Solid Capital Buffer And Overseas Expansion Will Support Future Profits

Key Takeaways

• Growing loan and premium income, alongside robust fee and interest income, are expected to enhance revenue and earnings across Cathay Financial's divisions.
  
• Strategic overseas expansion and a solid capital buffer position Cathay Financial to capitalize on market opportunities and withstand economic volatility.
  
• Regulatory changes and IFRS 17 adoption pose short-term risks to Cathay Financial's revenue, margins, and investor confidence, with potential asset quality challenges and funding cost concerns.

Catalysts

Through its subsidiaries, provides various financial products and services in Taiwan, rest of Asia, and internationally.

• Cathay United Bank is experiencing strong loan growth and expanding net interest margins, with robust increases in both net interest income and fee income. This ongoing growth is expected to boost revenue and earnings.
  
• Cathay Life's value-driven product strategy is generating strong CSM growth. This, coupled with a solid investment performance, is expected to enhance insurance profits and improve net margins.
  
• Cathay Financial Holding's overseas expansion, particularly in Vietnam and China, is showing growth in premium income and loan balances, which should positively impact future revenue streams.
  
• The implementation of IFRS 17 is anticipated to provide a more predictable earnings outlook due to positive interest spreads and increased insurance profit contributions, potentially boosting earnings.
  
• A strong capital buffer positions Cathay Financial to leverage market opportunities and withstand volatility, likely supporting stable revenue streams and potentially boosting future profitability.

Cathay Financial Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cathay Financial Holding's revenue will decrease by -37.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 42.8% in 3 years time.
• Analysts expect earnings to reach NT$103.6 billion (and earnings per share of NT$6.77) by about December 2027, up from NT$89.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2027 earnings, up from 11.2x today. This future PE is lower than the current PE for the GB Insurance industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

Cathay Financial Holding Future Earnings Per Share Growth

Risks

• Regulatory changes affecting investment-linked insurance policies have already led to a decline in first-year premiums, which could impact Cathay Financial's revenue growth and margins in the Life Insurance segment.
  
• The impending adoption of IFRS 17 may result in an initial erosion of book value and a decline in the equity-to-asset ratio for Cathay Life, although the long-term impact is expected to be positive; in the short term, this can present risk to earnings and investor confidence.
  
• The potential slowdown in raw deposit growth compared to loan growth at Cathay United Bank raises concerns about the sustainability of funding cost management, which may affect net margins if market conditions change.
  
• Cathay's significant increase in foreign currency loans, particularly in less stable regions, might pose asset quality risks if economic conditions in those markets deteriorate, potentially impacting overall earnings stability.
  
• Ongoing regulatory uncertainty related to dividend upstreaming from Cathay Life to the holding company, influenced by emerging details on special reserves and regulatory approval, could affect Cathay Financial's ability to distribute earnings and maintain financial flexibility.

Valuation

• The analysts have a consensus price target of NT$74.0 for Cathay Financial Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$80.0, and the most bearish reporting a price target of just NT$65.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$241.9 billion, earnings will come to NT$103.6 billion, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 6.1%.
• Given the current share price of NT$68.4, the analyst's price target of NT$74.0 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.