1.     Business Report for 2020

Changes in the Financial Environment

In 2020, the global economy underwent a significant recession because of the decline in consumer demand and the disruption to supply chains caused by the COVID-19 pandemic. Major economies adopted quantitative easing and expansionary fiscal policies to maintain economic and financial stability. Moreover, international factors such as U.S.-China political and economic tug-of-war, geopolitics, U.S. elections, and the recalcitrant pandemic interfered with the global economy, weakening its rebound. On the contrary, thanks to the proper control of the pandemic, coupled with the relief package and the return of capital from Taiwanese enterprises, the overall domestic economic growth was driven by private investments, government expenditures and export growth in turn propelled the overall deposits and loans of domestic banks to continuous growth in 2020, and the capacities compensated part of the interest income shrinkage due to the interest rate cut. However, there were several cases of defaults on the overseas credits which impacted the revenue of the domestic banks.

As regards the development of FinTech, the Financial Supervisory Commission (hereinafter referred to as the FSC) announced the “FinTech Development Roadmap” on August 27, 2020, expected to shape a friendly ecosystem for FinTech development and promote the launch of related services or business models to enhance the efficiency, accessibility, usability and quality of financial services. As three internet-only banks enter the market one by one, and traditional banks compete in developing mobile payment, open banking and innovative financial services, financial services are gradually extending to non-traditional banks’ customer bases and business, and will continue to move towards inclusive financing and realize the vision of the financial ecosystem.

Looking forward to 2021, the domestic economy is subject to uncertainties such as whether the global pandemic can be effectively controlled, trade frictions between major economies, the drastic increase in government debt in many countries, and the disconnect between the stock markets and economic fundamentals. However, because domestic demand, exports, industrial production and private investment all are reported continuous expansion, the Directorate-General of Budget, Accounting and Statistics forecasted in February 2021 that Taiwan's economic growth rate would be as high as 4.64% in 2021, and the National Development Council elevated the Monitoring Indicator to “yellow-red” signal in December 2020, which was the first “yellow-red” signal after March 2011, indicating the strong momentum of domestic economic growth. The economic growth and the low interest rate are expected to create business opportunities for domestic banks in the credit, wealth management and payment services. Meanwhile, the liberalization of wealth management policies for high-asset customers and the accelerated development of FinTech have prompted the launch of more specific business applications in mobile payment, information security, cloud services, blockchain and many other aspects, which will help banks expand their overall business scope. Furthermore, the domestic banks were more proactive and prudent in handling unsound credits and allocating loan loss provision in 2020, which are expected to improve its profitability in 2021 compared to the previous year.

Changes in Company Organization

(1)          For the needs of credit management, the Credit Management Department and the Corporate Credit Department were merged in January 2020 and re-named as the “Credit Management Department”. In addition, for the professional specialization of the business and the management aspects of wholesale banking 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.

(2)          To facilitate the development of information-related systems, as well as improve the efficiency of maintenance and management, the former “Information Technology Department” was split into “Information Technology Department I” and “Information  Technology Department II” in April 2020, responsible for planning, construction, maintenance and management of information systems, and core and peripheral banking business, respectively.

(3)          To meet business needs, the following changes were approved in December 2020: (i) the establishment of the Treating Customers Fairly Promotion Committee, (ii) the deletion of the Group Business Department III and the Corporate Operation Center, (iii) the consolidation of the Project Finance Department and the Corporate Product Department as the Corporate Product Department, and (iv) the addition of the Deposit and Remittance Banking Channels Division to the Consumer Banking Group and the transfer of the Deposit and Remittance Banking Department from the Personal Financial Services Division to the Deposit and Remittance Banking Channels Division. The aforementioned organizational changes went into effect on January 1, 2021.

Business Accomplishments in 2020

In 2020, the Bank faced the same impact as its peers on the growth of net interest income, because of the reduction of loan-to-deposit interest rate spread and net interest margin (NIM) which was resulted from the successive interest rate cuts by domestic and foreign central banks. Meanwhile, in the capricious environment where the COVID-19 pandemic impacted economic and industrial development, the Bank shifted its credit business strategy to the focus on adjusting the structure and fortifying post-loan management in order to control risks and maintain good asset quality even more rigorously. At the end of December 2020, the Bank’s non-performing loan (NPL) ratio, NPL coverage ratio and coverage ratio recorded 0.14%, 1,095.76% and 1.50%, respectively, maintaining high quality in the industry. The Bank had benefited from the growth of securities deposits and core deposits, which led to the expansion of the overall asset size. At the end of December 2020, the asset size reached NT$1,443.5 billion, an increase of NT$103.8 billion or 7.75% from the previous year.

The changes in major services are as follows:

On the other hand, the Bank's long-standing efforts in customer management and product innovation have received recognition from external organizations in multiple evaluations, including wealth management, digital finance and payment services. The awards the Bank won in 2020 are as follows:

Budget Implementation, Financial Status and Profitability

The net income in 2020 was NT$20.265 billion, a decrease of NT$3.107 billion from the net income of NT$23.372 billion in 2019. In which:

(1)          The net interest income was NT$12.621 billion, a decrease of NT$846 million from 2019, mainly due to reduced loan-to-deposit interest rate spread as a result of external interest rate cuts and reduced interest income from investment in securities.

(2)          The net income other than interest was NT$7.644 billion, a decrease of NT$2.261 billion from 2019, mainly due to a decrease in net handling fee income as a result of a decrease in syndicated loan, overseas credit card spending impacted by the pandemic, and income from insurance sales owing to the new policies of selling insurance products, as well as the recognition of impairment losses of NT$1.349 billion based on the result of the impairment test in accordance with International Accounting Standards (IAS), No.36 Impairment of Assets.

(3)          The bad debt expense was NT$1.943 billion, an increase of NT$876 million from 2019; the operating expense was NT$10.290 billion, a decrease of NT$508 million from 2019.

(4)          In summary, the Bank’s net income before tax in 2020 was NT$8.032 billion, and the net income after tax was NT$6.896 billion, a decrease of NT$3.150 billion from 2019, with a budget achievement rate of 86%.

Research and Development

(1)          The Bank has developed several digital financial transaction services, such as URL fast order placing, mobile insurance purchasing, 24-hour trading of ETF/overseas stocks, etc., to enhance the efficiency of financial specialists and reduce the risk of operations.

(2)          In 2020, the Bank obtained 12 new-type patents, including “Fund Recommendation System”, “Fund Investment System”, “Interbank Internet Banking System”, “Financial System Connected to Home Shopping Platform”, “Customer-guiding Marketing System”, “Internet Banking Membership Grading System”, and so on. The Bank had obtained a total of 22 new-type patents by the end of 2020, and  is planning the application of the patented technologies to the Bank’s system for improved services.

(3)          In terms of mobile payment development, the Bank cooperated with TWMP Co., Ltd. in May 2020 to launch the service of bundling the Bank’s credit cards with Taiwan Pay. In September 2020, the Bank cooperated with Alipay to launch the Cash Outbound, the cross-border business of agency collection and payment services, allowing customers to use the Bank’s FISC-II card to pay and spend on overseas online shopping platforms. And in November 2020, the Bank introduced payment services, such as LINE Pay Money and Taiwan Pay bundled with the Bank’s account, to provide customers with a more diversified mobile payment scenario.

(4)          The Bank has provided more convenient and diversified financial services for customers with new functions on mobile bank, such as “Regular and Fixed Amount Foreign Exchange Appointment”, “Automatic Foreign Exchange Transactions at Preset Prices”, “Inter-bank Transfer Service with Mobile Phone Number” and other features.

(5)          The Bank has applied to expand the business of proprietary trading of foreign bonds to DBU professional corporations and OBU clients, and added bond custody business and conditional bond trading to achieve service diversification and decentralization.

(6)          Calypso, a new financial system, commenced in January 2021, adding foreign bonds and repo transaction business, which will assist the front, middle and back operations of the trading departments in improving efficiency.

(7)          In response to the development of digital finance, technological innovation, business strategies and future expansion goals, the Bank continues to enhance its information infrastructure, improve efficiency and information security, and actively strengthen various digital channel functions based on customer needs. Main information system development and upgrade projects include NTD core system upgrade, new financial system construction, insurance agency system - mobile insurance project(including electronic signature), Open API project (2nd stage), Taiwan Pay QR Code service to implement the HCE credit card project, car loan application system development, corporate internet banking HSM security system upgrade, Hong Kong branch network optimization, Basel IV capital requirement system construction, Microsoft Windows Server upgrade and database upgrade, remote control room network expansion and construction, and branch network equipment replacement.

(8)          To strengthen the defense capability and effectiveness of the information system, the Bank have achieved the British Standards Institute (BSI) ISO 27001:2013 Information Security Management System (ISMS) certification, performed various information security assessments and attack and defense drills, and built a network advanced persistent threat (APT) defense system for early detection of abnormal activities. Also, the Bank has established the Security Information and Event Management System (SIEM) to enhance the ability to manage and analyze information security events and provide customers with safe and stable financial services.

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

In recent years, the FSC and the Central Bank have continued to assist domestic banks in cementing their operations and expanding into overseas markets through regulatory amendments and policy guidance on risk control, internal control, AML, information security, FinTech, and relaxation of access to overseas markets, enabling the banking industry to mitigate the impact of the COVID-19 outbreak in 2020 with sound financial and risk control capabilities. In the meantime, the banking industry as a whole supported the government’s relief and revitalization plans to help companies and the public cope with the impact of the pandemic.

In addition, the influence of important supervisory policies and changes in regulations on the Bank and the Bank’s corresponding measures are as follows

(1)          The FSC announced on August 7, 2020 that the “Regulations Governing Banks Conducting Financial Products and Services for High-Asset Customers” had been established：

In order to promote the upgrading of Taiwan’s wealth management industry, the FSC extended the regulations for banks to offer diversified financial products and advisory services to the customers with assets of NT$100 million or more. At the same time, to catch the opportunities in the international wealth management market and provide better financial products and advisory services for the capital imported from abroad, the FSC set up the terms and conditions of investment attraction and talent recruitment policies to encourage the financial industry to strengthen the training of talents and to enhance the capability of product research and development, so as. Applications for this business were opened in two phases in September 2020 and February 2021, and prospective banks must meet a number of criteria. In addition to meeting the criteria of “financial soundness”, “assets under management in wealth management services” and “compliance”, banks must be reviewed in capabilities such as “business planning”, “effectiveness of the internal control system and risk management culture”, “business operation capability and investment of resources” and “internal operating procedures”. The Bank will continue to build a solid foundation for its wealth management business and strengthen its product development capabilities in order to be qualified for this business and achieve the objective of developing a full range of financial services.

(2)          In accordance with the “Self-Regulatory Guidelines for Cooperation between Member Banks of the Bankers Association of the Republic of China and Third-Party Service Providers”, the Bank has executed the open banking policy promoted by the FSC:

In line with the FSC’s serial promotion of FinTech development and the second phase of open banking, “consumer information inquiry”, in 2020, the Bank was approved by the competent authorities as one of the first banks to conduct such business on December 31, 2020, in compliance with the operating regulations set by the Bankers Association and the Financial Information Service Co., Ltd. In the future, the Bank will keep cooperating with third-parties and complying with the competent authorities in the third phase of the open banking policy, “transaction information”, to provide more innovative financial services and to enhance the online experience of digital channel customers.

(3)          In response to risks of the probable discontinuation of LIBOR in 2022:

The Financial Conduct Authority (FCA) has announced that LIBOR will no longer be required to be quoted by member banks as of January 1, 2022, which means that LIBOR may be discontinued by the end of 2021. As LIBOR is currently used as the benchmark for global financial instruments, the Bank must respond to this change. In addition to participating in the inter-committee working group set up by the Bankers Association, the Bank has formed an internal task force to deliberate response measures and control mechanisms for the business and existing contracts (such as credit business, derivatives, bonds, etc.) that use LIBOR as the reference rate. The Bank is making adjustments in time regarding amendments to the contracts related to the conversion of alternative interest rate indicators, the system for the introduction of alternative interest rates, customer communication, compliance with treating customers fairly principles, and other matters, and will track and review such adjustments regularly.

(4)          In response to the COVID-19 pandemic, the banking industry played an important role in maintaining social stability with its own strength:

In the midst of the impact of the COVID-19 pandemic on the economy, the FSC proposed banking relief packages for enterprises in accordance with the “Special Act for Prevention, Relief and Revitalization Measures for Severe Pneumonia with Novel Pathogens”, including the extension of existing corporate loans, operating capital loans, interest subsidies for revitalization loans, and the relaxation of the rating scale to help new entrepreneurs obtain financing. The SME Credit Guarantee Fund of Taiwan also provided financing guarantees to support enterprises to tide over the impact of the pandemic and maintain the economic stability of the industry. In addition to cooperating with various government agencies in the aforementioned measures to provide relief for enterprises, the Bank provided financial services to facilitate the development of the real economy, such as relief loans for small-scale business, agreements with clients who have difficulties to repay personal loan due to the pandemic, extension and deferral measures, redeeming physical triple stimulus voucher, additional cashback reward for designated triple stimulus voucher on the Bank’s credit cards, and other services. In response to the severe fluctuations in the domestic and international financial markets, the Bank, to fulfill its responsibility to protect customers’ assets, immediately activated the customer care mechanism when the underlying assets of customers’ investments were impacted. In 2020, the Bank implemented 44 projects in 23 categories under the customer care program, notifying a total of 135,237 customers. In terms of caring for customers holding foreign bonds, preferred stocks, ETFs or foreign stocks, the Bank released 133 pieces of product information, notifying financial consultants  by e-newsletter, and notifying customers by making announcements on the Bank's official website and monthly statement.

(5)          Strengthen internal control mechanisms to prevent financial advisors from misappropriating customers’ funds:

In 2020, the FSC imposed a number of penalties on financial advisors for misappropriation of customer funds. In addition to imposing heavy fines on banks in serious cases, the FSC further imposed additional penalties on supervisors, ordered suspension of business, and required an increase in the capital requirement for operational risks, and so forth. This shows that the FSC attaches great importance to the ethical management of banks and the prevention of misconduct. Under the leadership of the Board of Directors, the Bank has always taken the establishment of ethical management, practices and systems seriously. Also, the Bank has supervised the implementation of financial consumer protection and fair treatment of customers. As regards the deficiencies in the peers, in addition to taking the initiative in doing checks, the Bank continues to perfect the management systems and regulations on financial advisors, systematically monitor high-risk transactions and improper fund transactions, and implement the three defense lines of internal control, based on the  “The Principles Related to Internal Controls of Preventing Bank’s Financial Advisors from Misappropriating Customers’ Funds” (the Ten Commandments of Financial Advisors) established by the Bankers Association. The Bank also reminds customers to be more vigilant through the General Agreement for Account Opening, official website announcements, and regular mailings of “Important Customer Rights Reminders” for effective prevention of misappropriation and further protection of the rights of consumers.

(6)          Transformation of insurance business in response to external regulations:

In response to the second reduction of the reserve rates, the implementation of the minimum ratio of death benefit to policy value (account value) and the establishment of stabilization mechanism for credited interest rates of insurance products in July 2020, the Bank has discontinued endowment insurance products, or adjusted the terms and conditions to comply with the new system. In recent years, endowment insurance has been regarded by investors as a capital-protected product and has been an asset allocation component. Now that the product conditions have been adjusted, the overall asset allocation of customers will definitively be affected, which in turn will affect the deposit size and wealth management business in the financial industry. In addition to offering recommendations for customers on asset allocation based on their risk tolerance and the suitability of the products, the Bank will focus on Investment Link Products (ILP), protection multiples and long-term products.

3.     Latest Credit Ratings

4.     Business Plan in 2021 and Outlook

In 2021, the Bank will focus on expanding business scale, increasing revenue sources, and enhancing the competitiveness in digital finance. We will gradually expand our business scale in all aspects to better the return on equity while maintaining quality assets. The highlights of the business plan are summarized as follows:

(1)          Business Development

A.      Expand loan scale. With interest rates of loan business outperforming bond investment yields, the Bank’s net interest income will increase through growth in loan scale and higher loan-to-deposit ratio. The momentum of growth in loan business is aimed at the balanced growth between wholesale banking and retail banking. In terms of corporate loan business, the Bank will carefully select cases in industries that are less affected by the pandemic and have good prospects. Also, the Bank will focus on transaction type loan with self-liquidating, such as negotiation, letters of credit, and accounts receivable, to build reliable dealings with customers and increase fee income. In terms of international syndicated loans, the Bank maintains a cautious approach. In the area of retail banking loan business, the Bank select quality customers for each products in order to grow steadily and expand revenues.

B.       In addition to expanding the business team and assets scale of wealth management by integrating the departmental resources of wholesale banking and retail banking through the resources of Yuanta Financial Holding Co., Ltd., the wealth management business will actively develop applications that make digital transactions more convenient and enhance the functions of systems related to the wealth management business, such as quick order placing for ETF and overseas stocks and mobile financial advisors, to render customers satisfied and loyal to the Bank while providing more diversified financial services for customers and cementing the relationship between customers and the Bank.

C.       Through the planning of various projects and marketing activities, the branches continue to work on and find customers in the locality, strengthen the ability to expand the customer base and bring in new capital. Also, the branches revitalize the development of direct payroll deposit accounts to increase customer willingness and loyalty for dealings with the Bank. In the meantime, the growth of core deposits will support the growth of loan scale and the expansion of the asset pool of the branches.

D.      With the planning and launching the “Five-Year Plan for Emerging Technology Application Development” and the “Digital Transformation Project” in 2020, the Bank will continue to implement various programs to improve operational and business efficiency through digital transformation, strengthen the marketing capabilities of our business units, enhance customer convenience and satisfaction, and ultimately build a good brand image and reputation. In terms of digital channel development, in response to the trend of FinTech development and changes in consumer payments, the Bank will continue to promote innovative customer-oriented financial services, with “actively promoting digital transformation and optimizing internal processes”, “valuing user experience and getting close to life scenarios” and “integrating new technologies and innovating FinTech tools” as main development strategies. By continuously optimizing the ease of use of our channel platforms and providing a diverse products and personalized services, the Bank will be able to bring the depth and breadth of our customer service to the next level.

(2)          Internal Control

A.       Through the establishment of risk models and databases, the Bank strengthens its ability to control risks in credit, market, operation and concentration. Also, the Bank has grasped a deeper understanding of the risk trends in various industries and countries, and continuously reinforced the review and monitoring mechanism for the detection of operational risks so that necessary countermeasures can be taken in a timely manner to reduce risks effectively.

B.        The Bank will continue to comply with external laws and regulations, and strngthen the completeness of the systems or operating procedures such as AML/CFT, information security, personal information protection, fair treatment of customers, etc. The Bank announce and revise internal regulations in real time in response to the latest changes in financial laws and regulations. Also, the Bank ensure the integrity of compliance through education and training, self-assessment of compliance with laws and regulations, and assessment operations. In addition, the Bank conducts analysis on cases in which other banks have been penalized to promote correct practices and strengthen the awareness of compliance among employees.

C.        The Bank will continue to consolidate and implement risk management, compliance, and internal audit and control mechanisms for overseas branches and subsidiaries.

(3)          Personnel Training

A.       The Bank will continue to conduct pre-service and on-the-job education and training for employees, cultivate multi-functional talents through a job rotation mechanism, implement a talent development program in response to business development needs, handle succession ladder grooming, and reserve business and management personnel at all levels to lay the foundation for the Bank’s sustainable development.

B.       The Bank examine, keep a record and develop learning paths for all types of personnel, promoting self-directed learning and career development and training all employees to improve their English proficiency to facilitate the establishment and development of bilingual branches and overseas business.

5.     Business Plan in 2021 and Outlook

With the United Nations Sustainable Development Goals (SDGs) as the blueprint, Yuanta Financial Holding Co., Ltd. (YFH) incorporates the concept of environment, social and corporate governance (ESG) into its corporate culture and operational strategies. In striving to become an international benchmark enterprise for sustainability, YFH promotes sustainable practices in the five facets of corporate governance, customer rights, employee care, environmental sustainability, and social welfare, and sets short-, medium-, and long-term performance indicators of sustainability to be the basis for compliance and review in striving to become an international benchmark enterprise for sustainability.

The Bank, under the firm leadership of the Board of Directors, upholds the business philosophy of “integrity, stability, service, innovation, and care” to implement the ethical management and corporate culture of YFH and follows the mechanisms of corporate governance, legal compliance, and risk control. In addition to various internal control mechanisms and regulations and sound products and services, the Bank has established a corporate governance director, an audit committee email address, a whistleblower channel, and an employee suggestion box. Moreover, the Bank has been working on improving the framework, including certification of ISO 10002 Customer Complaint Management System, regular performance evaluations of the Board of Directors and functional committees, and assessment of the principle to treat clients fairly. As a result of these improvement, the Bank was awarded the “CG6012 (2019) Corporate Governance Framework Assessment Certificate with Excellence” by the Taiwan Corporate Governance Association in 2020. The Bank will continue to cooperate with the FSC in promoting the “Corporate Governance 3.0 - Sustainable Development Roadmap” and consult the recommendations of the Bank’s CG6012 (2019) Corporate Governance Framework Evaluation Report for continuous improvement on the corporate governance framework.

In October 2020, the Bank officially joined the Equator Principles Association and signed the Equator Principles (EPs), becoming the seventh Equator bank in Taiwan and the 112th Equator bank in the world. The Bank will be reviewing credit cases according to international standards. We will also continue to work on credit cases such as issuance of green bonds, reduction in credit card carbon footprints, promotion of mortgages for the purchase of green buildings and car loans for the purchase of green vehicles, establishment of the first 100% green power branch, responsible investments, implementation of the principle to treat clients fairly, and other sustainable development projects. The Bank start with itself and work with our CSR customers to achieve the goal of sustainable development.