Welcome everyone to Cathay Financial Holding Company's First Quarter 2021 conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at that time if you would like to ask the question. Now I would like to introduce Ms. Sophia Cheng, the CIO of Cathay Financial Holding Company. Ms. Cheng, please begin.
Thank you. Good afternoon and good morning to investors in Europe. Welcome to Cathay Financial Holding 2021 first quarter analyst meeting. My name is Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding. Today I will be hosting the conference call, thank you so much for joining us today. In the beginning, I would like to introduce the senior managers who are with us and some of us are on the line. Today we have Mr. Daniel Teng, Senior EVP of Cathay Financial Holding; Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holding; Mr. Abel Lin, Managing Senior EVP of Cathay Life; Ms. Joyce Tsai, Senior EVP of Cathay United Bank. We also have the IR team led by Yajou Chang and Charlie Hu is also on the line. I think Shane Sun as well.
For today's conference call, Charlie from our IR team will be presenting the first quarter results, we will announce the new 2020 embedded value details. After the presentation, we are open for Q&A session in which senior management will be answering your questions. Without further ado, let me pass the call over to Charlie for the briefing of first quarter results. Charlie?
Thank you, Sophia. Let's start with the business overview of first quarter 2021 on page four, which provides a quick highlight on each subsidiary. Cathay United Bank deliver robust loan growth, net interest margin improved, and net interest income grew steadily. Continue to expand overseas business. Offshore earnings accounted for 49% of pre-tax earnings. Fee income grew 5%. Wealth management and credit card fee grew 10% and 7% respectively. Cathay Life continue the value-driven strategy. Protection type policy FYP grew almost 40% year-over-year. The asset under management of investment-linked products continue to grow, reached TWD 670 billion, ranked number one in the industry. Deliver strong investment performance with after hedging investment yield of 6.3%, setting record high earnings for the first quarter. Embedded value increased 22% to TWD 1.1 trillion, equivalent to TWD 86.8 EV per holding company share.
Cathay Century, the general insurance subsidiary, premium income grew steadily. Market share was 11%, maintained number two in the industry. Overseas premium continued to grow. Asset management subsidiary, Cathay SITE AUM was over TWD 1 trillion, ranked number one in the industry. Its first quarter earnings was record high. Lastly, Cathay Securities earnings for the first quarter reached record high for the second consecutive years. Please look at page five, Cathay Financial Holding's net income and EPS. Cathay Financial Holding's net income for the first quarter reached historical high of TWD 57.6 billion, more than double the earnings for the same period last year, driven by strong investment performance. EPS was TWD 4.36. Page six shows the subsidiaries' net income and ROE. Cathay Life delivered strong investment income and quarterly record earnings, benefited from the economy recovery and financial market rally.
Cathay SITE and Cathay Securities also reported historical high earnings. Cathay United Bank's net income decreased due to higher year-on-year base of investment income last year. Its core earnings grew year-on-year. On a consolidated basis, the holding company ROE was 26% in the first quarter 2021. Please turn to page seven to see the book value of Cathay Financial Holding. The consolidated book value of holding company was TWD 865 billion as of the end of first quarter. Book value per share was TWD 57.8. Page nine and 10 shows our overseas expansion. Cathay Financial Holding actively expands operation in Southeast Asia and owns footprints in nine out of 10 ASEAN countries. Cathay Life Vietnam's total premium increased 56% year-on-year, and Cathay Century performed steadily in Vietnam.
As for the subsidiary operation in China, the business of Cathay United Bank China is on the right track. For Cathay Life's joint venture in China, the total premium grew 21% year-on-year. Please turn to page 12 for more detail about the banking performance. Cathay United Bank delivered solid loan growth, driven by consumer loan, mortgage, and corporate loans. Loan balance increased 13% to over TWD 1.7 trillion as of the end of first quarter 2021. Deposit grew 11% year-on-year to TWD 2.6 trillion. The demand deposit ratio increased to 71%. Interest yield is shown on page 13. The net interest margin and spread rebounded, driven by lower funding costs in the first quarter 2021. The interest spread was 1.72%, and the net interest margin was 1.2% for the first quarter. Page 14 shows the asset quality of Cathay United Bank.
Due to prudent lending policy, Cathay United Bank maintained low NPL ratio at 19 basis points, and coverage ratio at 853%. Gross provision was TWD 1.3 billion, and recovery was around TWD 300 million. Now, please turn to page 15 for SME and foreign currency loans. Cathay United Bank focused on developing SME and foreign currency loan with benign asset quality. SME loan balance reached TWD 247 billion, increased 8% year-to-date. Foreign currency loan balance was TWD 239 billion, accounting for 14% of total loans. Page 16 shows offshore earnings. The offshore earning was TWD 3.5 billion. The decline was mainly due to the high base of investment income last year. Offshore earnings accounted for 49% of the bank's pre-tax earning for the first quarter. Please turn to page 17 for fee income.
Fee income grew 5% to TWD 5.8 billion in the first quarter of 2021. Credit card fee grew 7%. Wealth management fee grew 10%. Page 18 shows the breakdown of wealth management fee. Wealth management fee income increased to TWD 3.5 billion, in which mutual fund fee income grew more than 30% year-on-year. Cathay United Bank continued its focus on the diversified asset allocation product strategy. Please move to page 20 and 21 for Cathay Life's premium performance. Total premium increased [4%] to TWD 170 billion. On page 21, first year premium, FYP, was TWD 59 billion, grew 14% year-on-year, driven by the hot sale of investment product attributed to the favorable capital market. The protection type policy FYP up by almost 40% year-on-year. The annualized premium, APE, declined 23% to TWD 14.1 billion, owing to the dominating single-pay investment-linked product in FYP.
Page 22 shows the value for new business. Based on the 2020 embedded value assumptions, value of new business for the first quarter was TWD 8.3 billion. VNB and VNB margin declined due to the deferred premium income from stock selling effect during the end of 2019, caused by lower policy reserve rate at the beginning of 2020. Excluding such impact, VNB and VNB margin both increased. Page 23 shows the cost of liability and break-even asset yield. Both continued to improve. The reserve-based liability cost was 3.81% as of the end of first quarter 2021, improved 11 basis points year-on-year. The break-even asset yield was 3.11%. Please look at page 24 for the investment portfolio. Cathay Life's total investment reached TWD 7 trillion as of the end of first quarter 2021. Overseas investment accounted for 66%.
The investment return of each asset class are as follows: cash and cash equivalent, 0.2%; domestic equity, 30.2%; international equity, 16.7% pre-hedge; domestic bond, 1%; international bond, 6.5% pre-hedge; mortgage and secured loan, 1.5%; policy loans, 5.3%; real estate, 2.3%. Overall investment yield are shown on page 25 and 26. After-hedging investment yield was 6.31%. Cathay Life capture market opportunities to realize gains in capital markets, boosting the after-hedging investment yield. On page 26, the pre-hedging recurring yield was 2.79%. The decline was mainly due to the impact on new money yield amid low interest rate environment in 2020. The rebound in U.S. bond yield year-to-date should support Cathay Life's recurring income to grow. The hedging cost of first quarter 2021 was 1.4%, improved year-on-year. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of the hedging cost.
Please look at page 27 for the regional breakdown of overseas fixed income. For overseas fixed income investment, Cathay Life allocated 46% in North America, 18% in Europe. 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 and unrealized gain of financial assets reached TWD 673 billion and TWD 98 billion respectively. The unrealized gain of financial assets was affected by the increase of U.S. long-term bond yield this year. Next, please turn to page 32 and 33 for the performance of Cathay Century. Cathay Century's premium income was TWD 6 billion. Market share was 11%. Cross-selling synergy continued to perform well. Over 60% of the premium was generated by the group channel. So far, I've updated the first quarter 2021 operating results.
Today, we have one additional topic we would like to update, which is the 2020 embedded value and the appraisal value estimate. Please turn to page 36 for Cathay Life's 2020 EV and AV estimates. On page 36, we have summarized EV and AV major components. In this table, we have provided the asset yield assumption for various insurance policies. You can see that we have increased equivalent asset yield by 6 basis points to 3.97%. Based on the new assumption, Cathay Life 2020 embedded value increased by 22% year-on-year to TWD 1.1 trillion, equivalent to TWD 86.8 EV per holding company share. As for appraisal value, Cathay Life's AV as of 2020 was TWD 1.45 trillion, or TWD 109.8 AV per holding company share.
We have also estimated 2021 value for one-year new business of TWD 34.5 billion and apply multiples of 8.8 when deriving value for new business. In the following pages, you can see more detailed analysis on 2020 movement of each EV component. On page 43 and 44, we have provided a scenario of impact from various investment yield and discount rates, where on page 45, you can see a summary table for year-on-year comparison. We hope the information is useful to you. This is the end of presentation. Let's open to Q&A.
Yes. Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you wish to ask the question, please press zero one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. Should you wish to cancel your question, you may press zero two. Thank you. Please press zero one to ask the question. Thank you. The first to ask question, Sam Wong from Citi. Go ahead, please.
Thank you, Sophia and Charlie, for your presentation and introduction. I have two strategy questions, if I may. Number one, notice there is a foreign bank exiting the Taiwan retail market right now. What's your view on M&A? Number two, two of the three virtual banks in Taiwan have already launched. Are you seeing any changes in customer behavior, and how are you responding to that?
Thank you. Daniel, are you on the line?
Yes.
Why don't you comment first, and I will at some point. Thank you.
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Hello? Daniel?
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Hi, Sam. You asked two questions. One is you notice that there are foreign banks exiting Taiwan's market. This is a specific case. If you look at Taiwan banks, the market share is already very concentrated. Most of the banks will be looking for more details provided by the bank who looks to exit their consumer banking. At current moment, I think most of the banks are looking for what is available information. Today, we don't have much information that we can share with you. You also asked about whether this will trigger an M&A event in Taiwan, because the landscape is already If you look at the player, most of the M&A activity already happened very long time ago, I do not expect big scale of M&A activities in the banking sector in Taiwan. Sam?
Actually, for the first question, we are looking into a further discussion with Citibank. I don't think we are appropriate to discuss that topic right now.
Sorry, Sam, you had another question.
Thank you for the response. The second question is on the virtual bank. I noticed that LINE Bank and Rakuten Bank already launched. Are you seeing any changes in consumer behavior, and what Cathay plans to do in response to that?
I think-
We don't see any customer behavior change right now, because I guess there's a totally different customer cluster. Well, we are also developing our virtual bank, or I would say digital bank. That kind of customer cluster is already on our portfolio. Currently, we don't see any change for our customers.
Okay. Understood.
It is very important that regardless there is online bank, pure online bank or not, it is very important for us to penetrate into next generation. Cathay has been building our digital platform for many years, and that can reflect to our deposit inflow, our wealth management platform We will be observing competitors' development, but the customer is having proper digital service capability is also our duty.
Okay, got it. Thank you.
Thanks.
As a reminder, please press zero one on your keypad if you would like to ask the question. Thank you.
If no further question, it is okay that we can conclude the call. Before that, I can summarize a few points from the Chinese session. The year-to-date earnings and loan growth. If you look at the loan growth year-to-date, it is about 4.8%, we have seen quite stabilized net interest margin. Hopefully this year on the net interest income, we can secure some decent noted growth for 2021. Let me see. Now, Abel has also mentioned that the hedging cost for 2021, we are expecting hedging costs for the whole year to return back to our expected range of 1%-1.5%. Do we have more questions on the line?
Yes, Ms. Cheng, we do have Jemmy Huang of JP Morgan for questions. Go ahead please, Jemmy.
Hi. Just two quick questions from me on the banking side. One is, in terms of your improvement on the CASA ratio for deposits, do you think how much is affected by equity market vs the really underlying growth of more sustainable growth in terms of your CASA deposit? The second question is, I probably didn't hear very clearly in the Chinese session, but just try to understand, what is the reason for a relatively bigger quarter-on-quarter increase in the NPL amount at Cathay United Bank in the first quarter? How do we expect from which industry, and how should we expect the related impact on credit costs? Thanks.
Okay. For the credit cost back in the first quarter, the NPL came from some of the SME loan. Did that answer your question?
All those are collateralized? We don't need to worry about credit costs?
You don't need to worry because we are so conservative. Half of the NPL is fully collateralized, but half of that is purely credit.
Jemmy, you can see on the same page, on page 14, our gross provisions was higher than last year. Most of the reason is because we had very strong loan growth, and by regulation, we will make 1% provision against the loan growth itself. Most of the TWD 1.3 billion gross provision, a big part of that is to provide for the general provision for the loan increase.
I see.
For the CASA ratio, I think probably remain at 70% looking forward.
Let's say if equity market has a bigger pullback as a result, we don't need to worry about this CASA ratio to decline due to the outflow of settlement deposit?
Currently, we have no further evidence to see that, I cannot guarantee you.
Yeah. I see. Let me ask this question from another angle. Within your current deposit, what's the percentage related to the settlement deposit?
Currently, I don't have that kind of data, maybe we can reply to you after we check.
Yeah. Got it. Thanks.
Thank you. There appears to be no further questions at this point. Ms. Cheng, can we close the conference call now?
Just one second. Jemmy, I look at the deposit breakdown. We do see broker settlement deposit increase on year-over-year basis. If you look at the total deposit, year-over-year, the absolute amount differential, the broker account increase does not dominate that number, the increase at all. It's still a big part of that year-over-year increase actual amount is because of our deposit inflow. We will check the detailed number with you afterwards. Most of the contribution from the year-over-year increase is the regular deposit. We do have some deposit increase from the broker settlement account, but it's not the major contribution. Okay. If not, Jason, do we have more questions?
Not at this moment. Thank you.
Okay. Thank you. Thank you for your participation in Cathay Financial Holding Company's conference call, and the IR team will stand by for you. If you have further questions, please do feel free to contact our IR team. Thank you, and be safe, be healthy, and I hope the COVID-19 can get over as quickly as possible. We do have a lot of cases in the past few days. Cathay has already planned for quite a long time on a smooth operating capability. We have very quickly arranged more than half of the employees who can try to work from home. So far, the company has continued to expand its capability in responding to the contingency and COVID-19. Since beginning of last year, teams involved with a lot of strategic planning and pilot testing.
We are very glad to see that the recent increase in case, we can move very quickly and a lot of employees can work from home with limited disruption. We will continue to protect all infrastructure to ensure seamless service to customers and to ensure employees' health and safety. Thank you very much. We'll speak to you soon. Bye.
Okay. Thank you, Ms. Cheng. Ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Stay safe and goodbye.