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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome, everyone, to Shin Kong Financial Holding Company's 2021 First Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within an hour after the conference is finished. Please visit www.skfh.com.tw under the Investor Relations section.
And now I would like to introduce Mr. Stan Lee, the Senior Vice President of Shin Kong Financial Holding Company. And Mr. Lee, please begin.
Thank you, moderator. Good afternoon, ladies and gentlemen. Welcome again for joining the Shin Kong Financial Holding 2021 First Quarter Earnings Call.
Before we start, I would like to introduce my colleagues who are with me today. Here in the middle room are Hanwei Lin, Chief Actuary of Shin Kong Life; [ Ian Lui ], Head of the Investment Team in Shin Kong Life; Isabella and Christine, Members of the IR Team. We are also joined by Ophelia Au Young, Partner of Deloitte Actuarial and Insurance Solutions. Ophelia has been working closely with us over the past few months in reviewing our EV work, and she's here to help us answer any questions you may have.
The presentation we are about to go through was sent out 2 hours ago. You may also download it from our website or participate through this webcast. If you do not have the presentation, please let us know now.
Your lines will be muted when we are presenting. If you are cut off, please dial back in or call Christine at (886) 968-929-230 for assistance.
Now please turn to Page 4. SKFH recorded a consolidated after-tax profit of TWD 9.44 billion for the first quarter of 2021, up 23.7% year-on-year. Earnings per share was TWD 0.72. Consolidated shareholders' equity was TWD 231.38 billion, and book value per share at the end of the first quarter was TWD 17.34.
Life insurance EV per share of SKFH was TWD 23.2. EV of Shin Kong Life increased 6% year-on-year to TWD 309.4 billion in 2020. VNB was TWD 20.1 billion, and VNB margin increased to 27.8%, 6.5% higher than the year before.
The subsidiaries also posted strong results for the first quarter, which will be covered in later presentation.
Page 10. Not simply aiming for sales volume or market share, Shin Kong Life choose to promote foreign currency policies and value-focused products for stable interest spread, better asset-liability matching and CSM. As a result, FYP of foreign currency policies for the first quarter amounted to TWD 8.5 billion, accounting for 77.3% of the total. FYPE reached TWD 4.2 billion, and FYPE over FYP increased from 35.8% in first quarter 2020 to 38.2% in the first quarter 2021. Cost of liabilities decreased 3 basis points year-to-date to 3.8%, in line with our guidance.
Page 13 presents the overall view of Shin Kong Life's investment portfolio. Annualized investment return for the first quarter was 4.31%. Breakdown of investment returns for different asset classes were: real estate, 4.7%; mortgage and corporate loans, 1.7%; policy loans, 5.6%; overseas investment, 4.2%; domestic securities, 5.9%; and cash, 0.2%.
Page 14 shows the portfolio of overseas fixed income. At the end of first quarter, overseas fixed income topped TWD 1.9 trillion. Corporate bonds accounted for the largest share representing 47.7% of the total followed by international bonds at 27.2%. Emerging market government bonds accounted for 24.6%. About 90% of the overseas fixed income's position was deployed in U.S. dollar-denominated bonds. You may also find the chart of the overseas fixed income's portfolio by region in the upper right corner. North America and Europe accounted for the majority of overseas fixed incomes, showing a combined share of 62.3%.
Page 16. The pie chart on the left-hand side shows the mix of hedging instruments. At the end of first quarter, hedging ratio was 74.0%, including CS, NDF and the naturally hedged foreign currency policies. CS and NDFs accounted for 58% and 42%, respectively, of traditional hedges. Annualized hedging cost was 1.65% for the first quarter 2021, and foreign currency volatility reserve was TWD 4 billion. In order to better contain hedging costs, Shin Kong Life will flexibly adjust hedging ratio through its proxy basket and continue to build out its foreign currency volatility reserve.
I will now hand over to Isabella, who will take you through the results of Shin Kong Bank and MasterLink Securities.
Thank you, Stan.
Please turn to Page 20. Shin Kong Bank delivered a strong quarter on many fronts. Net interest income grew 3% year-on-year with improved deposit structure and steady loan growth. Net fee income and investment income increased 9.2% and 19% year-on-year, respectively. Preprovision operating profit reached TWD 2.07 billion, which was 8.3%, higher from a year earlier. Consolidated net income increased 13.7% year-on-year to TWD 1.52 billion.
Page 21. The bank's loan balance rose 1.9% year-to-date to around TWD 666 billion. Consumer lending grew 3.3% year-to-date and represented the largest segment of our loan portfolio as mortgage and other consumer loans increased 3.6% and 3.1% year-to-date, respectively. The full year target for loan growth remains 8%.
Page 22. As the deposit rates steadily repriced downward and the ratio of demand deposits increased, net interest margin and net interest spread went up 1 basis point quarter-on-quarter to 1.25% and 1.65%, respectively. The trend is in line with our guidance even at the full year 2020 analyst call.
Page 24. Wealth management income for the first quarter increased 10.3% year-on-year to TWD 675 million, thanks to strong sales momentum in mutual funds. The fee income from mutual funds accounted for 41% of the total. In the second half of the year, Shin Kong Bank will absolutely attract new funds and expand its client base through online marketing campaigns.
Page 25. Asset quality was stable with NPL ratio at 0.19% and coverage ratio at 712.77%. Both ratios were better than the level of 2020.
Page 27. MasterLink Securities generated a brokerage fee income of TWD 1.19 billion for the first quarter, which was 62.1% higher year-on-year. Proprietary trading income amounted to TWD 0.77 billion driven by disposal gains from equities and related securities, which was TWD 0.47 million higher year-on-year. Operating revenue grew 206.7% year-on-year to TWD 2.28 billion, and consolidated net income reached TWD 0.9 billion. In April, MasterLink Securities was approved for the high net worth business and the U.S. QI license. The company will look to expand the business opportunity.
I will now turn the conference over to Hanwei to talk about the results on EV and AV.
Thank you, Isabella.
Please turn to Page 29. For 2020 embedded value, the earning rate of VIF goes from 3.00% to 4.47% in 30 years for NT dollar products and 4.10% to 4.93% for U.S. dollar products. The equivalent investment yield is 3.91%. For VNB, it goes from 2.57% to 4.32% and 3.79% to 4.82% in 30 years for NT dollar and U.S. dollar products, respectively. The adjusted NAV increased 6%, VIF increased 3% and COC increased 1%. As a result, at the end of 2020, EV of Shin Kong Life increased 6% year-on-year to TWD 309.4 billion. VNB decreased 19% to TWD 20.1 billion. AV for 5 years of new business and 20 years of new business were TWD 392.0 billion and TWD 508.8 billion, respectively.
Page 30. Under the base case scenario, risk discount rate was reduced from 10.5% to 9.5%. We also provide the sensitivity test of investment return and the risk discount rate for your reference.
Page 31 shows the breakdown of adjusted NAV. Shin Kong Life's adjusted NAV at the end of 2019 amounted to TWD 196.9 billion. Profits in 2020 contributed an increase of TWD 7.2 billion, while unrealized gains on financial assets caused a decrease of TWD 8.1 billion. As for other adjustments, which represented an increase of TWD 12 billion, mainly included the capital injection from the financial holding company and an increase in FX reserve. Therefore, Shin Kong Life's adjusted NAV at the end of 2020 was TWD 208.1 billion.
Page 32. VIF grew from TWD 186.4 billion to TWD 192.5 billion in 2020. The main impact came from the change in economic assumptions, which caused a decrease of TWD 68.3 billion. However, the change in risk discount rate caused an increase of TWD 22.2 billion, and the new business issue added TWD 25.8 billion to VIF.
Page 33. The 38% decline in FYP deducted TWD 9.5 billion from VNB. However, Shin Kong Life adopted a value-driven strategy and a focus on products with higher margin such as regular premium products and protection products. The improved product mix was the biggest positive impact that added TWD 5.6 billion to VNB. Therefore, VNB only decreased 19% year-on-year from TWD 24.9 billion to TWD 20.1 billion in 2020, and VNB margin increased from 21.3% to 27.8%.
That wraps up our results presentation. Moderator, please start the Q&A session.
[Operator Instructions] The first question is coming from Jennifer of National Life.
I have 2 questions on Shin Kong Life. First, equity only accounted for 9% at the end of March. So do you expect a decline in cash dividend? And second, what is the new money yield from now?
Jennifer, to answer your questions, I think the first question is that it's like -- there is a likelihood that this year's cash dividend we received from domestic equity investments could be lower than what we had last year. It is possible. But now everything has been postponed, right, because of COVID-19. We are still waiting for the investor companies' AGMs to be held. And also during that time, the decisions may be changed, up -- both up and down. So we'll see. The general guidance that, yes, the likelihood -- there is a likelihood that the cash dividend we received this year could be lower than what we had last year.
And now the new money yield is around 3.5% to 3.8%, and mainly for the foreign fixed incomes. And that is much, much better than what we had last year. Even at the end of last year, we can only strive to get around 3%, which is very painful for us because we need definitely a very stable spread for the U.S. dollar-denominated policies. For NT dollar policies, we don't really mind them now, it's because now NT dollar policies are mainly focused on the protection-type of products. But for U.S. dollar policy, we have literally everything, including savings, we definitely need this positive spread.
Did I answer your question, Jennifer?
Well, if there's no follow-up questions, moderator, please check whether there are any other questions.
[Operator Instructions] And the next question is coming from Brooksley Kang, Bank of America Securities.
So my question is mainly on life insurance. So I think in [ many sessions ] that we mentioned that in order to support the CSM accumulation in Life, we will do a suitable fundraising every year. I would like to ask in detail that -- do you mean that we will -- we plan to have fundraising plan every year, the difference is only about the size or actually, we still have some discussion over whether we will do the fundraising of the year.
Thank you, Brooksley. And as just what I said in the Chinese session, I recommend not to overly interpret what's been said and particularly not buying the subject of the newspaper reports. What I've said is that we can expect a reasonable capital raising from the holding companies and a reasonable downstream, particularly to the life insurance. But some of the funds were also being downstream to the bank for their business support as well because, particularly for 2021, we're aiming for 8% growth of loans. Sooner or later, they're going to need some capital.
I think the point is not about every year. And how long is every year, right? And that's typically a misleading wording, shall we say. As I talked before, some analysts or investors tend to ask me whether we are going to do a one-off, larger size of kitchen-sinking fundraisings for IFRS 7. And my answer has been and will be, we don't plan to have one-off capital raising for that issue. What we will do is to accumulate CSMs by every year's sales of the new policies and maintain the quality of the new sales at a certain level. To support that, we need capital. That capital raising will not -- or downstreams will not be very big. The number is likely to be under TWD 10 billion.
For how long? I don't know, as I said in the Chinese session. There was one question raised, whether it will be 2 or 3 years. I don't know because almost all of those types of rating plan has to be approved by the Board. Before the Board have any resolution, I cannot disclose, and I don't even know the details of the fundraising. The general guidance is that we need a certain number of capital to support the business growth. If that's the philosophy, then I will be very comfortable to saying that every year, it should be a relatively small size, under TWD 10 billion. And -- but how long? How exactly that will be? I cannot say anything about it.
But for 2021, there's a likelihood that we're waiting for the resolutions of the Board that we will raise common equities from the holding company level and downstream to capital to life insurance. And again, that amount will be -- highly likely to be under TWD 10 billion.
Okay. I have a follow-up question on that. I just want to have a better understanding of the RBC ratio that we are currently standing at because I think our goal is to accumulate TWD 30 billion CSM every year. That's the target. So I would like to know that if we are going to achieve this, how much of this will consume our RBC capital? And whether or not that will affect our RBC offer against the regulatory filing. The reason why I asked this question is that although that our RBC is lower than our major peers, I just want to know that whether the 220-something RBC for us is good enough for us to achieve the TWD 30 billion CSM goal every year.
Thank you, Brooksley. I think that's very -- well, a very complex question. Sorry. That -- some of the solutions that -- we are also trying to figure it out. And then on -- before answering the details, I would say, yes, we're now looking at RBCs. The sectors that really increase the denominator and which also the risk-weighted assets is not only linked to the growth of assets. Only -- it's also about the mix of the asset, right?
And it's true that now when we grow the new business, as I just mentioned, for all those NT dollar-denominated products, we're only aiming for protection-type of products. And that will somehow make the growth of NT dollar assets lower. And also what you can see in FYP's trend is that in this year, 2021, similar to the trend that we have observed last year is still in downward trend, which will somehow decrease the growth of the overall assets.
If you look at the past 5 years, the CAGR of the assets growth is over 8%. 2021, I strongly believe it will be lower -- definitely lower than the 7%. And would that be equivalent of the risk-weighted asset growth, our answer is probably not because the weighting has also been changing.
I will say, yes, somehow, we have to still support the growth of, say, 6%, 7% of the asset world -- risk-weighted assets. It depends on the portfolios. So we still need some capital. If we have a particularly good year, and that is also why I cannot say -- I cannot give you a guidance saying 2, 3, 4 years -- every year, we are going to do something because there may be some years that we can generate enough ROEs. We can generate enough incremental shareholder equities as well through the other comprehensive incomes. But there may be some certain years that there will be other noises. But even when we have enough after-tax profit, the company asset income is not good enough. And the elements that are making the comprehensive income is not right for us to accumulate enough qualified capital.
It's very complex metrics. But again, I'm still quite confident in saying that the growth of the asset is stalling down. And that is the most important element here. But -- and that is also supporting my theory and also the plan that the needs for the capital will not be a one-off, will be a huge number, and we will not be a kitchen-sinking capital raisings. But again, I think it's still very realistic thinking that some certain level of capital raising and downstream is still necessary.
And next, we'll have Jemmy Huang of JPMorgan for questions.
Just 2 questions from me. The first one is for the unrealized capital gain losses of around TWD 17 billion as of first quarter at Shin Kong Life, could you give us a rough breakdown in terms of the split between equity and also banks?
And then the second question is if I look at your hedging mix in the first quarter, I think the hedging position, the U.S. dollar and other currencies actually has been increasing over the period of time. Just trying to figure out whether you think that you are taking a little bit more currency volatility risks here, even though you have been trying to top up the FX reserve.
Jemmy, I think I would like to answer the first question first. The TWD 17 billion remaining balance of the unrealized loss, those are all from -- were all from fixed income position. For the equities, I think we still have some gains. But the losses were all from fixed income. And the bulk of that is from the foreign fixed income's position, including the ETFs and also the outright ownership of the foreign bond.
As for the second question, hedgings, yes, you're right that U.S. dollar plus proxy basket, the position is slightly larger than what we had one quarter before. It was 21.8%, but now it's 23.2%. You're seeing a little bit raise in -- rise in that category. But again, we have raised the proportions of the process, and that means the negative U.S. dollar positions has not been increased. We are still taking care of the overall risk very, very carefully. But again, you also know the changes of the dollar NT fluctuations this year. It was huge, right? And it could be biweekly basis, you've seen significant differences. We have to remain very feasible. We have to change the mix of the basket and be very nimble, changing the NDFs and also versus negative positions to remain the 2% target of hedging cost possible.
Well, moderator, apparently, there's no further questions. If so, let's close the meeting now.
Sure. Yes. Thank you, Mr. Lee.
And ladies and gentlemen, we thank you for your participation in Shin Kong Financial Holding Company's Conference Call. There will be a webcast replay within an hour. Please visit www.skfh.com.tw under the Investor Relations section. And should you have further questions, please don't hesitate to contact the IR team of SKFH by phone or by e-mail. You may now disconnect. Goodbye.