Cathay Financial Holding Co Ltd

TWSE:2882

Earnings Call Transcript 2017-Q4

[Operator]

Welcome, everyone, to Cathay Financial Holding Co.'s 2017 Fourth Quarter Conference Call. [Operator Instructions]

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

[Sophia Cheng, executive]

Thank you. Good afternoon, and good morning to those friends in Europe. Welcome to Cathay Financial Holding's Analyst Meeting. My name is Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding. Today, I will host the conference call. Thank you for joining us today.

In the beginning, I would like to introduce the senior managers who are with us today. Today, we have Ms. Grace Chen, CFO of Cathay Financial Holding; Mr. Daniel Teng, Senior EVP of Cathay Financial Holding and Head of Corporate Banking in Cathay United Bank; Mr. Abel Lin, Senior EVP of Cathay Life; Ms. Sharon Wu, EVP of Cathay Financial Holding and Cathay United Bank; and lastly, Ms. Grace Han, EVP of Cathay Life.

For today's conference call, Charlie from our IR team will present the fourth quarter year-end results to you. And after the presentation, we are open for Q&A session, in which our senior management will be very happy to answer your questions.

Without further ado, let me pass the call over to Charlie for the briefing of year-end results for 2017. Charlie?

[Charlie Hu, executive]

Thank you, Sophia. Now, let's start with the 2017 business overview on Page 3, which provides a quick highlight on our subsidiaries. Cathay United Bank loan remained stable with benign asset quality. Credit card fees growth momentum continues, grew by 14%. Foreign currency loan grew by around 30% year-on-year. The offshore earning accounted for 46% of pretax earning in the year of 2017.

Cathay Life. FYP grew by 17% year-on-year due to the custody of investment-linked policies. Both FYP and annualized premium FYPE ranked #1 in the industry. On the investment side, overseas investment reached 64%. Hedging cost improved to 89 basis points. Overall investment yield was 4%. RBC ratio was 309%. Capital level remained strong. Next, Cathay Century, the general insurance subsidiary. Premium income grew by 5% year-on-year. We've been #2 in the industry. Asset management subsidiary, Cathay SITE, has AUM of TWD 587 billion, has already ranked #1 in the industry. Lastly, Cathay Securities continues to enhance digital application to optimize customer experience.

Please look at Page 4, shows Cathay Financial Holding and subsidiaries net income and ROE. Cathay Financial Holding reported TWD 56.7 billion of earnings for the year of 2017, increased by 18% year-on-year. EPS reached TWD 4.47. Cathay United Bank earnings grew by 12% due to the recovery of net interest income. Cathay Life earnings increased by [ 30% ] because of high one-off gains. On a consolidated basis, the holding company ROE was 10% in 2017.

Please turn to Page 5 to see the book value of Cathay Financial Holding. The consolidated book value of the holding company was TWD 609 billion. Book value per share was TWD 43.7 in the year of 2017.

Page 7 and 8 shows our overseas expansion, which is on the right track. To build a comprehensive trade finance platform in Asia Pacific, Cathay Financial Holding has expanded to many countries in Asia. The overseas banking footprint contributed to the strong growth of foreign currency loans in 2017. As for the subsidiaries' operation in China, Cathay United Bank received the China regulators approval to upgrade the Shanghai branch into subsidiary. For the Cathay Life joint venture in China, it completed capital raising in the fourth quarter of 2017. The solvency ratio reached 292% and total premium grew by 82% year-on-year.

Next, please turn to Page 10 for more detail about our banking performance. Cathay United Bank loan balance was TWD 1.4 trillion, remained stable year-on-year. On the basis of proper risk management, we grew our loan significantly in the fourth quarter of 2016 and adjusted the loan mix by decreasing government loan and increasing mortgage loan and foreign currency loans. Deposits grew by 3% year-on-year. The loan-to-deposit ratio was around 70% as of the end of 2017.

Please look at Page 11 to interest yields. The strong mortgage and foreign currency loan growth led to margin improvement. The interest rate improved by 3 basis points quarter-on-quarter to 1.67%. Net interest margin was 1.18%, improved by 11 basis points compared to the end of 2016.

Page 12 shows the asset quality of Cathay United Bank. Due to our prudent lending policy, Cathay United Bank [ remained at ] low NPL ratio at 21 basis points and coverage ratio at 756%. In the year of 2017, gross provision was TWD 4.5 billion; recovery came to TWD 1.8 billion.

Next, please turn to Page 13 for SME and foreign currency loans. SME loan balance has increased to TWD 152 billion, grew by 16% year-on-year. We managed the portfolio dynamically to maintain asset quality. Foreign currency loan rebounded due to the macro recovery in China and Southeast Asia. The loan balance reached TWD 224 billion, grew by 29% year-on-year.

Page 14 shows the offshore earnings, which has reached TWD 10 billion and accounted for 46% of the bank pretax earnings in the year of 2017.

Please turn to Page 15 for fee income. Cathay United Bank continued to enhance the non-interest income. Fee income was TWD 17.9 billion in 2017, dropped by 3% year-on-year, mainly due to the decline in wealth management fee. Credit card fee performed very well with 14% growth year-on-year.

Page 16 shows the breakdown of wealth management fee. Wealth management fee came to TWD 8.8 billion, down by 10% year-on-year, in which bancassurance fee declined due to regulatory change. Mutual fund fee grew nicely, up by 56% year-on-year.

Please move on to Page 18 and 19 for Cathay Life's premium performance. 2017, total premium reached TWD 768 billion, grew by 15% year-on-year.

On Page 19, FYP reached TWD 233 billion, up by 17%. The strong demand of investment-linked policies and the effective agency force contributed this growth of FYP. The annualized premium FYPE was TWD 79 billion, it dropped by 42% year-on-year due to the product mix [ shift ]. However, it's still ranked number #1 in the industry.

Page 20 shows our focus on regular paid traditional policy. Cathay Life continued the value-driven strategy to focus on regular paid products, which offer higher profit margin continuously. The value of new business was TWD 50.5 billion, declined by 33% year-on-year because of high year-over-year base and the custody of investment-linked policies.

Page 21 shows our cost of liability, which continued to improve. The reserve-based liability cost was 4.11% at the end of 2017, improved by 12 basis points compared to the end of 2016.

Please look at Page 22, for the investment portfolio. Cash position was 1.6% of invested assets. Overseas investment accounted for 64%. Investment return of each asset class are as follows: cash and cash equivalents, 0.5%; domestic equity, 9.1%; international equity, 8.3% pre-hedged; domestic bond, 2.1%; international bond, 5% pre-hedged; mortgage and secure loan, 1.8%; policy loans, 5.8%; real estate 2.3%. The overall investment return was 4% after hedge.

Please move to Page 23 for more detail about our investment performance. After hedging, the investment yield was 4% in 2017. Pre-hedging recurring yield was 3.4%, remained stable compared to the year of 2016. In terms of hedging, Cathay Life delivered well-contained hedging cost despite Taiwan dollar has appreciated by more than 8% in the year of 2017. The full year hedging cost was 89 basis points. Also, the foreign currencies [ mostly ] reserve was TWD 11.6 billion, which was the highest in the industry.

Please look at Page 24 for the dividend income and the regional breakdown of overseas fixed income. Cathay Life has recognized dividend income of TWD 23.7 billion in 2017. For the overseas fixed income investment, Cathay Life allocated 43% in North America, 18% in Europe and the rest are in Asia Pacific and other countries.

Page 25 shows the book value and unrealized gain of financial assets. The consolidated book value of Cathay Life was TWD 441 billion. The unrealized gain of financial assets has increased to TWD 51.6 billion as of the end of 2017.

Next, please turn to Page 29 and 30 for the performance of Cathay Century. Cathay Century's premium income was TWD 22 billion, up by 5% year-on-year. Market share was 13.1%. Cross-selling synergy continued to perform very well. Over 60% of the premium was generated by the group channels. And lastly, we would like to extend

[audio gap]

Okay. January 1, upon the adoption of IFRS 9, the group's pro forma net worth increased by TWD 35.8 billion to a balance of TWD 644.3 billion, mainly due to the increase of net worth from Life subsidiaries. Cathay Life's book value went up by TWD 32.6 billion and pro forma net worth surged to TWD 473.8 billion, while the impact on bank subsidiary, Cathay United Bank, is around TWD 3.2 billion.

And let's move on to Page 33. Cathay Life's net worth increased by TWD 32.6 billion, mostly came from 2 parts. Firstly, the impact of the new standard for asset reclassification and measurement. Based on the old accounting principal IAS 39, those investment portfolio which you won't require to reevaluate it, including loan and receivables and hold to maturity, financial instruments account for 62.5% of our total portfolio. And upon the adoption of IFRS 9, based on new criteria, the percentage of putting AC, we call amortized cost account, which are not required to mark-to-market, reduced to 47.8%. The difference is of about 15% debt holding reclassified to fair values through P&L and the fair value OCI have unrealized -- an unrealized gain of about TWD 34.3 billion. And secondly, impairments. For investment portfolios and lending, we need to assess their future possible credit risk and make a reservation in advance, and there was TWD 1.7 billion provision made for the impairment growth for Cathay Life, which can be reversed upon the repayment of principal or when the debt instrument are sold. For lending, current provision based on regulators' 5 categories [ extender ] is much higher than the required provision based on the IFRS 9 impairment model, though no impact on this regard. But the increase of shareholders' equity for Cathay United Bank also mainly due from -- due to the impact of the classification and measurement of financial investment.

And then, I pass to Charlie, and let's open to Q&A.

This is the end of our presentation on fourth quarter result and the opening for IFRS 9 in 2018, January 1. Our CFO has explained in detail. Now we are more than happy to answer your questions. Thank you.

[Operator]

[Operator Instructions] And the first question is from Anthony Lam from HSBC.

[Anthony Lam, analyst]

Quick questions on the banking business. First one on mortgage. I understand that there was mortgage [ book accretion throughout ] fourth quarter and in the [ third ] quarter briefing, you mentioned that about 120 basis point up from that. I'm just trying to get a sense of the final figure in terms of boost to capital adequacy in the fourth quarter. I think, there's quite a bit of improvement there. That's the first part of the first question. Second part of the first question will be, I think you continue to increase mortgage loan book and I also observed, I mean, the NPL ratio for the mortgage business actually crept up for the past few quarters. Just trying to get a sense of what management is, I mean, thinking about the ongoing public interaction having impact on mortgage book and asset quality? So that's the first. And second is on the insurance with fee involvement and this is I think the distribution volume in the fourth quarter is quite steady, around TWD 11-odd billion in terms of FYP, but the fee income from initial distribution in fourth quarter jumped quite a bit. Could you give us a sense of what kind of product mix is in -- is through the bancassurance, January, the fourth quarter that [ cross track ] in terms of fee income.

[Charlie Hu, executive]

Okay. Anthony, you're very close to your phone. So the voice is not super clear. Let me reiterate your question. And then, if I missed it, please let me know. Before our Q&A, I forgot to highlight that we are in the process of doing a preferred share. We are sending our application very soon, despite we are not formally in quite period yet. So we think from the overall governance point of view, we would -- we cannot provide forward guidance number for 2018 outlook. But up to today, up to year-end, any operation highlight up to now, if we can answer, we try our best, but we cannot answer anything with forward guidance. Okay. So Anthony, your first question is the impact to capital adequacy ratio when we adjust the capital charge for mortgage. Is that correct?

[Anthony Lam, analyst]

Yes, right, yes.

[Charlie Hu, executive]

And your second question is the overall mortgage book has increased and you noticed a slight push in NPL ratio. You are interested in knowing our view on the overall asset quality trend for mortgage market?

[Anthony Lam, analyst]

That's right, yes. That's the first bit, yes.

[Charlie Hu, executive]

And the third one, I'm not -- to make sure I don't miss, you were asking for the bancassurance distribution. So you want to know the -- you want to know Cathay United Bank distribution detail, you want to know Cathay Life FYP distribution by channel?

[Anthony Lam, analyst]

I think Cathay United Bank distribution details because I think the fee income from insurance distribution at Cathay United Bank was little less than TWD 1 billion in fourth quarter. So that's quite a bit of [ quarter ] drop there despite having pretty stable TWD 11-odd billion FYP distributed through Cathay United Bank. Just trying to get a sense, what caused drop in insurance -- with the fee income there.

[Charlie Hu, executive]

So what you mean is that the bancassurance volume is quite stable, but bancassurance fee has dropped in fourth quarter. Is that right?

[Anthony Lam, analyst]

Yes.

[Charlie Hu, executive]

Okay. So for capital adequacy ratio affected impact from mortgage and the mortgage market.

[Sophia Cheng, executive]

The [ interval for ] CET1 is around 0.8% and for total BIS it's 1.3% because it reduced the RWA, risk-weighted asset of Cathay United Bank by reducing the weight from 45% to 35% and non-residential from 100% to 75%.

[Charlie Hu, executive]

The positive impact.

[Sophia Cheng, executive]

Yes, positively impact.

[Unknown Executive]

Okay. I think for the overall housing market or the mortgage market in Taiwan, it's quite stable, especially the mortgage book for the Cathay Financial Holding or Cathay United Bank will only focus on the [ CET ] area. So it's relatively stable than overall housing or mortgage market in Taiwan.

[Charlie Hu, executive]

On Page 12 of the slide, I think you were referred to the mortgage NPL ratio. So end of 2016, it was 8 basis points and end of last year at 15 basis points. This will be very case specific, and we have not seen very obvious deterioration in mortgage asset quality at all. Anthony, we discussed a little bit on the [ fourth ] quarter bancassurance figure. I think, it will relate to the product mix. But we need to check the detail. Can I get back to you later on that?

[Operator]

[Operator Instructions] Next, we have [indiscernible] from Citi for questions.

[Unknown Analyst]

I have 2 questions on Cathay United Bank. The first one is on the provision charge. I saw in the fourth quarter, the provision charge was relatively high, both Q-on-Q and year-on-year. I just -- but at the same time, loan growth was rather weak. So I was wondering, what's the like -- what's driving up the loan provision expense? The second one is on operating expense. Also in fourth quarter, it was quite high, both Q-on-Q and year-on-year. So I also want to understand what's behind?

[Charlie Hu, executive]

Thank you. And for your question on the first one, the loan growth, if you look at Y-o-Y, the total loan book will be quite flat. But if you look into quarterly number, in fourth quarter alone, we had more deduction in loans to government-related entity. If you lend to government, actually, you do not need to make provision. And so you're seeing quite flat loan Y-o-Y, but we have seen the loan mix difference. You'll notice the positive 12% on mortgage growth and the corporate loan actually also grew. So the combined together, it will require a strong position for the increase in private sector for [indiscernible] 1%, for mortgage by 1.5%. There are also very few cases of new NPL that we make a specific provision, but roughly over half of that -- the half of that is actually the general provision because of the loan mix. The second question you're asking about cost income ratio in fourth quarter? It's higher. It's just a little bit of seasonality. We tend to have, the fourth quarter, higher expenses considering the year-end compensation of the other item. So fourth quarter cost-income ratio tend to be slightly higher. If you look at past years, usually 9-month cost income ratio will be a few percentage lower than whole year, so some of the expenses especially booked in fourth quarter. On top that, because we have this very sizable Costco credit card, the loyalty program that they can use up on this point to buy in Costco shop for free using the bonus point. And then, in our accounting, is booked as marketing expenses. So these all combined together [ will push ] fourth quarter expense ratio relatively higher than the other quarters.

[Unknown Analyst]

Understood. So I understand the main driver is actually the Costco card, right, because on year-on-year basis, it was quite high as well?

[Unknown Executive]

It's only a part of that. And the third one is the bank continue to strengthen our overall IT infrastructure that over the year, we will have some related expenses. So it will be advanced infrastructure and a seasonality for higher overall overhead book in first quarter. And yes, Costco, we continue to have new card, it will also boost the in-store women spending, they will become marketing expense.

[Operator]

[Operator Instructions] Next, we'll have Anderson Cha from BNP Paribas Hong Kong.

[Anderson Cha, analyst]

I have 2 questions. First of all, can you explain how the book value sensitivity to market interest rate has changed following the asset reclassification on the IFRS 9 adoption? And my second question is your IFRS 9 adoption has turned out to be quite book value accretive. So is there any changes in your capital management policy on the back of this book value accretion and some positive impact? You mentioned about also CET1 and BIS ratio on risk weight changes on mortgages and non-residential. So is there any changes on your capital management policy?

[Unknown Executive]

I think for the new classification, I give you some indication. For our new FVOCI, about the fixed income, the duration is around -- domestic fixed income is around 10.9 and about amortized costs is around 11. So this give you the -- some indication of the sensitivity to the interest rate change.

[Charlie Hu, executive]

Yes, we have to be very careful given that -- as I mentioned from the beginning, we can't give lot of forward guidance. So we'll have to think about some -- whether you can figure out there, and to give you, that is the speculation. It will create some concern.

[Unknown Executive]

The second question is on capital management policy [indiscernible].

[Sophia Cheng, executive]

As we have mentioned, the net worth, pro forma net worth increased mainly due from our debt financial [ interval ] and those are not articulated into our RBC and holding companies' CAR ratio. So the impact is quite little. So no further you asked the difference of management policy change, but for the [ emotional wait ], Taiwanese regulation is more strict compared with the international Basel III and the non-regulator could -- closer to the international standard and those increase our CET1 to a more [indiscernible] level 9.7% at year-end and that's quite good for our business development.

[Charlie Hu, executive]

Anderson, have we answered your question?

[Operator]

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

[Thomas Wang, analyst]

Couple of questions. Firstly, on your hedging cost. So we've seen the currency swap and NDF cost going up in the fourth quarter, but your costs actually came down in the fourth quarter. Can you just give a little bit more color, was it the proxy program that was -- gave you a positive boost or was -- and what you're seeing on the currency swap and the NDF part? And the second part is -- second question is on your cost liability. So it's quite good to see, it's another 3 basis point decline in the fourth quarter, but in terms of the product you're selling this year, how will -- what's your new policies cost [indiscernible]. If you can give us a little bit more color on that would be great.

[Unknown Executive]

I think the hedging cost right now, although the currency swap and NDF is high but because we also can change the structure of the mix of the CS and NDF and also because you will see actually our performance historical for the past year hedging is quite effective. So we think -- so this is quite last year, our hedging cost we still maintain, so relative stable, although the Taiwan dollar appreciation 8%. So I think that we didn't worry too much about it right now, although the CS and NDF hedging cost is high because we are -- I think that we have the ability to management the hedging cost. In the long run, we still maintain our hedging cost guidance that we think that annually, the hedging cost that we can maintain, and I think the 1% to 1.5%, still in line. Secondly, the cost of liability, we think that last year, yes, we dropped like 12 basis point and the [ new money grew ] actually because this year for the traditional product, it didn't change the interest pricing, so it didn't change. So that this year, the new policies or interest cost is the same for the last year, and we still maintain the same product mix. So we still -- I think that we give you guidance that I think that each year, we are confident that because it's 5 basis point to 10 basis point down, still also in line.

[Thomas Wang, analyst]

On the hedging costs, there is the proxy program, if you kind of split that up, proxy versus the currency swap and NDF, so can you just sort of give me a little bit more color? Is the proxy was it positive or they are very slow versus the currency swap and NDF?

[Unknown Executive]

I think the proxy is -- I think comparison to the CS and NDF, of course, is quite low comparison, right now almost 2.5% to 3%. But I cannot give you it's positive or negative. So sometimes, maybe it's positive, sometimes it's a little bit negative, but the costs are still far below the currency -- far below the cost of the CS and NDF.

[Charlie Hu, executive]

So that means our proxy hedge is actually helping to reduce the overall hedging from -- if you compare with currency swap and NDF.

[Thomas Wang, analyst]

Would you be able to say which is -- as of now or when you think that basket is anyone instrument, that's majority all that have a lot position within that basket or just more spread?

[Unknown Executive]

I think it's quite some know-how in there. So I just can show you is that it's relatively negative. So the composition, I think a lot of major currency are specialized Asian currency.

[Charlie Hu, executive]

And it's actually quite dynamically managed, so it's quite hard to tell you once very sizable currency. We try to make as a balance as we can and there are some Asian currencies they are also quite strong. So there's a little bit technical in it and hard to say today versus next month. And so we have been doing this basket hedge for over 10 years from late 2000 something for quite a long time. We pay lot of -- learnt lot of lesson and experience from that and we continue to strengthen that. And as of now, we do have quite sizable ForEx more than we should, that can be buffered, so with a combination of the overall risk discipline and our allocation, how much we want to put in, minimum percentage into the additional hedging. These are over important principle internally we follow.

[Operator]

And next, we'll have Chung Hsu from Credit Suisse for questions.

[Chung Hsu, analyst]

I have 2 questions. The first on the bank side. It's a number of questions. If I look at the Page 12 of your presentation, it shows a gross provision of TWD 4.5 billion and a recovery of TWD 1.8 billion, so net provision TWD 2.7 billion. But when I look at the appendix, the Cathay United Bank's P&L details, the lines on net provision for possible loss of TWD 3.5 billion. Just wanted to check if there's anything I missed there for this 2 number to be different? Second question is for Abel. Just want to get directional -- directionally with higher corporate bond yields year-to-date and along with a higher hedging cost, are you still -- are you getting better net recurring yield on your overseas investments on a net basis year-to-date?

[Unknown Executive]

Sorry, Chung, may you -- I didn't -- very clear. Could you say it again?

[Chung Hsu, analyst]

Yes. Year-to-date, we've seen a higher bond yields, right, and higher corporate bond yields, and -- but at the same time, we see higher hedging cost. Before considering any impacts on your basket hedging, just if you look at your hedging cost on currency swap and NDF, and plus the higher bond yields we're seeing year-to-date, are you seeing -- are you getting a higher recurring yield on a net -- on an after-hedge basis?

[Unknown Executive]

Okay. I got your point. But I think the -- of course the hedging cost, if you just look at 2 months, I think [indiscernible], but I can give you that because the value actually is high [ relevant ] last -- fourth quarter, and so we enjoyed the interest get hike. But the currency hedging, if you just look at the 2 months, although we think we add to February, our hedging cost still maintain below 1.5%. So -- but if you comparison to the last full year, it's only like the 0.9%. I think it's not fair just using 2 monthly job to comparison. But as I say, if you look at the loan growth, the hedging costs we feel confident in 1% to 1.5%, it is still our guidance. So I think that because the interest rates getting high, so we are confident that recurring yield, we should enjoy that in the future, the recurring yield can getting higher.

[Charlie Hu, executive]

Chung, you also asked about the discrepancy. 15, page tells the net provision if we take gross minus recovery compared with the end of the maturity in Cathay United Bank P&L, the net provision, the number, there are TWD 200 million, TWD 300 million difference. The PowerPoint you see on Page 12 is Cathay United Bank parent, where on the end, you see that it's consolidated book, so that means we have other subsidiary that also are non-lending as other provision required. Main reason, amount is not very big, but I will check the detail and get back to you. So the write-off is Cathay United Bank parent alone, where the financial statement is consolidated, that will include other previous companies and other items.

[Operator]

And the next one is coming from Katherine Hu from Merrill Lynch.

[Katherine Hu, analyst]

I have 2 questions. The first one is what's the purpose for the preferred share issue? If we look at the capital adequacy ratios in all subsidiaries, it seems to be quite sufficient. So why Cathay needs to issue the preferred shares because the preferred share is actually the dilution for the common shareholders? The second question is, is there any changes in the RBC calculation after the adoption of IFRS 9? My understanding is before the IFRS 9, the fixed income -- the calculation in the RBC ratio is based on the costs, but after the IFRS 9 adoption, some fixed income actually moved to fair value. So I'm wondering, whether the adoption will affect the RBC ratio, it's getting higher or getting lower?

[Unknown Executive]

Katherine, the question, why we are issuing preferred share? Both Cathay Financial Holdings and Cathay Life had made announcement sometime in February. Yes, you are right, if you look at on page -- the capital adequacy ratio page, that is on Page 35, we do have sufficient capital in Cathay Bank -- Cathay United Bank and Cathay Life, but I wouldn't say we have luxury capital. And also recurring -- beginning of rate rise, we are hopeful we can secure some additional capital buffer for subsidiary if we enter later into a broader market correction that we hope to have capital buffer if we need to buy [indiscernible]. But more detail on the size and the time, that would be sometime later in April. The detailed time and size that will be decided by the board and then followed by application. So to answer your question is many, we hope to have some capital buffer as more on -- over capital management point of view, and the costs on preferred share at current interest rate level, it will be quite favorable if we want to do so. The second question is the IFRS 9 impact to RBC ratio. I will leave Abel to answer that.

Katherine, I think the -- about the impact to, I mean, actually is very small because the unrealized gain and loss, right now calculating obviously will be excluded, so actually didn't change it too much. But unrealized gain will always have a little bit impact to the recalculated interest rate risk because we will refer to 5-year average investment rate. And this investment will including the change of the unrealized gain in those, including in the FVOCI. So if you will have some [ balance ], because you won't see the change flat, but comparatively, I can give you is the impact is very, very little to the RBC.

[Katherine Hu, analyst]

So Abel, what you mean is under the IFRS 9, when we calculate the RBC ratio for the 16 comp, the bond portfolio, we still using costs, whether they're in the fair value?

[Unknown Executive]

Yes. Exactly.

[Operator]

[Operator Instructions] And next we'll have Anthony Lam from HSBC for questions.

[Anthony Lam, analyst]

Actually a very factual question on preferred shares. I think Cathay already had about TWD 50 billion of preferred shares issued. And at the end of fourth quarter, if excluding that preferred shares at book value of -- at Cathay will be around TWD 550. If I recall correctly, that should be -- Cathay should have I think [indiscernible] all the financial holding companies can have 1/3 -- up to 1/3 of equity, I mean equity instruments coming from non-common equity instruments. So if we do a rough calculation, that translates to an additional roughly TWD 130 billion a quarter for preferred shares from the TWD 50 billion Cathay has of fourth quarter. That's my question.

[Sophia Cheng, executive]

The regulation link is based on the -- the 1/3 is the gross share. Now given the price of preferred share is [ TWD 50 ] per share, so the number of preferred share is quite small. So far, they extend the regulation limit. So there is still a large cushion for us to launch our preferred share program.

[Operator]

[Operator Instructions] And the next one is from Steven Lam from Bloomberg Intelligence.

[Steven Lam, analyst]

Couple of things here. One, I want to start with life insurance. So if I'm reading the presentation correctly, it seems like there is a [ mix ] in terms of the new business value, what you achieved versus the target. I understand most of the -- and this could have been coming from fourth quarter, so I just want to understand what was basically driving that? And to follow on that is -- I understand you're in a period where you cannot really give guidance, but let's say in the first few months or maybe even up to March, in terms of the new premiums, have you seen some -- what kind of product mix that has transpired in the last couple of months? I just want to get a sense of in terms of the margin outlook. And also related to life insurance, it's on the investment side. Now, I'm not perfectly clear in terms of the relationship between the IFRS 9 versus what you have been disclosing on the investment portfolio mix. So I'm just curious if that would change the amount on the investment portfolio because of the fair value accounting? That's more like a technical. And lastly, I just want to get a raw sense. This is probably a long shot with the trade war that's brewing out in the U.S., what does -- how does the management see in terms of the loan quality and as well as your exposure in Southeast Asia, China, et cetera?

[Charlie Hu, executive]

Hi Steven. Your first question is value of new versus fourth quarter performance. The first 9 months last year, we have VNB of TWD 37 billion, that transfer roughly into [ TWD 12 billion ] quarterly and has been quite steady. Actually, in fourth quarter last year, VNB catch up. The whole year was 50.5. So first quarter, quarterly VNB did outperform the other 3 quarters slightly. And as you see on Slide 19, we put FYP for 2015 to '17 to show you that 2015 FYP breakdown is more the ideal mix we want, because 2017, the traditional insurance policy will become much more expensive and therefore rather hostile, rush to buy at the cheaper old price in 2016 that create a skew into traditional life, and then 2017 reversed. So it take the channel little bit time to adjust to the overall product change and that's why you see last year, traditional contribution was only 28% of FYP. We do hope that long-term, we will hope to have a -- about 40%-ish from traditional and 40%-ish from investment is our long-term target. So if you want to think of some benchmark, you can take 2014, 2015 as a better benchmark for your reference. For the first 2 months FYP, we don't have detail number in hand, but we do see some progress in traditional life Y-o-Y basis, but bear in mind last year, the base was low. So we continue to make the effort, but it is very hard to provide guidance at this moment. We need a few more months to see our performance first, but that is definitely the direction we are going for. Your third question on IFRS. That question, I am not very clear. Would you might reiterate -- tell me again. I kind of missed your key points.

[Steven Lam, analyst]

Okay. I guess it's very simple. When I'm looking at slide -- I think, if its [ Slide 4 ], investment portfolio breakdown, right? The outstanding amount of bond, for example, can I assume that those amounts are based on already fair value or these are book value? Say, for example, international bond, TWD 3.06 billion -- trillion.

[Charlie Hu, executive]

I think that also -- if you see based on IFRS 9 the new number, when you see first quarter number, and apple-to-apple, the difference will be quite minimal. You will not have very significant change based on the old accounting and new IFRS 9. It should be not -- [ good question ] , not much change. And your last question is related to trade war -- trade war and Southeast Asia. Now the other million dollar question. These are things that we do care, and we closely monitor on daily basis, but it's very hard for us to -- in analyst call to share too much into this, but we would tend to look at [ risk weighted ] structure or event-driven, and we tend to try -- as you know the value in investment research, it tend to be able to forecast, so we constantly look at long-term trend, look at how the market may respond to that and why it's happening right now. And therefore, adjust our investment details. So these are all very deep and very important question, but I think at analyst meeting, it's not too much related to our operation detail. Maybe, I'll leave that to our later discussion if you don't mind.

[Steven Lam, analyst]

Actually if you don't mind, can I just circle back on the investment very quickly. Yes, I just wonder, so if I -- according to my tracking, so there it seems to be some increase in terms of the European bond allocation as well as North American bond allocation between third quarter and fourth quarter, just subtracting the amount. So I was just curious, are those mostly related to the actual -- you're adding position in there or these are mostly driven by just the price changes? And actually in relation to that, obviously, there's a lot that happened in February, right? Has that -- has your investment portfolio changed a little bit because of that, the stock route and the bond yield rally?

[Charlie Hu, executive]

I need to look -- detail into this, if you look into quarterly movement, that's very, very detailed. But I don't have that right now with me, but I think given our last guidance, if you look at the reduction in our bond investment -- fixed income investment into Europe, they tend to be -- given that such low rate, if we make new investment into such low yield is not profitable at all. So there may be natural maturity of the old bond with as good yield and there were some arbitration position. So make sure that you will see my exposure to Europe continue to reduce a little bit. And then the second is previously, the U.S. rate is really far too low, especially treasury, we will focus more on corporate credit and debentures. And now with U.S. risk-free rate has improved to much better level. These are all subject to the rate environment for our decision. And the -- I forgot, you have another question following?

[Steven Lam, analyst]

Just the February stock route, has that changed...

[Charlie Hu, executive]

Yes. If you look at the SVOCI based on the IFRS 9, according to Abel in earlier analyst meeting, his comment is that our FVOCI the unrealized gain is still positive, so both for equity and for bond.

[Operator]

And the next question is coming from [indiscernible] from Citi.

[Unknown Analyst]

So speaking of rates, I'd like to understand the rate sensitivity on both bank and insurance. So how -- like for every 25 basis point of rate hike, how much can be translated into the name expansion for banks and how much like the earnings impact on insurance?

[Unknown Executive]

I think that -- you want to those interest rate sensitivity -- because right now, our new -- because this year, we already adopted IFRS 9. So before that, we have provided interest rate going like the -- like for -- last year, we did before IFRS 9, for our IFRS domestic fixed income, interest rate changed 10 basis point, and our net worth were impact by TWD 1.8 billion, and overseas investment is changed by TWD 2.2 billion, but this is the old IAS 39. For the new IFRS 9, I think that I can give you that -- the duration. I think for the domestic, fixed income right now is around 10.8 and overseas fixed income is around 11. So you can use it as a indicator to the interest strategy.

[Charlie Hu, executive]

How about liability duration?

[Unknown Executive]

Right now, our liability duration is around 15.

[Unknown Analyst]

Okay. Understood. This is only insurance. How about on banks -- on bank news?

[Sophia Cheng, executive]

Because -- on banking sometimes, it's hard because we -- as you can see, the past 2 years, we made a lot of adjustment into the different rate environment on our loan book and loan deposit ratio. So if I only do say status quo as of today, if I don't do any change in my balance sheet scenario, but reality is we tend to look at loans to government, that's corporate versus treasury all as combined consideration when I do asset allocation depending on my thought and the rate. So it's very, very hard for us to provide you a sensitivity, but I think maybe later when we have the quarterly financial statement, we tend to have some scenario number. Thereby, it's very hard for me to provide a number that stand still because we really look at the overall environment, and you can see we're adjusting from loans from government to large corporate to foreign currency loans. All this mix maybe have bigger impact than the interest rate movement itself because bear in mind, the balance sheet, we have loan deposit ratio at 70%. So for bank, it's mainly the lending book, the treasury relative asset allocation were for life. Yes, investment is a very significant part of the balance sheet. So it's quite hard for me to think of a dual scenario on bank for that. And the last point, I want to highlight is people tend to say when interest rate rise, it will benefit spreads margin. But it actually is a classic, traditional, old-fashioned comment because it really depends on whether the market has surplus liquidity, proper liquidity or tight liquidity. In Taiwan, we have abundant liquidity. So it's not necessary rate hike would lead to much higher margin. It depends on this bank, can you provide more value-added service, do you have customer loyalty, can you do regional expansion, can you do better in loan selection, can you do better treasury? It's a bit more complicated [ and just right ]. So if you don't mind, I apologize that I really have difficulty giving a single number for bank on that scenario.

[Unknown Analyst]

Okay. So going back to one of the question I asked before on OpEx. So you mentioned the 4Q higher operating expense was partly due to the higher Costco card -- the higher expense of Costco card. Would you mind giving us some quantitative number like how much?

[Sophia Cheng, executive]

It's a bit too detailed. So we haven't done the detailed expense breakdown for quarterly number, so I need to check the number later back in my office.

[Operator]

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

[Sophia Cheng, executive]

Yes. Thank you for joining the call today, and our IR team will standby here for you if you have any more questions. Please feel free to call us if we can do anything for you. Thank you.

[Operator]

Thank you, Ms. Cheng. And ladies and gentlemen, we thank you for your participation in Cathay Financial Holding Co.'s conference call. You may now disconnect. Goodbye.