Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Analysis

Cathay Financial Holdings Shows Robust First Half 2024 Performance

Cathay Financial Holdings posted strong first half 2024 results with a net income of TWD 71.7 billion, the second highest on record, and an EPS of TWD 4.66. Subsidiaries like Cathay United Bank, Cathay Life, and others reported record earnings, driven by robust loan growth, higher net interest margins, and significant fee income increases. The consolidated book value rose to TWD 891 billion. Cathay Financial expects a low teens loan growth and a net interest margin of at least 1.5% for the full year. Wealth management fees are projected to grow by at least 30%, aided by favorable market conditions .

Strong Financial Performance

Cathay Financial reported impressive results for the first half of 2024, with a net income of TWD 71.7 billion, marking the second-highest on record. Earnings per share stood at TWD 4.66, and overall return on equity was 16.9%. Each subsidiary, including Cathay United Bank, Cathay Life, Cathay Century, Cathay SITE, and Cathay Securities, delivered robust financial performances.

Banking Growth

Cathay United Bank, the banking subsidiary, showed robust growth with a 15% year-on-year increase in earnings, driven by a strong 14% year-on-year growth in loans, totaling TWD 2.4 trillion. The net interest margin improved to 1.55% with an 11 basis point year-on-year increase, benefiting from Taiwan Central Bank's interest rate hikes. Wealth management fees and credit card fees also saw substantial growth, contributing to a 33% year-on-year rise in net fee income.

Life Insurance and Investment

Cathay Life adhered to its value-driven strategy, resulting in a 12% year-on-year growth in annualized premium and a 21% increase in the value of new business. The company maintained a solid investment performance with an after-hedging yield of 4.28%. The capital position remained robust, with a risk-based capital ratio (RBC) of 352% and an equity-to-asset ratio of 9.2%. The company continues to prioritize building its Contractual Service Margin (CSM), which grew 35% year-on-year to TWD 46 billion.

General Insurance and Asset Management

Cathay Century, the general insurance subsidiary, recorded a 17% increase in premium income year-on-year, achieving a 13.4% market share. Meanwhile, Cathay SITE, the asset management subsidiary, hit a new high in assets under management (AUM), reaching TWD 1.9 trillion.

Book Value and Overseas Expansion

The consolidated book value of Cathay Financial Holdings rose to TWD 891 billion, supported by both earnings contributions and a rise in equity markets. Book value per share increased to TWD 53.4. The company continues to expand its overseas operations, particularly in Vietnam, where Cathay Life saw a 17% year-on-year increase in premium income. In China, Cathay United Bank maintained prudent operations and saw a 9% year-on-year growth in total premiums through its joint venture.

Future Outlook

For the full year, Cathay Financial anticipates a low teens growth in loans, with net interest margins likely to remain above 1.5%, assuming 1 to 2 Federal Reserve rate cuts. Wealth management fees are expected to grow by at least 30% year-on-year if market conditions remain favorable. The banking division aims to maintain a credit cost of around 30 basis points for the entire year, while closely monitoring asset quality.

Sustainability and Impact Investment

Cathay Financial continues to lead in sustainable finance and climate change discussions. Recently, the company hosted a Sustainable Finance and Climate Change Summit and an Asset Management Summit, attracting participation from key market leaders and high net worth clients. These initiatives underline the company's commitment to generating positive social and environmental impacts through its investment strategies.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's Second Quarter 2024 Conference Call. [Operator Instructions] And now I would like to introduce Mr. C.K. Lee, the CEO of Cathay Financial Holding Company. Mr. Lee, you may begin. Thank you.

[Chang-Ken Lee, executive]

Good afternoon and good morning to those in Europe. Welcome to Cathay Financial Holdings 2024 Second Quarter Analyst Meeting. I am 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 online. Today, we have Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Ms. Sophia Cheng, Chief Investment Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Mr. Kevan Hu, Senior EVP of Cathay United Bank.

Before we begin the presentation, I would like to share some highlights with you. I am pleased to refer that so far this year, our core business momentum has remained firm, driving our first half earnings to TWD 71.7 billion, which is the second best in our history for the first half. Our subsidiary, Cathay Life had its second best performance on record. In our banking P&C insurance, Asset management and security have all achieved record high earnings.

Cathay United Bank, our banking subsidiary performed very well in both corporate banking and retail banking. Loan growth was robust. Net interest margin expanded notably and fees grew by 33% year-on-year. Cathay Life continue it's value-driven product strategy, leading to solid CSM growth. Investment performance was started and the capital position remained strong with an RBC ratio of [indiscernible]. Cathay Century, our P&C insurance subsidiary, maintained steady unwriting profit, while Cathay SITE, our asset management subsidiary continued to reach new heights in AUM. Cathay Securities also expand its market share in local brokerage business. We will share more details during the call.

Now I will hand over the call to Shane from our IR team for the 2024 Half Year Results Presentation. Please.

[Shane Sun, executive]

Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank delivered a regular high earnings for the first half period with 15% year-on-year growth. Loan growth was robust. Net interest income showed double-digit year-on-year growth. Asset quality maintained benign. Net fee income grew 33% year-on-year, driven by strong growth in wealth management and credit card fees.

Cathay Life adhered to our value-driven strategy to accumulated CSM. Annualized premium and value of new business grew 12% and 21% year-on-year, respectively. Driven by robust growth in health and accident policy and foreign currency-denominated traditional long-term regular premium products deliver some investment performance with after-hedging investment yield of 4.28%, maintain solid capital position with RBC ratio of 352% and equity-to-asset ratio of 9.2%.

Cathay Century, the general insurance subsidiary, premium income grew 17% year-on-year with market share of 13.4%. Asset management subsidiary achieved record high earnings for the first half period. AUM reached TWD 1.9 trillion. Lastly, Cathay Securities first half earnings have already surpassed 2023 full year's figure. Domestic brokerage market share continued to expand.

In addition to solid business performance, Cathay financial holdings continue to broaden sustainable impact. Please turn to Page 5. Cathay held it's sustainable finance and Climate Change Summit last month. bringing together international climate leaders and experts from Taiwan to discuss key trends and projects in sustainable finance and climate change. Over 4,800 people participated. Attending company represented 82% of Taiwan's market cap and accounted for over 54% of total greenhouse gas emission in Taiwan. In addition, Cathay Financial Holdings joined Global Impact Investing Network, an Asia Venture Philanthropy Network, aiming to generate positive social and environmental impact through impact investing.

Please turn to Page 6. In addition to the Climate Summit, we also host the first Cathay Asset Management Summit bringing together 20 global and domestic investment experts to discuss 7 key investment trends. The event attracted over 450 high net worth clients and livestream viewership of 30,000.

Please look at Page 7. Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income was TWD 71.7 billion, the second highest record for the first half. Other subsidiary show strong core business momentum, earnings per share was TWD 4.66. Page 8 shows the subsidiaries' net income and ROE. Cathay United Bank, Cathay Century, Cathay SITE and Cathay Securities each reached record high first half earnings. Cathay Life delivered its second highest first half earnings, supported by solid investment performance and steady underwriting gains. ROE of holding company reached 16.9%.

Please turn to Page 9 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company increased to TWD 891 billion, supported by earnings contributions and the rise in equity markets. Book value per share increased to TWD 53.4. Page 11 and 12 show our overseas expansion. Cathay Financial Holdings continue to expand overseas business, cultivates local and cross-border corporate banking business and leverage digital platform to develop retail banking business.

Premium income for Cathay Life Vietnam grew 17% year-on-year. As for the subsidiary operation in China, Cathay United Bank China continues prudent operations, enhancing online banking products and features and promoting digital transformation. For Cathay Life's joint venture in China, the total premium grew 9% year-on-year.

Please turn to Page 14 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth with mortgage and consumer loans, both showing double-digit growth. Total loan brands increased 14% year-on-year to TWD 2.4 trillion. Deposits showed steady growth with the advantage of high demand deposit ratio of 65%. Interest yield is shown on Page 15.

First half of 2024 net interest margin increased 11 basis points year-on-year. The increase was due to the strong loan growth and expanding position with higher yield in foreign financial assets. Benefiting from Taiwan Central Bank's interest rate high and well contained funding costs, the quarterly net interest margin increased 9 basis points quarter-on-quarter to 1.55%.

Page 16 shows the asset quality. Cathay United Bank maintained low NPL ratio at 12 basis points and coverage ratio at 1358%. Gross provision was TWD 4.2 billion. Maturity was the general provisions against new loan growth. Recovery was around TWD 600 million. Please turn to Page 17 for SME and foreign currency loans. SME loan balance increased to TWD 330 billion accounted for 14% of the total loan. Foreign currency loan balance was TWD 236 billion, growing 10% year-to-date. If excluding the impact from Taiwan dollar's depreciation, the growth was 4%. We aim to grow foreign currency loans while ensuring asset quality.

Page 18 shows offshore earnings. The offshore earnings were down to TWD 3 billion due to a high year-on-year base from a single case recovery in the first quarter of 2023. Please turn to Page 19 for fee income. Net fee income increased 33% year-on-year to TWD 14 billion, driven by strong wealth management fee from robust sales across wealth management products and 25% growth in credit card fees due to changes in the credit card spending mix.

Page 20 shows the breakdown of wealth management fee. Wealth management fee income reached TWD 8.3 billion, climbing 40% year-on-year. All products showed strong growth. Fee for mutual fund, security products and bancassurance grew by [ 71% ], 73% and 29% year-on-year, respectively. Please move to Page 22 and 23 for Cathay Life's premium performance. Total premium was TWD 216 billion, with the year-on-year decline reflecting the high base of investment-linked products due to regulation change in July 2023. The premium for petition products grew 8% year-on-year, supporting the contractual service margin.

On Page 23, first year premium FYP was TWD 52 billion, declined year-on-year due to the same reason as mentioned in previous slides, the high base of investment-linked products. However, annualized premium APE grew 12% year-on-year, driven by the strong sales growth in health and accident policies and foreign currency denominated traditional long-term regular premium products. High CSM health and accident product FYP increased 63% year-on-year.

Page 24 shows the value of new business. Value of new business was TWD 16 billion, up 21% year-on-year, driven by the notable FYP growth in health and accident policy and foreign currency, denominated traditional long-term regular premium products. VNB margin, VNB/FYP increased year-on-year to 31% only to lower FYP contribution from investment-linked products. Page 25 shows the cost of liability and breakeven asset yield. The cost of liability increased slightly quarter-on-quarter due to the declared rate increase for USD-denominated interest-sensitive policies. The breakeven asset yield continued to improve.

Please look at Page 26 for the investment portfolio. Cathay Life's total investment reached TWD 7.9 trillion as of the end of the first half. Overseas investment accounted for around 70%. On the right-hand side, the investment yield on domestic equity and international equity were 16% and 15%, respectively. Overall investment yield are shown on Page 27 and 28. Overall investment performed well with after-hedging investment yield of 4.28% owing to strong capital gains from adjusting the equity portfolio in favorable markets.

On Page 28, we have left-hand side. the pre-hedging recurring yield increased 6 basis points year-on-year to 3.3%, mainly due to lower dividends, reflecting equity position adjustment and dividend peak shifting into July this year. It was due last year. However, interest income continued to increase, owing to expanded position and higher yield in fixed income. Annualized hedging cost was 1.21% for the first half.

Cost of traditional hedging tools remain high due to the widened Taiwan dollar and U.S. dollar interest spread. The foreign currency volatility reserve increased to TWD 38.6 billion, driven by the depreciation of Taiwan dollars in the first half. Cathay Life will continue its dynamic hedging strategy to ensure the effective control of the hedging cost.

Please look at Page 29. For the cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized nice dividend income for TWD 5.8 billion in the first half and TWD 11.8 billion in the first 7 months. The latter is lower than the same period of last year due to dynamic adjustment in equity position. Page 30 shows the book value and unrealized gain of financial assets, both increased year-to-date. The book value increased to TWD 725 billion, supported by earnings contribution and increase in unrealized gain and loss driven by the rise in equity markets, equity to asset ratio reached 9.2%.

Next, please turn to Page 34 to 36 for the performance of Cathay Century. Cathay Century's premium income grew 17% year-on-year to TWD 19 billion. Market share was 13.4%. Page 36. Gross combined ratio increased due to higher year-on-year gross loss ratio from April 3 earthquake claim payments, while retained loss ratio and retained claim payments, were both lower year-on-year as such claim payment were covered by catastrophe reinsurance contract.

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

[Operator]

[Operator Instructions]. The first one to ask question, Jemmy Huang from JPMorgan.

[Jemmy Huang, analyst]

I have 3 questions. First one, could we get the swap revenues and also adjusted net interest margin for the first half or for the second quarter? And I think that you mentioned even if U.S. rate cuts, you can still maintain net interest margin above 1.5%. And what's the potential impact for swap revenue on the [indiscernible] basis? What's the likely impact?

And the second one is for the hedging cost at Cathay Life. If we look at on the year-on-year basis, I think Taiwan dollar actually depreciated more this year in the first half, but your hedging cost is actually higher than the same period last year. Should we attribute the difference to NDF or currency swap cost because I think the quoted price are actually not very much different in the first half of this year versus first half last year? Or is there any other reasons?

Yes. And the third question is for credit cost at Cathay Life -- Cathay United Bank. If based on your guidance, that loan growth momentum might moderate in the second half, should we expect the credit cost could also be lower in the second half? And what's the -- is there any rough range guidance for the full year that we could for us for reference.

[Hsing-Hsien Hu, executive]

This is Kevin from the Cathay United Bank. To answer your question, the swap revenue for quarter 2 is TWD 4.9 billion. That's a swap revenue for the quarter 2. And the whole year forecast on the NIM, 1.5% is based on the total revenue, excluding the swap revenue, it's a pure NIM number. So hopefully, that will answer your question.

As for the credit cost, we expect that overall, the full year credit card will maintain at 0.3%, 30 basis points. That's for the -- that's our expectation for the full year.

[Grace Chen, executive]

Jemmy, if we look at the first half swap revenue, Kevin just mentioned the second quarter. So for the first half, the total revenue swap revenue is TWD 1.6 billion, equivalent to 13 basis points of our NIM. So after the NIM aiding in our -- the NIM including swap revenue is 1.63% for the first half year.

[Chao-Ting Lin, executive]

About the hedging cost, mainly is from the FX reserve change because in the last half, in that year, the first half, actually, we have released around like TWD 7 billion from the FX reserve. But on the other hand, this year because we have a lot of FX gains. So actually, we increased our FX reserve by TWD 18 billion. So the change last year is released TWD 7 billion. This year, we increased TWD 18 billion, so the change is around TWD 25 billion. This is why this year, our hedging cost is 1.2%. But last year, our hedging cost is around 0.9%. This is the main reason of the FX reserve difference. Is that clear for Jemmy?

[Jemmy Huang, analyst]

Yes, thanks. Can I have a follow-up question? I think on credit cost, when you mentioned 30 basis points as a potential reference, that's already including recovery impacts, right?

[Chao-Ting Lin, executive]

Correct.

[Jemmy Huang, analyst]

Okay. And Abel, so I think the FX reserve changes is also because -- partially because that last year, you have certain periods that your FX reserve actually above the regulatory seeding and therefore, you don't need to make monthly contribution? Is that also part of the reason?

[Chao-Ting Lin, executive]

Yes. Yes. Correctly, because last year, the upper limit is only like TWD 43 billion. But this year, our limit is around TWD 69 billion. So till now, we still not target our upper limit. So this year, we increased, but last year we can release.

[Operator]

[Operator Instructions]. Next one to ask questions, Michael [ Zhang ] from Citi.

[Unknown Analyst]

So I have 2 questions around the bank. So firstly on credit cost. So first half, our loan growth is quite strong. And based on our guidance of low-teens loan growth, it seems that we expect loan growth to decelerate into the second half. So should we expect credit cost to come down in second half? And do we have any full year guidance on the credit cost front? And I noticed that we have seen very strong consumer loan growth. So would there be any asset quality risk associated with those? And how should we think about asset quality risk?

And then second question on fee income. Our wealth management fees has been doing quite well. But if we look at longer term, what do you see as a sustainable growth rate in the longer term? And what would be the key drivers for the wealth management in the longer run.

[Hsing-Hsien Hu, executive]

To answer the first question regarding the credit cost, as I said, the full year outlook, our expectation is around 30 bps, that mainly because contributed by the normal loan growth rate because our loan growth is -- for the first half and the full year is higher than our overall full year plan. And that's why I would say there is no such credit concern in that sense is purely by the normal loan growth rate. That's why the [indiscernible] will become like 30 bps.

And regarding the wealth management fee, first half definitely is a very successful story for the bank. And full year, we expect like at least 30% growth for the full year on the wealth management side. And if you want to look at the longer term, I will still maintain a quite positive side because the first, our customer number, the affluent customer number is still growing like double digit and AUM growth is like 14% at this stage. And so with a strong client growth and AUM growth for longer term, we're still looking very optimistic. Thank you.

[Operator]

[Operator Instructions].

[Hsing-Hsien Hu, executive]

Regarding one of the questions left is credit quality -- credit [indiscernible] of the consumer loan. As I said, we still take it very cautiously when we grow the loan portfolio, we don't have a very -- and we don't have this concern on the credit quality side.

[Grace Chen, executive]

And Michael, among our consumer loans, only below 40% is secure for those small amount consumer lending. But for -- more than [ 60% ] is secured by like mortgage or our client security like government bond, U.S. treasury or time deposits. So we -- like Kevin mentioned, we closely monitor the quality and should pay attention, not all of these increase are all those unsecured loans, more than half are secured.

[Shu-Fen Cheng, executive]

Michael, this is Sophia. I just want to add a few points. When you start -- when we started the consumer loan back about a decade ago, we did start with building an ecosystem, credit card spending, the clients foundation. So the initial [indiscernible] this product comes from client analytics, client segmentation. It is very important we try our best to analyze customer and drive new business from there.

So, so far in the past 2 years, despite the growth, we still have set some good criteria that we hope we can based on the same foundation and relax the risk appetite a little bit. So, so far, the overall credit cost delinquency remains quite manageable, and we have not seen a sizable scale in a deterioration in our consumer loan book. This is for the unsecured loan.

Where for the secured loan, for mortgage, for example, we try not to do the pure investment purpose. It's mainly focused on home use or high net worth, which the loan value ratio tends to be lower. So the overall loan value ratio is also quite [indiscernible]. So on an aggregate basis, we do think the asset quality remains quite stable. I hope that answers your question.

[Operator]

And Michael, you have been released from the Q&A queue, and I apologize for that. [Operator Instructions].

[Grace Chen, executive]

Good afternoon, this is Grace Chen. Before we close the call, I would like to give a summary from the Chinese session. In this afternoon, there were many questions asked by the audience surrounding our second quarter operations and outlook guidance for major key drives. And regarding the bank's performance, it has been strong across many areas in the first half. Questions from the audience focused on the momentum in the second half and our guidance.

For loans, we are expecting a low teens growth for the full year. And our net interest margin has already reached 1.5% in the first half driven by our increased position in higher year foreign currency financial assets and the optimization of our deposit structure. We anticipate that the NIM will likely be at least 1.5% for the full year, assuming 1 to 2 Fed rate cuts and [indiscernible] Taiwan Central Bank rate.

In terms of wealth management fees, we achieved a 40% year-on-year growth in the first half despite a favorable capital market environment in the second half of last year, which is set high base. We still expect full year wealth management fee to grow by at least 30%, potentially exceeding 30% if market conditions remain favorable. For life insurance, continuing to build CSM remains our top priority. In the first half, CSM continued its robust momentum, growing 35% year-on-year to TWD 46 billion.

On the investment side, while it's challenging to predict the capital gains, we still have quite abundant unrealized gain in our stock position with TWD 120 billion in the first half and still over TWD 100 billion after the significant correction in the stock market in July. Regarding hedging, we run a dynamic hedging strategy. In addition to traditional hedging tools, we also run proxy hedging.

As of July end, our foreign currency reserve stands at over TWD 50 billion, which also provide a good buffer on foreign currency volatility. We are confident that we will be able to maintain our hedging costs between 1% to 1.5% for the full year. And regarding our dividend policy, we will focus more on dividend year aiming to provide investors with a favorable dividend year while also considering the pick-out ratio. These are the key highlights.

[Unknown Executive]

Do we have more questions on the line.

[Operator]

There appear to be no further questions at this point. So Mr. Lee, can we close the conference call now?

[Chang-Ken Lee, executive]

Yes. Thank you. Well, thank you for participating in Cathay Financial Holding Company's conference call. If you have any further questions, please feel free to contact our IR team. Thank you.

[Jemmy Huang, analyst]

Thank you.

[Unknown Executive]

Thank you.

[Operator]

Thank you for your participation in Cathay Financial Holding Company's Conference Call. You may disconnect now. Thank you, and goodbye.