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Edited Transcript of 2882.TW earnings conference call or presentation 18-Nov-19 9:00am GMT

Q3 2019 Cathay Financial Holding Co Ltd Earnings Call

Taipei Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Cathay Financial Holding Co Ltd earnings conference call or presentation Monday, November 18, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chao-Ting Lin

Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director

* Chung-Yi Teng

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

* Sophia Cheng

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

* Wendy Juan

Cathay Financial Holding Co., Ltd. - IR Officer

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Conference Call Participants

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* Chung Hsu

Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist

* 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's Third Quarter 2019 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.

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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 in U.S. Welcome to Cathay Financial Holdings' 2019 Third Quarter Analyst Meeting. My name is Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding. Today, I will host the conference call. Thank you very much for joining us today.

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

For today's conference call, Wendy from our IR team will present the third quarter results. After the -- and after the presentation, we are open for Q&A section, in which our senior management will be more than happy to answer your questions. Without further ado, let me pass the call over to Wendy for the briefing of the results.

And before we take questions, I'd like to remind first that we are still in the project capital raising. So despite we are not in the quiet period, so we think from overall governance perspective, it is better that we provide year-to-date operating details and try not to touch forward-looking guidance.

Thank you. Wendy, you may start.

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Wendy Juan, Cathay Financial Holding Co., Ltd. - IR Officer [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 continued to adjust loan mix. Net interest margins rose compared with last quarter. Net interest income grew steadily. Overseas expansion continued. Offshore earnings made up 40% of total pre-tax earnings. Fee income increased 7% year-on-year, among which credit card and wealth management fee grew 8% and 4%, respectively.

Cathay Life continued its value-driven strategy. First year premium of protection-type policies grew 25% year-on-year. The annualized first year premium, APE, grew 26%. Value of new business for the first 9 months increased 20% year-on-year to TWD 45.7 billion. Cost of liability continued to improve. It has reached 3.98% by the end of the third quarter. Pre-hedging recurring yield increased 26 basis points to 3.8% compared with the same period last year.

Cathay Century, the general insurance subsidiary, premium income grew 7% year-on-year with market share of 12.6%. It remained the industry's second largest player. Overseas premium income continued to increase. Asset management subsidiary, Cathay SITE, has assets under management of TWD 773 billion, which is the highest in the industry. Lastly, Cathay Securities brokerage business continued to grow and its sub-brokerage business ranked #1 in terms of market share.

Please look at Page 5, Cathay Financial Holdings' net income and earnings per share. Cathay Financial Holding reported TWD 52.2 billion of earnings for the first 9 months of 2019, which has already surpassed 2018's whole year's earnings. Earnings per share was TWD 3.86.

On Page 6, shows the subsidiaries' net income and ROE. Cathay United Bank's earnings rose 4% year-on-year, driven by interest and fee income growth. Cathay Life's earnings declined due to high pace of investment income last year.

For other subsidiary, Cathay Century, the P&C insurance, and Cathay SITE, the asset management, ROE are over 20%. On a consolidated basis, the holding company's ROE was 11% in the first 9 months of 2019.

Please turn to Page 7 for book value of Cathay Financial Holding. The consolidated book value of holding company was TWD 732.3 billion and book value per share was TWD 50.2 as of the end of September 2019.

Page 9 and 10 shows our overseas expansion. We continue to expand overseas business by deepening overseas presence and reinforcing the relationship with local partners. As of today, Cathay United Bank has footprint in 9 out of 10 ASEAN countries. We will continue to provide customers with more comprehensive financial services and explore local business opportunities.

Cathay Life Vietnam's total premium increased 51% year-on-year. As for the business operation in China, Cathay United Bank's China subsidiary performed steadily. For Cathay Life's joint venture in China, the total premium grew 17% year-on-year. The general insurance, Cathay Century, work closely with Ant Financial in China, and Cathay Securities Hong Kong shows steady performance.

Please turn to Page 12 for more details about our banking performance. With proper risk management, Cathay United Bank continued to adjust the loan mix by increasing SME and reducing loan to government, focusing on quality and quantity. As of the end of the third quarter, Cathay United Bank's loan and deposit balance was TWD 1.5 trillion and TWD 2.3 trillion, respectively.

Please look at Page 13 for interest yields. Interest spreads for the first 9 months was 1.82%, up 2 basis points compared with the first half of 2019. It was due to the decreasing loans to government and increasing corporate loan yields. Net interest margin for the first 9 months remained 1.22%.

Page 14 shows the asset quality of Cathay United Bank. Cathay United Bank maintained benign asset quality with low NPL ratio at 21 basis points and coverage ratio at 788%. Gross provision was TWD 3.0 billion and recovery was TWD 1.5 billion for the first 9 months of 2019.

Next, please turn to Page 15 for SME and foreign currency loans. SME and foreign currency loans are a major focus of Cathay United Bank's corporate banking unit. SME loan balance grew 16% year-to-date to TWD 207 billion by the end of the third quarter. Foreign currency loan balance, exclusive of China subsidiary, was TWD 241 billion, which accounted for 16% of total loans. Page 16 shows offshore earnings of TWD 8.6 billion, which made up 40% of the bank pre-tax earnings in the first 9 months.

Please look at page 17 for fee income. Cathay United Bank continued to enhance the noninterest income. Fee income increased 7% year-on-year to TWD 16.2 billion for the first 9 months. Credit card and wealth management fee grew 8% and 4%, respectively.

Page 18 shows the breakdown of wealth management fee. Wealth management fee income was TWD 7.8 billion for the first 9 months. Bancassurance fee grew 5% year-on-year. Mutual fund fee decrease was due to capital market volatility.

Now let's move on to Cathay Life. Please turn to Page 20 and 21. Total premium was TWD 473.3 billion for the first 9 months of 2019. The year-on-year decline was due to the product mix change.

Page 21. First year premium was TWD 145.5 billion. This year, we focused on selling higher-value products such as traditional regular paid and protection-type product. The accumulated first year premium for protection-type policies grew 25% year-on-year. The annualized first year premium APE reached TWD 67 billion. The increase of 26% was due to an increase in traditional regular paid products. The accumulated annualized first year premium APE is still the highest in the industry.

Value of new business is on Page 22. Value of new business increased 20% to TWD 45.7 billion in the first 9 months of 2019. The increase was due to the product mix change of increased proportions in traditional life and protection policies. On the next page, Page 23, shows our cost of liability, which continues to show improvement. It has improved 5 basis points year-to-date to 3.98%.

Please look at Page 24 for the investment portfolio. Cathay Life's total investment reached TWD 6.3 trillion as of the end of the third quarter. Overseas investment accounted for 67% of the total invested account. The invested return of each asset classes are as follows: for cash and cash equivalents was 0.6%; for domestic equity was 7.7%; for international equity 7.7% pre-hedged; for domestic bonds 6.6%; for international bond 5.1% pre-hedged; for mortgage and secured loans 2.2%; for policy loans 5.6%; for real estate it was 2.7%.

After hedge investment yield was 4.07%. Pre-hedged recurring yield reached 3.8%. It has increased 26 basis points compared to same period last year. The annualized hedging cost was 1.3% for the first 9 months of 2019. New Taiwan dollars appreciated 0.1% against the dollar in the third quarter. However, the profit effectiveness was affected by other currencies moving in the opposite direction of New Taiwan dollars. Nevertheless, the narrowing of Taiwan and U.S. rate gap has helped lowering the cost of currency swap. We will continue to adjust hedging pools dynamically in order to control hedging cost.

Please look at Page 27 for the dividend income and the regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 23.7 billion in the first 9 months of 2019. 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 and unrealized gains of financial assets. Consolidated book value of Cathay Life increased to TWD 561.1 billion and unrealized gains of financial assets reached TWD 99.9 billion as of the end of the third quarter. Both were helped by the performance of equity and bond market this year.

Lastly, please look at Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income increased 7% to TWD 17.9 billion in the first 9 months, and market share was 12.6%. Cross-selling synergy continued to work well. Over 60% of premium was generated by the group channel.

Thank you. It's the end of 2019 third quarter results briefing. Now let's open to Q&A.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [4]

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Thank you, Wendy, and we are now good for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is coming from Yafei Tian of Citigroup.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [2]

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The first question is on the banking side. It's about the credit growth on the bank side. We see that as being relatively sluggish this year, and I think that is because Cathay is still quite focused on the loan mix to shift towards the higher-yielding area. Just wondering how long do you expect that loan mix shift to continue? And when would you expect somewhat of a turnaround in credit growth? Along that line, can you also give us some color why the foreign currency loan growth is also somewhat slower than the peers? That's the first question.

The second question is on the fee income side. I can see that the mutual fund fee has been a drag on the fee income this year. So the follow-up question is, do you expect with the capital repatriation plan to kind of see a bit of improvement in fee income? Or would that be a key driver for future fee income growth into going forward?

And then the next question is more around the hedging cost. I would appreciate if you can give us some breakdown of the slightly higher hedging costs this quarter, 1.5%, based on my estimates. And how much of that is due to the proxy hedging being ineffective? And how much is due to FX-related losses? And if you can give us some sensitivity of 1% movement on FX, NT dollar relative to U.S. dollars impact to the hedging costs, that would be great.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [3]

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Yafei, thanks a lot for your question. And I need to remind the investor that we are not in a quiet period. But because the capital raising, the right issue were closed end of -- late this month and, therefore, if your question relates to forward guidance, I think, you can call us 29th -- 29th of November. We'll give you a lot of detailed discussion. Today -- we prefer to answer up to today and explain a reason. And our operations is something that we mentioned before. We're happy to update again that we are very careful not to provide forward guidance at this moment. Okay?

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

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Okay. So if you could give us some understanding of why the fee income is a bit softer compared to peers. And why the loan growth is somewhat softer than peers? And also a bit of breakdown of hedging cost, that would be great.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [5]

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Okay. No problem.

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

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Okay. The first one is our loan growth is moderate, slow, but because we concern about the credit in the future. That's the first question, right? And for the first -- second question about the fee. For this year, the capital market is more volatile. So most of our clients -- very -- most of our clients are very concerned about the future. So they move their money from the capital market like mutual funds to fixed income market like insurance. That's why our fee income coming from the mutual fund is relatively slow. They all expect -- actually it's a [negative scope goal] this year.

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

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Also I'd like to add a point to that. Sometimes when we look at wealth management product, it just depends on the market expectation, how we see the rate and where the risk appetite relate our client to take additional risk appetite or not. So I think you can see that year-to-date the -- because of the following your investor, they will still try to look for security of the return. And you can see the insurance products. There is growth there, while keeping the market volatility end of last year to this year. Yes, the mutual fund sales could be a bit slow. So we tend to look at wealth management fee as a total aggregate solution to customers.

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [8]

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Thinking about the Cathay Life FX hedging in the third quarter, yes, it increased comparison to the second quarter, because at the moment, the Taiwan dollars -- I think the movement is relative to other major -- especially other major Asia currencies, the same movement, and so at the moment and especially Taiwan dollar is depreciating. So we have a gain on the proxy hedge. But on the third quarter because that Taiwan dollar, although only appreciation of 0.1%, but because the other Asian currency like the Korean won is depreciating about 3.8% and Sing dollar depreciation about 2.2% and renminbi depreciation about 3.5%. It means that Taiwan dollars is relatively strong than the other major currency.

So in the short period that our hedging costs increased, mainly due to the proxy hedge because we lost it on the proxy hedge due to the Taiwan dollar is relatively strong. So this is why the hedging costs here now in the third quarter is 1.3%. But I didn't give that $1 -- Taiwan dollar appreciation because it's relative complex. It didn't means that Taiwan dollar appreciation then we will lose it. For example, 2 years ago, Taiwan dollar appreciation 8% at that year. But actually, our proxy hedging, we are gain because that the other Asian currencies much stronger than Taiwan dollar. So we can gain on that. So it's quite complex that it is -- we didn't just 1 factor -- that Taiwan dollar appreciation or depreciation is not a good indicator. So this is a further trend, the third quarter FX hedging results.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [9]

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And that's why you do see 2017 our hedging cost was 89 basis points. The major force because of currencies by NDF. It was affected by U.S.-Taiwan rate. So in the past 2 years, when the revaluation increased, it create a lot of stress that we were working on the proxy position quite well. And that's why you can see despite the past 3 years' rate movement, the Cathay Life, their hedging cost has [compound] at within 1.3%. And it's very hard to look at 1 quarter volatility because all these [proxy hedge] simulation has been -- we have been doing that for over 15 years now. So as you look at more longer-term [similar are we], so that we can better represent it.

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [10]

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Actually, I'd make 1 point is that on this 1.3%, it actually increased and prove that we have FX reserve increase by TWD 4.3 billion.

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

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General provision.

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [12]

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Yes. This is the putting our FX reserves. So if we exclude this provision, actually, our hedging cost is around 0.9%, around. So it's much lower than that.

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

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And how is our ForEx more than reserve now?

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [14]

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At the end of third quarter, our FX reserve is TWD 22.4 billion, quite strong.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [15]

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Sorry, I couldn't catch the number? 22...

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [16]

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Because in the -- I'm sorry. Because the...

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [17]

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The FX reserve.

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [18]

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FX, our hedging, 1.3%, include our FX reserve provision. Because till now, our FX provision increased by TWD 4.3 billion. So if we exclude this TWD 4.3 billion, our hedging cost only 1.1%. I'm sorry, it's not 0.9%. It's 1.1%. And right now, our FX reserve at the end of third quarter, it's TWD 22.4 billion.

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

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This provides a buffer for ForEx volatility.

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Operator [20]

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And the next question is coming from Chung Hsu of Crédit Suisse.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [21]

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2 parts. The first, on the banking side. I see in your presentation the loan book contracted slightly and NIM increased by around 1 basis point year-over-year, but your net interest income increased by about 6%. Just wondering if you can give us some color on that. And whether there are any accounting adjustments or reclassification? Because I think the noninterest income was down quite a bit in the third quarter and first 9 months. My second question is on your recurring yield. I can't seem to back out the -- such a big pickup in recurring yield from your asset allocation shift. Is there any one-off item in there? And how should always driving that increase in recurring yield?

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Chung-Yi Teng, Cathay Financial Holding Co., Ltd. - Head of Strategic Planning Div. & Senior EVP [22]

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I'm not sure if you're talking about our net interest margin is growing. I saw the -- okay. Well, we continue to adjust our loan portfolio from now 2 years or so. So -- for maybe 2 -- for -- from the -- I mean, the second quarter, we continue to reduce our loan book from the government and government proxy. And we increased our SME and overseas corporate loan. That's why our net interest income from the -- our net interest income is still grow 6%, but our loan book is moderately slow -- I mean reduced.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [23]

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But I guess that my question is, is there some other items in there? I mean, I can't seem -- it's both NIM and your loan book. I'm not sure if your interest-earning assets increasing much more than your loan book. Perhaps that's the reason.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [24]

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Also we upgrade our China branches, PRC branches, into subsidiaries, and which also have some impact, around 3 to 4 bps to our NIM.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [25]

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Okay. My -- I guess you can't seem to explain -- or at least based on the presentation, I cannot seem to understand why your net interest income is growing much faster than your loan book. So what you mean is that effectively flat up 1 basis point. So it must be your interest-earning asset is increasing much faster than your own loan book. Is that correct? I mean, is that -- and what's driving that interest-earning asset increase?

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

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Chung, just 10 seconds.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [27]

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Sure.

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

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Chung, the number is a little bit technical. That means that enough detail and I'll tell you, it's related to FVTPL assets. But let me get detail, make it precise to you. Can I call you after the call?

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [29]

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Sure. Okay.

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

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Yes, yes. So there's no accounting process change at all. But it's just some of the detail, I think, it's easier to explain, because it's a bit technical.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [31]

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Okay.

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [32]

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And lastly about the recurring yield in the third quarter, annually 3.8% increase by 26 basis points. I think the main reason is that the first one, we increased the overseas investment, especially, in fixed income, the increase, and also longer-term duration. And especially talking before because at the end of that first quarter and this first -- that fourth quarter to this first quarter of this year, we increased quite a lot in fixed income overseas. At the moment, we get much higher yield around that 4.8% to 5% at that moment. So we increased quite a lot.

We got very much longer duration at the moment. So this is why this year till now our recurring yield is increased such large number. But because the risk-free rate turned out quite significant, so until now, actually, our -- especially U.S. fixed income right now is only around like the 3.8% to 4%. Although we still will increase in overseas fixed income, but we think the recurring yield cannot be large -- stronger increase just this year.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [33]

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Let's see. Can I just follow-up? I mean what is your duration now versus a year ago?

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [34]

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I think right now, our -- especially, our total fixed income duration is 11.

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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [35]

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Okay. And a year ago it's?

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [36]

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I think that a year ago, actually, quite similar. We didn't increase quite a lot. But because many of the advantages the fourth quarter last year end and this first quarter, the yield is much greater than before, especially than last year. Because as I remember, in the last year second quarter, our recurring yield for fixed income may be only like 4.2% to 4.5%. But after last, the yield is getting higher. So we increased much position on that part. But because right now, the yield also reduced. So we didn't put that much, but we still increased our overseas investment fixed income.

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Operator [37]

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(Operator Instructions)

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [38]

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Chung, just to highlight on the question asked earlier, but I will confirm the detail as I was thinking about the fixed duration. Basically FVTPL bonds investment, when we calculate NIM and calculate NII, one is included, one is not. But I need to double check which one include. That's why you see a little bit discrepancy in the number. But on the total net interest income, it should be -- that's all accurate. So I will follow a bit later.

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Wendy Juan, Cathay Financial Holding Co., Ltd. - IR Officer [39]

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The calculation of the ratio, NIM, include that impact. But for the actual amount, it doesn't include. That's why the difference you see in that figures.

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Operator [40]

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(Operator Instructions) The next one is coming from Yafei Tian of Citigroup.

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [41]

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Just another follow-up on the recurring yield and the cost of liability. We can see that the recurring yield is improved quite a lot. In a falling rate environment, that's very impressive. At the same time, it looks like the cost of liability is still falling at about 7 bps per annum, sort of, the rate you guided before. So right now, it looks like the negative spread has narrowed significantly because of the combination of the 2. So can you let us know what is the negative spread at the moment?

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [42]

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I think, actually, we didn't have a negative spread because if you look in our investments here, right now, it's 4.1%. And our cost of liability...

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [43]

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Underlying basis. So the recurring. So the recurring yield is 3.8% -- yes.

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [44]

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Yes. So you mean in recurring basis, right?

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [45]

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Yes.

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [46]

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Actually, we didn't disclose that kind of number. I think that you can -- it's not -- I mean, the recurring is before hedging, okay, this before hedging 3.8%. But hedging cost is relative volatile. So if you -- I mean that right now, our overseas investment is around 6%, 7%. So hedging costs 1.3%. So it means that you are -- I mean that recurring yield is 3.8%. So you need to fix that by 80 basis points. So after hedging, recurring is only 3%. But on the other hand, our -- effectively, our cost of -- effective cost of liability -- because right now, it's 3 point -- around 4%, right, but only account by 90 basis point. So it's around that 3.6%. So it means that we still have the negative spread on that part. After hedging, it's around 3%. Cost of effective liability is 3.6%. So this is generally speaking our breadth. So for the recurring yield, it's not totally -- when we say interest -- negative spread, so we do it in overall investment yield. It's not used in the recurring yield after hedge.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [47]

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Basically the breakeven asset yield. Would that be easier?

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Chao-Ting Lin, Cathay Life Insurance Co., Ltd. - Managing Senior EVP & Director [48]

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I think the breakeven -- so it's not another part. The breakeven asset yield is about around -- I think right now it's around 3.2% to -- 3.2% to 3.3%. It's around that period.

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [49]

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Yes. Let me reiterate. Your cost of liability already improved between 5 to 10 basis point per annum as we guided. We've been saying that in the past that this will continue for a couple of years. So far year-to-date, we are on the right track. And if you take the cost of liability, the reserve accounts for about 90% of balance sheet. So if you take 3.98% times by 0.9%, you will derive cost of assets about 3.5% to 3.6%. And you take away 3.6% minus mortality expense and all the other adjustment, roughly, the breakeven asset yield will be 3.2% to 3.3%.

And on the asset side, as Abel explained, this year, we can't guide you on 2019. But just to remind, if you look on Page 26, the left-hand side, 9 months recurring yield is higher than whole year compared to the right-hand side because, usually, second and third quarter we saw dividend income. Recurring yield tend to be higher. So on an annual basis, I will be hesitant to tell you that the whole year is 3.8%. So you can take right-hand side, 3.5% last year already, and plus the improvement in 2019. And then if you did that, say, 18 bps for hedging deduction, you can clearly see that, yes, the negative recurring basis, even if you don't count any capital gain, the recurring -- the negative spread will be somewhere about 40, 50 bps.

And you are seeing cost of liability improving. For hedging, yes, we do benefit from currencies through our NDF cost improvement. The NDF could be very volatile, and that's why we are reluctant to say there's no problem. And it's also important that we have to make sure the one-off gains are based on solid foundation of research. But we also need -- on the other hand need to consider global market volatility. So all we can answer to you is the cost of liability is improving. So if you balance, not just on FX yield enhancement, but also cost of liability improvement, I think, consider both together, it has been still quite positive. Is that clear?

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Yafei Tian, Citigroup Inc, Research Division - Assistant VP and Analyst [50]

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Yes. That's very clear.

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Operator [51]

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

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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [52]

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Yes. Well, thank you very much for participation in Cathay Financial Holdings' conference call. And I need to apologize again. At current stage, we can't provide forward guidance. Usually November time will be quite perfect to have such a discussion. So just wait for another 10 days. And within 2 weeks, we can speak a lot more detail on the forward-looking numbers. And if -- for any detail of the third quarter results, any questions, the IR team, they will stand by here for you. And thank you.

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Operator [53]

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