Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2019-Q4

[Operator]

Welcome, everyone, to Cathay Financial Holding Co.'s Fourth Quarter 2019 Conference Call. [Operator Instructions]

And now I would like to introduce Ms. Sophia Cheng, CIO of Cathay Financial Holding Co. And Ms. Cheng, please begin.

[Sophia Cheng, executive]

Thank you. Good afternoon, and good morning for those in Europe. Welcome to Cathay Financial Holdings 2019 Year-End Analyst Meeting. I am Sophia Cheng, 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 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; and Ms. [ Joyce Tang ], Senior EVP of Cathay United Bank.

For today's conference call, Yajou from our IR team will present the first quarter results. And after the presentation, we'll open for Q&A session, in which senior management will be more than happy to answer your questions. Without further do, let me pass the call over to Yajou for the briefing of our 2019 full year results.

[Yajou Chang, executive]

Thank you, Sophia. Let's start with the 2019 business overview on Page 3, which provides

a quick highlight of each subsidiary. Cathay United banks continue to adjust the loan mix. Net interest margin increased quarter-over-quarter and net interest income grew steadily. The foreign currency loan continued to grow. Offshore earnings accounted 40% of the pretax earnings. Fee income increased 8% year-over-year, among which credit card fee grew 9% and wealth management fee grew 7%.

Cathay Life continued its value-driven strategy. Protection-type policies grew 24% year-over-year. The annualized first year premium increased 35%. Value of new business reached TWD 62.5 billion, up 21% year-over-year. Cost of liability continued to improve. Pre-hedging recurring yield increased 15 basis points year-over-year to 3.65%. RBC ratio was 346%. Capital level remained solid.

Next, Cathay Century, the general insurance subsidiary. Premium income grew 9% year-over-year. Market share was 13% and stand #2 in the industry.

Asset management subsidiary, Cathay SITE, had AUM of TWD 810 billion, ranked #1 in the industry.

Lastly, Cathay Securities continue to grow brokerage business and its sub-brokerage market share remained #1 in the industry.

Next page, Page 4 shows Cathay Financial Holding's outlook for 2020. Cathay United Bank will continue to adjust the loan mix to enhance the capital efficiency and maintain benign asset quality. Cathay Life will focus on regular-paid policies, foreign currency denominated policies and investment-linked policies to increase the value of new business. On the investment side, Cathay Life adjusted investment portfolio dynamically in the face of market volatility and continued dynamic hedging strategy to maintain stable hedging cost. Cathay Century will grow both personal insurance and commercial insurance. The company will continue to increase the capital efficiency and expand overseas business.

Cathay SITE will continue to broaden the product line to meet customers' needs, integrate global asset management resources and expand distribution channels. Cathay Securities will utilize digital technology to expand its customer base and will develop products and services based on customer's needs.

Please look at Page 5, Cathay Financial Holding's net income and EPS. Cathay Financial Holdings reported TWD 64 billion of earnings for the year of 2019, increased 23% year-over-year. Earnings per share was TWD 4.76.

Page 6 shows the subsidiaries' net income and ROE.

Cathay United Bank's earnings rose 6% year-over-year, driven by interest and fee income growth. Cathay Life earnings grew 20% year-over-year because of better investment performance. On a consolidated basis, the holding company ROE was 9.7% in 2019.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company reached TWD 782 billion. Book value per share was TWD 51.6 in the year of 2019.

Page 9 and 10 show our overseas expansion, which is on the right track. Cathay Financial Holdings continues to expand its overseas business by deepening its overseas presence and reinforcing the relationship with local customers. As of today, Cathay United Bank has footprint in 9 out of 10 ASEAN countries. The overseas banking footprint contributed to the solid growth of foreign currency loans. Cathay Life Vietnam's total premium increased by 53% year-over-year, increasingly performing steadily in Vietnam. As for the subsidiaries operation in China, Cathay United Bank's China order [ book ] business is on the right track. For Cathay Life joint venture in China, the total premium grew 15% year-over-year. For the general insurance, the strategic alliance with Ant Financial is going very well in China. For Cathay Securities Hong Kong, each business line performed steadily.

Please turn to Page 12 for more details about our banking performance. With proper risk management, Cathay United Bank continued to adjust the loan mix by increasing SME, foreign currency and consumer loans, reducing loan to governments, increased their capital efficiency and focused on quality than quantity.

Cathay United Bank loan balance was TWD 1.5 trillion at the end of 2019. Deposits grew by 5% year-over-year to TWD 2.3 trillion.

Please look at Page 13 for the interest yields. The solid SME, foreign currency and consumer loan growth led to the margin improvement. Interest spread reached 1.83% for the year of 2019, and the net interest margin was 1.23%, both improved 1 basis points comparing to the first 9 months.

Page 14 shows the asset quality of Cathay United Bank. Due to our prudent lending policy, Cathay United Bank maintained low NPL ratio at 15 basis points and coverage ratio at 1137%. In the year of 2019, gross provision was TWD 4.6 billion and recovery was TWD 1.7 billion.

Next, please turn to Page 15 for SME and foreign currency loans. SME loan balance reached TWD 209 billion by the end of 2019, grew 18% year-over-year. Foreign currency loans balance grew 4% year-over-year to TWD 243 billion, accounted for 16% of total loans.

Page 16 shows the offshore earnings, which was TWD 10 billion, accounted 40% of bank's pretax earnings in 2019.

Please turn to Page 17 for fee income. Cathay United Bank continued to enhance the noninterest income. Fee income was TWD 21.4 billion in 2019, up 8% year-over-year. Credit card and wealth management fee grew 9% and 7% year-over-year, respectively.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income came to TWD 9.8 billion. Each individual subsector showed year-over-year growth.

Please move to Page 20 and 21 for Cathay Life's premium performance. In 2019, total premium was TWD 674 billion, slightly down year-over-year. The decline was due to the product mix change with lower first year premium.

On Page 21, first year premium was TWD 201 billion, down 5% year-over-year due to capital markets volatility with less investment-linked policy sales. Last year, we focused on selling higher-value products such as traditional regular paid and protection-type policies. The first year premium for protection-type policies grew 24% year-over-year. The annualized first year premium APE with TWD 96 billion. The increase of 35% was due to an increase of traditional regular paid products. The annualized first year premium was still the highest in the industry.

Page 22 shows value for new business. Value for new business increased by 21% to TWD 62.5 billion in 2019. The growth was due to the product mix change of increased proportion in traditional life and protection policies.

Page 23 shows our cost of liability which continued to improve. The reserve-based liability cost was 3.95% at the end of 2019, improved 8 basis points comparing to the end of 2018. We expect the total liability to come down 5 to 10 basis points in 2020.

Please look at Page 24 for the investment portfolio. Cathay Life total investments reached TWD 6.4 trillion as of the end of 2019. Cash position was 3.7% of the invested assets. Overseas investment accounted for 66%. The investment return for each asset class are as follows: cash and cash equivalents paying 0.6%; domestic equity, 7.9%; international equity, 6.5% pre-hedged; domestic bonds, 5.7%; international bond, 5.3% pre-hedged; mortgage and secured loans, 2.1%; policy loans, 5.6%; real estate, 2.7%.

Please move to Page 24 for more details about our investment performance. After-hedge investment yield was 3.95% in 2019, increased 13 basis points year-over-year. Pre-hedging recurring yield increased 15 basis points year-over-year to 3.65% in 2019. In terms of hedging, the full-year hedging cost was 1.4%. Taiwan dollar appreciated 2.1% against the U.S. dollar in 2019. However, the proxy effectiveness was affected by other ASEAN currencies weaker than Taiwan dollars. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging costs.

Please look at Page 26 for the dividend income and regional breakdown of overseas fixed income.

Cathay Life has recognized dividend income of TWD 24.7 billion in 2019. For overseas fixed income investments, Cathay Life allocated 44% in North America, 20% in Europe, and the rest are in Asia Pacific and other countries.

Page 27 shows the book value and unrealized gains of financial assets. Thanks to well performed equity and fixed income markets in 2019, Cathay Life's consolidated book value and unrealized gain of financial assets increased significantly to

TWD 595 billion and TWD 115 billion, respectively.

Next, please turn to Page 31 for the performance of Cathay Century. Cathay Century's premium income was TWD 25 billion, up 9% year-over-year. Market share was 13%. Cross-selling synergy continued to perform well. Over 60% of the premium was generated by the group channel.

Thank you. It's the end of 2019 results briefing. Now let's open to Q&A.

[Operator]

[Operator Instructions] The first question is coming from Edwin Liu of HSBC.

[Edwin Liu, analyst]

I have 2 questions on the Life side. First one is, can you provide an update in terms of the unrealized gain/loss position as of -- latest one or end of February? And also a related question is in our bond portfolio for the IG bond, can you give us more split in terms of the credit rating like AA or A, et cetera?

My second question is in terms of the asset duration. Can you provide an updated bond duration for 2019?

[Chao-Ting Lin, executive]

First one, at the end of February, we didn't provide a kind of unrealized gains by monthly data. So I'm sorry, I can't provide it. Second one, about the asset duration, we're now around [ 11 ]. And about the rating, we think...

[Sophia Cheng, executive]

Noninvestment-grade is about 3%. And if you compare with 3 years ago, it was 5%. So in the past 3 years, we have reduced our rating in noninvestment-grade. We have also increased the rating into A and AA in the past 2 years. So as of now, in the BBB category, including BBB+, BBB and BBB-, it is below 30%. It's about 29%. And A, AA, AAA, altogether is 69%.

[Chao-Ting Lin, executive]

69%.

[Sophia Cheng, executive]

So 69% is A and above. 29% in BBB all category and 3% in noninvestment-grade.

[Operator]

And the next question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

I just have one question. I think if we look at from the EVE perspective, could we argue that as Abel mentioned, credit spread has been widening. So we should assume -- is it fair to say we should assume even if we see the investment return assumption being revised down, the magnitude will be much milder compared to the risk-free rates? And therefore, the implication for embedded value may not be as negative as market perception? And also, if under the IFRS 17 mechanism, should we be able to draw the same conclusion? Or it will be somewhat different?

[Chao-Ting Lin, executive]

I think the founder -- thank you, Jemmy. The first one, I think that under the IFRS 17, yes, if we look at -- because of the liquidity premium, as I said, that if we adopt like kind of the ICS standard that can reflect the credit spread in this part. Although the risk-free rate is coming down, but the credit spread is much, much wider. So actually, total combined together, the net impact maybe is not that large. But because there still a lot of uncertainty, so I cannot give you that kind of conclusion. But as I -- right now, my opinion is that because the credit spread widens, so it will offset the risk-free rate down. This is for sure. So this is for the first one for IFRS 17.

And second one, because right now we are on the right process to determine the assumption of our embedded value, so at this moment, I cannot give you some detailed guidance that the investment assumption will be impaired large or not. But I think the way is correct that because the credit spreads widened, so total -- our total yield, they are not impaired that much. So it should be reflect in our assumption. But I cannot give you if they're big or not because this is still under some process and also need to be, I think, peer reviewed by our consulting firm. So I cannot give you very specific guidance at this moment.

[Sophia Cheng, executive]

We will announce the 2019 embedded value in the next analysts meeting, which will be sometime in May.

[Operator]

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

[Steven Lam, analyst]

Hello. Hi, can you hear me?

[Chao-Ting Lin, executive]

Yes.

[Steven Lam, analyst]

I do have a few but I'll start with the interesting ones first, probably more of a conceptual question.

[Sophia Cheng, executive]

Would you mind speaking slowly? I cannot hear your voice.

[Steven Lam, analyst]

Can you hear me okay? Right now?

[Sophia Cheng, executive]

When you speak very fast, become fragmented.

[Steven Lam, analyst]

Okay. I'm not sure. Maybe it's the connection. If I'm down, I will get in back. This is on the investment side. And I was curious, given all the market volatility, and understanding that -- I understand -- I realize that the cash position has gone up. Now my biggest -- my major question was how long can you wait to, so-called, buy the dip if you're going to manage the inflow and payment of the premiums and maturities and whatnot? That's probably a broad question on the investment side.

[Sophia Cheng, executive]

Sorry. I really cannot hear your question very well. I just hear that you mentioned that our cash position in terms of asset allocation has increased. But then you talk about something related to premium or bond, I cannot really hear.

[Steven Lam, analyst]

Okay. Basically, my question was that how long can you wait in terms of buying the dip, whether in equity or, as you say, some other non-risk-free bonds, for example?

The second question is about your outlook for FYPE and the margin mix for 2020. Now I understand the difficulty this year is that the appetite of clients in terms of different products may change, given 2 factors: one is we have the virus. And then secondly, yields would be very low. So I just wanted to get some sense in terms of what are your thoughts on the sales of, say, savings products versus protection products?

And I guess, lastly, is there anything that you can provide us in terms of color on what you have done so far in the last couple of weeks on the investment side and the dynamics that you have seen from the FYPE in, say, January, February and the first half of March? I hope you can hear my questions okay.

[Sophia Cheng, executive]

Okay. Let me confirm the first one. Were you asking about that we have increased the cash position? And then were you asking when do we think is the time to buy on dip? Am I correct?

[Steven Lam, analyst]

Oh, it's more like how much flexibility you can have to wait to buy the dip because we don't know right -- yes?

[Sophia Cheng, executive]

Yes. Yes, okay. If you don't mind looking on the slides, Page 24, that is our asset allocation. And you can see, if I compare with end of 2018, in the past year, we have increased the cash and cash equivalent to over TWD 200 billion. And in adjacent to that, in some of our equity and bond funds, when we invest, after we redeem, the cash remains in its own category. So the actual cash level should be higher than the number you see. We do have the buffer if we want to buy on dips.

And very importantly, if the market goes down, most of the insurers, their capital adequacy ratio could be affected. And that's why if you look at our slide -- let me check the number, just 1 second. On slide, Page 34, you can see that end of last year, we had RBC ratio for Cathay Life, 346%. So we do have the buffer. And if you look at my portfolio on both domestic and overseas equity, the peak, I think it was the fourth quarter 2018 or first quarter last year, so we have been spending the past 1 year, whole year, to do the task on derisk as well as we foresee that the credit spread and the fixed income and the equity valuation a little bit high. And therefore, we think that we should have a derisk strategy in case there is a significant market correction. This is what we have been doing. And, yes, we usually would tell you what we think -- what we thought or we have done, we try not to give forward guidance, especially on investment because: one, that's very dynamic; two, given our size, we think it's not proper for us to give any guidance to the market that can influence the market. So please accept my apology that we cannot share the forward-looking activity. We do look into the market. And if the valuation, the target are at attractive level, we will consider to buy on dip. But we'll buy on dip when we see it's proper.

And as Abel just mentioned that usually we do not give monthly number. So for the first quarter number, we should have the analyst meeting in May. I hope that's okay for you if we give you an update by that time. And in terms of the FYPE for outlook for 2020, Abel can answer the question.

[Chao-Ting Lin, executive]

I think that -- as I mentioned in the last investor presentation that because this year -- last mentioned, the interest rate is low, but also because we have a regulation change that we need to follow. So at this moment, I think that we're still in a hard time, but this is very expected. So we see the FYPE momentum is low, I think, that for the -- in the January and February results. And because we changed -- I think all the market changed to sell much more protection-type product, but it still need time to educate our policyholder to adjust there's more protection they need, and it's not an easy way that for the whole market to sell this kind of product. And Yajou mentioned right now the value that reduced the people to sell this kind of product.

So I think that we have a hard time at this moment. But we think that all the product mix, we think the -- maybe the savings product, I think, were less and protection-type will increase. And also, majorly, we are focused on lending product and USD policy. This is what I observed in this market.

[Sophia Cheng, executive]

And I can add a few points to that, if you look on Page 28, this is our life insurance premium, first year premium by distribution channel. So the -- because for 2020, the guarantee rate for both Taiwan dollar and US dollar policies has reduced, historically, this tend to create a 1 to 2 quarter of vacuum period where the lower rate the market needs some time to accept it and before it comes back to normal trend.

So even without all the recent slow rate end to the virus, we were expecting first half of 2020 to be a slower time due to much lower guarantee rate.

But we think it's a positive. Structurally, it's healthier for the industry if you consider eventual IFRS 17, you will guarantee rate versus your asset yield. So we think it's important price for the industry to pay for a healthier industry future.

And on this page, on Page 28, you can see we have bancassurance which accounts for about 26%, 27% of the life insurance FYP. And you can think about this one because Cathay is a financial group. So if the bank deposit does not flow to life insurance premium, the bank wealth management team will still sell the product to other products which suits to customers' need. So on aggregate basis, you can think about on consolidated book basis, the money, if we put those to -- from the bank deposit doesn't go to Cathay Life, we'll still divide it into other gross management fee income.

And I think the concern, we -- the overall FYP slowdown for the industry, this is not just Cathay, this is more industry-wide. As number one, a lower -- much lower guarantee rate so the customer base, they need to rethink and then at certain guaranteed rate, they will usually take 1 quarter to 2. So that's why originally in first half, it should be weaker already. And number two, try to think about the overall impact on group consolidated basis rather than one company -- one subsidiary alone.

[Steven Lam, analyst]

Can I just have a quick follow-up on the investment side? I just wanted to double check the return by asset classes. Are those on total investment return basis as in including unrealized and realized trading gains and all that?

[Sophia Cheng, executive]

You mean on Page 24, the most right-hand side column is return? Yes, it includes recurring and one-off gains as you said -- so if you aggregate it together and take away hedging cost, they will transfer into the after-hedging investment yield on Page 25, yes.

[Chao-Ting Lin, executive]

It didn't include unrealized gain, but it includes the realized gains and recurring yield.

[Steven Lam, analyst]

Perfect. So can I just double check the reason why the bond returns and -- the bond returns have been much higher? It's mostly because of trading, but realizing the gain or...

[Chao-Ting Lin, executive]

No. I think it's because of...

[Sophia Cheng, executive]

Yes, the cash flow part of that should be the realized gain as we [ depose ] some gain. We have been -- as we mentioned earlier, Abel explained we are -- we have been doing derisk in the book. So through the market spend or through the trend, we have, one, realized some gain and part of the decision also to change on the position, if they will be more sensitive to market volatility if we expect a sizable market correction.

[Operator]

[Operator Instructions] We thank you for all your questions. And there appears to be no further questions at this point. And Ms. Cheng, can we close the conference call now?

[Sophia Cheng, executive]

Okay. Thank you for your [ Audio Gap ]

[Operator]

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

I'm sorry, we are taking the last question, sorry, which is from the Jerry Lou of Point72.

[Jerry Lou;Point72;Analyst, analyst]

Just one quick question on the dividend policy. So this year, I understand that the Cathay Life didn't [ action ] the dividend. How should we think about the holding company dividend policy this year? Should it be similar with last year? Or we can have some improvement?

[Sophia Cheng, executive]

Sorry, the board has not discussed the dividend payout yet as of now. And I think they should be discussing very soon into next month. Currently, we cannot give you dividend guidance at all. But if you look into some area, number one, on the company chapter, the minimum payout ratio is 30%, and I believe we have been paying better than that. And if you allow us maybe another one, then we get some guidance from the board, then we can update to you. I hope that's fine.

Okay. If there are no further questions, I'd like to thank you for your participation in Cathay Financial Holdings conference call today. And if you have further questions, please do feel free to contact our IR team. We'll be here for you. Thank you, and goodbye.

[Operator]

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