Cathay Financial Holding Co., Ltd. (2882) Earnings Call Transcript & Summary

Welcome, everyone, to Cathay Financial Holding Company's Third Quarter 2023 Conference Call. [Operator Instructions] And now, I would like to introduce Ms. Sophia Cheng, CIO of Cathay Financial Holding Company. Ms. Cheng, please begin.

Thank you. Good afternoon, and good morning to investors in Europe. Welcome to Cathay Financial Holding's 2023, the Third Quarter Analyst Meeting. I'm Sophia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, I will host the conference call. Thank you for joining us today. In the beginning, I would like to introduce the senior managers who are with us on the line. Today, we have Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; and Mr. Kevin Hu, Senior EVP of Cathay United Bank. For today's conference call, [ Ya-Lo ], the IR head, will present the third quarter results. And after the presentation, we are open for Q&A section, in which senior management will answer your questions. Without further ado, let me pass the call over to [ Ya-Lo ] for the briefing of the third quarter results.

Thank you, Sophia. Let's start with the business overview on Page 3, which provides a quick highlight on each subsidiary. Cathay United Bank delivered a record high earnings for the first 9 months period with 22% year-on-year growth. Loan and deposits showed double-digit growth. Asset quality remained benign. Both net interest income and fee income showed double-digit growth. Cathay Life adhered to its value-driven strategy. First year premium for health and accident policies grew 12% year-on-year. Hedging costs contained well. Recurring yields continued to increase. Interest income showed double-digit year-on-year growth. Cathay Century, the general insurance subsidiary, premium income rose 12% year-on-year. Market share was 13%. Net income recovered due to the fading impact of pandemic insurance and continued business quality control. Asset management subsidiary, Cathay SITE, delivered record high earnings for the first 9-month period. AUM was TWD 1.5 trillion, ranked #1 in the industry. Cathay Securities remained its #1 market share position in sub-brokerage business. We would also like to share with you our progress in sustainability. Please turn to Page 4. Cathay Life was recognized by the investor agenda, Investor Climate Action Plans, for its best practice case studies in investments and investor disclosures. Cathay is the only asset owner in Asia to be featured in ICAPs. Biodiversity is essential for the process that supports all life on earth, including human beings. Nature Action 100 is the first nature-focused global investor engagement. Cathay Life is one of the initial participants and the only financial institution in Taiwan. Please look at Page 5, Cathay Financial Holdings' net income and EPS. Cathay Financial Holdings' net income was TWD 59.7 billion, increased 10% year-on-year, driven by solid core subsidiary businesses. EPS was TWD 3.81. Page 6 shows the subsidiaries' net income and ROE. Cathay United Bank set a record high first 9 months earnings of TWD 25.4 billion, up 22% year-on-year, driven by strong core earnings. Cathay SITE and Securities, respectively, delivered their highest and second highest historical first 9 months of record. Cathay Life's earnings recovered year-to-date. Recurring income continued to grow, and underwriting profits remained steady. Cathay Century's net income also recovered year-to-date with pandemic insurance fading out. Please turn to Page 7 to see the book value of Cathay Financial Holdings. The continued book value of holding -- the consolidated book value of holding company rebounded year-to-date to TWD 685 billion. Book value per share increased to TWD 39.5. Page 11 -- 10 and 11 show our overseas expansion. Cathay Financial Holdings continued to expand overseas business, cultivated local and cross-border corporate banking businesses and leveraged digital platform to expand retail customers. Premium income for Cathay Life Vietnam, and Cathay Century continued to show steady growth. As for the subsidiaries' operation in China, Cathay United Bank's China subsidiary actively delivered green finance services, promoting green deposits and loans. For Cathay Life's joint venture in China, the total premium grew 69% year-on-year. Please turn to Page 12 for more details about our banking business. Cathay United Bank delivered robust loan growth, with both mortgage and corporate loans showing double-digit growth. The total loan balance increased 12% year-on-year to TWD 2.2 trillion as of the end of September. Deposits grew 11% year-on-year to TWD 3.5 trillion, maintaining advantage of high demand deposit ratio over 60%. Interest yield is shown on Page 13. Net interest margin for the first 9 months increased 4 basis points year-on-year to 1.37%. The bottom table shows the quarterly numbers. The third quarter net interest margin declined slightly by 1 basis point, as the treasury investment yield increased, largely offset the increased funding costs due to the influx of FX deposits with higher interest rates. We expect the net interest margin for the full year will still be better than the figure of last year. Page 14 shows the asset quality. Cathay United Bank maintains low NPL ratios at 9 basis points and coverage ratio at 1,716%. Gross provision was TWD 4.8 billion. Recovery was TWD 2.5 billion. Please turn to Page 15 for SME and foreign currency loans. SME loans showed solid growth to TWD 320 billion, accounted for 15% of total loans. Foreign currency loan balance was TWD 233 billion, increased 7% year-to-date and 2% year-to-date, excluding the impact from Taiwan dollar depreciation. Page 16 shows offshore earnings. The offshore earnings were down due to lower year-on-year investment income. Please turn to Page 17 for net fee income. Net fee income increased 14% year-on-year to TWD 15.6 billion, driven by the growth in credit cards and wealth management fees. Page 18 shows the breakdown of wealth management fees. Wealth management fee income was TWD 8.9 billion, increased 5.5% year-on-year, attributable to significant growth in security fees and recovery in growth momentum in mutual funds. Please move to Page 20 and 21 for Cathay Life's premium performance. Total premium was TWD 337 billion for the first 9 months of 2023, showing a modest 4% year-on-year decline, while premium for high CSM protection products continued to grow. On Page 22 (sic) [ 21 ], first year premium, FYP, and the annualized premium, APE, was TWD 106 billion and TWD 35 billion, respectively. Both increased year-on-year, attributable to increase in sales further of investment-linked policies and traditional long-term regular premium products. FYP for health and accident policies, the highest CSN contribution product, showed 12% year-on-year growth. Page 22 shows the value of new business. Value of new business for the first 9 months was TWD 20.6 billion, increased 3% year-on-year, driven by higher sales volume from traditional long-term regular premium products. Page 23 shows the cost of liability and breakeven asset yield. The cost of liability increased slightly quarter-over-quarter due to the declared rate increase for interest-sensitive policies. The breakeven asset yield improved year-to-date. Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 7.6 trillion as of September end. Overseas investment accounted around 70%. We continue to increase the overseas bond position to enhance recurring income, which is quite beneficial to our earnings quality. Overall investment yields are shown on Page 25 and 26. After-hedging investment yield was 3.72%. The year-on-year decline reflected the higher hedging costs comparing to hedging gains due to the nearly 13% Taiwan dollar depreciation in the same period of last year. The pre-hedging recurring yield increased 8 basis points to 3.47%, with interest income showing double-digit growth. The annualized hedging cost improved quarter-over-quarter to 0.49%, owing to Taiwan dollar depreciation in the third quarter and effective proxy hedging. Please turn to Page 27 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized cash dividend income of TWD 18.1 billion in the first 9 months of 2023, lower than the same period of last year, as Cathay Life dynamically adjusted its stock portfolio year-to-date. On the right-hand side, the proportion of fixed income in North America increased to 51%. Page 28 shows the book value and unrealized gains of financial assets, both increased year-to-date. The book value increased to TWD 528 billion, supported by earnings contribution and rebound in unrealized gain on losses, which was driven by rebounding equity markets year-to-date. Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 12% year-on-year to TWD 24.8 billion. Market share was 13%. Page 34, the gross combined ratio and retained combined ratio each declined due to the fading impact of pandemic insurance year-to-date. This is the end of the presentation. Now let's open to Q&A.

Thank you, [ Ya-Lo ]. So now we are open for Q&A. Thank you.

[Operator Instructions]

Okay. Before the Q&A, I'd like to give a key summary from the Chinese section in this afternoon. There were many questions asked by the audience surrounding a couple of areas. First one is the question related to life insurance operations, the progress of the improvement in breakeven asset yield. So far, through September, it's 3.05%, and able to give a guidance at the whole year, we should be seeing further improvement for lower breakeven asset yields. And the hedging cost in the first 9 months, slightly below 0.5%. This is better than originally expected. Despite the recent strong Taiwan dollar appreciation due to quite dynamic hedging on our basket hedge, the Asian currency has performed quite well. That also offset some of the impact, the negative impact. So overall, forex multi-reserve remain at the ceiling, but the cap at TWD 42 billion, quite sufficient buffer for volatility. And we still think the annual long-term expectation for hedging cost between 1% to 1.5% remain intact, and this year should be at very low end of that. The recurring yield has improved. As you can see on slide -- Page 26, the first 9 months, we currently already improved by about 9 basis points year-on-year. And because we do have quite strong interest income growth of 12%, which is higher than roughly 10% for the industry average, but we do not try to hold the equity just simply for the dividend income. And therefore, this year, the dividend yield is lower. But the overall equity -- total return on equity is actually quite strong. Domestic equity is 8.7%; international equity, over 6%. An analyst also asked a question about the regulator the past 2 days has announced measurements which is allowing 15 years buffer for life insurers to make up the ICS capital gap, and also in IFRS 17, allow a 50 basis point additional equity premium for mark-to-market for the legacy high-guarantee policies, which naturally you will match with more adequate asset with longer duration and higher yields. So these together will lead to much lower pressure, immediate strength and offer better buffer for life insurance company to focus on to build a more intact asset liability management, so overall is positive. For Cathay United Bank, the year-to-date loan growth, deposit growth, and a slight increase in foreign currency loans, these are also positive. We are seeing quarter-over-quarter roughly 1 basis point decline in net interest margin, and we think this will be quite close to the trough of on quarterly net interest margin basis. Kevin was guiding whole year net interest margin around -- somewhere around 1.37% -- 1.38%. And we think at 2024, it will remain at similar level. We are doing the budget right now, so you will be more clear in about 2 months' time. We are very -- we are seeing good momentum in deposit inflow for U.S. dollar. That do boost the cost of funds from foreign currency, and that's why it leads to some slight decline in quarterly net interest margin. But this U.S. dollar deposit will bring very good foundation for wealth management momentum into 2024. So after a 5.5% year-on-year growth in wealth management fee for the first 9 months, we remain positive for 2024 fee income growth from the wealth management. And then the credit cards, so far, we remain #2 in total spending. Despite some cost structure changes, the spending remained very strong. So we are also quite positive by proper design to the business strategy. 2024 credit cards should also remain stable to some growth. So overall for the bank, expecting decent net interest income growth, fee income growth, and asset quality remain stable, so far it's also positive. So these are some of the key highlights. So on the line, are there anyone who want to ask questions?

Yes. The first one to ask question is Jemmy Huang from JPMorgan.

Two questions from me. I think on the first one, if you look at your quarter-on-quarter changes on your swap revenue, actually, third quarter swap revenue increased compared to second quarter. Are you allocating more excess capital to the swap activities during the quarter? And I recall you also mentioned you are trying to put excess liquidity into the investment into the U.S. dollar-denominated bonds. So how should we look at, maybe in the next couple of months, how your asset allocation for your U.S. dollar deposit would look like if we break down into maybe roughly lending investment and also the swap activities? How that will be change compared to third quarter or first half of the year? The second question is back to the dividend front. From the Chinese section, can I confirm that based on your understanding or your interpretation, for the under-reserved part in 2022, you don't really need to set aside additional special surplus? And therefore, any special surplus to be set aside or to be reversed this year will be purely based on the mark-to-market impacts happened year-to-date or happened in 2023, disregard any under-reserved portion in 2022?

This is Kevin. I think our first question regarding the swap, the quarter 3 is actually based on the volatility and more -- I would say, more trading opportunity for us to have the swap revenue -- to create the swap revenue side.

Also, because the currency volatility, they were quite strong, shore up demand by customers, so this will be more market-driven and structurally -- yes.

It's a market-driven opportunity right here. And regarding the foreign currency, it's positive. I think for lending part, we are still, I would say, cautiously to evaluate the loan cases, case by case, I would say, number one. Number two is we definitely will put those deposits to the foreign currency loan -- foreign currency bond, I would say. The third piece is definitely it's a good foundation for us to build a wealth management momentum for the next year. I cannot give you the precise of allocation between the replacement versus -- vis-a-vis the wealth management and split because the whole financial plan is not yet finalized here.

Follow-up, what kind of funds you are currently investing by Cathay United Bank, I mean in terms of the yields, the duration, that kind of breakdown?

I don't have such data on hand. Probably I can -- we can share with you offline.

And regarding, of course -- Jemmy, as you know, this is the second year, we implement our financial assets reclassification to AC for our Cathay Life subsidiaries. This is the second year. So based on the regulation, also our interpretation, we think this year we only need to -- major two parts, including the other assets and the AC revaluation put together. And so far, as we explained in the Chinese first meeting, that is still a positive impact up to date. So we don't need to have a special reserve for the second year.

Are you able to provide some guidance on what's the outstanding unrealized losses for the reclassified portion as of third quarter?

The third quarter, I don't have the figure on hand, but for the figures to year-to-date -- like year-to-date, as you know, for the equity part, both the Taiwan stock market and the U.S. equity market recovered. So we have a better revaluation in the equity side. But for the fixed income part, now the -- like U.S. treasury year now is higher compared with year-end of 2022. So for the AC part, that's true, we need to have more -- put the remediation loss. But the surplus of the equity valuation is larger than the loss of the AC part revaluation. So that's why our impact up to date now is -- no, we don't need to have a special reserve for the first 9 months' earnings.

[Operator Instructions] Next one to ask questions, Michael Zhang from Citi.

I just have one question on the bank. Just wanted to get a sense of your cost growth going forward. Obviously, this year, we are seeing quite fast cost growth. But how should we think about cost growth into next year? Do we have a target growth or any CI ratio to share?

Last year, our cost-to-income ratio is around 53%. This year, so far, we are at 48%, but we expect to -- by end of the year, the ratio will become close to 53%, I think. Regarding the next year outlook, we haven't finalized our budget. So roughly -- if you look at our history trend, roughly around 52% to 53%, that kind of range. Last year is 51%, sorry, to correct the numbers.

So roughly, 51% to 53% range remains stable.

[Operator Instructions] Next one, we have Peggy Shih from Morgan Stanley.

I have one question for the bank. I noted that Cathay United Bank's wealth management fee growth was a little bit weaker than peers, even the first 9 months of this year. May I know the reason? Yes. And I know you have mentioned that we are going to leverage our FX deposit to grow wealth management fee next year. So which kind of product are we focused for next year? Yes, that's my question for the bank. And the second question is about the dividend policy. I think a lot of investors would like to know when will our dividend policy return back to the historical level around like TWD 1.5 to TWD 2 per year.

Well, the wealth management part, looking at the next year, I would say insurance still play a key role to support our growth. And second product, the focus for us is fixing our product given to the high level of the interest rate. Still -- customers still appreciate the opportunity to enjoy the high rate environment. So those 2 will be our key focus.

Regarding the dividend policy, it's too early to expect whether the dividend level will compare with previous year. Of course, there are still 1 month ahead and capital market is volatile. So we need to wait for the whole year's financial figures and then to discuss the dividend policy. But that's our wish, to maintain a stable dividend policy for all the investors.

[Operator Instructions]

Okay. Well, if no further questions, I think we had quite fruitful discussion in the Chinese section already. If no further questions, I think we can conclude the call today. And thank you very much for joining the call today for our quarterly results. The IR team will stand by here if you have further questions.

Yes. Thank you, Sophia, and thank you, ladies and gentlemen. We thank you for your participation in Cathay Financial Holding Company's Conference Call. You may now disconnect. Thank you, and goodbye.

Thanks. Goodbye.