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

Welcome, everyone, to Cathay Financial Holding Company First Quarter 2026 Conference Call. [Operator Instructions] And 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 joining us from Europe. Welcome to Cathay Financial Holdings 2026 Fourth Quarter Analyst Meeting. I am C.K. Lee, CEO of Cathay let me begin by introducing the senior executives with us at Ms. Grace Chen, CFO of Cathay Financial Holdings; Mr. Abel Lin, President of Cathay Life; Mr. Robert Fuh, EVP of Cathay United Bank. Before I begin the presentation, let me share some key highlights. We delivered start start to the year in the first quarter, Case Financial Holding reported net income of TWD 31.7 billion. and adjusted net income reached TWD 48.6 billion. Core business momentum remains strong across the group. Cathay [indiscernible] reached a new fourth quarter earnings record, driven by solid loan and deposit growth, higher net interest income and wealth management fee growth. Cathay adjusted net income reached the second highest fourth quarter level on record. While robust new business CDM renovation and the civiositive spread continue to support future earnings. Cathay Century assets sit and Cathay securities also delivered record high first quarter earnings. This reflects steady premium growth and will contain loss ratio at Cathay century. [indiscernible] expansion at the case side and the active Taiwan equity market turnover with continued brokerage market share gains at Cathay securities. In addition, our board approved a cash dividend of TWD 3.5 per share on April 28 represented a 49.6% payout ratio and a 4.7% dividend yield based on the share price at announcement, reflecting our continued focus on shareholders' returns. Now I will hand over the call to Ya- Jou do from our IR team for the 2026 Fourth Quarter Results Presentation. Ya-Jou please.

Thank you, C.K. Let's start with business overview on Page 4, which provides a highlight on each subsidiary. Cathay United Bank, Net income reached a new first quarter record, up 8% year-on-year. Loans and deposits both posted solid growth, while net interest income increased 13% year-on-year. Wealth management fees also grew solidly up 13% year-on-year. Cathay light, new businesses here reached TWD 7.1 billion, and CSM balance increased to CNY 532.4 billion. Liability in trade costs declined significantly to 2.11%, supporting a stable positive spread. -- net work rebounded by JPY 121 billion with adjusted equity-to-asset ratio reaching 13.5%. Cathay Century the general insurance subsidiary. Retail premium continued to grow with market share reaching 12.8%. Net income also reached the first quarter record, supported by business growth and well content loss ratios across product lines. Asset Management subsidiaries, Cathay light, AUM reached TWD 2.8 trillion, while discretionary mandate AUM ranked the #1 in the industry. The company also continued to expand its EDF product offerings. Cathay Security continued to gain market share in the domestic brokerage supported by digital option and group synergies. Please turn to Page 5, Cathay Financial Holdings heading come EPS. Starting from 2026, Taiwan insurance industry adopted IFRS 17. I as the overlay approach for financial assets no longer apply certain valuation gains and losses are presented differently in the IFRS 17 restated figures, reducing comparability. Therefore, for a more meaningful year-on-year comparison, we continue to use IFRS 4 figures for the same period of last year. In addition, after the transition, most equity investments were reclassified as fair value through other comprehensive income, OCI. We also disclosed adjusted earnings, including FVOCI equity disposal gains as these gains are reflected in retained earnings and remain distributable. In the first quarter of 2026, Cathay Financial Holdings reported net income of CNY 31.7 billion, adjusted net income of CNY 48.6 billion. EPS of 2.15 and adjusted EPS of 3.31. Overall, core business momentum remained strong across all subsidiaries year-to-date. Page 6 shows our subsidiaries net income and ROE. Cathay United Bank Cathay Century Cathay Site and Cathay securities all delivered record high earnings for the first quarter. For Cathay Life, adjusted net income, including OCI equity disposal gains reached RMB 33.9 billion, the second highest first quarter level historically. On a consolidated basis, the holding company's ROE reached 16.9%, and all major subsidiaries delivered double-digit ROE please turn to Page 7, I see the book of value of Cathay Financial Holdings. The holding company's consolidated net worth increased by TWD 136 billion year-to-date to TWD 817 billion, supported by earnings contribution and strong recovery in OCI asset and liability valuation to better reflect economic value, we also disclose our adjusted net worth, which include after-tax CSM. Adjusted book value per share reached TWD 1.26 trillion. And after deducting preferred shares, adjusted book value per share was TWD 179 Page 8 shows our ongoing overseas expansion. We continue to deepen our regional process through localization, digitalization and green finance. Key highlights include the merchant app launched in Cambodia and strong premium growth from [indiscernible] Cathay Life in China, with total premium up 80 year-on-year. Now let's move to the performance of our major subsidiaries. Please note all the figures in this section are presented on a stand-alone basis. Please turn to Page 10 for more details about the banking subsidiary. Cathay United Bank's total loan reached nearly TWD 3 trillion, up 10% year-on-year, with solid growth across all segments. Corporate loans increased 12% year-on-year. Mortgage loans grew 7% year-on-year and consumer loans were up 11% year-on-year. Deposits grew 17% year-on-year to TWD 4.5 trillion and maintain the advantage of high demand deposit ratio of around 60%. Interest yield is shown on Page 11. In the first quarter, net interest margin 1.59%, and interest spreads reached 1.91%, both improving year-on-year and quarter-on-quarter, mainly supported by U.S. cut and well content funding costs. Page 12 shows the asset quality, asset the quality remains sound with NPL ratio at 16 basis points and coverage ratio at 10.31%. And annualized credit cost was 25 basis points up year-on-year, mainly due to a higher recovery base last year and increased the general provision on the strong loan growth. Please turn to Page 13 for SME and foreign currency loans. SME loans grew 9% year-on-year to TWD 371 billion, accounting for 13% of the total loans. Foreign currency loans increased 21% year-on-year to TWD 348 billion. The bank continued to pursue prudent growth while maintaining dissipate asset quality management. Page 14 shows offshore earnings. The offshore earnings slightly declined on year to TWD 2.6 billion. The decline was mainly due to higher investment income based last year. Please turn to 15 for net fee income. Net fee income was TWD 10 billion, down 2% year-on-year, mainly due to a one-off adjustment related to credit card ever redemption underlying momentum remains healthy with strong card spending and 13% growth in wealth management fees. Page 16 shows the breakdown of wealth management fee. Wealth management fees rose 13% to TWD 7.5 billion. Major bond fees increased 41% year-on-year, both wealth management consumers and AUM continue to show steady growth, supporting sustainable fee income growth. Please move to Page 18 for Cathay Life's earnings breakdown. Under IFRS 17, earnings are mainly presented through insurance service results, financial results and other operating results. In the first quarter, insurance service results was TWD 11.6 billion, supported by steady [indiscernible] release while financial result was TWD 10.8 billion, mainly driven by positive earning spreads. Overall, Cathay Life reported net income of TWD 17.4 billion. including OCI equity disposal gains, adjusted net income reached TWD 33.9 billion, the second highest level historically. Please move to Page 19 for Cathay Life's premium performance. First year premium FYP reached TWD 94 billion up 71% year-on-year, while annualized premium reached TWD 20.7 billion, up 23% year-on-year, supported by strong sales momentum in investment lead products amid favorable financial markets. Page 20 shows the new business CSM. New business CSM reached TWD 27.1 billion in the first quarter. Health and accident products contributed to more than half of new business yes, while Thai agent channel remained the key contributor accounting for nearly 90%. Please turn to Page 21 for [indiscernible] balance movement balance reached TWD 532.4 billion, up TWD 20.5 billion year-to-date, mainly supported by new businesses DSM. DSM Gres was TWD 8.5 billion, providing stable support to insurance service results. Page 22 shows the liability interest cost and breakeven as a yield. After transition to IFRS 17, insurance liabilities are measured using market-based discount rates catalyzed liability interest costs declined significantly by 129 basis points to 2.1%. And while the breakeven yield also declined to 2.02%. Please look at Page 23 for the investment portfolio. Following the IFRS 17 transition, financial assets will are designated and policy loans were reclassified under insurance liabilities. Total investment was TWD 7.7 trillion at quarter end with overseas investments accounting for 70%, and please refer to the right-hand side for investment yield by each asset class. Please turn to Page 24 for investment performance. In the first quarter of 2026, after-hedging investment yield was 3.72%, including FVOCI equity disposal gains. Under P&L basis, excluding these gains, after-hedging investment yield was 2.85%. Pre-hedging recurring yield was 3.4% and we also provide a detailed breakdown in the pan deck for your reference. Please turn to Page 25 for FX hedging strategy. Annualized hedging cost was 1.26%, higher year-on-year this was mainly because the FX validity reserve accounts was not yet applied in the first quarter last year and the benefit from Taiwan dollar appreciation was reflected in the P&L and compare provision with [indiscernible]. After adopting the new FX volteserve accounts and FX amortization for bonds classified as amortized cost, volatility in FX gains and losses has been significantly reduced and is now fully absorbed by the FX volatility reserve. Hedging costs become quite stable. The FX volatility reserve increased by TWD 10.1 billion during the quarter, reaching TWD 123.9 billion at the quarter end. Please turn to Page 26 for cash dividend income and regional breakdown of overseas bonds. This page provides historical cash dividend income and regional breakdown of overseas we continue to diversify overseas fund investments across regions to balance risk and returns. Please turn to Page 27. A for the net worth and OCI valuation changes. Cathay lite net worth increased by TWD 121 billion in the first quarter, mainly supported by earnings contribution and a strong recovery in OCI asset and liability valuation asset and liability valuations improved by TWD 86.2 billion, reflecting favorable equity markets and lower liability valuations from rising Taiwan interest rate which helped offset the impact of higher U.S. rates on bond valuation Equity-to-asset ratio reached 8.2%, and the adjusted equity to asset ratio reached 13.5%, indicating a solid capital position. Page 29, this page summarizes Cathay Life's key operating and financial indicators after the IFRS 17 transition for your reference. Next, please turn to Page 31 to 33 for the performance percent. Poteentry's region premium reached TWD $10 billion with market share at 12.8%, ranking second in the industry. Page 33, the retained combined ratio improved by 2.5 percentage points year-on-year, driven by lower loss ratio across product lines as well as the higher insurance revenue supported by increased underwriting capacity. And this concludes the presentation. We will now open the floor for Q&A.

[Operator Instructions]

Good afternoon. This is Grace Chen. Before we move into the Q&A, let me briefly recap some of the key topics discussed during our Chinese session. which may be helpful for our traditional investors. The discussion mainly focused on our 2026 outlook, key growth drivers and dividend policy. For banking business, Cathay United Bank remained resilient. We continue to target double-digit loan growth for the full year supported by broad-based momentum across all segments with foreign currency loans expected to remain strong. On net interest margin, we were more conservative at the last analyst meeting. Given recent economic developments, we now see room for mean to expand this year. Asset quality remains stable and we expect credit costs to stay around this year's level of 25 basis points. . Wealth management and credit card spending also remains solid, which supports which should support healthy fee income growth this year. For life insurance, performance was strong on both the insurance and investment side. New business CSM reached TWD 27 billion in the first quarter, representing a 36% achievement rate against the full year target of TWD 75 billion. This puts us well on track towards our full year target. In terms of hedging, since the FX accounting changes, the hedging cost will be quite stable. For the year, it is likely around 1.2% which is towards the lower end of our previous guidance range of 1.2% to 1.3%. The hedging ratio may also gradually decline by a few percentage points in the next 5 years, which should further help reduce hedging costs. in addition to sizable SB OCI equity disposal gains. Cathay Lifes book value also rebounded significantly increasing by more than TWD 200 billion in the first 4 months to cover to over to TWD 20 billion as of the end of April. With the equity-to-asset ratio further improving to 9.3% on on dividend capacity, as we explained earlier, FVOCI equity disposal gains are reflected directly in retained earnings and remain distributable. FVOCI equity disposal gains have been sizable so far this year. For Cathay Life adjusted earnings for the first 4 months were approaching TWD 60 billion and the recent unrealized equity gain balance is above TWD 270 billion. [indiscernible] equity disposal gains momentum has continued into May, supporting strong adjusted earnings. Overall, these factors give us more confidence in dividend capacity this year. For dividend policy, we will consider adjusted earnings, business development needs and peer dividend yield levels while maintaining healthy capital and financial metrics. Our goal remains to provide a competitive dividend yield. These are the key highlights.

Thank you. Grace. [Operator Instructions] Our first question will be coming from Jimmy Huang of JPMorgan.

A couple of questions from me. For banks, could we get a swap revenue in the first quarter and then also, I think on the consumer banking side, we know that the retailers also came into the gaining access to the equity markets through home equity unsecured personal loan or other personal loans. So how exactly you know that your consumer loan book is exposed to the equity market? And how do you do the risk management for different types of lending for life insurance, is the TWD 27 billion this quarter, April to April comparison to TWD 24 billion in first quarter last year. And if that's the case, then the decline in CSM margin, is that largely due to the investment in product sales this year or any other reason? And I think the final question is should we include CSM into the calculation of equity as ratio? Because this ratio is a regulatory ratio, and I'm not sure whether the regulator has already changed the definition or not? Because I remember when this ratio was introduced back in '18 or '19 I think the creative season at that time was because the base equity leverage. The balance sheet leverage was too high. for life insurance companies. So aside from the RBC ratio, regulators introduced additional requirements to control the balance sheet leverage. So even though CSM is a qualified capital by still a liability item. So I'm just wondering whether in the future we should include or exclude CSM into the calculation for regulatory requirements.

This is Robert speaking from continue banks. So the first question is about the swap position is that from our bank's perspective, this swap position is only to help us to adjust our currency exposure and to make sure that we can have a higher interest income to contribute our net interest income. So from our reservations in the first quarter, I think the swap would be still would be relatively resilient when we talk about mark-to-market gain a lot, which is relatively small. But relatively, we used a swap position to increase our foreign currency investment positions. So that will be give us a very higher interest income. That's why our net interest margin is increasing in the first quarter of this year. that's the explanation about our swap position. The other part is about the retail especially for the credit facility, whether that we observe that kind of credit facility will be for the purpose of the equity market investment because when our clients to deliver the application to our the loans, from us to establish the credit facility, we will monitor based on the regulations requirement to understand what is the purpose of the investment. From our opposition right now that the major purpose for this kind of loan would be more conservative investment for someone like a fixed income bonds, something like that. So relatively, we didn't see a very high surge for the equity market purpose, the credit facility but still, we also observed that there will be some demand from the client as well. But from our CP's perspective, we're relatively conservative about that. And we will make sure that the credit quality or the leverage ratio would be relatively safe. So I think that's a portion of which is not right now, it would be not significant backing our balance sheet.

Jimmy, this is go. The first one, the system margin this year, yes, compared to last year, this is mainly the as you know, the first quarter, our investing is so huge. And so this investment mainly when we calculate it include these investment in like VL, which gratifies insurance contract that will be combined to calculate the margin. So because the the first quarter actually increased quite a lot. So the margin, I think, compared to the same period that reduced. But if we exclude the vein contract actually for the traditional country the CS market, which is higher and higher pretty large comparison last year. This is because this year for normal, especially for the U.S. dollar interest credit product, actually their pain period much longer comparison that same period. So if we consider only traditional CSM margin, which is higher, but total core because the investment link, so their sales margin is lower. And the second part is, yes, I think right now, regulatory, we still in the communication with our regulator to pursue maybe in the regulatory that have just 3 then the calculation should be included the after-tax CSM but at this moment, I think they didn't finalize this regulatory change. So we we're still in the company location. But we think about maybe at the end of this year, should we have a clear answer.

[Operator Instructions] Thank you. Then there appears to be no further questions at the point. And Mr. Lee, can we close the conference call now?

Yes. So thank you for participation for the analyst meeting. Should we have any questions, please come the go ahead in [indiscernible] thank you.

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 again and Goodbye.