1.     Business Report for 2018

Changes in the Financial Environment

Looking back in 2018, among the major international economies, except for the acceleration of growth in the United States driven by domestic demand, economic growth in the Eurozone, Japan and emerging markets is still weak. In the first half of the year, the domestic economy was benefited from a steady increase in the global economy, with strong trade and production activities, and the economic growth rate was stable at more than 3%. However, in the second half of the year, affected by the US-China trade war, financial market volatility intensified, and the economy cooled down. According to the data announced by the Directorate-General of Budget, Accounting and Statistics in February 2019, the 2018 annual economic growth rate was 2.63%, lower than the 3.08% in the 2017, indicating that economic growth has slowed down.

In order to maintain steady growth in profitability, the banking industry is actively expanding overseas business with high interest spreads. At the same time, with the continued easing of funds, banks still use low interest rate to attract domestic SME loan , mortgage and syndicated loan business, and expand the scale of loan. Driven by the growth of the wealth management market and the development of FinTech, the 2018 overall pre-tax profit of the domestic banks grew by 9% compared with 2017. In addition, under the implementation and promotion of the competent authority on the national banks' risk control, information security, internal control, and continuity of AML policies, the overall risk control capability has continued to improve.

In terms of the development of financial technology, in addition to mobile payment, the banking industry has also increased its investment in the application and development of technologies such as information security, cloud services, blockchain, etc., and continued to move toward comprehension and security. With FSC’s deregulation of the internet-only bank and the policy of promoting the financial innovation through the regulatory sandbox, it is expected that the technical capabilities of the national banks' overall financial technology will be rapidly improved, and the transformation of the traditional banking business model is imperative.

As the US-China trade war has triggered the rise of global trade protectionism, it is expected to have an impact on global trade volume and also affect investment confidence. Most economic forecasting institutions estimate that the global economic growth will slow down in 2019, and the view on Taiwan's economic situation will also turn conservative. It is expected that financial market volatility will be more severe, investment operations will become more difficult, and investment income will not be as good as before. In addition to the continuous expansion of deposits and loan scales, and the increase in spread and fee income, the expansion of overseas markets and the development of financial technology are expected to be positive benefits for the banking industry’s profit increase.

Organizational Change

(1)          In response to the business operation and development of the Bank's merger with the Ta Chong Bank, in October 2017, the Bank added five new business divisions: Wholesale Banking Division, Retail Banking Division, Personal Financial Services Division, Financial Markets Division and International Business Division. In addition, Credit Management Department, Project Financing Department, Personal Loan Department, Personal Loan Credit Department, Financial Product Department, Financial Markets Administration Department, etc., are established. At the same time, the Secretarial Office was renamed as the Board Secretary Office, the Credit Management Department was renamed the Corporate Credit Department, and the Consumer Credit Management Department was renamed the Consumer Credit Department. The new organization took effective on January 1, 2018.

(2)          In line with the adjustment of business operations, the “Information Technology Development Department” was renamed “Information Technology Department” in April 2018. At the same time, in accordance with the provisions of Article 38-1 of the amendment to the “Implementation Rules of Internal Audit and Internal Control System of Financial Holding Companies and Banking Industries, ” the relevant responsibility of the bank-wide information maintenance management of the Information Security Management Department was transferred to the Information Department.

(3)          In order to enhance and strengthen the Bank's AML/CFT matters, in December 2018, the Board of Directors passed the resolution to have a dedicated unit separated from the “Compliance Affairs Department” which is previously responsible for handling the aforementioned matters, and the “AML Department” was established on January 1, 2019.

Actual Accomplishments in 2018

On January 1, 2018, the Bank completed the merger with the Ta Chong Bank. Due to the proper arrangement of the preparatory work for the merger, the business operated smoothly after the merger. By strengthening customer relationship and new business development, various businesses have remained stable, and the Bank's interest spreads have increased quarterly, driven by OBU's lending structure adjustment and the US dollar interest rate hike. Under proper cost control, the overall profitability is better than the pre-merger level of the two banks.

As of the end of December 2018, the Bank's assets reached NT$1,288.1 billion. The accumulated after-tax net income for the year was NT$8.608 billion, an increase of NT$709 million over 2017, with a growth rate of 9%, EPS of NT$1.16 and ROE of 7.52%. At the same time, with the continuous growth of profit, the Bank still maintained good asset quality. The Bank's wealth management business is committed to providing customers with professional services with “thoughtfulness, care and sincerity.” In the Wealth Magazine’s 2018 Wealth Management Survey, the Bank was awarded “Best Service, Best Professional Team, and Best Public Interest Promotion” Awards; the Bank also received the “Best Information Service, Best Products” awards in the Business Today's Wealth Management Bank Awards, showing the Bank has been well recognized by customers.

The changes in major services are as follows:

Budget Implementation, Financial Status and Profitability

The net income in 2018 was NT$21.966 billion, a decrease of NT$1.258 billion from the net income of NT$23.224 billion in 2017. In which:

(1)          Net interest income was NT$14.016 billion, a decrease of NT$615 million from 2017, and the main reason was the increase in interest expenses.

(2)          Net income other than interest was NT$7.95 billion, a decrease of NT$643 million from 2017, and the main reason was the recognized asset impairment loss resulted from the impairment test of goodwill conducted in in accordance with IAS 36 “Asset Impairment.”

(3)          The bad debts expense was NT$666 million, an increase of NT$141 million from 2017; the operating expenses were NT$11.256 billion, a decrease of NT$1.708 billion from 2017.

(4)          In summary, the Bank's 2018 net income before tax was NT$10.044 billion, and the net income after tax was NT$8.608 billion. Excluding the recognized asset impairment loss resulted from the impairment test of goodwill conducted in December 2018 in accordance with IAS 36 “Asset Impairment,” the accumulated net income after tax for the year was NT$10.024 billion, an increase of NT$ 2.126 billion from 2017, with a growth rate of 27% and a budget achievement rate of 105%.

Research and Development

(1)          Master market trends and launch innovative financial services such as cardless withdrawals, digital saving accounts, transfers via QR code , exchange rate alerts, fingerprint login for mobile banking, etc.

(2)          Cooperate with Alipay for cross-border agent collection and payment business, and launch the “Internet Store Order Barcode/QR Code Payment Function,” which allows customers to easily pay by scanning QR codes of the mobile phone on the Internet. Compared with the previous traditional webpage payment, it is more easy and simple.

(3)          Add the Fund + good investment smart wealth management function in fund trading, providing customers with the dual advantages of achieving stable growth of assets and diversification to reduce investment risk, through the investment in parent-child funds.

(4)          Transform the Huashan Branch into a new type of digital bank with the theme of culture and creativity. In collaboration with the startup animation company “Taiwan Bar” to make “FinTech ” animation films, introducing financial knowledge such as blockchain, banking, internet of things, artificial intelligence, financial technology, etc., through the social platform, it successfully attracts the attention of young people and receives enthusiastic responses.

(5)          Risk management：

A.       Credit risk: The Bank has strengthened and adjusted the use of rating models and strategic planning and evaluation in corporate and consumer banking, and advanced the control mechanism of concentration risk with improving the large exposure management system by systematically managing the total exposure and supervising the risky industries in China.

B.        Market and liquidity risk: Continuously plan and trial-calculate the net interest income of the banking book interest rate on various tenor-funding positions and the economic value maximization management mechanism, as well as the internal liquidity stress testing process and calculation procedures.

C.        Operational risk: Plan to establish a quantitative model of the Bank's operational risk loss data, and a construction plan of a feasible model when the operational risk management is measured by advanced methods.

(6)          Cooperating with the bank-wide business strategy and business development, the main information system R&D and upgrades include: CTI System Construction Project - 2nd Stage, Foreign Exchange System Upgrading Project -1st Stage, Hong Kong Branch Network Banking System Project, Credit Card Issuance Accounting and Authorization System Upgrading Project, Wealth Management System Upgrading Project, New Financial Trading System Construction Project, LM/FTP System Upgrading and Liquidity Risk Management Construction Project, Trust Host Upgrading Project, etc., improving system operation’s efficiency and safety.

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

In recent years, the domestic banking industry has maintained a stable profitability in the case of stable growth in deposits and loans and no significant changes in asset quality. Observing that the total pre-tax earnings of domestic banks in the past five years has all reached more than NT$300 billion, with abundant funds in the market, interest rate competition has become the norm. In addition to the impact of interest rate rises, the increase in interest income depends on the expansion of business scale, and the increase in other net income is mainly from wealth management business and investment income. Therefore, business and product innovation, financial asset deployment, and financial technology development are the key factors affecting revenue. After the Bank's merger with the Ta Chong Bank in 2018, the asset scale has exceeded NT$1 trillion. Facing more intense market competition, it is necessary to deepen customer relationships in order to stabilize the existing business and increase the scale strategically to drive the growth in profitability.

The impacts of important regulatory changes on the Bank and the response measures are as follows：

(1)          The Financial Supervisory Commission (hereinafter referred to as the FSC) amended the “Implementation Rules of Internal Audit and Internal Control System of Financial Holding Companies and Banking Industries”：

In order to strengthen the differentiated regulatory compliance risk management mechanism for banks with assets above certain scale, it is specified that the principles and responsibilities of the regulatory compliance risk management and supervision framework for large banks, including establishing a bank-wide regulatory compliance risk management framework and an independent legal compliance organization and responsibilities, and implementing legal compliance performance report and supervision. The Bank has met the standards of large banks since 2018. Since 2019, the Bank shall adjust the bank-wide regulatory compliance risk management and supervision structure within the specified time, and report them to the competent authority for reference.

In order to help financial holding companies and the banking industry to establish an ethical and transparent corporate culture and promote sound management, it is required that financial holding companies and the banking industry shall establish an internal whistleblowing system. In September 2018, the Bank’s Board of Directors approved the formulation of the “Implementation Regulations Governing Whistleblowing System” and announced its implementation.

In order to enhance the emphasis on information security in the banking industry, it is specified that the banking industry shall establish dedicated information security units and supervisors, responsible for the information security related work, and differentiated management is conducted according to the scale. The Bank established the Information Security Management Department in August 2017 and adjusted its responsibility in April 2018 to comply with the regulations.

(2)          The FSC formulated the “Financial Technology Development and Innovative Experimentation Act”：

The “Financial Technology Development and Innovative Experimentation Act” was promulgated on January 31, 2018 and took effect on April 30, 2018. As of the end of 2018, two cases (using telecom mobile identity certification for inclusive financial services and foreign migrant workers’ cross-border remittances) have been approved. Although it will not pose a threat to banking operations in the short term, it will likely change consumer behavior and affect the banking business model in the future. Therefore, the Bank will continue to observe and analyze market dynamics and develop response measures.

(3)          The FSC amended the “Regulations Governing Anti-Money Laundering of Financial Institutions” and the “Regulations Governing Reporting on the Properties or Property Interests and Locations of Designated Sanctioned Individuals or Entities by Financial Institutions”:

In response to the mutual evaluation of the Asia/Pacific Group on Money Laundering (APG) and the 40 recommendations of the Financial Action Task Force on Money Laundering (FATF), the FSC made amendments to the provisions on Know Your Customer, methods to recognize politically exposed persons, reporting timeline of suspected money-laundering or terrorism financing transactions, etc., of the “Regulations Governing Anti-Money Laundering of Financial Institutions.” In the implementation of AML/CFT, the Bank has revised the relevant rules and regulations and the contents of the education and training courses in accordance with the external regulations and business needs. In terms of the system, the Bank also detects suspicious transactions by correcting the transaction monitoring scenario parameters of the AML/CFT (AML) system, as well as importing external list databases and self-made list databases. In terms of new products, services or businesses, there is also an AML/CFT checklist for the business units to review the relevant money laundering and terrorist financing risks in order to establish corresponding control measures.

(4)          The FSC amended the regulations related to the establishment of internet-only bank and promulgated that it will accept applications from November 16 , 2018:

In response to the development trend of digital services for banks and meeting consumer demand, the FSC deregulated to accept applications for the establishment of internet-only bank. The FSC said that as of the deadline for the application, there were three internet-only bank promoters applying to establish internet-only banks, and the review results are expected to be announced before the end of June 2019. For the development of digital financial business, the Bank will continue to add and innovate service items according to the existing plans, improve system functions, and increase the number of customer accounts and usage rates, and the Bank will continue to observe whether the establishment of internet-only bank will have an impact on commercial banking business and make responses.

3.     Latest Credit Ratings

4.     Business Plan in 2019 and Outlook

In 2019, the Bank shall continue to expand its business scale, balance its business and profit structure, and implement various risk control and compliance mechanisms as its main development goals. The summary of the business plan is as follows:

(1)          Business Development

A.      In terms of deposit and remittance business, the Bank shall use project products and featured accounts to develop new customers and deepen customer relationships, steadily increase core deposits, and build a foundation for the development of wealth management business. At the same time, the Bank shall strengthen the promotion of payroll transfer business, agency collection and payment business, and acquiring business. In addition to providing customers with more diversified payment gateway integration services, it can increase the proportion of general demand deposits.

B.       For the corporate financial business, the Bank shall strengthen the expansion of high-yield products, actively seek opportunities to be the leading or co-leading bank of syndicated loans, and increase interest and fee income. In addition, by increasing the proportion of transaction financing such as trade finance and accounts receivable, etc., the Bank can develop supply chain financing to reduce the credit risk, and increase demand deposits and fee revenues.

C.       The Bank shall strengthen offshore banking business through the cooperation with international investment banks and privately offered funds, continue to expand the scale of international syndicated loans business, and strengthen the deposit and loan business of Hong Kong branch and sub-branches in Korea and Philippines, increasing the contribution to profit.

D.      For the personal finance business, the Bank plans the main operating pillars for various products. The mortgage business shall be targeted to the demand for self-occupied residential property, mainly focused on the collaterals with good liquidity and located in urban areas, and strengthen the cross-selling of products and the batch program. The auto loan business continues to be focused on deepening the automotive brand channel for new vehicles and strengthening the automotive brand auto financing business. The credit loan business is focused on using database to analyze and develop existing credit card or loan customers. The credit card business continues to be focused on the business model of niche marketing to enhance customer loyalty.

E.       Wealth management business is focused on bringing new customers and new funds, through the adjustment of customer classification system and rights, expanding to family members and business owner members, and using various marketing projects and cross-industry cooperation, in order to expand the scale of wealth management business by deepening customer base. The Bank shall also enhance the convenience of the digital channel platform and provide a diversified product line to enhance customer satisfaction.

(2)          Channel Development

A.       Domestic physical channel outlets are set up according to the commercial and wealth situations in the regions, and localized operations are implemented. The head office  effectively improve the performance of the channel operation through regular performance review and guidance measures. In response to the trend of financial technology development and changes in consumer payment patterns, the Bank promotes the Bank’s digital transformation, develops digital financial services, and encourages our existing customers to apply for digital accounts. The Bank guides customers to experience the fast and convenient service of digital channels, and cooperates with cross-industry payment gateway platforms to connect various industry platforms, providing digitalized services close to customer needs.

B.        For those overseas branch outlets, the Hong Kong branch and sub-branches in Korea and the Philippines have expanded the deposit and loan business based on their business items and local characteristics, with the influx of the Group's resources. At the same time, the head office continue to assist in the evaluation and improvement of the procedures such as process flows, loan review, investment, etc., as well as to enhance the security, function and performance of the information system, and implement the legal compliance and risk management work of the Bank, branches and sub-branches to maintain the Bank’s sound management.

(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.       Implement the execution of AML/CFT tasks, and revise the Bank’s relevant regulations in accordance with changes in external laws and regulations and practical operational needs. Continuously adjust the system functions, construct indicator data analysis and management mechanism, and improve the professional quality and execution capability of all employees through education and training.

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

(4)          Personnel Training

Implement pre-employment and on-the-job training, and train multi-functional talents through job rotation mechanism. In response to the development of financial technology and internationalization policies, strengthen the training of internationalized professionals and digital financial talents to build the foundation for the Bank’s sustainable development.