Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2022-Q4

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's Fourth Quarter 2022 Conference Call. [Operator Instructions]

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

[Shu-Fen Cheng, executive]

Thank you. Good afternoon, and good morning to investors in Europe. Welcome to Cathay Financial Holding's 2022 Fourth Quarter Analyst Meeting. I am Sofia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, our CEO, C.K. is here, and we will host the conference call.

Thank you for joining us today. In the beginning, I would like to introduce the senior managers who are with us on the line. Today, we have Mr. C.K. Lee, CEO of Cathay Financial Holdings; Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Mr. Kevin Hu, Senior EVP of Cathay United Bank.

For today's conference call, our CEO, C.K., will give us an opening comment and after that, our Head of IR, Ya-Jou, will provide full year results for 2022. 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 C.K. first, for the opening comments. C.K.?

[Chang-Ken Lee, executive]

Hello, everyone. Welcome to join us for the Analyst Meeting. After 2022 turbulent market, definitely it's affected our portfolio pretty significantly, especially after the Credit Suisse and UBS merger. Hopefully, this is the turnaround point to stabilize the capital market and can offer us a better foundation for the operation. So hopefully, we can generate better performance for all the investors this year.

And now we kick off the presentation.

[Shu-Fen Cheng, executive]

Thank you, C.K. Next is Ya-Jou's presentation and the full year results.

[Yajou Chang, executive]

Thank you, C.K. and Sophia. Let's start with the business overview on Page 3, which provides a quick highlight on each subsidiary.

Cathay United Bank delivered double-digit growth in deposits and loans. Asset quality remains benign. Benefiting fund rate hike, net interest margin expanded and net interest income grew 26% year-on-year.

Cathay Life, hedging costs improved nearly 1% year-on-year. Recurring yields increased 35 basis points. It also maintains solid capital position with RBC ratio of 316% and equity-to-asset ratio of 6.5%.

Cathay Century, the general insurance subsidiary, premium income rose 8% year-on-year. 2022 net loss reflected the impact of pandemic insurance. If excluding such impact, Cathay Century maintained stable profits.

Asset management subsidiary, Cathay SITE, AUM was TWD 1.2 trillion, ranked #1 in the industry.

And Cathay Securities maintained its #1 market share position in the brokerage business.

We would also like to share with you our progress in ESG. Please turn to Page 5 -- please turn to Page 4. Cathay once again begin -- selected as a constituent in DJSI Index and received best scores in various categories, including sustainable finance, financial inclusion and climate strategy.

Cathay received MSCI ESG AA rating for 3 consecutive years and appeared to be the highest ranking in the CDP A List. We became the RE100 member in last April, the first financial institution in Taiwan. We also received SBTi approval for carbon reduction targets in last September.

And please turn to Page 5, shows our progress in digital development. We developed the one-stop digital finance platform, connecting bank, life, P&C and security services and launched cross-sector products converting deposit interest into accident insurance, also launching ROBO investment-linked policies.

Cathay Life's FitBack app is a key driver for health promotion, leverages big data analysis, insurance expertise and technology innovation in interaction with policyholders.

We also devoted to cloud readiness and continued digitalization in overseas subsidiaries.

Next page, Page 6 shows our outlook for 2023. Cathay United Bank will expand wealth management business with well-rounded customer relationship management strategy; strengthen corporate banking business; enhance capital efficiency; and continue to enhance the customer digital experiences and expand overseas presence.

Cathay Life will continue the Protection First and Elderly Friendly strategy and focus on protection type of products to prepare for adoption of IFRS 17 and ICS. For investment, Cathay Life will seek opportunities for the quality stocks and bonds to enhance recurring income; continue our dynamic hedging strategies to maintain stable hedging costs.

And please look at Page 7, Cathay Financial Holdings net income, EPS and ROE. Cathay Financial Holdings net income was TWD 38 billion. The year-on-year earnings decline is attributable to pandemic insurance losses and capital markets volatility.

Subsidiary Cathay United Bank earnings reached TWD 25.6 billion, grew 8% year-on-year, driven by very strong growth in net interest income.

The bank and Cathay SITE, the asset management subsidiary both reached record-high earnings.

Please turn to Page 8 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 612 billion as of the end of 2022. The book value decline reflected a sharp rise in bond yields and a decline in equity markets. Book value per share was TWD 34.6.

Page 10 and 11 show our overseas expansion. Cathay Financial Holdings continue to expand overseas business. The Ho Chi Minh City branch loans grew 30% year-on-year. Cambodia subsidiary just launched new mobile banking app in the beginning of March.

Cathay Life Vietnam total premium increased 26% year-on-year.

As for the subsidiaries' operation in China, Cathay United Bank China subsidiary launched green deposits in last September as the first Taiwanese bank to do so in China.

For Cathay Life joint venture in China, the total premium grew 17% year-on-year.

Please turn to Page 13 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth with both mortgage and consumer loan showing double-digit growth. The total loan balance increased 13% year-on-year to TWD 2 trillion versus the end of 2022. Deposits grew 11% year-on-year to TWD 3.2 trillion with demand deposit ratio maintained at a high level of 68%.

Interest yield is shown on Page 14. Benefiting from the rising rates, the full year net interest margin increased 15 basis points to 1.36% and interest spread rose 21 basis points to 1.93%.

Page 15 shows the asset quality. Cathay United Bank maintained low NPL ratio at 8 basis points and coverage ratio at 2150%. Gross provision was TWD 5.7 billion. Recovery was TWD 1.3 billion.

Please turn to Page 16 for SME and foreign currency loans. SME loan balance grew 13% to TWD 304 billion, accounted for 15% of the total loan. Foreign currency loan balance was TWD 217 billion as we aim to grow foreign currency loan while ensuring asset quality.

Page 17 shows offshore earnings. The offshore earnings was down due to lower year-on-year investment income.

Please turn to Page 18 for fee income. Fee income was slightly down to TWD 18 billion in 2022. The robust year-on-year growth of 14% in credit card fees offset a decline in wealth management fee.

Page 19 shows the breakdown of wealth management fees. Wealth management fee income was TWD 10.6 billion, declined 10% year-on-year, attributable to lower sales in mutual funds and investment-linked policies due to capital market volatility. However, strong sales of overseas bond products boosted securities fees with nearly 50% growth year-on-year.

Please move to Page 21 and 22 for Cathay Life's premium performance. Total premium was TWD 480 billion in 2022. The decline was due to lower renewal premiums, reflecting the end of regular premium payment terms for some top-selling products as well as the lower first year premium resulted from higher-base periods for investment-linked product in 2021.

On Page 22, our first year premium, FYP, and annualized premium, APE, was TWD 129 billion and TWD 42 billion, respectively. Both declined year-on-year due to high base tariff for investment-linked policies in 2021 amidst strong capital markets. We continue to focus on protection type of policies to accumulate contract service margins, where you can see health and accident showing double-digit growth.

Page 23 shows the value for new business. Value for new businesses for 2022 was TWD 26.6 billion. The decline was due to the same reasons we mentioned earlier, the high base period for sales volume investment-linked policies in 2021. However, VNB margin increased attributable to product mix change with higher proportion in high-CSM protection type of products.

Page 24 shows the cost of liability and break-even asset yield. The cost of liability increased slightly in the fourth quarter of 2022 due to 2 reasons: number one, the declared rate increased for interest-sensitive policies; and number two, Taiwan dollar appreciation. Taiwan dollar strongly appreciated in fourth quarter resulting in reduced proportion of U.S. dollar policies. The cost of liability of U.S. dollar book is lower than that of the overall book.

The break-even asset yield increased only to the reduced denominator total invested assets amid the market volatility with mark-to-market loss. If we exclude such impact, break-even asset yield continued to show improvement.

Please look at Page 25 for investment portfolio. Cathay Life total investment reached TWD 7.3 trillion as of the end of 2022. Overseas investment accounted around 70%. The cash position is back to 4% level. The bond international increased to 62% as of the end of 2022. We took the rate hike opportunity to increase the overseas fixed income position with higher yield and better credit rating, which is quite beneficial to our recurring income and earnings quality in the long run.

Overall investment yields are shown on Page 26. After-hedging investment yield declined from a very high base in 2021 to 3.73% last year. Hedging costs improved substantially. After-hedging investment yield remained benign despite market turmoil in 2022.

On the right-hand side, the pre-hedging recurring yield increased 35 basis points to 3.37%, as the new money yields from overseas bond surged in 2022 with expanded position. Cash dividend income also increased year-on-year.

Hedging cost improved nearly 1% year-on-year to 14 basis points owing to Taiwan dollar depreciation. The foreign currency reserve was close to TWD 50 billion as of the end of 2022, serving as buffer for FX fluctuation while enabling greater flexibility in hedging strategy.

Please turn to Page 27 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized cash dividend income of TWD 24.8 billion in 2022, much higher than in 2021. On the right-hand side, the proportion of fixed income in North America increased to 50%.

Page 28 shows the book value and unrealized gains of financial assets. Both were strong year-on-year, reflecting a sharp rise in bond yields and decline in equity markets. The equity-to-asset ratio was 6.5% as of the end of 2022.

Next, please turn to Page 32 to 33 for the performance of Cathay Century. Cathay Century's premium income grew 8% year-on-year to TWD 29.6 billion. Market share was 12.8%.

Page 33, the gross combined ratio and retained combined ratio both increased due to the impact of pandemic insurance losses. And the cumulative first payment on retention basis for pandemic policy in 2022 and for the first 2 months of this year was TWD 18.6 billion and TWD 6.6 billion, respectively. The loss reserve balance as of the end of last year was TWD 9.4 billion and TWD 2.7 billion as of the end of February.

The claim payment for the first 2 months this year was offset by funds from the reserves, with the monthly earnings unaffected. As of the end of February, the number of outstanding policies was 565,000. If we exclude the policies that have already made the claim, the number of policies was down to 255,000.

And starting from March 20, COVID cases with no or light symptoms are no longer considered as national nor [ stayable ] disease and thus, do not qualify for claim payments. The total claim payment for pandemic insurance is still subject to the claims in the coming months.

Cathay Financial Holdings injected TWD 20 billion to Cathay Century in 2022. Cathay Century's RBC ratio was 368% as of the end of 2022.

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

[Operator]

[Operator Instructions] Now we'll have our first question, which is from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

I have 2 questions for Cathay United Bank. First one is if you look at credit cards, it was up quite a bit year-on-year. Could we assume it's largely due to the loan growth, the general provision for the loan growth? And if that is the case, then supposedly, the lower loan growth target this year should mean the credit costs are likely to decline year-on-year. Is that correct? That's the first question.

Second one is on OpEx. My understanding is part of the OpEx growth is still to credit card-related marketing expenses. So if we exclude that, what would the OpEx growth year-on-year look like in 2022? And then should we still expect relatively high expenses related to the credit card businesses in this year?

[Hsing-Hsien Hu, executive]

This is Kevin from CB. The first question is related to the credit card. I would say, usually, that CB would play a very cautious role when we're calculating those reserves. So given the uncertainty of the overall economic environment, we take a very, I would say, conservative way to put the numbers here. That's why you see the cost ratio is jumping like from 15 in 2021 to 23 basis points in 2022. That's question number 1.

Question number 2 is you're asking about operation expense, excluding the credit card cost. I don't have the number on hand, but I can give you that after the call. Okay?

And what's the third question? Sorry for that.

[Shu-Fen Cheng, executive]

Jemmy's also asking our expectation for the cost/income ratio 2023 versus 2022, whether can that run...

[Hsing-Hsien Hu, executive]

I would say if you look at the past trend, the cost-to-income ratio is always around 52 -- 51% to 53%, that kind of range. Last year is a special year. The ratio dropped down to 50.5%. But we -- our strategy is to continue to invest in people, continue to invest in technology platform and digital platform. So our expectation for the next -- for this year 2023, the ratio will go back to 51% to 53%, that kind of level.

[Grace Chen, executive]

Jemmy, has that answered your question?

[Jemmy Huang, analyst]

First follow-up question, pretty close. I think you said you take a relatively prudent approach when you assess the ECO. But actually, the asset quality looks pretty fine. So in that case, should we expect -- if the credit cards are not going to decline year-on-year, that means you're NPL coverage ratio will continue to go up. Is that the case?

[Grace Chen, executive]

Jemmy, to be more specific, as we have loan growth last year at 13%. So I think super majority of the provision reflects that loan growth is still mainly our internal provisions. Because as you say, we've been saying for quite a long time, nothing compares -- competes with asset quality. So yes, super majority for the general provision for loan growth. But we will still exercise caution as we do see the overall opening and the border and the economy, consumer both in Southeast Asia and China, but still, we need to see a better banking environment for us to accelerate the loan. We can see the foreign currency now gets stabilized. I think this year, maybe on the loan growth, time for foreign currency will be more back-end loaded.

And that will be positive because the foreign currency loan spread, that side in Taiwan dollar alone. And today, our loan-to-deposit ratio for foreign currency U.S. dollar and the others, average loan/deposit ratio for default currency is only below. Like he was saying, we do have lending capacity. But we do exercise caution and asset quality, nothing competes with that.

[Operator]

[Operator Instructions] And next, we have Michael Zhang of Citi for questions.

[Dingyu Zhang, analyst]

I have one question on dividend capacity. So if I exclude the reclassification benefit from this and the mark-to-market losses within the other equity reserve, it's still about TWD 400 billion as of last year. Just wondering. I just want to first of all confirm on this number?

And then second of all, just want to see if management can provide any color on how much of this market-to-market losses have you seen that you have recovered year-to-date if we exclude the reclassification benefit? Just want to have a sense of your dividend capacity going forward.

[Shu-Fen Cheng, executive]

Michael, so sorry I couldn't catch it very well because you speak very fast. You're asking about the reclassification? And what's after that, what do you want to know? Can you repeat please? Thank you.

[Dingyu Zhang, analyst]

Yes. Sorry, maybe I am speak too fast. Yes. So I looked at the fourth quarter report. And if I exclude the reclassification benefit, the mark-to-market losses within the other equity reserve is still around a bit more -- a bit higher than TWD 400 billion. And that gives you a gap of around TWD 200 billion between your undistributed earnings and the other equity reserves. And just want to understand what -- I think the stock market has recovered a bit in the first 2 months. Just wanted to understand how much of this mark-to-market losses have we seen that has been recovered year-to-date if we exclude the reclassification benefit, so that we can get a sense of your dividend distribution capacity going forward?

[Shu-Fen Cheng, executive]

Okay. Thank you. Let me confirm. You'd like to know from the unrealized losses, the impact when we need to compensate from the retained earnings. And therefore, how would the potential dividend payout capability will become? Is that your question?

[Dingyu Zhang, analyst]

Yes, yes, that's my question.

[Shu-Fen Cheng, executive]

Right. So maybe…

[Grace Chen, executive]

For the first part, for the negative value of the other equity already rebound TWD 37 billion. And the second part for extra surplus for [ retention ] for the AC representation, now is TWD 40 billion already. So if the capital market is back to normal, we think our dividend and distribution momentum will come back to normal very soon.

[Shu-Fen Cheng, executive]

But I'd like to highlight that because we do have the caution on the overall market last year. But on the other hand, we also do care about investment expectation that we will look for some dividend payout. So this will be a fine balance between our capital position. It leads to pay investors as you wish and in the meantime, balance pay the payout ratio and dividend growth.

In late April, the Board meeting will discuss the dividend payout. Hopefully, we can have a more clear guidance and final confirmation for the cash payout. But at the current level, we do plan to submit proposals for cash dividend payout. The dividend yield will not be 0.

[Operator]

[Operator Instructions]

[Grace Chen, executive]

Okay. Maybe I can take this opportunity to summarize some of the key highlights from the Chinese section of the analyst meeting.

First of all, on Cathay United Bank, after last year, there is strong growth in both deposit and loan, especially with very strong retail branding. Cathay United Bank continued to enjoy very strong deposit inflows. And after 13% year-on-year growth 2013 (sic) [ 2023 ], we are looking for high single-digit loan growth as a potential -- and the net interest margin end of last year, already has shown very good improvement. So we should be quite positive for net interest income for 2023.

And then the fee income, the wealth management, we are still observing how the market is moving, where credit cards fee has already stabilized. We work very hard to work on the CUBE card. We are seeing some positive momentum. This will be a very important focus for 2023, so we can smooth out the potential impact from the drop of COSCO card.

And lastly, on the cost/income ratio, as Kevin has just highlighted, it will be 51% to 53% for cost/income ratio. In the meantime, the asset quality remains quite solid. So overall, the outlook for Cathay United Bank should be quite positive.

And then for Cathay Life, the revenue first. As we mentioned in the Chinese section that we are looking for VNB to have some positive improvement. That will be pretty good. And so we hope in May, when we announce the updated invested value for end of 2022, we can have more detailed projection to share with investors. There will be an analyst meeting in May.

And then we look forward for more stabilized equity market and overall financial market situation. So the market value for our asset equity volatility that can overtake and think we'll have a potential turning that we can make it more stabilized.

Lastly, our Cathay Century, the P&C insurance, we are moving toward the end, the final part of the potential insurance claims and that the government has already lowered the criteria, the benchmark for the pandemic policy. So March 20 onwards, the claim potential, additional claim risk is dramatically reduced. So we are at the final price for settle down all the claims. We have the negative impact from last year can pass away and we can move forward future positive trends.

So this is a key summary from the Chinese section.

Can you check whether we have more questions online?

[Operator]

Yes, of course. Thank you, Ms. Chen. [Operator Instructions]

[Shu-Fen Cheng, executive]

If no further question, I will ask our CEO, C.K., to give us some final comments, that will be good, too.

[Chang-Ken Lee, executive]

Well, thank you so much again for joining the analysts meeting. If you have any further questions, please contact. The IR team will be happy to offer you more detailed information about your question. Thanks again.

[Shu-Fen Cheng, executive]

Thank you.

[Grace Chen, executive]

Thank you.

[Operator]

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