Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2021-Q2

[Operator]

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

[Shu-Fen Cheng, executive]

Thank you. Good morning. Good afternoon for investors from around the world. Welcome to Cathay Financial Holdings 2021 Second Quarter Analyst Meeting. I am Sophia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, I will host the conference call. Thank you very much for joining us today.

In the beginning, I would like to introduce the senior management -- senior managers who are with us on the line. Today, we have our CEO, Mr. Chang-Ken C.K. Lee, CEO of Cathay Financial Holdings. He will spend about 15 minutes with us, so investors are welcome to take the opportunity if you want to ask more about the questions over strategy, operations. We also have Ms. Grace Chen, Managing Senior -- 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; Ms. Grace Hong, EVP of Cathay Life.

First of all, I'd like to invite our CEO, C.K., to give us an opening remark. Please?

[Chang-Ken Lee, executive]

Hello, everyone. Welcome for joining us for the investor meeting. Well, actually, in Taiwan, we are very happy to enjoy a very good life before mid-May, the pandemic outbreak. But after the outbreak of pandemic, actually Cathay Financial and all its subsidiaries, we accelerated all the digital transformation. Especially, you can see we launched a cloud platform for the life insurance, for the underwriting for the new policies or even the customer services.

We also launched a new credit card services through our banks. The new tube credit card together with the account and also the digital application turned out pretty good for the customer to switch their customer benefit by themself. And also on the Cathay Centuries (sic) Century, we also utilized digital application for the new policies. For the Cathay Securities, actually, we launched more and more new products to the market, especially for the remote application for the life insurance policy. This is really, really fantastic services to customers and also to the tied agents.

Especially after the pandemic outbreak, everybody is still -- is afraid of touch each other because of the virus. But through the new cloud platform, actually, we can see customers and the tied agents are very happy to realize the new touch cloud platform for the new policy.

You can see the performance is really, really good. You can see only from May to August, the new policy reached for 54,000 new policies. So this new remote application through video conference and largely solved these problems of interface signature and contact for the insurance application.

But not only the business development, we also commit the [indiscernible] initiate. We commit to utilize renewable energy 100% by 2030. So we utilized the COVID-19's pandemic. We speed up our digital transformation. And also, we speed up the ESG development together. So this is the second quarter's development. But later, I would be happy to answer more and more questions from you. Thank you.

[Shu-Fen Cheng, executive]

Thank you, C.K., for sharing how we transfer -- transform the challenge of pandemic into our further self-improvement into service and into ESG, besides our solid year-to-date operating performance.

For today's conference call, our IR manager, Ya-Jou, will present second the quarter results. And after the presentation, we are open for Q&A session, in which senior management will be -- will answer your questions.

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

[Yajou Chang, executive]

Thank you, Sophia. Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank delivered steady loan and deposit growth. Net interest income also increased. Fee income showed double-digit growth year-on-year. Wealth management fee income and credit card fee income grew 15% and 18%, respectively.

Cathay Life continued the value-driven strategy. Protection-type first year premium grew 23% year-on-year. Asset under management of investment-linked products increased to near TWD 700 billion, ranking #1 in the industry.

Cathay Life also delivered sound investment performance with after-hedging investment yield of 5.6%. Both net profit and book values set new records. Retained strong capital position with RBC ratio of 371% and equity-to-asset ratio of 10.6%.

Cathay Century, the general insurance subsidiary, premium income grew 9% year-on-year. Market share was 12%, maintained #2 in the industry. Overseas premium continued to grow.

Asset management [indiscernible] subsidiary, Cathay SITE, AUM was over TWD 1.2 trillion, ranked #1 in the industry. First half earnings achieved a record high over the same period. Last week, Cathay Securities earnings and number of customers each hit new record for our first half period.

Please look at Page 5, Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income for the first half reached historical high of TWD 91.5 billion, outpacing 2020 full year earnings, driven by sound investment performance. EPS was TWD 6.66.

Page 6 shows the subsidiaries' net income and ROE. Cathay Life delivered strong investment income with first half net profit outpacing last year full year earnings. Cathay SITE and Cathay Securities also reported record first half earnings. The subsidiaries' strong earnings performance was attributable to economy recovery and financial market value.

Cathay United Bank's net income declined due to higher Y-o-Y base of investment income last year. Its core business remains solid with net interest income and fee income is growth showing. On a consolidated basis, the holding company's ROE was 20% in the first half of 2021.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 897 billion as at the end of the second quarter. Book value per share was TWD 60.3.

Page 9 and 10 show our overseas expansion. Cathay Financial Holdings continue to expand overseas business by deepening overseas presence. Cathay Life, Vietnam total premium increased 52% year-on-year. As for the subsidiaries' operating in China, Cathay United Bank China business development is on the right track. Its joint venture, Chongqing Ant Consumer Finance obtained operation approval in June. For Cathay Life joint venture in China, the total premium grew 19% year-on-year.

Please turn to Page 12 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth. Consumer loans and mortgage both showed double-digit growth. The total loan balance increased 11% year-on-year to TWD 1.8 trillion as of the end of the first half of 2021. Deposits grew 13% year-on-year to TWD 2.7 trillion. The demand deposit ratio increased to 72%.

Interest yield is shown on Page 13. The net interest margin and spread remained stable. The interest spread was 1.72% and the net interest margin was 1.2% for the first half of 2021.

Page 14 shows the asset quality of Cathay United Bank. Due to the prudent lending policy, Cathay United Bank maintained low NPL ratio at 21 basis points and coverage ratio at 763%. Gross provision was TWD 2.3 billion, including some [indiscernible] overseas cases, but more than half was the general provision for loan growth based on the regulation requirement. Recovery was around TWD 700 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 257 billion, increased 12% year-to-date. Foreign currency loan balance was TWD 220 billion, slowing down due to overseas pandemic uncertainty.

Page 16 shows offshore earnings. The offshore earnings was TWD 4.5 billion. The decline was mainly due to the high base of investment income last year. Offshore earnings accounted for 32% of the bank's pretax earnings for the first half of 2021.

Please turn to Page 7 (sic) [ 17 ] for fee income. Fee income grew 11% to TWD 11 billion in the first half. Credit card fee grew 18%, and wealth management fee grew 15%.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income increased to TWD 6.3 billion, in which mutual fund fee income grew over 40% year-on-year. Strong demand from new investment-linked policies contributed to the bancassurance fee growth.

Please move to Page 20 and 21 for Cathay Life's premium performance. Total premium was $327 billion in the first half. The decline was due to lower renewal premiums, reflecting the end of premium payment terms for some top selling regular paid products.

On Page 21, first year premium, FYP, reached $106 billion, up 26% year-on-year, driven by substantial growth in investment-linked products. Protection-type policies' FYP grew 22% year-on-year, strongly supporting the CSM, contractual service margin. The annualized premium, APE, declined to 26 -- TWD 26 billion, reflecting dominant single payment investment-linked policies in FYP.

Page 22 shows the value for new business. Based on the 2020 embedded value assumption, value of new business for the first half was TWD 15 billion. The decline was due to high base in first quarter of 2020, driven by the deferred premium income from stop-selling effect in the end of 2019 and lower sales volume in the second quarter this year amidst local pandemic outbreak.

Cathay Life continued to grow the high CSM protection-type FYP. VNB margin increased to 50% if excluding the FYP from single-paid investment-linked policies.

Page 23 shows the cost of liability and breakeven asset yield. Both continue to improve. The reserve base liability cost was 3.8% as of the end of second quarter, improving 9 basis points year-on-year. The breakeven asset yield was down to 3.06%.

Please look at Page 24 for the investment portfolio. Cathay Life total investment reached TWD 7.1 trillion as of the end of the first half. Overseas investment accounted 66%. The investment return of each asset class are as follows: cash and cash equivalents, 0.3%; domestic equity, 24.8%; international equity, 14.8% prehedge; domestic bond, 0.8%; international bond, 6.1% prehedge; mortgage and secured loans, 1.5%; policy loans, 5.4%; real estate, 2.7%.

Overall investment yield are shown on Page 25 and 26. After-hedging investment yield was 5.59%. Cathay Life captured market opportunities through realized gains in capital markets, boosting the after-hedging investment yield.

On Page 26, the pre-hedging recurring yield was 2.84%. The decline was mainly due to the impact on new money yield amid lower interest rate environment in 2020. The new money yield in the first half of 2021 increased year-on-year, supporting the prehedging investment yield enhancement. The hedging cost of the first half of 2021 was 1.39%, improved both quarter-on-quarter and year-on-year. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of hedging cost.

Please look at Page 27 for the cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized dividend income of TWD 4.8 billion and TWD 9.4 billion in the first half and in the first 7 months of 2021, respectively, more than the same period of last year given some cash dividend payments are delayed this year as the General Meeting -- General Annual Meeting has been postponed due to the local pandemic outbreak.

For overseas fixed income investment, Cathay Life allocated 46% in North America, 19% in Europe and the rest are in Asia Pacific and other countries.

Page 28 shows the book value and unrealized gains-loss financial assets. The consolidated book value reached a new record to $734 billion. Unrealized gain was TWD 135 billion, lower than the end of last year, reflecting the U.S. long-term bond yield rebound year-to-date.

Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 9% year-on-year to TWD 13 billion. Market share was 12%.

Page 34, the gross combined ratio and retained combined ratio increased due to the relatively large claim events from commercial fire insurance.

This is the end of the presentation. Now let's open to Q&A.

[Shu-Fen Cheng, executive]

Thank you, Ya-Jou.

[Operator]

[Operator Instructions] Our first question is coming from Steven Lam, Bloomberg Intelligence.

[Steven Lam, analyst]

Hello. Can you hear me?

[Shu-Fen Cheng, executive]

Yes. please go ahead. Thank you.

[Steven Lam, analyst]

Congratulations on the good results. So I have a couple of questions here, some in Life and some in the investment side. So on the Life side, I was just curious, of course, the margin expansion was quite decent. And I suppose that's because of -- it's a technical factor, the APE sort of slipped and investment link didn't really drive too much APE. So I was just wondering, even within the protection business, right, what was the margin trend within the protection-type products, say, versus 2020 or even 2019, for example?

The reason I ask is because if I look at the protection APE, the rebound was good in 2020, but it's still sort of low versus some first half of 2019 sort of the prepandemic level. So just wondering what's the sort of the plan for the rest of this year in terms of protection products? That's number one.

On the investment side, I was just curious, I noticed the domestic bond investment return sort of dropped to 0.8% compared to about 4.6% in 2020. So I just want to understand what was causing that? And within investment also, I noticed that, just some data question, there has been more allocation in the European bonds, if I'm not mistaken. Could we get some color in terms of what kind of what countries have stepped up in terms of those European bonds?

And then last but not least, what's the outlook for your equity allocation for both domestic and international. I know it's tricky time right now because everybody is watching Jackson Hole and there's a lot of volatility in the equity market. So just want to get your take on your equity allocation over the coming months?

[Shu-Fen Cheng, executive]

Steven, just 1 minute. Steven, thank you for your question. You have asked questions on number one, the margin trend, especially on protection-type policies for Cathay Life and then also the investment domestic bond. This year, the yield was 0.8% versus last year 4.6% because the return we have shown on Page 24, this includes both coupon and the capital gain. So the higher yield in last year, 4.6%, includes the realized gain of domestic bonds. Where this year, we have not try much on the domestic bond portfolio. So you can see the number.

And then you also asked about the bonds details for our allocation. As you noticed that bond allocation to European area increased by 1% to 19%, Abel will explain that. And lastly, you asked a question about equity allocation. And then I need to apologize, I think it's very unfair if we as an investor try to provide our view on the market because Cathay is a sizable investor.

Any comments we have on the market probably will create trouble for the overall market's public impressions. So please allow us not to answer your last question regarding our view on the equity market and our allocation plan. We tend to answer a question on what we have done [indiscernible] and the prospect of that. So with that, I will leave now to Abel to answer your question on the other margin for protection-type policies and the detail on Europe bond.

[Chao-Ting Lin, executive]

Yes. I think the protection type, we define the -- so first one, traditional protection, it means that the whole life product. And second one is the accident and health product. Generally speaking, the margin -- highest margin is the accident and health product, and then it's the whole life product. And if we comparison this year and in that year or 2019, I think the first one, health and accident, this year, the margin is a little bit higher than last year. This is because we have some product. We're using a new assumption to reflect some -- we observed some experience in our data.

So -- and for the traditional type protection, I mean, the whole life, the margin actually is very similar no matter in what year. So that you will see actually our focus is the -- this protection-type no matter in it's traditional life saving or health and accident.

Generally speaking, the accident and health products, actually, they have very stable demand for people in Taiwan because this medical expense we can cover by the commercial health insurance. So each year, I think that is a very stable demand for our company, actually grows by 5% to 10% each year. This is quite stable growth.

Second one is the protection whole life product. It -- sometimes it's relatively popular, but sometimes it's not. It will depend on some product features. So -- but if we combine it through segment and combine together -- actually, each year, we have very stable growth in protection type, no matter in total premium or in first year premium, if you look at our data in Page 20 or 21. So this is why shortly briefing for our protection type.

And for the European bond, actually, I didn't have that kind of detail for the European bond. So I think that maybe I get you later for this meeting.

[Operator]

[Operator Instructions] And next, we'll have Chien Po of Crédit Suisse for questions.

[Chien Huang, analyst]

Just would like to ask if there's any plan for Cathay Life to upstream capital to the holding company next year?

[Chao-Ting Lin, executive]

Yes. Okay. I see the first one, this year, our after-tax earnings is higher than last year. And structurally, this year, we have capital gain mostly come from equity. So equity capital gain is bigger than fixed income. So for the special reserve for equity for -- I mean if we [indiscernible], we realize the fixed income capital gain. We need to put some special reserve for the fixed income.

This year, disputable earning -- negative effect will be less than last year. So I mean this year, we should have some distributable -- but this is -- this cash dividend need to be approved by FSC. And so this is first one. So actually -- structurally, this year is good comparison to last year. And secondly, we have opportunity -- have the [ chance ] to communicate with FSC to get some -- get approval.

And secondly, we also want to communicate with FSC some reserve we didn't think it's reasonable. So we hope that we can make to balance our shareholder and also our solvency and also preparing for the future IFRS 17 and ICS. We want to have some balance not to more focus on the solvency side or the IFRS 17 side. And considering right now our solvency ratio, I mean, the RBC ratio is the highest 371% is the highest for the last 10 years.

So we think at this moment, we have some ability. But again, it need to be approved by FSC. So we will do our best to have this kind of approval. But P&L is still very uncertain, but I think we get some better position comparison to last year. We hope that we can balance each stakeholder demand for our company. So this is what I can say at this moment.

[Operator]

[Operator Instructions] And the next question is from Steven Lam, Bloomberg Intelligence.

[Steven Lam, analyst]

Sorry for troubling you guys again. Just want to follow up on the question on the equity investment. I understand forward-looking guidance, it's tough. Maybe I can switch that discussion around a little bit. If I look across the shoulders for your peers in the region, say, the Chinese, the Japanese or the Korean, I'm under the impression of your peearnings release in that because of the preparation for the new solvency rules, there's a tendency that they would like to control the equity exposure.

So with that sort of backdrop, could we assume that -- of course, there's some short-term trading opportunities here or there in the next few months or whatnot. But generally speaking, in the medium to longer term, say, 2, 3 years time frame, could we expect the allocation to stock should come down, not on an absolute basis, but, say, within the whole portfolio?

And then the second question is on banks. I can understand that you have quite some -- a very diversified portfolio on your overseas banking, say, across China and Southeast Asia. So now we are already almost 2 years in the COVID situation and supply chain has moved from China to Southeast Asia and in Southeast Asia back to China. What is the lessons learned? Or what does that mean to your banking -- overseas banking expansion or development thinking going forward from COVID?

[Shu-Fen Cheng, executive]

Steven, thank you for your question. You're asking a scenario for something past 2025. Taiwan, including ICS and IFRS 17, this is something toward 2016. And as Abel mentioned earlier in our Chinese [indiscernible] we have been lowering our asset duration. It's now down to 14.2. And then my -- sorry, asset duration already expanded to 12.1, where liability duration has reduced down to 14.2. So this is a very, very important but quite long-term issue if you take -- if you compare this with the equity movement.

So the eventual capital efficiency, IFRS 17 preparation, this has been our top agenda in the past 10 years. And definitely, this is something we do care, and we have been designing our new policy investment strategy to the direction. And yes, for the long-term, asset liability management, find the right timing at a good valuation for dividend payout stack. And having an increase the proportion of fixed income, this is something very important. But it's hard to mix that long-term strategy adjustment toward short-term market movements. I think these 2 are just different, okay?

So the overall strategy, yes, we do need to plan our long-term capital planning to IFRS, more CSM based overall asset allocation to matching with our product. So that is something we do care. And so if we have progress, we should update.

The second question you have is regarding how we think about overseas banking operation after COVID. If we think about the past 30, 40 years, there's one big event in every decade. If COVID become part of our daily life, we should be designing our business around that. And so this is a very dynamic adjustment from very beginning of last year.

And so within Taiwan, we were lucky able to contain. We have a very clear consensus. When situation is deteriorating, people just put up mask and follow -- go over the weekend, very so far lucky in the past 3 months, we can try to contain the situation. But yes, we never know whether there will be more and more different type of virus challenging us.

But -- and also we do have operation in Southeast Asia. The adjustment definitely will also follow the local government policy, how to respond. There's nothing more important than human being's life and health and safety, okay?

Our regional expansion is a 10-year, 20-year plan. It takes Cathay United Bank from the 1960s, 70s to today, it takes almost 60 years for Cathay Life. So 2-year, 3-year, even 4-year disruption is something to make us stronger. But it should not be something that blocking us from becoming a regional player. And so far, if you look on consolidated profit [indiscernible] Page 5, the group aggregate consolidated -- sorry, on the MDI version, you will see that compared with 2012 and about 10 years ago versus today, United Bank has made another 10 -- more than TWD 10 billion extra profit.

So this is a long-term growth we need to pursue. And so probably some [indiscernible] direction is a perfect time for us to rethink. If things resume, how can I better job than our original plan. And what are the operation lessons, including asset quality, loan allocation, local culture and then how do I design new business market along with local society trends. Are they accumulating more wealth? So this is a 20-year plan. It's not a 2-year plan. So I don't think I can give you a perfect answer. But the pandemic should not affect our ambition to become a regional -- one of the well-recognized regional bank.

[Operator]

[Operator Instructions] There appears to be no further questions at this point. And Ms. Cheng, can we close the conference call now?

[Shu-Fen Cheng, executive]

Yes. Thank you very much for dialing the call today to Cathay Financial Holdings' First Half Results. And in the Chinese session earlier, analysts has asked quite a lot of questions. So for those of you interested and understand the mentoring, you can also dial in there. And then if investors, you haven't brought up question right now, please feel free to contact our IR team whenever you need some information, data and et cetera, if you have any questions and comment. Thank you, and we will -- next quarter we can continue to have good results to share with you. Thank you very much, and goodbye.

[Operator]

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.