Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2018-Q2

[Operator]

Welcome everyone to Cathay Financial Holding Company's Second Quarter 2018 Conference Call. [Operator Instructions]

And now I would like to introduce Ms. Sophia Cheng, CIO of Cathay Financial Holding Company. Ms. Cheng, you may begin.

[Sophia Cheng, executive]

Thank you. Good afternoon and good morning to those in Europe. Welcome to Cathay Financial Holding's 2018 first half analyst meeting. My name is Sophia Cheng. I'm the Chief Investment Officer of Cathay Financial Holding. Today I will host the conference call. And thank you so much for joining us today.

In the beginning, I would like to introduce the senior management who are with us today. Today we have Ms. Grace Chen, CFO of Cathay Financial Holding; Mr. Abel Lin, Managing Senior EVP for Cathay Life; Mr. [ Edward Yung ], SVP of Cathay United Bank, Mr. [ Jeremy Kong ], EVP of Cathay United Bank.

For today's conference call, I will have Charlie from our IR team to present the first half results. And after the presentation, we will open up for Q&A session, 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. Charlie?

[Charlie Hu, executive]

Thank you, Sophia. Let's start with Page 4, which provides you with a quick overview of our subsidiaries' financial performances for the first half of 2018. Cathay United Bank loan and deposit delivered a mild growth with good credit quality. Overseas expansion continued. Foreign currency loans grew by 25% year-on-year. Wealth management and credit card fee grew by 6% and 15% year-on-year effectively.

Cathay Life continued value-driven strategy. Protection product's FYP grew by 64% year-on-year. FYP and FYPE remained #1 in the industry. After-hedging investment yield reached 4.2%. Hedging cost contained at 1.09%. Overall, investment performance remained stable.

Cathay Century, general insurance subsidiary. Premium income grew by 5% year-on-year. Remained #2 in the industry with 12.5% market share. Overseas premium increased steadily.

As for the asset management subsidiary, Cathay Securities Investment Trust has firmly established itself as the market leader with assets under management amounted to TWD 613 billion. Cathay Securities brokerage business continued to grow and its sub-brokerage ranked #1 in the industry.

Please look at Page 5 for our net income and EPS. Cathay Financial Holding reported after-tax net income of TWD 36 billion for the first half of 2018. It grew by 36% year-on-year. Our EPS reached TWD 2.71.

Please turn to Page 6 for the net income and EPS of our subsidiaries. Cathay United Bank's earnings grew 4%, with growth of both interest income and fee income. Cathay Life's earning increased 55% year-on-year because of the increase of investment income. On a consolidated basis the holding company's ROE was 11.6% for the first half.

Our book value is listed on Page 7. The holding company's book value was TWD 600 billion and book value per share was TWD 39.7 as of the end of June 2018.

Please turn to Page 9 and 10 for our overseas footprint in Southeast Asia and China. The holding company continued to expand abroad in order to facilitate the operation of our overseas businesses. So far, Cathay United Bank has actively expanded its footprint to 9 Asian countries. Since 2015, it has been gradually buying a 23% stake in Philippines' RCBC and 40% stake in Indonesia's Bank Mayapada. In the future, we will continue to strengthen our operational capacities and seize opportunities for growth.

Cathay Life Vietnam total premium income grew by 46% year-on-year. As for our footprint in China, the conversion of Cathay United Bank Shanghai branch into subsidiary should be completed by the end of the third quarter.

Cathay Lujiazui Life's fast-growing business was marked by a premium growth of 54% year-on-year. Cathay Century China's premium income grew significantly as new businesses are running steadily in partnership with the Ant Financial Group.

Now please turn to Page 12 for Cathay United Bank. With proper risk management, we continue with the loan portfolio adjustment by increasing mortgage and foreign currency loan. Cathay United Bank's loan balance grew 7% year-on-year to TWD 1.5 trillion. Deposit growth remained steady and amounted to TWD 2.1 trillion at the end of June 2018, representing a 5% increase year-on-year. The loan to deposit ratio was 71% as of the end of first half.

Interest yield is shown on the Page 13. The loan mix shift from government loan to foreign currency loan and the U.S. Fed rate hike led to the margin improvement. Year-to-date, spread further improved by 2 basis points to 1.83% and NIM was up 1 basis point to 1.25%.

On Page 14, you can find the bank's credit quality. In compliance with our prudent lending policy, Cathay United Bank maintained low NPL ratio at 20 basis points and coverage ratio at 789%, which is stronger than industry average. In the first half of 2018, gross provision was TWD 1.5 trillion. The majority came from the regulation requirement of 1% for performing loan and 1.5% for mortgage loan. Recovery was TWD 600 million.

Please turn to Page 15 for SME and foreign currency loans. Our corporate banking business places great emphasis on SME and foreign currency loans. We made an effort to maintain good asset quality while pursuing growth. SME loan balance reached TWD 167 billion, which made up 11% of total loans. Foreign currency loan balance grew 10% year-to-date to TWD 247 billion in the first half of 2018, which accounted for 16.5% of total loans.

Our offshore earnings is on Page 16. Overseas profit of TWD 4.2 billion represent 32% of pretax earnings. Compared to last quarter, the magnitude of year-on-year decline has improved.

Let's look at the fee income on Page 17 and 18. Cathay United Bank has been focusing on increasing the annual interest income. Fee income amounted TWD 9.7 billion in the first half of 2018, representing 9% year-on-year growth. Credit card fee growth momentum continued with 15% growth year-on-year. Wealth management fee grew 6% year-on-year to TWD 5.1 billion. Mutual fund sales fee grew nicely, up by 33%.

Now let move on to Cathay Life. Please turn to Page 20 and 21 for premium income data. In the first half of 2018, total premium was TWD 353 billion, down by 6% year-on-year. The decline was mainly caused by some policies maturing and caused lower renewal premium in the first quarter. The decline is improving since then. FYP was TWD 118 billion, down by 1% due to high year-on-year base of investment in policies.

Starting 2018, we're focusing on protection type products, which contribute more to mortality gain. The protection type product FYP increased 64% year-on-year in the first half. The annualized premium FYPE was TWD 37 billion, dropped by 10% year-on-year due to the increase of shorter premium payment term policies. However, our FYPE ranked #1 in the industry.

Page 22 shows our focus on regular paid products. We stick to our value-driven strategy by focusing on regular paid products. Single paid product was only 5% of the total traditional type policies. Value of new business was TWD 25.3 billion, indicating a 5% year-on-year growth because of a change in our product mix of increasing proportion of traditional life and protection policies. The VNB top growth target for 2018 is 8%.

On Page 23, you will find our cost of liability, which continues to show improvement. The reserve base liability cost was 4.07% as of the end of June 2018, improved by 4 basis points year-to-date.

Please turn to Page 24 for our investment portfolio. Cathay Life total investments reached TWD 5.7 trillion. Cash position was 2.1% of invested assets and overseas investment accounted for 65%. The investment return of each asset class are as follows: cash and cash equivalents, 0.6%; domestic equity, 9.7%; international equity, 13.4% pre-hedged; domestic bond, 3.1%; international bond, 4.7% pre-hedged; mortgage and secured loans, 1.9%; policy loans, 5.7%; real estate, 2.2%.

Overall investment yield are shown on Page 25 and 26. After-hedging investment yield was 4.22% in the first half. Cathay Life will maintain proper risk management and dynamic portfolio management in face of market volatility. Pre-hedging recurring yield was 3.12% and we expect further improvement in the third quarter supported by cash dividend income.

Regarding our hedging performance, the annualized hedging cost has been improved to 1.09%, while the traditional hedging cost continued to rise given higher interest yield differentials between Taiwan and the United States. Cathay Life will continue to adopt flexible and dynamic hedging strategy to ensure the effective control of our hedging cost.

Please look at Page 27 for the dividend income and overseas fixed income regional breakdown. Cathay Life has recognized TWD 19 billion of dividend income in the first 7 months, which is better than the same period last year. As for the overseas fixed income investment, Cathay Life allocated 44% in North America, 18% in Europe, 24% in Asia-Pacific and 14% in other countries.

Page 28 shows the book value and unrealized gain of financial assets. The consolidated book value of Cathay Life reached TWD 443 billion. The unrealized gain of financial assets was TWD 6.4 billion.

Lastly, please look at Page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income was TWD 11.2 billion, up by 5% year-on-year. Market share was 12.5%. And cross synergy -- cross-selling synergy continued to perform well. Over 60% of premium income was generated by the group's channel.

This is the end of this presentation. We appreciate your participation and welcome your questions and comments in the Q&A session.

[Operator]

[Operator Instructions] The first question is coming from Anthony Lam from HSBC.

[Anthony Lam, analyst]

I think in the Chinese session there was a fair bit of questions around VNB. I think a few months ago when you released your 2017 [ annual ] numbers, you were aiming for the TWD 54.5 billion -- I mean, the VNB for the particular year. So in terms of run rate, in the first half I think it's a little bit behind -- I mean, run rate. So just trying to see what you expect to do in the second half to make up for the VNB target. So that's the first one. And a couple of updated questions [indiscernible] at the end of second half, second quarter and the [indiscernible] in the second quarter.

[Charlie Hu, executive]

Sorry, I missed the second part -- question. The first one is, on first half VNB of TWD 25.3 billion, whether we can still achieve TWD 54.5 billion whole year VNB, is that correct?

[Anthony Lam, analyst]

Yes, that's right.

[Charlie Hu, executive]

And your second question is?

[Anthony Lam, analyst]

On the outstanding balance of domestic bonds.

[Charlie Hu, executive]

Outstanding domestic bonds position. Okay.

[Chao-Ting Lin, executive]

I think that we did target -- in this year we think that we got [indiscernible] we can achieve this target the whole year of the VNB target. It is TWD 12.5 billion in that. And second of all, [Technical difficulty]. It's a -- no, no, I think it's rollout -- total domestic is around 7%. In this year we virtually increased the domestic bond.

[Anthony Lam, analyst]

And in terms of having [indiscernible]?

[Charlie Hu, executive]

You mean [indiscernible]?

[Anthony Lam, analyst]

[indiscernible].

[Chao-Ting Lin, executive]

In the first half, it's around I think the TWD 14.6 million.

[Charlie Hu, executive]

But it's the highest in the market.

[Operator]

And next we'll have Jemmy Huang from JP Morgan for questions.

[Jemmy Huang, analyst]

I have a couple of questions. The first one is net interest margin. I think that you've been one of the few banks that can drive the NIM expansion throughout the tightening spreads. And I think that this is mainly due to the loan mix adjustment. Just want to get an idea how like sustainable this loan mix adjustment could continue in the coming quarters? And then apart from this, where other measures that you can use to drive the NIM expansion? That's the first question. The second question is on credit cost. If you look at on Page 14, it's a -- net provision should be around TWD 900 million in the first half of this year. But if you look at appendix, which is page 41, I think the total provision is actually TWD 1.5 billion. Could you remind us what are the difference between the 2 in terms of definition? It's either because of your overseas subsidiaries who are now lending provisions? And then quite a gap has been widening year-on-year. Because the gap in the first half is around TWD 600 million, but first half last year was only TWD 300 million. That's the second question. The third question still for the bank. Why the operating expense is up 17% year-on-year in the second quarter? Is there any one-time items? And then could you remind us what's your guidance for the OpEx growth for 2018? And then the fourth question is on recurring yields. I think you have a quite decent improvement quarter-on-quarter and the recurring yield actually pick up by more than 20 basis points. Is that mainly because of the dividend income or you are also seeing better new money yields on the fixed income side? And then whether we can see further improvement for the whole year on the year-on-year basis? Because I think I recall you say dividend income amount would be largely the same year-on-year. So dividend income unlikely to be one driver for recurring yield improvement this year. So just want to get a sense. And then final question is on foreign currency policies. Foreign currency -- could you give us the what's the percentage of your FYP [ cap ] on foreign currency policies? And then if we are excluding investment-linked products, then for the traditional life insurance products -- just trying to get a sense whether foreign currency policies are always more profitable compared to the Taiwan dollar ones around the VNB marking perspective? Or if the hedging cost below a certain level that Taiwan dollar can be actually more profitable than the foreign currency ones?

[Chao-Ting Lin, executive]

About the recurring yield, I think that this year because we spent whole year, the cash dividend is at probably the same level as that year. But we expect that this year the recurring yield can -- better than last year. Last year I think that it's 3.35%. But this year we think we can higher than that. Because that -- the first one is this year [indiscernible] interest going up, now better in this line or credit spread. So right now our new investment for the -- generally speaking, we can get around 4.5% to 4.7% for the new money, generally speaking. Better than that, in the first quarter the investment yield we get is around 4.2%. So the new money yield is higher than that. And also we think that we can -- we also increase our overseas fixed income asset allocation because we feel has enough room -- just I'll say that this year we gradually increased our [indiscernible] bond portfolio. So we think that -- in our internally, we think that our recurring yield can -- each yield can be better than each year. So this is the first one for the recurring yield. The second one, this year our foreign policy at the first half is around 46%. And along the 46%, I think that there are -- around 20% is foreign traditional policy. The other 25% is individual products. And for the traditional foreign currency policy in the VNB basis, which is better than traditional Taiwan dollar policy. So we think that we still -- because right now the duration can increase our foreign traditional policy from 25% to 35%. Right now we are around 20% in terms of our reserve of foreign currency. So we think that it still has a lot of room and we will gradually -- I think this is our major product line for the traditional policy. So we will under the proper risk control then -- and under this condition, we will still focus on this product line.

[Charlie Hu, executive]

And Jemmy, for your question for Cathay United Bank, that's right, we can see the first half loan mix adjustment contribute for our NIM growth. You can see the 1.2 -- 1.14% to the first half 1.25%, 11 bps better than first half last year, mainly due to, as you mentioned, the -- our low yielding government loan decreased more than 40% by more than TWD 63 billion. And while those high-yielding loans, including FX loan, SME loans and the pure consumer loan all grew by more than 20% year-on-year. That's why we can see NIM growth quite satisfactory. But however, as we mentioned, looking forward for second half or the coming 2019, I think our drivers for our NIM growth will be, say, Fed rate hike. So we can see the first half our FX loan here grow more than 46 bps. However, our foreign currency deposit only -- the cost of liability only grows 22 bps. So there are still the loan spread -- loan margin growth 24 bps. That will be our divers looking forward.

[Sophia Cheng, executive]

And Jemmy, just add to that if I were to summarize, end of last year our loan deposit ratio was about 69%. In the first half it is 71%. So our low -- relatively lower loan deposit ratio does provide some buffer for further loan growth. And as the loan mix [indiscernible] just explained, that should be the main reason for that. And into second half, you may be seeing some -- if [ growth ] is where we want to, we have some lending capacity. This year the dividend payout mainly paying to parent company, so mainly from Cathay Life. Whereas Cathay Bank in 2018 does not pay upstream to holding company. So we have been reserving further lending capacity there. And even if these things come here through yearend, will more mature. If you look at whole year, last year the NIM was 1.18%. We're already seeing year-to-date 1.25%, which I think on YoY whole year basis comparison is already quite healthy.

[Charlie Hu, executive]

As for your question concerning credit cost, Jemmy, what you see from the template is on consolidated basis. Especially our Indovina Bank in Vietnam, they not yet adopt IFRS 9. So for those looking forward no provision for their lending. Our [ CPRA ] just made adjustment. So that's why we see on the template the net provision is higher than -- the slide that you see -- that is right for our [ core provision ] being TWD 900 million.

[Sophia Cheng, executive]

So on Page 18, there is the target only. And the financial statement is [indiscernible].

[Charlie Hu, executive]

Right, right.

[Sophia Cheng, executive]

And then the next one is operating expense...

[Charlie Hu, executive]

Operating expense. Due to the growth for the business and also need to invest in our IT upgrade, so that's why our amortization cost as well as the increase of headcount, human resource related expense is a little bit higher. However, we maintain a quite good cost income ratio around the 50%.

[Jemmy Huang, analyst]

And can I have 2 follow-up questions? The first one is for the Indovina Bank. So the year on -- part of the year-on-year increase, can we assume it's one-off? Or there will be more to come in second half this year? And then for the operating expenses, I mean, it's mainly because of the growth of the businesses. But how much is that related to the back office? How much is really the marketing expenses related to, for example, credit card or wealth management?

[Sophia Cheng, executive]

We just have 1 or 2 specific cases, extra provision needed to be taken down in the first half for Indovina Bank. So that's normal in looking forward. And for the operating expense increase, I think that's mainly due to the business related, yes. As we undertake centralization for operation this year, those back office related expense will reduce -- will be reduced.

[Operator]

And the next question is coming from Anderson Cha from BNP Paribas.

[Anderson Cha, analyst]

I have 2 questions with regards to your Life business. First of all, I understand that year-on-year margin expansion was largely on the back of stronger high margin protection sales for the first 6 months of this year. So I wanted to double check if there was any actuarial assumption changes in calculating value of new business. And secondly, how sustainable do you think that this protection sales growth will be in the future? So can we get any kind of long-term guidance on this? And my second question is, in terms of your investment allocation, can you share some color on geographical allocations for overseas bond in the second quarter of this year? It appears that you've allocated funds into Europe and Asia bonds more in the second quarter. So if you can share some more color on this asset allocation to the extent that you can, it will be very much appreciated.

[Chao-Ting Lin, executive]

So yes. Chiefly it is because we [Technical difficulty] on protection type traditional life. And this is very high margin product. And I think the actuarial assumption, we didn't -- I think actually this year when we calculate the embedded value, we will update our actuarial assumption. For the actuarial assumption for the new business, in fact the actuary didn't change too much. So I think our actuarial assumption each year -- I think the most impact is the investment assumption. So the actuarial assumption didn't change too much. And our long-term guidance for -- I think the full -- because we didn't have any guidance for the FYP new sales value impact. We only had the long-term guidance, is that in the long run we think that -- we are committed to do our best to keep our VNB growth each year per annual -- I think the long-term is 5% growth. This is our long-term guidance for the VNB. But we didn't have any guidance for the FYP. We only have the FYP -- I think the -- our major product strategy is the focus on traditional life product, especially regular paid and also on foreign currency policy. This is the first one. And second one -- and also balance in unit link product, because we think that is considered for the capital [indiscernible]. In terms of regular, this is most highly product in unit link product. But in terms of VNB of course it's not, but in terms of regular it's very high. And so we balance these 2 major product lines. This is our product strategy.

[Sophia Cheng, executive]

So basically, if you look FYP, that also includes investment link. So you might be seeing a big investment-linked growth, which however then the margin be lower or vice-versa. So therefore we tend to look at value of new business. We have a long-term target for VNB growth, 3 to 5% that we think, highlighting that. So far we still give the same guidance. So we can give the guidance for long-term VNB growth. And so far in first half, our VNB growth of 5% pretty much tops the range we provide to investors. And of course long term we would hope the traditional regular paid and higher margin policy they will continue to grow. Year-to-date, we are seeing some progress in second quarter already. Your second question is, our fixed income investment by region. On the slides if you look at Page 31, there is geographic breakdown. You can see that U.S. and Europe pretty much stable. Asia, yes, with the asset growth -- sorry, Page 27. So you can see the allocation actually. This is first half last year. Not much change. We increased North America a little bit and then Asia-Pacific a little bit more. But overall is not very significant change in that. Anderson, is it okay?

[Anderson Cha, analyst]

Yes.

[Operator]

And the next one is coming from Chung Hsu from Credit Suisse.

[Chung Hsu, analyst]

My first question is on Page 16 of the presentation. I'm thinking if you can help us understand or give better sense of your overseas bank profit. It is a very significant part of your profit despite -- obviously, loans is only mid-teen with regard of loan mix. But it seems to be volatile. So can you give us some color or some breakdown of your overseas product contribution? For example, the net interest income and fee income as a percentage of that mix? And I think -- and can I clarify that the drop in the first quarter this year or first half this year is because of the trading or mark-to-market impact or is it because of increase in credit cost? My second question is on book value. Correct me if I'm wrong, but if we look at the full value of your financial holding company, TWD 599 billion, that is really inclusive of the TWD 42 billion preferred shares that you just raised. And so if that is correct and if I include the profit you made in the bank and other subsidiaries, there seems to be a pretty substantial, at TWD 60 billion to TWD 70 billion, loss -- erosion about it in the first half this year. Are this all just mark-to-market, some type of market swing or is there something else that I didn't -- I missed? My last question is on your recurring yield. Abel, you just mentioned that 3.35% recurring yield last year and this year it will be better. I assume that is vintage. And you also mentioned the new money was higher at 4.5% to 4.6%. Last year it was 4.2%. All these new yield numbers seem to be substantially higher than your reported recurring yields of your back book each year. Just want to understand that after so many years your new money yield is much higher than you back book. And I see you're also taking new money. So it's not just the amount of bonds or fixed income investments that mature. Why is that [indiscernible] not picking up faster given that you're going to investment equivalent of 15% to 16% of your total asset each year and you're simply -- at least is not 100 basis point higher than your blended back book?

[Sophia Cheng, executive]

Chung, for the bank offshore earnings. Yes, if you look at the earnings breakdown -- because we try not to go for the bank operation purely alone, first. In some countries it might -- treasury offers better return. Sometimes the corporate bond if the yield is better than -- compared to the corporate loan is not that worse. And the main reason for the bank earning strategy [Technical difficult] which we highlight in first quarter [indiscernible] given the new IFRS 9, those bank and life will have a bigger portion of the asset allocation, shifting to [ APOCI ]. So you should be seeing more volatile P&L -- shift to [ SMCPTL ]. And only insurance company, they have the overlay. They can help to smooth out the changes. So year-to-date, obviously the earnings drop mainly come from the investment book mark-to-market. In first quarter, our overseas bank earnings -- overseas actually YoY decline was a much bigger number. It was down by 33%. Where in first half, it was down 19%. So you can see very clear, second quarter that volatility -- the overall process has improved.

[Chung Hsu, analyst]

So if I can just follow up on this one. Is overseas bank profit is not affected by FX and can change back to Taiwan dollar?

[Sophia Cheng, executive]

Say that again?

[Chung Hsu, analyst]

Is -- your overseas bank product contribution, is there any impact from mark-to-market -- the currency mark-to-market back to Taiwan dollar?

[Sophia Cheng, executive]

Good question. There should be few basis points. But I need to check. So we try to come over back to Taiwan dollar. It's easier to understand. But can I check that and [Technical difficult] you later?

[Chung Hsu, analyst]

Sure.

[Charlie Hu, executive]

Sure. Regarding the growth in net worth on Page 7, the first half figure of TWD 599.7 billion in this includes the preferred share or capital increase of TWD 42 billion. But as you know, we have dividend distribution this year on the first half and this year we have TWD 2.5 per share, $0.5 per share more than the previous 2 years. And yes -- and the remaining is the reevaluation impact. Now given the surge of risk-free interest and credit spread widened in the first half, we have a reevaluation loss, especially for our international bond.

[Sophia Cheng, executive]

So it's mark-to-market [Technical difficulty]. And I always want to highlight the reality that it is quite confusing when we have assets in that mark-to-market asset book. But we don't have asset [indiscernible] in mark-to-market liability. As you know that our liability duration is much longer than asset duration for the group. So if I were to mark-to-market liability, the positive balances should be bigger than the book value volatility. But so far this having [indiscernible] temporary. We tolerate at this moment. So I always want to highlight to investor that don't just look at the asset side of that.

[Chao-Ting Lin, executive]

Yes, I think that-- Chung, I'm sorry. I think that -- I mean, the whole year we expect -- the current year is better than last year at 3.35. Of course it is before hedging. And also I'm talking about the new investment. And I just -- I think that I'm correct -- I think that this is only for our oversea fixed income right now, because this is our major new investment. So for the oversea new fixed income, our new investment yield is around 4.5% to 4.7%. Compared then to last first quarter, the same -- I think that the first quarter last year it's around 4.2%, is also the overseas fixed income investment, not the -- not includes the Taiwan dollar investment, not include the staff investment, but only for the fixed income. Because I think the major contribution to our recurring yield is oversea fixed income. And also I'm talking about -- we think that -- because we see a lot of growth for the overseas investment, so we think that we will gradually increase [indiscernible] on the market timing and increase our overseas investment. So this is -- we expect before hedge our recurring yield can be gradually up.

[Chung Hsu, analyst]

Just one follow-up question on this book value and the gross impact. If I remember correct -- I just want to clarify something, that the mark-to-market from bonds will have no impact on your RBC, only mark-to-market on...

[Charlie Hu, executive]

Yes. Everything is...

[Chao-Ting Lin, executive]

Yes, I think that -- Chung, yes. Basically because RBC calculation is only for the book value. So [indiscernible] actually didn't have any -- or only very [indiscernible]. You can omit that.

[Charlie Hu, executive]

So the main RBC volatility comes from book sharing, not residual income...

[Chao-Ting Lin, executive]

Yes, yes, exactly.

[Operator]

And the next question is coming from Yafei Tian from Citigroup.

[Yafei Tian, analyst]

I have a couple of questions. The first is a relatively simple one, is around the relatively slower loan growth in second quarter, particularly when you look at the corporate lending segment, domestic corporate lending segment. I was wondering if it has to do with the fact that economy is somewhat impacted by the macro uncertainties around trade and how should we think about that loan growth going forward? And second is that you mentioned the FX currency reserve has increased to TWD 14.6 billion and this is higher than last quarter. I guess this is benefiting from NT dollar depreciating. I was just wondering to what extent the lower hedging cost this quarter is benefiting from the NT dollar depreciation? And finally is a question -- just a follow-up question on the book value point. You mentioned that the volatility is a result of the IFRS 9 accounting policy, and if IFRS 17 were to be implemented, we could have more stability around book value. And then my question is that when IFRS 17 is implemented and when it comes, what is the time for the implementation? Are we thinking of 2021 or 3 years later? And when that is implemented, is it a one-off book value hit as the liability side could be mark-to-market and it hasn't been mark-to-market for a very long time?

[Chao-Ting Lin, executive]

I think that right now our FX reserves -- I'm just talking about TWD 14.6 billion. This is end of July. For the first half actually our FX reserve is TWD 15.4 billion, but still very large. I think that -- but because -- I think the increase of FX reserve is not really due to the Taiwan dollar depreciation. I think our FX hedge actually -- because we have partly hedged, so it will depend on Taiwan dollar relative to the other major Asian currencies, which is relative strong or relative weak. So this is the major factor, not only specific Taiwan dollar depreciation versus U.S. dollar. Not that easy. But because it's only thing that we have a very long historical record -- you can check that. We can keep our hedging calls quite stable. I think that our long-term guidance is that we can keep in 1% to 1.5% in the long run. This is the first answer. The second is, yes, for the IFRS 17, Sophia just mentioned that because we're not accounting for this [indiscernible] we put it in [ FD OCI ]. And then we need to mark-to-market for the fixed income. But in the same time, we did a mark-to-market to our -- this is very big liability. So actually if you look at the FX reserve, unrealized, notice it's [indiscernible] for the life insurance company. Especially we had the long duration liability. So clearly the mark-to-market [indiscernible] and also liability in the consistent way. This is I think the major principle for the IFRS 17. In Taiwan, we think the main run up at this moment to our past estimate -- effective time for Taiwan is 2021, perhaps 3 years. That means effective on the 20/24/'21. This is -- at this moment we think this is the -- it should be the best estimate for us. So our internal -- we had made another effort on this implementation of the IFRS 17. Of course as a transition date, in the first stage, I think that we need to re-calculate our liability value. But it's very counter effect and also a lot of technical issue. So at this moment we -- I think that another calculation internally and we are ongoing internally. But at this moment because still has a very large technical issue that need to be determined in Taiwan market, so I think that at this moment we can't see any number in front of investor. But we will do our best to -- when we think that it's a proper time, that maybe we can have some information sharing to our investor.

[Sophia Cheng, executive]

And Yafei, your first question regarding slower bank loan growth. First of all, in our first quarter loan growth was 2% year-on-year and that was caused by higher [ Y-o-Y ] base. Whereas, the first half our loan growth was actually 7%. So if I look at the [ Y-o-Y ] growth every quarter, year-to-date the -- year to trend -- the Y-o-Y growth is better than first quarter. But I want to highlight that it can be always distorted by the year-on-year base.

[Yafei Tian, analyst]

On the loan growth, I was just referring to the Q-on-Q decline in the corporate loan. Maybe I'm just reading too much into that because that line seems to have quite a lot of volatility. And then...

[Sophia Cheng, executive]

The loan growth -- because when you see -- the loan growth volatility if it's to corporate -- because corporate actually in a category -- for that category that includes corporate and government. Most of the loan volatility for corporate segment comes from the volatility in loans to government and government-related entity. If you look at pure private industry corporate, it has continued to grow. So that it appears mainly from our loans to government related. And as we highlight before, we tend to say loans to government, loans to [ Jumbo ] as more likely liquidity packing, depending our current lending environment. So it can be volatile, continue...

[Yafei Tian, analyst]

Thank you for clarifying the IFRS 9 -- 17 point and I understand it's still early stages to give us a good guidance. Just from a qualitative point of view given that Taiwan has the very longstanding legacy book and having the negative spread issue -- and I've seen research suggesting that in countries such as Korea that has similar issue, that there would be a one-off book value impact and the Korea regulator is thinking of mitigating that impact by maybe having a local version of the IFRS 17. I was just thinking, is there something that you have been in regular discussion with the regulator when it comes to the implementation of IFRS 17?

[Chao-Ting Lin, executive]

Yes. First, we have already adopt IFRS 9. So IFRS 17 is right now still too early to say the financial impact. But I think that Taiwan and Korea, we have the similar feature for our long-term liability and also I think that Korea right now the interest rate also is very -- decreased very significantly comparing back to 5 years ago. But Taiwan I think that there is -- but still has some different studies that -- actually, Taiwan, we have deal with the negative spreads quite a long time. I think that at least 10 to 15 years we have prepared very much for this kind of negative spread issue. So what do we do? We think that we are very -- to do our best for our business value, especially for the new business policy that can dilute our lending book. For example, right now our lending book right now is down to only 42% of our total reserve. We think that still it's -- we are not comfortable on this dilution. And also because the -- we prepared in the advance very early than Korea, so I think the impact number maybe not the same. And I think that also some technical for the calculation of liability, I think still have a very significant issue. So I think that Taiwan -- as we know, the Taiwan regulator also will consider the Taiwan situation, [ no matter ] in capital market situation, also in our product prospect. So they will under the financial reporting standard make -- and also have their authority to maybe have some flexibility to set up some rules to help Taiwan implement this IFRS 17, also can [ keep ] to introduce a good risk management and also [ AON ] scheme in the industry. So this is the major target for our regulator to help our local player to implement that smoothly and also have a good risk culture and [ AON ] scheme in this respect. I think this is what I know at this moment we can share. So I think, yes, Taiwan definitely will have some modifications. And it's under this features, but still have some maybe -- have had some new [indiscernible] to tell everyone that obey the same rules.

[Operator]

And the next question is coming from Thomas Wang from Goldman Sachs.

[Thomas Wang, analyst]

So a couple of questions here. One is, if we look at the FYP and the FYP numbers, so it seems to imply a significant change in the premium paying terms. So almost -- if look at the majority or almost all the policy now are probably less than 3 years in premium paying term. Was this something that it was more market driven or you did you do -- this was company's strategy why you decided to sell more shorter paying premium policies? And secondly related to that, also the cost of liability -- so we had -- there was only 1 basis point decline in cost of liability, but 3 basis point in the second quarter. What's changed? Was there something -- a change in your product mix in the second quarter significantly versus first quarter? Or just can you give me -- could you share something that will help us to quantify that change? Because in the context of first quarter -- in fact the volume between those 2 quarters -- and the fact that the U.S yield is rising is just sort of -- seems to -- a little bit strange that you actually accelerated that cost of liability decline in the second quarter.

[Chao-Ting Lin, executive]

For the first part the -- yes, this year -- I think for the first half comparison, that first half, our short-term payment, for example, 2 pay, 3 pay and 4 pay, the percentage is larger than last first half. This is because in this year we think that -- because in banking channel we didn't want to sell single paid product. But still they have some demand under short payment product. And under -- we think the margin is obey our standard. So we have increased that portion. So this is why you can see the traditional life FYPE is increased, but FYP is decreased. Mainly due to our banking channel we have more percentage of the short-term payment product. This is the main reason. And second part, for the first quarter our product basically dropped by 1 basis point and second is 3 basis point. So first half -- actually, totally we had 4 basis points above our guidance. But I just need to highlight one point, is that actually if you're looking at quarterly-quarterly numbers -- I didn't refer -- it should be smoothly. Actually, this kind of feature you will also -- you can see -- the previous years also has that kind of drop. Maybe each quarter is not the same. So actually this because the quarter really has a seasoning feature, because each quarter I think the volumes differs. And also renewable premium also has some different trends. So we think that quarterly number didn't [ refer ] too meaningful. But if you look -- see the yearly number, we think we are more confident. If you see our historical, each year is always under 5 to 10 basis -- actually, it's around -- if you're looking at first the past 5 years, it's around 8 basis points to 10 basis points. So we think that -- in the yearly number it should be suitable for your reference. But quarterly actually it will change. Quarter-by-quarter it's not so smoothly

[Thomas Wang, analyst]

Just a follow-up on that. If we assume at least the -- yes, the renewal premium applies -- kind of varies. So from that perspective if I assume the seasonality is similar to last year, then should we -- I mean, that's kind of how should I think about the second half decline in cost of liability? Is that the right way to think about it that we should refer to last year's pattern?

[Sophia Cheng, executive]

Thomas, of our full year target we tend to think somewhere between 5 to 10 basis per year at least for this year and next year will be more towards to the 8 to 10 basis points. Such guidance, we don't we see the need to change that. We're still on the right track. Just the type -- Abel said the highlight. Sometimes because of the high sale season can allocate to different months if you look at year-on-year comparison. So checking so closely on quarterly movement we are ahead of analysts. Especially, first quarter really states very little for the whole year.

[Operator]

And the next question is coming from Anthony Lam from HSBC.

[Anthony Lam, analyst]

I got a few follow-up questions. I think that Abel mentioned a 42% number for the high -- to calculate back book. Just wondering if the cut off is the 4%, which you so refer to. That's the first one. And the second one is on the impact on the financial statement on Cathy Life. I think -- I notice that the change in level is much lower than the first half last year. Just trying to figure out whether this is related to the slowdown in total premium or alternatively first pay premium. So -- I mean, if total premium is going to stay rather flat, then should we expect, I mean, a decline in the change in level of the [indiscernible] given that that should be lesser premium deficiency that's actually decided. And a second one -- I recognize this is a more philosophical one I think around -- Abel talked about uncertainty that's out there. And also mentioned in the Chinese session about [indiscernible]. I'm just trying to understand how long have you been monitoring that and -- I mean, in terms of application, how comfortable are you with -- I mean, if the regulator were to drop -- bring forward the adoption to 2020?

[Sophia Cheng, executive]

Anthony, sorry, but your voice -- the line quality is not very good. Can I -- can you allow me to -- you were asking for first half after-hedging investment yield of 4.2% and you want to know about...

[Anthony Lam, analyst]

No, no, no. That high portion of legacy adopted high currency rate [indiscernible]. And Abel now says it's around 43% of that...

[Sophia Cheng, executive]

43%, yes.

[Anthony Lam, analyst]

Yes. So wondering whether that's the 4% guarantee rate cut off that reduced too much...

[Sophia Cheng, executive]

Yes, it is. Yes. If you compare with end of 2017, it dominates more than 80% of our insurance reserve. As of now the insurance policy which guarantee 4% or more already down to only 42% of the portfolio. And that's correct.

[Chao-Ting Lin, executive]

I'm sorry, could you repeat your second question?

[Anthony Lam, analyst]

It's related to the change in liability reserve. I think towards the end about the Cathy Life [indiscernible] payment. So I think it was around TWD 178 billion in first half'18, but it was TWD [ 208 ] billion in first half '17. So wondering whether the drop was related to lower total premium or lower -- I mean, steady first pay premium? And whether we can expect this to be declining item for the full year?

[Sophia Cheng, executive]

Anthony, maybe I can refer to you after the call. Because when you look at the hedge made in the Cathay Life financial statement, the change in liability reserve reflects 2 things. You will make a reserve against the premium you're in and you also reserve your return against the claim or maturity of the insurance policy you pay out. So this is a net number. So I need to pick up the provision and the recovery of reserve. So can I get the number for you later please?

[Anthony Lam, analyst]

Sure, yes.

[Sophia Cheng, executive]

This is a net number. This is a net change. And your third question is relating to our...

[Anthony Lam, analyst]

Counter service margin.

[Sophia Cheng, executive]

Yes, counter service [Technical difficulty].

[Chao-Ting Lin, executive]

Yes. For the counter service margin, we have already did since -- for our -- because this is -- right now when we launch the new product, we not only focus on [indiscernible], we also will focus on [ CFN ] margin. This is from -- since at least 2 years ago we have adopted higher standard. So the impact -- so right now we will focus on IFRS 17 as we [indiscernible] evaluate the [indiscernible] margin. So a few years ago when we adopted the [Technical difficulty] some product in our company we think that is not profitable, so we don't want [indiscernible]. But because some [indiscernible] they think that it will profitable. So we [indiscernible] this kind of standard. We think that in the long run it's more helpful to adopt. When we adopt the IFRS 17, [indiscernible] will be little.

[Operator]

[Operator Instruction] There appears to be no further questions at this point. Ms. Cheng, can we close the conference call now?

[Sophia Cheng, executive]

Okay. Well, thank you very much for your participation in Cathay Financial Holding's conference call for this first half. And please free to contact our IR team. If you have further questions, the team will standby for you. Thank you and goodbye.

[Operator]

Thank you. And we thank you for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye.