Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2022-Q3

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's Third Quarter 2022 Conference Call. [Operator Instructions] And now I would like to introduce Ms. Sofia 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, our third quarter analyst meeting. I'm Sofia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, I will host the conference call. Thank you for joining us today. In the beginning, I would like to introduce the senior managers who are with us on the line and also in the midterm here. 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; and [indiscernible], Senior EVP of Cathay Century P&C Insurance. For today's conference call, Charlie from our IR team will present the third quarter results. 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 Charlie for the third quarter briefing.

[Charlie Hu, executive]

Thank you, Sofia. Now let's start with the first 9 months business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank net income reached a record high in the first 9 months of 2022 grew 11% year-on-year. Cathay United Bank delivered double-digit growth in deposits and loans. Asset quality remained benign. Net interest margin expanded net interest income grew 23% year-on-year owing to rate hikes. Cathay Life continued the value-driven strategy. Protection-type first year premium grew 11%, delivered some investment performance with after-hedging investment yield of 4.3%, benefiting from substantially improved hedging costs and enhanced recurring yield. Cathay Century, the general insurance subsidiary, the first 9 months' net loss reflected the impact of pandemic insurance. If excluding the impact from pandemic insurance, Cathay Century continued to deliver double-digit growth in premium and maintain stable profits.

As a management subsidiary, Cathay site, set the record high net profit for the first 9 months of 2022. Asset under management was TWD 1.14 trillion ranked #1 in the industry. Lastly, Cathay Securities maintained #1 market share in sub-brokerage business. Please look at Page 5, Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income for the first 9 months was TWD 54.5 billion. The year-on-year earnings decline was mainly due to higher base period for investment gains amidst favorable capital markets last year. EPS was TWD 3.83. Page 6 shows the subsidiaries' income and ROE. Cathay United Bank net income grew 11% year-on-year, driven by strong net interest income growth. Cathay SITE set the record high first 9 months earnings. Cathay Life delivered its second highest historical first 9 months earnings. The year-on-year decline was due to the higher base period for capital gains in the same period of last year. Cathay Century's net loss was due to pandemic insurance. On a consolidated basis, the holding company ROE was 11.9% in the first 9 months of 2022.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 307 billion as of the end of third quarter. The decline in book value reflected a sharp rise in bond yields and the equity market correction. Book value per share was TWD 15.4. Prior to the end of September, Cathay Life decided to change its business model for financial asset classification with effective date being October 1. Upon reclassification, the book value increased by TWD 243 billion to TWD 549 billion. Book value per share rose by TWD 18.4 to TWD 33.8. Page 9, 10 shows our overseas expansion. Philippine, Manila branch signs a sustainability-linked loan agreement with prime asset in September. Cathay Life Vietnam total premium increased 26% year-on-year. As for the operation in China, China subsidiary and Hong Kong branch saw steady growth in all business lines. For Cathay Life's joint venture in China, the total premium grew 17% year-on-year.

Please turn to Page 12 for more detail about the banking subsidiary. Cathay United Bank delivered robust loan growth with mortgage and consumer loans both grew in double digits. The total loan balance increased 11% to TWD 2 trillion as of the end of third quarter. Deposits grew 12% year-on-year to TWD 3.1 trillion. The demand deposit ratio was around 70%. Interest yield is shown on Page 13. Net interest margin and interest rates showed a significant increase in the rate hike. The accumulated net interest margin and interest spread increased to 1.33% and 1.93%, respectively.

Page 14 shows the asset quality. Cathay United Bank maintained low NPL ratio at 9 basis points and coverage ratio at 1855%. Growth per region was TWD 3.4 billion. Most was the general provision for the regulation requirement. Recovery was TWD 1 billion. Please turn to Page 15 for SME and foreign currency loans. SME loan balance grew to TWD 291 billion to 8% year-to-date, accounted for 15% of total loans. Foreign currency loan balance was TWD 230 billion. If converted the foreign currency loan to U.S. dollar was down year-to-date as we aim to grow foreign currency loans while ensuring asset quality. Page 16 shows offshore earnings. Offshore earnings showed a slight increase to TWD 7.1 billion.

Please turn to Page 17 for fee income. Fee income declined 2% in the first 9 months due to decreased wealth management fees. [indiscernible] fee continued to show solid growth. Page 18 shows the breakdown of wealth management fees. Wealth management fee declined 10% year-on-year due to lower sales in mutual funds and investment in products amid the volatile capital market this year. Security fees grew 24%, thanks to higher sales of overseas on products.

Please move to Page 20 and 21 for Cathay Life premium performance. Total premium was TWD 352 billion in the first 9 months of 2022. The decline was due to the lower renewal premiums reflecting the end of regular payment terms for some top-selling products as well as the lower versus premiums resulting from the higher base period for investment in product last year. Page 21 versus premium FYP and the annualized premium, APE, was TWD 101 billion and TWD 32 billion, respectively. Both declined year-on-year due to high base period for investment-linked policies and favorable capital markets last year. However, protection type policy FYP grew 11%, supporting the contractual service margin. Page 22 shows the value for new business. Based on the 2020 embedded value assumptions, Value of new business for the first 9 months was TWD 20.4 billion. The decline was due to the same reasons as we mentioned earlier, the high base period for sales volume in investment in policies last year. However, with our continuous effort in growing the high season protection-type policies, VNB margin increased year-on-year. Page 23 shows the cost of liability and breakeven as a yield. The reserve base liability cost was 3.73% as of the end of third quarter, improving 4 basis points year-to-date. The breakeven as a yield was 1.1 -- 3.16%.

Please look at Page 14 for the investment portfolio. Cathay Life total investment was over TWD 7 trillion as of end of third quarter. Overseas investment accounted for 70%. The investment return of each asset class are as follows: cash and cash equivalents, 0.3%, domestic equity, 9.8%, international equity, 6.3% pre-hedge; domestic down 3%; international bond, 3.8% pre-hedge; mortgage and secured loans, 2%; policy loans, 5.3%; real estate, 2.9%. Overall, investment yield are shown on Page 25 and 26. After-hedging investment yield remains benign at 4.26%. The year-on-year decline was mainly due to the higher base period for capital gains amidst favorable capital market last year. On Page 26, left hand side, the pre-hedging recurring yield increased 33 basis points to 3.35% and as the new money yield for overseas sponsors year-to-date with increased positioning and cash dividend income increased year-on-year. The overall hedging result was a net gain of 28 basis points in the first 9 months, owing to [indiscernible] depreciation and effective proxy hedging. The foreign currency reserves surpassed TWD 50 billion as of the end of third quarter.

Please look at Page 27 for the cash dividend income and regional breakdown of overseas fixed income. Cathay recognized cash dividend income of TWD 23.3 billion in the first 9 months of 2022, higher than 2021 full year cash dividend income. For overseas fixed income investment, Cathay Life allocated 49% in North America, 18% in Europe, and the rest are in Asia Pacific and other countries. Page 28 shows the book value and unrealized gain of financial assets. Both declined year-to-date, reflecting a sharp rise in bond yields and the decline in equity market. prior to the end of September, Cathay Life decided to change its business model for financial asset classification with effective date being October 1. Upon reclassification, Cathay Life book value increased by TWD 243 billion.

Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 11% year-on-year to TWD 22 billion. Market share was 13%. On Page 34, the gross combined ratio and retained combined ratio both increased due to the pandemic insurance losses impact. Following an update on the pandemic insurance. The number of effective COVID policy decreased to TWD 653,000 as of the end of October, shows meaningful decline compared to the TWD 1.3 million as of the end of April. The accumulated [indiscernible] payment was TWD 16.6 billion and TWD 18.1 billion for the first 9 and 10 months, respectively. The [indiscernible] reserve for claims not yet settled and incurred but not reported on a retention basis, was TWD 3.1 billion as of the end of October. In the first 10 months, the cumulative direct loss, including claims and loss reserves was about TWD 21.6 billion, and the retained loss was TWD 18.1 billion.

As the daily number of new COVID cases has gradually decreased recently, and preventative policy for the pandemic are also being adjusted. Cathay Century will continue to monitor pandemic-related development. We'll look to adjust its loss ratio accordingly. We will disclose related information in the monthly resort. And in order to enhance Cathay Century's capital adequacy, the Board of the holding company has approved the second capital injection this year, which will be completed by the end of December. This is the end of presentation. Now let's open for Q&A.

[Operator]

[Operator Instructions]

[Shu-Fen Cheng, executive]

Before we take questions, I'd like to remind investors that Cathay Financial Holdings is in the process of capital raising despite that we are not in the quiet period, considering governance of information disclosure, Today, we will focus on year-to-date operation details, and we will not touch and forward-looking guidance. Thank you.

[Operator]

Thank you, Ms. Cheng. [Operator Instructions]

Now our first question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

Just 2 questions from me. First one is on [indiscernible]. We see the operating expenses up 11% year-on-year. So is there any one-off items or what has been driving the much higher OpEx growth this year? Second question is for Cathay Life. I think after the bonds reclassification. We know that for [indiscernible] securities all the trading flexibility will be relatively constrained. Just trying to understand, is that correct that every year you can only no more than 5% of the outstanding balance. And then is there any color regarding, for example, when the bonds under FVOCI or TPL with overlay what's the turnover ratio usually in the past.

[Shu-Fen Cheng, executive]

Daniel?

[Chung-Yi Teng, executive]

Well, I don't have like kind of data with me. So I'm checking that kind of operating expense issue. You mean 11% growth.

[Shu-Fen Cheng, executive]

Yes. On Page 43, the P&L of Cathay United Bank. The net operating income grew by 13% and operating expenses grew by 11%. Jemmy was asking where it's...

[Chung-Yi Teng, executive]

I know , but I'm checking my in that kind of data with me. If I don't, maybe I'll get back to you later.

[Shu-Fen Cheng, executive]

Jemmy, overall, you can see that the expenses is growing at slower speed and the revenue increase. The cost income ratio in first 9 months was 49.3%, versus 50% last year during the same period.

[Jemmy Huang, analyst]

I see. So can I assume this is maybe driven by the performance-related compensation mostly.

[Shu-Fen Cheng, executive]

We do need to check a bit tougher. I'm checking the number.

[Chung-Yi Teng, executive]

Yes. Yes. On the salary increase and the incentive program and the market expenses is very aligned with our P&L operating event.

[Charlie Hu, executive]

Jemmy some are due to our marketing promotion.

[Chung-Yi Teng, executive]

Expenses, yes.

[Charlie Hu, executive]

Expenses for credit cards now in launch [indiscernible] and also for the upcoming August next year, the Cathay contract will be terminated. So we try very hard to just deepen the relationship with our credit card holder. Given the spending account around the in the shop, it's around 20%. So it's quite important for us to make -- maximize our [ Cubera ] program promotion-related activities.

[Chung-Yi Teng, executive]

[indiscernible] an agreement call.

[Unknown Executive]

Jemmy, about the classification right now, the regulation about the AC each year only allow this 5% of the [ AC ] position that can be capital light. But for the FVOCI or the overlay position, you don't have that kind of constraint. So as long as you think that under our investment team thinking that it's a proper time that we can own realize the capital gain. But we didn't like the past experience, the turnover rate for this kind of [indiscernible]. And also, I think the -- sometimes, if the market like last 2 years, capital market is good, then we have a lot realized capital gain on the FVOCI. But it will depend on the market conditions. So I didn't have that kind of turnover rate for the FVOCI.

[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]

Thank you. Thank you all for your participation in Cathay Financial Holdings conference for today. If you answer the question any time the IR team will be here, stand by for you. And sir, you can just e-mail that, thank you, and goodbye.

[Operator]

Thank you, Ms. Cheng. Ladies and gentlemen, we thank you for your participation in today Financial Holdings conference call. You may now disconnect. Goodbye.