Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Analysis

Cathay Financial Reports Strong Q1 Performance

Cathay Financial posted first-quarter earnings of TWD 37.6 billion, achieving 73% of the previous year's total earnings. Cathay United Bank delivered record earnings of TWD 10.4 billion, with net fee income growing 43% year-on-year. Cathay Life's value-driven strategy led to a 28% increase in new premium and a 32% rise in the value of new business. The board approved a TWD 2 cash dividend per share, a 61.7% payout ratio. The company maintained a robust capital position, supporting ongoing business growth. For 2024, Cathay expects first-year premiums for traditional products to show double-digit growth, while the recurring yield aims to exceed 3.45%, reaching at least 3.5%.

Strong First Quarter Performance

Cathay Financial Holdings reported an impressive first-quarter performance with net income reaching TWD 37.6 billion, which is 73% of last year's full earnings. This exceptional performance was primarily driven by their bank subsidiary, Cathay United Bank, which achieved record-high first-quarter earnings of TWD 10.4 billion. This surge was attributed to significant growth in both net interest income and fee income. Furthermore, Cathay Life demonstrated substantial growth with new premium and value of new business increasing by 28% and 32% year-on-year, respectively. The board approved a $2 cash dividend per share, reflecting a 61.7% payout ratio and an approximate 4% dividend yield.

Robust Performance Across Subsidiaries

Each subsidiary under Cathay Financial Holdings showed strong performance. Cathay United Bank recorded a 14% year-on-year increase in earnings, driven by a 43% rise in net fee income from wealth management and credit card fees. Cathay Life followed a value-driven product strategy, leading to a significant increase in its new premium and business value. Additionally, Cathay Century, Cathay Securities, and Cathay SITE, the asset management subsidiary, also recorded their highest first-quarter earnings ever. Cathay SITE ranked #1 in AUM at TWD 1.83 trillion.

Strong Growth in Wealth Management and Credit Card Fees

Cathay Financial witnessed a 43% year-on-year growth in fee income, which reached TWD 7.7 billion. This growth was fueled by robust sales across their wealth management products and a nearly 60% increase in credit card fees. Wealth management fees alone spawned TWD 4.6 billion, reflecting a 40% year-on-year rise. Fees for mutual funds, securities, and bancassurance also experienced significant increases.

Steady Improvement in Investment Yields

Cathay Life’s recurring yield increased by 8 basis points year-on-year, achieving an after-hedging investment yield of 4.39%. Robust overall investment performance contributed to a rise in book value, pushing their equity-to-asset ratio to 8.8%. Cathay Life’s asset management strategy remained focused on high-value long-term regular premium products, further strengthening their financial position.

Guidance and Future Outlook

The company’s future guidance remains optimistic with an anticipated high single-digit growth in bank loans across all sectors, including corporate, mortgage, and consumer loans. They expect net interest margin (NIM) to be at least 1.4% for the full year, with projections accounting for two Federal Reserve rate cuts. Cathay Life also aims to sustain its growth course, particularly in its traditional product lines, expecting first-year premiums to grow in double digits. The firm's robust capital buffer is bolstered by an RBC ratio over 300%, ensuring resilience against future market volatility.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's First Quarter 2024 Conference Call. [Operator Instructions] And now I would like to introduce Mr. C.K. Lee, President of Cathay Financial Holding Company. Mr. Lee, please begin.

[Chang-Ken Lee, executive]

Good afternoon, and good morning to investors in Europe. Welcome to Cathay Financial Holdings 2024 First Quarter Analyst Meeting. I'm C.K. Lee, CEO of Cathay Financial Holdings. Today, I will host the meeting. Thank you for joining us today.

In the beginning, I would like to introduce the senior managers who are on the line. Today, we have [ Ms. Grace Chen ], CFO of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Mr. Kevin Hu, Senior EVP of Cathay United Bank.

Before we begin the presentation, I would like to share some highlights from our first quarter. I am pleased to report on our first quarter earnings reached TWD 37.6 billion, achieving 73% of last year's full year earnings. Our bank subsidiary delivered another record high first quarter earnings of TWD 10.4 billion, with both net interest income and fee income showing robust growth.

Net profit showed to TWD 25.1 billion, surpassing last year's full year earnings. Thanks to strong investment income, Cathay Life continue it's value-driven product strategy, which annualize the new premium and value of new business growth by 28% and 32% year-on-year, respectively. High CSM protection product has shown strong growth momentum. Additionally, our subsidiary Cathay Century, Cathay Securities and Cathay SITE also achieved record high first quarter earnings. The board has approved the $2 cash dividend per share, reflecting a 61.7% payout ratio and dividend yield around 4% of announcement.

We continue to maintain the robust capital position to support ongoing business growth. Now I will hand over the call to Charlie from our IR team, who will present the detailed first quarter results and announce the new 2023 embedded value details. Charlie?

[Charlie Hu, executive]

Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank saw the record high earnings for the first quarter with 14% growth year-on-year show robust growth. The interest income grew fastly. Asset quality remained benign. Net fee income grew 43% year-on-year, driven by strong growth in wealth management fees and credit card fees. Cathay Life adhered to a value-driven product strategy. APE and VNB grew 28% and 32% year-on-year, respectively, driven by strong sales growth in long-term regular premium products.

Recurring yield increased 8 basis point year-on-year. Overall investment performance was strong. After-hedging investment yield reached 4.39%. Book value continued to rise with equity-to-asset ratio of 8.8%. Cathay Century, the general insurance subsidiary, premium income grew 16% year-on-year with market share of 13%. Asset management subsidiary, Cathay SITE, set a record high first quarter earnings, ranked #1 in AUM, amounting to TWD 1.83 trillion. Lastly, Cathay Securities continued to increase market share in domestic brokerage.

Please look at Page 5. Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income reached TWD 37.6 billion, the second highest record for the first quarter. All subsidiaries show strong core business momentum. Earnings per share was TWD 2.6.

Page 6 shows subsidiaries income and ROE. Cathay United Bank, Cathay Century, Cathay SITE and Cathay Securities each achieved historical high earnings for the first quarter. Cathay Life first quarter 2024 net income has surpassed 2023 full year's figure. Recurring income sustained year-on-year growth. Investment performance was strong. Underwriting profit retains steady.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company increased to TWD 875 billion, supported by earnings contribution and the rising equity market. Book value per share increased to TWD 52.4.

Page 9 and 10 shows our overseas expansion. Cathay Financial Holdings continue to expand overseas business through deepening business operation and digital transformation. Our Vietnam branch launched Digital Retail Banking in March, introducing Cathay United Bank [indiscernible] app and digital consumer loans. Cambodia subsidiary continued to expand customer base via digital applications. Cathay Life Vietnam's total premium increased 14% year-on-year. Cathay Century Vietnam showed steady growth.

As for the subsidiaries' operation in China, Cathay United Bank's China subsidiary focused on industries and customers with growth potential and expanded cross-border business. For Cathay Life joint venture in China, the total premium grew 22% year-on-year.

Please turn to Page 12 for more detail about the banking performance. Cathay United Bank delivered robust loan growth with mortgage and consumer loans, both showing double-digit growth. Total loan balance increased 13% year-on-year to TWD 2.4 trillion. Deposits grew 6% year-on-year to TWD 3.4 trillion, maintained the advantage of high demand deposit ratio of 65%.

Interest yields are shown on Page 13. First quarter 2024 net interest margin and interest spread increased [ 6 -- 5 ] basis points quarter-on-quarter, respectively. The increase was due to the lower funding costs resulting from a decrease in foreign currency deposits.

Page 14 shows asset quality. Cathay United Bank maintained low NPL ratio at 11 basis points and coverage ratio of 1,457%. Gross provision was TWD 2.4 billion. Majority was the general provision against new loan growth. Recovery was around TWD 300 million.

Please turn to Page 15 for SME and foreign currency loans. SME loan balance increased to TWD 325 billion, accounting for 14% of the total loan. Foreign currency loan balance was TWD 229 billion, growing 7% quarter-on-quarter. [ We aim to grow ] foreign currency loan while ensuring asset quality.

Page 16 shows offshore earnings. The offshore earnings were down to TWD 1.4 billion due to a high year-on-year base from a single case recovery in the first quarter of 2023.

Please turn to Page 17 for fee income. Fee income grew 43% year-on-year to TWD 7.7 billion, driven by strong wealth management fee from robust sales growth across wealth management products and nearly 60% growth in credit card fees due to changes in the credit card spending mix.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income was TWD 4.6 billion, growing 40% year-on-year. All products showed strong sales growth. Fees for mutual funds, security products and bancassurance fees grew by 44%, 92% and 30% year-on-year, respectively.

Please move to Page 20 and 21 for Cathay Life premium performance. Total premium was TWD 107 billion, showing a modest 4% year-on-year decline. The premium of protection-type products grew 8% year-on-year, supporting the contractual service margin.

Page 21, first year premium, FYP, was TWD 27 billion declined year-on-year due to the sales for investment in product slowdown, resulting from regulation change in 2023. While annualized premium, APE, grew 28% year-on-year, attributable to the strong FYP growth in traditional long-term regular premium products, in which high CSM, accidental and health products FYP increased 74% year-on-year.

Page 22 shows the value of new business. Value of new business was TWD 9 billion, up 32% year-on-year, driven by the strong FYP growth in traditional long-term regular premium products. VNB margin, VNB over FYP increased year-on-year to 33%, owing to a lower FYP contribution from investment-linked products.

Page 23, [ shows the cost of ] liability and breakeven asset yield. The cost of liability remained flattish quarter-on-quarter at 3.77%. The breakeven asset yield continued to improve.

Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 7.8 trillion as of the end of first quarter. Overseas investment accounted for around 70%. On the right-hand side, the investment yield on domestic equity and international equity were 15% and 19%, respectively.

Investment yield are shown on Page 25 and 26. Overall investment performed well. After-hedging investment yield increased year-on-year to 4.39%. The investment team sees the opportunity to realize capital gains upon the rise in equity markets as adjusted long-term asset allocation in private equity position.

On Page 26, left hand side, the pre-hedging recurring yield increased 8 basis points year-on-year to 3.23%, driven by expanded position and higher yield in fixed income with interest income showing sustained growth.

Annualized hedging cost was 1.21% for the first quarter. Cost of traditional hedging costs remained high due to the elevated Taiwan dollar and U.S. dollar interest spread. The foreign currency volatility reserve increased to TWD 32.6 billion driven by the depreciation of Taiwan dollar in the first quarter. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging cost.

Please turn to Page 27 for the regional breakdown of overseas fixed income. For overseas fixed income investment, Cathay Life allocated 51% in North America, 17% in Europe, and the rest are in Asia Pacific and other countries.

Page 28 shows the book value and unrealized gain of financial assets. Cathay Life's book value increased year-to-date to TWD 687 billion, benefiting from the earnings contribution and the increase in unrealized gain or loss.

Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 16% year-on-year to TWD 8.9 billion. Market share was 13%.

Page 34, the gross combined ratio and retained combined ratio each declined year-on-year as the impact of pandemic insurance ended.

This is our first quarter operating results. The next session will update the 2023 embedded value and appraisal value.

Please turn to Page 36 for a summary of embedded value and appraisal major components. In this table, you can see the SAU assumptions for various insurance policies. We increased equivalent investment yield by 1 basis point to 4.19%. Based on the new assumption, Cathay Life 2023 embedded value increased 15% year-on-year to TWD 1,140 billion, equivalent to TWD 77.7 per share of the holding company.

Cathay Life's appraisal value as of 2023 was TWD 1.39 trillion, equivalent to TWD 94.5 per share of the holding company. We estimated the 2024 value for 1 year new business of TWD 28 billion, and apply multiple of 8.8 when deriving value of new business. In the following pages, you can see more detailed analysis on 2023 movement of each EV component.

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 also see summary table for year-on-year comparison. We hope the information is useful to you. This is the end of the presentation. Now let's open for Q&A.

[Grace Chen, executive]

Good afternoon, this is Grace Chen. Before the Q&A session, I would like to give a summary from the Chinese session. In this afternoon, there were many questions asked by the audience surrounding our first quarter operation and outlook guidance for major key drivers.

For bank, we maintained a high single-digit growth target for loans, driven by all sectors, including corporate, mortgage and consumer loans. In the first quarter, the credit cost increased mainly due to the general provision for new loan growth. Full year's credit cost is likely to stay at regular level like 2022, below 25 basis points.

NIM increased quarter-on-quarter to 1.46%, thanks to better deposit structure. And for the full year, we expect our NIM to be at least 1.4%, assuming 2 Fed rate cuts and [indiscernible] Taiwan Central Bank policy rate. And net fee income in the fourth quarter was higher than expected. So we revised our -- revised of our outlook and anticipate double-digit growth in fees for this year. And for Cathay Life, continuing to build the CSM remains our top priority.

First quarter CSM grew over 30% year-on-year to exceed TWD 24 billion. We expect first year premiums for traditional products to show double-digit growth for the year. However, we are more conservative in the FYP outlook for investment-linked policies. And due to regulatory changing last year, we were the only life insurance company to seek growth in FYP for investment-linked policies, which create a high base for comparison.

And in terms of recurring year, the interest income and the rental income will continue to grow. Cash dividend will be dependent on the market situation as we focus on the total return for stocks. We expect the recurring year to be at least at last year's level of 3.45% or slightly better this year. We will continue to enhance our recurring income to achieve 3.5% recurring year prior to IFRS 17's adoption.

Hedging costs remain our regular guidance of 1% to 1.5%. And in terms of capital, our capital position was robust with RBC ratio over 300%. With the regulators transition measures, our current ICS ratio is well above the regulatory requirement and is strongest our RBC level.

We aim to build a strong capital buffer under ICS framework. This buffer will enhance our resilience against the future market volatility and ensure our robust performance following the IFRS 17 and ICS adoption. And these are the key highlights.

[Operator]

[Operator Instructions] And our first question will be coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

I have three questions. First one is on bank's investment income because we know swap revenue should be down year-on-year, but your total investment income at Cathay United Bank still increased quite meaningfully. So just trying to understand whether this investment income coming from, is that from equity trading, fixed income trading or anything else? And second question is for Cathay Life. Could we also get single rate equivalent for VNB for 2023? And then the second question for Life is, if we're talking about the new FX reserve mechanism and if Cathay choose to do, based on the proposal maybe the offsetting factors for the mark-to-market [indiscernible] would be 100%. Does it mean that if you choose to do so, that will actually increase the volatility on your qualified capital under ICS?

[Hsing-Hsien Hu, executive]

This is Kevin from the Bank. I would say the incremental investment income mainly coming from the fixed income debt, which accounts for like more than 60% of the incremental revenue. Another like 22% coming from derivative product, another like 15% to 16% coming from the equity debt.

[Chao-Ting Lin, executive]

Jemmy, the first one, for the new business, the equivalent rate for 2023 is 4.62% compared to year 2022, 4.6% up to 2 basis points. And secondly, the FX reserve right now is taking into consideration of ICS capital like RBC. So if the new mechanism that we expect the FX reserve will be increased. This is our purpose. So we think that once we apply for the new mechanism opening adoption, then we will expect the FX results should be increased in the long way. So we think that will be helpful for our ICS capital ratio.

[Jemmy Huang, analyst]

Okay. But I think in the long way, FX reserve could increase that should come from your earnings contribution and also maybe more favorable mark-to-market impacts to beef up the FX reserve. So one way or the other, it either comes from [indiscernible] maybe -- should be contributed to your profits, but now contributed to FX reserve. Is that fair statement?

[Chao-Ting Lin, executive]

Yes, yes, yes, exactly. So the -- for the income for the profit because that will be if we don't buy the new mechanism then because we still have 40% that can have FX scale. So that part will go into our profit net income that will be helpful comparison to new mechanism. But under ICS standard, I think this is the same because the profit and FX results will be shift. So contribution to ICS, I think this is set. But the income statement for the new mechanism, that will be less. But the last part will transfer to our FX reserves. So to the ICS ratio, I think, will be the same. And also [indiscernible] to highlight the application term, it will not be the announcement we were [indiscernible] that's not. We will determine the proper timing especially the Taiwan dollar versus U.S. dollar, the currency rate, what's the long-term view. So our investment team will decide the right time to apply.

[Operator]

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

[Chang-Ken Lee, executive]

Okay. Thank you. Thank you for your participation in Cathay Financial Holdings conference call. If you have any further questions, please feel free to contact our IR team. Thank you.

[Operator]

Thank you, President 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, and goodbye.

[Chang-Ken Lee, executive]

Thank you. Goodbye.

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