Welcome everyone to Cathay Financial Holding Company 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 the question. Now I would like to introduce Ms. Sophia Cheng, the CIO of Cathay Financial Holding. Ms. Cheng, please begin.
Thank you. Good afternoon, and good morning for those in Europe. Welcome to Cathay Financial Holding's 2020 first quarter analyst meeting. I'm Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding. Today, I will host 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 today. Today we have Mr. Daniel Teng, Senior EVP of Cathay Financial Holding, Ms. Grace Chen, our Chief Financial Officer of Cathay Financial Holding, Mr. Abel Lin, Managing Senior EVP of Cathay Life, and Ms. Joyce Tsai, Senior EVP of Cathay United Bank. For today's conference call, Shane Sun from our IR team will present the first quarter results. We also will update the 2019 embedded value details.
After the presentation, we are open for Q&A section, in which the management will be more than happy to answer your questions. Without further ado, let me pass the call over to Shane for the briefing of the first quarter results.
Thank you, Sophia. Let's start with the business overview of quarter 2020 on page four, which provides a quick highlight on each subsidiary. Cathay United Bank continued to adjust the loan mix with benign credit quality. Net interest income grew steadily. Overseas expansion continued. Cathay United Bank obtained Myanmar regulatory approval to upgrade the rep office to branch. Foreign currency loan grew steadily, but offshore earnings accounted for 51% of pre-tax earnings. Cathay Life continued its focus on value-driven strategy. First Year Premium ranked number one in the industry. After-tax investment yield reached 4.16%. Overall investment performance maintained stable. Cathay Century, the general insurance subsidiary, premium income grew 2% year-on-year. Market share was 11%, maintained number two in the industry. Overseas premium increased steadily. Asset management subsidiary, Cathay SITE, has AUM of TWD 781 billion, ranked number one in the industry.
Cathay Securities brokerage business continued to grow, and its brokerage market share remained number one in the industry. Please look at Page five. Cathay Financial Holding's net income and EPS. Cathay Financial Holding reported after-tax net income of TWD 23.5 billion for the first quarter of 2020, increased 74% year-on-year. All the subsidiaries had over double digit growth. Earnings per share was TWD 1.77. Page six shows the subsidiary's net income and ROE. Cathay United Bank's earnings grew 19%, with higher interest income and investment income. Cathay Life earnings grew 136% because of better investment performance. Cathay Life adjusted its investment portfolio to reduce the impact of market volatility, which resulted in higher capital gains. On a consolidated basis, the holding company's ROE was 13% in first quarter of 2020. Please turn to Page seven to see the book value of Cathay Financial Holding.
The holding company's book value as of the end of first quarter was TWD 670 billion, and book value per share was TWD 43.1. Page nine and 10 show our overseas expansion, which is on the right track. Cathay Financial Holding continued to expand its overseas business by deepening its overseas presence and reinforcing the relationship with local partners. In April, Cathay United Bank obtained new regulatory approval to upgrade the rep office to branch. Cathay Life Vietnam's total premium increased by 58% year-on-year. Cathay Century performed steadily in Vietnam. On the 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 by 9% year-on-year. For general insurance, the strategic alliance with Ant Financial was going very well in China.
Please turn to Page 12 for more details about our banking subsidiary. With proper risk management, Cathay United Bank continued to adjust its own mix by increasing foreign currency and consumer loans while reducing loans to governments. The bank increased the capital efficiency and focused on asset quality. Cathay United Bank loan balance was TWD 1.5 trillion in its first quarter of 2020. Deposits grew by 7% year-on-year to TWD 2.4 trillion. The bank continued to maintain high demand deposit ratio. Interest yield is shown on Page 13. The net interest margin was 1.25% for the first quarter of 2020. Interest rate was 1.91%, up by 5 basis points compared with last quarter, benefiting from rate cuts with lower funding cost. Page 14 shows the asset quality of Cathay United Bank.
Due to our prudent lending policy, Cathay United Bank maintained low NPL ratio at 15 basis points and coverage ratio at 1,190%. Gross provision was TWD 0.8 billion, most of which was the general provision for the regulatory requirement. Recovery was TWD 0.3 billion. Please turn to Page 15 for SME and foreign currency loans. Cathay United Bank's strategy to grow along with quality. SME loan balance reached TWD 206 billion in the first quarter of 2020. Foreign currency loan balance also reached TWD 247 billion, accounting for 16% of total loans. Our offshore earnings is shown on Page 16. Offshore earnings were TWD 4.4 billion, and offshore earnings accounted for 51% of bank pre-tax earnings for the first quarter of 2020. Please turn to Page 17 for fee income.
Fee income was TWD 5.5 billion in the first quarter of 2020, declined 5% year-on-year. Credit card fee declined due to impact from COVID-19 pandemic with lower consumption. Wealth management fee declined due to lower bancassurance. Page 18 shows the breakdown of wealth management fee. Wealth management fee income declined 2% year-on-year, amounting to TWD 3.2 billion. Starting from April 2019, continuous falling crediting rate has decreased the demand of saving-type insurance policies. With the strategy shifting to focus on protection-type policies and the impact from COVID-19, the bancassurance fee declined year-on-year. The bank continued to promote asset allocation with diversified products. Fee income from mutual fund and security product increased significantly year-on-year, largely offsetting the decline of bancassurance fee. Please turn to page 20 and 21 for Cathay Life's premium performance.
Total premium was TWD 163 billion in the first quarter of 2020, down 3% year-on-year. The decline was due to lower first-year premium. The renewal premium increased year-on-year, driven by growth of protection-type policy and traditional regular pay policy. On page 21, first-year premium was TWD 42 billion, and the annualized premium APE was TWD 18 billion, down by 13% and 37% respectively. The decline was mainly due to the impact from COVID-19 pandemic and the lower policy reserve rate. Page 22 shows the value of new business. The sales volume and product mix were impacted by COVID-19 pandemic and the lower policy reserve rate. Based on the 2019 embedded value assumptions, value of new business in first quarter of 2020 was TWD 8.5 billion, decreased by 47% comparing to TWD 16 billion in first quarter of 2019.
In later part of the presentation, we have provided update embedded value, including assumptions. Page 23 shows our cost of liability, which continue to improve. The reserve basis liability cost was 3.92% at the end of first quarter of 2020, improved 3 basis points year-to-date. Please look at page 24 for our investment portfolio. Cathay Life's total investment reached TWD 6.4 trillion as of the first quarter of 2020. Overseas investment accounted for 66%. The investment return of each asset class are as follows: cash and cash equivalent, 0.5%; domestic equity, 5.8%; international equity, 8% pre-hedge; domestic bond, 6.9%; international bond, 5.9% pre-hedge; mortgage and structured loans, 2.2%; policy loans, 5.4%; real estate, 2.6%. Overall investment yield are shown on page 25 and 26. After-tax investment yield was 4.16%. On page 26, pre-hedging recurring yield was 3.11%, declined by 23 basis points year-on-year.
To reduce the impact of market volatility, starting from the second half of last year, Cathay Life adopt a risk strategy to adjust its investment portfolio, reduce its equity position, and enhance the fixed income credit mix. The relatively higher cash position in January and February this year affected the recurring yield of first quarter. Since March, Cathay Life has taken the maximum opportunity to increase its investment position. The cash position has reduced most cash dividend comes in the second and third quarter, which will help improve the recurring yield. The annualized hedging cost was 1.69% for the first quarter. New Taiwan dollars depreciated 0.5%. Other foreign currencies were still relatively weak comparing to the New Taiwan dollars, which reducing the effectiveness of basket hedging. 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 fee income. Overseas fee income investment, Cathay Life has allocated 44% 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. Both the consolidated book value and unrealized gain of financial assets was down in first quarter of 2020. COVID-19 trigger risk evasion and caused global capital market volatility in the first quarter. In April, the capital market rebound. The unrealized gain and loss balance increased significantly by the end of April. Please turn to page 32 for the performance of Cathay Century. Cathay Century's premium income was TWD 5.8 billion, up by 2% year-on-year. Market share was 11% in the first quarter of 2020. Group selling synergy continued to perform well.
Over 60% of total premium income was generated by the group's channel. I have updated the first quarter 2020 operation result. Today we have one additional topic we would like to update, which is the 2019 embedded value and the appraisal value estimate. Please turn to page 36 for Cathay Life's 2019 EV and AV estimate. On page 36, we have summarized EV and AV major components. In this table, we have provided asset yield assumptions for various insurance policies. You can see that we have reduced the equivalent asset yield by 58 basis points to 3.860% and discount rate by 0.5%- 9.5%. Based on the new assumption, Cathay Life 2019 embedded value increased by 4% year-on-year, to TWD 74.1 EV per holding company share. Appraisal value, Cathay Life's AV as of 2019 was TWD 1.24 trillion.
Or TWD 98.4 AV per holding company share. We have also estimated 2020 value for one-year new business of TWD 35 billion and apply multiples of 8.8 when deriving value for new business. In the following pages, you can see more detailed analysis on 2019 movement of each EV component. On page 43 and page 44, we have provided the scenarios of impact from various investment yields and discount rate. On page 45, you can also see a summary table for year-on-year comparison. We hope the information is useful to you. This is the end of the presentation. Let's open to Q&A.
Yes. Thank you. Ladies and gentlemen, we will now begin the 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 on your telephone keypad to ask the question. Thank you. The first question is coming from Jemmy Huang of JP Morgan. Go ahead, please.
Yeah. Hi. Thanks for the presentation. A couple of questions, mainly on the banks. I think the first one is, you mentioned you are focusing on consumer loans as part of your loan growth strategy. Could you let us know what kind of mortgage consumer loans you are doing? If you are cautious on the economic outlook, should we perceive that consumer loans compared to mortgages are actually carrying higher risk quality uncertainty? The second question is, I think according to FSC, the bailout cases or loans at Cathay United Bank is actually one of the highest among the private banks. Just try to understand, for all the bailout cases you have done so far, are these all for your existing customers, or you are actually doing for the new customers as well? The third question is on bank's operating expenses.
It was down year-over-year in the first quarter. I look at the financial statement, it's mainly due to the other meeting and administrative expenses. Are those, the year-over-year decline, are these related to credit card promotion or anything else? Should we expect the operating expenses to decline for the whole year, or first quarter is just some seasonal factor? The final question is for the FYP. I think you have your own definition for protection-type policies, and sales was growing over 20% year-over-year in 2019. Just trying to understand how the momentum look like in the first quarter this year? Thanks.
This one about our consumer loan. We're talking about we are focusing on the consumer loans. Most of that is from the mortgage. A very small part, maybe TWD 10 billion or TWD 20 billion from the high credit score consumer loan. It's for our credit card clients for the short-term lending with very high margin. It's only for the, like May or June is tax season, so we offer some of our credit card clients a very short-term loan, consumer loan, with a high interest margin. Most of that is from our mortgage loan. For the first part, right?
The second from the bailout loan.
Yeah. For the bailout loan, it's mostly from our existing clients. Okay, for the third part about the expenses. The expenses reduction is because for the first quarter, our business activities is reducing because of COVID-19. The travel, commission, everything, even though as we continue without clients, it reduced a lot compared to last quarter-on-quarter or year-on-year. Expenses compared to last year, slowed down a lot. I forget how many percentage. I won't say it's a seasonal, it's because there is very special situation currently.
This is more temporary.
Yeah, I guess it is temporary. If the COVID-19 is relaxed and our business activity is getting more and more, I expect the expenses, especially related to our business activity, will be getting more and more.
For cost-income ratio, the level at low 50% should be a reasonable range as before. Quite similar.
I would say currently lower than 50%. Right now it's very reasonable. For the next season, or next quarter, or for the next half year, it really depends on how strong we will push our business to where.
It's really mainly related to business activities and the things that you asked.
Yes. Let me reiterate. For example, you can see the first quarter, our insurance premium was lower down around 30%. The related incentive personnel, especially paid to those wealth management consultant, is much lower. You can see the operating expense is much lower. CE ratio is lower.
Yeah.
Traditional.
The first quarter FYP, as we expected that, because there are two reasons. The first one is the reserve rate is down, we expect the momentum should be lower. Second one is COVID-19 also will impact our sales to approach our customer. This number refers to our value of new business right now is at TWD 8.5 billion. This is as expected. If we look at from the April, the momentum is a little bit stronger than the first quarter.
Last year, the pure protection and protection ratio-
No matter the protection type or the savings type, because mainly its reserve rate is still down, the premium increased. They still need time to catch up. We expected the first quarter is the lowest quarter, we expect that at the second quarter, as we see, is the volume, especially traditional, it should be gradually stable and pick up. Because at the third quarter, we also lower down the reserve rate more. We expect the second quarter, the volume to be increased.
That's very clear. Thank you.
As a reminder, please press zero one on your keypad if you would like to ask a question. Thank you. The next question is coming from Edwin Liu of HSBC. Go ahead, please.
Hi. Thanks for taking my question. I have two questions. First one is on the banks. I saw that the first quarter, the interest spread and the NIM actually increased despite the fact has been getting raised since the last few months of last year. Can I get more color, in terms of why the interest spread and NIM actually increased in the first quarter this year? I know you mentioned that the deposit rate came down first, but in first quarter this year, I think, the Fed has further cut rates and I just want more color from your side to understand the mechanism, in terms of the NIM and interest rate, interest spread movement. My second question is in terms of your Life's expense ratio. If I'm understanding correctly, if you sell more sort of protection-type business, your expense ratio should increase.
In first quarter, the expense ratio actually decreased. If we can just get more color in terms of why the expense ratio actually decreased. If I may add, a final question is on your investment portfolio of your Life. Your fixed income portfolio, I understand, in March, you might have had some bonds, probably in the U.S. due to the volatile market. May I know, as of now, do you see any deterioration in terms of your credit rating of your bond portfolio? That's the questions from me. Thanks.
For the first one, the only reason is our deposit rates reflect the rate cutting is faster than the lending rate. Our funding, I mean, the deposit rate reflect the rate cutting.
On page 13, if you look at the slide 13, you can see the funding cost actually reduced by about 15 basis points. If you look at first quarter versus whole year last year. That is the main reason. The second one is, of course, we have continued to maintain stable in SME and there is a small growth in foreign currency loan. This all balances at the level of contribution from the better loan mix is not as significant as a sizable improvement in funding cost. Daniel explained earlier today in the other analysts' meeting call that the pricing our lending rates over time will also be adjusted. If you look at from here towards the end of this year, we may be seeing a couple few basis point of deterioration as you also start to reprice your loan book.
We will try to hold the net interest margin for the whole year to a year, and if we can manage it as around 1.2% will be quite happy. The second question is the life insurance operating ratio. In first quarter last year, it was 11.0%. In first quarter this year, it was 8.5%. If you could look at slide 21 where you see FYP premiums, you will notice that the product mix in first quarter last year, the traditional life, especially regular pay, the contribution was a lot higher than this year. While this year in first quarter, if you look at the contribution, investment link contribution is also higher than last year for the same period. That explains, it is actually in line with what you said, the more traditional, the higher expense ratio.
The third question you are asking about the fixed income bonds corporate credit rating, we have not seen a noticeable credit rating downgrade in our portfolio. If you could look on slide 48, this is Cathay Life overseas bonds, our direct holding. The credit rating, and also by the breakdown of currency. You can see that 94% of our bonds is dominated in U.S. dollar, regardless what country that is. Where to the right-hand side, you can see non-investment grade was 3%. If you compare with three, four years, this non-investment grade was 5%-6%. We have prepared early, and 2019, we used the time to de-risk. If you look on two years span, we believe this non-investment grade has already reduced from about 5% each level to 3%. We have taken last year as the opportunity to de-risk.
Whatever corporate bond we own, more sensitive to potential market correction, we have already trimmed that to prepare for possible market volatility. Such will not just offer the buffer if there is credit rating, at meantime, it will not affect our capability to buy on dip when I see the valuation is better. Overall, if you look at our bond portfolio, we have not much of credit rating in the portfolio. Overall risk is contained quite well.
Okay, thank you. May I just follow up quickly on one general question? You mentioned in terms of insurance sales, starting in the second half of this year, because of the regulatory change, the insurance product will be more expensive. There's still much liquidity in the system, in the society, so your customer would want to invest somewhere. If you look at deposit rate, it's been quite low. Insurance return also quite low. Investment market right now is quite volatile, but uncertainty in your second half. If you look at your potential demand from your customer, where would they likely invest their money in the second half? What kind of position or strategy would you use to capture that opportunity? Thank you.
Okay. I think more than 50% of our clients still like to invest in the fixed income market. No matter if it's insurance or fixed income fund or just fixed time in bonds. They need a very stable interest earning. I would say it's a matter of customer needs.
The insurance guarantee rate is always on relative basis. The bank deposit rate has also fallen, so it usually takes some time for the market to accept the new rate, and that's why it would take one quarter to two for the FYP to push up again. Besides the rate cut in first quarter, there was also the coronavirus event that typically if Taiwan insurance sector, if there are agents selling force. This year, this special situation has slowed down the process of the completion of insurance policies so that the profit is slower. Over time, past two months, we have adjusted now the procedure flow, so it will start to be more smooth. We are into second half quarter of our economy activity has start to resume. They will also help the premium to regrow a little bit.
Okay. It's very clear. Thank you.
Thank you.
Next we'll have Chien Po of Credit Suisse for questions. Go ahead, please.
Hi. Just want to follow up on our questions for net interest income earlier. Based on management guidance, NIM is targeted to be maintained at above 1.2% this year. If we take into account of your loan mix adjustments, can we expect to see positive net interest income growth this year? Thank you.
I don't expect our net interest income will remain the same, because currently, if we don't make any change of our loan mix, I would expect the net interest income will maybe reduce by, I think more than TWD 1 billion.
You mean net interest income?
Net interest income, yeah. We do have a plan to make some loan mix change to mitigate the effect of our net interest margin lowered cutting down.
Chien Po , if you look at page 15, sorry, 53 of the presentation material, that is the financial summary for Cathay United Bank. If you see the effort of this bank over the years, it grew loan book. It also has supported net interest margin by way of better loan mix. If you see 2017, net interest income was TWD 29.7 billion. A year later, it was TWD 33.4 billion. Last year, it grew further 36% by TWD 36 billion in the net interest income. To the bank, its basic requirement is nothing competes with asset quality. We remain quite cautious on the overall macro. When we see opportunity, we will lend, but we will not try to lend to grow the loan book to just jeopardize the asset quality. If you look at the net interest margin assuming flat, where loan cost is flat at best, I think.
On a compound basis, probably net interest income will be flat to tiny decline.
Okay. Thank you.
Yeah.
We're now in question and answer session. If you would like to ask the question, please press zero one on your telephone keypad. Thank you.
Jason, if there's no further question, maybe we can close this conference call.
Yes. Thank you, Miss Cheng. Ladies and gentlemen.
Thank you very much for your participation in Cathay Financial Holding conference call, and the IR team will stand by here for you if you have further question. Thank you, and goodbye.
Thank you, Miss Cheng. Ladies and gentlemen, we thank you for your participation.