Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2021-Q3

[Operator]

Welcome everyone to Cathay Financial Holding Company's Third Quarter 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 afternoon, and Good morning to investors in Europe. Welcome to Cathay Financial Holdings 2021 Third Quarter Analyst Meeting. I am Sophia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, I will host the conference call, and thank you so much for joining us today.

In the beginning, I would like to introduce the senior managers who are with us on the line today. Today, we have Mr. Daniel Teng, Senior EVP of Cathay Financial Holdings; Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Ms. Joyce Chai, Senior EVP of Cathay United Bank; Ms. Grace Hong, EVP of Cathay Life.

For today's conference call, Chang from our Head of IR team will present the third quarter results. After the presentation, we are open for a Q&A section in which senior management will be more than happy to answer your questions.

Without further ado, let me pass the call over to Chang for the briefing of third quarter results. Chang? Thank you.

[Yajou Chang, executive]

Thank you, Sophia. Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiaries. Cathay United Bank, Net interest income grew solidly year-on-year with double-digit loan growth and higher demand-deposit ratio. Fee income showed year-on-year growth, driven by strong wealth management fee income.

Cathay Life, continued the value-driven strategy. Protection-type First Year Premium grew 12% year-on-year. Cathay annual management of Investment-linked products increased to near TWD 700 billion, ranking number one in the industry. Also delivered sound investment performance with after-hedging investment yield of 5.2%. Net profit continued to set new records, marking a milestone as the first Taiwan life insurer with year to date net profit over TWD 100 billion.

Cathay Century, our general insurance subsidiary, Premium income grew 10% year on year with market share, 12%, ranked second in the industry. As a management subsidiary, Cathay SITE, AUM ranked number one in our industry. First 9 months net profit and EPS both set new records. Lastly, Cathay Securities earnings and number of customers each hit new record for the first 9 months period.

Please look at Page 5, Cathay Financial Holdings' net income and EPS. Cathay Financial Holdings net income for the first 9 months reached TWD 122 billion, grew 90% year-on-year, driven by sound investment performance, and EPS was TWD 8.98. Page 6 shows the subsidiaries' net income and ROE. Cathay Life brought strong investment income with net profit over TWD 100 billion. Net profit of Cathay SITE and Cathay Securities surpassed respective 2020 full year earnings. The subsidiary's strong earnings performance was attributable to economic recovery and financial market rally. Cathay United Bank's net income declined due to higher year-on-year base of investment gain last year. This core business remains solid with net interest income and fee income each showing growth.

On a consolidated basis, the holding Company's ROE was 18.4% for first 9 months 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 870 billion as of the end of third quarter. Book value per share was TWD 58.2. Page 9 and 10 show our overseas expansion. Cathay Financial Holdings continued to expand overseas business by deepening overseas presence. Annualized Vietnam's total premium increased 43% year-on-year. As for the subsidiary operation in China, Cathay United Bank China issued the first batch of large-scale certificate of deposits in September to expand and enhance local business.

For Cathay Life's joint venture in China, our total premium grew 13% year-on-year. Please turn to Page 12 for more details about our banking subsidiary. Cathay United Bank delivered robust loan growth across consumer loans, mortgage and corporate loans. The total loan balance increased 12% year-on-year to TWD 1.8 trillion as of the end of third quarter 2021. Deposits grew 13% year-on-year to TWD 2.8 trillion. The demand deposit ratio increased to 73%.

Interest yield is shown on Page 13. The net interest margin stabilized in 2021. The net interest margin was 1.2% for the first 9 months of 2021. The interest rate of first 9 months came down to 1.7% due to lower benchmark rate of foreign currency loans in third quarter. Page 14 shows the asset quality of Cathay United Bank. Due to the prudent lending policy, Cathay United Bank maintained low NPL ratio at 18 basis points and coverage ratio over 900%. Gross provision was TWD 3.5 billion. Recovery was TWD 1.2 billion.

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 260 billion, increased 14% year-to-date. Foreign currency loan balance was TWD 222 billion, slowing down due to overseas pandemic uncertainty.

Page 16 shows offshore earnings. The offshore earnings was TWD 7.1 billion. The decline was mainly due to the high base of investment against last year. Offshore earnings accounted for 33% of the bank's pretax earnings for the first 9 months of 2021. Please turn to Page 17 for the fee income. Fee income grew 14% to TWD 17.6 billion in the first 9 months of 2021, driven by continued growth management fee growth.

And Page 18 shows the breakdown of Wealth management fee. Wealth management fee income increased to TWD 9.5 billion, in which mutual fund fee income grew over 30% year-on-year. Strong demand from investment-linked products contributed to the bancassurance fee equal of 15% year-on-year.

Please move to Page 20 and '21 for Cathay Life's premium performance. Total premium was TWD 472 billion in the first 9 months of 2021. The decline was due to lower renewal premium, reflecting the end of regular premium payment terms for certain top-selling products. On Page 21, first year premium FYP reached TWD 156 billion, up 27% year-on-year, which was driven by substantial growth in investment-linked products. Traditional life policy FYP grew 12% year-on-year, supporting the contractual service margin.

The annualized premium APE declined, reflecting the dominance of single payment investment-linked products in FYP. Page 22 shows the value for new business. Based on the 2020 embedded value assumption, value of new business for the first 9 months was TWD 21 billion. The decline was due to high base in the 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 mid-2021 amidst local pandemic outbreak in Taiwan.

Cathay Life continued to grow the high CSM protection first year premium. VNB margin increased to 48%, excluding the FYP from single-pay investment-linked products. Page 23 shows the cost of liability and break-even asset yield. The reserve-based liability cost was 3.78% as of the end of third quarter of 2021, improving 8 basis points year-on-year. The breakeven asset yield was 3.07%.

Please look at Page 24 for the investment portfolio of Cathay Life. Cathay Life's total investment reached TWD 7.1 trillion as of the end of the first 9 months of 2021. Overseas investment accounted for 66%. The investment return of each asset class are as follows: Cash and cash equivalents, 0.2%; domestic equity, 24.5%; international equity, 12.7% pre-hedged; domestic bond, 1.4% international bonds, 5.6% pre-hedged; mortgage and secured loans, 1.4%; policy loans, 5.4%; real estate, 2.5%.

Overall investment yields are shown on Page 25 and 26. After-hedge investment yield was 5.23%.Cathay Life captured market opportunities to realize gains in capital markets, boosting the after hedging investment yield. On Page 26, the pre-hedging recurring yield was 3.06%. The decline was mainly due to the impact of the new money yield, amid lower global interest rate in 2020. The new money yield in the first 9 months of 2021 already increased year-on-year, supporting the pre-hedging investment yield enhancement.

The hedging cost of the first 9 months of 2021 was 1.26%, much lower than the same period of last year, given the lower cost of traditional hedging tools and dynamic foreign exchange rate measurement of Cathay Life. Please look at Page 27 for the cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized dividend income of TWD 18.2 billion in the first 9 months of 2021, already surpassing 2020 full year dividend income.

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 gain of financial asset. The consolidated book value was TWD 704 billion, unrealized gain was TWD 80 billion. Book value was supported by strong realized gains, but was partially offset by lower unrealized gains from fixed income, which is reflecting the U.S. 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 10% to TWD 20 billion. The market share was 12%. Page 34, Gross combined ratio increased due to relatively large claim events from commercial fire insurance. However, retained combined ratio improved through adequate reinsurance arrangements. This is the end of the presentation. Now let's open to Q&A.

[Operator]

[Operator Instructions]. And the first question is coming from Steven Lam of Bloomberg Intelligence.

[Steven Lam, analyst]

I would like to ask a few things first. We're going to kick off with Life side. Could you give us a sense of your VNB outlook in 2022? Looking at the figures, even with the -- you made some revisions for 2020, so your base -- there's some base effect changes. But overall, it's still down in the first 9 months. I've seen some -- I think there's some stronger FYPE expansion in the October. So I was just curious if it's still investment-linked products that will drive the volume growth over the next few months? And what is the sort of the margin outlook for the VNB.

And then the second question on Bank. I would like to hear your thoughts on your outlook for loan growth. We noticed that there's some quarter-on-quarter slowdown. I mean, it's not -- it's still growth, but the growth rate have slowed down to, I think, below 1% in the third quarter. So I was just curious, was it mostly because of COVID related, either in Taiwan or in Southeast Asia? Or there's something else? And what is your thought on the loan growth in 2022?

And I guess, lastly, of course, very decent increase in the fee income driven by insurance, mutual funds and credit card fees. Just wondering, what is the outlook for fee income, specifically for your credit card? Of course, there's some strong rebound probably in the recent months. So I just want to see what will sort of continue that trend going forward?

[Yajou Chang, executive]

First of all, I want to answer about the VNB of Cathay Life. Yes, for the first 3 quarters, the VNB decreased by 20% comparison last year. I think that the main reason is that this year, especially on second quarter and third quarter, we have the pandemic effect. And so all the people actually is not allowed to close the marketing for our customer. But we look at -- because right now, Taiwan controlled the pandemic I think, quite well. So right now, we are allowed to have closely contact with our customer. So we can see that on the October and November, right now, the FYP, especially in traditional protection and also in hedge product, I think they've have come back to comparison to the second quarter and third quarter, I think this has a very different, I think has a different picture right now. So we think that the first quarter of the FYP, especially the traditional FYP, including the protection and hedge and savings type.

We think that fourth quarter will have much growing compared to second quarter and third quarter. For the outlook of next year, I think that for the VNB, we need to clear our disclosure date that we can have an exact number. But I think I still maintain our long-term guidance that our VNB this year, I think it's because the pandemic effect. We think that next year, I think we're thinking about Taiwan should be stable this right now. So we expect VNB still can have a 5% to 10% growth. This is our long-term guidance, but the exact number, we didn't disclose at this moment.

[Shu-Fen Cheng, executive]

And this is Sophia, before I can answer, you had a question related to the potential loan growth for to end of next year. I want to confirm the number with you regarding the loan Q-o-Q decline. Actually, if you look at the end of third quarter, our loan year-to-date grew by 10%. And then quarter-on-quarter grew by about 1%. So overall, the loan growth is still quite healthy. And Daniel, I'll pass over to you on the thoughts on overall loan growth and the thought on fee income.

[Chung-Yi Teng, executive]

Yes. I mean for the loan growth of 2021, we still target on high single-digit growth this year. For the next year, we'll -- maybe we will still maintain a high single-digit growth for 2022, either for the long side. And for the current environment, I can only say our growth was mostly from our local market [indiscernible] But if the regional economic environment changed, we'll definitely adjust our portfolio immediately. But currently, I can only state, we focus more on the local market. That's for the loan.

And for the fee income, we think for next year the fee income still will be very healthier growth for the next year by high single-digit because our customers still focus on the asset allocation, especially for the [ inflation ] issue. So we think the fee income mostly is from mutual fund and insurance.

And for the credit card, I think the fee income from credit card will be increasing a lot for next year. But, the cost of the credit card has also increased. So I will say for the net income of credit card, probably it still will stay for the same for next year.

[Shu-Fen Cheng, executive]

Steven, have we answered your questions?

[Steven Lam, analyst]

Yes. For the sequential loan growth, I was just curious what was causing the -- it's not contraction, I understand the slowdown.

[Shu-Fen Cheng, executive]

Usually, when you look at loan growth, try not to look at the quarter-over-quarter, because to me, that is too micro. You may have just certainly, at the end of the quarter somewhat repay or at the end of that quarter, you just have originated a new loan. So looking at the kind of year-to-date growth versus your whole year target, and also, I think that the value of that growth, the quality of that growth matters a lot. So sometimes, we may have quarterly down and then over to the end of that year that recovers. So looking at one quarter change, I think it will be a little bit too micro in my personal view.

[Chung-Yi Teng, executive]

Yes, totally agree. I think in the beginning of this year, we said we targeted a total loan growth of around 9% this year. But currently, the -- I mean, the Y-o-Y is around 10%.

[Shu-Fen Cheng, executive]

Year-to-date, 10%. Y-o-Y, I think it's more than 10%.

[Chung-Yi Teng, executive]

It's 14%, right.

[Shu-Fen Cheng, executive]

Y-o-Y is 12%. And year-to-date around 10%, yes.

[Chung-Yi Teng, executive]

So we have met our target this year.

[Steven Lam, analyst]

And the low mix is heading to the right direction as well, so...

[Shu-Fen Cheng, executive]

Because at the end of the day, nothing competes with asset quality. And in the Chinese session earlier today, Daniel has explained in great detail how we care about asset quality. And today, the foreign currency loan offers greater margin, but if you cannot physically do more due diligence, we'd rather wait when the overall economy, the pandemic situation is better controlled, so we can visit, we can do the DD.

And that's why you are seeing we are not in a hurry to regrow the foreign currency loan yet. But it's still quite sizable. So you can see that -- you can see the foreign currency loan come down a little bit, but it's not that drastic. But it really require good due diligence process for you to grant a loan.

[Steven Lam, analyst]

I'm not sure if we have time for a quick follow-up since you're on the foreign currency loan topic. This is more like looking out into not even 2022, maybe closer to 2023 when the rate hike actually starts at least from the U.S. So what would be the dynamic like between now and when the Fed actually start to hike rates? Do you feel that there will be like a higher demand that some customers want to lock in that lower rate before the hike cycle will begin? And then, however, like you said, I guess Taiwan policy is still sort of a zero-COVID tolerance policy. So it's still very hard for you to go out there and visit your clients. Just wanted to hear your thoughts.

[Shu-Fen Cheng, executive]

The COVID-19 should not stop traveling, because as long as you do quarantine, it's fine. But the thing is with COVID if the pandemic drags longer, it may affect corporate cash flow. So we put extra cautious on that. Traveling is not a problem. But if we see the overall information, and we don't see the comfort in economic recovery and how each country managed the whole situation and which company economy is better, then you can start to accelerate that loan. So it's the timing of the acceleration. But if the pandemic lasts longer, some corporate hedges will suffer. So the relative risk in getting a loan would be higher than before.

I am in quarantine right now, I just came back from COP26. So it should not affect my traveling, but it's the overall dynamic and the economic impact for whole economy, which segment, which sector, which company you feel comfortable or if it's more non-rush situation, because we do have low loan deposit ratio. We have the lending capacity waiting.

[Operator]

[Operator Instructions]. Thank you. And next we'll have Jemmy Huang of JPMorgan for questions.

[Jemmy Huang, analyst]

Just 2 questions for Cathay Life, first one is in terms of the hedging mix in Page 26, can I assume the quarter-on-quarter change is mainly you reduced NDF and then increased the proxy hedge during the period. If I look at the changes in the figures on the quarter-on-quarter basis? And then have you really increased your proportion of currency swap over the past couple of quarters, given much lower hedging cost or it's not necessarily the case?

And then the second question is for Investment-linked product. I think you mentioned in the Chinese session that you incur a slightly bigger first year surplus strength for the Investment-linked product without upfront fee. For products that if you collect upfront fee, would you still suffer from this kind of a first year supply strain? Or actually, it will be P&L accretive? And then for older investment-linked products that you have sold this year, is there any rough split between the products with upfront fee and without upfront fee?

[Chung-Yi Teng, executive]

Yes, I think from quarter-to-quarter, yes, that we -- the third quarter, actually, we reduced the NDF, this is right. But it's very dynamic, this is the end of the September. But on November, right now, maybe we still have some change on that. So as I said, we will depend on situation when -- sometimes we think the Taiwan dollars is relatively strong and maybe we will unlock NDF and to shift to the proxy hedge.

Currency swap actually didn't change too largely. This is because when we it's not -- only if we have some overseas is the new investment, like from the Taiwan dollar policy that we will have the new currency swap. But at this moment, the flow is very limited because our product policy for Taiwan dollar policy, actually, it's quite limit. So it's not changed too large for the currency swap. But as I say in Chinese station, we have a different structure. It means that right now, we have some portion is longer-term CCS comparison before.

So this is for the hedging structural issue. For the investment in, yes, not every investment in a -- we have the investment has the upfront fee. So this kind of product, we didn't suffer the first year's trend. But we have a product that has no upfront fee that the fee will be collected after that. So I think the -- but I don't have that kind of proportion. Maybe I can submit it after this meeting. I will give through the IR team to you.

[Jemmy Huang, analyst]

So you mentioned that you entered some like loan duration currency swap contracts. Is that like 2 years or even longer?

[Chung-Yi Teng, executive]

Even longer.

[Operator]

And next we have Chung Hsu of Credit Suisse for questions.

[Chung Hsu, analyst]

Just a quick question for Abel. Abel, I noticed that your FX hedging mix can change quarter-to-quarter. But would you be able to give a sense that if we strip out our mark-to-market proxy gains and losses, what would your -- this currency swap and NDF, the natural hedge mix the hedging cost be in the third quarter? Because if we try to get a sense of what you're -- without any mark-to-market gains, what does your stable hedging cost be at the moment?

[Chao-Ting Lin, executive]

Okay, I can give it to you. But right now, I need to state that for the third quarter I didn't have that kind of number. So I need to check it out after the meeting. I will give this information to you.

[Operator]

[Operator Instructions].

[Shu-Fen Cheng, executive]

Today, in the Chinese section, we had a very long session. I think it's like 1.5 hours. So maybe many analysts already answered question in the Chinese section. If there is no further question, it's okay.

[Operator]

Yes Ms. Cheng, we don't have any question at this moment. Can we close the conference call now?

[Shu-Fen Cheng, executive]

Thank you very much. If any of you think about some additional question later, it's always [indiscernible] -- it's always fine to contact our IR team, and they will be here standby for you. Thank you for your participation in Cathay Financial Holdings conference call today. Thank you, and goodbye. Keep safe and healthy.

[Operator]

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