Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2022-Q1

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's First Quarter 2022 Conference Call. [Operator Instructions] And now I would like to introduce Ms. Shu-Fen Cheng, CIO of Cathay Financial Holding Company. Ms. Cheng, please begin.

[Shu-Fen Cheng, executive]

Thank you. Good afternoon, and good morning to investors in Europe. Welcome to Cathay Financial Holding's 2022 First Quarter Analyst Meeting. My name is Shu-Fen Cheng, the Chief Investment Officer of Cathay Financial Holding. Today, I would like to host the conference call. Thank you very much for joining us today.

In the beginning, I would like to introduce the senior managers who are with us on the line. Today, we have Mr. Daniel Teng, Senior EVP of Cathay Financial Holdings; Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holding; Mr. Abel Lin, Managing Senior EVP of Cathay Life. Mr. [indiscernible], Senior EVP of Cathay [indiscernible].

For today's conference call, Ya-Jou from our IR team will present the first quarter results and announce the new 2021 invested value details. After the presentation, we are open for a Q&A section in which senior management will be answering your questions.

Without further ado, let me pass the call over to Ya-Jou for the briefing of first quarter results. Ya-Jou, over to you.

[Yajou Chang, executive]

Thank you, Shu-Fen. Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank delivered robust loan growth in deposit and loans, asset quality remains benign. Interest spread expanded, net interest income grew 10% year-on-year. Net fee income grew 15% year-on-year, driven by robust fee growth in wealth management, credit cards and syndicated loans.

Cathay Life continued the value-driven strategy, protection-type policies first year premium grew 21% year-on-year. AUM for investment-linked products rose to over TWD 700 billion, ranking #1 in the industry. Cathay Life also delivered sound investment performance with after-hedging investment yield of 4.7%. Hedging cost certainly should improved substantially. Embedded value increased 5% to TWD 1.2 trillion, equivalent to TWD 91 per share of the holding company.

Cathay Century, the general insurance subsidiary, premium income grew 14% year-on-year. Market share was 12%. Asset management subsidiary, Cathay SITE AUM was over TWD 1.2 trillion, ranked #1 in the industry. Lastly, Cathay Securities, number of customers hit new record of 1.3 million as of the end of the first quarter.

Please look at Page 5, to the Financial Holdings net income and EPS. Cathay Financial Holding's net income for the first quarter reached its second highest record of TWD 34.4 billion. The year-on-year earnings decline was mainly due to higher base period for investment gains and favorable financial market last year. EPS was TWD 2.6.

Page 6 shows the subsidiaries' net income and ROE. Cathay United Bank's net income grew 7% year-on-year, driven by robust net interest income and fee income. Cathay Century and Cathay SITE both recorded record-high first quarter earnings. Cathay Life delivered its second-highest historical first quarter earnings. The year-on-year decline was due to the higher base period for capital gains in the same period of last year. On a consolidated basis, the holding company ROE was 16.4% in the first quarter.

Please turn to Page 7 to see the book value of Cathay Financial Holding. The consolidated portfolio of holding companies was TWD 767 billion as of the end of the first quarter. The book value declined due to the rising bond yields and falling equity markets. Book value per share was TWD 50.3.

Page 9 and 10 show our overseas expansion. Cathay Financial Holding continue to expand overseas business. For banking, the Ho Chi Minh City branch opened in April. In Cathay Life, Vietnam, total premium increased 11% year-on-year. As for the subsidiaries' operation in China, Cathay United Bank, Hong Kong branch, issued the first structured product, providing greater flexibility in asset allocation for high-net-worth customers. For Cathay Life's joint venture in China, the total premium grew 8% year-on-year.

Please turn to Page 12 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth across consumer, mortgage and corporate loans. The total loan balance increased 7% year-on-year to TWD 1.8 trillion at the end of the first quarter. Deposits grew 11% year-on-year to TWD 2.9 trillion. The demand deposit ratio reached 73%.

Interest yield is shown on Page 13. The interest spread increased 5 basis points quarter-on-quarter to 1.79% due to optimized loan mix and increasing in lending rates. The net interest margin slightly declined quarter-on-quarter as we reduced the foreign currency bond position in the first quarter.

Page 14 shows the asset quality. Cathay United Bank maintained low NPL ratio at 8 basis points and coverage ratio at 1944%. Gross provision was TWD 0.7 billion, [ in line ] with the general provision for relation requirements. Recovery was TWD 0.5 billion.

Please turn to Page 15 for SME and foreign currency loans. Cathay United Bank grew SME with benign asset quality. SME loan balance reached TWD 279 billion, accounted for 15% of the total loan. Foreign currency loan balance grew 4% to TWD 227 billion. While showing notice growth, if we excluding the impact from the Taiwan dollar depreciation.

Page 16 shows offshore earnings. The Offshore earnings was TWD 2.7 billion. The decline was mainly due to the lower investment income this year.

Please turn to Page 17 for fee income. Fee income grew 15% to TWD 5.2 billion in the first quarter, driven by growth in wealth management, credit card and syndicated loans.

Page 18 shows the breakdown of wealth management fee in the first quarter. The wealth management fee income increased 6% to TWD 3.7 billion. Strong growth in bancassurance fee more than offsetting the decline in mutual funds fee.

Please move to Page 20 and 21 for Cathay Life premium performance. Total premium was TWD 126 billion in the first quarter. The decline was due to the lower renewal premium, reflecting the end of regular premium payment test from some top-selling products as well as the lower first year premium resulting from a higher base period of investment linked policies last year.

On Page 21, first year premium, FYP, and annualized premium, APE, was TWD 43 billion and TWD 13 billion, respectively, both declined year-on-year due to high base period for investment-linked policies in the first quarter of last year and a strong capital markets. Protection-type policies FYP grew 21% year-on-year, supporting the contract service margin.

Page 22 shows the value for new business. Based on the 2021 embedded value assumptions, value of new business for the third quarter was TWD 8 billion. The decline was due to the same reason as we mentioned earlier, the high base period for sales volumes in investment-linked policies last year. However, with our continued efforts in growing the high-CSM protection type of products, VNB margin increased year-on-year.

Page 23 shows the cost of liability and breakeven asset yield both continued to improve. The reserve base liability growth was 3.75% at the end of first quarter improving 2 basis points year-to-date. The breakeven asset yield was down to 3.07%.

Please look at Page 24 for the investment portfolio. Cathay Life total investment reached TWD 7.2 trillion as of the end of first quarter. Overseas investment accounted for 60% -- 68%. The investment return of each asset class are as follows: cash and cash equivalents, 0.2%; domestic equity 10.5%; international equity, 8.8% pre-hedge; domestic bonds 2.2%; international bonds, 4.3% pre-hedge; mortgage and secured loans, 1.9%; policy loans, 5.6%; real estate, 2.8%.

Overall investment yields are shown on Page 25 and 26. After-hedging investment yield declined from a very high base of last year to 4.74%, which is still the second highest historical record in the first quarter period. The benign investment performance was driven by substantial decline in hedging costs while seizing opportunities for capital gains.

On Page 26, left-hand side, the pre-hedging recurring yield increased 4 basis points to 2.83%. We saw significant increase in overseas bond yield year-to-date, which should support the recurring yield enhancement. The overall hedging result with a net gain of 43 basis points in the first quarter, owing to Taiwan dollar depreciation and effective proxy hedging. The foreign currency reserves reached TWD 23 billion as of the end of first quarter.

Please turn to Page 27 for regional breakdown of overseas fixed income. For overseas fixed income investment, Cathay Life allocated 48% in North America; 18% in Europe; and the rest are in Asia Pacific and other countries.

Page 28 shows the book value and unrealized financial assets. Both was done year-to-date reflecting mark-to-market decline from rising bond yield and falling equity markets. However, if we base our IFRS 17 center to mark-to-market both asset and liability, as the decline in liabilities exceeded that in assets, the book value increased by over TWD 100 billion between September 2021 to the end of the first quarter this year.

Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium increased -- income grew 14% year-on-year to TWD 7 billion. Market share was 12%.

Page 34, the gross combined ratio and retained combined ratio declined due to higher year-on-year base for loss ratio, resulting from relatively large claim events from commercial fire insurance last year. This is our first quarter operating results. The next session, we will provide the 2021 embedded value and appraisal value.

Please turn to Page 36 for the summary of embedded value and appraisal value major components. In this table, you can see the asset yield assumptions for various insurance policies. We increased the equivalent asset yield by 3 basis points to 4.06%.

Based on the new assumption, Cathay Life 2021 embedded value increased by 5% year-on-year to TWD 1.2 trillion, equivalent to TWD 91 per share of the holding company. Cathay Life appraisal value as of 2021 was TWD 1.46 trillion, TWD 111 per share of the holding company. We estimated 2022 value for 1 year new business of TWD 34 at a price multiple of 8.8 when delivering value of new business.

In the following pages, you can see more detailed analysis on 2021 movement of each EV components. You can refer to Page 43 and 44 for the scenario of impact from various investment yields and discount rates.

While on Page 45, you can see this year's summary table for year-on-year comparison. We hope this information is useful to you. Lastly, we would like to provide you with an update regarding the COVID-related policies from Cathay Century. The number of total effective policies was 1.3 million as of the end of April. 450,000 policies has already expired in May. So as of today, the total effective policies was down to 850,000.

Year-to-date, the accumulated return premium was TWD 418 million. The accumulated claim payment was TWD 180 million for around 10,000 cases.

As the COVID cases surge, the claim payment and number of bank cases might increase in May and June. So far, the average claim payment per day in the previous week was around TWD 11 million. So given the still evolving government prevention policies and epidemic situation, we will book the loss reserves in accordance with the developments in the academic and reflect that in our monthly earnings results. This is the end of the presentation. Now let's open to Q&A.

[Operator]

[Operator Instructions]

[Shu-Fen Cheng, executive]

Before the Q&A, let me just highlight because today in the Chinese session, there were kind of Q&A already occurred. And so I will expect in this question that the questions maybe fewer than usual, so allow me to have some key summary from our Chinese session. There were 3 areas, I'd like to highlight some [ of it here ]. First one is related to the COVID-related P&C insurance on the COVID-related insurance policies, what is the current update and what is potential impact. The accumulated policies Cathay Century issued was about 1.3 million policies which has -- about 600,000 has matured in middle of May. So as of now, we have 850,000 policies left. And this will fall down to about 500,000 plus into July and afterward there will be the -- the expiration speed will be more frightened.

And so far, the first [ tranche ] that we have sold before May last year, that you have quite high reinsurance rate. So even there were a lot questions asked about it after the expectation, whether there will be potential financial risk from the old policy which have enjoyed a 2-year insurance claim filing time. But because of the high reinsurance rate, we do not expect significant financial impact or total remaining how we manage the current 805,000 (sic) [ 850,000 ] insurance private policies in hand.

The total premium we have sold last year was TWD 550 million. And this year it's TWD 950 million, and where -- year-to-date we're at was TWD 520 million. So on a combined basis, the COVID-related insurance total premium income was TWD 1.47 billion. And so far, we have year-to-date received about 11,000 cases for insurance claims. And year-to-date, we have TWD 190 million for that claim plan.

And each day, so far, as the pandemic cases is rising. We handle about 20,000 policies a day and roughly TWD 11 million insurance claims a day. And because the whole situation is moving very dynamically, we will confirm the regulation -- the policymaker's idea that investor associations consensus, and so we will respond accordingly.

We have accumulated TWD 6.3 billion related insurance [ reserves ] can be a buffer, and we will also review into the next few months to see the emergence of the new insurance claims to see the impact. So this is so far the information we can share with you. And we hope in the next quarter, we will have more additional update. And if needed, of course, monthly update can be provided.

The cost here for us is the summary from the Chinese section was related to Cathay United Bank. The bank is expecting loan growth to show double digit, low double-digit loan growth and also high single fee income growth because the asset quality remains very healthy, we are expecting rising interest rates to support the quarterly net interest margin and where -- which will be positive for earnings of Cathay Financial -- Cathay United Bank, if we combine with quite decent loan growth. We have seen some growth in foreign currency loan. And so the overall growth could be furthermore, as again noted.

And the cost rate for the Chinese section is for Cathay Life. The company continued to focus on protection-type insurance policies. After 2021, protection-type policy had grew by 10% in first quarter this year, it further grew by 20% year-on-year, and we are expecting double-digit growth for the whole year. And this will enhance overall content service margin for Cathay Life in preparation for IFRS 17.

Each year, we are expecting roughly TWD 450 billion for reinvestment. And therefore, a structural increase in interest rate is quite favorable to the company. And maybe this will also allow us to flow into better yields in terms of asset allocation.

Currently, despite the rising rates, our effect the mark-to-market on assets, considering that we only acquire efforts for which only mark-to-market asset without mark-to-market and liability. But because the whole industry has been doing annual review, the test, we have done -- we have been doing that every September. So if we do that IFRS 17 calculation, which the test, which mark-to-market both asset and liability is actually net quite flexible positive benefits through the interest rate rise in the past 6 months.

So it was quite significant positive to the numbers based on the IFRS 17 net worth for the 6 months ended March 2022. So these are the 3 key highlights on the Chinese section I provided you. If you have further questions, please feel free to ask your questions.

[Operator]

[Operator Instructions].

[Shu-Fen Cheng, executive]

Okay. If no further question, because in the Chinese session it was so many questions. And people who understand Mandarin are more than welcome to watch the replay in the other one. If people who don't understand Mandarin we'll be more than happy to answer your detailed questions now or after the call. So let me see whether there were more questions from the audience.

[Operator]

[Operator Instructions]

[Shu-Fen Cheng, executive]

Okay. If no further questions, please -- I think we can make and end to this call. And with -- the whole IR team will standby for you. If you think about new questions, then we will be more than happy to follow up with you. I think so we -- may I close the call, I think?

[Operator]

Yes, of course. Thank you, Ms. Cheng. And ladies and gentlemen, we thank you very much for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye.