Welcome everyone to Cathay Financial Holding Company second quarter 2024 conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a Q&A session, and please follow the instructions given at that time if you would like to ask questions. Now I would like to introduce Mr. CK Lee, the CEO of Cathay Financial Holding Company. Mr. Lee, you may begin.
Thank you. Good afternoon, and good morning to those in Europe. Welcome to Cathay Financial Holdings 2024 second quarter analyst meeting. I am CK 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 online. Today we have Miss Grace Chen, Chief Financial Officer of Cathay Financial Holdings. Ms. Sophia Cheng, Chief Investment Officer 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 highlights with you.
I am pleased to report that so far this year, our corporate momentum has remained strong, driving our first half earnings to TWD 71.7 billion, which is the second-best in our history for the first half. Our subsidiary, Cathay Life, had its second-best performance on record. Our banking P&C Insurance, SMN, and Security all achieved record high earnings. Cathay United Bank, our banking subsidiary, performed very well in both corporate banking and retail banking. Loan growth was robust. Net interest margin expanded notably and fees grew by 33% year-on-year. Cathay Life continue its value-driven product strategy, leading to solid CSM growth. Investment performance was solid, and the capital position remained strong with the RBC ratio of 352%.
Cathay Century, our P&C insurance subsidiary, maintained steady underwriting profit, while Cathay SITE, our asset management subsidiary, continued to reach new heights in AUM. Cathay Securities also expanded its market share in local brokerage business. We will share more details during the call. Now, I will hand over the call to Shane from our IR team for the 2024 first half result presentation. Please.
Let's start with the business overview on page four, which provides a quick highlight on each subsidiary. Cathay United Bank delivered a record high earnings for the first half period with 15% year-on-year growth. Loan growth was robust. Net interest income showed double-digit year-on-year growth. Asset quality remained benign. Net fee income grew 33% year-on-year, driven by strong growth in wealth management and credit card fees. Cathay Life adhered to a value-driven strategy to accumulate CSM. Annualized premium and value of new business grew 12% and 21% year-on-year respectively. Driven by robust growth in health and accident policy and foreign currency denominated traditional long-term regular premium products. Delivered solid investment performance with after-hedging investment yield of 4.28%. Maintained solid capital position with RBC ratio of 352% and equity to asset ratio of 9.2%.
Cathay Century, the general insurance subsidiary, premium income grew 17% year-on-year, with market share of 13.4%. Asset management subsidiary achieved record high earnings for the first half period. AUM reached TWD 1.9 trillion. Lastly, Cathay Securities first half earnings have already surpassed 2023 full -year's figure. Domestic brokerage market share continued to expand. In addition to solid business performance, Cathay Financial Holdings continue to broaden sustainable impact. Please turn to page five. Cathay held its Cathay Sustainable Finance and Climate Change Summit last month, bringing together international climate leaders and experts from Taiwan to discuss key trends and practice in sustainable finance and climate change. Over 4,800 people participated. Attending company represented 82% of Taiwan's market cap and accounted for over 54% of total greenhouse gas emission in Taiwan.
In addition, Cathay Financial Holdings joined Global Impact Investing Network and Asia Venture Philanthropy Network, aiming to generate positive social and environmental impact through impact investing. Please turn to page six. In addition to the climate summit, we also host the first Cathay Asset Management Summit, bringing together 20 global and domestic investment experts to discuss seven key investment trends. The event attracted over 450 high-net-worth clients and a live stream viewership of 30,000. Please look at page seven. Cathay Financial Holdings net income and EPS. Cathay Financial Holdings net income was TWD 71.7 billion, the second highest record for the first half. All the subsidiaries showed strong core business momentum. Earnings per share was TWD 4.66 . Page eight shows the subsidiaries net income and ROE.
Cathay United Bank, Cathay Century, Cathay SITE, and Cathay Securities each reach record high first half earnings. Cathay Life deliver its second highest first half earnings, supported by solid investment performance and steady underwriting gains. ROE of holding company reach 16.9%. Please turn to page nine to see the book value of Cathay Financial Holdings. The consolidated book value of holding company increased to TWD 891 billion, supported by earnings contributions and a rise in equity markets. Book value per share increased to TWD 53.4. Page 11 and 12 show our overseas expansion. Cathay Financial Holdings continue to expand overseas business, cultivate local and cross-border corporate banking business, and leverage digital platform to develop retail banking business. Premium income for Cathay Life Vietnam grew 17% year-on-year.
As for the subsidiary operation in China, Cathay United Bank China continues prudent operations, enhancing online banking products and features, and promoting digital transformation. For Cathay Life's joint venture in China, the total premium grew 9% year-on-year. Please turn to page 14 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth with mortgage and consumer loan both showing double-digit growth. Total loan balance increased 14% year-on-year to TWD 2.4 trillion. Deposits show steady growth with the advantage of high demand deposit ratio of 65%. Interest yield is shown on page 15. First half of 2024 net interest margin increased 11 basis points year-on-year. The increase was due to the strong loan growth and expanded position with higher yield in foreign financial assets.
Benefiting from Taiwan Central Bank's interest rate high and well-contained funding cost, the quarterly net interest margin increased 9 basis points quarter-on-quarter to 1.55%. Page 16 shows the asset quality. Cathay United Bank maintained low NPL ratio at 12 basis points, and coverage ratio at 135.8%. Gross provision was TWD 4.2 billion. Majority was in the general provisions against new loan growth. Recovery was around TWD 600 million. Please turn to page 17 for SME and foreign currency loans. SME loan balance increased to TWD 330 billion, accounted for 14% of the total loan. Foreign currency loan balance was TWD 236 billion, growing 10% year to date. If excluding the impact from Taiwan dollar depreciation, the growth was 4%.
We aim to grow foreign currency loan while ensuring asset quality. Page 18 shows offshore earnings. The offshore earnings were down to TWD 3 billion due to a high year-on-year base from a single case recovery in the first quarter of 2023. Please turn to page 19 for fee income. Net fee income increased 33% year-on-year to TWD 14 billion, driven by strong wealth management fee from robust sales across wealth management products, and 25% growth in credit card fees due to changes in the credit card spending mix. Page 20 shows the breakdown of wealth management fee. Wealth management fee income reached TWD 8.3 billion, climbing 14% year-on-year. All products show strong growth. Fee for mutual fund, security products, and bank insurance grew by 51%, 73%, and 29% year-on-year respectively.
Please move to page 22 and 23 for Cathay Life's premium performance. Total premium was TWD 216 billion, with the year-on-year decline reflecting a high base of investment-linked products due to regulation change in July 2023. The premium for protection products grew 8% year-on-year, supporting the contractual service margins. On page 23, first year premium, FYP, was TWD 52 billion, declined year-on-year due to the same reason as mentioned in previous slide, the high base of investment-linked products. However, annualized premium, APE, grew 12% year-on-year, driven by the strong sales growth in health and accident policies and foreign currency denominated traditional long-term regular premium products. High CSM health and accident product, FYP, increased 63% year-on-year. Page 24 shows the value of new business.
Value of new business was TWD 16 billion, up 21% year-over-year. Driven by the notable FYP growth in health and SME policy and foreign currency denominated traditional long term regular premium products. VNB margin, VNB over FYP increased year-over-year to 31% due to lower FYP contribution from investment-linked products. Page 25 shows the cost of liability and break-even SA yield. The cost of liability increased slightly quarter-on-quarter due to the declared rate increase for USD denominated interest sensitive policies. The break-even SA yield continued to improve. Please look at page 26 for the investment portfolio. Cathay Life's total investment reached TWD 7.9 trillion as of the end of the first half. Overseas investment accounted for around 70%.
On the right-hand side, the investment yield on domestic equity and international equity were 16% and 15% respectively. Overall investment yield are shown on page 27 and 28. Overall investment performed well with after hedging investment yield of 4.28%, owing to strong capital gains from adjusting the equity portfolio in favorable markets. On page 28, the left-hand side, the pre-hedging recurring yield increased 6 basis points year-on-year to 3.3%, mainly due to lower dividends, reflecting equity position adjustment and a dividend peak shifting into July this year. It was June last year. However, interest income continued to increase, owing to expanded position and higher yield in fixed income. Annualized hedging cost was 1.21% for the first half. Cost of traditional hedging tools remained high due to the widened Taiwan dollar and U.S. dollar interest spread.
The foreign currency volatility reserve increased to TWD 38.6 billion, driven by the depreciation of Taiwan dollars in the first half. Cathay Life will continue its dynamic hedging strategy to ensure the effective control of the hedging cost. Please look at page 29 for the cash dividend income and regional breakdown of overseas fee income. Cathay Life recognized fee income for TWD 5.8 billion in the first half and TWD 11.8 billion in the first seven months. The latter is lower than the same period of last year due to dynamic adjustment in equity position. Page 30 shows the book value and unrealized gain of financial assets. Both increased year to date. The book value increased to TWD 725 billion, supported by earning contribution and increase in unrealized gain and loss.
Driven by the rise in equity markets, equity to asset ratio reached 9.2%. Next, please turn to page 34-36 for the performance of Cathay Century. Cathay Century's premium income grew 17% year-on-year to TWD 19 billion. Market share was 13.4%. Page 36. Gross combined ratio increased due to higher year-on-year gross loss ratio from April 3rd earthquake claim payments, while retained loss ratio and retained claim payments were both lower year-on-year. As such, claim payments were covered by catastrophe reinsurance contracts. This is the end of presentation. Now let's open to Q&A.
Yes, thank you. Ladies and gentlemen, we will begin our Q&A session. If you wish to ask questions, please press star key and number one on your telephone keypad to enter the queue. After your name is announced, please ask your questions. Should you wish to cancel your questions, you may just press star key and number two. Thank you. Now please press star key and one on your keypad. Thank you. The first one to ask question, Jemmy Huang from JP Morgan. Go ahead please.
Yeah, thanks for the presentation. I have three questions. First one, could we get the swap revenues and also an adjusted net interest margin for the first half or for the second quarter? I think that you mentioned even if U.S. rate cuts, you can still maintain net interest margin above 1.5%. What's the potential impact for swap revenue on the health basis? What's the likely impacts? The second one is for the hedging cost at Cathay Life. If we look at on the year-over-year basis, I think Taiwan dollar actually depreciated more this year in the first half. But your hedging cost is actually higher than the same period last year.
Should we attribute it, the difference to NDF or currency swap cost? Because I think the quoted price are actually not very much different in the first half of this year versus first half last year. Or is there any other reasons?
Yeah. The third question is for credit costs at Cathay Life, Cathay United Bank. If based on your guidance that loan growth momentum might moderate in the second half, should we expect the credit costs could also be lower in the second half? Is there any rough range guidance for the full -year that we could use for reference? Thanks.
This is Kevin from the Cathay United Bank. To answer your question, the swap revenue for quarter two is TWD 4.9 billion. That's our swap revenue for the quarter two. The whole year forecast on the NIM 1.5% is based on the total revenue excluding the swap revenue. It's a pure NIM numbers. Hopefully that will answer your question. As for the credit cost, we expect that overall the full -year credit cost will maintain at 0.3, 30 basis points. That's our expectation for the full -year.
Jemmy, if we look at the first half swap revenue, Kevin just mentioned the second quarter. If for the first half, the total revenue, swap revenue is TWD 1.6 billion, equivalent to 13 basis points of our NIM. After the NIM, adding in our the NIM including swap revenue is 1.63% for the first half year.
About the hedging cost, mainly is from the FX reserve changes. Because in the last half, in that year, the first half actually, we have released around like TWD 7 billion from the FX reserve. On the other hand, this year because we have a lot of FX gain, so actually we increased our FX reserve by TWD 18 billion. The change, last year is released TWD 7 billion. This year we increased TWD 18 billion, so the change is around TWD 25 billion. This is why this year our hedging cost is 1.2%, but last year our hedging cost is around 0.9%. This is the main reason of the FX reserve difference. Is that clear for Jemmy?
Yeah. Thanks. Can I have a follow-up question? I think on credit costs, when you mentioned 30 basis point as a potential reference, that's already including recovery impacts, right?
That's right.
Okay, thank you. Abel, so I think the FX reserve changes is also because, partially because that last year you have certain period that your FX reserve actually above the regulatory ceiling, and therefore you don't need to make monthly contribution. Is that also part of the reason?
Yes. Correctly. Because last year the upper limit is only like TWD 43 billion, but this year our upper limit is around TWD 69 billion. Till now we still not target our upper limit. This year we increased, but last year we can reduce.
Oh, I see. Thank you.
Next one to ask questions, Michael Zhang from Citi. Go ahead please.
Hi. Good afternoon, management. Thank you for taking my question. I have two questions around the bank. Firstly, on credit costs. First half our loan growth is quite strong, and based on our guidance of low teens loan growth, it seems that we expect loan growth to decelerate into second half. Should we expect credit costs to come down in second half, and do we have any full -year guidance on the credit cost front? I noticed that we have seen very strong consumer loan growth. Would there be any asset quality risk associated with those, and how should we think about the asset quality risk? And then second question on fee income.
Our wealth management fees has been doing quite well. If we look at longer term, what do you see as a sustainable growth rate in the longer term, and what would be the key drivers for the wealth management in the longer run? Thank you.
To answer the first question regarding the credit cost, as I said, the full -year outlook, our expectation is around 30 basis points. That mainly because contributed by the normal loan growth rate. Because our loan growth is high for the first half and the full -year is higher than our overall full -year plan. That's why I would say, there's no such credit concern. In that sense, it's purely by the normal loan growth rate. That's why the credit cost will become like 30 basis points. Regarding the wealth management fee, first half definitely is a very successful story for the bank. Full -year, we expect like at least 30% growth for the full -year on the wealth management side.
If you want to look at the longer term, I will still maintain a quite positive side because the first, our customer number, the affluent customer number is still growing like double digit. Even AUM growth is like 14% at this stage. With a strong client growth and AUM growth, for longer term, we're still looking very optimistic. Thank you.
We are now still in Q&A session. If you would like to ask questions, please press star key and one. Thank you.
Regarding one of the question left is credit quality of the consumer loan. As I said, we still take very cautiously when we grow the loan portfolio. We don't have the concern on the credit quality side.
Michael, among our consumer loan, only below 40% is unsecured for those small amount consumer lending. For more than 60% is secured by like mortgage or our or clients security like government bond, U.S. Treasury or time deposit. Like Kevin mentioned, we closely monitor the quality and you should pay attention, not all of these increase are all those unsecured loans. More than half are secured.
Michael, this is Sophia. I just wanted to add a few points. When we started the consumer loan back about a decade ago, we did start with building an ecosystem, credit card spending, client's foundation. The initial cross-sell on this product come from client analytics, client segmentation. It is very important we try our best to analyze customer and derive new business from there. So far in the past two years, despite the growth, we still have set some good criteria that we hope we can base on the same foundation and relax the risk appetite a little bit. So far, the overall credit cost delinquency remain quite manageable, and we have not seen sizable scale in the deterioration in our consumer loan book. This is for the unsecured loan.
Where for the secure loan, for mortgage, for example, we try not to do the pure investment purpose. It's mainly focused on own use or high net worth, which loan value ratio tend to be lower. The overall loan value ratio is also quite reasonable. On aggregate basis, we do think the asset quality remains quite stable. I hope that answers your question.
Thank you.
Michael, you have been released from the Q&A queue, and I apologize for that. If you do have a follow-up, you are welcome to press star key and one, and we take you instantly. Thank you.
Thank you.
Ladies and gentlemen, we are still in Q&A session. If you would like to ask questions, please press star one.
Good afternoon. This is Grace Chen. Before we close the call, I would like to give a summary from the Chinese session. This afternoon, there were many questions asked by the audience surrounding our second quarter operation and outlook guidance for major key drivers. Regarding the bank's performance, it has been strong across many areas in the first half. Questions from the audience focused on the momentum in the second half and our guidance. For loans, we are expecting a low-teens growth for the full -year, and our net interest margin has already reached 1.5% in the first half, driven by our increased position in higher-yield foreign currency financial assets and the optimization of our deposit structure.
We anticipate that the NIM will likely be at least 1.5% for the full -year, assuming one to two Fed rate cuts and a flat Taiwan Central Bank rate. In terms of wealth management fees, we achieve a 40% year-on-year growth in the first half, despite a favorable capital market environment in the second half of last year, which set a high base. We still expect full -year wealth management fee to grow by at least 30%, potentially exceeding 30% if the market conditions remain favorable. For life insurance, continuing to build CSM remains our top priority. In the first half, CSM continued its robust momentum, growing 35% year-on-year to TWD 46 billion.
On the investment side, while it's challenging to predict the capital gains, we still have quite abundant unrealized gain in our stock position with TWD 120 billion in the first half, and still over TWD 100 billion after the significant correction in the stock market in July. Regarding hedging, we run a dynamic hedging strategy. In addition to traditional hedging tools, we also run proxy hedging. As of July end, our foreign currency reserve stands at over TWD 50 billion, which also provide a good buffer on foreign currency volatility. We are confident that we will be able to maintain our hedging costs between 1%-1.5% for the full -year.
Regarding our dividend policy, we will focus more on dividend yield, aiming to provide investors with a favorable dividend yield while also considering the payout ratio. These are the key highlights.
Do we have more questions on the line?
There appears to be no further question at this point. Mr. Lee, can we close the conference call now?
Okay, thank you. Well, thank you.
Thank you, sir.
In Cathay Financial Holding Company's conference call. If you have any further question, please feel free to contact our IR team. Thank you.
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