Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2023-Q2

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's First Half 2023 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 afternoon, and good morning to investors in Europe. Welcome to Cathay Financial Holding's 2023 Second Quarter Analyst Meeting. My name is Sophia Cheng. I'm the Chief Investment Officer of Cathay Financial Holdings. Today, I will host the conference call, and 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. C.K. Lee, CEO of Cathay Financial Holdings; Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior Executive Vice President of Cathay Life; and Mr. Kevin Hu, Senior EVP of Cathay United Bank.

In today's conference call, I will ask our CEO, C.K., to give us some opening remarks. And after that, Charlie, from our IR team, will present the second quarter results. After the presentation, we are open for a Q&A section, in which senior management will answer your questions.

So let me pass the call over to C.K. for the opening remarks. Thanks.

[Chang-Ken Lee, executive]

Good afternoon, everyone. Thank you for joining us on this call to discuss our second quarter performance. Before we begin the presentation, I would like to share some highlights with you.

In the second quarter, Cathay Financial Holding [indiscernible] strongly picked up, driven by the sustained growth in recurring income, well managed hedging costs and diminishing impact of pandemic insurance policy. Our net income for the first half reached TWD 33 billion, accounted for 87% of the full year earnings in 2022. Our core businesses maintained the resilience. The balance achieved record high cost first half earnings with an ROE of 14%. We also see robust loan growth and pick up -- uptick in fee income.

The quality of earnings in net insurance continued strength with both recurring income and the value of new business showed us the growth. Our general insurance has successfully come back after the challenges hold by the pandemic. Additionally, our securities and asset management business have performed very well, each achieving their second highest earnings in the first half.

As we discuss our results today, we look forward to providing insight into the driving factors behind our performance. Once again, thank you for taking the time to join us today. With that, I will now turn the call over to Charlie. Thank you.

[Charlie Hu, executive]

Thank you. Let's start with the business overview on Page 3, which provides a quick highlight on each subsidiaries. Cathay United Bank first half net income is a new record high for the same period with 30% growth year-on-year. We were double-digit growth in deposits and loans.

Asset quality remained benign. Net interest income grew 18% year-on-year. Net fee income showed double-digit growth, driven by growth in credit card fees, asset life. Hedging costs were well managed. Recurring yield continues to improve. Interest income showed double-digit year-on-year growth, maintained solid capital position with RBC ratio of 312% and equity-to-asset ratio of 7.6%.

Cathay Century, the general insurance subsidiary, premium income rose 9% year-on-year. Market share was 13%. Net income for the second quarter recovered due to fading impact of pandemic insurance and continued business quality control. Asset management subsidiary, Cathay SITE, AUM reached a new record of TWD 1.5 trillion, ranked #1 in the industry.

Lastly, Cathay Securities expanded its domestic brokerage market share and ranked #1 market share position in the brokerage business. In addition to solid business performance, Cathay Financial Holdings continues to be at the forefront of leading the industry in climate actions.

Please turn to Page 4. Cathay held the seventh Cathay Sustainable Finance and Climate Change Summit in July 2023, bringing together domestic and international leaders to share insight on global climate trends and sustainability strategies. Over 4,000 people registered for the summit. Attending companies represented 75% of Taiwan's market cap and accounted for over 50% of total greenhouse gas emission in Taiwan.

Please look at Page 5. Cathay Financial Holdings net income and EPS. Cathay Financial Holdings' net income was TWD 33 billion. The year-on-year earnings decline was due to the high base effect, benefiting from Taiwan dollar depreciation and higher capital gains. Earnings for the first half of 2023 reflected moderate capital gains, while our recurring income show a meaningful increase.

Page 6 shows the subsidiaries net income and ROE. Cathay United Bank had a record high earnings of TWD 17.5 billion for the first half, grew 30% year-on-year, driven by strong core earnings. Cathay SITE and Securities each delivered their second highest historical first half record.

For Cathay Life, year-on-year earnings decline reflected the high base effect. Net income for the second quarter has rebounded quarter-on-quarter, driven by lower hedging costs and double-digit year-on-year growth in recurring income. Cathay Century's profit turned positive in the first half with pandemic insurance fading out.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company rebounded more than TWD 100 billion year-to-date to TWD 721 billion as of the end of first half. Book value per share increased to TWD 41.9.

Page 9 and 10 shows our overseas expansion. Cathay Financial Holdings continue to expand overseas business through deepening business operations and digital transformation. Our Cambodia subsidiary launched new mobile banking app, providing payment and account opening services.

Ho Chi Minh City branch plan to launch digital consumer business in the second half of 2023. Premium income for Cathay Life Vietnam and Cathay Century Vietnam both grew steadily. As for the subsidiaries' operation in China, Cathay United Bank's China subsidiary launched escrow account and U.S. dollar green deposits in the second quarter, providing corporate customer with more comprehensive services. For Cathay Life joint venture in China, the total premium grew 72% year-on-year.

Please turn to Page 12 for more detail about the banking subsidiary. Cathay United Bank delivered strong loan growth with double-digit growth across all loan segments. And the total loan balance increased 12% year-on-year to TWD 2.1 trillion as of the end of first half. Deposit grew 15% to TWD 3.45 trillion.

Interest yield is shown on Page 13. First half 2023 net interest margin increased 12 basis points year-on-year to 1.39%. Net interest margin and interest rates declined quarter-on-quarter due to increase in foreign currency deposits amidst rising interest rates.

Page 14 shows the asset quality. Cathay United Bank maintained low NPL ratio at 9 basis points and coverage ratio was over 1,800%. Growth per region was TWD 3.1 billion, recovery was TWD 2.2 billion.

Please turn to Page 15 for SME and foreign currency loans. SME loan balance showed robust growth to TWD 315 billion, accounting for 15% of the total loans. Foreign currency loan balance was TWD 226 billion. Cathay United Bank aims to grow foreign currency loans while ensuring asset quality.

Page 16 shows offshore earnings. The offshore earnings declined due to lower year-on-year investment income.

Please turn to Page 17 for fee income. Fee income grew 19% to TWD 10.5 billion in the first half of 2023, driven by strong growth in credit card fees.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income was TWD 5.9 billion, declined 2% year-on-year. The year-on-year decline magnitude was notably smaller than that of the first quarter this year. Security fees saw significant growth year-on-year, largely offsetting the decline in fees from other wealth management products. Number of customers and AUM both show steady growth.

Please move to Page 20 and 21 for Cathay Life's premium performance. Total premium was TWD 234 billion in the first half of 2023, declined 4% year-on-year, a small decline in magnitude comparing to the first quarter. The premium of protection-type policy grew 5% year-on-year, supporting the contractual service margin.

On Page 21, first year premium, FYP, and annualized premium, APE, was TWD 70 billion and TWD 24 billion, respectively. FYP declined year-on-year was due to a high base in the first quarter of 2022. Annualized premium APE grew 9%, driven by higher FYP for traditional long-term regular premium products.

Page 22 shows the value for new business. Value for new business for the first half was TWD 13.9 billion, grew 5% year-on-year due to higher sales volume from traditional long-term regular premium products.

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

Please look at Page 24 for the investment portfolio. Cathay Life total investment reached TWD 7.5 trillion as of the end of first half. Overseas investment accounted for around 70%. Please refer to the table for investment returns on each asset class.

Overall investment yield shown on Page 25 and 26. After-hedging investment grew from 3.44% declined year-on-year as there were higher capital gains in the first quarter of 2022 and substantial foreign currency gains from Taiwan dollar depreciation in the first half of 2022.

On Page 26, left-hand side, the pre-hedging recurring yield increased 20 basis points to 3.36% with interest income showing double-digit year-on-year growth. The annualized hedging costs improved significantly quarter-on-quarter to 0.87%, resulting from Taiwan dollar depreciation and effective property hedging in the second quarter.

Please look at Page 27 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized dividend income of TWD 9.9 billion and TWD 13.7 billion in the first half and for the first 7 months of 2023, respectively, lower than the same period of last year due to lower position and dynamic adjustment in equity. For overseas fixed account position, Cathay Life sees opportunity from rising rates to increase position in U.S. bonds, leading to an increase in proportion of overseas fixed income investment in North America at 51%.

Page 28 shows the book value and unrealized gain of financial assets. The consolidated book value of Cathay Life increased to TWD 568 billion. Equity to asset ratio reached 7.6%. The unrealized gain or loss balance of financial assets increased TWD 88 billion year-to-date as the stock and stock market rebounded in the first half.

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 16.3 billion. Market share was 13%.

Page 34, the gross combined ratio and retained combined ratio each declined resulting from the fading impact of pandemic insurance in the second quarter of 2023.

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

[Shu-Fen Cheng, executive]

Thank you, Charlie. Jason, we are ready for Q&A session. Thank you.

[Operator]

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

[Jemmy Huang, analyst]

Three question from me. The first one is, I think in the Chinese session, you mentioned about TWD 80 billion lending exposure to China. Is there any rough split between mainland enterprises and also mainland non-enterprises?

Second question is in terms of the loan growth momentum. I think that you are guiding for high single digit to low teens. Apart from mortgages on the corporate lending side, just trying to understand the growth strategy over the outlook in any key drivers for the loan growth this year and maybe in the next 6 to 12 months that you feel comfortable to go?

And third question is for Life, the unrealized loss of around TWD 130 billion. Is that 100% related to the bonds? Or is there any rough split between the banks and also equities?

[Hsing-Hsien Hu, executive]

Jemmy, this is Kevin. Regarding the TWD 80 billion loan exposure, roughly is around -- for those mainland enterprise, is roughly around 30%. That's the answer to you.

Regarding the second question, the loan growth strategy. We always take a balanced approach across all the loan product, including the corporate loan, mortgage loan and personal loan. And the overall target, I would say, since the first half of the year, we've already reached 12%. I think, overall, for the full year, we're still shooting for the high single-digit growth target.

[Chang-Ken Lee, executive]

About the unrealized loan for the Cathay Life for the first half, actually, the equity part -- actually, total equity right now is positive. It's around like TWD 30 billion, the other -- the equity, including domestic equity and international equity. And so other bonds, now still is negative.

[Jemmy Huang, analyst]

Okay. So the equity is already carrying TWD 30 billion unrealized gains, right?

[Chang-Ken Lee, executive]

Yes.

[Jemmy Huang, analyst]

Follow-up, one question is on the hedging side for the new money that put overseas, most of your hedging for the new money are currently done by proxy hedge and also NDF instead of currency swap, right?

[Chang-Ken Lee, executive]

I think for the new money, actually, right now, model is the [indiscernible] policy. So for the Taiwan dollar policy actually is very limited. So -- yes. So actually, all the hedging is the order inflow.

[Jemmy Huang, analyst]

I see. And for the existing hedging portfolio or position, when it comes to reprice, will you intend to lower the currency swap proportion? Or are you -- here you cannot, right, for the currency swap?

[Chang-Ken Lee, executive]

So this is why actually, except you dispose your asset. Otherwise, it will be a gain. So we can adjust between the NDF and [indiscernible] hedge.

[Operator]

[Operator Instructions]

[Shu-Fen Cheng, executive]

Thank you. If no further questions, maybe I can just give [indiscernible] some highlights from the Chinese section. For the overall, in the Chinese section, there were many questions asked regarded as the operation for banking for insurance and also for the recent economic development in China market.

Just also the bank, we are very happy to see year-to-date very strong deposit and loan growth. And as Kevin has just mentioned, that we are quite positive on the loan growth, looking for mid-high single-digit growth for this year that will be possible.

We're also seeing the net interest margin year-to-date has soften a little bit, but overall looking for at least -- level or slightly better than last year, that is visible. And we are also quite happy with the asset quality so far.

There has been questions asked about the exposure in China and how we see about the economy. C.K., our CEO, has highlighted that in the past 3 years, given the pandemic and the regional uncertainty, our overexposure to China-related has reduced dramatically. And so far, we're very happy on the quality, the cherry picking when we do the business. And as we highlight many times, nothing compete with asset quality.

For Life Insurance company, for Cathay Life, we can see that annualized first year premium in first half has grown by 9% and we're very happy to see the value of new business grew by 5% year-on-year. Abel has mentioned that how we are looking for high possibility that we can reach the target for VNB growth. And at the same time, the recurring yield has improved in first half compared with last year. The 20 basis point increase is quite meaningful.

We also tested [indiscernible] the year-to-date with the dynamic hedging works, the first half hedging cost, especially in second quarter has shown quite a nice improvement from first quarter. And keep finger crossed, we'll do very hard to make sure we still keep cautious on global development and try to do as best as we can to maintain the current resilience in operations and earnings.

Jason, do we have more questions standby?

[Operator]

Not at the moment, thank you.

[Shu-Fen Cheng, executive]

Okay. Okay. C.K., we can conclude the session for today.

[Chang-Ken Lee, executive]

Sure. Thank you so much for joining us on the investor meeting. So if there's no more question, then thank you so much.

[Shu-Fen Cheng, executive]

Thank you. The IR team will stand by and the team will be here for you. Any questions, please [indiscernible] Thank you.

[Chang-Ken Lee, executive]

Thank you.

[Operator]

Thank you, Ms. Cheng. Thank you. Ladies and gentlemen, we thank you for your participation in Cathay Financial Holdings Company's conference call. You may now disconnect. Thank you, and goodbye.