Welcome everyone to Cathay Financial Holding Company's T hird 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 investors in Europe. Welcome to Cathay Financial Holding's 2021 third quarter analyst meeting. I am Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding. Today, I will host the conference call. Thank you so much for joining us today. In the beginning, I would like to introduce the senior managers who are with us on the line today. Today we have Mr. Daniel Teng, Senior EVP of Cathay Financial Holding, Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holding, Mr. Abel Lin, Managing Senior EVP of Cathay Life, Ms. Joyce Tsai, Senior EVP of Cathay United Bank, Ms. Grace Han, EVP of Cathay Life.
For today's conference call, Shane Sun from our IR team will present the third quarter results. After the presentation, we'll open for a 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 Shane for the briefing of third quarter results. Shane, thank you.
Thank you, Sophia. Let's start with the business overview on page four, which provides a quick highlight on each subsidiary. Cathay United Bank. Its interest income grew solidly year-on-year with double digit loan growth and higher demand deposit ratio. Fee income show year-on-year growth, driven by strong wealth management fee income. Cathay Life continue the value-driven strategy. Protection type First Year Premium grew 12% year-on-year. Assets under management of investment-linked products increased to near TWD 700 billion, ranking number one in the industry. Also delivered strong investment performance with after hedging investment yield of 5.2%. Net profit continued to set new records, marking a milestone as the first Taiwan life insurance with year-to-date net profit over TWD 100 billion. Cathay Century, the general insurance subsidiary.
Premium income grew 10% year-on-year, with market share 12%, ranked second in the industry. Asset management subsidiary, Cathay SITE AUM ranked number one in the industry. First nine months net profit and EPS both set new records. Lastly, Cathay Securities earnings and number of customers, each hit new records for the first nine-month period. Please look at page five, Cathay Financial Holding net income and EPS. Cathay Financial Holding net income for the first nine months reached TWD 122 billion, grew 90% year-on-year, driven by strong investment performance, and EPS was TWD 8.98. Page six shows the subsidiary's net income and ROE. Cathay Life shows strong investment income with net profit over TWD 100 billion. Net profit of Cathay SITE and Cathay Securities surpassed respective 2024 year earnings. The subsidiary's strong earnings performance was attributable to economic recovery and financial market rally.
Cathay United Bank's net income declined due to higher year-on-year base of investment gain last year. Its core business remained solid, with net interest income and fee income each showing growth. On a consolidated basis, the holding company's ROE was 18.4% for first nine months of 2021. Please turn to page seven to see the book value of Cathay Financial Holding. The consolidated book value of holding company was TWD 870 billion as of the end of the third quarter. Book value per share was TWD 58.2. Page nine and 10 show our overseas expansion. Cathay Financial Holding continue to expand overseas business by deepening overseas presence. Cathay Life's Vietnam total premium increased 43% year-on-year. As for the subsidiary operation in China, Cathay United Bank China issued the first batch of large-scale certificates of deposit in September to expand and enhance its local business.
For Cathay Life's joint venture in China, the total premium grew 13% year-on-year. Please turn to page 12 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth across consumer loans, mortgage, and corporate loans. The total loan balance increased 12% year-on-year to TWD 1.8 trillion as of the end of the third quarter 2021. Deposit grew 13% year-on-year to TWD 2.8 trillion. The demand deposit ratio increased to 73%. Interest yield is shown on page 13. The net interest margin stabilized in 2021. The net interest margin was 1.2% for the first nine months of 2021. The interest rate of first nine months came down to 1.7% due to lower benchmark rate of foreign currency loans in the third quarter. Page 14 shows the asset quality of Cathay United Bank.
Due to the prudent lending policy, Cathay United Bank maintain low NPL ratio at 18 basis points, and coverage ratio over 900%. Gross provision was TWD 3.5 billion. Recovery was TWD 1.2 billion. Now please turn to page 15 for SME and foreign currency loans. Cathay United Bank focus on developing SME and their foreign currency loan with benign asset quality. SME loan balance reached TWD 260 billion, increased 14% year-to-date. Foreign currency loan balance was TWD 222 billion, slowing down due to overseas pandemic uncertainty. Page 16 shows offshore earnings. The offshore earnings was TWD 7.1 billion. The decline was mainly due to the high base of investment gains last year. Offshore earnings accounted for 33% of the bank's pre-tax earning for the first nine months of 2021. Please turn to page 17 for the fee income.
Fee income grew 14% to TWD 17.6 billion in the first nine months of 2021, driven by continued wealth management fee growth. Page 18 shows the breakdown of wealth management fee. Wealth management fee income increased to TWD 9.5 billion, in which mutual fund fee income grew over 30% year-on-year. Strong demand from investment-linked products contributed to the bancassurance fee, its growth of 15% year-on-year. Please move to page 20 and 21 for Cathay Life's premium performance. Total premium was TWD 472 billion in the first nine months of 2021. The decline was due to lower renewal premium, reflecting the end of regular premium payment terms for certain type selling products. On page 21, first year premium, FYP, reached TWD 156 billion, up 27% year-on-year, which was driven by substantial growth in investment-linked products.
Traditional type policy FYP grew 12% year-on-year, supporting the contractual service margin. The annualized premium, APE, declined, reflecting the dominance of single-payment investment-linked products in FYP. Page 22 shows the value for new business. Based on the 2020 embedded value assumption, value of new business for the first nine months was TWD 21 billion. The decline was due to high base in the first quarter of 2020, driven by the deferred premium income from stop selling effect in the end of 2019 and lower sales volume in mid-2021 amidst local pandemic outbreak in Taiwan. Cathay Life continued to grow the high CSM protection first year premium. VNB margin increased to 48%, if excluding the FYP from single-pay investment-linked products. Page 23 shows the cost of liability and break-even asset yield.
The reserve-based liability cost was 3.78% as of the end of the third quarter of 2021, improving 8 basis points year-on-year. The break-even asset yield was 3.07%. Please look at page 24 for the investment portfolio of Cathay Life. Cathay Life's total investment reached TWD 7.1 trillion as of the end of the first nine months of 2021. Overseas investment accounted for 66%. The investment return of each asset class are as follows: cash and cash equivalents, 0.2%; domestic equity, 24.5%; international equity, 12.7% pre-hedge; domestic bonds, 1.4%; international bonds, 5.6% pre-hedge; mortgage and secured loans, 1.4%; policy loans, 5.4%; real estate, 2.5%. Overall investment yield are shown on page 25 and 26. After-hedging investment yield was 5.23%. Cathay Life captured the market opportunities to realize gains in capital markets, boosting the after-hedging investment yield. On page 26, the pre-hedging recurring yield was 3.06%.
The decline was mainly due to the impact on the new money yield amid lower global interest rates in 2020. The new money yield in the first nine months of 2021 already increased year-on-year, supporting the pre-hedging investment yield enhancement. The hedging cost of the first nine months of 2021 was 1.26%, much lower than the same period of last year, given the lower cost of traditional hedging tools and dynamic foreign exchange rate management of Cathay Life. Please look at page 27 for the cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized dividend income of TWD 18.2 billion in the first nine months of 2021, already surpassing 2020 full-year dividend income. For overseas fixed income investment, Cathay Life allocated 46% in North America, 19% in Europe, and the rest are in Asia Pacific and other countries.
Page 28 shows the book value and unrealized gain of financial assets. The consolidated book value was TWD 704 billion. Unrealized gain was TWD 80 billion. Book value was supported by strong realized gains, but was partially offset by lower unrealized gains from fixed income, which is reflecting the U.S. bond rebound yield to date. Next, please turn to page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 10% to TWD 20 billion. The market share was 12%. Page 34. Gross combined ratio increased due to relatively large claim events from commercial fire insurance. Retained combined ratio improved through adequate insurance arrangements. This is the end of the 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 a 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. Thank you. The first question is coming from Steven Lam of Bloomberg Intelligence. Go ahead, please.
Hello. Hi, can you hear me?
Yes.
Yes. Hi, management. Thanks for the presentation. I would like to ask a few things. First, we're going to kick off with on the Life side. Could you give us a sense of your VNB outlook in 2022? Looking at the figures, even with the, you made some revisions for 2020, there's some base effect changes, but overall, it's still down in the first nine months. I think there's some stronger FYP expansion in October. I was just curious, is it still investment-linked products that will drive the volume growth over the next few months? What is the sort of the margin outlook for the VNB? The second question on bank. Would like to hear your thoughts on your outlook for loan growth. Notice that there's some quarter-on- quarter slowdown.
I mean, it's still growth. The growth rate has slowed down to, I think, below 1% in the third quarter. I was just curious, was it mostly because of COVID-related either in Taiwan or in Southeast Asia, or there's something else? What is your thought on the loan growth in 2022? I guess lastly, of course, very decent increase in the fee income driven by insurance, mutual funds, and credit card fees. Just wondering, what is the outlook for fee income, specifically for your credit card? There's some strong rebound probably in the recent months, so just want to see what will sort of continue that trend going forward. Thank you.
Yeah, thank you. First of all, I want to answer about the VNB of Cathay Life. Yes, for the first three quarter, the VNB decreased by 20% comparison last year. I think the main reason is that this year, especially on second quarter and third quarter, we have the pandemic effect. All the people actually are not allowed to close the marketing for our customer. Because right now, Taiwan controls the pandemic, I think, quite well. Right now, we are allowed to have a close contact with our customer. We can see that on the October and November, right now, the FYP, especially traditional protection and also A&H product, they have I think the comparison to the second quarter and third quarter, I think it has a very different picture right now.
We think that the first quarter of the FYP, especially the traditional FYP, including the protection, A&H, and the savings type, we think the first quarter will have much growing comparison, second quarter and third quarter. For the outlook of next year, I think for the VNB, we need to clear our disclosure date, that we can have an exact number. I think I still maintain our long-term guidance that our VNB this year, I think it's because of the pandemic effect. We think that next year, I think we're thinking about Taiwan should be as stable as right now. We expect VNB still can have a 5%-10% growth. This is our long-term guidance. Exact number, we didn't disclose at this moment.
This is Sophia. Before Daniel answers you the question related to the potential loan growth toward the end of next year, I want to confirm the number with you regarding the loan quarter-over-quarter decline. Actually, if you look at the end of third quarter, our loan, year-to-date grew by 10%, and then quarter-over-quarter grew by about 1%. Overall, the loan growth, still quite healthy. Daniel, I'll pass over to you on the thought on overall loan growth and the thought on fee income.
Yeah. For the loan growth of 2021, we still target on high- single digit growth this year. For the next year, maybe we will still maintain a high- single digit growth for 2022. That's for the loan side. For the current environment, I can only say our growth is mostly from our local market for next year. If the regional economic environment changes, we'll definitely adjust our portfolio immediately. Currently, I can only say we focus more on the local market. That's for the loan. For the fee income, we think for next year, the fee income still will be very healthier growth for the next year by high- single digit. Because our customers still focus on the asset allocation, especially for the inflation issue. We think the fee income mostly is from mutual fund and insurance.
For the credit card, I think the fee income from credit card will be increasing a lot for next year. The cost of the credit card is also increased. I would say for the net income of credit card, probably still will stay the same for next year.
Steven, have we answered your questions?
Yes, very well. Thank you. Yeah.
Thank you.
For the sequential loan growth, I was just curious what was causing the It's not contraction, I understand, but slowdown.
Oh, I see. Usually when you look at loan growth, try not to look at a quarter-over-quarter, because to me, that is too micro. You may have just certainly, at the end of that quarter, someone repay. At the end of that quarter, you just have originate a new loan. Looking at the kind of year-to-date growth vs your whole year target, also, I think that the value of that growth, the quality of that growth matters a lot. Sometimes we may have quarterly down and then over to the end of that year, the recovery. Look at one quarter change, I think it will be a little bit too micro in my personal view.
Yes, totally agree. Yeah. I think in the beginning of this year, we say that we target the total loan growth around 9% this year. Currently, the YoY is around, maybe it's around 10%, right?
Year-to-date 10%.
Yeah.
YoY, I think it's more than 10%.
14%, right?
Yeah. YoY is 12%. Year-to-date around 10%. Yeah.
We have met our target this year.
Right. Understood. Thank you. The loan mix is heading to the right direction as well?
At the end of day, nothing competes with asset quality. In the Chinese session earlier today, Daniel has explained in great detail how we care about asset quality. Today, the foreign currency loan offers greater margin. If you cannot physically do more due diligence, we'd rather wait when the overall economy, the pandemic situation is better controlled so we can visit, we can do the DD. That's why you are seeing we are not in a hurry to regrow the foreign currency loan yet, it's still quite sizable. You can see the foreign currency loan come down a little bit, it's not that drastic. It really requires good due diligence process for you to grant a loan.
I see. I'm not sure if we have time for a quick follow-up, since you were on the foreign currency loan topic. This is more like looking out into not even 2022, maybe closer to 2023, when the rate hike actually starts, at least in the U.S. What would be the dynamic like between now and when the Fed actually starts to hike rates? Do you feel that there will be a higher demand that some customers want to lock in that lower rate before the hike cycle will begin? Then, however, like you said, I guess Taiwan policy is still sort of a zero COVID tolerance policy. It's still very hard for you to go out there and visit your clients?
Yeah.
Just want to hear your thoughts.
Oh, I see. The COVID-19 should not stop traveling, because as long as you do quarantine, it's fine. The thing is with COVID, if the pandemic drag longer, it may affect corporate cash flow. We put extra cautious on that. Traveling is not a problem. If we see the overall information and we don't see the comfort in economic recovery and how each country manage the whole situation, then we confirm the economy is better, then you can start to accelerate that loan. It's the timing of the acceleration. Yeah. If the pandemic last longer, some corporate, they just will suffer. The relative risk in getting a loan will be higher than before.
Got it. Yeah. That makes perfect sense.
I am in quarantine right now. I just come back from COP26, so it should not affect my traveling. It's the overall dynamic in the economic impact for a whole economy, which segment, which sector, which company you feel comfortable or if it's more no rush situation. We do have low loan deposit ratio, we have that lending capacity waiting.
Yeah. Exactly.
Thank you.
Okay, thank you.
Sure.
Thank you. 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. Next we'll have Jemmy Huang of JPMorgan for questions. Go ahead please, Jemmy.
Yeah. Hi, thanks. Just two questions for Cathay Life. First one is, in terms of the hedging mix in page 26, can I assume the quote-unquote change is meaning you reduce the NDF then increase the proxy hedge during the period, if I look at the changes in the figures on the quarter-on-quarter basis? Then, have you really increased your proportion of currency swap over the past couple of quarters given much lower hedging costs, or it's not necessary the case? Then, the second question is for investment-linked product. I think you mentioned in the Chinese session that you incur a slightly bigger first year surplus strain for the investment-linked product without upfront fee. For products that if you collect upfront fee, would you still suffer from this kind of first year surplus strain, or actually it will be P&L accretive?
For all the investment-linked products that you have sold this year, is there any rough split between the products with upfront fee and without upfront fee? Thanks.
I think from the quarter- to- quarter, yes, the third quarter, actually, we reduced the NDF. This is right. It's very dynamic. This is the end of September, but on November or right now, maybe we still have some change on that. As I said, we work depends on situation when sometimes we think the Taiwan dollar is relatively strong, then maybe we will unlock NDF and to shift to the proxy hedge. Currency swap actually didn't change too much. This is because only if we have some overseas, is the new investment like from the Taiwan dollar policy that we will have the new currency swap. At this moment, the flow is very limited because our product policy for Taiwan dollar policy actually is quite limited, so it's not changed too much for the currency swap.
As I say in Chinese session, we have a different structure. It means that right now we have some portion is longer term, the CCS, comparison before. This is for the hedging structural issue. For the investment link, yes, we have the investment link have the upfront fee. This kind of product, we didn't suffer the first year's trend. We have a product that no upfront fee, that the fee will be collected after that. I don't have that kind of proportion. Maybe I can submit it after this meeting. I will give through the IR team to you.
Thanks. You mentioned that you enter some long duration currency swap contracts. Is that two years or even longer?
Even longer.
I see. Okay. Thank you.
Thank you.
Thank you, Jemmy.
Next we have Chung Hsu of Credit Suisse for questions. Go ahead, please.
Thank you. Just a quick question for Abel. Abel, I know that your FX hedging mix can change quarter- to- quarter, would you be able to give a sense that if we strip out our mark-to-market proxy gains and losses, what would this currency swap and NDF, the natural hedge mix, the hedging cost be in third quarter? If we try to get a sense of, without any mark-to-market gains, what is your stable hedging cost be at the moment?
Okay. I can give it to you, right now I need to submit it for the third quarter. I didn't have that kind of number, I need to check it out after the meeting. I'll give this information to you.
Okay. Thank you.
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.
Jason, today in the Chinese section, we had a very long session. I think it's like an hour and a half. Maybe, many analysts already asked a question in the Chinese section. If there is no further question, it's okay.
Sure. Thank you. Yes, Ms. Cheng, we don't have any questions at this moment. Can we close the conference call now?
Great. Thank you very much. If any of you think about some additional question later, it is always more fine to contact our IR team, and they will be here stand by for you. Thank you for your participation in Cathay Financial Holding conference call today. Thank you and goodbye. Keep safe and healthy.
Thank you, Ms. Cheng. Thank you. Ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye