exhibited a remarkable advancement of comprehensive performance as the following highlights:

(1)          Actively adjusted the business structure: by increasing the loan assets in U.S. dollars, the average interest rate for lending increased quarterly, which resulted in the higher interest income from lending with slightly lower total lending amount than previous year.

(2)          Continuously facilitated the comprehensive financial management services and strengthened cross-selling between wealth management and deposit and remittance, corporate and personal finance businesses; meanwhile, the Bank also actively customizes and diversifies wealth management and trust products in order to strengthen the Bank’s fee income sources to balance the overall income structure.

(3)          Master market dynamics to adjust the position of financial assets to maintain the stability of financial operating income.

As of December 31^st, 2017, the consolidated asset of the Bank amounted to  NT$882.9 billion, increased by 2% from NT$866.9 billion in 2016. Yearly accumulated net income after tax reached NT$6,743 million, and EPS was NT$1.58, a growth of NT$1,148 million or 21% from NT$5,595 million of the accumulated net income after tax in 2016. The NPL ratio, NPL coverage ratio, and Loan Coverage Ratio were 0.23%, 562.33% and 1.31%, 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 2017, the Bank’s net revenue achieved NT$15.13 billion. Compared with the net revenue in 2016 at NT$14.00 billion, the net revenue increased by NT$1.13 billion. Meanwhile:

(1)          Net interest income amounted to NT$9.21 billion or an increase by NT$0.62 billion from 2016, which was mainly caused by increase in interest rate spread.

(2)          Net non-interest income was NT$5.92 billion and grew by NT$0.51 billion from 2016 because of the increase in net fee income.

(3)          Bad debt expense in 2017 amounted to NT$0.31 billion, a decrease of NT$0.70 billion from 2016. Operating expenses in 2017 was NT$7.36 billion or an increase of NT$0.72 billion from 2016.

(4)          In conclusion, the Bank’s net income before tax in 2017 was NT$7.46 billion. After deducting income tax at NT$0.72 billion, the net income was NT$6.74 billion with the budget achieving rate as 112%, or an increase of NT$1.14 billion from NT$5.60 billion in 2016.

Research and Development

(1)          In response to the development trend of financial digitization, the Bank continues to develop new functions and optimize systems for various digital channels in order to meet customer needs. To encourage customers to conduct transactions online, the revision of the Bank’s official website, the personal digital loan application platform and the electronic ticket application platform were completed in 2017. In addition, the Bank has operated the social media, such as the Bank’s official Line account and Facebook fan page, to launch product promotions, event messages, new features, and seasonal greetings to increase interaction with customers. In the future, the Bank is planning to conduct precision marketing through big data analysis and innovative applications to enhance the efficiency of business and operation.

(2)          Risk Management:

A.       Credit risk: Strengthened and fine-tuned the credit rating models, supporting for corporate and consumer banking, covering the model use, model strategic planning and validation. Structured the system framework to manage the large exposure and risky industries in China. Revamped the large exposure management system. Well restructured the control mechanism of concentration risk.

B.        Market and liquidity risk: The Bank has continuously planned and trial the management mechanism of maximizing the net interest income/ economic value with the interest rate in the banking book for the fund position of each maturity, and the procedures of stress test and the calculation of internal liquidity.

C.        Operational risk: The Bank has planned to establish the quantity model of the Bank’s operational risk loss, as well as to build the feasible model of adopting the advanced measurement approach for the operational risk capital charge.

(3)          IT system R&D and upgrade: In response to the Bank’s business strategy and development needs after the merger with Ta Chong Bank, the Bank continuously enhances the information infrastructure, system efficiency and management functions, in order to strengthen the Bank’s core competency. In terms of information security, in addition to the BSI certification  to ISO 27001:2013 Information Security Management System (ISMS), the Bank also commissioned the qualified third-party agencies to conduct various information security assessment operations as well as offensive and defensive drills to strengthen and enhance the Bank’s cyber and information system security protection capabilities to provide customers with more secure and stable financial services.

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

Under the influence of the continuous development of FinTech, the major domestic banks continue to actively invest in the development of innovative digital services to provide customers with more convenient, secure. and innovative digital trading environment and tools.

Faced with the international anti-money laundering trend, the Financial Supervisory Commission (hereinafter referred to as “the FSC”) has become more rigorous in the policies on strengthening the banks’ capital structure and risk control in 2017. In particular, the anti-money laundering and countering the financing of terrorism (AML/CFT) requires the banking industry to devote more resources to strengthen the management 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)          Amended and promulgated the “Directions Governing Internal Control System of Anti-Money Laundering and Countering Terrorism Financing of Banking Business, Electronic Payment Institutions and Electronic Stored Value Card Issuers”  (Original title: Directions Governing Anti-Money Laundering and Countering Terrorism Financing of Banking Sector)

These Directions are also applicable to the electronic payment institutions and electronic stored value card issuers. The Bank has complied with the revised provisions to set up an independent special AML/CFT unit under the Bank’s “Legal Compliance Department,” add its functions, adjust the internal related operating regulations, and strengthen the staff’s compliance education and training, in order to expand business on the premise of compliance with legal regulations.

(2)          Amended and implemented the ”Regulations Governing Internal Operating Systems and Procedures for Banks Conducting Financial Derivatives Business”

In order to strengthen the Bank’s risk management of financial derivatives business and protect the rights and interests of customers, FSC adds the requirements that the person authorized to handle transactions by the customer shall have sufficient financial product expertise and transaction experience for the professional customer of the legal person or the fund. A legal person or fund that meets the qualifications of a professional customer shall sign the agreement to be a professional customer after fully understanding that the bank may be exempt from responsibility for the financial derivative transactions with professional customers. The bank is required to conduct review of the eligibility of professional customers at least once a year, and establish a product suitability system, which shall include the bases for the rating classification of customers and products. The Bank has revised the financial derivatives related internal operating regulations in order to comply with legal requirements.

(3)          Amended the ”Description and Forms for the Calculation Method of the Bank’s Capital and Risk Assets”

The major revision is to reduce the risk weight applicable to the owner-occipied residence from 45% to 35%. The risk weight for the non-owner-occipied residence is reduced from 100% to 75%. It is effective since December 31^st, 2017. The Bank’s capital charge will therefore be greatly reduced, which will help the Bank expand its business.

(4)          Formulated the “Financial Technology Development and Innovative Experimentation Act”

The “Financial Technology Development and Innovative Experimentation Act” was enacted and promulgated on January 31^st, 2018. It is expected to be implemented by the end of April and to accept applications. Although it will not pose any threat to the banking industry in the short term, it may change consumer behavior and the business operating model of traditional banking in the future. Thus, the Bank has already instructed relevant units to conduct research on the contents of this Act and evaluate feasible responses.

3.     Latest Credit Ratings

4.     Business Plan in 2018 and Outlook

The Bank and Ta Chong Bank were officially merged on January 1^st, 2018. In order to deal with the environmental changes and highly competitive business challenges, the Bank will not only accelerate the integration of corporate cultures but also aim to maximize both banks’ strengths and calibrate the orientations of organizations, systems and businesses to solidify the foundation for the Bank’s long-term development. The Bank’s operation plans are summarized as follows:

(1)          Business Development

A.      The loan structure in the corporate loans business will be adjusted. By actively seeking to be the leading bank in domestic syndicated loans, strengthening foreign currency loans, and expanding the scale of international syndicated loans, the Bank shall increase the return on loan assets and the related fee income.

B.         The personal loans business will take the advantages of the Bank’s merger with Ta Chong Bank to balance the two banks’ loans policies, and adopt the segmentation approach to increase the cross-selling and contribution of the existing customers.

C.       The wealth management business will establish a financial advisors team to strengthen customer asset planning and customer relationship management, and enhance revenue through detailed marketing management within different customer groups and product classification.

D.      For the customers of credit cards, the Bank will continuously launch card-using and installment promotion events to escalate the number of active cards, card spendings and revolving balance. To reduce the operating costs, the Bank will encourage the customers to use electronic statements and digital services.

(2)          Channel Development

A.       After the completion of the merger with Ta Chong Bank, the Bank will devote to the domestic market with professional service through 152 domestic branches which are evenly distributed throughout north, central and south Taiwan. Also, the Bank has a new overseas branch in Hong Kong from the merger, which will serve as the location dedicated to develop business between Taiwan, Hong Kong and Mainland China. In addition, with Yuanta Savings Bank (Philippines) and Yuanta Savings Bank (Korea), the Bank has built the prototype of overseas market.

B.        With the development trend of Fintech, the Bank not only invests in the development of new digital channel functions and the optimization of process, but also launches related preferential and marketing activities through the operation of the social media, actively guiding customers to use the Bank’s digital channels. Moreover, the Bank will promote digital accounts and apply for the operation of the online insurance services, in order to provide more diversified integration services of click and mortar.

(3)          Risk Management

A.       Solidify the Bank’s managerial capability in credit, market and operational risk through the deployment of risk models and databases. Build up the risk warning mechanism riding on the deeply understanding of each industry and country risk, so as to effectively reduce the risk.

B.       According to the authorities’ “Directions Governing Internal Control System of Anti-Money Laundering and Countering Terrorism Financing of Banking Business, Electronic Payment Institutions and Electronic Stored Value Card Issuer,” the Bank will strengthen the management mechanism, education training and system tuning of the Bank’s AML/CFT operations.

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

(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.