Welcome everyone to Cathay Financial Holdings Company's Fourth Quarter 2022 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 Ms. Sophia Cheng, the CIO of Cathay Financial Holdings Company. Ms. Cheng, please begin.
Thank you. Good afternoon, and good morning to our investors in Europe. Welcome to Cathay Financial Holdings 2022 fourth quarter analyst meeting. I am Sophia Cheng, the Chief Investment Officer of Cathay Financial Holdings. Today, our CEO, C.K., is here, and will host the conference call. Thank you for joining us today. In the beginning, I would like to introduce the senior managers who are with us on the line. Today we have Mr. C.K. Lee, CEO of Cathay Financial Holdings, Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holdings, Mr. Abel Lin, Managing Senior EVP of Cathay Life, Mr. Kevin Hu, Senior EVP of Cathay United Bank. For today's conference call, our CEO, C.K., will give us an opening comment, and after that, our Head of IR, Yajou, will provide full-year results for 2022.
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 C.K. first for the opening comment. C.K.?
Okay. Hello, everyone, and welcome to join us for the analyst meeting. After 2022 turbulent market, definitely it affect our portfolio pretty significantly. Especially after the Credit Suisse and UBS merge. Hopefully, this is the turnaround point to stabilize the capital market and can offer us a better foundation for the operation. Hopefully, we can generate better performance for all the investors this year. Now we kick off the meeting, please.
Thank you, C.K. Next is Yajou's presentation on the full year results.
Thank you, C.K. and Sophia. Let's start with the business overview on page three, which provides a quick highlight of each subsidiary. Cathay United Bank delivered double digit growth in deposit and loans. Asset quality remains benign. Benefiting from rate hike, net interest margin expanded and net interest income grew 26% year-on-year. Cathay Life's hedging cost improved nearly 1% year-on-year. Recurring yield increased 35 basis points. It also maintains solid capital position with RBC ratio of 316% and equity to asset ratio of 6.5%. Cathay Century, the general insurance subsidiary, premium income rose 8% year-on-year. 2022 net loss reflected the impact of pandemic insurance. If excluding such impact, Cathay Century maintained stable profits. Asset management subsidiary, Cathay SITE, AUM was TWD 1.2 trillion, ranked number one in the industry. Cathay Securities maintained its number one market share position in the brokerage business.
We would also like to share with you our progress in ESG. Please turn to page five. Please turn to page four. Cathay, once again, selected as a constituent in DJSI index and received best scores in various categories, including sustainable finance, financial inclusion, and climate strategy. Cathay received MSCI ESG AA ratings for three consecutive years and appeared to be the highest ranking in the CDP A list. We became the RE100 member in last April, the first financial institution in Taiwan. We also received SBTi approval for carbon reduction targets in last September. Please turn to page five, shows our progress in digital development. We developed the one-stop digital finance platform, connecting bank, life, P&C, and security services, and launched cross-sector products, converting deposits interest into accident insurance, also launching robo-investment linked policies.
Cathay Life's FitBack app is a key driver for health promotion, leverage big data analysis, insurance expertise, and technology innovation in interaction with policy holders. We also devoted to cloud readiness and continued digitalization in overseas subsidiaries. Next page six, shows our outlook for 2023. Cathay United Bank will expand wealth management business with well-rounded customer relationship management strategy, strengthen corporate banking business, enhance capital efficiency, and continue to enhance the customer digital experiences and expand overseas presence. Cathay Life will continue the protection first and elderly-friendly strategy and focus on protection type of products to prepare for adoption of IFRS 17 and ICS. For investment, Cathay Life will seek opportunities for quality stocks and bonds to enhance recurring income, continue our dynamic hedging strategies to maintain stable hedging costs. Please look at page seven, Cathay Financial Holdings net income, EPS and ROE.
Cathay Financial Holdings net income was TWD 38 billion. The year-on-year earnings decline is attributable to pandemic insurance losses and capital market volatility. Subsidiary, Cathay United Bank earnings reached TWD 25.6 billion, grew 8% year-on-year, driven by very strong growth in net interest income. The bank and Cathay's Asset management subsidiary both reached record high earnings. Please turn to page eight to see the book value of Cathay Financial Holdings. The consolidated book value of holding company was TWD 612 billion as of the end of 2022. The book value declined, reflecting the sharp rise in bond yields and a decline in equity markets. Book value per share was TWD 34.6. Page 10 and 11 show our overseas expansion. Cathay Financial Holdings continue to expand overseas business. The Ho Chi Minh City branch loans grew 30% year-on-year. Cambodia subsidiary just launched new mobile banking app in the beginning of March.
Cathay Life Vietnam total premium increased 26% year-on-year. As for the subsidiaries operating in China, Cathay United Bank China subsidiary launched green deposit in last September, as the first Taiwanese bank to do so in China. For Cathay Life's joint venture in China, the total premium grew 17% year-on-year. Please turn to page 13 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth with both mortgage and consumer loans showing double digit growth. The total loan balance increased 13% year-on-year to TWD 2 trillion since the end of 2022. Deposits grew 11% year-on-year to TWD 3.2 trillion , with demand deposit ratio maintained at high level of 68%. Interest yield is shown on page 14. Benefiting from the rising rates, the full year net interest margin increased 15 basis points to 1.36%, and interest rate rose 21 basis points to 1.93%.
Page 15 shows the asset quality. Cathay United Bank maintains low NPL ratio at 8 basis points, and coverage ratio at 2,150%. Cost provision was 5.7 billion TWD. Recovery was 1.3 billion TWD. Please turn to page 16 for SME and foreign currency loans. SME loan balance grew 13% to 304 billion TWD, accounted for 15% of the total loan. Foreign currency loan balance was 217 billion TWD, as we aim to grow foreign currency loan while ensuring asset quality. Page 17 shows offshore earnings. The offshore earnings was down due to lower year-on-year investment income. Please turn to page 18 for fee income. Fee income was slightly down to TWD 18 billion in 2022. The robust year-on-year growth of 14% in credit card fees offset a decline in wealth management fee. Page 19 shows the breakdown of wealth management fee.
Wealth management fee income was TWD 10.6 billion , declined 10% year-on-year, attributable to lower sales in mutual funds and investment-linked policies due to capital market volatility. However, strong sales of overseas fund products boosted security fees with nearly 50% growth year-on-year. Please move to page 21 and 22 for Cathay Life's premium performance. Total premium was TWD 480 billion in 2022. The decline was due to lower renewal premiums, reflecting the end of regular premium payment terms for some top-selling products, as well as the lower first-year premium resulting from higher base periods for investment-linked products in 2021. On page 22, our first-year premium, FYP, and the annualized premium, APE, was TWD 129 billion and TWD 42 billion respectively. Both declined year-on-year due to high base period for investment-linked policies in 2021 amidst strong capital markets.
We continue to focus on protection type of policies to accumulated contract service margin, where you can see health and accident showing double digit growth. Page 23 shows the value for new business. Value for new businesses for 2022 was TWD 26.6 billion. The decline was due to the same reason as we mentioned earlier, the high base period for sales value investment-linked policies in 2021. However, VNB margin increased, attributable to product mix change with higher proportion in high CSM protection type of products. Page 24 shows the cost of liability and break-even asset yield. The cost of liability increased slightly in the fourth quarter of 2022 due to two reasons. Number one, the declared rate increased for interest-sensitive policies. Number two, Taiwan dollar depreciation. Taiwan dollar strongly appreciated in fourth quarter, resulting in reduced proportion of U.S. dollar policies.
The cost of liability of U.S. dollar book is lower than that of the overall book. The break-even asset yield increased owing to the reduced denominator, total invested assets, and the market volatility with much market loss. If we exclude such impact, break-even asset yield continues to show improvement. Please look at page 25 for investment portfolio. Cathay Life total investments reached TWD 7.3 trillion as of the end of 2022. Overseas investments accounted around 70%. The cash position is back to 4% level. The bond international increased to 62% as of the end of 2022. We took the very high opportunities to increase the overseas fixed income position with higher yield and better credit rating, which is quite beneficial to our recurring income and earnings quality in the long run. Overall investment yields are shown on page 26.
After hedging investment yield declined from very high base in 2021 to 3.73% last year. Hedging cost improved substantially. After hedging investment yield remains benign despite market turmoil in 2022. On the right-hand side, the pre-hedging recurring yield increased 35 basis points to 3.37%. As the new money yield from overseas bond surged in 2022 with expanded position. Cash dividend income also increased year-on-year. Hedging cost improved nearly 1% year-on-year to 14 basis points owing to Taiwan dollar depreciation. The foreign currency reserve was close to TWD 50 billion as of the end of 2022, serving as buffer for FX fluctuation while enabling greater flexibility in hedging strategies. Please turn to page 27 for cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized cash dividend income of TWD 24.8 billion in 2022, much higher than in 2021.
On the right-hand side, the proportion of fixed income in North America increased to 50%. Page 28 shows the book value and unrealized gains of financial assets, both were down year-on-year, reflecting a sharp rise in bond yields and decline in equity markets. The equity to asset ratio was 6.5% as of the end of 2022. Next, please turn to page 32 to 33 for the performance of Cathay Century. Cathay Century's premium income grew 8% year-on-year to TWD 29.6 billion. Market share was 12.8%. Page 33, the gross combined ratio and retained combined ratio both increased due to the impact of pandemic insurance losses. The cumulative claim payment on retention basis for pandemic policies in 2022 and for the first two months of this year was TWD 18.6 billion and TWD 6.6 billion, respectively.
The loss reserve balance as of the end of last year was TWD 9.4 billion and TWD 2.7 billion as of the end of February. The claim payment for the first two months this year was offset by funds from the reserve, leaving monthly earnings unaffected. As of the end of February, the number of outstanding policies was 565,000. If we exclude the policies that have already made the claim, the number of policies was down to 255,000. Starting from March 20, COVID cases with mild or light symptoms are no longer considered as notifiable disease, and thus do not qualify for claim payment. The total claim payment for pandemic insurance is still subject to the claims in the coming months. Cathay Financial Holdings injected TWD 20 billion to Cathay Century in 2022. Cathay Century's RBC ratio was 368% as of the end of 2022.
This is the end of presentation. Now let's open to Q&A.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you wish to ask the question, please press star 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 two. Thank you. Please press star one to ask the question. Thank you. We'll have our first question, which is from Jemmy Huang of JPMorgan. Go ahead, please.
Thanks for the presentation and taking my questions. I have two questions for Cathay United Bank. First one is, if we look at the credit costs, it was up quite a bit year-on-year. Could we assume it's largely due to the loan growth, the general provision for the loan growth? If that is the case, then supposedly the lower loan growth target this year should mean the credit costs are likely to decline year-on-year. Is that correct? That's the first question. Second one is on OpEx. My understanding is part of the OpEx growth is due to credit card-related marketing expenses. If we exclude that, what would the OpEx growth year-on-year look like in 2022? Then, should we still expect relatively high expenses related to the credit card businesses in this year? Thanks.
This is Kevin from CUB. The first question is related to the credit cost. I would say, usually, the Cathay United Bank plays a very cautious role when we calculating those reserves. Given the uncertainty of the overall economic environment, we take a very, I would say, conservative way to put the numbers here. That's why you see the cost ratio is jumping from 15 in 2021 to 23 basis points in 2022. That's question number one. Question number two is, you're asking about operating expenses excluding the credit card cost. I don't have the number on hand, but I can give you that after the call. Okay. What's the third question? Sorry for that.
Jemmy was also asking our expectation for the cost income ratio.
I would say-
About 2023 vs 2022, with a kind of rough estimation?
I would say, if you look at the past trend, the cost to income ratio is always around 51%-53%, that kind of range. Last year is a special year. The ratio dropped down to 50.5%. Our strategy is continue to invest in people, continue to invest in technology platform and digital platform. Our expectation for this year, 2023, the ratio will go back to 51%-53%, that kind of level.
Jemmy, has that answered your question?
Just a follow-up question on credit cost. I think you say you take a relatively prudent approach when you assess the ACL, actually the asset quality looks pretty fine. In that case, should we expect if the credit costs are not going to decline year-on-year, that means your NPL coverage ratio will continue to go up. Is that the case? Thanks.
Jemmy, to be more specific, as we have loan growth last year at 13%.
13%.
I think super majority of the provision reflects that loan growth is still mainly on general provisions. As you say, we've been saying for quite a long time, nothing competes with asset quality. Yes, super majority is for the general provision for loan growth.
I see. Thank you.
We'll still exercise caution as we do see the overall opening on the border and the economy consumer, both in Southeast Asia and China. Still, we need to see a better lending environment for us to accelerate the loan. We can see the foreign currency loan get stabilized. I think this year, maybe on the loan growth side for foreign currency, will be more back-end loaded.
Got it. Thank you.
Yeah, that will be positive because the foreign currency loan is spread better than Taiwan dollar loan. Today, our loan deposit ratio for foreign currency, US dollar and the others, average loan deposit ratio for the foreign currency is only below 30%. We do have lending capacity, but we do exercise caution on asset quality. Nothing competes with that.
Yeah. Thank you.
Thank you.
Thank you.
If you would like to ask the question, please press star one on your telephone keypad. Thank you. Next we'll have Michael Zhang of Citi for questions. Go ahead, please.
If I exclude the reclassification benefits from this, the mark-to-market losses within the other equity reserve is still about TWD 400 billion as of last year. Just want to first of all confirm on this number, and then second of all, just want to see if management can provide any color on how much market-to-market losses have you seen that they have recovered year to date if we exclude the reclassification benefit? Just want to have a sense of your dividend capacity going forward. Thank you.
Michael, sorry, I couldn't catch it very well because you speak very fast. You are asking about the reclassification, and what's after that? What do you want to know? Can you repeat, please?
Yeah. Sorry. Maybe I speak too fast.
No. It's okay.
Yeah. I looked at the fourth quarter report, if I exclude the reclassification benefit, the mark-to-market losses within the other equity reserve is still around a bit higher than TWD 400 billion. That gives you a gap of around TWD 200 billion between your undistributed earnings and the other equity reserve. Just want to understand, I think the stock market has recovered a bit in the first two months. Just wanted to understand how much of this mark-to-market losses have you seen that has been recovered year-to-date, if we exclude the reclassification benefit, so that we can get a sense of your dividend distribution capacity going forward? Thank you.
Okay. Thank you. Let me confirm. You like to know from the unrealized losses, the impact when we need to compensate from the retained earnings, therefore, how will the potential dividend payout capability will become? Is that your question?
Yes. That's my question.
Maybe for the first two months, the first part for the negative value of the other equity already rebound TWD 37 billion. The second part for extra surplus appropriation for the AC reclassification, now it's TWD 40 billion of rebound already. If the capital market is back to normal, we think our dividend distribution momentum will come back to normal very soon.
I'd like to highlight that because we do have the caution on the overall market last year. On the other hand, we also do care about investors' expectation that they will look for some dividend payout. This will be a fine balance between our capital position, the need to pay investor as you wish, and in the meantime, balance the payout ratio and dividend growth. In late April, the board meeting will discuss the dividend payout. Hopefully, we can have more clear guidance, final confirmation for the cash payout. At current level, we do plan to submit proposal for cash dividend payout. The dividend yields will not be zero.
Thank you.
Thank you. We are now in question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Thank you.
Okay. Maybe I can take this opportunity to summarize some of the key highlights from the Chinese section of the analyst meeting. First of all, on Cathay United Bank, after last year, very strong growth in both deposit and loan, especially with very strong retail banking. Cathay United Bank continue to enjoy very strong deposit inflow. After 13% year-on-year growth, 2023, we are looking for high- single digit loan growth as a potential. The net interest margin end of last year already has showed very good improvement. We should be quite positive for net interest income for 2023. The fee income, the wealth management, we are still observing how the market is moving, where credit card fee has already stabilized. We work very hard to work on the CUBE Card. We are seeing some positive momentum.
This will be very important focus for 2023, so we can smooth out the potential impact from the drop of Costco cards. Lastly, on the cost income ratio, as Kevin had just highlighted, it will be 51%-53% for cost income ratio. In the meantime, the asset quality remains quite solid. Overall, the outlook for Cathay United Bank should be quite positive. For Cathay Life, the revenue story, Abel mentioned in the Chinese section that we are looking for VNB to have some positive improvement. They will be pretty good. We hope in May, when we announce the updated invested value for end of 2022, we can have more detailed projection to share with investors. They will be in the analyst meeting in May. We look forward for more stabilized equity market and overall financial market situation.
The market value for our asset and equity volatility that can over time can start to have a potential turning that we can make it more stabilized. Lastly, on Cathay Century, the P&C insurance, we are moving toward the end. The final part of these potential insurance claim, and as the government has already lowered the criteria, the benchmark for the pandemic policy. On March 10th onwards, the potential additional claim risk is dramatically reduced. We are at the final part for settle down all the claims. We hope the negative impact from last year can pass away, and we can move forward future positive trend. This is a key summary from the Chinese section.
Can you check whether we have more questions online?
Yes, of course. Thank you, Ms. Cheng.
Okay.
Ladies and gentlemen, 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.
If no further question, I would ask our CEO, C.K., to give some final comments. That would be good, too.
Well, thank you so much again for joining the analyst meeting. If you have any further question, please contact our team. We will be very happy to offer you more detailed information about your question. Thanks again.
Thank you.
Thank you.
Thank you. Ladies and gentlemen, we thank you for your participation in Cathay Financial Holdings Company's conference call. You may now disconnect. Goodbye.