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

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

Okay. Thank you. Good afternoon, and good morning to those in Europe. Welcome to Cathay Financial Holdings 2025 Third Quarter Analyst Meeting. I am C.K. Lee, CEO of Cathay Financial Holdings. 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 Grace Chen, CFO of Cathay Financial Holdings; Abel Lin, Managing, Senior EVP of Cathay Life; [ Jack Chen ], Executive VP of Cathay United Bank. Before we begin the presentation, I would like to share some highlights. Cathay Financial Holdings delivered a strong performance in the first 9 months, achieving our third highest result on record with net income of TWD 75 billion and ROE of 11%. Our core business remained resilient, Cathay United Bank, Cathay Century insurance and Cathay SITE, all reached record highs, while Cathay Security delivered its second best 9-month result. Cathay United Bank recorded 11% year-on-year earnings growth, supported by double-digit growth in net interest income and a 25% increase in fee income. At Cathay Life, earnings declined year-on-year, reflecting volatile financial market in the second quarter and a higher base of capital gain last year. That said, business fundamentals remains solid. Annualized premium value of new business and recurring income all posted healthy growth. Cathay Century continued to deliver strong underwriting profit with net income already surpassing last year's fiscal year level, up 28% year-on-year. Cathay SITE also achieved 50% earnings growth. Cathay Security continued to strengthen its position in the domestic brokerage market and maintained its #1 ranking in sub-brokerage. Now I will hand over the call to [ Claire ] from IR team for the 2025 Third Quarter Results Presentation. [ Claire ], please.

Thank you. Let's start with the business overview on Page 4. Which provides a quick highlight on each subsidiary. Cathay United Bank delivered record high earnings for the first 9 months with 11% year-on-year growth. Loan and deposit growth remained solid and asset quality stayed strong. Net interest income increased by 12% year-on-year. Net fee income rose 25% year-on-year. Wealth management and credit card fees grew 31% and 14%, respectively. . Cathay Life first year premium, annualized premium and the value of new business all achieved double-digit year-on-year growth. Recurring yield continued to improve, supported by higher dividend and interest income. Capital position remained robust with an equity-to-asset ratio of 9.3%. Cathay Century, the general insurance subsidiary, net income for the first 9 months exceeded last year's full year results, reaching an all-time high. Premium income grew 9% year-on-year and the market share reached 13.8%. Asset management subsidiary, Cathay SITE also delivered record high earnings. Asset under management reached TWD 2.3 trillion. Cathay Securities continued to gain market share in the domestic brokerage business and remained #1 in sub-brokerage market share. Cathay Financial Holdings continued to strengthen its asset management business as the group's third profit engine. Please turn to Page 5. The group has integrated the investment research capabilities of the life insurance business, the distribution strength of banking business and the product development expertise of the asset management arm to expand asset management capabilities and service scope. Today, the group's total asset under management have exceeded TWD 10 trillion. To further strengthen global connectivity and investment insight, we hosted the second Cathay Asset Management Summit in October. Global investment experts and the Cathay team explore market trends, investment strategies and industry development. Please look at Page 6. Cathay Financial Holdings net income and EPS. Cathay Financial holdings net income reached TWD 75 billion, down year-on-year. This was mainly due to the sharp appreciation of the Taiwan dollar in the second quarter and the high base of investment gains from last year's strong financial market performance. However, the core business momentum across subsidiaries remained solid. Earnings per share was TWD 4.84. Page 7 shows the subsidiaries' net income and ROE. Cathay United Bank, Cathay Century and the Cathay SITE each delivered record high earnings for the first 9 months, while Cathay Securities achieved its second highest account performance for the same period. The bank reported TWD 35 billion in net income, up 11% year-on-year. P&C insurance grew 28% and asset management increased 15%. Cathay Life posted TWD 35 billion in net income down year-on-year due to the high investment gains base and the sharp appreciation of the Taiwan dollar in the second quarter. Nevertheless, recurring income continued to rise and underwriting operations remained steady. On a consolidated basis, Cathay Financial Holdings recorded ROE of 11% with the bank, P&C insurance, asset management and security all delivering superior ROE performance. Please turn to Page 8 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 908 billion, up from the end of last year, supported by profit contribution and partially offset by mark-to-market losses on financial assets amid the sharp appreciation of the Taiwan dollar. Book value per share was TWD 54.5. Page 9 shows our overseas expansion. For the banking business, Cathay United Bank's Singapore branch launched corporate bond services, the first among Taiwan best banking. To address the growing demand for corporate cash management and help clients manage cash flow and liquidity more effectively. For the insurance business, Cathay Life joint venture in China achieved a 60% year-on-year growth in total premium, driven by the stop selling effect ahead of the reduction in guaranteed rate. Please turn to Page 11 for more details about the banking subsidiary. Cathay United Bank's total loan balance rose 8% year-on-year to TWD 2.76 trillion, with growth across all segments. Personal loans grew 14% and mortgage loan increased 8%. Deposits rose 21% year-on-year to TWD 4 trillion, maintaining the advantage of a high demand deposit ratio of about 60%. Interest yield is shown on Page 12. Interest rate for the first 9 months increased to 1.87%, up 5 basis points year-on-year, supported by lower funding costs from U.S. rate cuts and optimized deposit mix. Net interest margin for the first 9 months remained flat year-on-year at 1.55% as adjustment in higher yield FX financial assets reduced asset yield. Page 13 shows the asset quality. Cathay United Bank maintained low NPL ratio at 14 basis points and the coverage ratio at 1,140%. Gross provision was TWD 5.2 billion and the recovery was TWD 1.3 billion. Please turn to Page 14 for SME and foreign currency loans. SME loan balance grew 7% year-on-year to TWD 361 billion. Foreign currency loans also expanded, reaching TWD 289 billion, up 11% year-on-year or 16% excluding the impact of Taiwan dollar appreciation. Page 15 shows offshore earnings. The offshore earnings reached TWD 6.2 billion, up 5% year-on-year, driven by the recovery in deposits, loans and investment income. Please turn to Page 16 for a net fee income. Net fee income reached TWD 26 billion, up 25% year-on-year. Wealth management fees grew over 30%, while credit card fees increased 40% year-on-year, supported by increased card spending. Page 17 shows the breakdown of wealth management fees. Wealth management fees rose 31% year-on-year to TWD 16 billion, with mutual funds and bancassurance fees up 24% and 48% year-on-year, respectively. Both wealth management customers and asset under management continue to show steady growth. Please move to Pages 19 and 20 for Cathay Life's premium performance. Cathay Life's total premium income reached TWD 367 billion, up 12% year-on-year, driven by strong sales in investment-linked policies, up 37% and the U.S. dollar-denominated traditional products, up 10%. Total premium from high CSM protection products also increased 5%. On Page 20, first year premium reached TWD 135 billion, up 53% year-on-year, supported by strong sales of investment-linked and U.S. dollar-denominated traditional saving products, which also drove 10% year-on-year increase in annualized premium to TWD 44 billion. Health and accident premiums were affected by a high base in 2024, reflecting the stop selling effect ahead of the regulatory changes. Page 21 shows the value of new business. Value of new business was TWD 26 billion, up 11% year-on-year. This growth aligns with the same drivers seen in the APE performance. Page 22 shows the cost of liability and breakeven asset yield. The cost of liability remained flat quarter-on-quarter at 3.84%. Breakeven asset yield was 2.99%. Please look at Page 23 for the investment portfolio. Cathay Life's total investment was TWD 7.9 trillion, with overseas investment accounting for 69%. Please refer to the right-hand side of the table for investment yields by asset class. Overall investment yields are shown on Page 24 and 25. After hedge investment yield was 3.56%, 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 3.48%, up 3 basis points, driven by higher dividend income. The annualized hedging cost was 1.58% after adopting the new FX volatility reserve mechanism, along with regulatory for forbearance measures in the second quarter. The impact of FX fluctuations on earnings is fully absorbed by the FX volatility reserve. The annualized compulsory provision was raised to 1.5%, which increased hedging cost but also accelerated reserve accumulation and strengthened the ability to withstand FX fluctuations. Please turn to Page 26 for cash dividend income and the regional breakdown of overseas fixed income. Cathay Life recognized cash dividend income of TWD 17.4 billion in the first 9 months, surpassing the full year amount of last year. On the right-hand side, Cathay Life continued to diversify fixed income investment across regions to mitigate risk, allocating 52% in North America, 18% in Europe and the rest in Asia Pacific and the other countries. Page 27 shows the book value and unrealized gain of financial assets. Cathay Life's book value reached TWD 738 billion, up TWD 20.5 million from the end of last year, supported by profit contribution and the recovery in equity and bond valuation, partially offset by mark-to-market losses amid sharp Taiwan dollar appreciation. The equity-to-asset ratio reached 9.3%, reflecting strong capital adequacy. Next, please turn to Page 31 to 33 for the performance of Cathay Century. Cathay Century's premium income grew 9% year-on-year to TWD 31 billion, ranking second in the market share. Page 33, the returned combined ratio improved to 88.4%, down year-on-year, driven by expanded underwriting capacity following adjustment to the reinsurance structure with higher retention rate, along with fewer large claim events and a stable loss ratio. This is the end of the presentation. Now let's open to Q&A.

Good afternoon. This is Grace Chen. Before we move into Q&A session, let me briefly recap the key topics and questions that came up during our earlier Chinese session, along with a few key highlights we would like to share. The audience were mainly focused on 3 areas: our third quarter operating performance, the outlook for next year and the key metrics as we transition to IFRS 17 and ICS. Starting with banking, our bank continues to demonstrate strong resilience. For the full year, we are still looking at high single-digit loan growth with healthy momentum across all segments. Net interest margin should hold roughly around the 2024 full year level. Fee income remains robust, and we are targeting double-digit growth for the year. Credit cost will stay around a 20 basis point level, supported by better-than-expected recoveries and the cost-to-income ratio should be around 50%. Looking ahead to next year, we expect continued growth across loans, net interest income and fee income. The core banking trends remain optimistic. For Cathay Life, we saw a solid rebound in the third quarter after navigating through the market volatility in the second quarter. Business momentum this year have been very strong. Both investment-linked products and traditional saving products delivered robust growth, creating a relatively high base for this year. Looking into next year, growth in saving products may be more moderate, but we do expect high CSM health products to grow. For the first 9 months of this year, our new business CSM reached TWD 62 billion. And for next year, we are targeting around TWD 75 billion. On the investment side, we expect recurring yield to reach about 3.5% next year. Concerning IFRS 17 adoption, as we have been shifting towards value-driven product strategy ahead of our peers for many years, IFRS 17 will have a positive impact on our insurance liabilities at transition. However, under IFRS 17, liabilities are measured on a market value basis and the U.S. dollar assets backing U.S. dollar liabilities will also be reclassified from amortized cost to fair value OCI. This will result in a negative impact on reported shareholders' equity at transition. However, the combined value of shareholders' equity and after-tax CSM will be higher than the shareholders' equity reported under the current accounting standard. We have accumulated a sizable CSM balance, and we expect CSM release to grow by about 10% to 15% annually over the first 5 years with a release rate of around 5% initially gradually rising over the longer term. Our liability cost on an asset basis will largely decline from 3.4% to about 2.2% to 2.3%, creating positive spread under the investment results. Under IFRS 17, net income will also be more predictable and stable, should be broadly comparable to earnings in a normalized year under current accounting standard. For capital, we are targeting an ICS ratio in the range of 125% to 140% upon adoption, which could create a healthy buffer for financial market volatility. Lastly, on next year's dividend policy. Given that our earnings this year have been very strong, probably the third highest in our history, we will consider our full year results, investors' expectations and peers' dividend year. And our goal is to provide a dividend year that is competitive within the industry. These are the key highlights.

[Operator Instructions] First we'll have Jimmy Huang of JPMorgan for questions.

Just one question from me still on the IFRS 17 transition. I think we talked about the changes on the cost of liability and also the impact of trading gain parts. The other 2 parts I want to figure out is, I think currently, your P&L already embedded the mortality and loading gains. That part should be offset by the CSM release. Just trying to understand what would be the more normalized mortality and loading gain levels that we have been observing maybe over the past 5 years? And then another part is the first year surplus trend. I think that, that part should also be amortized under IFRS 17. So what's roughly first year surplus strength that you have been incurring in recent years on the annual basis?

I think the first one, actually, the mortality and loading gain actually will reflect in the CSM release, most of them. So actually, you will consider like the CSM release mainly is our mortality and loading gain for the next year. This is the first one. And second one, actually, for the IFRS 17, we will no longer have so-called surplus strength. It means that when we sell the new business, once they are profit, we will have first year, that will have the CSM release. So actually, this is quite benefit for us. If we have very strong new business growth, actually, that will reflect as the ones that will reflect 5% of the new business release in the first year.

Can I follow up? I think should we assume the CSM release in the future will be bigger or were similar to the mortality and loading gain embedded?

Jimmy, I will tell you in the next month, okay? And in the first month next year, the number I think that we will release that, you will clear.