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

Welcome, everyone, to Cathay Financial Holding Co.'s Second Quarter 2025 Conference Call. [Operator Instructions] And now I would like to introduce Mr. C.K. Lee, CEO of Cathay Financial Holdings Co. Mr. Lee, please begin.

Good afternoon, and good morning to those in Europe. Welcome to Cathay Financial Holdings 2025 Second 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 these senior managers who are with us. We have Ms. Grace Chen, CFO of Cathay Financial Holdings; Ms. Sophia Cheng, CIO of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior, EVP, of Cathay Life; [ Mr. Quincy Chen ], EVP of Cathay United Bank. Before I begin the presentation, I would like to share some key highlights. Cathay Financial Holdings delivered solid performance in the first half with net income of TWD 46 billion and an ROE of 11%. Core businesses across our subsidiaries remained resilient with Cathay United Bank P&C insurance and asset management subsidiaries each delivering record-high first half earnings. Cathay United Bank reported a 16% year-on-year earnings growth, supported by double-digit growth in loans and net interest income as well as a 28% growth in net fee income. Cathay Life's earnings declined year-on-year, reflecting 11% depreciation of the Taiwan dollar and the high capital gain base in the previous year. Nonetheless, key operating metrics remained robust with annualized premium value of new business and recurring income all recorded solid growth. Cathay Century, our P&C insurance subsidiary, maintained solid underwriting profitability with net income up 45% year-on-year. Cathay SITE, our asset management subsidiary, posted 14% year-on-year earnings growth and continued to gain strong market recognition. Cathay Securities delivered its second highest first half earnings and further strengthened its position in the domestic brokerage market. Now I will hand over the call to Ya-Jou from our IR team for the 2025 second quarter results presentation. Ya-Jou, please.

Thank you, C.K. Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank delivered a high -- record high earnings for first half with 16% year-on-year growth. Loans and deposit showed double-digit growth. Net interest income grew 15% year-on-year. Net fee income grew 28% year-on-year, while wealth management and credit card fees rose 34% a 16%, respectively. Cathay Life's first year premium, annualized premium and value of new business all achieved double-digit year-on-year growth. Pre-hedging recurring yield rose 11 basis points, supported by higher interest and dividend income. Capital position remained solid with RBC ratio of 328% and equity-to-asset ratio above 8%. Cathay Century, the general insurance subsidiary, achieved a record high earnings. Premium income grew 11% year-on-year and market share reached 13.5%. Asset management subsidiary, Cathay SITE, also delivered record high earnings. Assets under management reached TWD 2.2 trillion. Cathay securities continued to gain market share in the domestic brokerage business and remained #1 in sub-brokerage market share. In addition to solid business performance, Cathay Financial Holdings continued to advance its sustainability agenda. Please turn to Page 5. In July, we hosted the ninth Cathay Sustainable Finance and Climate Change Summit, bringing together global climate experts and industry leaders to share trends and best practices. The event attracted over 5,000 participants, including representatives from more than 700 listed companies covering approximately 80% of Taiwan's market cap. Please look at Page 6, Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income reached TWD 46 billion, down year-on-year mainly due to the sharp Taiwan dollar appreciation in the second quarter and the high investment income base in the same period of last year amid favorable market -- financial market. Nevertheless, core business momentum across subsidiaries remained solid. EPS was TWD 2.89. Page 7 shows the subsidiaries' net income and ROE. Cathay United Bank, Cathay Century and Cathay SITE each delivered record high earnings for the first half while Cathay Securities achieved the second highest year-to-date earnings. Cathay Life's earnings declined year-on-year, reflecting the sharp Taiwan dollar appreciation in the second quarter and the high capital gains base in the same period of last year. However, recurring income increased and underwriting profits remained steady. On a consolidated basis, the holding company's ROE was 10.9% with the bank P&C insurance, SITE and securities all recording double-digit earnings. Please turn to Page 8 to see the book value of Cathay Financial Holdings. The consolidated book value of the holding company was TWD 781 billion, down year-on-year, reflecting lower mark-to-market value of financial assets and the sharp Taiwan dollar appreciation and financial market volatility. Book value per share was TWD 45.9. Page 9 shows our overseas expansion. For the banking business, Cathay United Bank obtained FSC approval in July to establish Tokyo branch and Fukuoka sub-branch. For Cathay Life joint venture in China, the total premium grew 15% year-on-year. Please turn to Page 11 for more details about our banking subsidiary. Cathay United Bank delivered robust loan growth with mortgage and consumer loans showing double-digit growth. The total loan balance increased 11% year-on-year to TWD 2.7 trillion. Deposits grew 15% year-on-year to TWD 4 trillion and maintained the vantage of high demand deposit ratio of over 60%. Interest yield is shown on Page 12. Net interest margin for the first half increased 6 basis points year-on-year to 1.56%, benefiting from improved deposit mix and lower FX funding costs following rate cuts. On a quarterly basis, both net interest margin and interest spread increased, supported by improved deposit mix and well-controlled funding costs. Page 13 shows the asset quality. Cathay United Bank maintained low NPL ratio at 14 basis points and coverage ratio at 1,200%. Gross provision was TWD 3.2 billion and recovery was TWD 900 million. Please turn to Page 14 for SME and foreign currency loans. SME loan balance increased to TWD 351 billion, accounting for 13% of the total loan. Foreign currency loans also continued to grow, reaching TWD 282 billion. Excluding the impact of Taiwan dollar appreciation, this represents 10% year-to-date growth. Page 15 shows offshore earnings. The offshore earnings rebounded to TWD 5.2 billion due to the recovery in deposits, loans and investment income. Please turn to Page 16 for net fee income. Net fee income reached TWD 7.8 billion, up 28% year-on-year, driven by over 30% increase in wealth management fees, a 16% year-on-year growth in credit card fees supported by higher spending. Page 17 shows the breakdown of wealth management fees. Wealth management fee rose 34% to TWD 11 billion with mutual funds and bancassurance fees up 35% and 53% year-on-year, respectively. Both wealth management customers and AUM continued to show steady growth. Please move to Page 19 and 20 for Cathay Life's premium performance. Total premium grew 18% to TWD 255 billion, driven by strong sales of investment-linked and U.S. dollar-denominated traditional products while premium income from high CSM protection products grew 6%. On Page 22, first year premium, FYP, reached TWD 95 billion, up 82% year-on-year, supported by strong sales in investment-linked policies and U.S. dollar-denominated traditional products. This also led to 13% growth in annualized premium, APE. Health and accident premium were affected by high base in 2024, which reflected a stop-selling effect ahead of the regulatory change. Page 21 shows the value of new business. Value of new business was TWD 18 billion, up 12% year-on-year. The growth aligns with the same drivers seen in our APE performance. Page 22 shows the cost of liability and break-even asset yield. The cost of liability rose 5 basis points quarter-on-quarter to 3.84%, reflecting adjustments to reserve rate and mortality table for certain products, higher declared rates on interest-sensitive products and Taiwan dollar appreciation. Break-even asset yield was 2.95%. Please look at Page 23 for the investment portfolio. Cathay Life total investment was TWD 7.8 trillion with overseas investment accounted for 68%. We increased the cash position in the second quarter to better navigate the financial market volatility. Please refer to the right-hand side for investment yield by each asset class. Overall investment yield are shown on Pages 24 and 25. After-hedging investment yield was 3.47%, down year-on-year due to higher hedging costs and reduced capital gains, while recurring income increased. Page 25, the pre-hedging recurring yield was 3.41%, up 11 basis points, benefiting from higher interest income from continued expansion of fixed income position at elevated yields along with increased cash dividend income. The annualized hedging cost was 1.45%, and remained well controlled despite an 11% appreciation of Taiwan dollars in the second quarter. We have adopted the new FX volatility reserve mechanism and applied the FSC forbearance measures, provisioning all release excess policy reserve into FX volatility reserve. This further enhanced our ability to absorb FX fluctuation and manage FX risks effectively. Please turn to Page 26 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized cash dividend income of TWD 8.5 billion in the second half and TWD 14.8 billion in the first 7 months, TWD 3 billion higher than the same period of last year. On the right-hand side, you can see we diversified our fixed income investment across regions to balance risk and return. Page 27 shows the book value and unrealized gains of financial assets. Cathay Life's book value was TWD 628 billion, down year-to-date due to lower mark-to-market valuations amid sharp Taiwan dollar appreciation and financial market volatility. However, the equity-to-asset ratio remained above 8%, indicating robust capital strength. Next, please turn to Page 31 to 32 for the performance of Cathay Century. Cathay Century's premium income grew 11% year-on-year to Cathay 21 billion. Market share was 13.5%. Page 33, the retained combined ratio improved to 87.8%, supported by higher retained premium as we adjusted the insurance structure to enhance underwriting capacity. In addition, large claim events decreased and the loss ratio remained stable. This is the end of the presentation. Now let's open for Q&A.

Good afternoon. This is Grace Chen. Before we move into Q&A session, let me provide a brief recap of the key discussions and questions from our earlier Chinese session. The audience was particularly interested in our second quarter operation performance and outlook for key drivers. For banking side, our bank has remained resilient in the first half. Many questions centered on the potential impact of reciprocal tariffs on asset quality. We have carefully reviewed for our corporate loan portfolio and only 36 companies are affected with total loan balance less than TWD 5 billion accounting for only 0.7% of the loan book. We are working closely with the clients to help them navigate this situation. Looking ahead, our guidance remains unchanged from the first quarter analyst meeting. We continue to expect high single-digit loan growth for the full year with growth well balanced across all sectors. Net interest margin is expected to hold at around the 2024 full year level, and fee income remains strong. We are targeting a double-digit growth for the full year. For Cathay Life, life insurance has experienced volatile financial markets in the second quarter. Investors were particularly interested in our buffer for further Taiwan dollar appreciation and our outlook under IFRS 17. Since adopting the new FX volatility reserve mechanism in May, FX movements no longer affect earnings as long as we maintain sufficient FX volatility reserve balances. As of yesterday, our FX volatility reserve was over TWD 56 billion, providing capacity to absorb an additional Taiwan dollar appreciation. In June, we provisioned TWD 50.8 billion excess policy reserves permitted by regulators into FX volatility reserve. Given this is part of our transition plan, it's just an early implementation steps and does not change our IFRS 17 transition plan. We continue to expect a 10% to 15% year-on-year increase in CSM release, a much lower cost of liability at around 2.3% on asset basis. These are the key highlights.

[Operator Instructions] Our first question will be coming from Jemmy Huang, JPMorgan.

Two questions from me. First one is for Cathay United Bank, you pointed out the potential impact on asset quality from tariffs. Is there any positive impacts that could result for the banking operation because of the tariffs? And the second question is for Cathay Life. If we look at the unrealized loans for Cathay Life in large, roughly around TWD 60 billion quarter-on-quarter in the second quarter, are we able to quantify how much is because of the currency movement and how much is because of the equity and bond price movement?