Cathay Financial Holding Co., Ltd. ($2882)

Welcome, everyone, to Cathay Financial Holdings Company's Fourth Quarter 2025 Conference Call. [Operator Instructions] After the presentation, there will be a question-and-answer session. Please follow the instructions given the time if we would like to ask the question. Now I would like to introduce Mr. C.K. Lee., CEO of Cathay Financial Holdings Company. Mr. Lee, please begin.

Okay. Thank you. Good afternoon, and good morning to those joining us from Europe. Welcome to Cathay Financial Holdings 2025 first quarter analyst meeting. I am C.K. Lee, CEO of Cathay Financial Holdings and I will host today's meeting. Thank you for joining us. Let me begin by introducing the senior management team with us today. Ms. Grace Chen, CFO of Cathay Financial Holdings; Mr. Abel Lin, President of Cathay Life; Mr. Robert Wu, EVP of Cathay United Bank. Before we begin the presentation, let me share some key highlights. Cathay Financial Holdings delivered strong performance in 2025 achieving our third highest record. With net income of TWD 108 billion, EPS of TWD 7.06 and an ROE of 11.7%. This performance reflects the resilience of our core businesses, Cathay United Bank, consistent insurance and Cathay Securities each delivered record high results. Cathay United Bank reported 30% year-on-year earnings growth, driven by double-digit increases in both net income, income and fee income. At Cathay Life, earnings reached third highest level on record, or second highest excluding the one-off currency volatility reserve provision. Business fundamentals remain solid with healthy growth across annualized premium value of new business and recurring yield. Cathay Century continued to deliver strong underwriting profit with net income increasing by 14% year-on-year. At the SITE, assets under management grew 7% year-on-year to a record high. Cathay Securities further strengthened its position in the domestic brokerage market and maintain its #1 ranking in sub-brokerage business. Now I will hand over the call to Charlie from our IR team for the 2025 fourth quarter presentation. Charlie, please.

Thank you. Let's start with the business overview on Page 4, which provides a quick highlight on each of the receivables. Cathay United Bank net income increased by 13% year-on-year to TWD 43.5 billion, marking a record high for the fifth consecutive year, loans and deposits maintained solid growth. Net interest income increased by 12% year-on-year. Asset quality stays benign. Net fee income rose 22% year-on-year. Wealth management and credit card fees grew 28% and 12%, respectively. Cathay Life continued value-driven product strategy to accumulate CSM. First year's premiums, annualized premium and value of new business continue to grow fueled by strong sales of U.S. dollar-denominated and investment-linked policies. Recurring yield increased year-on-year with dividend income rising by 11% and Capital position remained robust with an equity-to-asset ratio of 9.4%. Cathay Century, the general insurance subsidiary, net income reached an all-time high, increasing by 42% year-on-year. Premium income grew 7% year-on-year, and market share reached 13.8%. Asset management subsidiary, Cathay SITE, listed its flagship Taiwan equity ETF on Tokyo Stock Exchange in September 2025, marking the first Japan listed ETFs directly tied to the Taiwan stock market. Cathay SITE under management reached TWD 2.4 trillion. Cathay Securities delivered TWD 4.5 billion in net income, continued to expand market share in the domestic brokerage business. And maintained its #1 position in sub-brokerage market share. Next page, Page 5 shows our outlook for 2026. Cathay United Bank will deepen relationships with high-net-worth clients and optimize across asset wealth management to drive fee income growth. capitalized on supply chain realignment to expand cross-border financial services and accelerate business expansion in Asia, leverage AI and technologies to accelerate product innovation and improve efficiency. Cai, we're focused on product with high CSM and capital contribution to support policyholders to achieve healthy leasing and prosperous retirement. For investments, Cathay Life will seek opportunity in high-quality equities and bonds to enhance recurring income while strengthening asset liability management and reducing currency mismatch risk. Cathay Centuary will grow business emphasizing on quantity and scale, deepen digital application to enhance customer satisfaction and retention. Cathay SITE will continue to develop asset management business as the group third growth pillar. Cathay Securities will advance digital operations and leverage AI to enhance customer-centric experiences aiming to become the investors AI broker of choice. Please look at Page 6, Cathay Financial Holdings net income, EPS and ROE. Cathay Financial Holdings net income reached TWD 108 billion, EPS of TWD 7.06, core business momentum across subsidiaries remain solid. The income and subsidiaries Cathay United Bank, Cathay Centuary, and Cathay Securities all reached record highs. The decline in Cathay Life net income was mainly due to the one-off additional provision of TWD 21.7 billion to the foreign currency volatility reserve. Excluding this one-off impact, the group achieved its second highest net income on record. On a consolidated basis, the holding company's ROE reached 11.7%. Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of hosting company was TWD 934 billion. Book value per share was TWD 57. Page 8 shows our overseas expansion. For the banking business, Cathay United Bank continued to strengthen its operations localization digital transformation and green finance. The Hong Kong branch was replicated to 1 One Causeway Bay further scaling our operations and enhance both adaptive breadth of services. For the insurance business, Cathay Life joint venture in China achieved 49% year-on-year growth in total premiums driven by the stop selling effect ahead of the reduction in guarantee rate. Please turn to Page 10 for more detail about the banking subsidiaries. Cathay United Bank's total loan balance rose 8% year-on-year to TWD 2.8 trillion with growth across all segments. Deposit rose 15% year-on-year to TWD 4.3 trillion, maintaining the advantage of high demand deposit ratio of about 60%. Interest yield is shown on Page 11. The full year net interest margin reached 1.55%, remaining flat year-on-year. Net interest margin and interest spread in the fourth quarter both increased quarter-on-quarter supported by lower funding costs amid U.S. rate costs. Page 12 shows the asset quality. Cathay United Bank maintained low NPL ratio at 15 basis points and coverage ratio at 1060%. Gross provision was TWD 8.5 billion and recovery was TWD 1.6 billion, with credit cost up 25 basis points. Please turn to Page 13 for SME and foreign currency loans. SME loan balance grew 8% year-on-year to TWD 362 billion. Foreign currency loans increased to TWD 315 billion, up 12% year-on-year or 16% excluding the impact of Taiwan dollar appreciation. Page 14 shows offshore earnings, the offshore earnings reached TWD 7.6 billion, up 19% year-on-year, driven by the recovery in deposits, loans and investment income. Please turn to Page 15 for net fee income. Net fee income reached TWD 34 billion, up 22% year-on-year. Wealth management fees grew 28% year-on-year, while credit card fees increased 12%, supported by increased card spending. Page 16 shows the breakdown of wealth management fee. Wealth management fees rose 28% year-on-year to TWD 20 billion with mutual funds and bancassurance fee up 21% and 44% year-on-year, respectively. Both wealth management customer numbers and assets under management continued to show steady growth. Please move to Page 18 and 19 for Cathay Life premium performance. Cathay Life total income reached TWD 519 billion, up 6% year-on-year, driven by strong sales investment-linked policy. Total premiums on high CSM protection products also showed steady growth, up 5% year-on-year. On Page 19, first year premium reached TWD 191 billion, up 24% year-on-year, supported by strong momentum on investment and U.S.-denominated traditional products. Annualized premium grew 5% year-on-year to TWD 61 billion. Page 20 shows the book value of new business -- the value of new business. Value of business was TWD 35 billion, up 5% year-on-year. This growth aligns with the same drivers in the APE performance. Page 21 shows the cost of liability and breakeven as a yield. The cost of liability remained flat quarter-on-quarter at 3.84%, a Breakeven asset yield was 2.99%. Please look at Page 22 for the investment portfolio. Cathay Life's total investment was TWD 8 trillion, with overseas investments accounting for 69%. Please refer to the right-hand side of the table for the investment yield by asset class. Overall investment yield as shown on Page 23. After hedging investment yield was 3.94%, supported by the realized gain from the favorable financial market. On the right-hand side, the pre-hedging recurring yield was 3.46%, up 3 basis points, driven by higher dividend income. The hedging cost was 1.57%, an following the adopting the new foreign currency for per reserve mechanism, along with the regulatory forbearance measures in the second quarter. The impact of the foreign currency fluctuation on earnings is fully absorbed by the foreign currency volatility reserve. The annualized compository origin ratio was raised to 1.5%. In addition, effective January 2026. Foreign currency gain on loss on overseas to classified as amortized costs will be amortized over the remaining life of the bonds which is expected to a significant reduced foreign currency volatility supported by the strong foreign currency volatility reserve buffer, Cathay Life has greater capacity to absorb foreign currency fluctuations and a reduced need for hedging, leading to a lower hedging ratio. The foreign currency volatility reserve balance reached TWD 114 billion as of last year-end. Please turn to Page 24 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized cash dividend income of TWD 18.7 billion in 2025, up 11% year-on-year. On the right-hand side, Cathay Life continued to diversify fixed-income investment across regions to mitigate risk allocating 53% in North America, 17% in Europe and the rest in Asia Pacific and other countries. Page 25 shows the book value and unrealized gain of financial assets. Cathay Life book value reached TWD 750 billion, up TWD 32.6 billion year-on-year, supported by profit contribution, while partially offset by mark-to-market loss on financial assets amid Taiwan dollar appreciation. The equity to asset ratio reached 9.4%, reflecting strong capital adequacy. Next, please turn to Page 29 and 30 for the performance of Cathay Centuary. Cathay Centuary's premium income grew 7% year-on-year to TWD 40.6 billion, ranking #2 by market share. Page 30 the gross combined ratio increased year-on-year due to higher natural catastrophe claims, while the retained combined ratio declined year-on-year, supported by effective reinsurance and higher return premiums from expanded underwriting capacity. This is the end of presentation.

Good afternoon. This is Chris Chen. There are many discussions and questions raised during our Chinese decision. Before we move into the Q&A, let me briefly recap some of the key topics and highlights. That may be helpful for our international investors. Overall, the audience showed particularly interest in our 2026 outlook, including key growth drivers and dividend policy. Starting with banking, we are targeting double-digit loan growth, supported by broad-based momentum across corporate, mortgage and consumer loans. Asset quality remains stable and we expect credit costs stay at a benign level similar to this year around 25 basis points. . For net interest margin, we expect full year NIM to remain relatively stable, broadly around this year's level. and net fee income has been strong over the past 2 years, creating a higher base. Therefore, we expect fee income to continue growing from a higher base with wealth management remaining the primary driver. Meanwhile, we expect the cost-to-income ratio at around 51% this year, reflecting continued investment in digital and overseas expansion. For case, continuing to build CSM remains our top priority. We expect IT growth in high in high CSM contribution, health and accident products. The U.S. dollar-denominated interest sensitive light products should also see continued growth while investment-linked products will remain more sensitive to capital market conditions. On the investment side, we are focused on enhancing our recurring year with the full year target at 3.5%. On the hedging side, following the IFRS accounting change effective from January this year gains and losses on foreign bonds measured at amortized cost will be amortized over the remaining life of the bond. And this will significantly reduce FX volatility and lower hedging needs. As a result, we will be able to reallocate the savings to strengthening our FX volatility reserve and the overall capital buffer. In addition, part of these savings can be redeployed into fixed income investments to further enhance our recurring income. Looking ahead, we expect the hedging costs to be stable at around 1.2% to 1.3%. With the liability interest costs, largely down to 2.2% to 2.3% following the IFRS 17 transition together with a recurring year around 3.5% and stable hedging costs, we expect to maintain a positive spread. In addition, we expect annual CSM release to grow at 10% going forward. And we were also asked about the source of earnings volatility. The main sources would be, first, mark-to-market movement from bonds classified under fair value TPL, which cannot be disconnected under fair value OCI. And second, variances, pertain actual and expected claims within the insurance service result. Overall, under IFRS 17, our earnings should be more stable and predictable going forward. Finally, dividend policy this year's dividend payment will be -- will still be determined based on IFRS 4 accounting. Our payout capacity remains solid. Will reflect our third highest earnings level while taking into account, including peers dividend year, investors' expectations and our future growth needs, while maintaining healthy financial metrics and capital levels, our goal remains to deliver a competitive dividend year and we will submit our proposal to the Board for their consideration and approval. These are the key highlights.

Ladies and gentlemen, we will now begin the question and session. [Operator Instructions]. First we will have Jimmy Huang, JPMorgan for questions.

Thanks for the presentation. Just a couple of questions. for life insurance for our own forecast. The first thing is, I think you mentioned that for other operating expense the indirect expense it could be only 50% of the normal level in the past. Can I confirm that is referring to roughly around TWD 8.6 billion in 2025. And that will be probably only around 50% of the level going forward? And the second question for Life is, if we look at the first 2 months, I think the effective tax rate for Life also become relatively stable, roughly around 18%, 19% compared to in the past, it was very volatile. So should we also assume that will be a more normalized effective tax rate going forward for Cathay Life? And then I think the third question is in the Chinese session, you mentioned the rise in U.S. yield, the impact on equity to asset ratio is actually positive if we assume 100 basis points and 30 basis point move on the U.S. dollar and Taiwan dollar rates. But if only the U.S. dollar move, is there any sensitivity that we can use for reference, if you just assuming Taiwan dollar yield start move, but only U.S. dollar move, by 100 bps, what would be the sensitivity for the equity ratio. And just 1 question on the banking side that you do mention the fee expenses in general, you made some assumption changes for the rebate program. You say it's onetime, but should we assume for the rest of the year, the fee expenses will also be higher or it's just in January? Because if you assume the usage rate going up, then as long as you have more like credit card consumption and the fee expenses should also be higher compared to in the past.

This is Robert Wu from Cathay United Bank. I think that I will answer the question first for about the credit fee income related to the January accounting estimate about the rewarded point expense ratio. I think this would be 1 of the accounting estimation because in the past, we just estimate that those reward points will not be fully utilized by the consumer. And you know that the reward point for the credit card is time limited. So most of them probably 30% of them would be re-expired without using. But we found that the program is so successful that most of our clients came to use this kind of ruble points. So average in the beginning of every year, especially in January, we were trying to estimate whether we should increase this kind of expense ratio estimation. So in January, we find out because of the popularity of this kind of reward points usage. So in general, we're increasing the estimation for the going-forward basis. So this would be a onetime 1 of reversion from the fee income number. But as I mentioned that, that means this would be an estimation, if the evopoint will now be used as we expected. For example, like that will be lower exchange rate exchange report point going forward. Probably that we will reverse back as well. So that would be a one-off. And even though that in the remaining month of this year. I think that if the credit card consumption increases and our fee income will also increase as well. So that will be minimized and smooth out the whole year of this kind of fee income contributions.

Jim, I think the following 3 questions about life. The first 1 is our expense. Actually, I didn't say any kind of that information. You just mentioned the 50% they have come from -- I think it's Taiwan Life disclosure, but we didn't disclose. Yes, but if on the same basis, actually, our amortized to that time is not -- is less than 50%. Actually, for our company, it's around like 40% to 45% around. So we are below -- we are below them. We didn't have declined 50%. But secondly, our test I think this -- yes, it's right. This is because from last year because the capital gain, especially from domestic capital there they didn't have take the come to income statement. So the effective tax actually is below. But right now, actually, mainly the capital gain from domestic market, actually, they come to return earnings. So they didn't have that higher effect. So you will see the first 2 months, actually, the tax rate stable, but the tax is that we still have a rather issue like the minimum AMT and et cetera, I still have a little bit -- some sector will effect. So I cannot guarantee you that the 16% to 18% is the normal cases. But in most of the cases, yes, they were comparison stable comparison in the IFRS 4 cases. This is second question. And third, about the rising interest rate, we didn't have this kind of U.S. dollar basis point, but Taiwan dollar didn't change because in that case, we don't want to discuss this kind of sensitive because that you just take this year that this month situation, you tell you want to send this situation. So I don't think it's -- this is just 1 month. We think in the long run, we're thinking the Taiwan dollar interest volatility is just 1/3 of the U.S. dollar notes. So we tell you it's long-term cases, not just for 1 month -- so this is what I can tell you. So sorry, I cannot disclose this kind of sensitive. But I tell you, yes, for -- I think you want as like in March, just the interest rate, especially U.S. dollar going up high, I think the huge -- but the Taiwan dollar almost keep the stable prices. But this is just 1 month, I don't think in the 1 year cases that they have -- because maybe next month, the U.S. dollar will become much lower. So I don't want to tell you that to sensitive situation. So this is my answer.

[Operator Instructions] Any questions? Ladies and gentlemen, we are now in question-and-answer session. [Operator Instructions]. Okay. Then there appears to be no further questions at the point. Then Mr. Lee, can we close the conference call now?

Okay. Thank you.

Thank you. And ladies and gentlemen, we thank you for your participation in Cathay Financial Holdings Company's conference call. You may now disconnect. Have a nice weekend. Thank you, and goodbye. .

Thank you. Good bye.

Thank you. Good bye.