Welcome everyone to Cathay Financial Holding Co.'s first quarter 2025 conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at the time if you would like to ask a question. Now, I would like to introduce Mr. C.K. Lee, CEO of Cathay Financial Holding Co . Mr. Lee, please begin.
Thank you. Good afternoon and good morning to those in Europe. Welcome to Cathay Financial Holding 2025 first 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 would 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 first quarter, with net income reaching TWD 32 billion and ROE at 14.4%.
Core businesses across our subsidiaries remain resilient, with the Cathay United Bank, P&C Insurance, and asset management subsidiaries all reaching high first quarter earnings. Cathay United Bank reports 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 rate of new business and the recurrent income both recorded steady growth. Hedging costs were contained. Despite recent sharp appreciation of the Taiwan dollar against the U.S. dollar, our capital position remain robust, providing a solid buffer against the financial market volatility.
Cathay Century, our P&C Insurance subsidiary, presented steady underwriting profitability with net income up 21% year-on-year. Cathay SITE, our asset management subsidiary, posted 28% year-on-year earnings growth and continues to receive strong market recognition. Cathay Securities also further strengthened its position in the domestic brokerage markets. Now, I will hand over the call to Shane from our investor relations team for the 2025 first quarter results presentation. Thank you.
Thank you. Let's start with the business overview on page four, which provide a quick highlight of each subsidiary. Cathay United Bank delivered record high earnings for the first quarter, with 17% growth year-on-year. Both loan and deposits show robust growth. Net interest income grew 18% year-on-year. Asset quality remain 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, FYP, APE and VNB continue 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, had 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 continue to gain market share in the domestic brokerage business. Sub-brokerage business maintained the largest market share in the industry. Please look at page five. 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 market. Core business momentum across subsidiaries remain solid. Earnings per share was TWD 2.18. Page six 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 ROEs. Please turn to page seven 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 down market corrections. Book value per share was TWD 52.8. Pages nine and 10 are overseas expansion. Cathay Financial Holdings continue to expand its overseas business, deepen corporate banking business, and enhance 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 Well-Being Workplace Award by Employer Branding Institute. The Hong Kong branch continue promoting sustainable finance and served as mandate arranger for Hong Kong Broadband Network 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, maintaining an advantage of high demand deposit ratio of over 60%. Interest yield is shown on page 13.
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 Fed rate cuts. On a quarter-on-quarter basis, both net interest margin and interest spread declined by 2 basis points, reflecting higher share of Taiwan dollars loans and fast loan repricing compared to deposits amid the rate cut environment. Page 14 shows the asset quality. Cathay United Bank maintain 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 continue 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 manager fee grew over 40%, while credit card fee increased 14% year-on-year, driven by higher spending. Page 18 shows the breakdown of wealth manager fee.
Wealth manager fee rose 46% to TWD 6.7 billion, with mutual funds and bank insurance fee up 56% and 64% year-on-year respectively. Both wealth managers, customers, and AUM continue to show steady growth. Please move to page 20 and 21 for Cathay Life's premium performance. The total premium growth 24% to TWD 134 billion, driven by strong sales growth in investment-linked products, where premium 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 premiums 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 break-even asset yield. Cost of liability rose slightly due to the declared rate increase for interest-sensitive policies. Break-even 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 yield 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 yields, 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. Asset 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 maintains 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 number two in the industry. Page 34, the gross combined ratio rose year-on-year due to higher gross ratio from January 21st earthquake claim payments. However, as these claims were largely covered by catastrophic reinsurance, the retained combined ratio remained stable. This is our first quarter operating result. The next section, we will update the 2024 embedded value and appraisal value.
Please turn to page 36 for a summary of embedded value and appraisal value measure components. In this table, you can see the SAU 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 values increased 2% 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 estimated 2025 value for one year new business of TWD 30 billion and apply 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 BV component. You can refer to page 43 and 44 for the scenarios of impact from various investment yield 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.
Yes. Thank you, Shane. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star key and number one on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. Should you wish to cancel your question, you may press star key and number two. Thank you. Now, please press star key number one on your keypad if you would like to ask a question. Thank you.
Good afternoon. This is Grace Chen. Before we move into the QA 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. tariffs and the current market volatility on both the banking outlook and the life insurance strategies. 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 uses a basket of currencies that have 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 tenure. The effectiveness of proxy hedging also helped mitigate the impact on earnings. As of the end of April, our foreign-exchange volatility reserve, which currently offset 60% of currency impacts on earnings, remains TWD 30.5 billion. This month we have submitted an application to the regulator to adopt the new foreign-exchange 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 impacts at 100%.
As of today, our foreign-exchange 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 TWD 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. 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 the ICS next year. These are the key highlights.
Thank you. Ladies and gentlemen, please press star key and number one on your keypad if you would like to ask a question. Thank you. The first question will be coming from Jimmy Huang of JPMorgan. Go ahead, please.
Oh, yeah. Thanks for the presentation. Just three 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 over properties and then to buy the U.S. dollar products, to get yield enhancement as well. 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 the banks adopt to monitor this part of the potential risks for the businesses?
For the Cathay Life, I think you do mention you don't believe there will be any structural change on the Taiwan dollar FX rates. 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 or given your capital position is very strong, so you will just keep the current probably the hedging mix and then allow the earnings and also the capital to absorb the volatility if Taiwan dollar further appreciate from current levels. The final question is could we also get a single rate equivalent for value of new business?
I think the 2023 was 4.62%. What would be for 2024? Thank you.
Hi, Jimmy. This is Kevin from the banking side. I would say overall, the pledge portfolio actually does not account for a major part of the business. Having said that, if I look at the overall loan-to-value ratio, we maintain the overall portfolio at 50%, which I would think 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. Actually in May, we do see some momentum slow down in starting of three weeks of May, but the insurance are actually picking up from last week. Overall, we still have a healthy portfolio, and we still target to grow the overall development fee like at a high single digit level. Thank you.
Yeah. Jimmy, 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 that in the first two trading days that Taiwan dollar is actually relatively strong. I think that no matter what strategy actually didn't work. 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. For example, recently, you will see Taiwan dollar appreciate in the low for four days, especially I think from this week.
Actually, Taiwan dollar already also in the low appreciate. But also the other major Asian currency also appreciate at the same pace. For example, for this week, although Taiwan dollar appreciate, we still didn't get hurt on FX. This far, actually we have FX gain for this week.
We still very confident that our hedging strategy is very effective. I think the only for the very short period, it just didn't work. It will back to I think the they will shift to the normal. You will see in the long run we still very, very confident. This is what I say, we have very long history of this experience for the hedging strategy. No matter we increase the traditional hedging or increase the basket upon the other major Asian currency, we still till now, we still thinking it very work. We still didn't get too much hurt, especially we have new FX reserve mechanism. We don't think we will. I think at this moment we still.
I said we didn't see the structural change. We still believe the currency movement is still in the normal range. We didn't expect we will run out of our FX reserve. I think that I can share is that our FSC is also very concerned about this issue. You will see, I think, maybe it will have some short-term proposal that may be effective. Second is that equivalent investment yield for the new business this year is around 4.7%. Including the total, all together, including Taiwan dollar new business and U.S. dollar new business. Last year, the equivalent rate is around 4.62%.
Can we add-
Yeah.
This is Sophia. I just add two 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 seven years, I think. 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 serving this inflow deposit, we still have a lot of work to do, so we don't go over-leverage into client assets. As I showed, overall you can see in the past year, when there was market concerns on things, Cathay strategically outperformed and more resilient. The second one is regarding to hedging.
If you can look at page 49 of the slides, which is a historical 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 that within 1%. Where in year 2022, when Taiwan dollar depreciated near 10%, we still have some hedging costs at 14 basis points. You can see the effort of working almost 20 years on proxy hedge, basically 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. With, basket hedging, proxy hedging, that help us try to minimize the hedging cost.
On page 49 of the slides, you can see in the past 12 years, year 2020 and year 2024, these are the two of 14 years in which our hedging costs surpassed the 1%-1.5% benchmark that Cathay Life set. I hope, with or without the currency movement, moving to another bank is still a relative performance basis. We'll continue to work on this, dynamic hedging strategy. I really think that strategy worth helping us to minimize the hedging cost instead of currency speculation. Thank you.
Yeah. Thanks. Just out of curiosity, I think in the past, let's say, 12, 13 years, what-
How much is the proxy hedge you can leverage up to? If we look at that, I think currently up obviously it may be somewhere around 10%, 20% in recent years. How much in your from the risk management perspective you can leverage this proxy hedge?
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. It's so we still have room on that. Before that, as I remember, actually sometimes the basket, the major, the other major currency will pull a lot of weight very largely right now. It happens before.
I can give you some numbers. In year 2022, where structurally Taiwan dollar continued weaker, we have currency swap and NDF at 15%. At that time proxy is about 33%. But you can see from last year, the whole year with currency volatility, Taiwan dollar moves. Then this year it's quite strong. You can see our traditional hedging. In the first quarter, the traditional hedging currency and currency swap and NDF is already 69%. It really depends on how the Taiwan dollar and other benchmark currencies against U.S. dollar, the likelihood of further appreciation or further depreciation. The risk-reward judgment and also on the various currency relative strength or weakness going forward.
If I take past 10 years, I think it's between 10% -3 0%-something, low 30%, as a cap.
Oh, very clear. Thank you.
Thank you.
Thank you. If you would like to ask the question, please press star key and number one on your keypad. Thank you. We are now in question and answer session. If you would like to ask the question, please press star one on your telephone keypad. Thank you. As a reminder, please press star one on your keypad if you would like to ask the question. Thank you.
Any further question?
I think no. Thank you, Mr. Lee. Can we close the conference call now?
Okay, sure. Thank you.
Yes, thank you. Ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Co.'s Conference call. You may now disconnect. Thank you and goodbye.
Thank you.