Q3 2017 Cathay Financial Holding Co Ltd Earnings Call
Nov 14, 2017 AM CST
2882.TW - Cathay Financial Holding Co Ltd
Q3 2017 Cathay Financial Holding Co Ltd Earnings Call
Nov 14, 2017 / 09:00AM GMT
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Corporate Participants
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* Grace Chen
Cathay Financial Holding Co., Ltd. - CFO & Senior EVP
* Sophia Cheng
Cathay Financial Holding Co., Ltd. - CIO & Senior EVP
* Yajou Chang
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Conference Call Participants
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* Anderson Chow
* Anthony Lam
HSBC, Research Division - Associate
* Chung Hsu
Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist
* Jemmy Huang
* Thomas Wang
Goldman Sachs Group Inc., Research Division - Equity Analyst
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Presentation
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Operator [1]
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Welcome, everyone, to Cathay Financial Holding Co.'s 2017 Third Quarter Conference Call. (Operator Instructions)
And now, I would like to introduce Ms. Sophia Cheng, the CIO of Cathay Financial Holding Co. Ms. Cheng, you may begin.
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [2]
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Thank you. Good afternoon, and good morning to those friends in Europe. Welcome to Cathay Financial Holding 2017 Third Quarter Analyst Meeting. I am Sophia Cheng, the CIO of Cathay Financial Holding. Today, I will host the conference call, and thank you for joining us today.
In the beginning, I would like to introduce the senior managers who are with us today. Today, we have Ms. Grace Chen, CFO of Cathay Financial Holding; Mr. Daniel Teng, Senior EVP of Cathay Financial Holding and Head of Corporate Banking in Cathay United Bank; Mr. Joseph Wang, Senior EVP of Cathay Life and Head of Life Investment team; and Ms. Sharon Wu, EVP of Cathay Financial Holdings and Cathay United Bank; and Ms. Grace Han, EVP of Cathay Life.
For today's conference call, Yajou from IR team will present the third quarter results. And after the presentation, we are open for Q&A session in which senior management will be happy to answer your questions.
Without further ado, let me pass the call over to Yajou for the briefing of third quarter results.
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Yajou Chang, [3]
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Thank you, Sophia. Now we start with the third quarter 2017 business overview on Page 4, which provides a quick highlight on each subsidiary. Cathay United Bank loan grew by 13% with benign asset quality. Credit card fee grew by 19%. Foreign currency loans grew by 38% year-over-year. The offshore earnings accounted for 43% of pretax earnings in the first 9 months of 2017. Cathay Life. FYP grew by 19% year-over-year. Both FYP and annualized premium FYPE ranked #1 in the industry. On the investment side, overseas investment reached 62%. Hedging cost improved to 94 basis points (sic) [0.94%]. Overall investment return was 4.2%. Next, Cathay Century, the general insurance subsidiary. Premium income grew by 4% year-over-year. Maintained #2 in the industry. Asset management subsidiary, Cathay SITE, has AUM of TWD 560 billion, has already ranked #1 in the industry. Lastly, Cathay Securities continue to enhance digital application to optimize customer experience.
Please look at Page 5 for Cathay Financial Holding's net come and EPS. Cathay Financial Holding reported TWD 48.3 billion of earnings for the first 9 months of 2017, increased by 23% year-over-year. EPS reached TWD 3.81.
Next page, Page 6, shows subsidiaries performance. Cathay United Bank earnings improved due to the recovery of net interest income. Cathay Life earnings increased because of higher one-off gains. On a consolidated basis, the holding company ROE was 11.5% as of September 2017.
Please turn to Page 7 to see the book value of Cathay Financial Holding. The consolidated book value of holding company was TWD 594 billion. Book value per share was TWD 42.5 as of September 2017.
Page 9 and 10 show our overseas expansion, which is on the right track.
Please turn Page 12 for more details about our banking performance. Cathay United Bank loan balance reached TWD 1.5 trillion, up by 13% year-over-year. Mortgage and ForEx loans are the major growth drivers. Deposits grew by 4% year-over-year. The loan to deposit ratio was around 70% as of September 2017.
Please look at Page 13 for interest yields. The strong mortgage and ForEx loan growth led to the margin improvements. The interest spread came to 1.64%. Net interest margin was 1.16%, improved by 9 basis points compared to the end of last year.
Page 14 shows the asset quality of Cathay United Bank. Due to our prudent lending policy, Cathay United Bank maintained low NPL ratio at 20 basis points and coverage ratio at 749%. In the first 9 months of 2017, gross provision was TWD 3 billion; recovery came to TWD 1.6 billion.
Next, please turn to Page 15 for SME and foreign currency loans. SME loan balance has increased to TWD 138 billion. We managed the portfolio dynamically to maintain asset quality. Foreign currency loans rebounded due to the macro recovery in China and Southeast Asia. The loan balance reached TWD 212 billion, grew by 22% year-over-year.
Page 16 shows offshore earnings, reached TWD 8.2 billion and accounted for 43% of the bank's pretax earnings in the first 9 months of 2017.
Please turn to Page 17 for fee income. Cathay United Banking fee income was TWD 13.8 billion as of September. Credit card fee performed very well with 20% growth year-over-year.
Page 18 shows the breakdown of wealth management fee. Wealth management fee income came to TWD 6.9 billion, down by 10% year-over-year, in which bancassurance fee declined due to high base effect and regulatory changes. Mutual fund sales fee grew nicely, up by 49% year-over-year.
Please move to Page 20 and 21 for Cathay Life's premium performance. In the first 9 months of 2017, total premium reached TWD 557 billion, grew by 14% year-over-year.
On Page 21, FYP reached TWD 173 billion, up by 19%, with strong demand of investment-linked policies and effective agency force contributing to the growth of FYP. The annualized premium FYPE was TWD 59 billion, dropped by 41% year-over-years due to product mix change. However, it still ranked #1 in the industry.
Page 22 shows our focus on regular paid traditional policy. Cathay Life continues the value-driven strategy to focus on regular paid product, which offer a high profit margin continuously. Value of new business was TWD 37 billion, declined by 33% year-over-year due to high year over base -- year-over-year base and product mix change. After the one-off decline, we expect value of new business to return back to long term target of 3% to 5% per year.
Page 23 shows our cost of liability, which continues to improve. The reserve base liability cost reduced 4.14% at the end of third quarter, already improved by 9 basis points year-to-date.
Please look at Page 24 for the investment portfolio. Cash position was 3% of invested assets. Overseas investment accounted for 62%. The investment returns of each asset class are as follows: cash and cash equivalents, 0.5%; domestic equity, 10.6%; international equity, 8.8% pre-hedged; domestic bond, 2.1%; international bond, 5% pre-hedged; mortgage and secured loans, 1.8%; policy loans, 5.8%; real restate, 2.3%. The overall investment return was 4.2% after hedge.
Please move to Page 25 and 26 for more details about our investment return. On Page 25, you can see after hedge investment return was 4.2%, while on Page 26, pre-hedge recurring yield was 3.5%; this is flat year-over-year. Cathay Life maintained stable hedging performance, despite Taiwan dollar appreciation this year. The annualized hedging cost as of September was 94 basis points (sic) 0.94% . Also Cathay Life FX volatility reserve recovered to [TWD 9.5 billion], which provided Cathay Life with more hedging flexibility.
Please look at Page 27 for the dividend income and the regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 22.5 billion in the first 9 months of 2017. For overseas fixed income investment, Cathay Life allocated 44% in North America, 18% 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 of Cathay Life was TWD 429 billion. The unrealized gain of financial assets increased to TWD 43.5 billion as of September.
Lastly, let's look at P&C insurance on Page 32 and 33 for the performance of Cathay Century. Cathay Century's premium income was TWD 15.9 billion, up by 4% year-over-year. Market share was 12.7% at the end of third quarter. Cross-selling synergy continued to perform well. Over 60% of the premium was generated by group channel.
Thank you. It's the end of quarterly results briefing. Now let's open to Q&A.
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Questions and Answers
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Operator [1]
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(Operator Instructions) The first question is from Chung Hsu from Credit Suisse.
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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [2]
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Sophia, thanks for the presentation. Two questions. My first question is on the bank. If I compare your loan spread and NIM on a quarter-over-quarter basis, the spread increased by about 10 bps Q-over-Q, but NIM only increased by 2 bps. These are on the back of higher LDR of around 71.6% compared to below 70% in second quarter. So I'm trying to understand a bit any factor that we missed when we try to compare your loan spread and NIM improvement in the third quarter? My second question is on the VNB and FYP guidance for next year. I think in the earlier session, Yajou mentioned that traditional life product sales FYP would be higher next year. Just want to check on the basis of comparison, not sure if he was referring to the mix of FYP net sales, meaning it could be more than [50%], or just comparing to the absolute amount of traditional FYP this year, because that number is actually quite low. And lastly just wanted to check, if I take a 30% to 35% VNB decline for this year, you pretty much [categorized] VNB back to 2013 level. I think earlier management mentioned that next year will go back to a normalized growth track. Just want to understand how much of this VNB decline is because of management's intentional hold backs. I'm just -- again if I compare your product mix versus other life insurers in Taiwan, it does look quite different. So I just want to know how much of that decline is intentional versus market conditions?
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Grace Chen, Cathay Financial Holding Co., Ltd. - CFO & Senior EVP [3]
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Well, I think the difference between the interest spread versus the NIM, the 3 differences would be the foreign bond investment, because over the past 9 months we increased a lot of investment in foreign bonds, with high yield that explains why interest spread -- and that explains why NIM is a lot more higher than the interest spread.
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [4]
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And Chung, let me answer your question on Cathay Life first. Can you look at the slide on Page 21? On Page 21, to the left hand side you will notice that the first year premium this year is very much skewed to investment-linked policies, which account for 66% of FYP. So if you look into 2016, totally different, and that's why put 2015 there as the benchmark for investors to better understand when they're looking for kind of long term projection. In 2016, as the regulator reduced and the whole industry was cutting guarantee rate again, and (inaudible) cheaper claim is lower that will meet net present value and even insurance price will become more expensive. So we [saw major preempted demand for] 2017 for this traditional regular tax that will push forward to 2016. So, you can see in first 9 months of last year, the traditional life occupied super-majority of the FYP, where the result usually will take 6 to 9 months for the market to get used to that situation and for the wealth to accumulate, to come into each product. But this year, we are seeing because a big part of the traditional life has moved to last year, you have seen a decline in 2017 for traditional life policies. And also the investment-linked is very strong. The impact of that is investment-linked we think okay, they are very big volume, but the margin is same. As we highlight before, investment-linked, the concept for that versus annuity, the margin is quite similar, but investment-linked has to [tracked] out of capital. So if you take 2016 and '17, I think that is divide by 2, there will be normal [rent we have]. And as we're moving to our fourth quarter and moving towards 2018, we expect that the revenue mix will move back to the normal range. For long term, Cathay Life is looking for traditional life to be 30% to 40%, investment-linked to be 30% to 40%. With respect to rent, because it will depend on the [hot sales product avenue], but over time we think it will balance out the mix. And information about 2018, the traditional life will increase, that means the percentage contribution of 2018 FYP, we will be seeing more balanced mix. The traditional life first 9 months of 28% contribution to FYP, that 28% to 2018 will be a higher percentage. And you also asked a question for value of new business. So far year-to-date, our agent needs a bit longer time to adjust to the premium product mix shift. So it takes a bit longer time than we thought. So I understand the investment value what we're assuming 2017 value of new business, original assumption was TWD 54 billion. And if you compare with Page 22 on the slide to the right hand side, very bottom part, you can see the blue bars is our annual target, where the green bars means we were up to our target. But because of hot sale in 2016, as explained to you last year, the huge growth in 2016 value of new business. And because of that on year-on-year base we also seen this one-off decline in 2017. So yes, we're setting this new base in 2016 -- 2017. Moving to next year, we should be expecting some growth we turn back to the right track.
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Chung Hsu, Crédit Suisse AG, Research Division - Director and Taiwan Equity Strategist [5]
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Okay, understood. Can I just follow on the bank question? There is a -- so if I understood it correctly then, for year-to-date the NIM increased more than spread because added more high yield overseas or foreign currency bond investment. In Q3, it was a reversal, you sold some of those bonds. And that's why we saw more increase in spread over the NIM in Q3?
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Grace Chen, Cathay Financial Holding Co., Ltd. - CFO & Senior EVP [6]
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Mentioned our third quarter -- the loan to LDR is 71%, now almost 2% higher than the second quarter's 69%, and most of this is due to quite like what you mentioned there is a high yielding FX foreign currency loan, that is why the third quarter lending spread 10 bps increase compared with the NIM (inaudible).
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [7]
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And Chung, to add some points to that, on top of Grace's comments, if you look at the quarterly movement, usually the spread movement will be more volatile than NIM because when you look at the total assets it would depend on the loan deposit ratio we have and the loan mix. So the non-lending assets tend to be treasury and if the asset duration is not very long, they tend to be less sensitive. So if you look quarter-on-quarter movement, it tends to be a fewer basis points compared with the spread movement. And so the second quarter, I think, further enhancement into the spread. And also as Grace mentioned, the loan deposit ratio also has increased on net basis. If you look at much bigger assets, which is already about TWD 2 trillion, the total -- if you look at a much bigger denominator, then that change will also be smaller. I hope that answers your question.
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Operator [8]
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And the next question is from Anthony Lam from HSBC.
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Anthony Lam, HSBC, Research Division - Associate [9]
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I think I'll focus on the life side. I think in Chinese session, there was a question on [yield discount] and then a question on IFRS 9. I want to get my head around these 2 related questions (inaudible). Firstly, I think on IFRS 9, I think you have mentioned that you have already adjusted the position ahead of IFRS 9 adoption. And just want to try to get a sense of, going forward after IFRS 9 is adopted whether you will have much less disposal activity, because you have more disposals that will have an impact on [allocation] or potentially more volatile impact on the income statement? And the follow on question will be on the investment return assumption for EV calculation, because we have a -- assuming about 4.4% investment return for EV calculation for the past few years, and I think about 70, 80 basis points of that realized total investment return comes from the real life gains on equities and fixed income. I'm just trying to get a sense of, going forward, how much real life return we should be expecting after IFRS 9 is adopted?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [10]
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Okay. First of all on IFRS 9, you are right. When we have to changes [USD] mostly in the P&L, but remember we will apply that overlay. That means what is the inside figure by this IFRS 9? At the bottom of the P&L, there will be item called overlay to offset the impact. So in the afternoon session, in Chinese Analyst Meeting session, as [Grace] mentioned, the total line impact to P&L, as Grace mentioned. When we have to open the book for [stock details] IFRS 9, we will do the one-off adjustment on the inactive market portfolio, however keeping the rate movement, they tend to be sensitive in the mark-to-market. So we intend not to disclose the numbers, because the market, it could be quite sensitive to small move in the market rate. So far it could be positive to the book value, but not until we see December number can we disclose the number. We think that is more responsible. So overall impact to P&L is quite limited. Have I answered your question on impact?
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Anthony Lam, HSBC, Research Division - Associate [11]
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I think it's stationary impact, yes. In terms of going forward, how will that adoption affect your disposal activities, typically at this stage it does mean -- you have -- I mean, some of your other peers had a bit more disposal activities this year to kind of offset the pressure from hedging cost. And I think going forward, IFRS 9 is adopted you'll probably face more constraints like -- regards to disposal activity in a financial market when it comes to equities or fixed income. Just trying to get a sense how much realized gains in terms of investment return component we should expect going forward? And that might affect the yield assumption, your EV calculations. So that's a key question.
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [12]
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Anthony, because we see -- for insurance industry, they were clients of bank. So if any treatment of volatility caused by this IFRS 9, it will be offset in the P&L. So it will have to impact P&L from (inaudible). It will impact the P&L, because we expect the fact the accounting, the item of those assets. So the net impact will be limited. But when will we see a big positivity? The whole world is talking about IFRS 17 to be implement by 2021. Based on the previous experience, Taiwan may be up to 1 or 2 years later than that. The moment when we step to mark-to-market liability, yes, we will start to mark-to-market asset fully. So you can have a profit mark-to-market on both assets and liabilities. Otherwise today, we do not mark-to-market liabilities, which like insurance business is very sensitive to asset yield assumption as well. If you only mark-to-market [left-hand] side of your balance sheet without the mark-to-market to liability, you actually create more confusion. So if we look at the current rule for next year, because of the overlay structure is applied to P&L impact to be not that much. The second question regarding our investment challenge, how was the effect? As of now, we have been suffering on taking liquidity risk and credit risk. And therefore, we are taking total asset duration much shorter than the liability. So (inaudible) benefit. Of course, it will go out with the opportunity to lock into fixed income at the mortgage (inaudible) yield. If we can do recurring, we will prefer. At current level, when we look at these one-off gains, you really tend to depend on the investments in the FX and we see it -- how we see the world (inaudible) and see the financial market and see the risk. So the IFRS 9 impact will have some inference on when we define the cash flow, the SPPI, whether you'll pass the test, that's why one-off fixed income really depends on our analysis on the financial market.
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Anthony Lam, HSBC, Research Division - Associate [13]
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Okay, let me think about it.
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [14]
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So if you have more questions, feel free to call me. We can discuss a bit more, that's fine. And your second question on investment, I am very sorry, I couldn't get it very perfect. Would you like to say that again?
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Anthony Lam, HSBC, Research Division - Associate [15]
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Yes, because the EV investment return assumption that we have been using is about 4.4% and that probably includes other component of realized return, which in the past 2 years is about 0.8%. And given, I mean -- I think it's related to -- I mean, some of the responses you have given me [you think] whether IFRS 9 adoption will reduce (inaudible) activity you have in this market, which will put pressure on the realized return component and in turn affecting the investment return assumption in the EV calculation. So that's where I mean key focus. That means, I think, I need to think about it on the first part before coming back to you.
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [16]
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Okay. First of all, the asset yield, as we announced in early May for the embedded value, we are assuming an asset yield of about first equivalent at about 4.4%. And if you look at the changes for the EV 25 basis points, if the asset yield is cut by 25 bps, they will translate to about $8 to $10 per share in EV. The question is, yes we can think about the one-offs, so there will be 2 questions. One is the long term if the risk doesn't go up, the long term recurring yield will also go up. The second question is, if these one-offs -- eventually if we include the mark-to-market versus asset liability, this one-off gain will go to OCI but it will still go to book value, but it still creates value if you look from an embedded value point of view. Embedded value is pre-book value for asset value derived from our future (inaudible). So it may not go to P&L eventually, but it still goes to OCI. And therefore, that will also boost the book value per share, they will also become part of embedded value eventually.
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Operator [17]
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(Operator Instructions) And the next one is from Thomas Wang from Goldman Sachs.
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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [18]
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I've got 2 questions. One, on the life side, the expense seems to be higher for this quarter. Was there any particular reason?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [19]
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Okay. The expenses so far -- you mean Cathay Life, yes?
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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]
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Yes, Cathay Life, yes, going forward for the third quarter?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [21]
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Right. If you look at slide, page number 30, there is this expense ratio. In first 9 months, it was 8.6% and versus last year at 10.1%. We usually do not look at a very small quarterly movement, because it would depend on the asset mix. For example, if it's annuity investment the expense ratio tend to be less. But if it's traditional life, a special regular type, the upfront commission tend to be quite high. Unlike the U.S., they amortize the commission; in Taiwan, we don't amortize. So everything is upfront when we've pay commission, it goes through the P&L. So definitely in third quarter, there was some slight increase in the traditional life FYP contribution. And as a result, the expense ratio for traditional life is higher. Therefore, a little bit higher expense ratio compared with last quarter.
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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]
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Okay. And as you said you were expecting traditional life to kind of -- the mix to go higher next year?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [23]
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It is on this page, 9 months last year the expense ratio was about 10%. And so you consider as the benchmark somewhere in between (inaudible), but we do not provide formal guidance for future years.
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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [24]
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Yes, sure. And second question, more general, just how do you think about your investment in terms of areas you want to spend money on? Obviously, we had the China opening up. Did that change your outlook for how you think about growth in China? Or do you -- is there any thinking of (inaudible) impact that you want to invest? Just how do you think where you want to invest, where the future growth is coming from?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [25]
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And this is mainly for Cathay Life, yes?
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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]
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For the group. Because China opened it up for life security and banks, [that was in line with] how you think about it?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [27]
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Yes. So first of all, can you look at -- it's on Slide 9 and Slide 10, this is our recent expansion, okay, in which you see our China, we already have high growth [in this line]. We have banking. We have life, which is the half-half JV which is absolutely convincing. And at P&C, we own 49%; Ant Financial group, they own 51%. We also have asset management, which we own 1/3 with China Development Bank Securities, they own the other 2/3. And we also have a securities platform in Hong Kong. So we're very happy to see China market opening to foreign investors. And at current level the bank, we have our own branch. Including branches, we have 6 footprints already in China. And our Shanghai branch is quite profitable and is going quite well. And Cathay Life, the half-half JV, we quite appreciate the [strong] relationship. We still chat with financial group. So our philosophy is [keep your business stream] perfect. And of course in the future, when the market opens more up and there are other opportunities, we'll be happy to review. Currently, we do have a footprint there and we want to make it stronger.
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Thomas Wang, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]
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Got it. Then is there any other area you want to think about investing in and there are [other uptick] or are there something else I am missing?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [29]
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To translate, if you can see the banking footprint, it's high growth, we already have the most expensive banking footprint in Southeast Asia. We finished -- we completed transaction in Philippines. Today, we own 23% of RCBC. And in Indonesia, we already own 40% which is foreign investment into Bank Mayapada. And you can also say Cathay in 2013, all our transactions are less than [USD 400 million] the NIM progress is really by the license. Having a local footprint, we can really strength and build a strong financial and transaction banking platform and through that platform we could grow in corporate banking, we can learn about local environment and get deeper further eventually to retail, but this is a 10-year play, not (inaudible) year trend. We are currently under the discussion with Malaysia, the regulator. We have announced that we are buying Bank of Nova Scotia. They want to exit Malaysia. We are buying the operations 100%. And this is still under discussion with their regulators, they're pending. Other than that, it really depends on the following things: number one, is the available packet; number two, we (inaudible) corporate governance; and then number 3, if it comes through a 100% that's fine; if not, we have the financial potential long term relationships; and lastly, [business and] valuation. So it's not where we want to go, it's whether there's packet available, whether there is a closer match and whether that fit into our valuation discipline.
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Operator [30]
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Next we have Jemmy Huang from JP Morgan for questions.
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Jemmy Huang, [31]
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Just one question from me. I think, just trying to get a sense how do you think your net interest margin and spread at a bank will move going forward into the first half 2018? Taking into account your construction about the loan growth momentum as well as the interest rate environment of Taiwan and U.S., if any guidance or colors would be appreciated.
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Grace Chen, Cathay Financial Holding Co., Ltd. - CFO & Senior EVP [32]
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Well, given the long difficult [situation] is really behind what's in the bank. And I think that momentum will be at a more better pace compared to this year. Cheng?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [33]
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The incremental will be more mild versus the past year. And Jemmy, if you look at the whole year basis, we are adding year-by-year at NIM of 1.10 and as well as [1.20]. If you look at whole year basis, the thing is not because of investment 2018 (inaudible) maybe slight improvement. Like even then we have quite sizable improvement in the past year already. We are looking for sequential improvement, could be more mild than the past year.
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Jemmy Huang, [34]
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If there is any sequential improvement, do you think that will still be drive by, I mean stronger loan growth to drive up LDR? Or you are expecting any change in the interest rate environment that could help with the loan mix changes? What would be the key drivers, let's say, into first half 2018, if there is any improvement?
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Grace Chen, Cathay Financial Holding Co., Ltd. - CFO & Senior EVP [35]
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I think that key drivers would be the price, given the (inaudible) impacting the banking partners for earning to continue to grow with the price and some yield (inaudible).
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Operator [36]
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(Operator Instructions) And the next one is from Anderson Chow, BNP Paribas Hong Kong.
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Anderson Chow, [37]
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I've got 2 questions on your banking business. First of all, for the operating expenses, has increased quite substantially on a Q-o-Q basis. Can you remind me of, is there any particular reason to that strong increase in operating expenses? And also can you remind me of your cost management policy such as cost income ratio target, and et cetera, in the next 12 to 18 months? And my second question is, how do you see current level of provision expenses? Is it more at a sustainable level? Or do you see any further room for improvement in the future? And can you share your thoughts about current credit cycle on your loan book?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [38]
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Okay. So on the expense ratio, if you look at the appendix on Cathay United Bank, you will see the cost income ratio in first 9 months was 49%. (inaudible) in third quarter -- in second quarter, that is not that high if you compare with 2015 and 2016. And we like to have -- we have been [prioritizing] the concept. We are upgrading the bank IT infrastructure. And sometime this year and to next year, the related expense will be slightly higher. The second one is usually in September and October. It is the time for the -- our Costco credit card, which is the time for the customers to use the bonus point. So the moment they use bonus point, this accounting will (inaudible) for the marketing expense. So you will see that in September and October, expense rates to be higher, mainly because of the Costco credit card, the bonus points. The customer can use the bonus points to exchange for the goods in Costco.
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Anderson Chow, [39]
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Okay, understood.
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Grace Chen, Cathay Financial Holding Co., Ltd. - CFO & Senior EVP [40]
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I'm sorry, your second question is?
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Anderson Chow, [41]
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Credit quality cycle. Do you see any further room for improvement in the future? Or just generally, can you share your thoughts about current credit cycle?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [42]
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Can you look at slide -- Page 14, this is asset quality, credit quality and provision. You will notice that our NPL ratio is moving at 0.2%, (inaudible) Taiwan corporate negative equity ratio is very low. However, to make sure you look at our loan portfolio, our mortgage loan book given the low loan value ratio at only around 70%-ish. There is pretty decent downside compression there but our corporate loan increase and our efforts into the customer asset quality control. We have not seen very significant asset quality deterioration and so we do not expect so in 2018. The coverage ratio is still maintained at over 700%. That is quite healthy. And on gross provision, in 2015 and '16, we've seen a lot of the ETFs that offset. So 2017, super-majority of this provision is because of our loan growth. The regulator requires regular performing loans, you need to provide 1% at loan increase, while for mortgage you need to provide 1.5%, and that is the reason behind the gross provision. The asset quality overall is quite healthy.
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Anderson Chow, [43]
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Okay. So you're basically expecting quite stable provision expenses going forward?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [44]
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Depends on the loan growth. If you look at pure asset quality [cover] is quite stable, and nimble, and very, very quite small. We haven't seen any meaningful -- very big deterioration. So this gross provision will depend on the loan book growth.
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Operator [45]
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There appears to be no further questions at this point. Miss Cheng, can we close the conference call now?
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Sophia Cheng, Cathay Financial Holding Co., Ltd. - CIO & Senior EVP [46]
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Yes. Well, thank you, everyone, for joining the conference call. Our IR team will stand by here. If you have further questions, our management here is very happy to answer your questions. Thank you, and speak to you next time.
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Operator [47]
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Thank you, Miss Cheng. And we thank you for your participation in Cathay Financial Holding Co.'s conference call. You may now disconnect. Good-bye
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