Welcome everyone to Cathay Financial Holding Company's first quarter 2020 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 a 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 for those in Europe. Welcome to Cathay Financial Holding 2020 first half analyst meeting. I am Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding. Today, I will host the conference call. Thank you very much for joining us today. In the beginning, I would like to introduce the senior managers who are with us today. Today we have Ms. Grace Chen, CFO of Cathay Financial Holding, Mr. Abel Lin, Managing Senior EVP of Cathay Life, Ms. Joyce Tsai, Senior EVP of Cathay United Bank. For today's conference call, Charlie from our IR team will present the first half results. After the presentation, we are open for a Q&A section, in which senior management will be more than happy to answer your questions. Without further ado, let me pass the call over to Charlie for the briefing of first half results.
Thank you, Sophia. Let's start with the business overview on page four, which provides a quick highlight on each subsidiary. Cathay United Bank loan and deposit both grew steadily as the quality remained benign. Overseas business continued to expand. Plan to open Myanmar branch by the end of 2020. Offshore earning was up by 8% year-on-year, accounted for 48% of total pre-tax earnings. Cathay Life continue its value-driven strategy and focus on selling investment-linked and traditional regular-pay policies. Total premium grew steadily, driven by the growth of renewal premium. FYP and APE both ranked number one in the industry. RBC ratio was 347%. Capital adequacy remained solid. Cathay Century, the general insurance subsidiary, premium income grew by 2% year-on-year. Market share was 12%, maintained number two in the industry. Overseas premium income continued to rise.
Asset management subsidiary, Cathay SITE, has AUM of TWD 873 billion, ranked number one in the industry. Lastly, Cathay Securities brokerage business continued to grow, and its sub-brokerage ranked number one in terms of market share. Net income almost doubled year-on-year. Please look at page five, Cathay Financial Holding net income and EPS. Cathay Financial Holding reported TWD 32.7 billion of earnings for the first half of 2020, declined by 4% from last year due to the recognition of the tax expense on undistributed earnings. EPS was TWD 2.18. Page six shows the subsidiaries' net income and ROE. Cathay United Bank's earnings grew 9% year-on-year, driven by better investment income and lower expense. Cathay Life's net income was flat compared to the same period last year. The net income of other subsidiaries all grew by double digits.
On a consolidated basis, the holding company ROE was 8.3% in the first half of 2020. Please turn to page seven to see the book value of Cathay Financial Holding. The consolidated book value of holding company was TWD 787 billion, reaching a historical high. Book value per share was TWD 51.9 as of the first half of 2020. Page nine and 10 shows our overseas expansion. Cathay Financial Holding continued to expand its overseas business by deepening its overseas presence. In Southeast Asia, Cathay United Bank has footprints in nine out of 10 ASEAN countries. We plan to open Myanmar branch by the end of the year. Cathay Life Vietnam's total premium increased by 57% year-on-year, and Cathay Century performed steadily in Vietnam. As for the business operation in China, Cathay United Bank's China subsidiary's business is on the right track.
For Cathay Life's joint venture in China, the total premium grew 8% year-on-year. For the general insurance, premium income continued to grow. The strategic alliance with Ant Financial was going very well in China. Please turn to page 12 for more details about our banking performance. Along with proper risk management, Cathay United Bank continues to optimize the loan mix. Total loan was up by 3% year-on-year, driven by the growth of personal loans, SME loans, and foreign currency loans. Cathay United Bank loan balance was TWD 1.6 trillion as of the first half of 2020. Deposit grew by 7% year-on-year to TWD 2.4 trillion. The demand deposit ratio reached 67%. Please look at page 13 for interest yield. The net interest margin and interest spread was 1.21% and 1.82% respectively.
The decline spread was mainly due to the rate cut impacts on loan yield repricing. Page 14 shows the asset quality of Cathay United Bank. Due to our prudent lending policy, Cathay United Bank maintained benign asset quality with low NPL ratio at 13 basis points and coverage ratio at 1,330%. In the first half of 2020, gross provision was TWD 1.4 billion. Most were the general provisions from the regular requirement on the loan gross. Recovery was TWD 500 million. Next, please turn to page 15 for SME and foreign currency loans. Cathay United Bank focuses on developing SMEs and foreign currency loans, secondly, with benign asset quality. SME loan balance reached TWD 205 billion. Foreign currency loan balance was TWD 246 billion, accounting for 16% of total loans. Our offshore earning is shown on page 16.
Offshore earning was TWD 7.5 billion, up by 8% year-on-year, which accounted for 48% of the bank pre-tax earning in the first half of 2020. Please turn to page 17 for fee income. Fee income was TWD 9.9 billion in the first half of 2020. Credit card fee declined year-on-year because of decreased consumption momentum under the pandemic. Page 18 shows the breakdown of wealth management fee. Wealth management fee income grew 1% year-on-year, amounted to TWD 5.5 billion in the first half of 2020. Cathay United Bank continued to promote asset allocation with diversified products. Fee income of mutual funds and security products increased significantly year-on-year, large offsetting the decline of bancassurance fees. Please move to page 20 and 21 for Cathay Life's premium performance.
Total premium was TWD 334 billion in the first half of 2020, grew by 3% year-on-year. On page 21, first year premium was TWD 84 billion, dropped by 21%. The decline was resulted from the impact of the pandemic and the lower policy reserve rate. The annualized premium, APE, was TWD 36 billion, down by 25% due to product mix change. Page 22 shows the value for new business. Based on the 2019 Embedded Value assumptions, value for new business in the first half of 2020 was TWD 17.4 billion, decreased by 32% year-on-year because of the impact of the pandemic and lower policy reserve rate to the sales volume and product mix. Page 23 shows our cost of liability, which continued to improve.
The reserve-based liability cost was 3.89% as of the first half of 2020, improved by 12 basis points year-on-year and 6 basis points year-to-date. Please look at page 24 for the investment portfolio. Cathay Life's total investment reached TWD 6.6 trillion as of the first half of 2020. Cash position was 3.9% of the invested assets. Overseas investment accounted for 60%. The investment returns of each asset class are as follows: cash and cash equivalent, 0.5%, domestic equity, 8.8%, international equity, 1.4% pre-hedge, domestic bond, 6.8%, international bond, 5.8% pre-hedge, mortgage and secure loans, 1.9%, policy loans, 5.5%, real estate, 3.2%. The overall investment return was 3.78% after hedge. Overall investment yield are shown on page 25 and 26. After hedging, investment yield was 3.78%. The decline was due to the one-off recognition of equity method investment loss and the higher hedging cost.
Cathay Life will maintain proper risk management and dynamic portfolio management in face of market volatility. On page 26, pre-hedging return yield was 3.12%. Since most central banks embrace easing monetary policies to sustain the economic stability and corporates adopt more conservative dividend policies, Cathay Life reacted dynamically to the volatile capital market and realized the capital gains, which resulted in the lower recurring yield. The annualized hedging cost was 1.8% for the first half of 2020. New Taiwan dollars appreciated 1.5% and 2% in the first half and the second quarter respectively. However, other foreign currencies were still relatively weak comparing to the New Taiwan dollars, which reducing the effectiveness of basket hedging. On top of that, Cathay Life recognized TWD 2 billion extra foreign currencies smoothing reserves. 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 dividend income and regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 4.9 billion and TWD 12.3 billion in the first half and the first seven months of 2020 respectively. For overseas fixed income investment, Cathay Life allocated 45% in North America, 20% in Europe, and the rest are in Asia Pacific and other countries. Page 28 shows the book value and unrealized gain of financial assets. The consolidated book value was TWD 618 billion, and unrealized gain of financial assets was TWD 121 billion as of the end of the first half, both hit record high. Lastly, please look at page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income was TWD 12 billion, up by 2% year-on-year. Market share was 12%.
Cross-selling synergy continued to perform well. Over 60% of the premium income was generated by the group's channel. It is the end of 2020 first half results briefing. Thank you.
Thank you, Charlie. We'll now be ready for Q&A.
Yes, of course. Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you wish to ask a 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 if you would like to ask a question. Thank you. The first to ask question is Yafei Tian of Citigroup. Go ahead, please.
Hi, Yafei.
Hi. Thank you very much for the presentation. I mainly wanted to focus on the Mayapada loss. If you were to exclude this loss from the life business, it is actually a very different quarter. Just wanted to understand a little bit more details about the strategic plan for this business, going forward. Understanding you have just under 40% of the stake, and in our view, it perhaps makes sense to increase the stake to a controlling stake. Given that you are at the moment, fully made provisions for all the investments you have made. In a hypothetical scenario, if you were to increase the stake to 51%, what would be the acquired cost, in aggregate that you are going to transfer it from the life business to the holding company or even to the bank?
Based on that assumption, what would be the additional required capital, if you were to increase the stake to 51%? What would be the implication from a capital perspective for the financial holding company? Thank you.
Yafei, thank you for your question. You are asking a question like that this is definitely going to happen. Allow us to clarify. This can be broken in a couple of things. First one, on the recognition of equity method loss, Cathay Life has done this TWD 14 billion equity method loss on Bank Mayapada. This is more on our due diligence work and through the scenarios on their NPL, potential NPLs and loan book. By taking a more conservative calculation, Cathay Life feel that it is more comfortable if they can recognize it right now, rather than later.
However, the company, you can see their share price still there. If you really think about the market liquidity, so currently there is a gap between the loss we realize in equity method, but where the operation-wise and the share price on the financial market in Indonesia, not much has changed. By doing that, Cathay Life can have a clean pace to start going forward. Your second question is, whether Cathay Group, Cathay Financial Holding or any of the subsidiaries will be taking a controlling stake. This is really at very early stage. We have a relationship with the bank and therefore naturally being one of the important shareholder, we should care about how to help them to stabilize their liquidity current situation. Of course, there will be various scenarios that different shareholder and the regulator can brainstorm. At current stage, there is really nothing we can share to investor.
The only thing we can share with investors is when we think about any possibility, Cathay shareholders' common interest is the most important. Therefore, we strongly recommend investors monitor our company's formal announcement. All those questions you just asked is more like a brainstorming and it's next to impossible for us to comment because some of them may be just at idea level, some of them are totally not a number. Okay? You also talk about the impact to capital, whether the company has the source of fund, if there's any deal. This definitely is important consideration when any company make any potential M&A or acquisition scenario. If we were to do anything, that will be part of our discussion. Okay? As of today, everything is still at very brainstorming discussion stage, so there are so many uncertainties.
Because the outcome of operation status quo or there were more drastic stress to liquidity, all kinds of scenarios will lead to very different outcome. That's why it's so hard for us to give you a guidance whether we will take a stake or even a controlling stake. It's a go or no-go deal. At current stage it's very unclear. Okay. We do want to highlight that nothing compete with Cathay shareholders' interest.
That's super clear. Thank you so much, Sophia. Is there a timeline where this decision would have to be made? Given that I presume that Mayapada would need to perhaps raise capital to support the current business as it is. I wonder if there's anything that investors can look forward to from a timeline perspective.
First of all, what you can look at is it's already 100% clear that Cathay Life balance sheets through this equity method. You can expect no downsides in the counting numbers. Second, there's no timeline at all. We think before we have more clarity in what we want to do, giving any guideline is not right. There's no timeline at all. As you say, the possible outcome, the potential, whether there will be a deal, whether they will need money, these are all very early stage. Bear in mind that Cathay United Bank does have CET1 of over 11%. We need the strong CET1 to support our loan growth. We also need to follow the D-SIB with extra 2% CET1 requirement as a Domestic Systemically Important Bank.
When we think about capital planning, there are many angles, and it's unfair to make it such a big calculation because of uncertain deal. We do put everything into consideration, and we do take whether we need money from a rights issue extra serious, because we do care about every dollar we take from shareholder, what does that mean to our ROE.
Okay. Appreciate the detailed reply. Thank you so much.
Thank you. Lastly, I want to highlight, as our CEO mentioned in today's earlier analyst meeting conducted in Mandarin. When we do investment, there's always positive and negative. Of course, when you go to a new market, sometimes there will be some lessons learned, and we feel that we could have done a much better job. If we can do anything to minimize the loss, we will help. We really want to do. There was an analyst asking whether this will affect our regional expansion. Our CEO has clearly highlighted that we want to learn and try to strengthen as much as we can through investment or after investment management. This will not affect Cathay's M&A into the region. When we think about M&A, it will depend on availability of M&A targets. It will base on the size of the deal.
For example, so far from 2013 up to now, all the M&A deal we have done, all less than $400 million. Some market, it could be for the more purpose of accessing to a license. Some are because of the local market, some types of operation will be already sufficient. For example, the deal we have in Cambodia, we own 100%. Initially, it was far less than $100 million. Availability of target, size of deal, and then operation capability, do we have the competence we can do more there? Then I think going forward on overall corporate governance area, we would make a little more detail into those area. This will not affect our plan, and that will put extra attention to more detail to do better job than before.
Yes. Thank you, Ms. Cheng. Next we'll have Chung Hsu from Credit Suisse for questions. Go ahead, please.
Hi. Sophia and Grace. I want to ask a more broad question about Cathay's overseas investments. Specifically, I was wondering if you can give us or your shareholders a sense of if there is a investment threshold, investment return threshold, excuse me, over a certain period, so that we can understand that your overseas investments is not entirely dilutive because you're looking at the Cathay United Bank for the past 10 years making 10%-11% return on equity. Put aside this Bank Mayapada investments, I don't think any of your overseas operations are making anything close to that. Just trying to understand if going forward, when Cathay look at overseas investments projects, is there any criteria that you look at, and how do you prioritize your investments?
I understand this is a bank-specific investments, look at the non-bank, the Cathay Life overseas investment as well. If you can give us some more color on that'll probably help us to get a sense of how you in the future allocate your capitals and how we think that as you grow bigger overseas, how is your return on equity of your group could turn out to be. My second question is a more specific detailed question on the Cathay United Bank. The OpEx is down 6% in the first half. Just trying to understand how much of that is tied to a credit card decline in the first half this year. If we strip out the credit card-related expense, what's the OpEx year-over-year change look like? Also, if you could give us some guidance for full year OpEx of Cathay United Bank.
Thank you, Chung, for your question. Let me work on your question regarding our overseas expansion, Grace can comment on the OpEx ratio for Cathay Bank later. First of all, if you can kindly look on page six, this shows you the profit and the return on equity of Cathay Holdings and the subsidiaries. As you can see, Cathay United Bank has ROE over 10% in the past years, and this year in the first half, it was 11.9%. Cathay Life, because of the natural negative spread, it does need some one-off gains, you can see the ROE is more volatile, where if you look at Cathay Century and Cathay SITE, the ROE has been very, very strong. Cathay Century has high teens, where Cathay Asset Management in the first half even reached 30%.
Besides Life Bank, we do put asset management as our important first pillar. The second point is, if you look on page nine and page 10, this is our regional expansion. Naturally, following your customer to a new country is easy, and then after that, if you have a minimum size of business, you can use that as a foundation to localize. On page nine, there is a table on page nine, you can see where our footprint is. China and Vietnam, we were there since the year 2000. Through the past two decades, we were able to expand business line by business line, where when you go to newer countries like the others, you can see banking has border footprints. To answer your question, when we go to a new market, I think there were two things that are very important.
One is whether in the market, you can follow your customer corporate sale movement. You can see a lot of Taiwan corporate in the region, they have to move to the new production base. Some corporates also go there to capture local consumption opportunities. If we have a good relationship with them in Taiwan already, naturally, we can follow them. Then after that, we will lend into more localized. That's why in China, in Vietnam, in Cambodia, we do have retail banking license. The second important will be when you talk about localized, that means you are seeing future growth in economics, in product consumption, in their future corporate success, like gaining more market share in the market or in the global market. You do need to take a look at every single country and their economic characteristics.
Then after that, you will look into every country about their If you talk about consumers, you think about their lifestyle. Do their people save? Do they borrow? Do they pay back after they borrow? How do they view foreign financial institutions in their country? Is it easier to go through insurance, through banking, or through asset management? There are many angles, and that's why when you think about Cathay United Bank, we had a restructuring after the year 2012, I think. We were taking banking as the easier first step to go there, where insurance, you need a household to accumulate some wealth for that to take off. That's why so far in insurance, we have more focus on China and Vietnam.
I'd like to share with you in Vietnam and in China, the FYP, if you take 2019 vs 2016, both markets' total premium has tripled. We are growing into this country. Just on aggregate, if you put page nine and page 10 together, simply on insurance or simply on banking, pure loan profit, it means very tiny vs my consolidated financial holdings profit. This page you see here, this is a 10-year, 20-year plan. Even if you look at China or Vietnam, it took us two decades to get to today. We may be a sizable amount of foreigners, but we are still small in those countries. Lastly, when we think about this investment, we do care about return on capital. Come back to page six. ROE is definitely our target.
For banking operation, when we think about the KPI our group has, the KPI is overseas earnings contribution to the pretax profit. That will include loans and business with other financial institutions, our own treasury, that's all combined. I hope this has explained the logic when we do regional expansion. Lastly, I want to share a few numbers with you, because when we expand this regional footprint, it does help my regional loan book. In the old days, we had the OBU, which is the main booking center, and through the past years, when we enhanced our operation in Hong Kong and Singapore branches, they also contribute a lot. Today, we have OBU, we have Hong Kong, we have Singapore as our important regional loan booking center.
If I take today, the total loan book in Hong Kong and Singapore combined, that's already over TWD 100 billion, vs in 2015 to 2016, it was only at TWD 30 billion-TWD 40 billion level. We do have good growth in regional corporate banking through the two important booking centers, Hong Kong and Singapore. None of this can grow overnight, and we will help through good opportunities, through syndication project finance. We can also cooperate and learn from our regional and global peers. Over time, we hope we continue to strengthen our banking core competence. These are our expenses to update on the first half of the operating expense ratio.
Yes. Chung, our Cost-to-Income Ratio for the first half of this year is 47.4%, compared with the same period last year, 51.1%. There was a 3.7% drop, and the absolute operating expense, the saving is TWD 1 billion. You are right, 50% of that is due to credit card-related promotion expense. As you know, we have some alliance card, like EVA Air or Infinity MileageLands. Those are severely influenced by the COVID-19 pandemic. Our first half of the year, the credit card spending contraction is 15%. That's part of the reason our Cost-to-Income Ratio, compared with last year, is lower. However, the spending momentum recover looking forward for the second half this year. The full year's costing conversion might be expected to be at a range of 52%-53%.
Okay. Thank you, Grace. Sophia, I have two follow-up questions, if I may. It's very interesting, Grace, you mentioned about TWD 1 billion cost savings from credit card, if I heard that number correct. If I look at your fee income in slide 17, your fee income declined less than TWD 1 billion. Is it correct for me to say that certain credit card co-branded product is actually not profitable? Because by seeing a consumption volume decline on those credit card products, you're actually seeing a bigger decline in OpEx than the loss in your fee income.
Chung, if we look at the first half, the credit card-related fee income, TWD 3.4 billion last year, and this year, TWD 2.7 billion. The reduction, the shrinkage is TWD 0.7 billion. Our expense saving is around TWD 0.5 billion.
Got it. I thought it was TWD 1 billion. Sorry. Okay.
50% of the TWD 1 billion is due to credit card-related promotion expense. Not all.
I got it. Thank you. My mistake. Thank you. My second question is for Sophia. If I may ask, if I look at slide 15, if you think about Cathay's goal and longer-term plan for the overseas contributions. If I look at foreign currency loan as a percentage of your total loan, it's still quite small compared to some of the bigger banks, your bigger competitors in Taiwan. What is this ideal target? I'm not sure if this is the right way of looking at it, because you do have overseas profit contributions in slide 16, 40%, but that probably includes some treasury or trading gains from overseas. What is the mix that Cathay United Bank is targeting with all this effort to go overseas in Southeast Asia?
Chung, good question. The only thing we know is there's a lot of room. If you can see year-to-date, if you take 2019 vs 2018, there was an increase, but the magnitude percentage increase only reduced a little bit, because starting from about mid of last year, we get more cautious on global macro uncertainty. This year, specifically, COVID-19 is affecting a lot of corporate, how they respond to this. We have been extra cautious on asset quality because the currency margin, nothing competes with asset quality. On page 15, to the left-hand side, you can see SME loan year-to-date is quite flat. Where to the right-hand side, year-to-date foreign currency loan increase is also quite muted.
If you look at the percentage, yes, you are right, SME is only 13% of our loan book, where foreign currency loan is less than 16% of our total loan book. If I look at our main funding peers we benchmark, they do have a range all higher than us. Some company, their foreign currency loan even 30%, 40% of their book, with some sizable peers, they probably at around 20%-ish. Okay. It's a question hard to answer because I think naturally, if I don't have asset quality concern, this can go a lot faster. Whenever there is a macro downturn, I can review whether we respond earlier. For example, in China, it has been so many years that we don't lend to pure real estate collateral beyond Beijing, Shanghai, Shenzhen, and Guangdong.
Every country have different kind of criteria, where regional syndication project financings will remain active. Except I think this year, we need longer time to monitor every country, how they respond to the whole virus thing, and how their country import, export significant YoY decline can improve. We would not expect the rest of the year to see a very big growth. Longer term, I do think a structural growth in both SME and foreign currency loans, the growth could be expected. If you move to page 16 on the contribution, the reason we have more treasury income today is because when you look at my foreign US dollar loan deposit ratio is still at below 50%, because you can always compare lending and investment as your kind of relative opportunity cost.
Seeing at current stage, lending, if before you were very comfortable, sometimes you were invested in bonds vs loans or lending to many Asian, Southeast Asia countries, their bank may not have sufficient U.S. dollar, you can be a net interbank lender. You need to combine all the potential business opportunity on the relative opportunity cost. Okay, in terms of loans, I do think that structurally there should be a growth in both SME and foreign currency loans. In terms of overseas earnings as a percentage of pre-tax profit, originally our target is around 40%. We are there. It can be up and down, but we can maintain it above 40%, we'll be very happy. Long term, it may be shifting from treasury into local loans if we can localize to each market better than before. Yeah. I hope I have answered your questions.
Okay. Yep. Fine. Thank you. Thank you, Sophia.
As a reminder, please press zero one on your keypad if you would like to ask the question. Thank you. If you would like to ask the question, please press zero one on your telephone keypad. Thank you. We are now in question and answer session. If you would like to ask the question, please press zero one on your telephone keypad. Thank you. There appears to be no further questions at this point. Ms. Cheng, can we close the conference call now?
Thank you. Thank you all for participating in Cathay Financial Holding conference call. Yajou and the IR team will stand by here if you have further questions. Please do feel free to contact us. Thank you and goodbye.
Yes, thank you. Ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye.