Thank you for standing by, welcome to Fubon Financial's first quarter 2021 financial results. At this time, all participants will be in a listen-only mode. Questions will be taken at the end of the presentation. This call is being recorded. If you have any objections, you may disconnect at this time. Now I'll hand the call over to your host, Ms. Amanda Wang, Investor Relations Officer of Fubon Financial Holdings. You may begin.
Thank you. Welcome, everyone. Thank you for joining Fubon Financial's first quarter conference call today. There will be two sections in the presentation today, including Fubon's first quarter performance followed by the embedded value of Fubon Life year 2020. We'll have the Q&A session hosted by the senior management team, including President Mr. Harn. Firstly, please turn to page four of the presentation. In April, the board announced the proposal of the dividends, including the cash at TWD 3 per share and stock dividend at TWD 1 per share, that reached a record high, which including upstream from Fubon Life of TWD 7.4 billion and also contribution from other subsidiaries. In the first quarter, the earning performance is quite strong. That's come to TWD 15.6 billion in the first quarter, with the growth from all major subsidiaries and specifically from Fubon Life.
Meanwhile, the book value per share on common share basis reached over TWD 72 per share. In terms of the assets, we also reached a record high, that including the use of financial assets that will consolidate into the holding company's financial statement starting from March. In Fubon Life, the net profit growth on the back of investment return improvement, the hedging cost improvement, and also the premium that we continue to stand at a top two position in the market. In the meantime, the net worth reached over TWD 524 billion with a high performance. In Fubon Bank, the net profit growth in first quarter is about 20% year-over-year. The increase mainly come from an interest income and also treasury activities.
Meanwhile, the double-digit growth in the active credit card and card consumption pushed up our market share again, while the asset quality for the whole bank remained benign. In page five, Fubon Insurance continues its strong market position with a top one at the market share of over 24%. The net profit growth reflects its investment return improvement. In Fubon Securities, the net profit growth reflects in its brokerage business, that's attributable to the market turnover strength and also the increase in the brokerage market share. In terms of the strategic environment, fintech is one of the key areas in Fubon. We would like to report to you, in Fubon Bank, we have reached our numbers of the online customers with nearly 1.98 million, and also the online trading volume continued to grow at over 47% growth year-over-year.
In Fubon Securities, there is over 74% of the trading now is go through online. For new account customers, the percentage is even higher at 90%. In terms of the ESG development, three points to report to share with you. Firstly is that we rank top one in the Sustainalytics ranking in terms of the global insurance industry and also among top three among global corporations. In Taipei Fubon Bank, we recently also implement the loans connected to the sustainability index to foster sustainable development. In the meantime, the low-carbon economy is one focus area, we recently announced a few initiatives, including termination of new project finance with coal-fired power plants, and also we set up stringent lending criteria in specific sectors.
In page six, in terms of the holding company's profitability, we can see the net profit growth of 120% year-over-year. EPS reach the holding company's top position. In page seven, the earnings growth is across all major subsidiaries. Specifically, Fubon Life contributes 80% of the holding company's earnings. In page eight, the assets now reach over TWD 9.6 trillion. That is also including adjacent assets, which is the first time they consolidate into the holding company's balance sheet starting from March. Also, the net worth increased and therefore pushed up our book value per share to over 72%. In ROE and ROA, both increased year-over-year. Please note, this is our annualized basis. Next, let's move on to Fubon Life. Please turn to page 11.
The total premium is an 8% decline that mainly reflects the renewal premium sale of about 12.7%. That is on back of the pay-up pattern of the regular pay policy, while the first-year premium continues to grow at over 5%. In page 12, the first-year premiums growth that we can see from this page that mainly attributable to the investment link and also interest-sensitive annuity policies. Therefore, contribution from investment link go up to 48%, and interest-sensitive annuity go to over 20% of FYP. In page 13, we can see the FYPE and VNB decline as a result of, number one is high base in the same period last year, and secondly, it's because of the investment policy was popular this quarter. However, if you look at the quarter-over-quarter performance, you can see FYP actually increased by over 30%. Therefore, that boosts the FYPE and VNB growth.
In page 14, in terms of channel, we can see Taipei Fubon Bank play a key role in terms of FYP contribution at over 37%. FYPE contribution mainly comes from the high agents contribution, that's about 47%. In page 15, in terms of the investment portfolio, total growth reached 12.2%. In terms of the allocation, we can see the domestic equity investment increase while the overseas fixed income percentage came down. That mainly reflects the portfolio adjustment ahead of the bond yield rebound to take profit and also lead to a higher cash position. Page 16, the overseas fixed income portfolio, here we can see the composition change reflect in number one is the financial bonds decrease year-over-year, mainly reflect the redemption of the international bond in year 2020. However, trend actually has already been stabilized this year.
The new allocation starting from last year and also, I think second half this March, now we gradually deploy into the corporate bond and also the government bond. In terms of geographical exposure, Asia and others increased. That mainly reflects the government bond investment. In page 17, the investment income, here we can see a meaningful growth of over 60% year-over-year. In terms of the return, also increased both before and after hedge basis, as we can see in the bottom two lines of the table. That's mainly on back of the capital gain strength and also the hedge cost improvement. In page 18, the hedging cost on your upper left-hand side, now we can see it continue to improve. We also expect the hedge cost can see a lower level compared to year 2020's level at about 93 basis points.
For the overall recurring return on before and after hedge basis, it was decline so far on first quarter, that mainly reflects, number one, the higher cash position, and that's from capital gain realization. Number two is the Taiwan dollar's appreciation. However, we do expect that after hedge basis, recurring return should see stabilization for the full- year. In cost of liability, we can see in page 19, it shows improvement year-over-year, therefore, the positive spread between the cost of liability and investment return has widened. In your lower part of this page, you can see the break-even point also shows improvement. That's due to number one is the cost of liability, and also number two is the product mix change. In page 20, the unrealized gain continue to increase quarter-over-quarter on back of the realized capital gain also shows a record high.
We can see the mark-to-market value primarily comes from the contribution of equity investment. Therefore, the shareholders equity also reach all-time high. Next, let's move on to Taipei Fubon Bank. The revenue is a 6.5% growth year-over-year, mainly driven by net interest income growth of over 5%, and also treasury-related growth. In the meantime, it's a net fee income with a downward trend, that mainly because of adjustment in the product mix in wealth management business. In page 23, we move on to the credit composition. In Taipei Fubon Bank, the loan growth of 9.4% compared to the Taiwan industry average growth over the same period of 7.8%, that we continue to outperform. In page 24, the composition into each of the loan segments, we can see the loan growth for corporate banking primarily driven by NT dollar loan book. That is a growth of over 8%.
SME is another key growth area with over 17% growth. In page 25, the mortgage grow at 9.3%, and another key area for retail credit is personal unsecured loan. That's another 19.9% growth. From the funding cost perspective, in page 26, we can see the growth in both the NT dollar and foreign currency deposit balance. In the meantime, the composition from demand deposit ratio both improved from NT and foreign currency. The total books, demand deposit ratio reached over 61%. In terms of the asset deployment, NT dollars loan-to-deposit goes slightly higher to 85.9%, while the foreign currency book, if we include the bond investment, it reach 67%. In page 27, the interest spread shows a sequential improvement. In this quarter, our loan-deposit spread is 1.3%. For the net interest margin, slightly down by 1 basis point or 4 basis points down on same-year basis.
They reflect mainly the interest rate cuts. In page 28, the asset quality of the bank remains stable. As you can see, NPL and also coverage ratio both shows improvement and also outperform the market average. The following page 29, we further break down the asset quality by different product line that we can also see a solid performance. For the provision cost, on your right-hand side, that is mainly driven by the general provisions of the loan growth and over-securing in this provisioning level is denied. In page 30, the fee income was down 14% year-over-year. That mainly reflects the wealth management fee down by 9.5%. That's mainly because of adjustment in the sales product mix. While in the meantime, the AUM of the wealth management business continued to grow by 9% growth year-over-year, and the outstanding reached nearly TWD 1 trillion .
In terms of the credit cards, if we can look at the business dynamics, we can see the cards and also the total consumption amount both shows growth and also outperform the market. While the per card basis, the spending per card spending actually slightly came down, mainly reflects the overseas spending was missing piece during the pandemic. In page 32, the overseas branches, the performance that we see the top- line net revenue still is a decline. In fact, we see the growth from the wealth management fees. The net interest income is still a downward trend, mainly because of the more cautious underwriting policy and also the cuts. That's why that brings down the contribution to 9.6% of the total bank. Let's move on to page 34. In Fubon Insurance, its premiums leading market position of over 24%.
That keeps us at number one, while the underwriting quality remains very strong. As you can see, the net combined ratio reached 90.2% and is improvement year-over-year. In page 36, in Fubon Securities, the net profit also shows a meaningful improvement, and that mainly reflects in its brokerage business as the market turnover increased and also our brokerage market share continue to gain market share. In page 38, in Fubon Bank (China), the balance sheet items, including assets, loans, and deposits, all show a decent growth. Strategically, we continue to cultivate Taiwanese customers as a priority in our growth strategy. In page 39, we can see the net profit of Fubon Bank (China) deliver growth of 6%, mainly on the back of the net interest income growth.
The NIM expansion of over 30 basis points is one of the key contributors, while the asset quality remains stable. Looking ahead, we expect the capital injection plan of CNY 1 billion will support its growth into the next phase. Next, we will have Grace Hsu to present the embedded value of Fubon Life. Ms. Hsu is the Appointed Actuary and Senior Vice President of Fubon Life. Okay, Grace, over to you. Thank you.
Thank you, Amanda. I'll report the 2020 embedded value results. Same as past practice, the results have been reviewed by Deloitte Consulting on a full-scope basis. Now please turn to page 41. The value creation summary for Fubon Life Taiwan. The 2020 net worth and the adjusted net worth grew by more than TWD 100 billion. The growth much explained by the historical high record of earnings of TWD 60.6 billion, equity market rebound, and fixed- income asset appreciation. The value of in-force at the COC stands at TWD 336.7 billion, or 20.4% higher than previous year. These two contributed to embedded value reached at TWD 781.4 billion, a strong growth of 29% accordingly. New sales value creation. In 2020, the FYP and VNB is much lower than 2019, mainly resulted from two reasons. The high base of 2019 due to two times of subsidy effect.
The low sales of 2020 because of COVID-19 and reserving interest rate reduction. The 2020 VNB is TWD 24.4 billion, 25% lower than previous year. You can note that our VNB margin is increased due to the higher FYP mix of regular paid traditional insurance policy. Some of them came from the 2019 stop selling effects spill over to 2020. The value per financial holding company share is 76.4% for embedded value and 98.7% for appraisal value, respectively. Page 42. The movement analysis of adjusted net worth. The historical high record of TWD 60.6 billion earnings and TWD 86.3 billion financial assets appreciation in 2020 drive the significant growth of net worth to reach a high record. The adjustments made to net worth to calculate the adjusted net worth are similar to previous years.
Here is for your reference that the biggest part is the adjusted market value of fixed income asset to book value. The investment assumption we calculate for VIF is based on the book yield. Page 43. The value of in- force before CoC movement. The expected earnings and required return explain how this grow over one year. TWD 19.7 billion earning is transferred to the net worth, which is much lower than the actual result we have in 2020, which is TWD 60.6 billion. The data change is a positive impact. This data change is meant to capture the impact of actual versus expected policy data variances. The reduction of credit rates for interest-sensitive products helped to reduce the cost of liability and contributed the positive impact here. Compared to last year, the investment return assumption are adjusted downwards to reflect the NTD appreciation and low interest rate environment.
Negative impact from non-economic assumption change reflects the slightly higher morbidity and lapse rate assumption. The value of new business is an important driver for this growth as previous years. The risk discount rate reduction from 11% to 10% contribute another 10% growth. We will explain more why we lower the risk discount rate on page 48. Page 44, the VNB movement. The same basis VNB reduced by 32% with the negative impact for sales volume reduction and positive impact on product mix. The economic change is a positive to reflect the latest interest rate environment, although it's lower, but we also have lower hedging costs. The non-economic assumption is a negative impact reflect the slightly higher lapse rate and unit cost assumption in 2020. Risk discount rate is reduced by 50 basis points and we'll explain further on page 48. Page 45 summarize the economic assumption for your reference.
Now please move to page 46. The value of in-force portfolio return. You could see the investment return is slightly lower in early period. This is to reflect the latest economic environment, the existing assets, hedge cost, and other investment assumptions. We realized some credit gains from fixed income assets last year when the interest rate was lower, which leads to more cash at hand and lower yield for newly invested investments, but it is expected to pick up the yield gradually into the future. Page 47, the VNB portfolio return. The investment return starts at higher than last year, with the gap get closer in later years to reflect the recent interest rate environment, lower hedge costs, and other investment assumptions. Page 48, the risk discount rate. CAPM model is utilized to evaluate the risk discount rate assumption as previous years.
After incorporating the latest interest rate, equity plus country risk premium and beta, the calculated risk discount rate curve shows about 1% lower than last year. The equity plus country risk premium gradually decreases in recent years to reflect the improvement of Taiwan country rating and better investment environment. The beta also gradually reduces per financial holding company stock experience. Risk discount rate, in some sense, could be explained as shareholder required return. In the past, we used higher discount rate for VIF and lower for VNB. Which mainly to reflect there are some high guarantee interest rate policies in the in-force portfolio. After many years of efforts striving to lower the cost of liability and the calculated discount rate from CAPM model, we decide to use 10% discount rate for both VIF and VNB this year. This has been discussed and agreed by our external consultant, Deloitte.
The risk discount rate of 10% is also now closer or slightly higher than the main peers. Page 49, cost of capital. The methodology is the same and no regulation changes for risk capital calculation this year. Page 50 and 51 presents the sensitive summary for portfolio return and risk discount rate, to different value metrics for your reference. Now I will pass the call over to Ophelia from Deloitte Consulting. Thank you.
Okay. Thank you, Grace. Good afternoon, everyone. We are now on page 52 of the presentation. Deloitte's audits have been engaged by Fubon Life again for the review of this year's EV and VNB. Similar to the previous years, the scope of this year's review includes a reasonableness review of the assumptions applied by Fubon Life in this valuation, as well as the overall EV and VNB results. A high-level review of the actuarial model and policy data used by Fubon Life in this valuation, and also a review of the calculation methodology for the cost of capital, adjusted net worth, and the value of in-force movement analysis. Moving on to page 53. With respect to the risk discount rate assumption applied by Fubon Life, the assumption derivation methodology has been kept consistent using the CAPM approach.
Similar to the previous years, Fubon Life has derived four data points, including the risk discount rate based on the current risk-free rate, long-term risk-free rate, as well as an in-force and new business equivalent RDR. These four RDRs lie between 7.71% and 10.13%, and Fubon Life has set the RDR assumption for both the in-force and new business at 10% for this year's valuation. Moving on to page 54. In the previous years, Fubon Life set a higher RDR for the in-force business to reflect the higher cost of capital and interest rate risk underlying the in-force business. Through its efforts in adjusting the business mix through new business, the risk profile of both the in-force and new business has converged over time. We find the use of the same risk discount rate for both the in-force and new business a reasonable approach for this year's valuation.
Turning to page 55. With respect to the investment return assumption, Fubon Life has adopted a consistent derivation methodology. The initial risk-free rate for both New Taiwan dollar and U.S. dollar has been updated to the prevailing level as of the valuation date, whilst keeping the long-term level the same as last year's. The investment return assumption for all asset classes has been appropriately updated to reflect the company's latest asset mix and investment strategy. Turning to page 56. Based on our review, we find the investment return assumption and the adjustments made to the net worth internally consistent. The overall investment return assumption lies within a reasonable range. Turning to page 57. Deloitte Consulting has also reviewed all the non-economic assumptions applied by Fubon Life. All the assumptions have been updated to reflect the company's latest experience and lie within a reasonable range. Now to page 58.
Through a review of the movement analysis for the value of In-force business and nalue of new business, and also series of sensitivities, we find the overall EV and VNB results for this year to lie within a reasonable range. This is Deloitte Consulting's briefing on our review of Fubon Life's EV results. Detailed findings can be found in the opinion letter issued by Deloitte Consulting. Thank you for listening, and I'll now pass time back to Amanda. Thank you.
Okay, thank you. Operator, we can open the floor for Q&A. Thank you.
Thank you. We will now begin the question- and- answer session. If you would like to ask a question, please press star one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To cancel your request, press star two. Again, to ask a question, please press star one. One moment please for our first question to queue up. Our first question is from Jemmy Huang of JP Morgan Securities. Your line is now open.
Hi. Thanks for the presentation. Just three questions from me, mainly for the life insurance operation. First one is, can you explain a little bit more in terms of the year-on-year decline for the renewal premium in the first quarter, the reason behind, and then how we see the full year situation here? The other two questions were related to the embedded value. In terms of the beta, you lower from 1.2 to 1.1. Just wondering what kind of time horizon are you using to determine the beta? Is that one- year or three- year or five-year average? The second question is on hidden costs. I know the investment return assumption being revised up for value of new businesses. This is our hidden cost.
Just try to understand whether you do the same adjustment or similar adjustment for VIF, or you simply do this for VNB this time. Thank you.
Okay. Let me reiterate Jemmy's question. I think the first question regarding the renewal premiums decline. I think this question will have [Tyding] to reply. The second and third question related to the embedded value. Can we have Grace to reply? Thank you.
Regarding the renewal premium, because for the past few years, we sold a lot of short premium period product. In this year, a lot of policy are paid up. That's why the renewal premium dropped substantially this year.
[Tyding], I think Jemmy also asked about our full- year expectation on renewal premium.
Our renewal premium, we will expect drop 10%. Let me see. Well, 10%-20% this year. For the whole year.
Sorry, I didn't hear clearly. It's a 10%-20% decline for this year, for the renewal premium?
Yeah, from previous year.
Can I follow up that you mentioned it's mainly because of the two-year paid products that you sold in the past couple of years?
Right. That's correct. Two or three years.
Yeah. Thank you.
Okay.
Okay, great.
Okay. Over to you, Grace.
Thank you. For the risk discount rate, because we don't think this is some sort of shareholder required return, we don't think this is a very frequently change from year to another. When we look at the information for the assumption, the beta is based on the past 10 years average. For the hedging cost effect, yes, the hedge cost is applied to the assumption will be to reflect the latest experience for both VNB and VIF. Because for in-force, many of them, the hedge contract is already there. The newly hedged contracts, they have very small impact to the whole portfolio return. That's the reason why I don't mention that in the VIF part, but just in VNB. Actually, they are all both reflected, and most recent experience are also adopted. Thank you.
Thank you. Once again, to ask a question over the phone, please press star one. Excuse me, speakers. At this time, there are no further questions on queue. Please proceed.
Maybe we wait for a few seconds to see if there's any questions come up. Thank you.
We do have one question. It is from Steven Lam of Bloomberg Intelligence. Your line is now open.
Hi. Good afternoon. Thanks for the opportunity to ask questions. On two front, both relating to life insurance. One is, given the trend that we have seen so far in first quarter, would you suggest that it will be difficult to grow, develop new business for this year? Is it mainly due to the volume side or it's a combination of both volume and margin? Second part is about investment. Notice that very, very strong earnings up until April. We will see probably the May number very soon, in a couple of weeks time. Just curious, what would be the management expectation, say, in May, June, or in the near- term, for example? Would we still expect a high level of realized gains from securities?
Have you sort of taken the opportunity to deploy some of the cash holdings that you have had in March, maybe bought a bit more in terms of foreign bonds, for example? Thank you.
Okay. I think the first question is regarding our VNB outlook for this year, so I will have [Tying] to comment on that. I think the second question regarding the investment. I think we probably can only have a very high level of comment. I think Cather, please comment on the second one. Thank you.
Okay. The first quarter VNB drop, mainly caused by the margin drop. The main reason is that the stock market is doing very well. The first quarter, most money switched from traditional interest-sensitive products to unique link policies. Most policies are single premium, and that margin is much lower than regular paid interest-sensitive product. That's why the margin dropped a lot. For the next few quarters, we try to push more protection product and try to bring up the VNB margin.
Thank you. Our next question is from Roger Lam of GIC. Your line is now open.
Hi. Thanks for taking the question. I think the speaker before me has asked a similar question, but I thought I'd approach the investment question slightly differently and ask your investment team. In terms of the rest of the year, what kind of top-down strategy are you looking at in terms of investing in the market? Obviously, the equity team has done extremely well. Again, it is tough to make predictions about performance for the rest of the year. Can you help us understand what's the strategy for the next nine months? Thanks.
Okay. Thank you, Roger. Cather, can you please comment on our top-down investment strategy? Thank you.
Okay. No problem. As we just mentioned earlier that we already have realized substantial gain from both our fixed income and also bond. Fixed income such as bond and also equity market in the first quarter. Currently, even though the recent COVID-19 outbreak has caused turbulence in the financial market overall, however, we think Taiwan's economic prospect still looks promising. We expect the previous earnings momentum to sustain going forward. With the increased cash position, as we just mentioned, that we saw from equity and also bonds, we will be able to buy on dip of the stock market with maybe high dividend payout and also growth potential. In addition, with the rising bond yield environment and low hedging costs, we will expect this overall return may be after hedge still can beat last year's level.
That's all.
Sorry. Just to add on to that, the unrealized gains are quite massive still. To what extent will that provide also a buffer in terms of the rest of the year?
I would say it could be still substantial, but.
[inaudible]
Yeah, quite similar—
Okay
to last quarter.
Okay. Understood. Yeah. Go ahead, Amanda.
Okay. Roger, yeah. Just want to reiterate, I think our top-down focus is still more on the recurring return management. In terms of the recurring return, we aim for, on an after-hedge basis, we can be at least at a similar level as in year 2020. That we can achieve a positive spread between the recurring returns versus the breakeven point.
Sure. I'm asking because a lot of the consensus has to be raised quite a bit just because of the very strong first quarter. I guess we want to calibrate our expectations for the rest of the year. Obviously, I hope you beat all the numbers, and everybody has to continue to upgrade. My other question is a small question here about the insurance business. The VNB has actually collapsed quite a bit, and it's driven basically by renewal premiums collapsing. Just wondering, how about the persistency ratio? Because we didn't show that number. Does it also reflect a drop in persistency?
No, actually, the persistency is pretty good. Still above 95%. It is not a problem.
Okay.
Okay. Yeah. Let me add on a few comments. Roger, if you can refer to the appendix page at the back of this presentation. In the bottom of the table, we show the persistency for 13 months and 25 months.
Okay.
You can see the 13 months persistency are still at 97%, and 25 months is 95%.
Okay. Yeah. I got it. I missed this. Yep.
Okay. Good. Thank you.
Thank you.
Our next question is from Brooks ley Kang of BofA Securities. Your line is now open.
Hi. Thank you. I have two questions on banks. First, I think in the first quarter, the FX lending still has some growth. Despite of that, the management mentioned that actually we are still conservative on lending policy. Can I have more color that is, whether or that in some of the regions we are now more comfortable with? Second question is that, if I can have some high-level comments and updates on Fubon Bank (Hong Kong) for first quarter. Thank you.
Okay. I think for the first question, yeah, please. Thank you.
Sorry, let me. The first quarter, our total loans outstanding increased 9%, up to TWD 1.5 trillion, mainly from our SME lending and retail consumer lending, plus mortgage loans. Also, we have 13% increase in our foreign currency long-term bond investment. As you referring to the FX lending, the FX, foreign exchange currency- denominated loan outstanding increased mainly from our local corporates. They draw down our U.S. dollar loan to support their overseas investment. While you mentioned our loan outstanding increase in overseas branches. In that part, our lending policy so far is kind of conservative rather than aggressive. Our loans outstanding in Hong Kong, let me give you the number. This. Our loans outstanding in Hong Kong actually is a drop from previous year.
Year-on-year growth is a 20% decrease for the reason that some of the loan repaid, and we are in a position to review our credit quality. Far our overseas lending, Hong Kong and Singapore, we reduce our exposure. While we increase our loans outstanding in Vietnam by 40%. That is basically the situation in our overseas branch.
Okay. Thank you. That's very clear.
Okay. Yeah. Also, Brooks ley, you asked about Fubon Bank (Hong Kong), we actually only disclose on half-year basis. I think a very high-level comment is that we see LI starts to show stabilization and also the asset quality.
Okay. Thank you, Amanda.
Yeah.
Our next question is from Chung Hsu of Credit Suisse. Your line is now open.
Okay. Hi. Thank you. Yes, I have two questions from Fubon Life. If I look at your presentation, slide 19, just want to clarify, your cost of liability on the year-over-year basis is down about 20 basis points
From 3.51% to 3.31%. Your breakeven point is down 43 basis points. I just wanted to clarify what is that additional 23 basis point decline breakeven points coming from. I guess what I am trying to get at is how sustainable or stable is this drop in breakeven point much more than the drop in cost liability? My second question is on FX hedging cost. If I go to page 18, and if I look at just the gray area, the gray bar on the left side, the currency swap and NDF cost dropped from 42 basis points in the fourth quarter to 12 basis points. I am just trying to get a sense that it feels that at a 12 basis point hedging cost in the first quarter, it feels as if you have almost no NDF.
It's very small NDF, we still see a pretty big sequential or Q-over-Q drop. Can you just give us more color, the split, and or was it more because you changed your hedging mix Q-over-Q to drive that? I'm just also similarly trying to get a sense of how sustainable this very low hedging cost of 38 basis points is for 2021. Thank you.
[Patty], could you please comment firstly? Thank you.
Last April, because the pandemic and the Fed dropped the interest rate. That's why we dropped our credit rate on interest-sensitive product by 20%. Usually, it takes one year to roll over all the in-force block business. That's why the cost dropped substantially last year. This year, we go back to normal. The average drop will be 5 basis points to 6 basis points. The breakeven point. Last year, because the product mix, we sold a lot of six-pay whole- life product, and that needs to hold additional reserve. That's why the breakeven rate is high. This year, because the product mix changed, it go back to normal, around the 2.6%. We expect the 2.6% will last for the whole year, this year.
I see. Just want to clarify on that point. Those six-year products mature, so this is some release of the reserve. This 2.6%, there won't be some one-off items we have to adjust. Like you said, this 2.6% is going to be sustained or more closely tied to your cost liability trend going forward. Should we expect more impact on product mix change for the rest of the year?
This year, we don't have that kind of product. We expect the breakeven rate will be stable at 2.6%.
Okay.
Okay.
Cather, could you comment on the second one?
Cather, can you comment on the second question?
I think maybe you can look at the chart that as you just mentioned, that actually our cross-currency swap position or even the hedge by forward, actually the position is relatively high. It is because the hedge, the [inaudible] swap point actually reflects the differential or gap of the U.S. and Taiwan dollar interest rate. That means the two rates gap keep narrowing from maybe last year. The reason you can see our hedge cost from the last chart is also down from -70% and -42% and even a -26%. It just reflects the interest gap between the U.S. and NT dollars. That will be the trend. Also because the forward contract normally monitors within the six months that it is because the rollover effect. You can see it is just gradually lower and lower.
Based on these things, the same thought, if we still expect this interest gap still very narrow this year, that means our cross-currency swap points or cost could be sustained at this current low level. That reason we just mentioned in the Asian option, we think overall hedge cost can be management, maybe within 70% to 90% at this point, or lower about 15 basis points compared to last year. Here's our view right now.
Thank you. We have another question. I'm sorry, go ahead.
Sorry. Let me add some comments, if I may. I think a question on the NDF. Indeed, we do have NDF position, it accounts for a very low percentage in our hedge mix, and we tend to be quite active in adjusting this portfolio. I think by end of March, is at a very low position. It also reflects the NT dollar's position at that time. I think we do widen our exposure to NDF from time to time when we feel the need to do so. That's why that echoes what Cather just mentioned. Year-round, full year expectation for the hedge cost will be somewhere about 70 basis points to 90 basis points.
Thank you.
Okay.
We have another question from Steven Lam. Your line is now open.
Hi. Thank you for the opportunity again. I know it's running out of time, I'll be quick. On life side, just want to hear your views on the recent spike in COVID cases. I know it's a very unfortunate event. A lot of people are working very hard to contain that. What's your outlook for the impact on, say, new business, for example, especially from the experience that we've seen elsewhere, it'll be very hard to sell protection type products when face-to-face is being reduced. Secondly, just in terms of going back to the investment preference, could we get some color in terms of your preference in the next six to nine months, say, between the regions, say, Asia versus Europe versus North America? Thank you.
The pandemic will cause a lot of impact on our new business, according to our experience last year. We expect these two months will be very difficult. For the second half year, we will see, and hopefully, the business can pick up.
President Chen, do you have anything to add, comments from Taipei Bank's perspective?
Regarding the COVID-19, so far, including our corporate and retail business from the deposit lending and wealth management, situation is still under control. No significant change. We are waiting for the situation and to see what the pandemic will continue or not.
Thank you, President Chen. Cather, could you comment on the investment performance by geography? Thank you.
First of all, we talk about the fixed income. The U.S. region will remain our priority, other may be also Europe region. For the equity, if opportunity arise, we will buy on dip stock, both with the high dividend and payout, and also growth potential, and most likely will be on Taiwan stock market amount. That's all.
Okay. Thank you, Cather.
Okay. I just want to add that the COVID-19 situation in Taiwan started to deteriorate about weeks ago. It is probably too difficult to gauge the impact on our business. I think it would probably more appropriate for us to give you a more precise update, probably in the next few weeks. I think any comment at this moment is still pretty premature, in my view. Okay, Amanda, please go ahead.
Thank you, President Harn. Operator, I think we are fine with the call for time being, and time is up. Shall we close the call, please?
Of course. Thank you very much. That concludes today's conference. Thank you all for participating. You may disconnect at this time.