Welcome everyone to Cathay Financial Holding Company's Fourth Quarter 2020 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 that 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. Good morning to investors in Europe. Welcome to Cathay Financial Holding Company's 2020 analyst meeting. Today, we will give you an update on last year's full year results. My name is Sophia Cheng, the Chief Investment Officer for 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 today. We have Mr. Daniel Teng, Senior EVP of Cathay Financial Holding, Ms. Grace Chen, Chief Financial Officer for Cathay Financial Holding, Mr. Abel Lin, Managing Senior EVP of Cathay Life, Ms. Joyce Tsai, Senior EVP of Cathay United Bank, Ms. Grace Hong, EVP of Cathay Life.
For today's conference call, Shane Sun from our IR team will present the first quarter results. After the presentation, we are 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 year-end results.
Thank you, Sophia. Let's start with the 2020 business overview on page three, which provides a quick highlight on subsidiaries. Cathay United Bank delivered steady loan and deposit growth with benign credit quality. Offshore earnings grew 14% year-on-year, accounted for 46% of pre-tax earnings. Wealth management fee grew steadily, driven by mutual fund sales. Cathay Life continued its focus on value-driven strategy. Both first-year premium, FYP, and annualized premium, APE, ranked number one in the industry. Earnings hit a record high, driven by sound investment performance. RBC ratio and equity to asset ratio reached 330% and 10.6%, respectively. Solid capital position provided buffer against the market volatility. Cathay Century, the general insurance subsidiary premium income grew steadily. Market share was 12.3%, maintaining number two in the industry. Overseas premium continued to grow.
Asset management subsidiary, Cathay SITE, AUM reached TWD 1 trillion, ranked number one in the industry. Lastly, Cathay Securities' earnings increased significantly to all-time high. Next page. Page four shows Cathay Financial Holding Company's outlook for 2021. Cathay United Bank will continue to grow along steadily with benign asset quality, leverage group synergy, and develop diversified wealth management products. Expand and deepen overseas presence to increase offshore earnings. Cathay Life will focus on protection policy, foreign currency denominated policies, and investment-linked policies to increase Value of New Business. On the investment side, Cathay Life will adjust its investment portfolio dynamically and continue dynamic hedging strategy to maintain stable hedging costs. Cathay Century will grow both Personal & Commercial insurance business, enhance capital efficiency, and grow business and net profit steadily.
Cathay SITE will continue to offer comprehensive product lines to meet customers' needs, 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 five, Cathay Financial Holding Company's net income and EPS. Cathay Financial Holding Company's after-tax net income for 2020 reached a historical high of TWD 76 billion, driven by sound investment performance. EPS was TWD 5.41. Page six shows the subsidiaries' net income and ROE. Cathay United Bank's net income slightly decreased year-over-year. Cathay Life's net income grew 38% year-over-year to all-time high, driven by better investment income. Asset Management and Securities subsidiaries' earnings also set new records. On a consolidated basis, the holding company's ROE was 9% in 2020. Please turn to page seven to see the book value of Cathay Financial Holding.
The consolidated book value of the holding company reached a record high of TWD 905 billion. Book value per share was TWD 60.8 in the year of 2020. Based on recent stock price, the price-to-book ratio is around 0.8 x. Pages nine and 10 show our overseas expansion, which is on the right track. Cathay Financial Holding continue to expand its overseas business by deepening its overseas presence and reinforcing the relationship with local partners. Yangon branch in Myanmar opened on January 8th. Cathay Life Vietnam's total premium increased by 53% year-over-year, and Cathay Century performed steadily in Vietnam. As for the subsidiary operation in China, the business of Cathay United Bank China is on the right track. For Cathay Life joint venture in China, the total premium grew 11% year-over-year. Please turn to page 12 for more details about the banking subsidiary.
With proper risk management, Cathay United Bank loan balance was up 7% year-over-year to TWD 1.6 trillion as of the end of 2020, driven by the growth in consumer loan and mortgage. Deposits grew 12% year-over-year to TWD 2.6 trillion. The demand deposit ratio increased from 63%- 70%. Interest yield is shown on page 13. The mean and spread of fourth quarter 2020 rebounded due to lower funding costs. The interest spread was 1.74% for the year of 2020, and the net interest margin was 1.18%, mean recovery in the fourth quarter, as you can see in the bottom table. Page 14 shows the asset quality of Cathay United Bank. Due to the prudent lending policy, Cathay United Bank maintained low NPL ratio at 14 basis points, and coverage ratio is over 1,000%.
In the year 2020, gross provision was TWD 4 billion. Recovery was TWD 1.1 billion. Please turn to page 15 for SME and foreign currency loans. Cathay United Bank focused on developing SME and foreign currency loan with benign asset quality. SME loan balance reached TWD 228 billion, up 9% year-on-year. Foreign currency loan balance was TWD 233 billion, accounted for 40% of total loans. Foreign currency loan grew 1% year-on-year. The decline should reflect currency appreciation of New Taiwan dollars. Page 16 shows offshore earnings, which was up 14% to TWD 11.5 billion, accounting for 46% of the bank's pre-tax earnings in 2020. Please turn to page 17 for fee income. Fee income was TWD 20.2 billion for the year 2020. Credit card fee declined year-on-year due to lower spending on the pandemic.
Page 18 shows the breakdown of wealth management fee. Wealth management fee income increased 2% year-on-year to TWD 10 billion. Strong growth in mutual funds more than offset a decline in bancassurance fee. Please move to page 20 and 21 for Cathay Life's premium performance. Total premium slightly decreased 1% to TWD 666 billion due to lower first-year premium. However, the renewal premium grew 7% year-on-year, driven by protection and regular-paid traditional products. On page 21, first-year premium, FYP, was TWD 161 billion, down 20% year-on-year. The decline was due to lower policy reserve rate. The annualized premium, APE, was also down due to lower sales volume and product mix change. The market share of first-year premium, FYP, and annualized premium, APE, both remain number one in the industry. Page 22 shows the Value for New Business.
Based on the 2019 embedded value assumptions, Value of New Business for 2020 was TWD 31.8 billion, decreased 34% year-on-year, as the regulator reduced the policy reserve rate, impacting the sales volume and product mix. Page 23 shows the cost of liability and break-even asset yield. Both continue to improve. The reserve-based liability cost was 3.83% at the end of 2020, improved 12 basis points year-on-year. Please look at page 24 for the investment portfolio. Cathay Life's total investment reached TWD 6.9 trillion as of the end of 2020. Overseas investment accounted for 65%. The investment return of each asset class are as follows: cash and cash equivalents, 0.4%. Domestic equity, 35%. International equity, 5.5% pre-hedge. Domestic bond, 4.6%. International bond, 5.5% pre-hedge. Mortgage and secured loans, 1.7%. Policy loans, 5.6%. Real estate, 2.9%. Overall investment yield are shown on page 25.
After hedging investment yield was 3.93%. Cathay Life will maintain proper risk management and dynamic portfolio management to capture the market opportunities. Pre-hedge recurring yield was 3.19%. The lower interest rate environment and enhanced credit rating mix in a bond portfolio has led to lower new money yield. Selling into strengths together with corporate conservative dividend policy last year results in lower cash dividend income. Hence, the higher cash level, lower new money yield, and less cash dividend income affected the recurring yield. Year-to-date, the U.S. 30-year Treasury yield has rebounded around 70 basis points. The 30-year single A and BB B corporate bond index returns also increased around 60 basis points- 80 basis points. This will help to increase the interest income. The hedging cost of 2020 was 1.72%. If excluding the additional provision of foreign exchange fluctuation reserve, the hedging cost of 2020 was 1.5%.
New Taiwan dollars appreciated 5.6% in 2020 and 2% in fourth quarter. However, due to better proxy hedging effectiveness, hedging costs improved in fourth quarter 2020. NDF market price trend down since last fourth quarter, which helped Cathay Life to reduce the hedging cost. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging cost. Please look at page 26 for the dividend income and the regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 70.6 billion in 2020. Lower cash dividend income due to equity portfolio adjustment with higher capital gains. For overseas fixed income investment, Cathay Life allocated 46% in North America, 18% 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 and unrealized gain of financial assets, which TWD 721 billion and TWD 195 billion respectively, both reached record highs. Next, please turn to page 31 for the performance of Cathay Century. Cathay Century's premium income was TWD 25 billion, and market share was 12%. Cross-selling synergy continued to perform well. Over 16% of premium was generated by the group channel. This is the end of the presentation. Now, let's open to Q&A.
Yes, 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. Thank you. Now please press zero one to ask the question. Thank you. The first question is coming from Chung Hsu of Credit Suisse. Go ahead please, Chung.
Hi.
Hi, Chung.
Hi, Sophia. I want to first ask about Cathay Life's FX hedging cost. First, I want to clarify that in the earlier Chinese section, Abel mentioned that the hedging cost could be 20 basis points- 25 basis points lower year-over-year or about TWD 9 billion a year. That is just because of the lower currency swap and NDF cost. I just want to first clarify that, correct?
Yeah. Chung, the early Chinese version, yes, I mentioned because compared to last year, our hedging cost is 1.72%, and mainly due to the higher NDF hedging cost. Comparison last fourth quarter in average, the NDF was 6.5% around, but YTD average is down to 4.6%, among this side.
You can see that page information on slide page 37 in the presentation material.
Inside page 37, it just explains the NDF YTD, the cost comparison, last fourth quarter is down by 1.8%. Among these traditional hedging costs, we are confident that the hedging cost comparison last year were down by 20 basis points- 25 basis points. On the other hand is that we still have uncertainties, the proxy hedge. We think the proxy hedge last year, is roughly Taiwan dollar is relatively strong than other major Asian currency. This year, we expect this phenomenon should be Taiwan dollar should be as strong as the other major currencies. We expect the The policy should be improved. Our guidance that this year, the hedging cost will be back to 1%-1.5%, and mainly, it should be lower than last year. This is what I mean in the hedging cost side.
Last year, Taiwan responding to COVID-19 was quite lucky, it was quite good. On top of that, on the new technology, 5G, EV, all the supply chains, Taiwan did enjoy quite strong trade. Therefore, if you look at net inflow of capital, the fundamental of corporate earnings, the economy, they all put together bodes very well for Taiwan's strong currency. As a result, Taiwan dollar was stronger than other Asian currencies. Looking into 2021, we think that gap will not be as big as last year. Abel was trying to say that we think Taiwan dollar probably will move more along with other Asian currencies. We would not expect Taiwan to be the first stronger than other Asian currency, and this will therefore benefit, reduce the pressure from the basket hedge.
Thank you. I see. I guess, I assume that if we also factor in a TWD 10 billion extra FX reserve that you took last year, we could potentially be looking at about TWD 19 billion-TWD 20 billion less in FX hedging cost on a year-over-year basis. Is that correct?
Yep.
You mean nine to 12 or 19?
19 to 20, meaning TWD 9 billion from lower NDF and TWD 10 billion.
TWD 9 billion for lower comparison to 2020. We expect if the hedging cost is around this stage, we think that after five years, we should be saved by TWD 50 billion for the next five years.
Compared with last year, TWD 9 billion-TWD 10 billion for a year.
I see. This is before we factor in any extra FX reserve you took last year. You took about TWD 10 billion. Is that number correct?
I see. The reserve was made last year already, they should be putting aside as a buffer. If you have FX gain, you need to reserve half into the pool and vice versa. Typically, we will not be taking the pool as part into the equation. We do think last year, given the strong life earnings, having some additional reserve pool into FX does provide a buffer if there is any uncertainty in this year.
Okay. I got it. The second thing I want to clarify is, I think, Abel, you also mentioned in a Chinese session that because of the increase in bond yield, also by deploying some of the money into reallocating your investment allocations, you are able to increase your after-hedge recurring yield from 2.1%-2.3%. Just want to clarify, this 20 basis points increase is before taking into account a lower hedging cost, right?
Yes. It is already taken into account the lower hedging cost. Also, our recurring yield, I think that before hedging, we also expect our recurring yield should be gradually up in the next five years if the interest rate stays the same level as right now.
I see. That point is already inclusive of lower hedging cost.
Yes.
Okay. Thank you. My next question is for the bank. I just want to check that your NIM guidance of moderate improvement is based on steady, higher or lower loan-to-deposit ratio. I think Cathay United Bank loan-to-deposit ratio dropped by 3% in 2020. I think the number is around 62.5%, I see on the back of your presentation. That's very low. I think that's probably the lowest or one of the lowest among the Taiwanese bank. Just trying to get a sense that first, your NIM guidance is based on what loan-to-deposit ratio assumptions, and whether there is any prospect to take that higher?
[Non-English content] [crosstalk]
Daniel, take it.
Sure. Okay. Our current loan-to-deposit ratio is around 62.5%. For the New Taiwan dollar loan-to-deposit ratio, it's around 70%. I think this year, for the New Taiwan dollar loans will remain the same, maybe 71%- 72%. For the foreign currency loan, currently, I think it's below 40%. We think for this year, the loan-to-deposit ratio, I mean, the foreign currency loan, will be increased by maybe 3%-5%.
It will be a combination of slight increase in Taiwan dollar loan, the loan deposit ratio, more importantly is the potential regrowth of foreign currency loan. On page 15, you can see end of last year, our foreign currency loan in U.S. dollar, grew by about 1%. Because the Taiwan dollar strength, when we convert that into Taiwan dollar, you can see that last year there was a mild decline. In the Chinese session, Daniel has highlighted that given the fact that in Asia last year, the regional macro uncertainty and each country, how they respond to COVID-19, we were more cautious in granting new loans. However, in the region, because of that, there's accumulated a lot of delayed funding needs from borrowers.
Daniel was expecting in 2021 and 2022, there may be acceleration in regional loans depending on the macro improvements. 2021, the major improvement will come from foreign currency loan growth.
Now I get the number. We target the FX loan to deposit ratio this year is around 50%.
I see. 40%-50%. Okay.
40%-50%.
Okay. Thank you.
Have we answered your questions?
Yes.
Great. Thanks.
The next question is coming from Brooksley Kang of Bank of America Securities. Go ahead, please.
Hi. Good afternoon to management. I have two questions on interest. May I have more color on the credit rating for the [overdue sponsored portfolio]? I think from the material, it was in 2020, the investment grade accounted for 99%, but sometimes in the history it's 95%. What's the rationale behind the difference? Do you have any thoughts on the allocation to lower credit rating bonds as the global economy recovers? That's the first one, if you like. Secondly, on bank, may I understand that, what's the main positive driver for NIM for Cathay Bank to rebound in fourth quarter last year? If the mechanism will work differently in 2021 to support your NIM from falling? Thank you.
I think the credit rating, we don't want to increase non-investment grade. Right now, corporate bonds for the BB B + above that already hiked by 80 basis points. We think right now we still will maintain the same credit quality for our fixed income portfolio.
We already can enjoy some yield enhancement in investment grade already.
Yes.
Brooksley, can you repeat your question for the bank again? Sorry about that.
Sure, no problem. I would like to know the main positive driver for Cathay Bank's NIM to rebound in the fourth quarter last year, and if the way will work differently in this year to support bank's NIM from falling?
Okay. For the last quarter, we redeemed some of our issued debt. It's like TWD 25 billion with very high yield.
The funding cost-
Funding cost issued by the bank itself. It's quite a large mortgage loan growth for the last quarter, the yield is much higher than the government and public non-profit l oan. We also reduced the government and non-profit loan by a lot. That's the last quarter thing. For this year, how to say? We see the deposit rate is bottom out from the third quarter last year. We see the corporate loan rate has slipped a little bit higher than before. We believe the NIM this market this year, I won't say as a growth, I will say as a worst case, will be very stable, just like the level of last year.
It would be reasonable to at least assume a mild loan growth and at least flat NIM?
Yeah. At least flat.
Okay. Get it. Thank you.
Thank you.
Thanks.
Next we have Sam Wong from Citi. Go ahead, please.
Thank you, Sophia and the management. I actually would like to have two questions, if I may. The first one is a follow-up on the NIM point. Could you please give us a bit more granularity in terms of how much of the 4 basis points NIM expansion quarter-on-quarter was attributable to the retirement of the sub-debt, and how much was attributable to the mortgage loan growth you just mentioned? That's the first question. Hello?
Actually, checking the number in one second.
Yeah. Thank you very much.
Because you were asking very detailed into the contribution, we need to go back to check on the formula. The first quarter last year, U.S. dollar rate also fell. That is only part of that. I think in terms of the breakdown for the contribution, how much from the refining callback of the debenture for local. The other one is how much come from falling deposit rate. We need to do a deeper check later.
Yeah. Sure.
What is your second question?
Okay, sure. The second question is a follow-up on the long growth point. I'm curious, where do you see the overseas lending opportunities? Because I think you mentioned that asset lending will be a focus for next effort this year. Is it still going to be the ASEAN region? Are you worried about the asset quality in those markets?
Okay. Just get the [smell] of the market. We do see some of the FX loan markets becoming very positive this year due to, I explained in the Chinese section. The first one is the global economy is getting back to normal. Secondly, as a global low interest rate environment. Thirdly, the deferred corporate activities from last year. We do see the FX loan market as becoming very positive, especially for the Southeast Asia and the Greater China area. The syndication market is becoming more and more apparent.
We are seeing the momentum emerging-
The momentum.
much better than last year.
Yeah.
I see. Okay. By geography, it's still going to be Greater China and ASEAN, right? The Southeast Asia part of the world.
Yes. Well, we don't want to do business for some kind of market we don't understand.
Understood. Okay.
The broader return to normal business, maybe every country has different speed. Overall the momentum is positive.
Actually, we do have the business opportunity in the U.S. Currently we don't have the branch in U.S. We only focus on the Southeast Asia and the Greater China area.
Understood. That's very helpful. Thank you.
You're welcome.
As a reminder, please press zero one on your keypad if you would like to ask the question. 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. There appears to be no further questions at this point. Ms. Cheng, can we close the conference call now?
Yes. Thank you. We're very glad to see the global recovery happening, and we do like to wish all the participants and your family stay safe and healthy, and we really hope the economy activity resume can come as fast as possible so we can see the investors in person. Cathay will continue to try our best to face through the market volatility and hope any tiny effort can ensure our sustainability for earnings. Thank you very much for your participation in Cathay Financial Holding conference call, and I hope the information from the presentation and the Q&A section is useful to you. If you have further questions, please feel free to contact our IR team, and they will be staying by here for you. Thank you and goodbye.
Thank you, Ms. Cheng. Ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye.