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Edited Transcript of 2882.TW earnings conference call or presentation 22-Aug-19 9:00am GMT

Q2 2019 Cathay Financial Holding Co Ltd Earnings Call

Taipei Sep 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Cathay Financial Holding Co Ltd earnings conference call or presentation Thursday, August 22, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chung-Yi Teng

Cathay Financial Holding Co., Ltd. - Head of Strategic Planning Div. & Senior EVP

* Shane Sun

Cathay Financial Holding Co., Ltd. - Deputy Manager of IR Department

* Sophia Cheng

Cathay Financial Holding Co., Ltd. - CIO & Senior EVP

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Conference Call Participants

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* Thomas Wang

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Yafei Tian

Citigroup Inc, Research Division - Assistant VP and Analyst

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Presentation

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Operator [1]

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Welcome, everyone, to Cathay Financial Holding Company First Half 2019 Conference Call. (Operator Instructions) And now I would like to introduce Ms. Sophia Cheng, CIO of Cathay Financial Holding Co. Ms. Cheng, please begin.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [2]

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Thank you. Good afternoon, and good morning to investors from U.S. Welcome to Cathay Financial Holding's 2019 First Half Analyst Meeting. My name is Sophia Cheng, the Chief Investment Officer for Cathay Financial Holdings. Today, I will host the conference call, and thank you very much for joining us today.

In the beginning, I'd like to introduce our senior managers who are with us today. We have Mr. Daniel Teng, Senior Executive Vice President of Cathay Financial Holdings; Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings; Mr. Abel Lin, Managing EVP of Cathay Life; Mr. Joseph Wang, Senior EVP of Cathay Life; Mr. Edward Yung, Senior EVP of Cathay United Bank; and Ms. Grace Han, EVP of Cathay Life.

For today's conference call, Shane from our IR Team. He will present the first half 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 Shane for the briefing of our first half results.

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Shane Sun, Cathay Financial Holding Co., Ltd. - Deputy Manager of IR Department [3]

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Thank you, Sophia. Let's start with the business overview on Page 4, which provides a quick highlight on each subsidiary.

Cathay United Bank first half of 2019 net profit grew by 14% year-on-year, driven by solid growth in core business. Overseas expansion continued. FX loan grew steadily. Offshore earnings accounted for 48% of total pretax earnings.

Fee income increased 12% year-on-year, among which wealth management and credit card fees grew 7% and 9%, respectively.

Cathay Life continue its value-driven strategy. FYP of protection and policy grew nearly 40% year-on-year.

The annualized first year premium, APE, grew 28%, ranked #1 in the industry. Hedging cost improved to 1.2%. Pre-hedging recurring yield climbed to 3.48% with 36 basis point increase comparing to the same period of last year. RBC ratio was 333%. Capital adequacy remained solid.

Cathay Century, the general insurance subsidiary. Premium income grew by 7% year-on-year. Market share was 12.4%, maintained at #2 in the industry. Overseas premium income continued to rise.

Asset management subsidiary, Cathay SITE has AUM of TWD 753 billion, ranked #1 in the industry.

Lastly, Cathay Securities brokerage business continued to grow and its sub-brokerage ranked #1 in terms of market share.

Please look at Page 5, Cathay Financial Holding's net income and EPS. Cathay Financial Holding's report TWD 34.1 billion of earnings for the first half of 2019, declined by 5% from last year. This is because of the higher investment income in the same period last year. EPS was TWD 2.45.

Page 6 shows the subsidiaries' net income and ROE. Cathay United Bank's earnings rose 14% year-on-year, driven by interest and fee income growth. Cathay Life earnings declined due to high pace of investment income last year. On a consolidated basis, the holding company's ROE was 11% in the first half of 2019.

Please turn to Page 7 to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 699 billion. Book value per share was TWD 47.5 in the first half of 2019.

Page 9 and 10 show our overseas expansion. Cathay Financial Holdings continue to expand its overseas business by deepening its overseas presence and reinforcing the relationship with our core partners. As of today, Cathay United Bank has footprints in 9 out of 10 ASEAN countries. It will continue to provide customers with more comprehensive financial service and explore local business opportunities.

Cathay Life Vietnam's total premium increased by 55% year-on-year and Cathay Century performed steadily in Vietnam.

As for the business operation in China. Cathay United Bank launched its finance subsidiary last September and all the business is on the right track.

For Cathay Life's joint venture in China, the total premium grew 17% year-on-year. For the general insurance, the strategic alliance with Ant Financial was going very well in China. For Cathay Securities Hong Kong, each business line performed steadily.

Please turn to Page 12 for more details about our banking performance. With proper risk management, Cathay United Bank continue to adjust the loan mix by increasing SME and foreign currency loan. Cathay United Bank loan balance increased by 2% year-on-year to TWD 1.5 trillion in the first half of 2019. Deposits grew by 5% year-on-year. The loan-to-deposit ratio was near 70%.

Please look at Page 13 for interest yield. The interest rate was 1.8% for the first half of 2019 and the net interest margin was 1.22%, remained stable comparing to the first quarter of 2019.

Page 14 shows the asset quality of Cathay United Bank. With our prudent lending policy, Cathay United Bank maintained benign asset quality with low NPL ratio at 21 basis points and coverage ratio at 810%. In the first half of 2019, growth provision was TWD 2.1 billion. About half were the general provision from a regulation requirement on our loan growth. Recovery was TWD 1.3 billion.

Next, please turn to Page 15 for SME and foreign currency loans. SME and foreign currency loans are the major business focus for Cathay United Bank's corporate banking. SME loan balance reached TWD 197 billion in the first half of 2019, grew by 11% year-to-date. Foreign currency loan balance was TWD 242 billion, accounted for 16% of total loans.

Page 16 shows offshore earnings, which was TWD 6.9 billion, accounted for 48% of the bank pretax earnings in the first half of 2019.

Please turn to Page 17 for the fee income. Cathay United Bank continued to enhance the noninterest income. Fee income was TWD 10.8 billion in first half of 2019, up 12% year-on-year. Credit card fee increased by 9% and wealth management fee grew by 7% year-on-year.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income came to TWD 5.5 billion in first half 2019. Mutual fund fee decreased due to the volatility of the capital market while bancassurance fee grew 14% year-on-year.

Please move to Page 20 and 21 for Cathay Life's premium performance. In first half of 2019, total premium was TWD 326 billion, down 8% year-on-year. The decline was due to the product mix change with lower FYP.

On Page 21, first year premium was TWD 105 billion, down 11% due to high pace of investment-linked policies same period last year. This year, we focused on selling higher-value products (inaudible) traditional regular paid and protection products.

The protection policy FYP grew nearly 40% year-on-year in first half of 2019. The annualized first year premium APE was TWD 48 billion, increased 28% due to a increase of traditional regular paid products. Meanwhile, our annualized premium APE was still ranked #1 in the industry.

Page 22 shows value for new business. Value of new business increased by 30% to TWD 33 billion in the first half of 2019. The growth was due to the product mix change of increased proportion in traditional life and protection policies.

Page 23 shows our cost of liability, which continue to improve. The reserve-based liability cost was 4.01% in the first half of 2019, improved 2 basis points comparing to the end of 2018.

Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 6.1 trillion as of the first half of 2019. Cash position was 2.7% of the invested assets. Overseas investment accounted for 67%. The investment return of each asset class are as follows: cash and cash equivalents, 0.6%; domestic equity, 4.7%; international equity, 9.1% pre-hedge; domestic bond, 7.3%; international bond, 5% pre-hedge; mortgage and secured loan 2.2%; policy loan, 5.5%; real estate, 2.8%; the overall investment return was 4.03% after hedge.

Overall investment yield are shown on Page 25 and 26. After-hedge investment yield was 4.03%. Cathay Life remain -- will maintain proper risk management and dynamic portfolio management in face of market volatility.

On Page 26, pre-hedge recurring yield reached 3.48%, increase by 36 basis points comparing to same period last year. The annualized hedging cost was 1.2% for the first half of 2019. Cathay Life continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging cost. The foreign currency [smoothing] reserve as of the end of June was around TWD 25 billion.

Please look at Page 27 for the dividend income and regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 18.7 billion in the first 7 months of 2018. For overseas fixed-income investment, Cathay Life allocated 43% in North America, 20% in Europe and the rest are in Asia Pacific and other countries.

Page 28 shows the book value of unrealized gain of financial assets. Thanks to well-performed global equity and fixed income market in the first half of 2019, the consolidated book value and the unrealized gain on financial assets of Cathay Life increased significantly to TWD 530 billion and TWD 76.6 billion, respectively.

Lastly, please look at Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income was TWD 12 billion, up 7% year-on-year. Market share was 12%. Cross-selling synergy continued to perform well. Over 60% of premium was generated by the group channel.

Thank you. This is the end of 2019 first half results briefing. Now let's open to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [2]

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Before we take a question, I'd like to remind the investors that we -- our board has just approved a capital raising plan, and we should be sending out a notification soon. Despite we are not in a quiet period yet, we think it's better that today we provide year-to-date operating details, not touching forward-looking guidance. Thank you.

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Operator [3]

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And our first question is coming from Yafei Tian of Citigroup.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [4]

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I have 2 qualitative questions, given it's a quiet period. The first one is around the potential of Cathay capturing the repatriation of capital back to Taiwan. And how do you see from an industry perspective, how this coming back -- repatriation of capital going to drive your strategy of growth, your revenue going forward? And then the second question is more around the broader operating environment for the life business given the falling interest rate. I think where I'm coming from is we see quite a lot of realized gains given the bond yield has fallen. But how should we think about the business longer term in this current operating environment, particularly when you think about the future trend for EV, and how should analysts take into account of the potential much lower EV if we were to factor in the lower rates and how do you value it?

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Unidentified Company Representative, [5]

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I think right now, the falling interest rate, actually we see a scope that first one we will make all of the investment here. I think that (inaudible) be affected. But on the other hand, actually for our life -- our interest credit production will -- also will decrease our funding -- our credit risk. For example, that if you're looking at from the beginning of the year till now actually that the USD dollar policy we have already lowered down by 25 basis point. And actually I think in the future, I think that we still will consider the market interest rate, and we will -- maybe will -- if the market interest rate is going down, we also will cut our credit rate.

So in liability slide, we also well described there is falling interest rate environment. So I think that although we said that the investment return for the recurring year and the reinvestment will be affected, but on the other side, the liability side also will be affected.

Totally speaking, because the market is not -- can be well predicted, so I think that -- on the embedded value side, I think the investment return should be affected. But because we also can generate -- but if you look at our past few years, actually each year, because we reflect the falling interest rate environment, so we also lower down our investment assumption to our embedded value assumption. But on the other side actually, the liability side, we still have very solid value of new business, especially we're quite focused on our potential protection type products. So you can see from our margin actually increased compared to last -- past year.

So I cannot give you -- because it's quite dynamic, but I think totally for the asset side and liability side, quite also be affected. But I think that what we will do is that we will focus strongly on the product side to focus more margin, it's higher that protection side and also we think that investment side will control the cash flow. We don't want to have too much cash flow, flow in to utilize our investment on the income.

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Chung-Yi Teng, Cathay Financial Holding Co., Ltd. - Head of Strategic Planning Div. & Senior EVP [6]

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With further capital returning policy issue by the government, we do receive some inquiries from our customers and then we do see some opportunity, while I have that kind of policy. So we're not only focused on the 25% of the financial investment but also focused on the 70%. The 70% of the fund should be invested in direct investment. So we will leverage our subsidiary life insurance or venture capital or sites to find more and more investment opportunities offered to our customer to do the -- for the 70% part. That's our advantage compared to the other financial holding companies.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [7]

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Just to explain a little in case anyone who was interested in happened, the government so far has concerted 2 plans. One is already done that encourage corporate to come back to invest in Taiwan. So they were given some incentives that if corporate return their capital home, there were some incentive for them. And what is undergoing right now is to encourage overseas capital to return home. If they put in a long-term investment into special account deposit in the bank, then they can have some wave on the tax rates. The government allow within that scheme, they have 5% in cash, 25% invest in financial market. The remaining 70% must invest in direct investment. They however can include investing in PE funds as long as they are linked to, say, infrastructure, domestic sector to help the economy.

For Cathay Financial Holding as a whole, we have insurance subsidiary, we have banking, we have asset management firm which raise the first (inaudible) in Taiwan. We also have venture capital subsidiaries. So we put this as a group-wide plan to -- hoping that we can capture this opportunity, as Daniel mentioned, not just for investors to deposit the amount for investing to financial market, but also the 70%, which linked to direct investment. So we already have the team IT in the process of setting up some fund, and we have already started a communication product offering to our customers.

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Operator [8]

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And the next question is coming from [Edward Liu] of HSBC.

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Unidentified Analyst, [9]

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I have 3 questions. First one is on cost of liability improvement. So as management commented in the Chinese call, you're maintaining the guidance of 5 to 10 basis point improvement per year. But given that the FYP has been decreased, meaning that there is less new book to value the legacy book, I just want to confirm that if you can continue to improve as you guided.

And second question is on product. So I noticed that there is a pick up on single-paid traditional life products. Just wonder what that is and what's margin of that. And then the overall margin of your book has been relatively stable, given that the protection mix has increased. Just want to know why is that because I would expect the margin would increase as well. And the last question is on pre-hedge recurring yield. It has been improved quite substantially. May I know what's the driver behind the improvement?

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Unidentified Company Representative, [10]

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I'm sorry. The first one, we still keep our guidance, total liabilities 5 to 10 basis points. I think the -- because the -- all the product change and all the FYP volume actually is under our estimate. Till now, all the result actually is as our expected, so although the second quarter only dropped by 1 basis point, actually it's as our expected to our trend and we still guidance 5 to 10 basis points is the same. And also if you look at the last second hedge till now for the 1 year actually, the drop is 6 basis points, still under our guidance. This is the first one and second one.

I think the single paid premium, yes, this first hedge essentially is the first quarter increase. This is mainly we focused -- we launched single U.S. dollar policy. This is because we -- for the last year-end actually we see some opportunity. We look at U.S. dollar yield actually. It is at the high level so we want to [lock in] the year. So also we launched the new product at that moment so the single paid premium USD, the premium is large. This is because we already lock in the year for the fixed income. So we launched the value actually we are limited at some value. And right now so you will see actually when the interest rate going down, actually we lowered down the credit rate also. And right now, the value is meet our target. So right now, this kind of product is already stopped there.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [11]

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And the margin for this, as you mentioned.

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Unidentified Company Representative, [12]

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I think the margin for this is the -- we say a lot of time the single paid, I think the margin is only about 5% only. And regular paid will depend on what premium pay give and what kind of product. I think the range is quite large from that 10% to maybe 40% range. It will depend on the product type and premium paid period.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [13]

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Yes, on Page 26 to the left-hand side, you can look for the profit margins with the product mix actually in first half the VNB margin 31% is higher than 21% in first half of last year. So the traditional life, especially regular paid is helping the overall value on new business.

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Operator [14]

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(Operator Instructions)

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Unidentified Company Representative, [15]

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I'm sorry for the pre-hedge recurring yield, this first half actually increased (inaudible) we -- the first one from the asset allocation, we still increased by the overseas fixed income like the Formosa bond and also the other is the Taiwan dollar-based ETF. So recurring yield from the asset allocation and second one is the -- for the first quarter actually, when we see the interest is highest, then actually we increase quite a lot for the overseas investment. So lock in, in the higher investment yield. So this is quite the first half recurring yield increased significantly compared to same period.

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Operator [16]

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And we're taking the last question -- I'm sorry I'm taking the next question and the next one is Thomas Wang of Goldman Sachs.

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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [17]

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A quick question. I'm trying to understand investment in the domestic fixed income returns, 7.3% in the first half. I want to understand just what's actually helped that to get to the absolute level?

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Unidentified Company Representative, [18]

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I think the value is the Taiwan dollar-based ETF.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [19]

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The asset yield increase realized gains besides the coupon.

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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

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Sorry. Is this a realized gain because bond yield declined or is this actually NT dollar fixed income that absolute increase in -- because the U.S. dollar appreciate in value that this value gone -- is it FX gain or is actually a capital gain from fixed income?

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Unidentified Company Representative, [21]

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I think they are both.

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Unidentified Company Representative, [22]

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The Taiwan dollar ETF that is we (inaudible) actually U.S. dollars fixed income. So when we realize, it includes the capital gain because of breakdown and also includes the Taiwan dollar (inaudible) also increase the FX gain, both.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [23]

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But having said that, I want to highlight that you can see on Page 26, 2014 was the trough for our recurring yield. So we may take (inaudible) year and how the interest rate moves might be. We do have a policy there. We have been working very hard to improve our recurring yield. That remains our main policy and that's why you can see last year 2018, the pre-hedge recurring yield already 3.5% versus 3.17% in 2014. While this year in the first half, the recurring yield pre-hedging was 3.48% versus 3.12%. So as we highlighted before, we remain the same strategy there. Having a higher recurring yield is very important to safeguard long-term earnings.

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Operator [24]

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(Operator Instructions) And the next one is from Thomas Wang of Goldman Sachs.

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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Sorry, just a follow-up. You talked about recurring yield, so would you -- in the recurring yield would that be -- so the increase in domestic fixed income asset for increasing the return, would that contribute to the increasing pre-hedge recurring yield?

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [26]

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When we calculate the recurring yield, this is before hedging and so it is realized gain. It is not included. If it's coupon, yes. But if it's regular mutual fund, it is counted as a fund. So mainly it's the -- okay, the quick answer is if it's realized gain, it is not included.

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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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But the FX -- the increase in NT dollar value because the dollar FX gain off those Taiwan-dollar-denominated fund that will be including in the...

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [28]

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Okay. The -- put it 2 layers. The first layer is your interest income and when they convert to Taiwan dollar, yes, currency does have influence. And that's why when you look at the charge in 2017, Taiwan dollar was a little bit stronger. And therefore you see 2017, our recurring yield sharpened a little bit because the currency was rather strong in that year. So when you think about converting to Taiwan dollar, this ForEx is first layer, and then after that, you convert to Taiwan dollar, we do separate the interest income from the realized gain. So yes, ForEx affecting both recurring and one-off gains.

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Operator [29]

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(Operator Instructions) There appears to be no further questions at this point. Ms. Cheng, can we close the conference call now?

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [30]

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Okay. That's great. Thank you, again, for your -- thank you for participation in Cathay Financial Holding's conference call today. Our IR team will stand back here. If you have any further question, please feel free to contact our IR team. Thank you very much, and goodbye.

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Operator [31]

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