Fubon Financial Holding Co Ltd

TWSE:2881

Earnings Call Transcript 2020-Q1

[Operator]

Thank you for standing by, and welcome to Fubon Financial's First Quarter of 2020 Financial Results. [Operator Instructions] 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.

[Amanda Wang, executive]

Thank you. Hello, everyone. Welcome to join Fubon Financial's investor conference call today. And in this call, we will show with you our first quarter '20 results and followed by the embedded value of the Fubon Life 2019.

So firstly, let's turn to Page 4 of the presentation. In this quarter, Fubon reported TWD 23 billion of net profit, and that is over 80% growth compared to previous year's first quarter mainly driven by very strong investment income from Fubon Life.

One of the main subsidiaries of the holding company, you can see that Taipei Fubon Bank continued to deliver steady NIM and also from the fee growth, especially from wealth management, we continued to deliver strongly. While the approval for the Sydney rep office application is granted from FSC, and they will help us to expand into the Pan-Pacific financial service network.

In Fubon Life, we see our business momentum remains decent with FYPE at top position and also in terms of the VNB continued to grow. But on the investment side, the after-hedged recurring return and also the cost of liability continued to show improvement. While in terms of the virtual life license in Hong Kong's operations, that is granted with a 35% stake.

In Fubon Insurance, we continued to be the market leader with a total premium to top position, while the combined ratio remained at steady level.

In Fubon Securities, we keep at a top 3 market position in terms of brokerage and emerging stock trading business.

In Page 5, now you can see the net profit and EPS continued to show the strong results, while the first 4 months result that we reached TWD 28 billion and still top ranked in the market.

In Page 6, by subsidiaries, earning performance that we can see, life insurance and also P&C delivered a growth, largely due to the investment income's performance. And that led to Fubon Life's contribution of over 70% of the total earnings, while the 3 bank subs together accounts for over 20% of the earnings.

In Page 7, in terms of asset, we grow over 9%, while the net profit decline reflects the market volatility of the marketable securities, while we see a recovery of nearly TWD 70 billion in April.

In Page 8, the ROA and ROE both shows improvement on back of the earning momentum.

And in Page 9, as we see the past few months, the COVID-19's impacts 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.

And for each of the subsidiaries, from a banking side, we basically help customers to apply for the bailout programs, and we delivered online platforms, including the credit cards and also the card users, the digital banking activities volume, which shows improvement.

And in terms of security, we see the online new account application actually doubled, and also the interface, we continue to improve.

Finally, insurance business. We see the policyholder subscription for COVID-19-related insurance accounted for over to 125,000 policyholder subscription. And also, that is the way that help us to build the customers' 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 and then 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 our corporate loan lending to the overall banking's growth of 11.5%. And if we -- excluding the government lending, the growth rate will be 12.9%.

And 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%. And in terms of SME, also delivered quite decent growth at 12.9%.

In Page 14, in terms of the retail credit, mortgage grow at 5.9%. That is more steadily performance, while the other consumer credit mainly led by the unsecured business, that grow 9.5%.

In Page 15, the total deposit, including NT and foreign currency, reached TWD 2 trillion by the end of this quarter. And 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%. And if we -- including the foreign currency investment, the total deployment accounts for up to 70.8% of the total foreign deposit.

In Page 16, we see the spread from loan deposit spread perspective widen by 4 bps largely due to the foreign currency loans growth and also liabilities structure improvement. While the margin remained flat at 1.1% compared to Q1 last year, as the net interest margin also gets negative impact from the rate cut, and that offset the spread widening benefit from loan deposits spreads performance.

In Page 17, the net interest -- sorry, the NPL ratio started moving upward. That's mainly due to a single case, a corporate default case in Singapore and also led to the coverage ratio to come down. While we write-off the case in April, we see the NPL drop back to 0.18% and also a coverage ratio rebound back to over 650%.

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. And the wealth management business that accounts for the bulk of the fee contribution also grow at over 20%, and that is mainly driven by the investment products as we see in the first 2 months, especially in first 2 months of the first quarter. While starting from March and also in the recent 2 months, we see the customers' preference for cash preservation as demand is getting higher. And therefore, we are taking a more conservative stance on the growth outlook in wealth management.

In Page 19, the wealth -- sorry, 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. And it also shows that in our total loan balance of the 3 overseas branches actually continue 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 structure changes and declined by 42%. And we continue to be the market leader in FYPE and top ranked in terms of FYPE and top 2 in FYP and renewal premium.

In Page 22, Fubon saw FYP declined by 42%. That is similar to the market's overall trend of 35% down. And due to this higher base driven by the hot sale in previous year and also the company's changes to regular-paid policy this year and also the COVID-19's impact that led to the decline. While the regular-paid policy, as you can see, the contribution here now reach over 50% of 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 agents. While on the right-hand side, the FYPE by channel, that especially from the agent and also external banks, shows strong momentum in regular-paid policy that led to their contribution also getting higher.

In Page 25, 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 credit widening take place and, therefore, we accelerate the accumulation during the spread widening stage. While in the earlier part of the first quarter, we -- actually, 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 come from recurring investment type, while the dividend income from mutual fund and equity grows more. And in capital gains, this quarter, we see a fixed income's 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 interest rates spread narrowing. And while the portfolio on the right-hand side, as you can see, compared to the previous quarter, we lowered down our other currency exposure and increased the NT dollar position to reflect the current currencies movement.

While the recurring return performance from the after-hedge perspective, it shows certain improvement. While before hedge, they reflect the lower rate environment, the clawback and also the FX rate we applied 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 crediting rates lower down trend. In the breakeven point perspective, we can see the increase year-over-year, mainly due to the product mix change into a regular-paid policy, and therefore, lead to a higher first year strain.

In Page 30, the investment performance from unrealized balance perspective, it shows quite meaningful volatility in the first quarter, and that reflects the market movement. And 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. And therefore, related to the shareholders' equity, as of April, go up to over TWD 300 billion.

And next section, let's move on to Fubon Insurance. In Page 32, Fubon Insurance premium rose at 10.1%, and that outperformed the market and, therefore, we see the market share increased. And now we are at 24.8%. On the right-hand side, we can see the combined ratio slightly edged up, largely due to the compulsory auto business, while expense ratio continued to improve. And the overall combined ratio still keep at a decent 90.9%.

In Page 34, the Fubon Securities highlights. Here, we can see the market position across the main business remains decent. While the revenue and net profit declined, that largely reflects the unrealized loss from mark-to-market, while 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 China. In Page 36, Fubon Bank China's deposit and loan both reached a record highs. And the growth momentum is quite strong at over 50% for deposit growth and over 30% for loan growth. And that also lead to the asset to reach over CNY 100 billion.

In Page 37, in terms of the financial highlights here, the net interest margin slightly came down, largely flat in the market interest rate, while the asset quality indicators continued to improve, while the loan balance continued to expand as well. So I will have the actuarial team head address you to walk you through the embedded value result, and followed by Deloitte consultant's comments. Thank you.

[Grace Chiu;HR, executive]

Okay. Thank you, Amanda.

[ As expressed ], our past practice, the 2019 EV results have been reviewed by Deloitte Consulting on a full-scope basis.

Now please turn to Page 39, value creation summary for Fubon Life. First of all, let's look at the in-force value creation. The 2019 net worth and adjusted net worth are higher than TWD 300 billion, the growth of more than 60% much explained by the equity market rebound and fixed income asset appreciation. The 2019 delivered 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.

The 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-paid 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 '19 and how it is adjusted for the embedded value calculation. The positive TWD 26.5 billion earnings and TWD 109.3 billion financial assets appreciation in 2019 drove a significant growth of net worth to reach TWD 337.5 billion, a 68% growth compared to 2018. The adjustments made are similar to previous years: firstly, at the special reserves that could be recognized in available capital calculation for RBC percentage; secondly, removed the unrealized capital gain or loss of fixed income from the accounting book to align with the bond yield return assumptions we used for this calculation; lastly, added on used 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 1 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 actions to lower credit rate for interest-sensitive products. The negative impact from noneconomic assumption change is due to the actual experience observed being slightly less favorable compared to original assumption and the result in a minus 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 notes below shows that VIF-equivalent return for 2018 was 4.42%, rolling over to 4.5% after 1 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 regulatory premium product due to the [ stock sale ] effect. Similar to in-force economic assumptions, the investment return for new business is adjusted downward accordingly.

Noneconomic assumptions improved to reflect the lower acquisition expense due to larger new business sales volume in 2019. The notes below shows the VNB equivalent return for 2018 was 4.35%, rolling over to 4.38% after 1 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 summary. 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 both of these, as VIF return starts at existing assets and gradually move to new investments after existing assets mature.

Risk discount rates stayed 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 and 37 basis points. A bigger reduction of 18 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 to 60 basis points.

Page 45, the curve for VNB portfolio return. The higher reduction of U.S.-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 new business ultimate portfolio return for NTD-denominated policies are reduced more than the U.S. dollar policies to reflect the lower NTD interest rate.

Page 46, the discount rate. 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 a 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 tiers.

If you would like to make consistent comparison with the industry peers, the sensitivity results on Page 49 could be referenced for your further adjustments.

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 rates. 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 product.

Now I will pass the call over to Ophelia from Deloitte Consulting. Thank you.

[Ophelia Au Young]

Thank you, Grace. Good afternoon, everyone. We are now on Page 50 of the presentation.

The 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.

Turn 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 was 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 basis with which we calculated the independent risk discount rate, and I'll leave these with you for your reference.

Turning to Page 53. In relation to the investment return assumption, Fubon Life applied 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. Growth has 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 in the historical interest rate information for both economies, and 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 noneconomic 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 (sic) [ Page 56 ]. We have reviewed the overall EV and VNB results and are satisfied that they are reasonable at a high level. And we are focused on the changes of the value of in-force business from year 2018 to 2019 and also causes of the value of the new business from year 2018 to year 2019 as well as the range of sensitivity test that Fubon Life conducted.

For further details of our review opinion, please refer to our opinion letter.

I now pass the time back to Amanda. Thank you.

[Amanda Wang, executive]

Thank you. And now we would like to open the Q&A for the audience, and that will be shared by Sophia Wang, Head of the Finance and Accounting of the Holding Company.

So operator, can you please take questions with the investors, name and company name, please?

[Wang Wei, executive]

Okay. Hi, everyone. Thank you for joining our intersection of our IR meeting. We would like to take your question after listening the briefing from Amanda Wang and Grace. Okay. Please raise your question. Thank you.

[Operator]

[Operator Instructions] Our first question, this comes from Jemmy Huang.

[Jemmy Huang, analyst]

Couple of questions from me. First is for Taipei Fubon Bank, I think that you mentioned that under the stress test, your credit costs might increase by 7 to 10 basis points. But just trying to understand what's your base case assumption for credit cost this year.

And then for Fubon Life, have you observed all your overseas fixed income portfolio? Any rating downgrade in the first 4 months of this year? Or 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?

And on the holding level, 2 questions. The first one is double leverage ratio increased quite a bit on a 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 the unrealized gains. So should we be concerned about return 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. But what is the key driving factors for the cost of capital increase in addition to the underlying business growth?

[Wang Wei, executive]

Okay. Regarding to the questions towards the Taipei Fubon Bank, I would like to have [ Tim ] to answer the question, please.

[Unknown Executive]

Okay. On the cash from credit cost that we estimate, the 7 to 10 basis points is after our stress test on portfolio. So if you state, it's the base case on the low side should be about 7 basis points, more on the extreme side of about 10 basis points. But I have mentioned that is after our stress test, not in the normal situation.

[Wang Wei, executive]

Regarding to -- this is Sophia. Regarding to your questions towards the decrease of double leverage ratio for the financial holding company, the reason why the decrease just because of the reduced reduction of equity for the -- by the end of the March. And regarding to the second question for the population tax, since we still have the remaining return earnings, we do have -- we will have appropriate -- non-appropriate earning tax this year. So have we answered your questions?

[Jemmy Huang, analyst]

Maybe a follow up on the credit cost. Let me refer to -- my question is on your credit cost for Taipei Fubon Bank is roughly around 13, 14 basis points in 2019. How -- what's your base case versus that level this year?

[Unknown Executive]

The base case versus what?

[Jemmy Huang, analyst]

Let's say credit cost last year was around 13 to 14 basis points at Taipei Fubon Bank. So what's your base case for credit cost versus -- compared to last year?

[Unknown Executive]

Yes, in a stressed situation, we will have around 20 basis points of credit cost. These are under the stress test situation. If the virus going south again, then this should -- this kind of situation could happen.

[Jemmy Huang, analyst]

So -- but what's the base case? Let's say, your baseline scenario, should we expect credit cost also increase by, let's say, 10 basis points year-on-year?

[Unknown Executive]

On normal situation, I don't think so. 10 basis points is quite a lot.

[Operator]

Our next question, this comes from Edwin Liu from HSBC.

[Edwin Liu, analyst]

Can you hear me?

[Unknown Executive]

Yes.

[Edwin Liu, analyst]

I'm Edwin from HSBC. So can I ask a first question regarding your overseas investment? I think that you have mentioned you have increased overseas investment recently because of the higher credit spread. But 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?

And I think second question is on your new money yield. I think you just mentioned your new money yield would be around 3% to 3.5%. And 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. Does that spread also under pressure recently? Could you give us an idea about the spread now versus maybe in last year?

[Wang Wei, executive]

Okay. So regarding to the investment questions, I would like to ask [ Cantor ] from the Fubon Life investment department to answer the questions. Okay. So please?

[Unknown Executive]

Yes, yes. Actually, our foreign investment strategy have no big change recently. And I would highlight if interest rate go high, then we will take advantage of that. And I don't think we will, especially to increase the volume investment. But if we have sale -- if we sell more foreign policy, then we can buy more for inbound in terms of the liabilities, also U.S. currency-denominated, so here is to basically.

And also, about the first question, our foreign bank [ corporate ] issue are more than -- should be more than 95% are investment grade. And about the financial credit, all investment grade, so there is no significant downgrade during this COVID-19 period.

[Grace Chiu;HR, executive]

And I'd like to add a point on the cost liability for new product sales. For the 2019, we have gradually reduced our credit rate for the interest-sensitive product. So the cost of liability for the 2019 new sales is less than 3%. And at the moment, after this reduction on credit rates, the cost liability for new products are both lower than -- for NT dollar policy is less than 2%. And for U.S. dollar policy, it's also less than 3%. So I think in terms of the cost liability for new sales, it's still lower than the target of investment return outlook we expect.

So pretty much maintained a positive spread.

[Wang Wei, executive]

Let me clarify -- I'm Sophia. Let me clarify my answer before. Since the double leverage ratio for the Fubon Financial Holding Co. at the end of 2019 is 111%. And by the end of the March, the ratio has been to 140%. The reason for the increase of double leverage ratio resulted mainly from the reduction of equity. So do we have more question from you?

[Edwin Liu, analyst]

No.

[Operator]

Our next question, this comes from Steven Lam from Bloomberg Intelligence.

[Steven Lam, analyst]

Can you hear me okay?

[Wang Wei, executive]

Yes, pretty good.

[Steven Lam, analyst]

Yes. Okay. Yes, 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. So for the bond gains that you've realized in the first quarter, can I assume that the bulk of it is from foreign loans or domestic loans?

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, right, in April and May, what have you done so far since the rally, the pickup and ahead of the Fed buying for those bonds?

And then I think on the life insurance side, I just want to get a sense. I mean, I can understand the FYPE will slow down. NBV (sic) [ VNB ] 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 probably at a double-digit pace. So 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? So that's on the life insurance side.

And 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 your business side, from a longer-term perspective, say, more than 6 or 12 months after the COVID-19?

[Wang Wei, executive]

Okay. So since you have asked several questions, so first of all, I would like to have [ Cantor ] to answer the investment questions. [ Cantor ], please.

[Unknown Executive]

For the [ treasury ] of the bonds actually from offshore more than domestic bonds. This is the first one. And the second for the reinvestment or the increased exposure in the North America actually is straight bonds. And about the treasury issue loan is especially [ 2-month ] treasury later this quarter. Then we see the economy begin to recover, and later on the yield curve may even that. We will increase our foreign bond at that moment.

[Steven Lam, analyst]

Sorry, I didn't get that, the last part of treasury in detail. Can you repeat that again? Sorry.

[Wang Wei, executive]

Sorry, we cannot hear your voice clearly. Could you repeat again? Thank you.

[Steven Lam, analyst]

Yes. 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.

[Unknown Executive]

No, no, no. We don't buy treasury because the yield is too low. 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.

[Wang Wei, executive]

So regarding to your question on FYPE, we have Grace to answer the question. Grace, please.

[Grace Chiu;HR, executive]

Your observation on FYPE sale during April is quite true. And I think this is mainly due to the COVID-19. And so we feel the FYP and -- for this year will not be promising. Because last year is a sort of a historical high, so we expect the FYP will be lower than -- maybe reduced by 30%. But the FYPE, we still expect the reduction will be lower than the FYP reduction. Because for this year, we will try to -- as we have been focused on these years, try to move our product to regular-paid policies. So maybe in this year, the FYPE may not be very positive, but we have longer -- mid- to longer-term view that the VNB will still try to achieve a single-digit growth. And so the -- you mentioned about the major concern for the customer about the long term, the macro slowdown. I think we still need to observe. But because we will be more focusing on the interest-sensitive product and protection type of products, so I think those protection gap is still there. So there is still ways to strive for the growth for our business.

[Steven Lam, analyst]

Okay. I see. Is there any pickup in May? Just curious. I guess we'll find out in a couple of weeks' time, but...

[Grace Chiu;HR, executive]

Yes. Yes. Thank you.

[Steven Lam, analyst]

Yes. And 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?

[Wang Wei, executive]

Good question. Okay. Yes. So yes, we will have our Chief Economist, yes, in our group, [ Dr. Wei Long ].

[Unknown Executive]

We don't think that the -- we don't think that inflation will be an issue right now because the virus has a quick -- has made that -- market demand has decreased significantly. So until the infection has slowed down, otherwise, no. But we don't think that inflation will be quite an issue in this moment.

[Wang Wei, executive]

I think right now, everything has been so uncertain. Yes. So from daily news, we can hear a lot of different points from different economists and investors. So 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. And that's what we can do right now, okay?

[Steven Lam, analyst]

Okay. Great.

[Operator]

Our next question, this comes from Brooksley Kang from Bank of America Securities.

[Brooksley Kang, analyst]

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? And are we also worry about other -- of our lending portfolio in Singapore as well?

And another question on Fubon China. The absolute amount of provision expense rise year-on-year during the first quarter. May I have more color on how -- do these come from the increase in lending mainly? Or we have some extra to raise coverage ratio to a higher level?

[Unknown Executive]

Okay. Firstly, on the feel in Singapore is [indiscernible]. Our loan outstanding is about USD 28 million. And on a provision ratio, we have raised -- we have reserved about 70% of the provision, yes? And on the other portfolio in Singapore, I don't -- 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?

[Brooksley Kang, analyst]

Yes. That's good. And also on Fubon China?

[Amanda Wang, executive]

Yes. Firstly, it's mainly due to general provision. And 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%.

[Operator]

Our next question, this comes from Jemmy Huang from JPMorgan.

[Jemmy Huang, analyst]

Yes. Sorry. One follow-up question from me. I think that your breakeven point at Fubon Life increased this year, as you said, it's because of a higher proportion of regular-paid policies. But 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. And also, I think I didn't get my answer for the cost of capital. Maybe I missed that. Yes.

[Wang Wei, executive]

Yes. Okay. Grace, please.

[Grace Chiu;HR, executive]

Okay. For the new business strain for 2019, because the regular-paid policies really shows higher NB strain than single-paid policies, so yes, we do have higher NB strain policies for 2019 when we compare with 2018.

And secondly, regarding the cost of capital, when you look at the Page 39, the cost of capital increased by 19% on the -- it is much explained by the AUM growth, as the 2019, our AUM growth is close to 12%. This is the most of -- the biggest impact. Then secondly is the regulation change. Because the regulation per our summary in the cost of capital change, this also contributes another 5% to 6% of the cost of capital increase.

And also, the reduction of our investment return, this is also impact the cost of capital to a higher level, because if we have a lower investment return assumption, then that means the investment income earned from the required capital will be less. So pretty much the 3 components explain the higher level of cost of capital. Thank you.

[Jemmy Huang, analyst]

For the breakeven, my question is for first quarter this year versus first quarter last year. So is that still the same case that absolute amount of first year surpass can still increase year-on-year?

[Grace Chiu;HR, executive]

For this quarter and last year, and yes, indeed, because last -- in 2019 first quarter, we had some [ stock selling ] effect due to the single premium interest-sensitive product. And the industry trends for those products would be minimum or even no NB strain. But for the regular-paid policies we sold this year, because you can see the FYPE divided by FYP is actually pretty high. So those policies will have higher NB strain, indeed.

[Operator]

At this time, speakers, we don't have any questions on queue. [Operator Instructions] Speakers, at this time, we don't have any questions on queue.

[Amanda Wang, executive]

Since there is no question anymore, so thank you very much to attend this meeting, and talk to you next time. Thank you very much. Bye.

[Operator]

That concludes today's conference. Thank you for participating. You may now disconnect.