Welcome everyone to Cathay Financial Holding Company's fourth quarter 2021 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 the question. Now, I would like to introduce Ms. Sophia Cheng, the CIO of Cathay Financial Holding Company. Ms. Cheng, please begin.
Thank you. Good afternoon and good morning to our friends in Europe. Welcome to Cathay Financial Holding 2021 first quarter analyst meeting. I'm Sophia Cheng, the Chief Investment Officer for Cathay Financial Holding. Today, I will host the conference call. Thank you very much 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. Daniel Teng, Senior EVP of Cathay Financial Holding, and also Senior VP of Cathay United Bank. Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holding, Mr. Abel Lin, Managing Senior EVP for Cathay Life. For today's conference call, Charlie Hu from our IR team will present the fourth quarter results. 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 Charlie for the briefing of the results. Thank you.
Thank you. Over to page three, which provides a quick highlight on Cathay Financial Holding. Cathay Financial Holding net profit reached TWD 141 billion, setting a new record for the third consecutive years. Most subsidiaries also deliver record earnings. Cathay Financial Holding has leading position in ESG and responsible investment and lending. Cathay is quite honored to be ranked number one globally in DJSI categories of sustainable finance and financial inclusion, as well as number one in overall score among Taiwan insurers. Cathay once again received MSCI ESG AA rating in the life and health insurance category. Cathay has been selected by The Investor Agenda for its global top 10 best practice case studies in areas of corporate engagement and policy advocacy. Lastly, Cathay has committed to utilizing 100% renewable energy by 2030 for all business operation sites in Taiwan and targeted to achieve net zero emission by 2050.
Cathay also urged investee companies and corporate borrowers to transition to low-carbon operations. We would also like to share with you our digital development. The group launched the Cathay- as- a- Service, CaaS Ecosystem platform, to offer cross-industry partner API packages and one-stop user experience. Cathay Life launched the Cathay Vision Experience, CVX, Taiwan's first remote insurance application platform. Cathay United Bank's CUBE card integrates credit card benefits from different partners and allow cardholders to select benefits on the mobile banking app, aiming to increase customer stickiness. Cathay Financial Holding foster digital transformation in Vietnam and Cambodia, offering entire agent apps and retail digital products to accelerate business development and enhance customer experience. Please turn to page four, the 2021 business overview of each subsidiary. Cathay United Bank deliver robust growth in deposit and loan. Asset quality remain benign.
Net interest margin rebounded, net interest income grew 9% year-over-year. Cathay Life continue the value-driven strategy. Protection type first-year premium grew 15% year-over-year. Asset under management for investment link products increased to over TWD 700 billion, ranking number one in the industry. Deliver some investment performance with after-hedging investment yield of 4.9%. Cathay Life maintain solid capital position. RBC ratio and equity asset ratio reached 371% and 10.5% respectively. Cathay Century, the general insurance subsidiary, premium income grew 10% year-over-year with market share of 12%, ranked second in the industry. Asset management subsidiary, Cathay SITE AUM reached TWD 1.3 trillion, ranked number one in the industry. Lastly, Cathay Securities, number of customers and earnings both hit new record in 2021. Next page five, shows Cathay Financial Holding outlook for 2022.
Cathay United Bank will continue to grow loans steadily with benign asset quality, develop diversified products, and utilize digital platform to increase wealth management fee. Regarding overseas operation, Cathay United Bank will continue to expand and deepen overseas presence to increase offshore earnings. Cathay Life will employ the protection first and elderly-friendly strategy and focus on protection-type products to prepare for IFRS 17 and ICS adoption. On the investment side, Cathay Life will seek opportunities for quality stock and bonds to enhance returning income. Meanwhile, Cathay Life will continue dynamic hedging strategy to maintain stable hedging costs. Cathay Century will grow business emphasizing on quality and quantity and implement risk control and compliance. In terms of overseas operations, Cathay Century will expand online business in China, strengthen digital capability in Vietnam, and further develop opportunities for cross-industry operations.
Cathay SITE will continue to focus on new product development and innovation in fintech application and services, integrate global asset management resources, and expand distribution channels. Cathay Securities will continue to utilize digital technology to increase customer base and enhance user experience. Please look at page six, Cathay Financial Holding net income, EPS, and ROE. Cathay Financial Holding net income reached TWD 141 billion in 2021, grew 85% year-over-year, driven by strong investment performance. EPS was TWD 10.34. Cathay Life delivered strong investment performance, with net income once again reaching new records. Cathay United Bank, Cathay Life, Cathay Securities also delivered record high earnings. On a consolidated basis, the holding company ROE was 15.5% in 2021. Please turn to page seven to see the book value of Cathay Financial Holding. The consolidated book value of holding company was TWD 914 billion.
Book value per share was TWD 61.5. Page nine and 10 shows our overseas expansion. Cathay Financial Holding continue to expand overseas business by deepening overseas presence. Cathay Life Vietnam's total premium increased 38% year-on-year. P&C business also grew steadily. As for the subsidiaries operation in China, Cathay United Bank China issue first batch of interbank certificate of deposit in November 2021 to add funding sources and increase market activity. For Cathay Life's joint venture in China, the total premium grew 14% year-on-year. Please turn to page 12 for more detail about the banking subsidiaries. Cathay United Bank delivered robust loan growth across consumer loans, mortgage, and corporate loans. The total loan balance increased 9% year-on-year to TWD 1.8 trillion as of the end of 2021. Deposit grew 11% year-on-year to TWD 2.9 trillion.
The demand deposit ratio increased to 74%. Interest yield is shown on page 13. Both net interest margin and net interest spread rebounded, mainly driven by loan mix optimization and lower funding costs. The net interest margin was 1.21%. The interest spread was increased to 1.72%. Page 14 shows the asset quality of Cathay United Bank. Due to the prudent lending policy, Cathay United Bank maintained low NPL ratio at 9 basis points, and the coverage ratio at 1,778%. Gross provision was TWD 4.5 billion. Recovery was TWD 1.9 billion. Please turn to page 15 for SME and foreign currency loans. Cathay United Bank focused on developing SME and foreign currency loans with benign asset quality. SME loan balance reached TWD 170 billion, increased 18% year-on-year. Foreign currency loan balance was TWD 218 billion.
The slowdown in foreign currency loan was due to the pandemic. Page 16 shows offshore earnings. The offshore earning was TWD 9.1 billion. The decline was resulted from the higher base of investment gain in 2020. Offshore earning accounted for 34% of the bank pre-tax earning in 2021. Please turn to page 17 for net fee income. Net fee income grew 12% to TWD 18.2 billion in 2021, driven by double digit growth of wealth management fee. Page 18 shows the breakdown of wealth management fee income. Wealth management fee income increased to TWD 11.8 billion, in which mutual fund fee grew by 30% year-on-year. The strong demand for investment-linked products contributed to the 19% year-on-year growth of bancassurance fee. Please move to page 20 and 21 for Cathay Life's premium performance.
Total premium was TWD 646 billion in 2021, declined 3% year-on-year, mainly due to lower renewal premiums resulting from the end of regular premium payment terms for certain top-selling products. On page 21, first-year premium reached TWD 202 billion, up 26% year-on-year, driven by substantial growth in investment-linked products. Protection type policy FYP grew 15% year-on-year, supporting the contractual service margin. The annualized premium, APE, declined, reflecting the dominance of single-pay investment-linked policies in FYP. Page 22 shows the value for new business. Based on the 2020 embedded value assumption, value of new business for 2021 was TWD 29 billion. The decline was due to the lower sales volume in the mid-2021 amid local pandemic outbreak. Sales volume rebounded in the fourth quarter of 2021 as the local epidemic eased. Cathay Life continued to grow the high CSM protection products first-year premium.
VNB margin increased to 48%, excluding the single-pay investment-linked products. Page 23 shows the cost of liability and break-even asset yield. The reserve-based liability cost was 3.77% as of the end of 2021, improving 6 basis points year- on- year. The break-even asset yield was 3.08%. Please look at page 24 for the investment portfolio. Cathay Life's total investment reached TWD 7.3 trillion as of the end of 2021. Overseas investment accounted for 66%. The investment return of each asset class are as follows: cash and cash equivalents, 4.2%; domestic equity, 20.9%; international equity, 8.8%; 11.6% pre-hedge. Domestic bond, 1.7%. International bond, 5.3% pre-hedge. Mortgage and secure loans, 1.4%. Policy loans, 5.4%. Real estate, 2.4%. Overall investment yield are shown on page 25. After hedging investment yield was 4.92%. Cathay Life captured market opportunities to realize gains in capital markets, boosting after-hedging investment yield. Pre-hedging recurring yield was 3.02%.
The decline was driven by lower new money yield amid lower global interest rates in 2020. Looking forward, we expect recurring income may increase with higher new money yield amid rate high cycle. The hedging cost was 1.1%, improved more than 60 basis points year- on- year, given lower cost of traditional hedging tools and dynamic foreign exchange risk management. Please look at page 26 for the cash dividend income and regional breakdown of overseas fixed income. Cathay Life's cash dividend income increased year- on- year to TWD 20 billion in 2021. For overseas fixed income investment, Cathay Life allocated 47% in North America, 19% in Europe, and the rest are in Asia Pacific and other countries. Page 27 shows the book value and unrealized gain of financial assets. The consolidated book value hit new yearly record, reaching TWD 742 billion. Unrealized gain was TWD 102 billion.
The decline reflected the rebound of U.S. bond yield. Next, please turn to page 31 to 32 for the performance of Cathay Century. Cathay Century's premium income grew 10% to TWD 28 billion. Market share was 12%. Page 32, gross combined ratio increased due to relatively large claim events from commercial fire insurance. Net combined ratio improved through adequate reinsurance arrangements. This is the end of presentation. 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 zero 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 zero two. Our first question is coming from Jemmy Huang of JPMorgan. Go ahead, please.
Yeah. Hi. Thanks for the presentation. Just two questions from me. First one is on your Life investment. Let's say, assume if the market yields stay at current levels, is there any target for you to bring up your foreign fixed income investment to any certain levels that can further optimize the recurring yields? Given the dynamics that we have been seeing over the past, let's say, one to two years, in terms of the global market volatility, et c. For the new investments, were you trying to reduce your exposure to the emerging market exposure and then shifting more to U.S. and Europe markets? That's the first one. The second question is, in terms of your banking outlook guidance in the Chinese session, I didn't recall you provide any guidance on the income, or maintenance fee growth target. Is there any color you can share with us? Thanks.
Hi, Jemmy. About the specific label of the interest rate, I think the first one, because right now, the 30-year corporate, I think the investment grade corporate at this moment is about 4.3%. It's quite high. It's much above our internal target at this moment. I think we still have a choice to maybe investment more on the single kind of categories. We don't have a specific rule that we can apply more than you need to judgment. I think that all our investment team will make a better choice, consider all the factors. See, this is the first one. I didn't have any specific rules so I can tell you, but it's more dynamic, more judgment. It will be left to our investment team to make this decision.
Secondly, I think because right now interest rate as investment yield, especially in U.S. market, at this moment it's high. I didn't know it can be sustainable. I think the emerging market, we still have this demand, that investment in emerging market. Whether we will decrease the emerging market to put it in more in U.S. fixed income market, I think maybe it will be a choice. For example, at this moment, maybe. It still needs to see the market condition to determine. Maybe it's not significant.
Also, if you look at our slide, page 37, in terms of our direct investment on bonds overseas, we have 94% in U.S. dollar, where we have 99% in investment grade. Over the past years, we have been reducing the exposure to non-investment grade. Of course, if there's the market volatility triggering credit spread to a mispricing level, the team will have dynamic review on that. Sorry, it's on slide page 35. On the slide. Currently, end of last year, the non-investment grade is only 1%. It really depends on the market situation. Daniel, would you like to share the key highlights of 2022, key elements of our business?
Hi, Jemmy. We expect the net fee income will grow by 10- point something percent this year.
Got it. Supposedly, wealth management fee should grow stronger than the total fee income?
What? Sorry. Please say again.
I mean, supposedly the wealth management fee growth should be higher than the total fee income growth. Is that the case?
Sure. The major growth will be come from by wealth management business, maybe by mid double digit percent.
Got it. Thank you.
Thank you. Next question is coming from Steven Lam of Bloomberg Intelligence. Go ahead, please.
Hi. Thank you, management. Just want to piggyback on Jemmy's point on the investment allocation. I just want to clarify. There will be a shift towards more U.S. bonds and probably less in maybe Europe or even emerging markets. Is that the case? The second part of that question in terms of investment allocation, I'm hoping to hear your view in terms of the dollar and the wild swings in the bond yields in the U.S. Treasury in recent days. Do you feel there's some risk in terms of the dollar status in the medium to long term because of the inflation or geopolitical risk perspective? Second question is on Life insurance. I think I recall that we were kind of optimistic in terms of new business value growth this year. I just want to double-check that is the case.
I'm not sure if there was a guidance in terms of a figure that you can share with us. If there's one, that'd be great. Interested to double-check the driver of the new business value growth. Is it a good mix of sales volume plus margin expansion, or it's leaning more towards sales volume? Second part on the life question is that there's a lot of volatility in the market for sure. How has that impacted your sales of investment linked policy in recent weeks, and perhaps maybe an outlook for second quarter, for example? Lastly, on bank, just want to double-check. We have a target of, let's say, 10% growth in loan growth, and you were saying the majority of that will come from, for example, for foreign loans and personal loans. Is that the case? Thank you.
To sum up about the Life business, I think the first one, we didn't have any guidance on FYP. This guidance, it will depend on market condition, especially like the unit- linked product. It almost depends on the market condition. This is first one. Second one, I think that right now we are more focused on value. In our slide, I think it was very clear. Right now it's protection first. We need to provide more protection type product to our policy holders. For us, right now, we are more focused on this kind of product and more focused on contract service margin for the international IFRS 17 for the adoption purpose. This is the second one. The other, I think that we didn't have any specific items.
Just to add some point to that. When you look at slide page 21, you can see we had a quite decent first year premium growth. If you look into the details, a big volume of that is supported by investment in policies, which when you look to the right-hand side, you can see if you analyze that, the contribution will be smaller. As Abel highlighted in the Chinese section earlier today, we want to emphasize to you that our new business comes from traditional life protection, which is where the contract service margin is. It's growing despite very low rate and also the pandemic affecting business operation. You can see last year, both on premium or on analyzed premium, it's the same. The traditional life protection policies has shown very strong growth. This is very positive for contract service margin.
Sometime in this year, we will hope to start to provide you both VNB and CSM, it will be easier for analysts to start to build a track record forward, because we spent a couple years very focused on how to transit into IFRS 17 mode, which includes asset liability matching, longer term looking for recurring yields. Very focused on traditional life protection policies and also asset liability management capability. We are quite ready for that. After years of accumulating very strong profits, our shareholder equity has accumulated to a level which offer a lot higher buffer. I can add some point to that. Abel, I think you also asked about the investment link policy, whether they have been affected by recent market volatility. Do we have any comment for that?
Yeah. I think that, as I said, investment link policies, the sales value always depend on market condition. Of course, at this moment, the volatility is much more and maybe the stock market going down, interest going high, the bond market going down. Of course it will affect our investment link policy.
Overall, if the rate is strengthening, we can have better asset yields on the new money. For example, earlier in Abel's explanation, recently we can have A- rating companies 30- year have yields more than 4%. We say if your declare rate is more favorable, they will also be positive for selling traditional life. If you look at a lot bigger investment link, they will also means lower margin, where if you can really push more into traditional life, your margin will be higher. I think looking at total contract service margin is our goal. I hope we have answered your question on life part. For the bank, in terms of the key driver for the 10% loan growth, I will pass to Daniel.
Yes, you're right. We target the total loan growth at around 10% this year. The major growth momentum is from two items. First is the FX loan. At the base of our 2021, it's relatively low, so we hope we can achieve 17% growth this year. The second part is personal loan, because of the higher margin and the risk has been controlled very well for years. We hope it can achieve 20% growth this year. That's for the loan growth.
May I just ask quickly, with that expansion, is that combination going to help your NIM as well, without the Fed rate hike and so on and so forth?
We hope. This quarter we will also increase some of the government, or maybe the proxy of government or related loan, which has a very low net interest margin.
Overall, yes, a rising rate will be positive for yields on interest earning assets. At the meantime, to a later stage, your funding cost may also come up a little bit. Obviously, if we lend to foreign currency loans and SME loans, it will be favorable to the overall net interest margin. On net basis, we think at this current interest margin should be able to be sustained, where we have quite strong loan growth, quite strong fee income growth. That combined will be a very good positive support to the bank earnings for 2022.
Okay. That's great. Thank you. I just want to double-check. Did I hear your response on your investment allocation strategy, say U.S. vs Europe and Asia? Thank you.
Currently, we do not expect significant change in our asset allocation at all. We do think with better rate hikes and also stronger U.S. dollar bond yields, we will be taking the opportunity if we can lengthen asset duration and also improve the recurring yield. We will try our best to do that. We also see the rising rate with U.S. rate hike. Structurally and historically, you can see under such situation, the basket hedge and overall hedging cost net-net could be quite positive. Year- to- date, our hedging cost performance, we see further improvement. Therefore, in the afternoon section, Abel has mentioned that if we look at net basis and after hedging recurring yield, we will continue to see improvement.
Last year, we have after hedging, recurring yield at about 2.3%, which is better than 2.1% in 2020, where in 2022, if the expectation for further improvement in foreign currency hedging, if we can see that, then we are expecting after hedging recurring yield to reach above 2.4%. Net arising rate should be quite positive for both recurring and also for the hedging cost at current moment.
Okay. That's great. Thank you.
Thank you.
Thank you. If you would like to ask the question, please press zero one on your telephone keypad. Thank you. Next we'll have Matthew Macron of UBP for questions. Go ahead, please.
Hello, good afternoon. Thank you for the presentation. I had one question about your science-based targets. I believe you are committed to the initiative, as appears on the SBTi website. Could you give us a more precise idea of the timeline in terms of revealing how aligned you are with the long-term objectives of the Paris Agreement?
This is a very great question. I need to apologize, I don't have the detailed document on SBTi in my hand. I can share with you some of the key targets, if that's okay. We do commit to 2050 net zero target. We commit to 2030, 100% renewable energy by 2030 in all our Taiwan operations. If we incorporate all overseas altogether, we also look for 2050, 100% renewable energy. We have formally applied RE100 already, looking for positive news. We're very looking forward to that. At the meantime, by starting 2019, the bank has stopped lending any new coal-fired power plants in loans, where Cathay Life, if a coal-fired power plant company do not have an aggressive transition plan, we will stop new investments and look into divest.
Overall, moving to a low carbon transition, Cathay is a very clear leader in Taiwan, and we are quite well-recognized with our efforts globally. For SBTi, in all the methodology, you need to separate the methodology, the toolkit applied to your loan, real estate, and some asset category that you have existing toolkit, some you need to base on their theory, including ICAP. This is a bit technical. If you can email our IR, which is ir@cathayholdings.com.tw, we will give you a detailed explanation on that. Overall, if you want to do SBTi, roughly you need to have your greenhouse gas reduction by, I think it's more than 25% or 30%, which I need to confirm. We need to fulfill the SBTi criteria, their minimum requirement in order to apply. We have already submitted document.
Okay, thank you.
Yeah, sure. I think we will be uploading the more detailed English version slide tomorrow. Tomorrow we will upload a NDR version of the English presentation material, and you are more than welcome to look starting from page 40 to the following pages. We have put a few highlights on our efforts in our ESG integration, responsible investment, and also our very leading climate actions in a lot of global initiative. I hope they will be useful information to you.
Okay, thank you. Ladies and gentlemen, we are now in question and answer session. If you would like to ask the question, please press zero one on your telephone keypad. Thank you.
If there is no question, let me just quickly summarize some of the key highlights, because in the 2:00 P.M. section, there were so many questions asked. I thought it will be good to also summarize some of the points for you. First, on Cathay Life, we continue to look for value-driven policies, and on page 23, on the break even asset yield page, you can see the cost of liability end of last year reached 3.77%. Cathay Life continue to look for the improvement of the cost of liability between five to 10 basis points. Far as current interest rate is higher, we are able to lock into asset as much better yield.
We are expecting, for the same reason, our liability, the offering rate could be slightly higher, on net basis, we still look for cost of liability to improve by five to 10 basis points, but likely to be more towards 5 basis point range. On the other hand, because of the old legacy book continue to reduce its significance in the portfolio. Overall, as long as the new business guarantee rate is lower than the current blended portfolio mix because of liability reduction should be continued, that should not be a problem. We also look for net after hedging recurring yield to improve. As I mentioned, higher on the better asset yield and also lower hedging cost. The interest rate increase is quite positive.
If you look at from IFRS 17 point of view, our internal simulation, if you look at the match maturity for asset and liability, it's actually value accretive based on for this rate hike, despite it's positive for recurring yield, but despite it will be a dampener short-term on the unrealized gain areas. For bank, we are looking for growth in foreign currency loans and in SME loans and personal loans, combined with net fee to grow at around 10% that Daniel has just mentioned. Overall, the bank should continue to enjoy some earnings growth for 2022. Lastly, there were quite a lot of questions asking about our dividend payout. Our CFO, Grace, has summarized that we do consider investors' emphasis on having a decent dividend yield and also care about the per share. We still keep the same policy over the past years.
When we decide a dividend payout, we will consider a balance of dividend payout ratio, per share, and dividend yield. In the meantime, we will also benchmark our peers in the market to decide a proper dividend that will make our long-term shareholder feel secure and also will continue to enjoy being our shareholder. However, this will all be subject to the management team proposing to the Board meeting, and they will need Board approval. Jason, do we have more questions from the audience?
Sure. There appears to be no further questions at this point. Ms. Cheng, can we close the conference call now?
Okay. I think because in the earlier session, there were so many questions asked already, and I'm very happy to see that over the past year, we have built up more and more capital buffers that make us much better prepared for IFRS 17. We are also very happy to see that investors better understand the whole structure and appreciate Cathay's value-driven business model. We do have some time this year, we can have more information for you to start to have parallel information both on VNB and CSM. Moving forward, it will be easier for analysts. Thank you so much for your participation in Cathay Financial Holding conference call today, and we will conclude here. If you have further questions, please feel free to contact Yajou and the IR team. Thank you and goodbye.
Thank you, Ms. Cheng. Now, ladies and gentlemen, we thank you very much for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye.