Thank you for standing by. Welcome to Fubon Financial's first quarter of 2020 financial results. At this time, all participants will be on listen- only. During the discussion, there will be the question- and- answer session. To ask a question, please press star and then one. This call is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to your host, Ms. Amanda Wang, IR officer of Fubon Financial Holdings. You may begin.
Thank you. Hello, everyone. Welcome to join Fubon Financial's investor conference call today. In this call, we will share with you our first quarter 2020 results and followed by the embedded value of Fubon Life 2019. Firstly, let's turn to page four of the presentation. In this quarter, Fubon reported TWD 20 billion of net profit. That is over 80% growth compared to previous year first quarter, mainly driven by a very strong investment income from Fubon Life. The main subsidiaries of the holding company, you can see that Taipei Fubon Bank continue to deliver steady NIM and also from the fee growth, especially from our wealth management, we continue to deliver strongly. The approval for the Sydney rep office application is granted from the FSC, and they'll help us to expand into the Pan-Pacific financial service network.
In Fubon Life, we see our business momentum remains decent with the FYPE at the top position and also in terms of the VNB continue to grow. On the investment side, the after-hedge current return and also the cost of liability continue to show improvement. In terms of the virtual life license in Hong Kong's operation, that is granted with a 35% stake. In Fubon Insurance, we continue to be the market leader with the total premium at the top position, while the combined ratio remain at steady level. In Fubon Securities, we keep at a top three market position in terms of brokerage and emerging trading business. In page five, now you can see the net profit and EPS continue to show the strong results, while the first four months of result that will reach TWD 28 billion and still top ranks in the market.
In page six, by subsidiaries earning performance that we can see life insurance and also P&C deliver the growth, largely due to the investment income's performance. That lead to Fubon Life's contribution of over 70% of the total earnings, while the three bank subs together account for over 20% of the earnings. In page seven, in terms of assets, we grow over 9%, while the net profit decline reflect the market volatility of the marketable securities, while we see a recovery of nearly TWD 70 billion in April. In page eight, the ROA and ROE both shows improvement on back of the earning momentum. In page nine, as we see the past few months, the COVID-19's impact still impact the whole market globally. While in Taiwan, we are well-controlled, but we try to deliver the professional financial services that Fubon can deliver to counter the pandemic.
From each of the subsidiaries, from the banking side, we basically help customers to apply for the bailout programs. We deliver the online platforms, including the credit cards and also the card users, the digital banking activities volume, which shows the improvement. In terms of Fubon Securities, we see the online new account application actually doubled. The interface will continue to improve. While in the insurance business, we see the policyholder subscription for COVID-19 related insurance accounted for over 125,000 policyholder subscription, that is a way that helps us to build a customer's interaction during this difficult timing. In page 11, we move on to Taipei Fubon Bank. The core revenue continued to grow quite nicely at double-digit in terms of net interest income and fee income.
While the net treasury income declined, mainly due to the unrealized losses, that led to the top- line decline by 10%. In page 12, the loan breakdown by sector that you can see that we see a very strong growth in corporate loan that led to the overall banking growth of 11.5%. If we include in the government lending, the growth rate will be 12.9%. In page 13, in terms of the credit from the corporate banking side, we see the NT dollars growth at 25% and foreign currency growth at 13.9%. In terms of SME, also delivered quite decent growth at 12.9%. In page 14, in terms of the retail credit, mortgage grew at 5.9%. That is more steady performance. While the other consumer credit, mainly led by the unsecured business, that grew 9.5%.
In page 15, the total deposit including NT dollars and foreign currency, reached TWD 2 trillion by the end of this quarter. We see the deposit mix continued to improve from the NT dollar book, while the foreign currency's LDR shows some improvement to 38.7%. If we include in the foreign currency investment, the total deposits accounts for up to 70.8% of the total foreign deposit. In page 16, we see the spread from loan deposit spread perspective widened by 4 basis points, largely due to the foreign currency loans growth and also liabilities structure improvement. While the margin remains flat at 1.1% compared to Q1 last year, as the net interest margin also gets negative impact from the rate cut, that offset the spread widening benefit from loan deposit spreads performance. In page 17, the NPL ratio started moving upward.
That's mainly due to a single case, a corporate default case in Singapore, also led to the coverage ratio to come down. While we wrote off the case in April, we see the NPL drop back to 0.18% a coverage ratio rebound back to over 60%. On page 18, the fee income of the bank, we see a very strong growth of over 20%, driven by double-digit growth in several areas, including wealth management, credit card, and syndication loan business. The wealth management business that accounts for the bulk of the fee contribution also grew at over 20%. That is mainly driven by the investment product, as we see especially in the first two months of the first quarter. While starting from March and also in the recent two months, we see the customers' preference for cash preservation demand is getting higher.
Therefore, we are taking a more conservative stance on the growth outlook in wealth management. In page 19, the overseas branches was down by 12% Y-o-Y, and that mainly reflects the Hong Kong branches performance. While we see in Singapore and Vietnam, the earnings momentum remains steady. It also shows that in our total loan balance of the three overseas branches, actually continues to grow by 19%. In page 21, we move on to Fubon Life. The total premium shows a decline of 11%, largely due to the FYP's structural changes and declined by 42%. We continue to be the market leader in FYPE and top ranked in terms of FYPE and top two in FYP and annual premium. In page 22, full month FYP declined by 42%. That is similar to the market's overall trend of 35% down.
Due to this higher base driven by the hot sale in previous year, and also the company's changes to regular pay policy this year, and also the COVID-19's impact that led to the decline. While the regular pay policy, as you can see the contribution here, now reach over 50% of the FYP. In page 23, the FYPE performance here is very strong at 35% growth, and that also led to VNB growth of over 8%. In page 24, by channels that we can see over half of the contribution coming from our internal channels, including Taipei Fubon Bank and tied agent. While on the right-hand side, the FYPE by channels that especially from the agents and also external banks, shows a strong momentum in a regular pay policy, leading to their contribution also getting higher.
In page 25, in the investment portfolio, the overall outstanding reached over TWD 4 trillion with 6% growth, while the portfolio adjustment largely is addition into overseas fixed income. That's mainly from the second half of the March, as we see the market interest rate. Sorry, I should say the spread widening take place, and therefore we accelerate the accumulation during the spread widening stage. While in the earlier part of the first quarter, we do the portfolio adjustment to take profit and also to reduce our position. In page 26, it shows to you the current allocation of overseas fixed income by asset type and also by region. It's largely similar as our previous quarter's performance. In page 27, in terms of the investment income composition, we can see that primarily it comes from the recurring investment type, while the dividend income from the mutual fund and equity grows more.
In capital gains, this quarter we see a fixed income contribution significantly increased as I just described. In page 28, in terms of the hedging activity, we can see the cost shows a meaningful decline in first quarter, mainly due to the interest rates spread narrowing. While the portfolio on the right-hand side that you can see, compared to the previous quarter, we lowered down our other currency exposure and increased the naked dollar position to reflect the current currencies movement. While the recurring return performance from the after-hedge perspective, it shows improvement. While the before hedge may reflect the lower rate environment, the callback, and also the FX rate we apply when we calculate the income. In page 29, from the cost of liability perspective, we see the improvement continuously, driven by the new business and also by the credit yield rates lower down trend.
In the break-even point perspective, we can see the increase year-over-year, mainly due to the product mix change into a regular pay policy, therefore lead to a higher new business strain. In page 30, the investment performance, from unrealized balance perspective, it just shows a quite meaningful volatility in the first quarter, that reflects the market's movement. Therefore, it came down to unrealized loss of TWD 57 billion at end of March, while we see the rebound back quite meaningfully in April, therefore led to the shareholders' equity as of April go up to over TWD 300 billion. Next section, let's move on to Fubon Insurance. In page 32, Fubon Insurance premium growth at 10.1%, that outperform the market, therefore we see the market share increase. Now we are at 24.8%.
On the right-hand side, we can see the combined ratio slightly edge up, largely due to the compulsory auto business. Fubon expense ratio continue to improve, the overall combined ratio still keep at a decent 90.9%. In page 34, the Fubon Securities highlight. Here we can see the market position across the main business remains decent, while the revenue and net profit decline that largely reflect the unrealized loss from the capital market. The brokerage revenue continued to grow decently, along with the market turnovers increase. In response to the pandemic, the company also focused on digital platforms access and also its risk control. Next section, let's move on to Fubon Bank (China). In page 36, Fubon Bank (China)'s deposit and loan both reach record highs. The growth momentum is quite strong at over 50% for deposit growth and over 30% for loan growth.
That also lead to the asset to reach over TWD 100 billion. In page 37, in terms of the financial highlights here, the net interest margin slightly came down. That largely reflects the market interest rate, while the asset quality indicators continue to improve, while the loan balance continue to expand as well. I will have the Actuarial Team Head, Grace Chiu, to walk you through the embedded value results and followed by Deloitte consultant's comment. Thank you.
Okay. Thank you, Amanda. Same as past practice, the 2019 EV results have been reviewed by Deloitte Consulting on a full scope basis. Please turn to page 39, value creation summary for Fubon Life. Let's look at the in-force value creation. 2019 net worth and adjusted net worth are higher than TWD 300 billion. Growth of more than 60%, much explained by the equity market rebound and fixed income asset appreciation. 2019 value at in-force after cost of capital stands at TWD 279.7 billion, slightly higher than 2018. This is a mixed result of strong VNB growth and a more conservative economic outlook. 2019 embedded value reached to TWD 605.2 billion, a strong growth of 26.5% compared to last year accordingly.
In terms of new sales value creation, the 2019 VNB is TWD 32.7 billion, a 22.8% higher than 2018, mainly contributed by traditional regular pay policies with higher VNB margin. The value per share information is also summarized here for your reference. Please turn to page 40, the movement analysis for adjusted net worth. This page shows the net worth movement between 2018 and 2019, and how it is adjusted for the embedded value calculation. The posted TWD 26.5 billion earnings and TWD 109.3 billion financial assets appreciation in 2019 drive a significant growth of net worth to reach TWD 337.5 billion, a 68% growth compared to 2018. The adjustment made are similar to previous years.
Firstly, add the special reserve that could be recognized in available capital calculation for RBC percentage. Secondly, remove the unrealized capital gain or loss of fixed income from the accounting book to align with the book-year return assumptions we used for this calculation. Lastly add the unused real asset appreciation not recognized in our accounting books. Page 41, the movement analysis for value of in-force before cost of capital. The expected earnings and required return explains how VIF grow over one year. The TWD 15.7 billion earnings is transferred to the net worth, and the unwinding of 11% discount rate contributes another TWD 44.8 billion. Compared to last year, the investment return assumption for all portfolios are adjusted downwards to reflect a more conservative investment outlook based on recent market observations. Simultaneously, this impact is mitigated as the company could take action to lower crediting rate for interest-sensitive products.
The negative impact from non-economic assumption change is due to the actual experience observed being slightly less favorable compared to original assumption and it results in a -2.1%. The value of new business is still the major driver for value of in-force growth. This year, VNB before cost of capital contribute additional 10%, and the overall VIF growth at 6.7% compared to last year. The note below shows the VIF equivalent return for 2018 was 4.42%, rolling over to 4.5% after one year. The reduction of return assumption further lowers 18 basis points to 4.32%, the equivalent return for value in-force. Page 42, the movement analysis for value of new business. The same-basis VNB grows at 39.8%. The significant product mix improvement reflects our strategy toward regular premium policy. It is also boosted by high-margin traditional regular pay premium product due to the step-setting effect.
Same as in-force economic assumptions, the investment return for new business is adjusted downward accordingly. Non-economic assumptions improve to reflect the lower acquisition expense due to larger new business sales volume in 2019. The note below shows the VNB equivalent return for 2018 was 4.35%, rolling over to 4.38% after one year with the 2019 product mix. The reduction of return assumption further lowers 40 basis points to 3.98%, the equivalent return for 2019 VNB. Page 43, the economic assumption summaries. The investment return assumptions are lower for both VNB and VIF, as mentioned before. The reduction on new money return for VNB calculation is bigger than those of VIF, as VIF return starts at existing assets and gradually move to new investments after existing assets mature. Risk discount rates stay at the same level of previous years. That is 11% for VIF and 10.5% for VNB, respectively.
The equivalent return for VIF and VNB are reduced by 10 basis points and 37 basis points. A bigger reduction of 18 basis points and 40 basis points if rolling over effect is also considered. The initial and ultimate assumption for Taiwan dollar and U.S. dollar 10-year rate is also summarized here for your reference. Page 44, the VIF return curve you can see from the page shows the reduction of ultimate return could reach to 40 basis points to 60 basis points. Page 45, the curve for VNB portfolio return. The higher reduction of USD-denominated policies initially to reflect the portfolio backed by more U.S. dollar-denominated fixed income assets. The NT dollar-denominated policies are backed by some equity investments, so the reduction is not as much as USD-denominated policies initially. However, the ultimate portfolio return for NTD-denominated policies are reduced more than the U.S. dollar policies to reflect the lower NTD interest rates.
Page 46, the discount rates. The discount rate remained at the same level as last year, 11% for VIF and 10.5% for VNB. Per Deloitte consultant's opinion shown on page 51, if the discount rate curve is applied to calculate the VIF and VNB, a single equivalent discount rate could be determined to reach the VIF and VNB figures based on the discount rate curve. The single discount rate would then be 10.26% and 10.14% for VIF and VNB respectively, which are more close to 10% discount rate used for most peers. If you would like to make consistent comparison with the industry peers, the sensitivity results on page 49 could be referenced for your further adjustment. Page 47, the cost of capital. The methodology is the same, and the C3 extra charge stays at 50% as last year.
Regulation changes are also reflected and briefly summarized here for your reference. Page 48 and 49 shows the sensitivity summary for portfolio return and risk discount rate. The sensitivity results give you a sense on how some key assumptions drive various value metrics. You may find the VNB is less sensitive to investment return in percentage-wise due to a higher share percentage of interest rate sensitive products. Now I will pass the call over to Ophelia from Deloitte Consulting. Thank you.
Thank you, Grace. Good afternoon, everyone. We are now on page 50 of the presentation. Deloitte's independent review this year included Fubon Life's embedded value as of the end of 2019, as well as the value of the new business written during the year 2019. The review included a few components including the valuation assumptions, actuarial model changes, and the various components of the calculations. Turning to page 51, in relation to the risk discount rate assumption, Deloitte performed the review by constructing a set of independent risk discount rate assumptions, and it ranges from 8.81% to 11.05%, as shown in the table. In addition, we also calculated a single equivalent risk discount rate for the new business and also new in-force business, which comes at 10.14% and 10.26%, respectively.
Considering Fubon Life's assumption lies within the range of the reference points, we consider the risk discount rate assumption to be reasonable. Turning to page 52, these are notes relating to the parameters and the bases with which we calculated the independent risk discount rate, and I leave these with you for your reference. Turning to page 53, in relation to the investment return assumption, Fubon Life applies a consistent approach in deriving the investment return assumption this year. In particular, separate investment return assumptions were used for the NT dollar business and U.S. dollar business to reflect the different asset allocations. One change this year is the ultimate risk-free rate for both NT dollar and U.S. dollar. Both have dropped by 25 basis points from last year, standing at 3.25% and 5% respectively.
We have considered this change with the supporting information provided by Fubon Life as well as the latest global interest rate level and historical interest rate information for both economies, we consider the investment return assumption to be reasonable. Turning to page 54, in relation to the investment return assumption, we also reviewed its consistency with the adjusted net worth calculation. The adjusted net worth has been adjusted with the appropriate unrealized gain loss adjustment, and we consider it to be internally consistent with the investment return assumption. Turning to page 55, we have also reviewed all of the non-economic assumptions used by Fubon Life in the calculations, such as mortality rate, expense, and lapses. These are all reasonable and appropriately reflect the actual experience of the company in the past years.
Turning to page 55, we have reviewed the overall EV and GMB results and are satisfied that they are reasonable at a high level. We're focused on the changes of the value of in-force business from year 2018 to 2019, also the causes of the value of new business from year 2018 to year 2019, as well as the range of sensitivity tests that Fubon Life conducted. For further details of our opinion, please refer to our opinion letter. I now pass the time back to Amanda. Thank you.
Thank you. Now we would like to open the Q&A for the audience, and that will be chaired by Sophia Wang, the Head of the Finance and Accounting of the holding company. Operator, can you please take questions with the investor's name and company name, please? Thank you.
Thank you, speakers.
Hi, everyone. Thank you for joining our section for the IR meeting. We would like to take your question after listening the briefing from Amanda Wang and Grace. Please raise your question. Thank you.
Thank you, speakers. We will now begin the question- and- answer session. If you would like to ask a question, please press star and then one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, please press star and then two. One moment, please, for the first question to queue up. Excuse me, speakers. There is one question in queue. I need to step out for me to able to gather the names and the company name of the questioner. One moment, please.
Thank you.
Thank you.
You're welcome. Excuse me, speakers?
Yes, please.
Our first question, this comes from Jemmy Huang.
Hi.
Jemmy, your line is now open.
Thanks for the presentation. A couple of questions from me. First is, for Taipei Fubon Bank, I think that you mentioned that under the stress test, your credit cost might increase by 7 basis points to 10 basis points, just try to understand what's your base case assumption for credit cost this year. For Fubon Life, have you observed for your overseas fixed income portfolio any rating downgrade in the first four months of this year? Perhaps, could you give us what's the percentage of the non-investment grade in your overseas fixed income portfolio by the end of last year versus the latest status? On the holding level, two questions. The first one is, double leverage ratio increase quite a bit on the quarter-on-quarter basis. What is the reason behind?
Second question is, given a much lower payout ratio this year and also the recovery on realized gains, should we be concerned about retained earnings tax will be much higher this year, or it will be mitigated by the new special reserve requirement on the fixed income trading gains starting from this year? Final question is on cost of capital for the embedded value. In page 47, you listed a couple of reasons, what is the key driving factors for the cost of capital increase in addition to the underlying business growth? Thanks.
Okay. Regarding to the questions towards the Fubon Bank, I would like to have Tim to answer the question, please.
Okay. On the extra credit cost that we estimate, this 7 basis points to 10 basis points is after our stress test on our portfolio. If you said the base case, on the low side should be about 7 basis points. More on the extreme side, about 10 basis points. I have to mention, this is after our stress test, not in the normal situations.
Yeah. This is Sophia. Regarding to your questions towards the decrease of double leverage ratio for the financial holding company. The reason why of the decrease is because of the reduction of the equity by the end of March. Regarding to the second question, for the retained earnings tax, since we still have the remaining retained earnings, we will have retained earnings tax, this year. Have we answered your questions?
Excuse me, Jemmy?
Yeah. Thanks. Maybe I follow up on the credit cost. Let me rephrase my question, your credit cost, for Taipei Fubon Bank is roughly around 13 basis points- 14 basis point in 2019. What's your best case versus that level this year?
Your best case is versus what?
Let's say credit cost last year was around 13 basis points - 14 basis point, at Taipei Fubon Bank. What's your best case for credit cost compared to last year?
In a stressed situation, we will have around 20 basis point on credit cost. It's under the stress test situation.
Yeah.
If the virus going south again, this kind of situation could happen.
What's the base case? Let's say your baseline scenario, should we expect credit cost also increase by, let's say, 10 basis point year-on-year?
On a normal situation, I don't think so. 10 basis point is quite a lot.
Yeah. Okay. Thank you.
Yep.
Excuse me, speakers. Our next question comes from Edwin Lu from HSBC.
Oh, I haven't.
Your line is now open.
Okay.
Hi, can you hear me?
Yes.
Yes.
Hi. Thanks. Thanks for taking my question. I'm Edwin from HSBC. Can I ask a first question regarding your overseas investment? I think that you have mentioned you have increased your overseas investment recently because of the higher credit spread. Just want to get an idea about more from a medium to longer term view about your overseas investment proportion. Do you intend to increase your overseas investment? Given that the U.S. bond yield has been at a historical low level and credit spread may not be high at that level for longer term, do you intend to have a change in your investment strategy? I think, second question is on your new money yield. I think you just mentioned, your new money yield will be around 3% to 3.5%. This is lower compared to previously.
Just want to get an idea about the spread, meaning the new money yield, versus your cost of liability on your new product sales. Has that spread also under pressure recently? Could you give us an idea about the spread now versus maybe in last year? Thank you.
Okay. Regarding to the investment questions, I would like to ask [Cantor] from the Fubon Life investment department to answer the questions. [Cantor], please.
Excuse me, speakers.
Yeah. Actually, our foreign investment strategy have no big change recently. I would say that if interest rate go higher, then we will take advantage of that. I don't think we will, especially to increase the foreign investment. If we have sale—
sell more foreign policy than we can buy more foreign bonds in terms of the liabilities. U.S. currency dominate. Here is statistically. About the first question. Our foreign bonds corporate issue should be more than 95% are investment grade. About the financial credit are all investment grade, there is no significant downgrade during this COVID-19 period. That's all. I'd like to add the point on the cost of liability for new product sales. For 2019, we have gradually reduced our crediting rate for the interest-sensitive product. The cost of liability for the 2019 new sales is less than 3%. At the moment, after this reduction on credit rates, the cost of liability for new products are both lower than, for NT dollar policies, less than 2%, and for U.S. dollar policies, it's also less than 3%.
I think in terms of the cost of liability for new sales, it's still lower than the target of investment return outlook we expect. Pretty much maintain the positive spread.
Okay. Let me clarify. I'm Sophia. Let me clarify my answer before. Since the double leverage ratio for the Fubon Financial Holding Company at the end of 2019 is 111%, by the end of March, the ratio has increased up to 140%. The reason for the increase of double leverage ratio resulted mainly from the reduction of equity. Thank you. Do we have more questions from you?
Nope. Thank you. Thank you very much.
Okay.
Thank you, yes.
Excuse me.
Go ahead, speakers. Excuse me, speakers. Our next question comes from Steven Lam from Bloomberg Intelligence. You may proceed.
Hello? Hi, management.
Hi.
Good afternoon, everybody. Can you hear me okay?
Yes, pretty good.
Yeah? Okay. Thank you. I just want to follow up on the questions on the foreign investments. I guess I will start by asking a couple of the just confirmation type. For the bond gains that you've realized in the first quarter, can I assume that the bulk of it is from foreign bonds or domestic bonds? Secondly, when you say you bought into the dip in March on the corporate credit in North America, can I assume that you're mainly talking about straight out bonds, or would be a mix of some maybe bond ETFs as well? Third one on the investment is about just so far. In April and May, what have you done so far since the rally, the pickup, and ahead of the Fed buying for those bonds? I think on the life insurance side, just want to get a sense.
I can understand the FYPE will slow down. MBV will slow down. I was just curious, on the margin side, are we going to continue to see some pressure on the margin side over the next couple of quarters? For example, when I look at the April figures, looks like the FYPE also fell, but probably at a double-digit pace. I was wondering, for those decline, are those basically in line with the underlying trend that you have expected, or there's also a mix of maybe customers' concerns about the macro slowdown? That's on the life insurance side. I guess, generally speaking, with the central banks printing money all over the world, is there any concern? What are your major concerns, be it from an investment side or from running a business side from a longer-term perspective, say more than six or 12 months after the COVID-19?
Thank you.
Okay. Since you have asked several questions, first of all, I would like to have [Castor] to answer the investment questions. [Castor] please.
Okay. For the RCG of the bonds are from offshore more than domestic bonds. This is the first one. The second, about the reinvestment on the increased exposure in North America, it's trade bonds. About the treasury, if better to issue more treasuries later this quarter. We see if the economics begin to recover and later on the yield curve may be different, we will increase more foreign bond at that moment.
Sorry, I didn't get that on the last part, the Treasury and the yield curve. Can you repeat that again? Sorry.
Sorry, we cannot hear your voice clearly. Could you repeat again? Thank you.
Hello? Yeah, sorry. I was saying, I missed the second part about the Treasury and the yield curve part. Are you talking about you bought more Treasury in April? Sorry.
No, no. We don't buy Treasury because the yield is too low.
Sure.
Basically, we just buy some corporate issue with attractive credit spread, and we will see if the interest rates go higher, then we will take an opportunity to buy more. That's my point.
Okay. Got it.
Okay.
Regarding to your question on FYPE, we have Grace to answer the question. Grace, please.
Your observation on FYPE sale during April is quite true, and I think this is mainly due to the COVID-19. We feel the FYP for this year will not be promising because last year is a sort of a historical high. We expect the FYP will be lower than maybe reduced by 30%. The FYPE, we still expect the reduction will be lower than the FYP reduction. For this year, we will try to, as we have been focused on this year, try to move our product to regular pay policies. Maybe in this year, the FYPE may not be very positive, but we have mid- to longer- term view that the VNB will still try to achieve a single-digit growth.
You mention about the major concern for the customer about the long- term, the macro slowdown, I think we still need to observe. Because we will be more focusing on the interest-sensitive product and protection type of product, so I think those protection gap is still there. There is still ways to strive for the growth for our business. Thank you very much.
Okay. I see. Is there any pickup in May? Just curious. I guess we'll find out in a couple of weeks time.
Yes. Yeah.
Okay.
Thank you.
The last question, just generally on the just money printing, inflation, are those any of your concern from running the business? More like a structural impact or pretty much status quo?
Okay. Inflation. Okay. Yeah, we will have our Chief Economist in our group, Dr. Wei Luo.
We don't think the inflation will be a issue right now because the virus has made the market demand has decreased significantly. Until the infection has slowed down, otherwise, no, we don't think the inflation will be quite a issue in this moment.
I think that right now, everything seems so uncertain. Yeah, from daily news, we can hear a lot of different points from different economists and investors. Probably right now we cannot give you a quite clear answer, but we will observe closely towards the market change and our asset quality as well. That's what we can do right now. Okay?
Okay. Great. Thank you. Really appreciate the time.
Thank you.
Thanks.
Yeah, thank you.
Excuse me, speakers. Excuse me, speakers. Our next question comes from Brooksley Kang from Bank of America Securities. You're now unmuted.
Okay. Good afternoon, everyone. Thank you for giving me the opportunity to raise questions I may have missed out in the Mandarin session. May I double-check that, for bank, what's the size of the specific case happened in Singapore, and what's our provisioning progress so far? Are we also worried about other of our lending portfolio in Singapore as well? Another question on Fubon Bank (China), the absolute amount of provision expense rise year- on- year during first quarter. May I have more color on did these come from the increase in lending mainly, or we have some extra to raise coverage ratio to a higher level? Thank you.
Okay. Firstly, on the deal in Singapore is Agritrade. Our loan outstanding is about $28 million. On the provision ratio, we have reserved about 70% of the provision. Yeah. On the other portfolio in Singapore, we don't see there's any significant we have to watch out on the portfolio so far, yet. Is that all you want on the answer?
Yes. That's good. Thank you. Also on Fubon Bank ( China).
Firstly, it's mainly due to general provision. The bank actually starts to make a higher GP based on the reserve to total loans percentage. It will increase to 1.8% from earlier at 1.72%.
Got it. Thank you.
Excuse me, speakers.
Yes.
Hello. Hi. Our next question comes from Jemmy Huang from JPMorgan. Your line is now open.
Yeah. Sorry, one follow-up question from me. I think your break-even point at Fubon Life increased this year, as you said, is because of a higher proportion of regular pay policies. If under absolute basis, do we see the first year surplus trend, absolute amount basis, is the first year surplus trend increase or decrease this year, given your FYP amount is actually declined quite a lot? Thanks. Also, I think I didn't get my answer for the cost of capital.
Yeah.
Maybe I missed that. Yeah. Thanks.
Yeah. Okay. Grace, please.
Okay. For the new business strain for 2019, the regular pay policy really shows higher VNB than single pay policy. Yes, we do have higher VNB policies for 2019 when we compare with 2018. Secondly, regarding the cost of capital. When you look at the page 39, the cost of capital increased by 19%. It is much explained by the AUM growth as the 2019, our AUM growth is close to 12%. This is the biggest impact. Secondly is the regulation change. The regulation per our summary in the cost of capital change, this also contributes another 5%-6% of the cost of capital increase. Also, the reduction of our investment return. This is also impact the cost of capital to a higher level.
If we have a lower investment return assumption, then that means the investment income earned from the required capital would be less. Pretty much the three components explain the higher level of cost of capital. Thank you.
Thanks. For the break-even point, my question is for first quarter this year versus first quarter last year.
Uh-
Is that still the same case that absolute amount of first-year surplus can still increase year-on-year?
For this quarter and last year, yes indeed, because in 2019, first quarter, we have some step-setting effect due to the single premium interest-sensitive product. The NB strain for those product would be minimum or even no NB strain. For the regular pay policies we sold this year, because you can see the FYPE divided by FYP is actually pretty high. Those policies will have higher NB strain indeed.
Okay, thank you.
Thank you.
At this time, speakers, we don't have any questions in queue. Once again, to ask a question, please press star and then one. Excuse me, speakers. At this time, we don't have any questions in queue.
Okay. Since there's no question anymore. Thank you much to attend this meeting and talk to you next time. Thank you very much. Bye.
That concludes today's conference. Thank you for participating. You may now disconnect.