Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2023-Q1

[Operator]

Welcome, everyone, to Cathay Financial Holding First Quarter 2023 Results Webinar. [Operator Instructions] I would like to introduce Ms. Sophia Cheng, CIO of Cathay Financial Holding Company. Sophia, you may begin. Thank you.

[Shu-Fen Cheng, executive]

Good afternoon, and good morning to investors in Europe. Welcome to Cathay Financial Holding's 2023 First Quarter Analyst Meeting. I'm Sophia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, I will host the conference call. Thank you for joining us today. In the beginning, I would like to introduce the senior managers who are with us online. Today, we have Mr. C.K. Lee, CEO of Cathay Financial Holdings. C.K., would you like to say a few words?

[Chang-Ken Lee, executive]

Hello, everyone. Welcome to the investor meeting. Thank you.

[Shu-Fen Cheng, executive]

Thanks. And we also have Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; and Mr. Kevin Hu, Senior EVP of Cathay United Bank. For today's conference call, Shane from our IR team will present the first quarter results and announce the new 2022 embedded value details. After the presentation, we are open for a Q&A session in which senior management will answer your questions. Without further ado, let me pass the call over to Shane for the briefing of first quarter results.

[Shane Sun, executive]

Thank you, Sophia. Let's start with the business overview on Page 4, which provides a quick highlight on this subsidiary. Cathay United Bank. First quarter net income set a new record high from the January to March period, with 33% growth year-on-year, delivered double-digit growth in deposits and loans. Asset quality remained benign, benefiting from rate hike. Net interest income grew 26% year-on-year.

Cathay Life. Recurring yield continued to improve. Interest income showed double-digit growth year-on-year. Book value recovered with equity to asset ratio of 7.4%. Cathay Century, the general insurance subsidiary. Premium income rose 11% year-on-year with 12% market share. Asset management subsidiary Cathay SITE. AUM reached a new record of TWD 1.4 trillion, ranked #1 in the industry. Lastly, Cathay Securities maintained its #1 market share position in sub-brokerage business.

Please look at Page 5. Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income was TWD 7.2 billion. First quarter's earnings reflects lower investment income, while the same period last year set a high base period for earnings, benefiting from Taiwan dollars' depreciation and more favorable capital markets.

The core business maintained solid as recurring [ count ] continued to show robust growth. Page 6 shows the subsidiaries' net income and ROE. Cathay United Bank earning grew 33% year-on-year to TWD 9.2 billion, driven by strong core earnings. Cathay SITE and Securities, each delivered their second-highest historical first quarter record.

Although Cathay Life's earning was offset by elevated hedging costs and subdued capital gains, the recurring income saw double-digit Y-o-Y growth, which is quite beneficial to the company's earnings quality in the long run. Cathay Century regained normal profit performance in April with pandemic insurance sector fading out.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of the holding company rebounded TWD 84 billion quarter-on-quarter to TWD 900 -- TWD 696 billion as of the end of first quarter. Book value per share increased to TWD 40.2.

Page 9 and 10 show our overseas expansion. Cathay Financial Holdings continue to expand overseas business, [ further deepening ] business operation and digital transformation. Ho Chi Minh City branch loans grew 20% year-on-year. Cathay Life Vietnam total premium increased 25% year-on-year.

Cathay Century Vietnam premium also grew steadily. Also for the subsidiary operation in China. China subsidiary launched green bankers' acceptance discounting services in February, the first Taiwanese bank to do so in China. For Cathay Life's joint venture in China, the total premium grew 20% year-on-year.

Please turn to Page 12 for more details about the banking subsidiary. Cathay United Bank delivered strong loan growth with mortgage and corporate loans. It is showing double-digit growth. The total loan balance increased 14% year-on-year to TWD 2.1 trillion as of the first quarter. Deposits grew 12% year-on-year to TWD 3.3 trillion. Interest yield shown on Page 13, benefiting from rising rates.

First quarter 2023 net interest margin and interest spread increased 19 basis points and 12 basis points year-on-year, respectively, while declining quarter-on-quarter due to faster repricing of deposit rates. Page 14 shows the asset quality. Cathay United Bank maintained low NPL ratio at 7 basis points and coverage ratio was over 2,000%. Gross provision was TWD 1.5 billion. Recovery was TWD 1.8 billion.

Please turn to Page 15 for SME and foreign currency loans. SME loan balance showed robust growth to TWD 310 billion, accounted for 15% of the total loan. Foreign currency loan balance was TWD 270 billion, maintained [ the facilities of ] '22 year-end, excluding the impact from Taiwan dollar appreciation.

Page 16 shows offshore earnings. The offshore mix declined due to lower Y-o-Y investment income.

Please turn to Page 17 for fee income. Fee income grew 2% to TWD 5.3 billion in the first quarter of 2023, driven by strong growth in credit card fees, offsetting the decline in wealth management fees.

Page 18 shows the breakdown of wealth management fees. Wealth management fee income was TWD 3.3 billion, declined 11% year-on-year, mainly due to higher base [ fee rate of ] sales in mutual funds and insurance due to more favorable capital markets in first quarter last year. However, overseas bond sales increased due to substantial growth in securities fees.

The number of customers show solid growth, while AUM delivered double-digit growth year-on-year. We are still into a high single-digit wealth management fee year-on-year growth on a full year.

Please move to Page 20 and 21 for Cathay Life's premium performance. Total premium was TWD 111 billion in the first quarter of 2023. The decline was largely due to the higher base period for investment-linked policy in the first quarter last year, which saw more favorable capital markets. The premium of protection-type policy grew 6% year-on-year, supporting the contractual service margin.

On Page 21, first year premium, FYP, and the annualized premium, APE, was TWD 30 billion and TWD 12 billion, respectively, both declined year-on-year due to the same rate as mentioned for the total premium. Annualized premium, APE, of traditional products remained steady.

Page 22 shows the value of new business. Value of new business for first quarter was TWD 7 billion. The decline was due to the higher base period for sales volume of investment-linked policy and an increased uptake of traditional saving products. However VNB margin remains steady.

Page 23 shows the cost of liability and breakeven asset yield. The cost of liability rose slightly quarter-on-quarter due to the declared rate increase for interest-sensitive policies, but breakeven asset yield improved.

Please look at Page 24 for the investment portfolio. Cathay Life total investment reached TWD 7.4 trillion as of the end of first quarter. Overseas investment accounted around 70%. Please refer to the table for investment returns on each asset class. Overall investment yield are shown on Page 25 and 26. After-hedging investment yield was 2.69%, reflecting elevated hedging costs and subdued capital gain.

On Page 26, [ investment insights ] the pre-hedging recurring yield increased 42 basis points to 3.15% with interest income showing double-digit year-on-year growth. The annual hedging cost of first quarter was 1.1%. Cost of traditional hedging tools remain high year-to-date. Taiwan dollars appreciated 0.8%, making Taiwan dollar strong among Asian currencies, reducing the effectiveness of proxy hedging.

The foreign currency volatility there stood at over TWD 42 billion as of the end of first quarter. The new FX volatility mechanism and the abundant FX volatility result balance saving its powder for FX fluctuation and using up the traditional hedging cost pressure while enabling a wider flexibility in hedging strategies. Cathay Life will continue its flexible and dynamic hedging charges to ensure the effective control of the hedging cost.

Please turn to Page 27, for regional breakdown of overseas fixed income. For business fixed income investment, Cathay Life allocated 50% 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. Both increased over TWD 70 billion quarter-on-quarter as the stock and bond market rebounded in the first quarter.

Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 11% year-on-year to TWD 7.6 billion. Cathay share was up 12%. Page 34, the gross combined ratio and retained combined ratio of [ growth ] increased due to the impact of pandemic insurance losses.

Since the pandemic insurance impact has come to an end, Cathay Century has returned to normal profit performance in April. [ Combined ] ratio remained above 300%. The related reserve balance was TWD 0.5 billion at [ April end. ] We believe it to be sufficient to cover the outstanding [ expense. ] This is our first quarter operating results. The next session we will update on 2022 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 SAU assumptions for various insurance policies. We increased the equivalent investment yield by 1 basis points to 4.12%. [ First ] our new assumption, Cathay Life's 2022 embedded value decreased by 18% year-on-year, the decline was mainly due to book value decrease caused by aggressively rate hike and equity market volatility.

The EV per shareholding company was TWD 75. [ Year 1 ] the appraisal value as of 2022 was TWD 1.2 trillion, TWD 33 per share of the holding company. We estimate 2023 value for 1 year new business of TWD 27.5 billion, an applied multiple of 8.8 when deriving value of new business.

In the following pages, you can see more detailed analysis of 2022 [ overview ] of HDV components. You can refer to Pages 43 and 44 for the scenario of impact from various investment yields and discount rate. While on Page 45, you can also see a summary table for year-on-year components.

We hope the information is useful to you. This is the end of the presentation. Now let's open to Q&A.

[Operator]

[Operator Instructions] The first question is from Alex Ye, UBS.

[Alex Ye, analyst]

I have a question on the bank side. So in the Chinese section, management said that you expect that the reporting to be at bottom in Q1 and expect a sequential recovery in coming quarters. So could you give us some color in terms of what is the driver for a rebound in the coming quarters from both an asset yield and funding cost perspective.

[Hsing-Hsien Hu, executive]

This is Kevin from the CUB side. Okay, the first -- the reason causing the first quarter 1 downward is the rising insure rate and the saving rate is going faster than the loan repricing speed. Therefore, we see in quarter 2 and onwards, once we can reflect the asset side, the loan side to reflect the actual spread, then our NIM will be improved. That's our basic expectation.

[Shu-Fen Cheng, executive]

The deposit rate usually reflects earlier than lending rate. So that's why there's a lagging effect, we already see deposit costs increase and then the following quarters, lending rate will expand.

[Alex Ye, analyst]

So did you have any expectation in terms of the report it mean, for the year-end level or full year level?

[Shu-Fen Cheng, executive]

We think it's a bit too early to conclude how would be the end or pick the NIM. But at least at current level, we feel quite comfortable that 1.40% level should be the [ trough ], and we should expect a little bit upside. And having said that, you can notice that our loan growth is quite strong. And therefore, on a net interest income basis, we should be expecting quite decent growth.

[Operator]

And the next question is coming from Jemmy Huang, JPMorgan.

[Jemmy Huang, analyst]

Just two questions from me. First one is for the bank operating expenses. May I know is the year-on-year growth is largely driven by the better earnings growth and, therefore, higher compensation or any other reasons to result in relatively high OpEx growth? And second question is on embedded value, the cost of capital. I think in the Chinese session, you mentioned the TWD 36 billion year-on-year increase is largely due to the higher interest rate risk. So on the basis that if we see a bigger impact on RBC ratio this year due to further increase in the interest rate risk charges, should we assume the cost of capital increase this year for 2023 could be even bigger than in 2022?

[Shu-Fen Cheng, executive]

Jemmy, if you look on Page 55, the P&L for Cathay United Bank, you will notice that, yes, there is a 24% increase in operating expenses. You also notice that a 26% increase in revenue. So as a result, the cost income ratio first quarter this year annualized the first quarter this year at 48.23% versus first quarter last year 48.9%. So the cost/income ratio is actually stable and slightly down. So yes, it should be in accordance to the revenue growth, but the cost income ratio actually remained quite stable. And then [indiscernible]

[Unknown Executive]

I think yes, Jemmy, this year, in RBC fixed rate -- interest rate risk, because the regulation will step-by-step adjust the factor. So this year, the impact is bigger than last year.

[Operator]

The next question is from Michael Zhang, Citi.

[Dingyu Zhang, analyst]

On cost, just want to understand what's the driver behind the cost growth in the first quarter? Was that mainly due to the credit card-related fees, the promotional expenses?

[Shu-Fen Cheng, executive]

Michael, sorry, you were cut off at the first sentence. Would you mind repeating your question again?

[Dingyu Zhang, analyst]

Sure. I just want to follow up on the cost question. I noticed that there is a pickup in the promotional expense and bank operating expense. Just wanted to understand, is it mostly related to credit card fees? And do you still maintain this 51% to 53% cost/income ratio guidance?

[Hsing-Hsien Hu, executive]

Michael, the increase mainly coming -- we spend or invest mainly into three dimensions. The first dimension is on the people. We continue to invest in people. So the people cost drives up the expenses. Secondly, we're investing in the customer. That's why you mentioned that we increased the marketing expenses for all the products, not only for the credit card but also including the branding, cards and other products as well. And thirdly, we improved -- we invest -- we continue to invest in our platform upgrade, digital services and overall infrastructure.

[Shu-Fen Cheng, executive]

Michael, you can see that as we were responding to the potential upcoming shrink in the credit card coming from Costco, we have put tremendous effort into promoting the cube card. So far, the card promotion and the spending has delivered quite strong performance. And in line with that, yes, the marketing expense will also increase.

As I mentioned earlier, the overall cost/income ratio in first quarter has maintained at 48.2%, which is slightly lower than first quarter 2022. And the whole year, we are still looking at somewhere 51% to 53% range, as you mentioned.

[Operator]

[Operator Instructions] There appears to be no further questions at this point. Sophia can we conclude this meeting?

[Shu-Fen Cheng, executive]

If there's no further questions, Sophia I will pass to C.K. for the closing remark.

[Chang-Ken Lee, executive]

Well, thank you so much. So should you have any further questions, please contact our IR team. Thank you.

[Shu-Fen Cheng, executive]

Thank you very much, and we will see you in the next quarter. Thank you, and goodbye.

[Operator]

Thank you for participating in Cathay Financial Holding Company's results webinar. You may now disconnect. Goodbye.