CEO Conversations XXXII: Terence Tai, Chairman; John Tsai, Vice Chairman, King’s Town Bank
Before the interview with King's Town Bank’s Chairman, Terence Tai and Vice Chairman, John Tsai, we had a chat with a couple of sell-side analysts who cover Taiwan financials about their thoughts on King's Town Bank. We also collected some feedback from global investors. The comments contain positive affirmation and constructive criticisms from various perspectives. However, we found most responses had one thing in common – King’s Town Bank is very "unique".
A Different Kind of Bank: Cost Advantage from the South
Comparing the financial performance with other banking peers, King’s Town Bank delivers higher growth and better profitability while maintaining a low NPL ratio. King’s Town Bank mainly focuses on corporate banking, especially in niche markets such as small and medium-sized enterprises, along with a conservative write-off policy. If you know this, you can understand the differences in the financial numbers. However, the cost-to-income ratio (CI ratio) is far lower than peers. King’s Town Bank’s CI ratio is around 20%, while that of other banks is about 50% to 60%. The difference is just too significant.
John explained, “Many people ask us how do we maintain such a low cost structure. King’s Town Bank was formerly the Tainan Business Bank and is the only TWSE-listed bank with its headquarters in Tainan. We have 66 branches in Taiwan, and about 73% of them are located in Southern Taiwan. Many of them are in non-metropolitan areas. Such distribution of branches naturally brings significant cost advantages. Most employees are based in the south of the island, and the cost of maintaining a branch network in Southern Taiwan is a small percentage of that in Taipei, so our operating costs can be remarkably lower. In addition, we focus on corporate banking, which leads to a considerably lower cost structure compared with consumer banking. Consumer banking requires considerable investments in human resources and IT system. This is why we sold our credit card department many years ago. Moreover, standardized products such as mortgage loans account for only a small proportion of our business given the low spreads. Our business strategy is very ROA-oriented.”
John thought for a moment and continued, “We also review ourselves to see whether there are areas we don’t invest enough. However, among our 960 employees, there are more than 80 IT-related people, and we just upgraded our computers last year. We have a very clear strategy and ROI goal with our fintech investments – focusing on what our customers need rather than pursuing cutting-edge features. We’re quite aware that realistically, a bank of our size can’t afford to invest in cutting-edge features.”
Home Advantage to benefit from the Great Opportunities in Southern Taiwan
Being rooted in Southern Taiwan now offers King’s Town Bank yet another important: we can uniquely take full advantage of the rapidly expanded tech manufacturing buildout in Southern Taiwan. Due to the onshoring of tech manufacturing capacity from China and increase in long-term demand in the Semi industry, within the past one to two years, one after another, tech companies have announced capex plans in southern Taiwan. TSMC has expanded its production base in Tainan and will increase the production again this year. TSMC added close to 8,000 employees in the area in the past two years, accounting for over 50% of the total increase of almost 14,000 employees. Therefore, it was not a surprise that property prices in Tainan rose the most in Taiwan in the past several years. In addition, the Kaohsiung city government just approved the new TSMC fab plan in Nanzih earlier this year. TSMC targets to begin production in 2024. TSMC and its supply chain alone will bring many growth opportunities in this area. The media also reported that Merck plans to invest EUR€500 mn in semiconductor materials over the next 5 to 7 years, Entegris targets to increase its investment to US$ 500 mn over the next three years, and WIN Semiconductors also announced an investment of NT$ 11bn in Luzhu. ]
King’s Town Bank views it as a once-in-a-lifetime opportunity to flex their muscle, and it is a very long runway. Terence said confidently, “Several science parks and industrial areas will connect together in an S-shape, forming a new technology cluster. The S corridor in the south is about to take shape. The growth opportunities we have seen in Southern Taiwan are not just a three to five-year but a ten to twenty-year megatrend.”
“However, KTB doesn’t focus on these big technology companies but instead on the vendors and subcontractors in the industry supply chain. We won’t change our strategy of focusing on the niche market of small and medium-sized enterprises. We have already observed some companies in the TSMC supply chain beginning to have funding needs as they look to grow.” Terence further explained.
Terence smiled, revealing his excitement, and continued, “Such growth opportunities are not only limited to the semiconductor and technology industries. We will start to see consumption growth brought in by the newly created employment opportunities and the surrounding service industries. If any young entrepreneurs plan to open their own coffee shops, they should consider the neighborhoods of these new technological clusters. The development from Taipei to Hsinchu 30 years ago is likely to be replicated in the south, so this will be a megatrend for at least the next ten years. The economy in Southern Taiwan shows resilience in a more challenging global economic environment and indeed we can already observe the wealth of our customers increase via the deposit trends.”
What is the strategy for the next step? John replied, “We have already begun to strengthen our loan and deposit business quite aggressively. Our overall market share in the deposit market isn’t high, accounting for only about 1%. However, if we only look at Yunlin, Chiayi, and Tainan areas, our market share is about 6%. This number is rather high versus our peers. KTB has a dominant position in Southern Taiwan, not to mention that many of our branches are the only bank in the town. We have a very close relationship with the local community. In the past, a relatively high percentage of our loans was in Northern Taiwan, so we channelled the relatively cheaper deposits collected in the South and use it in Northern Taiwan. Heretofore, we will allocate more human resources in the South and recruit some industry experts from relevant sectors.”
How should we connect the growth opportunities in Southern Taiwan and King’s Town Bank’s long-term strategy and outlook? Terence shared with us and said, “Loan growth is generally related to the GDP growth. Currently, GDP growth in Taiwan is better than that of the world. Well, we hope that Taiwan can continue to maintain its outperformance. We believe that the GDP growth in Southern Taiwan has a good chance of surpassing that of Northern Taiwan in the long run, considering at least the land resources in the Northern region are quite limited. Therefore, we are confident that our loan growth will be higher than the industry over the long-term.”
Focusing on Long-term Targets and Strategies During Periods of Low Profitability
The start of the rate hike cycle, increasing inflationary pressure, and the geopolitics bring uncertainties to the global economy and the financial markets, the market value of financial assets fluctuated significantly, hurting King’s Town Bank’s profits and book value this year. John explained, “From a long-term perspective, the size of our foreign currency bond portfolio has been the smallest in the past five years. We generally hold these positions for a long time and only adjust them once every few years. As we trimmed our overseas bond portfolio last year, along with some repayments, the amount and duration of our overseas bond portfolio is below historical levels, while also accumulating deposits concurrently. We are waiting for good opportunities to adjust our asset portfolio, which should be helpful to our NIM over a longer time horizon.”
When it comes to investments, King’s Town Bank is very transparent in disclosing information and is often willing to share its market view or investment strategies with the public. In addition, King’s Town Bank’s profits and book value do fluctuate due to the mark-to-market of financial assets. Therefore, many people think that King’s Town Bank is unique from other banks as it does not focus on its core business enough and focuses too much on investments. John gave us a wry smile and said, “We took advantage of the fact that we are a bank to invest in overseas bonds so I would not look at this business from such a perspective. However, I admit that we are unique. Since we are a small bank, we build cross-departmental collaboration culture on purpose, as we all work towards the same goal, different departments can collaborate effectively. For example, the flow of information and communication between the loan department and the investment department are very smooth, making it easier for us to benchmark overseas bonds with loans in the same sector to compare valuations and find undervalued bonds. In addition, we do not set annual budgets for investment returns so that we can focus on the long-term and value investment. We patiently wait until we observe systemic risks in the market. We also match our foreign bond exposure with our US dollar deposits, avoiding currency exchange risks. Finally, during the investment evaluation process, we view foreign bond investments as a type of loan and perform rigorous research with regular reviews. I think these are the reasons for our consistent, long-term outperformance, rather than relying on investing heavily in high-risk financial assets.”
Another reason that causes King’s Town Bank’s profits to swing is its rather unique write-off policy. The bank’s non-performing loan ratio was only 0.02%, and its loan loss reserves are 73 times of the NPLs at the end of the first quarter. The bank writes off almost all doubtful assets as losses as soon as possible, so the amount of the non-performing loan is very small and the high recovery rate historically has led to low net losses in the long run as if there are "hidden profits". For example, the recovery of Green Energy‘s bad debts in April has turned the bottom line from negative to positive. To the question, “Isn’t the write-off policy too conservative and doesn’t it cause financial results to fluctuate?” John explained. “Whether loans or financial assets, our practice is to recognize all the losses at once or the highest possible losses under the regulations or accounting rules to maintain good asset quality. We even write off bad debts backed by collateral. We then deal with the recovery later. Due to our size, we must keep high standards for asset quality. Otherwise, it is too risky. We also intend to keep a good level of transparency. After contemplating long-term operational risks and short-term profit fluctuations, we decided to maintain the existing write-off policy. The majority of our claims is protected by collateral, and our recovery rate in the past was quite high. However, the recovery of bad debts needs to go through legal procedures, which may take at least three or four years. Therefore, I do not intend to build up high expectations for this.”
In the end, Terence shared from the heart, “Because of the pandemic, we realize the importance of sustainability even more. However, we must plan for a bank based on a five to ten-year time horizon anyway. After many years of hard work, we have built a good foundation, and we now look forward to the exciting opportunities in Southern Taiwan, which should bring King’s Town Bank a more stable and long-term growth.” We look forward to the next ten years for King’s Town Bank.
If you would like to arrange a meeting with King’s Town Bank’s Chairman Terence Tai and Vice Chairman John Tsai, please contact yvonnehuang@qtumic.com.
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