1.     Business Report for 2019

Changes in the Financial Environment

The global economic environment in 2019 has suffered multiple unfavorable factors, including the rising US-China trade war, the rising trade conflict between Japan and South Korea, the tightening geopolitical situation, Hong Kong’s protest against extradition bill, and the turbulent impact on Brexit pending. However, with the U.S. Fed’s adoption of quantitative easing and the Central Bank’s unchanged policy of maintaining low interest rates, the domestic and foreign investment markets are still supported. Coupled with the business opportunities brought by the repatriation of investment capital from Taiwanese businessmen, the domestic banks have shown growth in their businesses, including deposits, loans and wealth management businesses in 2019.

With regard to the development of FinTech, in addition to the Regulatory Sandbox to boost the financial innovation, the FSC has announced the list of three internet-only banking licenses at the end of July 2019. The internet-only banks are expected to launch into the market in mid-2020, bringing a new business model to the banking industry. It has also encouraged traditional banks to invest more resources in the developing of digital accounts, mobile payments, open banking and emerging financial services. As the target customer base intended to extend to multiple civilians who never access financial services, the banking industry is expected to move forward towards inclusive financing, and to practice the vision about the financial ecosystem.

Looking forward to 2020, the domestic banks’ overseas business will grow, and the repatriation of investment capital from Taiwanese businessmen is expected to pose a series of new business opportunities. Together with the opening up of the policy for the wealth management business of high-asset customers, overseas Taiwanese businesses are expected to become the source to boost the domestic and foreign loans and the growth in fee income. At the same time, due to the rapid growth of FinTech and the continuation of  more comprehensive development, coupled with the increase in people’s use and trust, and a transformation of banks’ business model brought by internet-only banks, they will benefit the banking industry to explore new customer base. However, domestic banks may have some impacts due to the global economic variables, including the difficulty in increasing investment operations, coupled with the continuous impacts of the U.S. interest rate cuts, which will result in the compressed interest rate spreads in foreign currencies have been compressed, which may have some impacts on domestic banks. With the spread of the COVID-19 from the mainland China to countries around the world in early 2020, the pandemic has an impact on domestic and global trade, tourism industry, consumers’ demand and supply chains. The extent and duration of its impacts cannot be accurately estimated. Domestic and foreign research institutions have downward revision of the economic growth rate forecast for the first quarter of 2020. In summary, the operation of the domestic banking industry in 2020 will face both business opportunities and economic uncertainties.

Changes in Company Organization

(1)          In January 2019, the “Anti-Money Laundering Department,” formerly known as the “Anti-money Laundering Team of the Compliance Affairs Department,” was established, responsible for handling the Bank’s AML/CFT affairs.

(2)          In order to meet the needs of the business, the establishment of the “Wholesale Banking Group” and “Consumer Banking Group” and the addition of “Group Business Division” were approved in February 2019. Among them, the “Wholesale Banking Group” is responsible for supervising the “Wholesale Banking Division,” “Group Business Division” and “International Business Division,” and the “Consumer Banking Group” is responsible for supervising the “Retail Banking Division” and “Personal Financial Services Division.”

(3)          In April 2019, the supervision unit of Overseas Business Department has changed from the International Business Division of the Wholesale Banking Group to the Head Office.

(4)          For the needs of credit management, the Credit Management Department and the Corporate Credit Department were merged to be re-named as the “Credit Management Department.” In addition, for the professional specialization of the business and management aspects of wholesale banking business to improve work efficiency, the units under the Wholesale Banking Group are divided into the front business unit, the middle and back management units, and operation units. The proposal of the organization adjustment was passed in December 2019, and it has been officially in operation since January 2020.

Actual Accomplishments in 2019

Since the merger between the Bank and Ta Chong Bank two years ago, the Bank has continued to improve the deposit and loan structure and move towards the goal of becoming a large, high-quality bank. Although part of interest income was affected by the interest rate cut of the US dollar in 2019, with the growth of the net fee income, investment income and expense austerity, the profit reached a new high. As of the end of December 2019, the Bank’s assets reached NT$ 1,339.7 billion, and the annual after-tax net income was NT$ 10.046 billion, with an increase of NT$ 1.439 billion from the previous year, a growth rate of 17%, EPS of NT$ 1.36, and ROE of 8.46%. With the continued growth of profitability, the Bank’s quality of assets still maintains a high standard in the industry.

The changes in major services are as follows:

On the other hand, the Bank’s long-term efforts in customer management, product innovation and employee care have won recognition from external organizations in 2019 in the aspects of wealth management, credit business, digital finance, and creating a high-quality working environment, with the following awards：

Budget Implementation, Financial Status and Profitability

The net income in 2019 was NT$23.372 billion, a increase of NT$1.404 billion from the net income of NT$21.968 billion in 2018. In which:

(1)          Net interest income was NT$ 13.467 billion, a decrease of NT$ 551 million from 2018, and the main reasons were that the decrease in interest income from investing in securities and the slight impact on loan interest income from an interest rate cut in the US dollar.

(2)          Net income other than interest was NT$ 9.905 billion, an increase of NT$ 1.955 billion from 2018, and the main reasons were the increase in net fee income, the increase in profit of financial assets, and the impairment loss of assets recognized in 2018.

(3)          The bad debts expense was NT$ 1.067 billion, an increase of NT$ 400 million from 2018; the operating expenses were NT$10.798 billion, a decrease of NT$458 million from 2018.

(4)          In summary, the Bank ’s net income before tax in 2019 was NT$ 11.507 billion, and the net income after tax was NT$ 10.046 billion, an increase of NT$ 1.439 billion over the previous year, with a growth rate of 17% and a budget achievement rate of 100%

Research and Development

(1)          Master market trends and launch innovative financial services such as cardless inter and intra-bank withdrawals, via transfers QR code, scan code for payment, exchange rate alerts, quick fund order placing service, fingerprint and facial recognition login for mobile banking, accessibility services, etc.

(2)          Adding the service for customers to conduct online identity verification for credit loan contract singning through Yuanta e-counter, reducing the time needed for customers to conduct the matter in person at the branch.

(3)          As of the end of 2019, the Bank has twelve patents, including “Automatic Rate”, “Facial Recognition”, “Financial Examination” and “Financial Automatic Voice System and Voice Input / Output Device,” etc., approved by the Intellectual Property Office, Ministry of Economic Affairs, continuously planning the application fields of various patents and implementing them in digital financial services.

(4)          Adding the Fund + good investor and Fund+3.0 smart wealth management function in fund trading, providing customers with parent-child fund investment setup and the use of investment criteria such as asset diversification, disciplinary investment and revolving transfer, to achieve multi-advantage of stable asset growth, reducing investment risk, and time saving.

(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 data model of the Bank's operational risk loss data, and a construction plan of a feasible model when the operational risk capital charge is measured by the advanced method.

(6)          Cooperating with the bank-wide business strategy and business development, the main information system R&D and upgrades include: Projects such as forex system upgrade phase II, trust host hardware upgrade, wealth management system upgrade phase II, Hong Kong internet banking system phase I, Open API phase I, ATM cardless deposit and withdrawal and foreign currency withdrawal, eFCS payment platform, New Taiwan dollar bond system upgrade, online credit loan online identify verification, Microsoft Windows Server and database upgrade, etc., improving system operation’s efficiency and safety.

(7)          Expand the firewall audit tool, License authority, and hardware resource, install firewall devices in front of branch ATMs, to strengthen the defense capabilities and performance of the Bank's information system, and build Security Information Event Management) (SIEM) project to strengthen monitoring information and analyze and detect abnormal behavior in real time, improving the security protection capabilities of Bank’s information system and providing customers with safe and stable financial services.

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

Driven by the steady growth of the deposit and loan business, wealth management and investment income, the total pre-tax earnings of the domestic banks in 2019 reached NT$360.7 billion, a record high. However, with ample capital in the market, price competition has become the norm. It is observed that the domestic banks have been actively undergoing business transformation in recent years and expanding more diversified revenue sources. It is expected that differentiated business and product innovation, efficient deployment of financial assets, and the development of intelligent financial technology will become important factors influencing future profitability breakthroughs.

In addition, the impacts of important regulatory changes on the Bank and the response measures are as follows：

(1)          The Ministry of Finance enacted “The Management, Utilization, and Taxation of Repatriated Offshore Funds Act” to be implemented on August 15, 2019：

In the face of changes in the global economy and taxation environment, the government enacts “The Management, Utilization, and Taxation of Repatriated Offshore Funds Act,” in order to guide the repatriation of the nationals’ personal and profit-seeking enterprises’ funds to be invested in physical industries and financial markets in the Republic of China, to strengthen the domestic economy and increase employment opportunities, in line with international money laundering prevention and international taxation regulations. After the implementation of the Act, it is expected to promote the repatriation of overseas funds to be injected into industries and financial markets. Through the special account management mechanism, it provides long-term stable funds in the domestic financial market, and drives the growth and diversification of the financial industry in wealth management, credit, securities and insurance services. In response to the opening up of this Act, the Bank has revised the relevant operating regulation and forms, supplemented by monitoring systems such as revision of system control, etc., with the implementation of compliance with relevant laws and regulations, to develop the arising business opportunities in investment, financing, wealth management or corporate payment flow.

(2)          The Bankers Association formulated the “Operational Directions for Banks’ Relevant Internal Control to Prevent Wealth Management Specialists from Embezzling Customers’ Funds”：

In order to assist banks to strengthen internal control and eliminate wealth management specialists’ embezzlement of customers’ funds, the Bankers Association has formulated the “ Operational Directions for Banks’ Relevant Internal Control to Prevent Wealth Management Specialists from Embezzling Customers’ Funds” in accordance with the aspects of the personnel management system, internal control and check principles, and internal audit system. The content includes ten major anti-fraud measures. Banks must implement the three internal defense mechanisms in accordance with the principles laid down to protect consumer rights. The Bank has revised the relevant internal regulations in accordance with the principles laid down, carried out relevant education, training and tests, and indeed implemented the three lines of defense mechanism of internal control to effectively prevent the occurrence of such cases.

(3)          The Financial Supervisory Commission (hereinafter referred to as the FSC) promulgated the amendments to the “ Regulations Governing Insurance Agents” on November 18, 2019：

In order to improve the procedures for banks to sell insurance products, to avoid improper sales and to enhance the protection of consumers’ rights and interests, the FSC announced in the letter dated on October 5, 2019 the relevant principles of strengthening internal control measures related to the credit and deposit side of the bank’s concurrently operating of insurance broker and agent business. On November 18, 2019, the FSC announced amendments to the “Regulations Governing Insurance Agents,” mainly to strengthen the six items of “implementation of KYC procedures,” “implementation of the equitable principle of remuneration and performance,” “strengthening measures for the source of insurance premiums being loans,” “preferential waiver of deduction on interests from the termination of customers’ time deposits to purchase insurance,” “strengthen internal control and internal auditing of deficiency red flags,” and “should be included in the bank's internal control and internal audit system regulations and related education and training is conducted,” when banks sell insurance. The Bank currently has established an enhanced management and monitoring mechanism which meets the requirements, to ensure that the sales system can effectively identify the customer’s product suitability and trading risks. In addition, a systematic inspection mechanism is expected to be completed by June 2020.

(4)          The FSC opened up the “Banks to Conduct Business of Pledge on the Beneficial Rights of Specific Money Trust Where the Bank ltself Acts as the Trustee”：

In order to assist in people’s funding scheduling, the FSC increases the flexibility and liquidity of the use of funds by the trustees (and beneficiaries) of specific monetary trusts, and the convenience of pledged loans at the same trustee bank, by opening the banks to conduct business of pledge on the beneficial rights of specific money trust where the bank itself acts as the trustee. Interested banks can apply to the FSC after completing information system adjustments and related internal control mechanisms. The Bank has been approved by the FSC to handle this business, which will provide customers with more convenient fund scheduling services.

(5)          The FSC enacted the “Operation Directions Governing Banks’ Applications for Pilot Programs”：

After the enactment of the “Financial Technology Development and Innovative Experimentation Act” in 2018, allowing that innovative businesses involving restrictions by laws, regulations, and orders, may apply under the Financial Regulatory Sandbox Experimental Program, the FSC promulgated the enactment of the “Operation Directions Governing Bank’s Applications for Pilot Programs” in the letter dated on June 19, 2019, in order to encourage banks to take into account risk control and target approved business scopes, if they intend to expand via different means, they may apply to the FSC in a “pilot program business” manner to enhance the momentum of the country's financial innovation, developing financial products and services, and enhancing competitiveness and financial consumers’ rights through innovation. The Bank continues to encourage business units to innovate and develop, and will apply to relevant application procedures in accordance with regulations, if needed.

(6)          The FSC amended the “Regulations Governing the Capital Adequacy and Capital Category of Banks” and designated five domestic banks as systemically important banks in the Republic of China：

In order to strengthen the risk-bearing capacity of the domestic market-leading banks, enhancing the financial system's support to the real economy and integrate with international standards, the FSC promulgated the amendments to the “Regulations Governing the Capital Adequacy and Capital Category of Banks” in December 2019, adding the requirements that the competent authority may designate systemically important banks and require them to provide additional capital. Although the Bank is not currently a bank designated by the FSC, the relevant capital adequacy ratios have all met the requirements of the systemically important banks in the regulations.

3.     Latest Credit Ratings

4.     Business Plan in 2020 and Outlook

In 2020, the Bank shall continue to have the business scale expansion, balance business and profit structure as the main operation pillars. By strengthening product design and cross-selling, and cultivating customer relationships, implementation of risk control and legal compliance mechanisms are needed for each business execution in order to maintain stable growth in profitability. The summary of the business plan is as follows：

(1)          Business Development

A.      For deposit and remittance business, the Bank will increase core deposits through planning marketing activities such as time-limited preferential deposit projects and special accounts, based on the analysis of customer transactions and product holdings. It will also help to stabilize the source of funds and build a solid foundation for the development of the wealth management business. At the same time, the Bank will promote the direct payroll deposit business and the collection of payment flow integration services through the integration of cross-department and group resources to rise the proportion of general current deposits.

B.       In terms of the wholesale banking business, the Bank will strengthen the expansion of high-yield products, actively strive to participate as the leading bank or co-leading bank of syndicated loans, and increase interest and fee income. It will continue to expand the civil engineering financing business and fishery industry chain loans by leveraging on the advantages it has been cultivating for many years. For the operation of large and medium-sized group customers, it will strengthen the ability to cross-sell products, meet customers' overseas and cross-border financial needs, and continue to expand its customer base.

C.       For personal banking business, the Bank will strengthen capacities of various types of loan business and cross-sales effectiveness to customers. The mortgage business continues to lock in the demand for self-occupied home purchases. The focus will be on collateral in metropolitan areas and with good liquidity. In addition to deeply cultivating the new car brand channel and strengthening the auto loan refinancing business, the car loan business will also actively explore car loan business outside the original factory and non-contracted dealers Combining with channel resources, credit loans launch stock subscriptions or general loan projects for high-quality corporate employees, targeting employees with stable income in high-quality companies to promote credit business. The credit card business will plan equity and innovation activities to maintain product competitiveness.

D.      The bank will continue to uphold the attentive in wealth management business, caring and sincere attitude and provide customers with comprehensive wealth management planning, and continue to expand and strengthen the wealth management business team through actions such as the reserve financial advisor plan, investment advice of the consulting team and the branch’s sharing of practical experiences. In terms of customer management, the Bank will improve the planning of the “Fuju Family” customer courtesy plan, expand family members and business owner members, and use various marketing projects and cross-industry cooperation to achieve new customer and new fund addition and expansion of wealth management scale. At the same time, the Bank also actively develops more convenient digital trading services, such as loyalty point platform, URL quick order placing, mobile insurance, 24-hour trading of ETF /overseas stocks, etc., to effectively improve the customer activation rate and contribution, further improving customer satisfaction and stickiness.

(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 units effectively improve the performance of the channel operation through regular performance review and guidance measures.

B.        For those overseas institutions, the Hong Kong branch and subsidiaries in Korea and the Philippines have expanded the customer bases and deposit and loan business scales, based on their local political and economic characteristics, with the influx of the Group's resources. At the same time, the Head Office continues 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.

C.        For digital channel development, in response to the trend of financial technology development and changes in consumer payment patterns, the Bank continuously promotes innovative financial services centered on “customers,” and takes “actively promoting digital transformation and optimizing internal processes,” “emphasizing user experience and staying close to daily scenarios” and “combining new technologies and innovating FinTech development” as the main development strategies. Through continuous optimization of the ease of use of the channel platform, the Bank provides diverse product lines and personalized services to improve customer satisfaction.

(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.       Comply with the external laws and regulations, and continue to strengthen the completeness of the system or operating procedures such as AML/CFT, information security, personal information protection, fair hospitality, etc. Announce and revise internal regulations in real time in response to the latest financial laws and regulations changes information. Ensure the complete compliance of various laws and regulations, through education and training, and self-assessment and assessment operations for compliance with laws and regulations, etc. In addition, conduct case analysis and advocate the correct practices of penalized cases in the industry, enhancing employees' c awareness of legal compliance.

C.       Strengthen risk control, legal compliance and internal audit and control management 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. Execute talent development plan, and build a pool of business and management personnel in response to the needs of business development, building the foundation for the Bank’s sustainable development.