Cathay Financial Holding Co Ltd
TWSE:2882
Earnings Call Analysis
Q4-2023 Analysis
Cathay Financial Holding Co Ltd
Cathay Financial Holdings has demonstrated a notable uptick in earnings for the first quarter of 2023, with net income escalating by 36% to TWD 51.5 billion. The bank registered record earnings attributed to robust growth in loans and fees. Similarly, the life insurance sector reinforced its foundation with a steady rise in recurring income and the value of new business. The property and casualty (P&C) insurance, as well as securities subdivisions, also outperformed, recording their highest and second-highest earnings respectively.
Cathay United Bank showed a 15% year-on-year net income growth due to strong wealth management and credit card fee income. Cathay Life maintained its financial robustness with an improved recurring yield and established a solid capital position. Additionally, the general insurance subsidiary Cathay Century secured a 13% increase in premium income. The asset management subsidiary, Cathay SITE, remained at the industry's zenith with the highest AUM. Cathay's embracement of digital transformation catalyzed the growth of its banking subsidiary's digital users to 7 million and Cathay Life's health promotion program members to over 1 million.
Cathay Financial Holdings continues to focus on nurturing local and cross-border customer relationships. Achievements such as the Singapore branch's green trade loan signify sustainability initiatives. Regions like Vietnam and China displayed robust premium income growth, with Cathay United Bank China branch maintaining strong customer selection, growth momentum, and a 0% NPL (non-performing loan) ratio. Notably, Cathay Lujiazui Life experienced a 55% year-on-year surge in total premiums.
Cathay United Bank achieved a 12% year-on-year growth in total loan balance and a 9% increase in deposits. Net interest margin edged up slightly to 1.38%, benefitting from higher yielding foreign currency assets. Commendable asset quality was maintained, featuring a low NPL ratio and an impressive coverage ratio. SME loans and foreign currency loans also saw substantial growth, indicating a well-aligned strategy aiming to scale these services while preserving quality.
Wealth management fee income registered a year-on-year growth of 7%, primarily driven by significant gains in securities fees and a resurgence in mutual fund fees. Cathay Life's total premium dipped by a modest 3%, yet the earnings from high-contractor service margin protection products continued their stable ascent. First-year premiums and annualized premiums for investment-linked policies and traditional long-term regular premium products both increased, suggesting a solid demand for Cathay Life's core offerings.
The post-hedging investment yield for Cathay Life faced a decline to 3.28%, reflecting elevated hedging costs in 2023. Nevertheless, these costs remained well managed at 0.96%. Liquidity through foreign currency reserves provided a flexible buffer against market fluctuations. Additionally, a strategic shift in the equity portfolio led to a lower cash dividend income. The book value and unrealized gains from financial assets amplified, symbolizing a rebound in equity and fixed assets' market values, which bolstered equity to asset ratios and net worth.
Executives anticipate high single-digit loan growth across all segments, with credit costs expected to remain stable. Net interest margin is projected to stay consistent, assuming a reduction in federal interest rates. Fee income, encompassing wealth management and credit card fees, is expected to grow at a mid-to-high single-digit rate. The primary objective remains building the Contractual Service Margin (CSM), with a target to enhance recurring income and achieve a 3.5% recurring yield by 2025. The long-term hedging cost expectation ranges between 1% and 1.5%.
Cathay Financial Holdings expresses confidence in its dividend distribution capabilities, encouraged by robust earnings and a significant rebound in the balance of unrealized gain and loss. An optimistic dividend policy is projected for the forthcoming year, with a suggestion that the potential payout ratio might exceed the 46% average maintained over the past decade.
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Welcome, everyone, to Cathay Financial Holding Company Fourth Quarter 2023 Results Webinar. [Operator Instructions]. I would like to introduce Mr. C.K. Lee, President of Cathay Financial Holdings. Mr. Lee, you may begin.
Good afternoon and good morning to Los in Europe. Welcome to Cathay Financial Holdings 2023 First Quarter Analyst Meeting in CKD Cathay Financial Holdings. Today, we will -- I will host the meeting. Thank you for joining us today. In the beginning, I would like to introduce some senior managers on the line today we have Ms. Grace Chen, CFO of Cathay Financial Holdings; Mr. Abel Lin, Manager Senior VP of Cathay Life, Mr. Kevin Hu, Senior EVP of Cathay United Bank.
Before we begin the presentation, I'd like to make some comments. Cathay Financial Holdings earnings from the pickup in 2023. The net income grew by 36% to TWD 51.5 billion. Our core business remained resilient.
The bank delivered another record high earnings with robust growth in loans and fees. Life's earnings quality continued to strengthen with both recurring income and the value of new business, demonstrated steady growth.
P&C insurance underwriting profit steadily grew. As [indiscernible] spend and securities also performing well, which are achieving their highest and second highest earnings, respectively. Our robust capital position continued to serve us further foundation for our business growth. We remain committed to sustainability and digitization. The group's digital users have exceeded 8.6 million. Now let me hand over to -- hand over the call to [indiscernible] from our IR team for the 2023 results presentation.
Thank you. Let's start with the business overview on Page 3, which provides a quick highlight on each subsidiary. Cathay United Bank showed a robust growth in deposits and loans. Net interest income grew steadily year-on-year. Asset quality maintained benign. Net income grew 15% year-on-year, driven by solid growth in wealth management and credit card fees.
Cathay Life hedging costs contained well, recurring yield improved with interest income showing double-digit year-on-year growth, maintained a solid capital position with RBC ratio of 323% and equity-to-asset ratio of 8%. Cathay Century the general insurance subsidiary. Premium income rose 13% year-on-year with 13% market share. Asset management subsidiary, Cathay SITE, AUM reached TWD 1.6 trillion others, ranking the #1 in the industry.
Cathay Securities continued to gain market share in domestic brokerage business. We also like to share with you our progress in sustainability, please turn to Page 4. Cathay has been selected in the DJSI Index for 9 consecutive years, the longest among Taiwan financial institution in insurance industry. Cathay received MSCI ESG AA rating for 4 consecutive years and appeared to be the highest ranking in the CDP A list for 2 consecutive years.
We actively participated in global natural initiatives in addition to climate actions. Last December, we hosted important forums at COP28 in Dubai, showing case in our commitment to climate actions and stay connected with the latest trends of sustainability.
Page 5 shows our progress in digital development. We continue to empower financial service with digital data and technology. Cathay United Bank's digital users increased to over 7 million. Cathay Life's feedback health promotion program. Its members exceeded 1 million, ranking #1 in the industry. We continue to diversified financial innovations in 5 key areas: AI, blockchain, cloud, data and ecosystem and develop overseas business through digital performance.
Next page, Page 6, shows our outlook for 2024. Cathay United Bank will grow loans steadily, while maintaining benign asset quality, expand wealth management business by offering diversified products and deepening relationship with high net-worth clients. Deepen overseas presence and expand cross-border financial services, develop retail banking business via digital platforms. Cathay Life will continue the protection first and elderly friendly strategy and focus on protection type of product to accumulate contractor services margin.
For investment, Cathay Life will take opportunities for quality stocks and bonds to enhance recurring yield. Income continued dynamic hedging charges to maintain stable hedging cost. Cathay Century will grow business emphasizing on quality and quantity. For overseas operations, Cathay Century will expand online business in China, strengthen digital capability in Vietnam and the further development opportunities for cross-industry cooperation.
Cathay SITE, will focus on development and innovations in fintech applications and services, develop financial planning for retirement and strengthen ESG investment process. Cathay Securities will continue to utilize digital technology to increase customer base and enhance users' digital experience. Please look at Page 7, Cathay Financial Holdings, net income, EPS and ROE. Cathay Financial Holdings net income was TWD 51.5 billion, up 36% year-on-year. EPS was TWD 3.24. Subsidiary Cathay United Bank, Cathay SITE, and Cathay Securities to deliver double-digit year-on-year growth in net income. Cathay Life's earnings declined year-on-year, mainly reflecting increase in hedging costs.
Cathay entry's profit recovered as the impact of pandemic insurance subsided. Please turn to Page 8 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company rebounded year-on-year to TWD 801 billion. Book value per share was TWD 47.5. Page 10 and 11 show our overseas expansion. Cathay Financial Holdings continue to cultivate the local and cross-border customers.
Singapore branch Signed green trade loan with Apeiron Bioenergy to support the development of sustainable aviation fuel. Premium income for Cathay Life Vietnam and Cathay Century showed steady growth. As for the subsidiaries' operation in China, Cathay United Bank China subsidiary carefully selected customers with growth potential, maintained growth momentum and 0 NPL. For Cathay Lujiazui Life, the total premium grew 55% year-on-year.
Please turn to Page 13 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth with mortgage and consumer loans showing double-digit growth. The total loan balance increased 12% year-on-year to TWD 2.3 trillion; deposit grew 9% year-on-year to TWD 3.5 trillion, maintained the advantage of high demand deposit ratio over 60%. Interest yield is shown on Page 14. Accumulated net interest margin increased 2 basis points year-on-year to 1.38% while quarterly net interest margin increased 4 basis points quarter-on-quarter. The increase was due to an increased position and a higher yield in foreign currency financial assets.
Page 15 shows the asset quality. Cathay United Bank maintained low NPL ratio at 11 basis points and coverage ratio at 1453%. Gross provision was TWD 6.9 billion; recovery was TWD 2.7 billion. Page 24 shows the cost of liability and breakeven asset yield.
Page 16, for SME and foreign currency loans. SME loan balance grew 7% year-on-year to TWD 324 billion, accounting for 14% of the total loan. Foreign currency loan balance was TWD 215 billion as we aim to grow foreign currency loans while ensuring asset quality.
Page 17, shows offshore earnings. The offshore earnings was down to TWD 3.2 billion due to lower year-on-year investment income resulting from optimization of bond portfolio.
Please turn to Page 18 for fee income. Net income was TWD 20.7 billion, growing 15% year-on-year due to robust growth in wealth management and credit card fees.
Page 19 shows the breakdown of wealth management fee. Wealth management fee income was TWD 11.3 billion, climbing 7% year-on-year. driven by 80% year-on-year growth in securities fees and recovery in mutual fund fees with 10% year-on-year growth.
Please move to Page 21 and 22 for Cathay Life's premium performance. Total premium was TWD 466 billion, showing a modest 3% year-on-year decline, while premium from high contractor service margin protection products continue to grow steadily.
On Page 22, first year premium FYP and the annualized premium APE, was TWD 133 billion and TWD 47 billion, respectively, both increased year-on-year attributable to an increase in sales volume of investment-linked policy and the traditional long-term regular premium products. FYP for health and accident policies, the highest CSM contribution products showed 13% year-on-year growth.
Page 23 shows the value of new business. Value of new business was TWD 27.6 billion, the increase of 5% year-on-year was due to higher sales volume from traditional long-term regular premium products. VNB margin remained stable.
Page 24 shows the cost of liability and breakeven asset yield. The cost of liability increased slightly due to the declared rate increase for interest-sensitive policies, breakeven asset yield improved.
Please look at Page 25 for the investment portfolio. Cathay Life total investment reached TWD 7.6 trillion. Overseas investment accounted to 70%, we continue to increase the overseas bonds positioned to enhance recurring income. Moreover, on the right-hand side, the investment yields on domestic equity and international equity were 7.4% and 5.5%, respectively.
Overall investment yield are shown on Page 26. Pre-hedging recurring yield rose 8 basis points reflecting double-digit year-on-year growth in interest income that partially offset by the decline in cash dividend income.
After hedging investment yields declined Yo -- year-on-year to 3.28% last year, mainly reflecting increased hedging costs in 2023, while hedging costs remained well contained of 0.96%. The foreign currency reserve was still TWD 20.8 billion, serving as buffer for fluctuation while offering greater flexibility for hedging.
Please turn to Page 27 for cash dividend and original breakdown of overseas fixed income. Cathay Life recognized a cash dividend income of TWD 19.7 billion lower than the amount in 2022 due to the dynamic adjustment to equity portfolio. The proportion of overseas fixed income in North America increased to 51%.
Page 28 shows the book value and unrealized gain of financial assets. Cathay Life book value increased year-on-year to TWD 628 billion, benefiting from rebound in unrealized gain and loss and earnings contributions. Equity to asset ratio was above 8%. Unrealized gain and loss increased TWD 144 billion going to rebound in mark-to-market value of equity and fixed assets.
Next, please turn to Page 32 and 33 for the performance of Cathay Century. Cathay Century's premium income grew 13% year-on-year to TWD 33.5 billion. Market share was 13%. Page 33, the gross combined ratio and the retained combined ratio each declined year-on-year as the impact of pandemic insurance subsided. This is the end of presentation. Now let's open to Q&A.
Good afternoon. This is Grace Chen. Before the Q&A session, I would like to give a summary from the Chinese session. In this afternoon, there were many questions asked by the audience surrounding our outlook guidance for major key drivers and dividend policy. [indiscernible] we expect high single-digit growth in loans driven by all sectors, including corporate, mortgage and consumer loans.
Credit cost is likely to remain at a regular level of low 20 basis points. And full year net interest margin is likely to sustain at a similar level of 1.38% as we increased position with better year in foreign currency assets last year, providing support to NIM. This is based on the assumption of fed rate cut of 75 basis points in the second half of the year.
For fee, we expect the mid- to high single-digit growth as well as for wealth management and credit card fees. And our website, continuing to build the CSM remains our top priority. We expect the first year premium for traditional products, including highly [indiscernible] CSM products, health and accident policies will have solid growth. The renewal premium is likely to hold its downward trend and stabilize, and we will continue to enhance our recurring income to achieve 3.5% recurring year by 2025.
Annual long-term expectation for hedging cost is 1% to 1.5%. And regarding dividend policy, our earnings strongly picked up last year. Additionally, there was a substantial rebound in balance of unrealized gain and loss, which including both other entities and the impact of AC reclassification, which especially the other equity as of the 2023 year-end, was improved to negative TWD 78.5 billion and compared to the special reserve of TWD 226.8 billion already set aside at this year's AGM.
The shareholder meeting allows for a reversal of TWD 148.4 billion, which significantly boosted our unappropriated earnings. And above we all mentioned are highly encouraging our dividend distribution capability and the key financial metrics. And given these factors, we are quite optimistic about our dividend policy in terms of the dividend year and the payout ratio as compared with -- for example, compared with the average payout ratio for the past 10 years for Cathay Financial Holding was approximately 46%.
And we will prepare a competitive and optimistic proposal for the board for their decision. And these are some key highlights.
We will now begin our question-and-answer session.
[Operator Instructions], [Foreign Language] The First question is from Jemmy Huang from JPMorgan..
Yes. Okay. I have two questions. First one is for Cathay United Bank. If we look at the OpEx growth was 19% year-on-year. I understand there was some effect due to higher business tax. But if we excluding that, what is the underlying trend for OpEx growth last year? And how should we expect the trend for this year? The second question is back to the dividend policy.
I think you do mention there was some release of the spatial surplus of over TWD 140 billion from the -- under the shareholder equity. But if we take into account like the unrealized losses for the reclassified portion -- and I believe some of the losses you didn't really fully cover in 2022. So out of the TWD 140 billion, how much is that really we can freely use either for business growth or for dividend payout distribution.
Jemmy, for the dividend policy issue, sure. There was still a negative balance of our AC impact of AC [indiscernible] at year-end. However, for the 2024 AGM, now the reversal of TWD 148 billion improvement of the other equity, which can be treated as our unappropriate earnings. But going to next year for 2025, and this will be the beginning unappropriate profit. And those according to the company standard, this will be put to the AC -- impact of AC ratification still have a negative balance.
We should use these figures and appropriate property set aside to cover the negative balance of the AC reclassification impact that's for sure. But we are entering into the rate cut cycle and we can -- we take optimistic view on the AC revaluation, probably, we can wait [indiscernible] still on the first quarter. So I think -- your question [indiscernible] for the coming quarters to see the revaluation change of the AC reclassification.
Okay. But how about the OpEx question.
Jemmy, we don't have the information on hand. Can we provide to you offline?
Yes, sure.
[Foreign Language] Next question is from Michael Zhang, Citi.
I have quick question, a follow-up on the NIM. I think we cited that this year's NIM will be around 1.38, but how should we think about the swap income this year? And if we include swap income, how should we think about like adjusted NIM for 2024?
We don't have a specific target for the swap income as we treated the swap as an investment opportunity. When there is opportunity, we will catch it and there's none, we will pursue other investment opportunities. So we don't have a specific slot income target in our plan.
[Operator Instructions] There appears to be no further questions at this point. There appears to be no further questions at this point. Mr. Lee, can we conclude this meeting?
Okay. Well, thank you for your participation in Cathay Financial Holdings conference call. If you have any further questions, please feel free to contact our IR team. Thank you.
Thank you for your participation in Cathay Financial Holdings conference call. You may now disconnect. Goodbye.