Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2021-Q1

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's First Quarter 2021 Conference Call. [Operator Instructions] And now I would like to introduce Ms. Sophia Chang, CIO of Cathay Financial. And Ms. Chang, please begin.

[Yajou Chang, executive]

Thank you. Good afternoon and good morning to investors in Europe. Welcome to Cathay Financial Holdings 2021 First Quarter Analyst Meeting. My name is Sophia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, I'll be hosting the conference call, and thank you so much for joining us today. In the beginning, I would like to introduce the senior managers who are with us and followed us on the line.

Today, we have Mr. Daniel Teng, Senior EVP of Cathay Financial Holdings. Ms. Grace Cheng Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Ms. Joyce Tsai, Senior EVP of Cathay United Bank. We also have the IR team led by [ Yajou Chang ] and Charlie is also on the line in addition as well. For today's conference call, Charlie from our IR team, will be presenting the first quarter results, and we will announce the new 2020 embedded value details. After the presentation, we are open for a Q&A session in which senior management will be answering your questions. With further ado, let me pass the call over to Charlie for the briefing of first quarter results. Charlie?

[Charlie Hu, executive]

Thank you, Sophia. Let's start with the business overview of first quarter 2021 on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank delivered robust loan growth net interest margin improved and net interest income grew slightly, continue to expand overseas business. Offshore earnings accounted for 45% of pretax earnings. Fee income grew 5% and wealth management and credit card fee grew 10% and 7%, respectively. Cathay Life continued value-driven strategy. Protection-type policy FYP grew almost 40% year-on-year.

The asset under management of investment-linked products continued to grow, reached TWD 670 billion, ranked #1 in the industry. Deliver strong investment performance with after hedging investment yield of 6.3%, setting record high earnings for the first quarter. Embedded value increased 22% to TWD 1.1 trillion, equivalent to $86.8 per company share.

Cathay Century, the general insurance subsidiary. Premium income grew steadily market share was 11%, maintained #2 in the industry. Overseas premium continued to grow. Asset management subsidiary, Cathay SITE, AUM was over TWD 1 trillion, we're #1 in the industry. Its first quarter earnings was record high. Lastly, Cathay Securities earnings for the third quarter reached record high for the second consecutive year. Please look at Page 5, Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income for the first quarter reached historical high of TWD 57.6 billion, more than doubled the earnings for the same period last year, driven by sound investment performance. EPS was TWD 4.36.

Page 6 shows the subsidiaries' net income and ROE. Cathay Life delivered strong investment income and quarterly record earnings benefited from the economy recovery and financial market rally. Cathay SITE and Cathay Securities also reported historical high earnings. Cathay United Bank's net income decreased due to higher year-on-year base of investment income last year. Its core earnings grew on year. On a consolidated basis, the holding company ROE was 26% in the first quarter 2021.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 865 billion as of the end of first quarter. Book value per share was TWD 57.8.

Page 9 and 10 shows our overseas expansion. Cathay Financial Holdings actively expanded operation in Southeast Asia and owns footprint in 9 of 10 ASEAN countries. Cathay Life total premium increased 56% year-on-year, and Cathay Century performed steadily in Vietnam. As for the subsidiary operation in China, the business of Cathay United Bank China is on the track. For Cathay Life joint venture in China, the total premium grew 21% year-on-year.

Please turn to Page 12 for more detail about the banking performance. Cathay United Bank delivered solid loan growth, driven by consumer loans, mortgage and corporate loans. Loan balance increased 13% to over TWD 1.7 trillion as of the end of first quarter 2021. Deposit grew 11% year-on-year to TWD 2.6 trillion. The demand deposit ratio increased to 71%.

Interest yield is shown on Page 13. The net interest margin spread rebounded driven by lower funding cost in the first quarter of 2021. The interest spread was 1.72%, and the net interest margin was 1.2% for the first quarter. Page 14 shows the asset quality of Cathay United Bank. Due to prudent lending policy, Cathay United Bank maintained low NPL ratio at 19 basis points and coverage ratio at 853%. Gross provision was TWD 1.3 billion and recovery was around TWD 300 million.

Now please turn to Page 15 for SME and foreign currency loans. Cathay United Bank focused on developing SME and foreign currency loan with benign asset quality. SME loan balance reached TWD 247 billion, increased 8% year-to-date. Foreign currency loan balance was TWD 239 billion, accounting for 14% of total loans.

Page 16 shows offshore earnings. Offshore earnings was TWD 3.5 billion. The decline was mainly due to the high base of investment income last year. Offshore earnings accounted for 49% of the bank's protect earnings for the first quarter.

Please turn to Page 17 for fee income. Fee income grew 5% to TWD 5.8 billion in the first quarter of 2021. Credit card fee grew 7%, and wealth management fee grew 10%. Page 18 shows the breakdown of wealth management fee. Wealth management fee income increased to TWD 3.5 billion, in which mutual fund fee income grew more than 30% year-on-year. Cathay United Bank continued its focus on the diversified asset allocation products credit.

Please move to Page 20 and 21 for Cathay Life premium performance. Total premium increased 4% percent to TWD 170 billion. On Page 21, first year premium FYP was TWD 59 billion, grew 40% year-on-year, driven by the half sale of investment product attributed to the favorable capital market. The protection-type policy FYP up by almost 40% year-on-year. The annualized premium APE declined 23% to TWD 14.1 billion, owing to the dominating single-pay investment in product in FYP.

Page 22 shows the value for new business. Based on the 2020 embedded value assumptions, value of new business for the first quarter was TWD 8.3 billion. VNB and VNB margin declined due to the deferred premium income from stop selling effect during the end of 2019 caused by lower policy reserve rate at the beginning of 2020. Excluding such impact, VNB and VNB margin both increased.

Page 23 shows the cost of liability and breakeven asset, both continue to improve. The reserve-based liability cost was 3.81% as of the end of first quarter 2021, improved 11 basis points year-on-year. The breakeven asset was 3.11%.

Please look at Page 24 for the investment portfolio. Cathay Life total investment reached TWD 7 trillion as of the end of first quarter 2021. Overseas investment accounted for 66%. The investment return of each asset class are as follows: Cash and cash equivalents, 0.2%; domestic equity, 30.2%; international equity, 16.7% pre-hedge; domestic bond, 1%; international bond, 6.5% pre-hedge; mortgage and secured loans, 1.5%; policy loans, 5.3%; real estate, 2.3%.

Overall investment yield are shown on Page 25 and 26. After hedging investment yield was 6.31%. Cathay Life capture market opportunities to realize gains in capital markets, boosting the after hedging investment yield. On Page 26, the pre-hedging recurring yield was 2.79%, the decline was mainly due to the impact of [indiscernible] amid low interest rate environment in 2020. The rebound in U.S. bond yield year-to-date should support Cathay Life's recurring income to grow.

The hedging cost of first quarter 2021 was 1.4%, improved year-on-year. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging cost. Please look at Page 27 for the regional breakdown of overseas fixed income. For overseas fixed income investments, Cathay Life allocated 46% in North America, 18% in Europe and rest are in Asia Pacific and other countries. Page 28 shows the book value and unrealized gain of financial assets. The consolidated book value and unrealized gain of financial assets reached TWD 673 billion and TWD 98 billion, respectively. The unrealized gain of financial assets was affected by the increase of U.S. long-term bond yield this year.

Next, please turn to Page 32 and 33 for the performance of Cathay Century. Asset interest premium income was TWD 6 billion. Market share was 11%. Cross-selling synergy continued to perform well. Over 60% of premium was generated by the group channel. So far, I've updated the first quarter 2021 operating results. Today, we have one additional topic we would like to update, which is the 2020 embedded value and the present value estimate.

Please turn to Page 36 for Cathay Life's 2020 EV and AV estimates. On Page 36, we have summarized EV and AV major components. In this table, we have provided asset yield assumptions for various insurance policies. You can see that we have increased equivalent asset yield by 6 basis points to 3.97%. Based on the new assumption, Cathay Life 2020 embedded value increased by 22% year-on-year to TWD 1.1 trillion, equivalent to TWD 86.8 EV per holding company share. As for FSO value, Cathay Life's AV as of 2020 was TWD 1.45 trillion or TWD 109.8 AV per holding company share. We have also estimated 2021 value for 1-year new business of TWD 34.5 billion and apply multiple of 8.8 when deriving value for new business.

In the following pages, you can see more detailed analysis on 2020 movement of EV components. On Page 43 and 44, we have provided a scenario of impact from various investment yield and discount rates. We're on Page 45, you can see a summary table for year-on-year comparison. We hope information is useful to you. This is to end our presentation. Now let's open to Q&A.

[Operator]

[Operator Instructions] The first to ask question, Sam Wong from Citi.

[Unknown Analyst]

I have 2 strategy questions, if I may. Number one, notice there is a foreign bank exiting the Taiwan retail market right now. So what's your view on M&A and then number two, 2 of the 3 virtual banks in Thailand have already launched. So are you seeing any changes in customer behavior? And how are you responding to that?

[Unknown Executive]

[Foreign Language]

[Grace Chen, executive]

Hi, Sam. You asked 2 questions. One is you noticed that there are foreign banks entering Taiwan's market. This is a specific case. If you look at Taiwan Bank, the market share is already very concentrated. Most of the banks will be looking for more details provided by the bank who looks to actually the consumer banking. So at current moment, I think most of the banks are looking for what is available information. Today, we don't have much information that we can share with you. And you also asked about whether this will trigger an M&A in Taiwan because the landscape is already -- if you look at the player, most of the M&A activity already happened very long time ago. And so I do not expect big scale of M&A activities in the banking sector in Taiwan.

[Unknown Executive]

Actually, for the first question, we are looking into further discussion with Citi Bank. So I don't think we are appropriate to discuss that topic right now.

[Unknown Analyst]

Yes. The second question is on the virtual bank. So both LINE Bank and Rakuten Bank already launched. So are you seeing any changes in consumer behavior? And what CapEx has to do in response to that?

[Unknown Executive]

We don't see any customer behavior change right now. Because I guess that's a totally different customer cluster. So we are also developing our virtual bank -- our digital bank. So that kind of customer cluster is already on our portfolio. So, currently, we don't see any change for our customers.

[Grace Chen, executive]

It is very important that regardless, there is online banks, pure online bank or not, it is very important for us to penetrate into next generation, and Cathay, we have been building our digital platform for many years, and that can reflect to outlet deposit inflow, our wealth management platform. So we will be observing competitor development, but customer is having proper digital service capability. It's also our duty.

[Operator]

[Operator Instructions]

[Yajou Chang, executive]

If no further question, it's just okay that we can conclude the call. Before -- I can summarize a few points from the Chinese section. First of all, year-to-year earnings and loan growth. If you look at the loan growth year-to-date, it's about 4.8%, and we have seen quite stabilized net interest margin. So hopefully, this year, on the net interest income we can secure some decent margin growth for 2021. And [ Abel ] also mentioned that the hedging cost for 2021, we are expecting hedging costs for the whole year to return back to our expected range of 1% to 1.5%. Do we have more questions on the line?

[Operator]

We do have Jamie Horn of JPMorgan for questions.

[Unknown Analyst]

Just two quick questions for me on the banking side. One is in terms of your improvement on the CASA ratio for deposits, do you think how much is affected by equity market versus the really the underlying growth of -- more sustainable growth in terms of your CASA deposits. And the second question is, I might probably didn't hear very clearly in the Chinese session, but just trying to understand what is the reason for a relatively bigger quarter-on-quarter increase in the NPL amount at Cathay United Bank in the first quarter and how do we expect -- like from which industry? And how should we expect the related impact on credit cost?

[Unknown Executive]

Okay. For the credit cost, I think the first quarter has come from -- I mean, the NPL has come from some of the SME loan. Is that answer your question?

[Unknown Analyst]

So all those are connect, right? So we don't need to worry about credit cost?

[Unknown Executive]

You don't need to worry because we are so conservative. Half of them is from the -- is fully collateralized. half of that is -- it's purely credit.

[Chao-Ting Lin, executive]

And, you can see on the same page on Page 14, our gross provision was higher than last year. But most of the region is growth because we have very strong loan growth and with that relation, we will make 1% provision against that loan growth itself. So most of the TWD 1.3 billion gross provision is a big part of that is to provide for the general provision for the loan increase.

[Unknown Executive]

And for the CASA ratio, I think we probably remain at 70%, looking forward.

[Unknown Analyst]

So let's say if equity market has a bigger pullback as a result, you don't -- we don't need to worry about this CASA ratio to decline due to the outflow of settlement deposits?

[Chang-Ken Lee, executive]

I currently, we will have no further evidence to see that, but I cannot guarantee you.

[Unknown Analyst]

Yes. I see. Let me ask this question from another angle, so within your Cathay deposits, what's the percentage related to the settlement deposit?

[Unknown Executive]

Currently, I don't have that kind of data. So maybe we can reply to you after we check.

[Operator]

And there appears to be no further questions at this point. Ms. Chang, can we close the conference call now?

[Yajou Chang, executive]

Yes. Just one second please. Jamie, I look at the deposit breakdown. We do see broker settlement deposit increase on a Y-o-Y basis. But if you look at the total deposit Y-o-Y, the actual amount differential, the low count increase does not dominate that number that increase also. So it's still a big part is that Y-o-Y increase after a month because of our deposit inflow. We'll check a detailed number we give afterwards. But the most of the contribution from the Y-o-Y increase is the regular deposit.

We do have some deposit increase from the [indiscernible], but it's not a major contribution. Okay. If no -- operator do we have no question?

[Operator]

Not at this moment. Thank you.

[Yajou Chang, executive]

Thank you for your participation in Cathay Financial Holdings conference call. And the IR team will standby for you. If you have further questions, please do feel free to call our IR team. Thank you, and be safe, be healthy and a happy COVID-19, get over as quickly as possible. We do have a lot of cases in the past few days.

Cathay has already planned for a long time and a smooth operating capability. We have very quickly arranged more than half of the employees who can try to work from home. So far, the company has continued to expand its capability in responding to the contingency and COVID-19 and since beginning of last year, we've involved with a lot of strategic planning and product testing.

We are very glad to see that the recent increase in case we can move very quickly. And rather we'll come home with limited disruption. We will continue to protect our infrastructure to ensure a more service to customers and to ensure employees' health and safety. Thank you very much, and we'll speak to you soon. Bye.

[Operator]

Thank you. And ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Stay safe, and goodbye.