I. Operating Results in 2018

A. Domestic and External Circumstances

In the first half of 2018, the global economy was driven by the stable recovery in major countries, creating gentle growth. However, in the second half of 2018, due to the expansion of the trade issue between China and US and the impact of the new emerging market financial fluctuations, the growth pace varies among different countries. Subsequently, several negative risk factors were generated and affecting economic expansion. Among the major countries globally, the economy of US continues to expand, but the growth in Euro Area, Japan and China slowed. The international forecasting agencies IMF and IHS Markit estimate that the 2018 global economic growth rates are 3.6% and 3.2%, which are lower than 3.8% and 3.2% in 2017. Regarding the domestic economy, under the influence of the favorable factors of stable output with two-digit growth and the stock market index maintaining above ten thousand points, the performance for the first half of 2018 was great, and the economic growth rate estimated by the Directorate-General of Budget, Accounting and Statistics (DGBAS), Executive Yuan was 3.22%. Beginning from the third quarter, the trade war between China and US started to take effect, and the domestic output demand and consuming power were relatively reduced. In addition, with the US Federal Reserve System (Federal Reserve) continued to increase the interest rate, leading to strong USD and causing the global fund movement with violent financial fluctuation; therefore, the outlook for the second half of the year was changed to conservative. The economic growth estimated by DGBAS is 2.08%, slightly lower than the first half, and the estimated annual economic growth rate is 2.63%.

In terms of the financial condition, the US economy continues to expand, and the Federal Reserve interest rate normalization solution continues to be activated, and the interest rate was raised by 1% in total in 2018, and the Federal Funds Rate was adjusted to between the interval of 2.25%-2.5%. In addition, although the central banks of major countries - Bank of Japan (BOJ) and European Central Bank (ECB) etc. still maintain the short-term interest rate at approximately 0%, nevertheless, due to different reasons, many Asian or new emerging market countries follow the policy of raising interest rate, the currency policy becomes tightened, such as: Malaysia, India, Indonesia, Thailand, Mexico, South Africa and South Korea etc. For the domestic market, since the variables in 2019 increase, in addition to the trade war, the slowing down of economic growth in China, unclear currency policy direction of major countries and the European political and economic situation disturbances can all have possible impacts on the domestic economy. In 2018, for a period of 4 quarters consecutively, the board of directors of the Central bank maintained the rediscount rate, rate on accommodation with collateral and short-term financing interest rate unchanged at 1.375%, 1.75% and 3.625%. The interest rate policy in Taiwan has been frozen continuously for ten sessions.

The securities market in 2018 was also affected by the global economy, and the main stock indices worldwide all indicated the trend of high to low due to fluctuation at the end. During mid-October, due to the weak purchase of the long-term government bond sale in US, the 10-year government bond interest rate raises above 3.25% in US, causing the US stock to plunge for two consecutive days and leading the global market to pull back for correction. Regarding the domestic stock market, in the first half of 2018, due to the influence of the factors of the recovery of global economy and return of funds etc, the trading volume in the Taiwan stock market increased continuously, and the Taiwan SE Weighted Index (TWSE) also rose above 11,000 points. Subsequently, due to the factors of the trade conflict between China and US, and Federal Reserve continued to increase the interest rate, the internal funds were driven to exit from the new emerging financial market such as Taiwan. In mid-October, the Taiwan stock market was further affected by the plunge of the US stock market, and TWSE dropped over 660 points on October 11, ending the longest period of TWSE maintained above ten thousand points for nearly 17 months consecutively and also marked the record of single-day largest dropping point in the history. The TWSE at the end of the year closed at 9,727 points, and the annual decrease was approximately 8.60%. However, the trading volume of the stock market was increased, and the average TWSE daily trading volume in 2018 was NTD 119.87 billion, an increase of 23.01% over the NTD 97.45 billion in the previous year.

B. Change of Company Organization

In 2018, the capital increased by surplus earnings was at an amount of NTD 331,999,920, and the paid-in capital after the increase reached NTD 28,198,659,360. The subsidiary, International Bills Finance Corporation (IBFC), newly established the financial product department in March 2018.

C. Outcome from Execution of Business Plan and Strategy

In 2018, IBFC had no non-performing loans, the loaning asset quality was excellent, and the capital adequacy ratio was maintained at high level. The operation financial cost continued to increase due to the consecutive raise of interest rate by the Federal Reserve balance sheet normalization. Under the condition of the decrease of interest rate spread profit margin and credit discount expansion, opportunity was seized to establish high rating bonds, and multiple currency bonds portfolio is established; therefore, the overall bonds positions and profit remained stable. For the equity and convertible bond investment, the timing for the investment was also controlled properly, such that the net profit after tax in 2018 was NTD 1.895 billion, and the earning per share (EPS) was NTD 1.05.

In 2018, the brokerage fee income of Waterland Securities increased from last year, and it was mainly due to the effect of the reduction of the day-trading tax and the Taiwan stock market moving average of NTD 165.3 billion, an increase of 20.39% from 2017. However, TAIEX suffered from the great drop in October, 2018 to drop from the high point at 11,270 in January such that the longest period for the market maintained above ten thousand points was ended, and closed at 9,727 points at the end of the year, with an annual decrease of approximately 8.6%. Consequently, the profit from the proprietary business, an underwriting business of Waterland Securities did not reach the expectation, and the net profit after tax in 2018 was NTD 325 million, with EPS of NTD 0.43.

In 2018, the investment industries of Waterland Venture Capital mainly focused on the information technology, optoelectronics and precision machinery sectors. At the end of 2018, the securities net investment was NTD 1.078 billion (excluding the long-term investment of equity method of NTD 1.059 billion), and the performance was considered relatively great in the capital market; in addition, with the reinvestment in the Guo Want International Leasing Corp. in China with a profit of RMB 11.46 million, the annual net profit after tax was NTD 97.82 million.

D. Budget Implementation and Profitability Analysis

In 2018, the Investment income recognized under equity method of the Company is NTD 2.19 billion, net profit after tax is NTD 2.021 billion, EPS is NTD 0.72.

For IBFC, the net income is NTD 2.92 billion, operating expense is 680.9 million, net profit after tax is 1.89 billion, EPS is NTD 1.05.

For Waterland Securities, the income is NTD 2.27 billion, expenditure and expense is 1.96 billion, net profit after tax is 324.6 million, EPS is NTD 0.43.

For Waterland Venture Capital, the income is NTD 148.1 million, expenditure and expense is 60.11 million, net profit after tax is 97.82 million, EPS is NTD 0.64.

E. Research and Development Status

1. In response to the government internet-only bank policy planning, the Company establishes relevant operational plan with strategic cooperating partners, and applies business license with the competent authority.
2. Encourage employees to actively participate in on-job training courses, and invite professional instructors to organize business seminars in order to strengthen the employees’ professional abilities in legal compliance, corporate governance and financial technology etc. through training.
3. Understand the domestic/foreign economic, financial status and trend as well as cooperate with the business development needs, establish diverse, integrated strategic collaboration solutions in order to increase shareholders’ benefits and expand the operating synergy.
4. Periodically maintain the risk control system in order to strengthen the information system function and to reflect the operational risk timely.

II. Business Plan for 2019

A. Operating Policy and Guidelines

1. Launch the core business development strategies for bills, securities and venture capital etc. In addition, through the financial holding platform, integrate diverse financial services of the Group in order to increase the operating synergy of all affiliates, and to reduce the impact of the financial market change on the business.
2. Actively establish internet-only bank financial innovative solutions with the strategic cooperating partners, in light of providing convenient and secured financial service to customers.
3. Comply with policies of competent authority, strengthen and comply with the anti-money laundering and terrorism financing prevention, legal compliance, corporate governance and information security operation regulations in order to achieve sound operation management for the entire group.
4. Cope with the financial technology development, cooperate with the subsidiaries in the development of innovative business satisfying long-term development, and participate in the association in the industry, and seek competent authority approval in the new business, in order to provide complete financial services in greater extend.

B. Targets

According to the overall political and economic, financial trend and development as well as the operating status of the subsidiaries, the Company will continue to strengthen the operational management on the invested enterprises, improve profit contribution of each subsidiary, and assess the feasibility of the development of other financial businesses. The expected 2019 operating goals are:

1. IBFC: guaranteed issues of commercial papers for NTD 866 billion, certification of commercial papers for NTD 1.6 trillion, purchase and sale of various bills for NTD 4 trillion, purchase and sale of various bonds for NTD 3.118 trillion.
2. Waterland Securities: Brokerage business volume of consigned purchase and sale transaction for 1.719 trillion, margin trading average balance of NTD 11 billion, short selling average balance of NTD 1.964 billion.
3. Waterland Venture Capital: Newly increased the investment amount of NTD 150 million, and focus on the individual cases in the four major sectors of smart machinery, biomedical, artificial intelligence and high value-added service industry etc.

III. Development Strategy

To improve the Group competitiveness, the Company will continue to develop diverse, integrated and strategic collaboration solutions, and complete the financial holding cash flow platform, heading toward the development of a medium and large financial holding company. In addition, in response to the government policies on the financial technology development, the Company actively plans innovative business models, and collaborates with the cooperating partner in the establishment of internet-only bank development solution, in light of creating diverse stable income sources and achieving the long-term strategy goals.

IBFC will continue to strengthen the fixed income product core business, cultivate, maintain and develop target customer groups, in order to create differential service value. For the loan business, the company will continue to cooperate with government policy and develop new financing cases in order to increase the self-guarantee bills interest spread, and optimize the risk control mechanism, dynamically manage the customer credit status, and provide pre-warning for the occurrence of the loan account credit downgrade. In addition, the corporation overall service quality will be improved in order to seek the equity commodity subscription other than loan business or other business opportunities. Furthermore, to cope with the trend and demand, the company plans to actively introduce the financial technology application in order to provide diverse financial technology service.

Waterland Securities will consider the market environmental change and the permission progress of the competent authority on the regulations and businesses in order to actively seize market opportunities and to increase the company profit sources. Moreover, the company will strengthen the Group business collaboration mechanism, integrate research resources and strengthen the position operational control methods in order to provide products and services matching with the needs of customers and of greater quality. For the internal, the cost control will continue to be implemented, the investment decision making and risk management mechanism will be strengthened, such that under the long-term stable operational strategies, all businesses are able to have balanced development and continuous growth.

The industries invested by the Waterland Venture Capital will focus on the three main sectors of the smart machinery, biomedical and artificial intelligence led by the government policies. In addition, investment opportunities in high value-added service industry will be developed. Furthermore, the ratio of the key strategic investment accounts will be continuously increased in order to prevent overly diversified investment.

IV. The Impact of the External Competitive Environment, Regulatory Environment, and Macroeconomic Conditions

In recent years, material anti-money laundering control events occurred in Taiwan, such as the New York branch of Mega International Commercial Bank involved in relevant negligence, leading to major penalty by the competent authority in US and causing impacts on the international financial image of Taiwan. To seek reclassification on the “general watch list” by mutual survey of the Asia/Pacific Group on Money Laundering (APG), the Legislative Yuan passed the third reading on the “Money Laundering Control Act’ and “Counter-Terrorism Financing Act’ amendments in November 2018 in order to correct flaws in the regulatory requirements. In addition, APG assigned personnel conducted field surveys in Taiwan in November 2018, and interviews were performed on randomly selected financial service providers. After the review, the survey team provided positive recognition to Taiwan but expressed that there were still rooms for improvement, such as the financial institutions overly relying on the money laundering representative figures announced by the agency, but the offshore financial center OBU inspection mechanism should be enhanced, legal entity and substantial beneficiary disclosure should be more transparent etc. APG survey final result will be announced in the annual conference held in July 2019. If Taiwan becomes a member of the “general watch list” of the best level, it means that Taiwan has already achieved a certain standard in the anti-money laundering mechanism, and the scope of the international fund outward/inward remittance, financial institution overseas business, and Taiwanese overseas investment etc. in the future will not be restricted.

Regarding the competent authority policies, to assist the transformation and integration of the financial industry in our nation in order to increase the competitiveness, FSC announced the amendments of the three laws of the “Regulations Governing the Investing Activities of a Financial Holding Company” etc. in November 2018 in order to implement the deregulation that for the shareholding percentage of a financial holding company or bank in an invested financial institution for the first time, the controlling interest required to be acquired is reduced to exceed 10%, providing the option of taking parts in the shareholding cooperation before negotiation for merger, and the capital charge is used as the incentive, triggering the market mechanism to take effect, and promoting the “ financial institution-to-financial institution” merger and acquisition. Furthermore, regarding the financial technology policies, FSC established the financial technology innovation park and organized financial technology exhibition in Taipei based on the promotion of the financial technology innovation experimental mechanism, as well as permitted the establishment of internet-only bank. In 2018, demonstrating the ambition in the development and promotion of digital finance. All different fields of the financial sector and relevant financial technology operators actively participate in the development of innovative businesses in order to provide new model of financial services to the general public.

Looking ahead of 2019, most of the international organizations, including IMF and OECD etc., believe that the global economy in the future may continue to expand; however, under the influence of the implementation of trade protectionism and new emerging market financial turmoil, the global growth rate has reached its top. IMF and IHS Markit estimate the global economic growth rates in 2019 to be 3.3% and 2.8%, which are lower than those in 2018. For the domestic market, the DGBAS estimates that the economic growth rate in the 4th quarter of 2018 is reduced to 1.76%, and the economy monitoring indicator in December changes to blue light, indicating the economy expansion pace becomes slow. The domestic and foreign main institutions estimate that the economic growth rate in Taiwan for 2019 is between 2.1%~2.6%, and the recovery force is relatively weaker than that in 2018. The economy in Taiwan is deeply affected by the global economic fluctuation, and if the scale of the trade war between China and US continues to be elevated, then it will cause the global trading and supply chain to shift, expand the negative effect on the output and economy of our nation; therefore, such issues shall be concerned continuously with great care. The government of our nation actively promotes the prospective fundamental construction plans, promotes investment and expands the domestic consuming power etc. with the substantial effect of expansion type of financial policies, which will become the key factor in determining whether the domestic economy continues its growth.

With the rapid development of the financial technology and internet trend, along with the condition where the global economy is facing downward trend, the Company will uphold the principle of consistent stable operation to continuously strengthen the development of the core businesses, achieve operational efficiency, and based on the consideration of the benefits of the shareholders in priority, the Company will cooperate with the relaxation of business policies of the competent authority, seek appropriate strategic cooperating partners or subject matters and head toward the digital financial innovative development, in light of constructing a complete financial holding system, achieving operation synergy and satisfying the expectations of all of the shareholders.

V.Credit Ratings

Company

IBF Financial Holding Co., Ltd.

International Bills Finance Corp.

IBF Securities Co., Ltd.

Rating Institution

Fitch Ratings Limited, Taiwan Branch

Fitch Ratings Limited, Taiwan Branch

Fitch Ratings Limited, Taiwan Branch

Date of Rating

2019/7/5

2019/7/5

2019/7/5

National Long-Term Credit Ratings

A+(twn)

A+(twn)

A+(twn)

National Short-Term Credit Ratings

F1(twn)

F1(twn)

F1(twn)

International Long-Term Credit Ratings

BBB

BBB

BBB

International Short-Term Credit Ratings

F3

F3

F3

Outlook

Stable

Stable

Stable