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

Welcome, everyone, to Cathay Financial Holding Company's Fourth Quarter 2024 Conference Call. [Operator Instructions] Now I would like to introduce Mr. C.K. Lee, CEO of Cathay Financial Holding Company. Mr. Lee, please begin.

Okay. Thank you. Good afternoon, and good morning to those in Europe. Welcome to Cathay Financial Holdings 2024 Fourth Quarter Analyst Meeting. I am C.K. Lee. Today, I will host the meeting. Thank you for joining us. In the beginning, I would like to introduce the senior managers, who are with us today. We have Ms. Grace Chen, CFO of Cathay Financial Holdings; Ms. Sophia Cheng, Chief Investment Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Mr. Kevan Hu, Senior EVP of Cathay United Bank. Before we begin the presentation, I'd like to share some key highlights. Last year, we delivered strong financial results with the group's net income reached TWD 111 million, more than double the figures in 2023, marking the second highest profit in our history. This achievement was driven by robust performance across our subsidiaries with record high earnings from the Cathay United Bank, P&C insurance, asset management and securities, while Cathay Life posted second highest profit on record. Cathay United Bank maintained strong business momentum, achieving double-digit loan growth and expanding net interest margin and over 30% year-on-year growth in fee income. Cathay Life continued to strengthen its -- fundamentally, reducing a historic high in CSM of TWD 90 billion. Investment performance was solid and capital position remained strong. Cathay Century, our P&C insurance subsidiary, sustained steady underwriting profitability, while Cathay SITE, our asset management subsidiary, saw AUM reaching another record high. Meanwhile, Cathay Securities continued to expand its customer base and gain market share in the domestic brokerage business. We will share more details on our performance and outlook during the call. Now I would like to hand over the call to Charlie from our IR team for the 2024 first quarter results presentation. Thank you.

2 Thank you. Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank's 2024 annual earnings set a record high for the fourth consecutive year with 32% growth year-on-year. Loan growth was robust. Asset quality remained benign. Net interest income grew 18% year-on-year. Net fee income rose 34% year-on-year, with wealth management and credit card fee rising 41% and 33% year-on-year, respectively. Cathay Life continued value-driven product strategy to accumulate CSM. Annualized premiums and value of new business grew 22% and 30% year-on-year, respectively. Maintained solid capital position. RBC ratio was 359% and equity-to-asset ratio was around 9%. Cathay Century, the general insurance subsidiary, premium income grew 13% year-on-year with market share of 13.6%. Asset management subsidiary, Cathay SITE, delivered record high annual earnings in 2024. AUM reached TWD 2.24 trillion. Lastly, Cathay Securities continued to gain market share in domestic brokerage business, maintained #1 market share in sub-brokerage business. We would also like to share with you our achievement in sustainability on Page 5. Cathay has been selected in the DJSI Index for 10 consecutive years and received highest MSCI ESG AAA rating. We have attended COP for the fourth consecutive year and once again hosted important forum in the Blue Zone at COP29, showcasing our leadership in sustainable and climate finance. Page 6 shows our progress in digital development. The number of the group's digital users has grown to over 9.3 million. In AI, Cathay leads in developing GenAI architecture with diverse application and governance across the group. In cloud development, Cathay is the first financial institution in Taiwan to receive approval from FSC for data migration to the cloud. For overseas business, we continue to expand customer base and digital retail business. Next page, Page 7, shows our outlook for 2025. Cathay United Bank will expand wealth management and credit card business by deepening relationship with high-net-worth clients to increase fee income. Grow loans steadily while maintaining benign asset quality, enhance cross-selling for more effective capital deployment, develop cross-border business and digital retail banking business overseas. Cathay Life will continue the Protection First and Elderly Friendly strategy and focus on protection-type products to accumulate CSM. For investment, Cathay Life will seek opportunities for quality stocks and bonds to enhance recurring income, maintain dynamic hedging strategy to deliver stable hedging costs. Cathay Century will grow business emphasizing on quality and quantity, deepen digital application to enhance customer satisfaction. For overseas operation, Cathay Century will expand online business in China. In Vietnam, Cathay Century will strengthen digital infrastructure and foster cross-industry cooperation. Cathay SITE will focus on promoting retirement and inclusive financial planning products and developing innovative fintech applications. Cathay Securities will enhance data-driven capability to provide diverse and personalized services, creating strong word-of-mouth effect, replicate the success of strategies such as smart systematic investment plan and dividend reinvestment, driving new growth momentum. Please look at Page 8, Cathay Financial Holdings net income, EPS and ROE. Cathay Financial Holdings net income reached TWD 111 billion in 2024, the second highest record. EPS was TWD 7.29. Net income for subsidiaries, Cathay United Bank, Cathay Century, Cathay SITE and Cathay Securities set all-time highs. Cathay Life's net income delivered second highest record. On a consolidated basis, the holding company ROE reached 13% with all subsidiaries achieving double-digit ROE. Please turn to Page 9 for the book value of Cathay Financial Holdings. The consolidated book value of holding company reached TWD 907 billion, driven by the earnings contributions and the rebound in equity markets. Book value per share was TWD 54.3. Page 11 and 12 shows our overseas expansion. Cathay Financial Holdings continued to expand overseas business, cultivate local and cross-border corporate banking clients. Singapore branch shows strong business momentum with more than 30% of revenue generated from new business and clients. Premium income for Cathay Life Vietnam increased 7% year-on-year. As for the operation in Greater China, Cathay United Bank China subsidiary and Hong Kong branch continue to advance in sustainable finance, earning local recognition. For Cathay Life's joint venture in China, the total premium grew 17% year-on-year. Please turn to Page 14 for more detail about the banking subsidiary. Cathay United Bank delivered robust loan growth with double-digit growth in corporate, mortgage and consumer loans. The total loan balance increased 17% year-on-year to TWD 2.6 trillion, deposits grew 8% to TWD 3.8 trillion, maintained the advantage of high demand deposit ratio of over 60%. Interest yield is shown on Page 15. Net interest margin for the year increased 17 basis points year-on-year to 1.55%, driven by strong loan growth, increased position and higher yield in foreign currency financial assets as well as well-contained funding costs. Page 16 shows the asset quality. Cathay United Bank maintained low NPL ratio at 11 basis points and coverage ratio at 1,445%. Gross provision was TWD 9.8 billion. Recovery was TWD 1.2 billion. Please turn to Page 17 for SME and foreign currency loans. SME loan balance increased to TWD 335 billion, accounting for 13% of the total loan. Foreign currency loan grew 31% in 2024, reaching TWD 282 billion. Excluding foreign currency rate effect, foreign currency loan grew 23% year-on-year. Page 18 shows offshore earnings. The offshore earnings rebounded to TWD 6.3 billion due to the recovery in deposits, loans and investment income. Please turn to Page 19 for net fee income. Net fee income reached TWD 27.8 billion, up 34% year-on-year, driven by strong sales across wealth management products and a 33% year-on-year increase in credit card fees due to increased overseas spending. Page 20 shows the breakdown of wealth management fees. Wealth management fee rose 41% to TWD 16 billion. All products showed strong growth. Fees for mutual funds, security products and bancassurance grew by 52%, 48% and 32% year-on-year, respectively. Please move to Page 22 and 23 for Cathay Life's premium performance. Total premium grew 5% to TWD 488 billion. Premium for high CSM protection products and traditional saving products both rose 7% year-on-year. On Page 23, first year premium FYP rose 16% year-on-year to TWD 154 billion, driven by significant growth in sales for health and accident products and foreign currency-denominated traditional long-term regular premium products, which also led to a 22% year-on-year growth for annualized premium APE. Notably, FYP for high CSM health and accident products increased 31% year-on-year, driving new business CSM to an all-time high. Page 24 shows the value of new business. Value of new business reached TWD 35 billion, up 30% year-on-year. This growth was driven by the same factors as APE performance, which also contributed to the increase in VNB margin. Page 25 shows the cost of liability and breakeven asset yield. The cost of liability remained stable quarter-on-quarter at 3.78%, while breakeven asset yield continued to improve. Please look at Page 26 for the investment portfolio. Cathay Life's total investment reached TWD 8 trillion. Overseas investment accounted for around 70%. Please refer to the table for the investment returns by each asset class. The investment yield for domestic and international equity were 15% and 12%, respectively. Overall investment yield are shown on 27. After-hedging investment yield was 3.74%, supported by capital gains on equity portfolio adjustment during the market rally. The pre-hedging recurring yield was 3.43%, down slightly by 2 basis points, reflecting lower cash dividend income from capital gain realization, partially offset by continued growth in interest income. The hedging cost was 1.56% as major Asian currencies were weaker in Taiwan dollar against U.S. dollar in the fourth quarter, reducing the effectiveness of proxy hedging. In particular, the sharp depreciation of Korean won in last December, driven by short-term political turmoil has a notable impact, but has largely rebounded year-to-date. If excluding this short-term impact, the hedging cost for the first 11 months was 1.45%. While property hedging may experience short-term volatility, it is an effective strategy that help us to achieve more stable hedging costs in the long run. Please turn to Page 28 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized TWD 16.8 billion cash dividend income in 2024, down year-on-year as Cathay Life dynamically adjusted its portfolio amid favorable equity market. On the right-hand side, Cathay Life took the higher interest rate opportunity to increase the holding of U.S. funds, raising the proportion of fixed income investment in North America to 52%. Page 29 shows the book value and unrealized gain of financial assets, both increased year-on-year. The book value rose to TWD 718 billion, supported by earnings contribution and an increase in unrealized gains and loss of financial assets. The equity-to-asset ratio was around 9%. Next, please turn to Page 33 and 34 for the performance of Cathay Century. Cathay Century's premium income grew 13% year-on-year to TWD 37.8 billion. Market share was 13.6%. Page 34, the gross combined ratio and retained combined ratio both improved due to higher premium income in 2024. This is the end of the presentation.

Okay. Thank you.

Good afternoon. This is Grace Chen. During today's earlier Chinese session, the audience had many questions regarding our outlook guidance on key drivers and dividend policy. For the bank, we expect high single-digit growth in loans driven by all segments, including corporate, mortgage and consumer loans. Asset quality remained benign with credit cost expected to be around 30 basis points. Our full year NIM is expected to remain around this year's level. That is 1.55%, assuming the Taiwan Central Bank keeps rates flat and the Fed cuts the rate by 50 basis points. For fees, we anticipate at least a high single-digit growth in credit card and wealth management fees. Wealth management fees have potential for double-digit growth, particularly if capital markets perform well. On the life insurance side, continuing to build the CSM remains our top priority. We expect the FYP growth in traditional products, including highest CSM contribution product, health and accident products as well as the U.S. dollar-denominated interest sensitive life policies. So far, the sales momentum for investment-linked policies have been strong, though it remains sensitive to movements in the capital markets. In terms of investment, we will continue to enhance our recurring income, targeting at 3.45% to 3.5% level for the full year. Regarding next year's IFRS 17 and ICS adoption, we are well prepared and have a positive outlook on the post adoption impact. The economic value will still be the same, but it provides us with an opportunity to reset the high guaranteed cost of liability from the legacy book, as the liabilities will be measured at market rates. We have been accumulated quite sizable CSM since 2012 by transferring to value-driven product strategy. While there will be a one-off manageable impact on the book value, the book value combined with the after-tax CSM will be much higher than the current book value and the liability cost will significantly decline. This will allow us to enjoy a possible spread on recurring basis. With our strong CSM generation capability, annual CSM release to the net income is expected to grow 10% to 15% over the next 5 years post adoption. The earnings are likely to be more predictable. We have also built a strong capital buffer with current ICS ratio stands around 190%, far above the industry requirement of 100%. As for our dividend policy, we will reflect our strong earnings from last year, the second highest, while also consider peers' dividend payout as well as our financial and capital position. Our goal is to provide a competitive dividend year and provide a proposal to the Board for their decision and approval. These are the key highlights.

Okay. Thank you. Any questions?

[Operator Instructions] And our first question will be coming from Jimmy Huang of JPMorgan.

Just 2 questions from me. First one is if we look at your credit cost last year, TWD 5 billion is for general provisions. So we still have another like TWD 4 billion to TWD 5 billion that's for specific provisions. Could you provide a little bit more color in terms of what these specific provisions set aside? Is that for the consumer banking or the corporate banking? Corporate banking, is that in Taiwan or the offshore loan portfolio? I think the second question I want to figure out more is, I think you do mention under IFRS 17, maybe the insurance earnings will be less volatile and therefore, better visibility for dividend policy. But just trying to understand because even either under IFRS 17 or under the current accounting, the dividend distributions all need to take into account OCI, the other comprehensive income. So even though the reported profit will be less volatile under IFRS 17, the OCI will remain volatile. So just trying to figure out like under that kind of situation, how could you make the dividend policy more visible or more sustainable?

Let me answer the question about the credit loss. I think majority of the loss coming from those corporate, even though we do have witnessed some loss from the personal loan side, but majority of the loss from -- actually coming from the corporate side and across all markets, including the Taiwan and overseas.

Yes. Jimmy, yes, current rules for the distributable earnings, it will like -- you need to consider the OCI change and -- but right now -- because OCI only consider for the asset side. So there is no hedging to consider the liability side. But after that, because you need to consider is the asset and liability. So as I mentioned that right now, we are managing our ALM quite well. So we're thinking about -- even though the interest rate volatile, we're thinking about the asset and liability that can match, especially in U.S. dollar portfolio. Of course, on -- the Taiwan dollar portfolio still have some volatile. This is because the currency mismatch like the Taiwan dollar interest curve and the U.S. dollar interest curve. But because we also -- we will classify some portion of the U.S. fixed income to amortize cost. So we're thinking about it also can be manageable. So right now, we're still positive. But of course, all the rules need to be determined by the FSC, still can be -- have some changes on the calculation of the distributable earnings. But till now, we're thinking about it's more manageable comparison right now.

But another volatility will come from equity investment, right, because that part will also be the volatility on OCI. Is there any mechanism to manage that volatility as well? Or will you increase the dividend -- the investment proportion into the dividend stock, as the way to lower the value?

I think that this is the Taiwan unique situation to consider this kind of volatility. So maybe another way is that we need to lobby this kind of -- should it be considering to the distributable earnings calculation because this is already remain in current situation. But because when we adopt IFRS 17, maybe it's a time that we can discuss with the FMC to see if that some possible that can change the calculation, not to even to considering the volatility of the equity in OCI.

[Operator Instructions] Next one, Meizhi Yan, UBS.

My first question is about your earlier comments that post IFRS 17 adoption, you are going to expect a post -- a positive spread, meaning that your post-hedge recurring yield is going to be higher than your cost of liability. So I just want to confirm that what's the underlying assumption regarding the recurring hedging cost because obviously, that is quite volatile in recent 2 years because you don't disclose that in your presentation. But if we refer to the level of your peers, so they're running at around 2.4% level of post-hedge recurring yield. So should we consider that as sort of the right level to expect going forward? And does that mean your cost of liability is going to be lower than that level? I'll stop for that.

Yes. I think our assumption in hedging cost is still -- our guidance is 1% to 1.5%. So if you calculate our recurring year is around like 3.45% to 3.5%. Then after deduct by the hedging cost, I think it's around -- after hedging, our recurring yield is well around like the 2.7% something. But because -- and this 2.7% something I think will be higher at this moment, which is higher than our cost of liability in net income.

Just at some point to that, when we apply IFRS 17, we will settle down the old legacy book, the mark-to-market basically. So the whole industry will be applying redefined yield curve. So based on that, if you settle down the old legacy book problem, that means we no longer need to take current profit to compensate for the old problem, then, yes, you can reflect your earnings.

Yes. So second question is regarding your treatment on your equity position post adoption. So if you classify them as the FVTPL, then the volatility will go through P&L. But if under the OCI, they won't -- so I just want to confirm what's the strategy going forward? Are you going to place most of them into OCI so that you minimize the volatility, but the capital gain will not go through P&L?

Well, our equity, we will classify almost in FVOCI. So we don't want to -- even though we don't have that kind of capital gain in income statement, but our -- because we have positive spread and also we have very strong insurance result, mainly come from the CSM release. So actually, our net income will be very strong, even though we didn't consider in the capital gain on the equity. So we want to keep the -- minimize the volatility of our net income to be more predictable on our net income. But we still will maintain equity position. Actually, I think that's still like the same. Right now, we have the 10% to 15% of all the equity position. We didn't want to change this policy, but all the equity will classify to FVOCI. So the capital gain will come to the shareholder equity in our distributable earnings.

And we will also -- we have been actually doing this for a couple of years by identifying the good timing for companies, who offer a good dividend yield. So dividend yield play will be one of the main focus in our equity portfolio.

[Operator Instructions]

Any other questions? Okay.

Then Mr. Lee, there appears to be no further questions at this point. Can we close the conference call now?

Okay. Thank you. Well, thank you for your participation in Cathay Financial Holdings conference call. If you have any further questions, please feel free to contact our IR team. Thank you so much.

Thank you, Mr. Lee. And 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.