Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2020-Q4

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's Fourth Quarter 2020 Conference Call. [Operator Instructions] And now I would like to introduce Ms. Sophia Cheng, the CIO of Cathay Financial Holding Company. And Ms. Cheng, please begin.

[Sophia Cheng, executive]

Thank you. Good afternoon. I'm commenting to investors in Europe. Welcome to Cathay Financial Holdings' 2020 Analyst Meeting. Today, we will give you update on last year's full year results. My name is Sophia Cheng, the Chief Investment Officer for 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 our senior managers who are with us today. We have Mr. Daniel Teng, Senior EVP of Cathay Financial Holdings; Ms. Grace Chen, Chief Financial Officer for Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Ms. Joyce Tsai, Senior EVP of Cathay United Bank; and Ms. Grace Hong, EVP of Cathay Life.

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

[Yajou Chang, executive]

Thank you, Sophia. Let's start with 2020 business overview on Page 3, which provides a quick highlight on the subsidiary. Cathay United Bank delivered steady loan and deposit growth with benign credit quality. Offshore earnings grew 14% year-on-year, accounted for 46% of pretax earnings. Wealth management fee grew steadily, driven by mutual fund sales.

Cathay Life continued its focus on value-driven strategy. Both first year premium, FYP, and annualized premium, APE, rank #1 in the industry. Earnings hit a record high, driven by sound investment performance. RBC ratio and equity-to-asset ratio reached 330% (sic) [ 360% ] and 10.6% respectively. Solid capital position provided buffer against the market volatility.

Cathay Century, the general insurance subsidiary, premium income grew steadily. Market share was 12.3%, maintained #2 in the industry. Overseas premium continued to grow.

Asset management subsidiary, Cathay SITE, AUM reached TWD 1 trillion, ranked #1 in the industry.

Lastly, Cathay Securities earnings increased significantly to all-time high.

Next page, Page 4 shows Cathay Financial Holdings outlook for 2021. At the United Bank, we'll continue to grow loans steadily with benign asset quality. Leverage group synergies and develop diversified wealth management products. Expand and deepen overseas presence to increase offshore earnings.

Cathay Life. We will focus on protection policy, foreign currency-denominated policies and investment-linked policies to increase value of new business. On the investment side, Cathay Life will adjust its investment portfolio dramatically and continue dynamic hedging strategy to maintain stable hedging cost.

Cathay Century will grow both personal and commercial insurance business. Enhance capital efficiency and grow business and net profit steadily.

Cathay SITE will continue to offer comprehensive product lines to meet customers' needs, integrate global asset management resources and expand distribution channels.

Cathay Securities will continue to utilize digital technology to increase customer base and enhanced user experience.

Please look at Page 5, Cathay Financial Holdings net income and EPS. Cathay Financial Holdings uptick net income for 2020 reached historical high of TWD 76 billion, driven by sound investment performance. EPS was TWD 5.41.

Page 6 shows the subsidiary's net income and ROE. Cathay United Bank's net income slightly decreased year-on-year. Cathay Life's net income grew 38% year-on-year to all-time high, driven by better investment income. Asset management and security subsidiaries' earning also set new records. On a consolidated basis, the holding company's ROE was 9% in 2020.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company reached a record high of TWD 905 billion. Book value per share was TWD 60.8 in the year of 2020. Based on recent stock price, the price-to-book ratio is around 0.8x.

Page 9 and 10 show our overseas expansion, which is on the right track. Cathay Financial Holdings continue to expand its overseas business by deepening its overseas presence and reinforcing the relationship with local partners. Yangon branch in Myanmar opened on January 8. Cathay Life Vietnam's total premium increased by 53 year-on-year -- 53% year-on-year. And Cathay Century performed steadily in Vietnam.

As for the subsidiary operation in China, the business of Cathay United Bank China is on the right track. For Cathay Life's joint venture in China, the total premium grew 11% year-on-year.

Please turn to Page 12 for more details about the banking subsidiary. With proper risk management, Cathay United Bank loan balance was up 7% year-on-year to TWD 1.6 trillion as of the end of 2020, driven by the growth in consumer loan and mortgage. Deposits grew 12% year-on-year to TWD 2.6 trillion. The demand deposit ratio increased from 63% to 70%.

Interest yield is shown on Page 13. The NIM and spread of fourth quarter 2020 rebounded due to lower funding cost. The interest spread was 1.74% for the year of 2020, and the net interest margin was 1.18% NIM recovered in the fourth quarter, as you can see in the bottom table.

Page 14 shows the asset quality of Cathay United Bank. Due to the prudent lending policy, Cathay United Bank maintained low NPL ratio at 14 basis points and capital ratio is over 1,000%.

In the year of 2020, gross provision was TWD 4 billion, the recovery was TWD 1.1 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 228 billion, up 9% year-on-year. Foreign currency loan balance was TWD 233 billion, accounting for 14% of total loans. Foreign currency loan grew 1% year-on-year. The decline should reflect currency operation of new Taiwan dollars.

Page 16 shows offshore earnings, which was up 14% to TWD 11.5 billion, accounting for 46% of the bank's pretax earnings in 2020.

Please turn to Page 17 for fee income. Fee income was TWD 20.2 billion for the year of 2020. Credit card fee declined year-on-year due to lower spending under pandemic.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income increased 2% year-on-year to TWD 10 billion. Strong growth in mutual funds more than offset the decline in bancassurance fee.

Please move to Page 20 and 21 for Cathay Life's premium performance. Total premium slightly decreased 1% to TWD 666 billion due to lower first year premium. However, our renewal premium grew 7% year-on-year, driven by protection and regular paid traditional products.

On Page 21, first year premium FYP was TWD 161 billion, down 20% year-on-year. The decline was due to lower policy reserve rate. The annualized premium APE was also down due to lower sales volume and product mix change. The market share of first year premium FYP, annualized premium APE both remain #1 in the industry.

Page 22 shows the value for new business. Based on the 2019 embedded value assumptions, value of new business for 2020 was TWD 31.8 billion, decreased 34% year-on-year as the regulator reduced the policy reserve rate, impacting the sales model and product mix.

Page 23 shows the cost of liability and breakeven asset yield. Both continued to improve. The reserve-based liability cost was 3.83% at the end of 2020, improved 12 basis points year-on-year.

Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 6.9 trillion as of the end of 2020. Overseas investment accounted for 65%. The investment return of each asset class are as follows: cash and cash equivalents, 0.4%; domestic equity, 13.5%; international equity, 5.5%, pre-hedged; domestic bond, 4.6%; international bond, 5.5% pre-hedged; mortgage and secured loans, 1.7%; policy loans, 5.6%; real estate, 2.9%.

Overall investment yield are shown on Page 25. After hedging investment yield was 3.93%. Cathay Life will maintain proper risk management and dynamic portfolio management to capture the market opportunities. Pre-hedge recurring yield was 3.19%. The lower interest rate environment and enhanced credit rating mix in the bank portfolio has led to lower new money yield. Selling into strength, together with corporate's conservative dividend policy last year, results in lower cash dividend income. Hence, the higher cash level, lower new money yield and least cash dividend income affected the recurring yield.

Year-to-date, the U.S. 30-year treasury yield has rebounded around 70 basis points. The 30-year single A and BBB corporate bank interest returns also increased around 60 to 80 basis points. It will help to increase the interest income. The hedging cost of 2020 was 1.72%. If excluding the additional provision of foreign exchange fluctuation reserve, the hedging cost of 2020 was 1.5%. New Taiwan dollars appreciated 5.6% in 2020 and 2% in fourth quarter. However, due to better proxy hedging effectiveness, hedging costs improved in fourth quarter 2020. NDF market price trimmed down since last fourth quarter, which helped Cathay Life to reduce the hedging cost. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging cost.

Please look at Page 26 for the dividend income and the regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 17.6 billion in 2020. Lower cash dividend income due to equity portfolio adjustment with higher capital gains. For overseas fixed income investment, Cathay Life allocated 46% in North America, 18% in Europe, and the rest are in Asia Pacific and other countries.

Page 27 shows the book value and unrealized gain of financial assets. The consolidated book value and unrealized gain of financial assets reached TWD 721 billion and TWD 195 billion, respectively, both reached record highs.

Next, please turn to Page 31 for the performance of Cathay Century. Cathay Century's premium income was TWD 25 billion, and market share was 12%. Cross-selling synergy continued to perform well, over 16% of premium was generated by the group channel.

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

[Operator]

[Operator Instructions] The first question is coming from Chung Hsu of Crédit Suisse.

[Chung Hsu, analyst]

So, I just -- I wanted to first ask about Cathay Life FX hedging cost. First, I want to clarify that in the earlier Chinese section, Abel mentioned that the hedging cost could be 20 to 25 basis point lower year-over-year or about TWD 9 billion a year. And just -- that's just because of the lower currency swap and NDF cost. I just want to first clarify that's correct.

[Chao-Ting Lin, executive]

Yes. Chung, in the early Chinese version, yes, I mentioned -- because compared to last year, our hedging cost is 1.72% and mainly due to the higher NDF hedging cost, but comparison last fourth quarter, in average is -- NDF was 6.5 around. But what it averages, it's down to 4.6. So among this slide...

[Sophia Cheng, executive]

You can see that page information on slide -- Page 37 in the presentation material.

[Chao-Ting Lin, executive]

So in slide -- Page 37, is just explains NDF YTD. The cost comparison last fourth quarter is down by 1.8%. And so along these traditional hedging costs, we are confident that the hedging cost will compare to last year, were down by 20 to 25 basis points.

And on the other hand is the -- we still have uncertainties of pricing hedge. But we think the pricing hedge last year, I think, is roughly Taiwan dollar is relatively strong than other major Asian currency. And this year, we expect this phenomena should be -- Taiwan dollar should be strong as the other major currency. So we expect the prices should be improved.

So I guidance that this year, the hedging cost will come back to 1% to 1.5%. And mainly, it should be lower than last year. This is what I mean in the hedging cost side.

[Sophia Cheng, executive]

That's the Taiwan responding to COVID-19 was quite lucky, it was quite good. And on top of that, on the new technology, 5G, EV orders, supply chain, Taiwan did had -- enjoyed quite strong trade, and therefore, if you look at net inflow of capital, the fundamental of corporate earnings, the economy. They all put together bodes very well for Taiwan's strong currency.

And as a result, Taiwan dollar was stronger than other Asian currencies. Looking into 2021, we think such gap would not be as big as last year. We -- Abel already said that. We think Taiwan dollar probably will move more along with other Asian currencies. We would not expect Taiwan to be that much stronger than other Asian currency. And this will, therefore, benefit, reduce the pressure from the basket hedge.

[Chung Hsu, analyst]

I see. So my -- I guess then, I assume that if we also factor in a TWD 10 billion extra FX reserve they took last year, we could potentially looking at about TWD 19 billion to TWD 20 billion less in credit -- in FX hedging cost on a year-over-year basis? Is that correct?

[Chao-Ting Lin, executive]

Yes, yes.

[Sophia Cheng, executive]

TWD 9 billion to TWD 12 billion over '19?

[Chung Hsu, analyst]

TWD 19 billion to 20 million -- TWD 9 billion from lower NDF and TWD 10 billion...

[Chao-Ting Lin, executive]

TWD 9 billion for lower comparison to 2020 and for expect -- if the hedging cost is around this stage, we think the -- after 5 year should be set by TWD 50 billion for the next 5 years.

[Sophia Cheng, executive]

Compared with last year, TWD 9 billion to TWD 10 billion per year.

[Chao-Ting Lin, executive]

Yes, yes.

[Chung Hsu, analyst]

I see. I see. I did it before we factored in any extra FX reserve you took last year, you talked about TWD 10 billion. Is that number correct?

[Sophia Cheng, executive]

Oh, I see. The reserve was made last year already, so this should be putting aside as a buffer. If you have 4x gain, you need to reserve half into the pool and vice versa. So typically, we will not be taking the pool as -- part into the equation. But we do think last year, given a strong Life earnings, having some additional reserve pool into 4x does provide the buffer if there is any uncertainty in this year.

[Chung Hsu, analyst]

Okay. I got it. And the second thing I want to clarify is, I think Abel, you also mentioned in the Chinese session that because of the increase in bond yield and also deploying some of the money into the -- in reallocating your investment allocation, you're able to increase your after hedge recurring yield from 2.1% to 2.3%. Just want to clarify this 20 bps increase is before taking into account of lower hedging cost, right?

[Chao-Ting Lin, executive]

Yes. Yes. It's already taking into account the lower hedging cost. And also, our recurring yield, I think that in the -- before hedging, we also expect our recurring yield should be gradually up in the last 5 years, if the interest rates stay the same level as right now.

[Chung Hsu, analyst]

I see. So that 20 bps is already inclusive of lower hedging costs?

[Chao-Ting Lin, executive]

Yes, yes.

[Chung Hsu, analyst]

Okay. My next question is on the -- for the bank. I just want to check that your NIM guidance of moderate improvement is based on steady higher or lower loan-to-deposit ratio. I think Cathay United Bank's loan-to-deposit ratio dropped by 3% in 2020. I think the number is around 62.5%. I see on the back of your presentation. That's very low. I think that's probably the lowest or one of the lowest among the Taiwanese bank.

Just trying to get a sense that, first, your NIM guidance is based on what loan-to-deposit ratio assumptions and whether there is any prospect to take that higher.

[Chao-Ting Lin, executive]

[Foreign Language]

[Sophia Cheng, executive]

Just 1 minute.

[Chung Hsu, analyst]

Sure.

[Chung-Yi Teng, executive]

Okay. Our current loan-deposit ratio is around 62.5%. For the NT dollar loan deposit ratio is around 70%. I think this year, for the NT dollar loan will remain the same, maybe 71%, 72%. But for the foreign currency loan, this currently is only below -- I think it's below 40%. We think for this year, the loan-to-deposit ratio, I mean, foreign currency loan will be increased by maybe 3% to 5%.

[Sophia Cheng, executive]

But it will be a combination of slight increase in Taiwan dollar loan, the loan-deposit ratio, but more importantly is the potential growth of foreign currency loan.

On Page 15, you can see end of last year, our foreign currency loan in U.S. dollar grew by about 1%. But because the Taiwan dollar strength, when we convert that into Taiwan dollar, you can see that last year, there was a mild decline.

And in the Chinese session, Daniel had highlighted that given the fact that in Asia last year, the regional macro uncertainty and each country, how they respond to COVID-19, we were more cautious in granting new loans. However, in the region, because bad debt accumulated a lot of delays funding means some borrowers. So Daniel cited in 2021, 2022, there may be acceleration in regional loans, depending on the macro improvement.

2021, the major improvement will come from foreign currency loan growth.

[Chao-Ting Lin, executive]

So now I get the number. We target the FX loan-to-deposit ratio this year is around 50%.

[Chung Hsu, analyst]

I see. So 40% to 50%?

[Chao-Ting Lin, executive]

Yes, 40% to 50%.

[Sophia Cheng, executive]

Have we answered your questions?

[Chung Hsu, analyst]

Yes, yes.

[Operator]

And the next question is coming from Brooksley Kang of Bank of America Securities.

[Brooksley Kang, analyst]

So I have 2 questions on interest. May I have more color on the credit rating for the overseas bond portfolio? I think from the material as of 2020, the investment grade accounted for 99%. But in some times in the history, it is 95%. So what is now behind the difference? And do you have any thoughts on the allocation to lower credit rating bonds as the global economy recovers? So that's the first one, right.

And secondly on bank, may I understand that -- what will be -- what's the main positive driver for NIM for Cathay United Bank to rebound in fourth quarter last year? And if the mechanism will work differently in 2021 to support your NIM from falling?

[Chao-Ting Lin, executive]

I think the credit rating, I think we don't want to increase loan investment grade. We still -- I think that as right now, corporate bond for the BBB product about that's already hiked by 80 basis points. So we don't -- we think, right now, we still will maintain the same credit quality for our fixed income portfolio.

[Sophia Cheng, executive]

So we already can enjoy some yield enhancement in investment grade already.

[Chao-Ting Lin, executive]

Yes.

[Sophia Cheng, executive]

And just quickly, can you repeat your question for the bank again? Sorry about that.

[Brooksley Kang, analyst]

Sure, no problem. So I would like to know that the main positive driver for Cathay Bank's mean to rebound in fourth quarter last year. And if the way will work differently in this year to support the bank's mean from falling.

[Chung-Yi Teng, executive]

[Foreign Language] Okay. For the last quarter, we redeemed our -- some of our issued debt. It's like TWD 35 billion with very high yield.

[Sophia Cheng, executive]

For the funding cost....

[Chung-Yi Teng, executive]

The funding cost, the issued debt, issued by the bank itself. And we have -- it's quite a large mortgage loan growth for the last quarter, which -- it's much, much -- the yield is much higher than the government and public -- I mean, the public -- or the [indiscernible] loan. And then we also reduced the government and nominal profit loan by a lot. Okay. That's that last quarter thing.

For this year, we do see -- I mean we do see -- it's hard to say. Okay, we see the deposit rate. We see the deposit rate has bottomed out from the third quarter last year. And then we see, okay, the loan rate -- I mean the corporate loan rate is a little bit higher than before. So we believe the net interest margin this year will be -- I won't say there's a growth. I will say, at the worst case, we'll be very stable, just like at the level of last year.

[Sophia Cheng, executive]

So it will be reasonable to, at least mention a mild loan growth and at least flat NIM.

[Chung-Yi Teng, executive]

Yes, at least flat.

[Operator]

And next, we have [ Ben Wong ] from Citi.

[Unknown Analyst]

So I actually would like to have 3 questions, if I may. The first one is a follow-up on the NIM point. So could you please give us a bit more granularity in terms of how much of the 4 basis point NIM expansion quarter-on-quarter was attributable to the retirement of the sub debt? And how much was attributable to the mortgage loan growth you just mentioned?

That's the first question. Hello?

[Sophia Cheng, executive]

We're checking the numbers. Just 1 second.

Ben, because you're asking very detailed into the contribution, we need to go back to check our -- the formula. The first quarter last year, U.S. dollar also fell, so that is only part of that. But I think in terms of the breakdown for the contribution, how much from the refunding [indiscernible] of the debenture for local, and the other one is how much come from falling deposit rate, we need to do a deeper check later.

And what is your second question?

[Unknown Analyst]

Okay, sure. So the second question is a follow-up on the loan growth point. So I'm curious, where do you see the overseas lending opportunities? Because I think you mentioned that FX lending will be a focus for next -- for this year. So is this still going to be the ASEAN region? And are you worried about the asset quality in those markets?

[Chung-Yi Teng, executive]

Okay. Okay. That's [indiscernible] for the market. We do see some FX loan market becoming very positive this year due to -- by expanding the Chinese section. So the first one is the global economy is getting back to normal. And secondly, as a global low interest rate environment. And thirdly, the deferred corporate activities from last year. So we do see the FX loan market becoming very positive, especially for the Southeast Asia and the Greater China area.

And in the syndication market, it's becoming more and more active.

[Sophia Cheng, executive]

So we are seeing the momentum...

[Chung-Yi Teng, executive]

Yes, momentum...

[Sophia Cheng, executive]

Much better than last year.

[Chung-Yi Teng, executive]

Yes.

[Unknown Analyst]

I see. Okay. So by geography, it is still going to be greater China and ASEAN, right, to the Southeast Asia part of the world?

[Chung-Yi Teng, executive]

Yes, yes. Because we don't want to do business for some type of market, we don't understand.

[Sophia Cheng, executive]

The [ market ] return to normal business, maybe [ Abel ] can try a different speed, but overall, the momentum is positive.

[Chung-Yi Teng, executive]

Actually, we do have the business opportunity in the U.S. But currently, we don't have the branch in the U.S., so that we only focus on the Southeast Asia and the Greater China higher rate.

[Operator]

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

[Sophia Cheng, executive]

Yes. Thank you. Very good to see the global recovery happening, and we do like to wish all the participants and their family, stay safe and healthy, and we really hope the economy activity resume can come as fast as possible so we can see the investors in present. Cathay will continue to drive ourselves to face to the market volatility, and I hope our -- any -- all the tiny effort can ensure our sustainability for earnings.

Thank you very much for your participation in Cathay Financial Holdings conference call, and I hope the information from the presentation and the Q&A section is useful to you. If you have further questions, please feel free to come to our IR team, and they will be standing by here for you. Thank you, and goodbye.

[Operator]

Thank you, Ms. Cheng. And ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call.

You may now disconnect. Goodbye.