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Earnings Call Analysis
Q3-2024 Analysis
Cathay Financial Holding Co Ltd
Cathay Financial Holding began 2024 with robust earnings, reporting a net income of TWD 103 billion in the first nine months, marking the second highest figure in its history. This impressive performance was powered by notable growth from its subsidiaries, particularly the Cathay United Bank and Cathay Securities, both of which achieved all-time high earnings. The bank experienced a substantial increase in loan growth, net interest margins, and a remarkable 34% year-over-year growth in fee income.
Each of Cathay's subsidiaries contributed positively to the financial picture. Cathay United Bank surpassed its 2023 full-year earnings within the first nine months, driven by strong loan growth of 16% year-over-year and a net interest income increase of 17%. Meanwhile, Cathay Life reported a solid annualized premium growth of 14% alongside a 20% increase in the value of new business, demonstrating the effectiveness of its value-driven product strategy. Additionally, the asset management arm, Cathay SITE, set a record with assets under management (AUM) reaching TWD 2.1 trillion.
Cathay Financial Holding's overall return on equity (ROE) reached 15.8%, supported by strong contributions from all subsidiaries, each exhibiting double-digit ROE figures. Moreover, the holding company’s book value rose to a record TWD 939 billion, driven by the positive impacts of earnings and favorable market conditions. The book value per share also increased, suggesting solid fundamentals backing the company's equity.
Cathay's commitment to expanding its market share is evident across its operations. For instance, Cathay Century, the property and casualty insurance arm, increased premium income by 15%, enhancing its market share in a competitive landscape. Likewise, the bank continues refining its foreign currency deposit structure to optimize funding costs, indicating a strategic response to market dynamics.
Looking ahead, Cathay is preparing for the implementation of IFRS 17, which promises to enhance predictability in earnings and allow for the upstreaming of dividends from its life insurance subsidiary. Under IFRS 17, the company anticipates a significant positive shift, with expectations of generating at least TWD 70 billion in new Contractual Service Margin (CSM) annually, translating to 10% to 15% growth in insurance profit contribution to net income over the next several years.
Cathay maintains a strong capital position with a risk-based capital (RBC) ratio exceeding 350% and an equity-to-asset ratio of 9.6%. Such metrics affirm the company’s resilience against market fluctuations and its capability to capitalize on growth opportunities. Coupled with a conservative approach to underwriting and investments, including maintaining a low non-performing loan ratio (NPL) at just 12 basis points, Cathay demonstrates sound risk management practices.
While Cathay aims to maintain its current net interest margin of approximately 1.56% for the full year, macroeconomic conditions, notably interest rate volatility and GDP growth, will play a critical role in shaping future outcomes. The bank is optimistic about recovering its deposit growth trajectory back to historical mid-high single-digit levels, enhancing liquidity and lending capacity.
The conversation surrounding dividends remains crucial given the strong earnings reported to date. Management expressed optimism about a more favorable dividend policy in the future, indicating an expectation to distribute a larger percentage of earnings post-IFRS 17 implementation. This reflects a commitment to shareholder returns amidst rising profitability.
Welcome, everyone, to Cathay Financial Holding Company's Third Quarter 2024 Conference Call. [Operator Instructions] And now I would like to introduce Mr. C.K. Lee, CEO of Cathay Financial Holding Company. Mr. Lee, please begin.
Thank you. Good afternoon and good morning to those in Europe. Welcome to Cathay Financial Holding 2024 Third Quarter Analyst Meeting. I am C.K. Lee, CEO of Cathay Financial Holding. Today, I will host the meeting. Thank you for joining us. In the beginning, I would like to introduce the senior managers who are with us today. We have Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holding; Ms. Sophia Cheng, Chief Investment Officer, Cathay Financial Holding; 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 key highlights. Our first 9 months earnings reached TWD 103 billion, which is the second highest in our history, driven by strong and resilient performance across all subsidiaries, Cathay United Bank and Cathay Securities reached all-time highs surpassing their full year earnings from last year. Our P&C insurance and asset management business delivered record-breaking results for the first 9 months, while Cathay Life posted second highest earnings to date.
Cathay United Bank performed very well, driven by strong loan growth, expanding net interest margin and a 34% year-on-year surge in fee income. Cathay Life's value-driven product strategy continues to drive strong CSM growth, while investment performance remains solid and capital position stayed robust. Cathay Century, our P&C insurance subsidiary, maintained steady underwriting profitability while Cathay SITE, our asset management subsidiary reached record AUM. Meanwhile, Cathay Securities expands its market share in local brokerage business, we will share some more details during the call. Now I will hand over the call to Ya-Jou from our IR team. Thank you.
Thank you, C.K. Let's start with the business overview on Page 4, which provides a quick highlight on its subsidiaries. Cathay United Bank first 9 months earnings have already surpassed 2023 full year figures, delivering a new record high with 23% growth year-on-year. Loan growth was robust. Asset quality remains benign. Net interest income and fee income grew 17% and 34% year-on-year, respectively. Cathay Life, annualized premium and value of new business grew 14% and 20% year-on-year, respectively. After-hedging investment yield reached 4.15%. RBC ratio was above 350% and equity-to-asset ratio reached 9.6%. Cathay Century, the general insurance subsidiary, premium income grew 15% year-on-year with market share of 13%. Asset management subsidiary, Cathay SITE, delivered record high earnings for the first 9 months. AUM reached TWD 2.1 trillion. Lastly, Cathay Securities delivered another record high earnings, domestic brokerage market share continued to grow.
Please look at Page 5, Cathay Financial Holding's net income and earnings per share. Cathay Financial Holding's net income reached TWD 103 billion, the second highest record for the first 9 months, driven by strong core business momentum across all subsidiaries. EPS was TWD 6.78. Page 6 shows the subsidiaries' net income and ROE. Cathay United Bank and Cathay Securities' net income surpassed 2023 full year figures setting all-time highs. Cathay Century and Cathay SITE delivered record high year-to-date earnings. Cathay Life achieved second highest first 9 months record driven by solid investment performance and steady underwriting gains. On a consolidated basis, the holding company ROE reached 15.8% with our subsidiaries achieving double-digit ROE. Please turn to Page 7 to see the book value of Cathay Financial Holding. The consolidated book value of holding company reached a record high of TWD 939 billion, driven by earnings contribution and the rebound in equity and bond markets. Book value per share increased to TWD 56.7.
Page 9 and 10 shows our overseas expansion. Cathay Financial Holding continue to expand overseas business, cultivate local and cross-border corporate banking clients and leverage digital platform to develop consumer banking business. Premium income for Cathay Life Vietnam increased 10% year-on-year. As for the subsidiary's operation in China, Cathay United Bank China subsidiary continues to broaden operations enhancing online banking products and features and promoting digital transformation. 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 with mortgage and consumer loans showing double-digit growth. The total loan balance increased 16% year-on-year to TWD 2.6 trillion. Deposits showed steady growth to TWD 3.5 trillion. The bank continued to optimize its foreign currency deposit structure and increased proportion of Taiwan dollar deposits, effectively controlling funding costs.
Interest yield is shown on Page 13. Net interest margin for the first 9 months increased 18 basis points year-on-year to 1.55%, while the quarterly net interest margin rose 6 basis points quarter-on-quarter to 1.61%. This expansion was driven by strong loan growth, increased position and higher yielding foreign currency financial assets as well as the continued -- well-contained funding costs. Page 14 shows the asset quality. Cathay United Bank maintained low NPL ratio at 12 basis points and coverage ratio at 1294%. Gross provision was TWD 6.5 billion, with more than half of the general provision against new loan growth. Recovery was around TWD 900 million. Please turn to Page 15 for SME and foreign currency loans. SME loan balance increased to TWD 338 billion, accounted for 13% of the total loans. Foreign currency loans returned to growth this year, achieving double-digit year-on-year growth to TWD 259 billion.
Page 16 shows offshore earnings. The offshore earnings rebounded to TWD 5.9 billion due to the recovery in deposits, loans and investment income. Please turn to Page 17 for the net fee income. Net fee income reached TWD 20.9 billion, up 34% year-on-year, attributable to strong sales across wealth management products and a 32% year-on-year increase in credit card fees due to changes in the spending mix. Page 18 shows the breakdown of wealth management fees. Wealth management fees rose 39% to TWD 12.4 billion, all products showed strong growth. Fees for mutual funds, securities products and bancassurance grew by 41%, 71% and 32% year-on-year, respectively. Continued growth in both the number of customers and AUM provides us a solid foundation for future business expansion. Please move to Page 20 and 21 for Cathay Life's premium performance. Total premium was TWD 327 billion, a slight decrease of 3% year-on-year. Premiums from high CSM protection products rose 11% year-on-year, partially offsetting the decline in premiums for investment-linked policies due to regulatory changes in July 2023.
On Page 22, first year premium, FYP, was TWD 89 billion, declining year-on-year, reflecting the high base of investment-linked policies due to regulatory change in July last year. However, annualized premium, APE, grew 14% year-on-year, driven by the robust sales in health and accident policies as well as foreign currency-denominated traditional long-term regular premium products. Notably, APE for high CSM health and accident products increased 46% year-on-year. Page 22 shows the value of new business. Value of new business was TWD 24 billion, up 20% year-on-year. This growth aligns with the same drivers seen in our APE performance. Page 23 shows the cost of liability and breakeven asset yield. The cost of liability remains stable quarter-over-quarter at 3.78%, while breakeven asset yield continued to improve. Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 8 trillion. Overseas investment accounted for around 70%. On the right-hand side, the investment yields for domestic equity and international equity was 17% and 13%, respectively.
Overall investment yields are shown on Page 25 and 26. After-hedging investment yield was 4.15%, supported by capital gains from equity portfolio adjustment during the market rally. Page 26, the pre-hedging recurring yield was 3.45%, down slightly by 2 basis points, reflecting lower cash dividend income due to capital gains realization, partially offset by continued growth in interest income. The annualized hedging cost was 1.28%. And despite a 2.5% appreciation of the Taiwan dollar in the third quarter, the strengthening of the major Asian currencies enhanced the effectiveness of proxy hedging, keeping hedging costs well-contained.
Please turn to Page 27 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized cash dividend income of TWD 15.3 billion in the first 9 months, lower than the same period of last year as the Cathay Life dynamically adjusted its portfolio in favorable equity markets. On the right-hand side, Cathay Life took the higher interest rate opportunity to increase its holdings in U.S. bonds, raising the proportion of fixed income investments in North America to 52%.
Page 28 shows the book value and unrealized gain of financial assets. Both increased year-to-date. The book value rose to TWD 756 billion, supported by earnings contribution and the rebound in unrealized gains and losses of financial assets. The equity-to-asset ratio increased to 9.6%. Next, please turn to Page 22 to -- 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 15% year-on-year to TWD 28.4 billion. Market share was 13%. Page 34, the 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 payments were covered by catastrophe reinsurance contract. And lastly, as we approach the implementation of IFRS 17 and the new sovereign regime implementation, I would like to provide an update on our progress and anticipated impacts. Since 2012, we have transitioned to a value-driven product strategy for accumulized CSM, which represents insurance profit under IFRS 17.
In recent years, we have also built a strong capital buffer to ensure resilience and this effect positions us well for the upcoming adoption. Following the transition, we expect to largely reduce the cost of liability, positive interest spread, increased insurance profit contribution to P&L and robust capital buffer. And you can also refer to Page 36 to 39 for the IFRS 17 and ICS -- new solvency region related information. So number one, the positive spread, while IFRS 17 does not change our economic value, it provides us an opportunity to address loss-making legacy book upfront and started to enjoy positive interest spread thereafter.
While this may result in some erosion of our book value upon adoption, the impact is quite manageable, and the CSM balance will remain robust. The equity-to-asset ratio may slightly decline on adoption, but when equity is combined with the after-tax CSM, the adjusted equity-to-asset ratio will be well above the current level of 9% to 9.5%. And post implementation, our cost of liability will be largely reduced at the same level as peers though our after-hedging recurring yield has enjoyed positive interest spreads.
And number two, the increased insurance profit contribution to the net income. Accumulating CSM is our top priority in preparation for IFRS 17. Our annual target is to generate at least TWD 70 billion in new CSM, and we exceeded this goal last year and this year. Strong CSM generation capabilities will drive 10% to 15% growth in CSM released into the net income annually for the next several years after adoption, steadily increasing insurance profit contributions. And number three, strong capital buffer, based on our current market rates and announced transition and localization measures, our new solvency ratio is around 160%, well above the regulatory requirement of 100%.
Upcoming localization measures will further boost this ratio. This strong capital position ensures our resilience against the future market volatility and provides us with the flexibility to buy DIPs when market corrections. So in summary, our early preparation and strategic actions, early transition to value-driven product strategy with strong CSM generation capabilities and building a strong capital buffer has positioned us well for IFRS 17 and new solvency regime. And these efforts ensure our financial resilience improved profitability structure and the ability to seize opportunities in a dynamic market environment. And this is the end of presentation. Now let's open for Q&A.
[Operator Instructions] And our first question will be coming from Jemmy Huang, JPMorgan.
Two questions from me. First one is if I look at your bank net interest margin over the past 4 to 5 quarters, one key driver is actually coming from your funding cost management. We can see the deposit only grew by 1% compared to double-digit loan growth. I think that helps your LDR, but also your funding mix as well. So how sustainable this kind of adjustment you could do? Should we see similar churn into 2025? Second question is for Cathay Life. If we look at it from a more top-down longer-term perspective, I think Life earnings average over the past 1 decade is somewhere around TWD 40 billion to TWD 50 billion operating profit. Obviously, under IFRS 17, we have the addition from CSM amortization, but at the same time, equity trading gain is -- should be largely gone. So in terms of the absolute operating profit is there any like a ballpark or a top-down estimate, how should investors looking at absolute operating profit levels under IFRS 17 for Cathay Life?
This is Kevin. I will -- first, I will answer the NIM questions. The full year for the 2024 is around 1.56% for the full year this year. If you ask me about outlook for next year I would say, kind of early to tell you the actual guidance because given that Trump hasn't released all his policy to -- and the market hasn't -- I would say, if you look at the recent market performance, you will see the market consensus for the interest rate for the next year is still very, I would say, volatile. But our goal is to maintain our NIM at the same level, at least with same as this year aside from all the volatility in the market, I would say, pretty much if there is a good trend for the NIM, definitely, we can update you in the next investor meetings.
Jemmy, it's Sophia. Let me also add a few points to that. You are right that we didn't grow a lot of deposits. But if you look on Page 13, for the overall rate, the funding cost, if I look at from beginning of last year, 1.26% into 1.52% in the recent quarter. The increase in funding cost was 26 basis points. On the other hand, if you look at the return on interest earning assets, the increase from 2.66%, up to 3.07%. The increase was 41 basis points. So while the spread's quite stable and slightly down, we do benefit from a higher interest rate and also a better loan deposit ratio also helped that.
So I wouldn't say it's only purely on the deposit mix. And the second point is if you look at the loan mix, especially foreign currency loan, we start to see some growth improvement. It really depends on the overall economy in other Asian countries where we're seeing some momentum in Southeast Asia and also China current level is still not very healthy yet. So longer term, the improvement in SME loans and also if we see better timing for the foreign currency loan to continue to increase, and I think they will still bode quite well for the net interest margin to maintain at current level. I hope that adds some point. Thank you.
So basically, my question is are you going to maintain a relatively low deposit growth in the next 12 months, and we will continue to see further increase in LDR, is that the way to look at into 2025?
Next year, we actually think the deposit will grow. The past year as we don't think we need to compete on foreign currency deposits. So there was a mix adjustment because our loan deposit ratio is relatively low. And its overall GDP growth and because of the retail banking, I think when the -- also deposit competition in the market is better, but we do think the deposit will return to its normal growth. And if you look at every year, this year is maybe the only year that deposit growth 1%, the past decade grew at mid-high-single-digit growth each year.
Yes. I think, Jemmy, you look at -- your question is that Cathay Life, for example, past 5 years, but normally -- yes. Actually, our investment team did a good job. So actually, we have a lot of the capital gain come from the equity. So generally speaking, you say that our net income is around like TWD 40 billion to TWD 50 billion. So you wonder that in IFRS 17, how is about our net profit from the IFRS 17 perspective. Okay. I know a lot of investors wants to know this kind of numbers but I want to say, first one, because all the equity we will classify for IFRS 17 as FVOCI not FVTPL because that we don't allow to have the overlay methodology. So we -- most of the equity we will classify the FVOCI.
Once we classify the FVOCI, so the capital gain from equity side won't come into net income, but instead in OCI perspective, it means that it will in our retained earning, but it still can be distributed. So actually, the basis is quite different. But I know you want to see some comparison. But at this moment, I don't want to really disclose this kind of number, although we have this kind of number. And I will tell, we are quite positive on that. But I cannot give you a very specific number. But I will say, yes, after IFRS 17, we are positive in net income and also more predictable no matter the equity capital gain is large or not. So this is one thing, but the F3 number actually is not proper at this moment that we can disclose like this kind of TWD 40 billion to TWD 50 billion. But I will say, we are positive on that.
Next question, Michael Zhang, Citi.
Just 2 questions, please. The first one on Life, you mentioned that the Life earnings will be more predictable starting in 2026 and you are also positive on the earnings outlook and CSM growth. So just wanted to understand from a dividend perspective because recent years, it could be a bit difficult for Life to upstream dividends. And if I look at your historical record Life during years the upstream dividends, they upstream about 20%, 30% of earnings as dividends. So just wondering, under IFRS 17, with earnings becoming more predictable. But does that change the way we think about dividend upstream from the Life subsidiary? And the second question is on the bank side. I think many bank peers are also reporting a very strong growth in other consumer loans. So just wanted to understand what type of loans is driving like can we get more specific details and what kind of loans that is? Is it more unsecured consumer loans? And how do we think about the asset quality risk arising from such rapid growth of these consumer loans?
Michael, I think that I also -- because before we adopt IFRS 17 and ICS, yes, we are not allowed to dividend upstream to Cathay Financial Holding. This is because we need to make sure all life industry have sufficient capital to adopt this international standard. But we are positive that after we -- adoption because this uncertainty actually is gone. And we are clearly positive, after that our -- no matter in our solvency ratio, our net income is more predictable. And so we expect we can have cash dividends and upstream to Cathay Financial Holding, I'm positive on that. But the number calculation still have some details need to be determined by our regulator. For example, some special reserve aspect, this kind of calculation will impact the number we can upstream. And also because the dividend upstream, we also need to get some approval from our regulator and we have some internally detailed calculation, the amount which we can apply to submission our application to regulator.
This kind of some calculation detail needs to be determined. But this kind of calculation actually, at this moment, is not priority for our regulator. At this moment, our regulator most priority is that the fourth stage localization measure, that right now is the most emergency. So I think the more detailed result should be wait to hear that maybe in 2026. And that year, I think that will be more clear. But at this moment, we're thinking about that our regulator knowing that after we adoption, the Life subsidiary needs to have some cash dividend upstream. They know about this, this is quite important, especially for a listed financial company, financial holding company. So we know that they recognize this issue so we are positive on that. But at this stage, it's still not to care about how many or how percentage of our net income can be upstream. So -- but we are positive on this issue.
Michael, I think for the bank side, the growth of the personal loan actually coming from those secured loans, more than 60% of the loan growth under the personal loan growth actually are securitized. So there is an underlying security here. So in terms of the risk management, I think it is more manageable. Thank you.
[Operator Instructions]
[Foreign Language] This is Grace Chen. In the Chinese -- earlier Chinese session, a lot of participants are interested in our dividend policy given our strong earnings performance year-to-date, the second highest. And as we have communicated with the investors, our dividend policy each year will take into consideration multiple factors, including our earnings, peers, dividend yields, payout ratio, investor expectations and our financial resilience, and we aim to deliver a favorable dividend year. And as a strong earning year-to-date, we remain optimistic about our dividend payment. Although as we know, Trump is the U.S. President Elect and our CEO said if there is no big surprise until the end of this year, we are, for sure, our dividend policy will be a more favorable one compared with this year. Thank you.
[Operator Instructions] Okay, then there appears to be no further questions at the point. Mr. Lee, can we close the conference call now?
Okay. Thank you. Well, thank you for participation in today's conference call. If you have any further questions, please feel free to contact our IR team. Thank you.
Thank you, Mr. Lee. And ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Thank you, and goodbye.