Cathay Financial Holding Co Ltd

TWSE:2882

Q1-2025 Earnings Call

[Operator]

Welcome, everyone, to Cathay Financial Holding Company's First Quarter 2025 Conference Call. [Operator Instructions] And now I would like to introduce Mr. C.K. Lee, CEO of Cathay Financial Holding Company. Mr. Lee, please begin.

[Chang-Ken Lee, executive]

Thank you. Good afternoon, and good morning to those in Europe. Welcome to Cathay Financial Holding 2025 Fourth Quarter Analyst Meeting. I am C.K. Lee, CEO of Cathay Financial Holdings. Today, I will host the meeting. Thank you for joining us today. In the beginning, I'd like to introduce the senior managers who are with us.

Today, we have Ms. Grace Chen, CFO of Cathay Financial Holdings; Ms. Sophia Cheng, CIO of Cathay Financial Holdings; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Mr. Kevin Hu, Senior EVP of Cathay United Bank. Before we begin the presentation, I would like to share some key highlights. Cathay Financial Holdings delivered solid results in the fourth quarter with net income reached reaching TWD 32 billion and ROE at 14.4%.

Core businesses across our subsidiaries remain resilient with the Cathay United Bank demand, P&C insurance and asset management subsidiaries all reached record high first quarter earnings. Cathay United Bank reported a 17% year-on-year growth in earnings, supported by double-digit growth in loans, net income, net interest income as well as over 30% growth in net fee income, while Cathay Life's earnings declined year-on-year due to a high base of capital gain in the same period of last year.

Key operating metrics remain robust. Annualized premium value of new business and the recurring income both recorded steady growth and hedging costs well contained. Despite recent sharp appreciation of the Taiwan dollar against the U.S. dollar, our capital position remained robust, providing a solid buffer against the financial market volatility. Cathay Century, our P&C insurance subsidiary remained solid underwriting profitability with net income up 21% year-on-year.

Cathay SITE, our asset management subsidiary, posted 20% year-on-year earnings growth and continued to receive strong market recognition. Cathay Securities also further strengthened its position in the domestic brokerage market.

Now I will hand over the call to Shane from our IR team for the 2025 first quarter result presentation. Thank you.

[Shane Sun, executive]

Thank you. Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank delivered record high earnings for the first quarter with 17% growth year-on-year. Both loans and deposits showed robust growth. Net interest income grew 18% year-on-year. Asset quality remained benign. Net fee income grew 33% year-on-year with wealth management and credit card fees up 46% and 14% year-on-year, respectively. Cathay Life Insurance, FYP, APE and VNB continued to grow, driven by strong sales growth of U.S. dollar-denominated traditional products and investment-linked products.

Pre-hedging recurring yield increased 17 basis points year-on-year. Hedging costs were well contained. Overall investment yield reached 4%. Equity to asset ratio stood at 8.5%, reflecting the strong capital position. Cathay Century, the General Insurance subsidiary, hit record high first quarter earnings. Premium income grew 12% year-on-year with market share of 13%. Asset Management subsidiary, Cathay SITE, AUM reached TWD 2.2 trillion. Net income once again set a new record high for the first quarter.

Lastly, Cathay Securities continued to gain market share in the domestic brokerage business. The brokerage business maintained the largest market share in the industry.

Please look at Page 5, Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income reached TWD 32.2 billion, down year-on-year, mainly due to high base of investment income in the same period of last year amid favorable financial markets. Core business momentum across subsidiaries remained solid. Earnings per share was TWD 2.18.

Page 6 shows the subsidiaries' net income and ROE. Cathay United Bank, Cathay Century and Cathay SITE each delivered record high earnings for the first quarter. Cathay Life saw a year-on-year decline, mainly due to a high base of capital gains in first quarter 2024. However, recurring income increased and underwriting profits remained steady. On a consolidated basis, the holding company's ROE was 14.4% with all subsidiaries achieving double-digit ROE.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 884 billion, down year-to-date, reflecting lower mark-to-market value of financial assets amid stock market corrections. Book value per share was TWD 52.8. Page 9 and 10 show our overseas expansion. Cathay Financial Holdings continue to expand its overseas business, deepened corporate banking business and enhanced digital retail banking in Southeast Asia. In March, Cathay United Bank received approval from Taiwan's regulator to establish a Mumbai branch in India.

In Greater China, Cathay United Bank China subsidiary was the only Taiwanese bank recognized with the Wellbeing Workplace Award by Employer Branding Institute. The Hong Kong branch continued promoting sustainable finance and serve as mandate arranger for Hong Kong Broadband Networks sustainability linked loan.

Please turn to Page 12 for more details about the banking subsidiary. Cathay United Bank's total loan balance rose 15% year-on-year to TWD 2.7 trillion with double-digit growth in corporate, mortgage and consumer loans. Deposits grew 11% to TWD 3.8 trillion, maintained the advantage of high demand deposit ratio of over 60%.

Interest yield is shown on Page 13. Net interest margin and interest spread in the first quarter increased 9 basis points and 10 basis points year-on-year to 1.55% and 1.85%, respectively, benefiting from changes in deposit structure and lower funding costs for foreign currency deposits due to fixed rate cuts. On a quarter-on-quarter basis, both net interest margin and interest rate declined by 2 basis points, reflecting higher share of Taiwan dollar loans and fast loan repricing compared to deposits amid the rate cut environment.

Page 14 shows the asset quality. Cathay United Bank maintained low NPL ratio at 13 basis points and high coverage ratio at 1,297%. Gross provision was TWD 1.9 billion. Recovery was TWD 0.6 billion.

Please turn to Page 15 for SME and foreign currency loans. SME loan balance increased to TWD 340 billion, accounted for 13% of total loans. Foreign currency loans also continued to grow, reaching TWD 287 billion at the quarter end. Cathay United Bank aim to grow foreign currency loans while ensuring asset quality.

Page 16 shows offshore earnings. The offshore earnings rebounded to TWD 2.8 billion, driven by recovery in deposits, loans and investment income. Please turn to Page 17 for net fee income. Net fee income reached TWD 10.2 billion, up 33% year-on-year. Wealth management fee grew over 40%, while credit card fee increased 14% year-on-year, driven by higher spending.

Page 18 shows the breakdown of wealth management fee. Wealth management fee rose 46% to TWD 6.7 billion, with mutual fund and bancassurance fee up 56% and 64% year-on-year, respectively. Both wealth management customers and AUM continue to show steady growth. Please move to Page 20 and 21 for Cathay Life's premium performance. The total premium grew 24% to TWD 134 billion, driven by strong sales growth in investment-linked products, while premiums income from high CSM protection products grew 6%.

On Page 21, first year premium FYP doubled to TWD 55 billion, supported by strong sales growth in investment-linked products and U.S. dollar-denominated traditional products. This also led to 8% year-on-year growth in annualized premium APE. Health and accident premium were affected by a high base in 2024, which reflects a stop selling effect ahead of regulatory changes.

Page 22 shows the value of new business. Value of new business reached TWD 9.4 billion, up 9% year-on-year, driven by the same factors supporting APE growth. Page 23 shows the cost of liability and breakeven asset yield. Cost of liability rose slightly due to the declared rate increase for interest-sensitive policies. Breakeven asset yield was 3.01%.

Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 8 trillion. Overseas investments accounted for around 70%. Please refer to the table for the investment returns by each asset class. The investment yield for domestic and international equity were 11.7% and 7.8%, respectively. Investment yields are shown on Page 25 and 26. After hedging investment yield was 4%, supported by capital gain from equity portfolio adjustments during the market rally, while hedging costs were well contained.

On Page 26, pre-hedging recurring yield was 3.4%, up 17 basis points, driven by higher interest income from continued expansion of fixed income position at elevated yield, along with increased cash dividend income. Annualized hedging costs were well contained at 80 basis points, supported by 1.2% depreciation of new Taiwan dollars and effective proxy hedging. FX volatility reserve totaled TWD 38.6 billion as of the end of March.

Please turn to Page 27 for regional breakdown of overseas fixed income. Cathay Life maintained a diversified portfolio with 52% allocated to North America, 17% to Europe and the remainder in Asia Pacific and other countries. Page 28 shows the book value and unrealized gains of financial assets. Cathay Life's book value was TWD 678 billion, down year-to-date, reflecting equity market corrections. Equity to asset ratio stood at 8.5%, indicating robust capital strength.

Next, please turn to Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 12% year-on-year to TWD 9.9 billion. Market share was 12.7%, ranking #2 in the industry. Page 34, the gross combined ratio rose year-on-year due to higher growth ratio from January 21 earthquake claim payments. However, as these claims were largely covered by catastrophe reinsurance, the retained combined ratio remained stable. This is our first quarter operating results.

The next section, we will update the 2024 embedded value and appraisal value. Please turn to Page 36 for the summary of embedded value and appraisal value major components. In this table, you can see the asset yield assumption for various insurance policies. We increased the equivalent investment yield by 1 basis point to 4.26%. Based on the new assumptions, Cathay Life's 2024 embedded value increased 12% year-on-year to TWD 1,279 billion, equivalent to TWD 87.2 per share of the holding company. Cathay Life's appraisal value as of 2024 was TWD 1.55 trillion, equivalent to TWD 105.4 per share of the holding company. We estimate 2025 value for 1 year new business of TWD 30 billion and apply a multiple of 8.9 when deriving value of new business.

In the following pages, you can see more detailed analysis on 2024 movement of each EV component. You can refer to Page 43 and 44 for the scenarios of impact from various investment yields and discount rates. While on Page 45, you can also see a summary table for year-on-year comparison. We hope the information is useful to you.

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

[Operator]

[Operator Instructions].

[Grace Chen, executive]

Good afternoon. This is Grace Chen. Before we move into the Q&A session, I would like to briefly summarize a few key topics raised by investors during today's earlier Chinese session. This includes the impact of the sharp appreciation of Taiwan dollars against the U.S. dollar on life business and the implications of U.S. tariff and the current market volatility on both the banking outlook and the life insurance strategy.

Let's start with the impact of Taiwan dollar appreciation on life business. We have run a very dynamic hedging strategy that combines traditional hedging tools, currency swap and NDF with proxy hedging, which use a basket of currencies that have a high correlation with Taiwan dollars against the U.S. dollars. While proxy hedging may have short-term volatility, it is quite effective over time. In the first quarter, anticipating that the Taiwan dollar might appreciate further this year, we increased our traditional hedging position when NDF costs were relatively low and extended the contract tenor. The effectiveness of proxy hedging also helped mitigate the impact on earnings.

As of the end of April, our FX volatility reserve, which currently offset 60% of currency impact on earnings remains TWD 30.5 billion. This month, we have submitted an application to the regulator to adopt the new FX volatility reserve mechanism. Once approved, it will allow us to add additional TWD 14.6 billion to the reserve and enable us to fully offset currency movement impact at 100%.

As of today, our FX volatility reserve still provides buffer against the further currency fluctuations. In terms of capital position, as of this year-end, our RBC stood at 359%. The equity-to-asset ratio was around 9%. If the Taiwan dollar was to appreciate by 10% from the last year-end rate of 32.8%, the estimated impact on our capital metrics would be a 30% decline in RBC and a 0.7% reduction in the equity-to-asset ratio. Therefore, our strong capital position continues to provide solid resilience against the further financial market volatility.

And another key question was about the potential impact of U.S. tariffs and the current market volatility. Our banking business showed strong momentum in the first quarter, as CEO mentioned, as we anticipated a higher volatility earlier this year, we are maintaining our full year target of high single-digit loan growth. a stable net interest margin and a high single-digit growth in fee income. For the life insurance business, in preparation for market volatility, we have increased our cash position to enhance flexibility. Our investment strategy remains focused on aligning assets with insurance liabilities, while our product strategy continues to prioritize value-driven and the accumulation of CSM.

While there may be impact on short-term earnings, we are well positioned for the upcoming adoption of IFRS 17 and ICS next year. These are the key highlights.

[Operator]

[Operator Instructions] The first question will be coming from Jemmy Huang of JPMorgan.

[Jemmy Huang, analyst]

Just 3 questions from me. On the banking side, I think in recent years, the wealth management businesses, I think the common practice from investors is they may pledge their Taiwan dollar assets or properties and then to buy the U.S. dollar products to get yield enhancement as well.

So given the recent Taiwan dollar appreciation, how do you see this part of the group of the investors, their risk profile, their behavior, what kind of the risk mechanism that banks adopt to monitor this part of the potential risks for the businesses. And for the Cathay Life, I think you mentioned you don't believe that there will be any structural change on the Taiwan dollar FX rates. So just trying to figure out that, obviously, you still have the FX reserve. But what if the FX reserve balance being fully wiped out, will be any change on your hedging behavior over -- given your capital position is very strong.

So you will just keep the current -- probably the hedge mix and then allow the earnings and also the capital to absorb the volatility if Taiwan dollar further appreciate from current levels.

And the final question is, could we also get the single rate equivalent for value of new business? I think 2023 was 4.62%. What would be for 2024?

[Hsing-Hsien Hu, executive]

Jamie, this is Kevin from the banking side. I would say, overall, the pledge portfolio actually didn't -- it wasn't -- is not a major part of the -- account for the major part of the business. Having said that, if I look at the overall loan-to-value ratio, we maintained the overall portfolio at 50%, which I would think is not -- is actually at a healthy level. We don't have any major concern for the clients. That's number one.

Number two is investment revenue actually mainly driven by the market performance rather than those hedging strategies. That's the second part I can answer you. As I shared with you during the afternoon sessions, overall, I would say we have a very good performance in April. But actually, in May, we do see some momentum slowdown in starting 3 weeks of May, but the insurance part is actually picking up from last week.

So overall, we still have a healthy portfolio, and we still target to grow the overall wealth management fee like at a high single-digit level.

[Chang-Ken Lee, executive]

Yes. Jemmy, I think that I can share you is that I think that in May is a little bit different is the speed of the Taiwan dollar appreciation, but it only happened in just, I think in the first 2 trading days, that Taiwan dollar is actually relatively strong.

So I think that no matter what strategy actually didn't work. But after that, actually, I can tell you is that all the movement from Taiwan dollar and the other major Asian currency actually is also back to normal. So follow the same pace and same direction. So for example, recently, you will see Taiwan dollar appreciate in a row for 4 days, especially, I think from this week, actually, Taiwan dollar already also in a row appreciate.

But also the other major Asian currency also appreciate at the same pace. So for example, for this week, although Taiwan dollar appreciated, we still didn't get hurt on FX, this part actually, we had FX gain for this week. So we're still very confident that our hedging strategy is very effective. I think only for the very short period, it just didn't work, but it will back to, I think -- I think they will shift to the normal. So you will see in the long run, we're still very, very confident. This is what I said. We have a very long history of this experience for the hedging strategy.

So no matter we increase the traditional hedging or increase the basket from the other major Asian currency. We still -- till now, we're still thinking it's very work. And so we still didn't get too much hurt, especially we have new FX reserve mechanism. And we don't think we will -- I think at this moment, we still said -- as I said, we didn't see the structural change. We still believe the currency movement is still in the normal range. So we didn't expect we will run out of our FX reserve.

And also, I think that still -- I think I can share is that our FSC also very concerned about this issue. So you will see, I think maybe it will have some, I think, maybe short-term proposal may be affected. And second is that equivalent investment rate for the new business is that this year is around 4.7%, including the total, including altogether, including Taiwan dollar new business and U.S. dollar new business. Last year, the equivalent rate was around 4.62%.

[Shu-Fen Cheng, executive]

Jemmy -- this is Sophia. I just add 2 points to that. First one regarding the wealth management, it's very honored that we see Cathay United Bank deposit growth has outperformed the key peers that we benchmark has been outperforming for the past 7 years, I think. So by appreciating the better brand name, which attract retail deposits, and also by enhancing corporate services, we also have the deposit from corporate clients injecting.

Just by servicing this inflow deposit, we still have a lot of work to do. So we don't go over leverage into client assets. So overall, you can see in the past year, when there was market concerns on things, Cathay was relatively outperformed and more resilient.

And the second one is regarding to hedging. If you can look at Page 49 of the slides, which is a historic in the past 14 years, the Taiwan dollar appreciation, depreciation against U.S. dollar, we can see that in year 2017, Taiwan dollar appreciated by 8%. Our hedging can contain at within 1%, where in year 2022, when Taiwan dollar depreciated near 10%, we still have some hedging costs at 14 basis points.

So you can see the effort of working almost 20 years on proxy hedge, basket hedging is to humbly look at the currency correlation and how Asian and other benchmark currencies perform against U.S. dollar and against Taiwan dollar. So with basket hedging, proxy hedging does help us try to minimize the hedging cost.

So on Page 49 of the slide, you can see in the past 12 years, year 2020 and year 2024, these are the 2 of 14 years in which our hedging costs surpassed the 1% to 1.5% benchmark that Cathay Life set. So I hope we go without the currency movement, moving to another bank is still a better relative performance basis. So we will continue to work on this dynamic hedging strategy. I really think that strategy was helping us to minimize the hedging cost instead of currency speculation.

[Jemmy Huang, analyst]

Just out of curiosity, I think in the past, let's say, 12, 13 years, how much is the proxy hedge you can leverage up to if we look back, I think currently, obviously, it may be somewhere around 10%, 20% in recent years. But how much in your -- from the risk management perspective, you can leverage this proxy hedge?

[Chang-Ken Lee, executive]

I think the proxy hedge is the -- during the past years' experience, it will range around like 10% to around the -- at most, we will see the 30% of the proxy hedge. So we still have room on that. And before that, as I remember, actually, sometimes basically, the other major currency will put a lot of weight on very large than right now. So it happens before.

[Shu-Fen Cheng, executive]

So I can give you some numbers. In year 2022, where structurally Taiwan dollar contains weaker, we have currency swap and NDF at 15% and that time proxy is about 33%. But you can see from last year, the whole year's currency volatility, Taiwan dollar move. And then this year is quite strong. You can see our traditional hedging and end of first quarter, the traditional hedging currency and currency swap and NDF is already 69%.

So it really depends on how the Taiwan dollar and other benchmark currencies against U.S. dollar, the likelihood of further appreciation or further depreciation. So the risk reward judgment and also on the various currency relative strength or weakness going forward. So if I take the past 10 years, I think it's between 10 to 30-something percent, low 30% as a cap.

[Operator]

[Operator Instructions].

[Chang-Ken Lee, executive]

Any further questions?

[Operator]

I think no. Thank you. Mr. Lee, can we close the conference call now?

[Chang-Ken Lee, executive]

Okay, sure. Thank you.

[Operator]

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

[Chang-Ken Lee, executive]

Thank you.