Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2021-Q4

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's Fourth Quarter 2021 Conference Call. [Operator Instructions] Now I would like to introduce Ms. Shu-Feng Cheng, the CIO of Cathay Financial Holding Company. Ms. Cheng, please begin.

[Shu-Fen Cheng, executive]

Thank you. Good afternoon, and good morning to our friends in Europe. Welcome to Cathay Financial Holdings 2021 First Quarter Analyst Meeting. I am Shu-Feng Cheng, the Chief Investment Officer for Cathay Financial Holdings. Today, I will host the conference call. Thank you very much for joining us today.

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

For today's conference call, Charlie from our IR team will present the fourth quarter results. And after the presentation, we are open for 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 Charlie for the briefing of the results.

[Charlie Hu, executive]

Thank you. On Page 3, which provides a quick highlight on Cathay Financial Holdings. Cathay Financial Holdings net profit reached TWD 141 billion, a new record for the third consecutive years. Most subsidiaries also delivered record earnings.

Cathay Financial Holdings has leading position in ESG and responsible investment and lending. Cathay is quite honored to be ranked #1 globally in the GSI categories of sustainable finance and financial inclusion as well as #1 in overall score among Taiwan store.

Cathay, once again, received MSCI ESG AA rating in the Life and Health insurance category. Cathay has been selected by the investor agenda for its global top 10 best practice case studies in areas of corporate engagement and policy advocacy. Lastly, Cathay has committed to utilizing 100% new renewable energy by 2030 for all business operations site in Taiwan and targeted to achieve net-zero emission by 2050. Cathay also urged investee companies and corporate borrowers to transition to low carbon operations.

We will also like to share with you our digital development. The group launched the Cathay-as-a-service CAAS ecosystem platform to offer cross industry partner API packages and one-stop user experience. Cathay Life launched Cathay Vision experience, CVX, Taiwan's first remote insurance application platform. Cathay United Bank's CUBE card integrated credit card benefits from different partners and allow cardholders to select benefits on the mobile banking app, aiming to increase customer stickiness.

Cathay Financial Holdings foster digital transformation in B&M and Cambodia offering entire agent apps and retail digital products to accelerate business development and enhance customer experience.

Please turn to Page 4, the 2021 business overview of each subsidiary. Cathay United Bank delivered robust growth in deposit and asset quality remained benign. Net interest margin rebounded and net interest income grew 9% year-on-year. Cathay Life continued the value-driven strategy. Protection-type first year premium grew 15% year-on-year. Assets under management for investment-linked products increased to over TWD 700 billion, ranking #1 in the industry.

Delivered sound investment performance was after-hedging investment yield of 4.9%. Cathay Life maintained solid capital position. RBC ratio and equity asset ratio reached 371% and 10.5%, respectively. Cathay Century, the general insurance subsidiary, premium income grew 10% year-on-year with market share of 12%, ranked second in the industry.

Asset management subsidiary, Cathay SITE, AUM reached TWD 1.3 trillion, ranked #1 in the industry. Lastly, Cathay Securities number of customers and earnings both hit new record in 2021.

Next page, Page 5, shows Cathay Financial Holding's outlook for 2022. Cathay United Bank will continue to grow along steadily with benign asset quality, develop diversified products and utilize digital platform to increase wealth management fee. Regarding overseas operation, Cathay United Bank will continue to expand and deepen overseas presence to increase offshore earnings. Cathay Life will employ the protection first and elderly friendly strategy and focus on protection-type products to prepare for IFRS 17 and ICS adoption.

On the investment side, Cathay Life will seek opportunities for quality stock and bonds to enhance recurring income. Meanwhile, Cathay Life will continue dynamic hedging strategy to maintain stable hedging costs. Cathay Century will grow business, emphasizing on quality and quantity and implement risk control and compliance.

In terms of overseas operations, Cathay Century will expand online business in China, strengthen digital capability in Vietnam and further develop opportunities for cross-industry operations. Cathay Life will continue to focus on new product development and innovation in fintech applications and services. integrate global asset management resources and expand distribution channels.

Cathay Security will continue to utilize digital technology to increase customer base and enhance user experience. Please look at Page 6, Cathay Financial Holdings net income, EPS and ROE. Cathay Financial Holdings net income reached TWD 141 billion in 2021 grew 85% year-on-year, driven by some investment performance, EPS was TWD 10.34. Cathay Life delivered strong investment performance with net income once again reaching new records.

Cathay United Bank, Cathay SITE, Cathay Securities also delivered record high earnings. On a consolidated basis, the holding company ROE was 15.5% in 2021.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 914 billion. Book value per share was TWD 61.5. Page 9 shows our overseas expansion. Cathay Financial Holdings continues to expand overseas business by deepening overseas presence, Cathay Life Vietnam's total premium increased 38% year-on-year.

PSC business also grew steadily. As for the subsidiaries' operation in China, Cathay United Bank China issued first batch of interband certificate of deposits in November 2021 to add funding sources and increased market activity. For Cathay Life joint venture in China, the total premium grew 14% year-on-year.

Please turn to Page 12 for more detail about the banking subsidiaries. Cathay United Bank delivered robust loan growth across consumer loans, mortgage and corporate loans. The total loan balance increased 9% year-on-year to TWD 1.8 trillion as of the end of 2021. Deposits grew 11% year-on-year to TWD 2.9 trillion. The demand piracy ratio increased to 74%.

Interest is shown on Page 13. Both net interest margin and net interest spread rebounded mainly driven by loan mix optimization and lower funding costs. The net interest margin was 1.21%, the net interest rate was increased to 1.72%.

Page 14 shows the asset quality of Cathay United Bank. Through the lending policy, Cathay United Bank maintained low NPL ratio at 9 basis points and the coverage ratio at 1,778%. Gross provision was TWD 4.5 billion, recovery was TWD 1.9 billion. Now please turn to Page 15 for SME and foreign currency loans.

Cathay United Bank focused on developing SME and foreign currency loans with benign asset quality. SME loan balance reached TWD 270 billion, increased 18% year-on-year. Foreign currency loan balance was TWD 218 billion. The slowdown in foreign currency loan was due to the pandemic.

Page 16 shows offshore earnings. The offshore earnings was TWD 9.1 billion, the decline was resulted from the higher base of the investment gain in 2020. Offshore earnings accounted for 34% of the bank pretax earnings in 2021.

Please turn to Page 17 for net fee income. Net income grew 12% to TWD 18.2 billion in 2021, driven by double-digit growth of wealth management fee. Page 18 shows the breakdown of wealth making fee income. Wealth management fee income increased to TWD 11.8 billion, in which mutual fund fee grew by 30% year-on-year. The strong demand from investment-linked products contributed to the 19% year-on-year growth of bancassurance fee.

Please move to Page 20 and 21 for CCLP's premium performance. Total premium was TWD 646 billion in 2021, declined 3% year-on-year, mainly due to lower renewal premiums resulting from the end of regular premium payment terms for certain top-selling products.

On Page 21, first year premium reached TWD 202 billion, up 26% year-on-year, driven by substantial growth in investment-linked products. Protection-type policy FYP grew 15% year-on-year, supporting the contractual service margin. The annualized premium, APE, declined, reflecting the dominance of single-pay investment policies in FYP.

Page 22 shows the value for new business. Based on the 2020 embedded value assumptions, value of new business for 2021 was TWD 29 billion. The decline was due to the lower sales volume in the mid-2021 amid local pandemic outbreak. Sales volume rebounded in the fourth quarter of 2021 as the global pandemic eased. Cathay Life continues to grow the high season protection products for their premium. VNB margin increased to 48%, excluding the single-pay investment in products.

Page 23 shows the cost of liability and breakeven as a yield. The reserve base liability cost was 3.77% as of the end of 2021, improving 6 basis points year-on-year, with breakeven asset yield was 3.08%. Please look at Page 24 for the investor portfolio. Cathay Life total investment reached TWD 7.3 trillion as of the end 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, 20.9%; international equity, 11.6% pre-hedge; domestic bond, 1.7%; international bond, 5.3% pre-hedged; mortgage and secured loans, 1.4%; policy loans, 5.4%; real estate, 2.4%.

Overall investment yield are shown on Page 25. After-hedging, investment yield was 4.92%. Cathay Life capture market opportunities to realize gains in capital markets with the after-hedging investment yield. Pre-hedging recurring yield was 3.02%. The decline was driven by lower new money yields amid lower global interest rates in 2020.

Looking forward, we expect recurring income may increase with higher new money yield amid high cycle. The hedging cost was 1.1%, improved more than 60 basis points year-on-year, given lower cost of traditional hedging tools and dynamic foreign exchange risk management.

Please look at Page 26 for the cash dividend income and regional breakdown of overseas fee income. Cathay Life cash dividend income increased year-on-year to TWD 20 billion in 2021. For overseas fixed income investment, fixed net allocated 47% in North America, 19% 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 hit new yearly record, reaching TWD 742 billion. Our realized gain was TWD 102 billion. The decline reflected the rebound of U.S. bond yield.

Next, please turn to Page 31 to 32 for the performance of Cathay Century. Cathay Century premium income grew 10% to TWD 28 billion. Market share was 12%. Page 32, gross combined ratio increased due to relatively large current events from commercial fire insurance. However, recent combined ratio improved through adequate reinsurance arrangements. This is the end of presentation. Now let's open to Q&A.

[Operator]

[Operator Instructions] Our first question is coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

Just two questions from me. First one is on your Life investment. Let's say -- assume if the market yields stayed at current levels. Is there any target for you to bring up your foreign fixed income investment to any certain levels that can further optimize the recurring yields?

And given the dynamics that we have been seeing over the past, let's say, 1 to 2 years in terms of the global market volatility, et cetera. For the new investments, is there any -- I mean, were you trying to reduce your exposure to the emerging market exposure and then shifting more to U.S. and Europe markets.

That's the first one. The second question is in terms of your banking outlook guidance in the Chinese session, I didn't recall you provide any guidance on the income wealth management fee growth target. Is there any color you can share with us?

[Unknown Executive]

Jamie, about the specific label of the industry -- I think it's -- the first one because this -- right now, the 30-year corporate, I think the investment-grade corporate at this moment is about 4.3%, is quite high. So it's much above our internal target at this moment.

But I still -- I think we still have the choice to maybe invest more -- like the single kind of category. So it's not -- we don't have a specific rule that we can apply more than you need to judge. We -- I think all our investment team will make a better choice consider all the factors. This is the first one. So I didn't have any specific rules, so I can tell you, but it's more dynamic, more judgment. I will leave that to our investment team to make this decision.

Secondly, I think about -- because right now interest rate as investment yield is, especially in U.S. market, at this moment is hard. But I didn't know it can be sustainable. So I think the emerging markets still have the -- will still have this demand that investment in emerging markets. But whether we will decrease the emerging market to put it in more in U.S. fixed income market, I think maybe it will be a choice.

For example, at this moment, maybe, but it's not -- it still need to see the market condition to determine. Maybe it's not significant.

[Shu-Fen Cheng, executive]

And if you look at our Slide, Page 37, in terms of our direct investment on bonds overseas, we have 94% in U.S. dollar, where we have 99% investment grade. So over the past years, we have been reducing the exposure to noninvestment grade. Of course, if there's market volatility triggering credit spread to a pricing level, it will be -- the team will have a dynamic review -- sorry, it's on Slide -- Page 35 on the slide. So currently, end of last year, the 9 investments only 1%. So it really depends on the market situation. And Daniel, would you like to share the key highlights of 2022 key elements of our business?

[Chung-Yi Teng, executive]

Jamie. we expect net -- we expect the net fee income will grow by 10-point something percent this year.

[Jemmy Huang, analyst]

Got it. So supposedly, wealth management fee should grow stronger than the total fee income?

[Chung-Yi Teng, executive]

Sorry? Say again.

[Jemmy Huang, analyst]

I mean, so supposedly, the wealth maintenance fee growth should be higher than the total fee income growth. Is that the case?

[Chung-Yi Teng, executive]

The major growth will be come from by wealth management business, maybe by mid double-digit percent.

[Operator]

The next question is coming from Steven Lam of Bloomberg Intelligence.

[Steven Lam, analyst]

Just want to piggyback on Jamie's point on the investment allocation. So I just want to clarify, there will be a shift towards more U.S. brands and probably less in maybe Europe or even emerging markets. Is that the case? Now the second part of that question in terms of investment allocation.

It's -- I'm hoping to hear your view in terms of the dollar and the wild swings in the bond yields in the U.S. treasury in recent days. Do you feel there's some risk in terms of the dollar status in the medium to long term because of the employee channel or geopolitical perspective.

Second question is on life insurance. I think I recall that we were kind of optimistic in terms of more business value growth this year. I just want to double check that is the case. I'm not sure if there was a guidance in terms of some figure that you can share with us? If there's one that would be great.

But interested to double check the driver of the new value growth. Is it a good mix of sales volume plus margin expansion or it's leaning towards more towards on sales volume. Second part on the life question is that there's a lot of holes in the market for sure.

How has that impacted your sales of investment-linked policy in recent weeks and that has maybe an outlook for second quarter, for example. And then lastly, on bank, I just want to double check.

So we are -- we have a target of, let's say, 10% growth in loan growth. And you're saying the majority of that will come from, for example, foreign loans and personal loans. Is that the case?

[Chao-Ting Lin, executive]

To sum up, about the Life business, I think the first one, we didn't have any guidance on FYP, this guidance. It will depend on market conditions, especially like the uniting product. It almost depending on the market conditions. So this is the first one. And second one, I think that right now, we are more focused on value trade.

I think the -- in our slide, I think it was very clear. Right now, it's protection first. We need to provide more protection type product to our policyholders. So far as right now, we are more focused on this kind of product and more focused on contract service margin for the international IFRS 17 for the adoption purpose. So this is the second one. And the other, I think we did not have any specific items.

[Shu-Fen Cheng, executive]

Just to add some point to that. When you look at slide Page 21, we had quite decent first year premium growth. If you look into the details, a big volume of is supported by investment in policies. When you look to the right-hand side, you can see if you analyze that, the contribution will be smaller.

But as Abel highlighted in the Chinese section earlier today, want to emphasize to you that our new business come from traditional life protection, which is where the contract service margin is. it's growing despite very low rate and also the pandemic affecting business operation.

And you can see last year, both on premium or analyzed premium is the same. The protection in life -- traditional protection policies has shown very strong growth. This is very positive for content system service margin time in this year, we will hope to start to provide you both VNB and CSM. So it will be easier for analysts to start to build a track record forward because we spent a couple of years very focused on how to transit into IFRS 17 mode, which includes asset liability matching, longer term booking for recurring yields, very focused on traditional life protection policies and also asset liability management capability.

We are quite ready for that. And after years of accumulating very strong profit, our shareholder equity has accumulated to a level, which offer a lot higher buffer. So I can add some point to that. And I think you also asked about the investment policy, whether they have been affected by recent market volatility. Do we have any comments for that?

[Chao-Ting Lin, executive]

Yes, I think that, as I said, investment policy, the sales volume always depends on market conditions. So of course, at this moment, the volatility is much more. And maybe the stock market going down, interest is going high, the bond market going down. So of course, it will affect our investment policy.

[Shu-Fen Cheng, executive]

But overall, if the rate is strengthening, we can have better asset use on the new money. For example, earlier in April's explanation, recently, we can have A-rating companies 30-year have yields more than 4%. And we said if you declare rate, it's more favorable, they will also be positive for selling traditional lines. .

So if you look at a lot bigger investment linked, they will also mean lower margin. Where if you can really push more into traditional line, your margin will be higher. So I think looking at total contract service margin is our goal. I hope I had answer you -- we have answered your question on life price. And for the bank in terms of the key drivers for the 10% loan growth, I will pass to Daniel.

[Chung-Yi Teng, executive]

Yes, you're right. We target the total loan growth at around 10% this year and the major growth momentum from two items. First is the FX loan. As a base of 2021 is relatively low, so we hope we can achieve 17% growth this year. And the second part is the personal loan because of the higher margin and the risk has been controlled very, very well for the years. So we hope it can achieve 20% growth this year. That's for the loan growth.

[Steven Lam, analyst]

May I just ask quickly, with that expansion, is that combination going to help your NIM as well without the Fed rate hike and so on and so forth?

[Chung-Yi Teng, executive]

We hope that we -- is Thialand , we will also increase some of the government -- I mean the proxy of government or related loan, which at a very low net interest margin.

[Shu-Fen Cheng, executive]

And overall, yes, a rising rate will be positive for yield on interest-earning assets. But in the meantime, to later stage, your funding cost may also come up a little bit. And obviously, if we lend to foreign currency loans and SME loan, they will be favorable to the overall net interest margin.

So on a net basis, we think at this current interest margin should be able to be sustained, where we have quite strong loan growth, quite strong fee income growth, that combined will be a very good positive support to the bank earnings for 2022.

[Steven Lam, analyst]

Okay. That's great. I just want to double check. Did I hear your response on your investment allocation strategy, say, U.S. versus Europe and Asia?

[Shu-Fen Cheng, executive]

Currently we do not expect significant change in our asset allocation at all. But we do think with better rate hike and also stronger U.S. [indiscernible] bond yield we will be taking the opportunity if we can lengthen asset duration and also improve the recurring yield, we will try our best to that. We also see the rising rate with U.S. rate hike structurally and historically, you can see under such situation, the basket hedge and overall hedging cost net-net be quite positive.

So year-to-date, our hedging cost performance, we see further improvement. And therefore, in the extent section, Abel has mentioned that. If we look at net basis after hedging recurring yield, [ 2022 ], we will continue to see improvement. Last year, we had after hedging recurring yield at about 2.3%, which is better than 2.1% in year 2020.

Where in 2022, if the expectation for lower further improvement in foreign currency hedging can be if we can see that, then we are expecting after hedge recurring yield reached above 2.4%. So net-net rising rate should be quite positive for both recurring and also for the hedging cost at current moment.

[Operator]

[Operator Instructions] And next we have Matthew Macron of UBP.

[Unknown Analyst]

I had one question about your science-based targets. I believe you're committed to the initiative appears on the SBTI website, but could you give us a more precise idea of the time line in terms of revealing how aligned you are with the long-term objective of the Paris agreement.

[Shu-Fen Cheng, executive]

This is a very good question, but I need to apologize. I don't have the detailed document on SBTI in my hand. I can share with you some of the key targets if that's okay kind. We do commit to a 2050 net zero target. We commit to 2030, 100% renewable energy by 2030 in all our Taiwan operations.

And if we incorporate all overseas altogether, we also look for 2050, 100% renewable energy. We have formally applied RE100 already, looking for positive news. We're very looking forward to that. In the meantime, by 2019, the bank has stopped lending any new coal-fired power plants where Cathay Life, if a coal-fired power plant company do not have aggressive transition plan.

We will stop new investments and looking to divest. So -- and for moving to a low carbon transition, Cathay is a very clear leader in Taiwan, and we are quite well recognized efforts globally. For SBTI, in our methodology, you need to separate the methodology, the tool gets applied to your loan, real estate and some asset category that you have existing tool kit, some you need to base on their theory, including ICAP.

So this is a bit technical. I will -- if you can email our IR, which is [e-mail], we will give you a detailed explanation on that. So overall, if you want to do SBTI, you do need roughly, you need to have the reduction, greenhouse gas reduction by I think it's more than 25% or 30%, which I need to confirm. So we need to fulfill the SBTI criteria their minimum requirement in order to apply. We have already submitted document.

And I think in -- we will be uploading the more detailed English version slide tomorrow. So tomorrow we will upload [ NDF ] operation, of the English presentation material. And you are more welcome to look starting from Page 40 to the following pages. We have put a few highlights on our efforts in our ESG integration, response for investments and also our very leading climate actions in our global initiative. I hope there will be useful information to you.

[Operator]

[Operator Instructions]

[Shu-Fen Cheng, executive]

If there is no question, let me just quickly summarize some of the key highlights because in [indiscernible] section there are so many questions asked. I thought you will be connected to us so to summarize down some of the point for you. First, on Cathay Life, we look -- we continue to look for value-driven policies.

And on Page 23, on the breakeven asset yield page, you can see the cost of liability end of last year reached 3.77%. And Cathay Life continued to look for the improvement of cost liability between 5 to 10 basis points. So far as current interest rate is higher, we are able to into as much better yield.

And we are expecting, for the same reason, a liability, the offering rate could be slightly higher. And on a net-net basis, we still look for cost liability to improve by 5 to 10 basis points that are likely to be more towards 5 basis point range.

On the other hand, because of the old legacy book continue to reduce it's significant in the portfolio. So overall, as long as the new business guarantee rate is lower than the current blended portfolio mix, because liability reduction just the continuation of the problem.

We also look for net after hedging, recurring yield to improve. I mentioned higher on the better asset yields and also lower hedging costs. And the interest rate increase is quite positive. If you look at IFRS 17 point of view, our internal simulation you look at the mark-to-market for asset and liability, it's actually value accretive based on for this rate hike despite it's positive for recurring yield despite it will be demand short term and unrealized gain areas.

For a bank, we are looking for loan growth in foreign currency loans and in SME loan and personal loans, and combined with net fee to grow at around 10% that Daniel has just mentioned, overall, the bank should continue to enjoy some earnings growth for 2022. And lastly, there were quite a lot of questions asking about our dividend payout.

Our CFO, Grace has summarized that we do consider investors emphasis on having decent dividend yield and also care about per share. And so we still keep the same policy over the past years when we decide a dividend payout, we will consider a balance of dividend payout ratio per share and dividend yield.

In the meantime, we will also benchmark our peers in the market to decide a proper dividend that will make our long-term shareholder feel secure and also will continue to enjoy being our shareholders. However, this will all be subject to the management team proposing to the Board meeting, and they will need Board's approval.

Jason, do we have more questions from the audience?

[Operator]

Sure. Then there appears to be no further questions at this point. And Ms. Cheng, can we close the conference call now?

[Shu-Fen Cheng, executive]

Okay. I think because in the earlier session, there were so many questions asked already. And I'm very happy to see that over the past years, we have built out more and more capital buffer that make us much better prepared for IFRS 17. We are also very happy to see the investors better understand that how our structure and appreciate Cathay business model.

And we do have some time this year. We can have more information for you to start to have a parallel information, both on VNB and CSM. So moving forward, it will be easier for analysts. Thank you so much for your participation in Cathay Financial Holdings conference call today. And we will conclude here. And if you have further questions, please feel free to contact the IR team. Thank you, and good bye.

[Operator]

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