E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2018-Q1

[Unknown Executive]

Hi, everyone, dear investors. Welcome attending E.SUN Financial Holding Company 2018 First Quarter Webcast Conference. The conference will be moderated by me and [ Matt ] from Investor Relations. And also in the room, we have Mr. Joseph Huang, CEO and President of E.SUN Financial Holding Company; and [ Chiwei ], IR Head.

So before we start, I would like to invite CEO Joseph to give us short briefing notes.

[N. Huang, executive]

Dear investors, thank you for joining the web conference of first quarter 2018. In the beginning of the year, E.SUN delivered robust momentum. The net revenue was up 18.7% year-over-year, including 18% in net fee income and 6.5% growth in net interest income.

E.SUN's wealth management delivered good performance with 36.2% net fee income growth, driven by strong demand in bancassurance and cross-border side. We find a stable demand in both foreign currency deposit and loans, increased by 24.8% and 14.9% year-over-year, respectively.

On the other hand, compliance and risk management will be the most important factors of business expansion. This year, E.SUN set up information security management division and compliance division to comply with the regulatory requirements and enhance risk management. We will strengthen organizational structure, employee skill and technology to manage 3 lines of defense. Furthermore, we will employ fintech into regtech to manage information security and detect money laundering activity more effectively.

We are also very proud to share some great information with you. This year, E.SUN Bank was ranked 192nd worldwide in Top 500 Banking Brand by The Banker magazine, which is the top 10 brand value climbers in the world. With a 51% rise in brand value, the recognition demonstrates our commitment, both in business growth and sustainability. We will not stop making us better and will keep moving towards our goals to be the best and most respected bank in Taiwan.

More information will be discussed in the presentation. Thank you.

[Unknown Executive]

Thanks, Joseph, for reporting. And now please move on to today's presentation. Please turn to Page 1 of the summary. On the asset side, both financial holding company and bank achieved TWD 2.1 trillion, and key financial figures maintained healthy levels. Book value per share was TWD 15.16 and double leverage ratio was 104.19%. On the distribution channel, both domestic and overseas networks maintained the same amount in the first quarter. Domestically, we have 138 branches; and overseas, we have 25 branches across 9 countries and regions.

Please turn to the next page for the financial and operational highlights. Net profit for the first quarter 2018 was TWD 4.8 billion. It is a 27.9% year-over-year growth. Our top line net revenue showed a growth momentum, increased by 18.7%. Earnings per share, TWD 0.47; annualized return on equity, 12.57%; annualized return on assets, 0.91%.

On the business operation. We see on a year-over-year basis, net interest income and net fee income increased by 6.5% and 18%, respectively. The main driver of the fee income growth was wealth management at 36.2% and credit card at 8.6%.

This year, E.SUN mainly focused on the cross-borders, so we can see the platform boosted the growth of foreign currency deposits and foreign currency loans. The deposit increased by 24.8%, and foreign currency loans increased 14.9%. On the asset quality side, NPL ratio at 0.24% and coverage ratio at 489%.

Then we will move on to some highlights in the first quarter. The first one is the balanced dividend policy. E.SUN's Board of Directors approved to pay TWD 1.2252 per share, including TWD 0.6126 in cash and TWD 0.6126 in stocks. So the cash dividend payout ratio now is 41%. We believe this trend is very unique on compared with the system policy previously.

Now we move on to some of the intangible metrics in the first quarter. The first one is the brand value. Joseph mentioned earlier we are now ranked top 200 worldwide in the Top 500 Banking Brand by The Banker. And we are among the top 10 brand value climbers in the world with a 51% rate in brand value. Also in sustainability, we are now the members of Dow Jones Sustainability Index, DJSI, including 2x listed in DJSI-World and MSCI ESG rating, AA, which is the highest in Taiwan financial sectors. On the corporate governance side, we have been recognized by the regulators. Taiwan Stock Exchange has -- have been evaluating the corporate governance for all the listed companies in Taiwan for 4 years in a row, and we are very proud to say that E.SUN has been listed in the top 5% in corporate governance evaluation for 4 years in a row.

Now please turn to Page 4 for the group -- net income of the group. Bank still contributed the majority of the group profit, which accounts for 93.9%. On the right-hand side, except foreign, financial holding company increased 27.9% on net income. We can also see that the bank, E.SUN Bank, increased 18% year-over-year.

Then please move to Page 5 for a net profit breakdown. The top line net revenue increased 18.7% year-over-year and our OpEx increased 4.7%. For the bottom line, the net profit increased by 27.9% year-over-year.

Then next page, Page 6, for the revenue breakdown. Total net revenue in the first quarter was TWD 12.4 billion, and the largest portion was net interest income, accounting for 41.6% and net fee income accounts for 34.3%. Also see that the fixed income, foreign exchange and others account for 24.1%. So if you look at the bar chart on the right-hand side, both the 3 main revenue streams increased steadily.

On Page 7, we see some of the main drivers of fee income growth. First, you see the net fee income breakdown, wealth management accounts for 50.9% and followed by credit card, 29.8%. On the right-hand side, wealth management increased 36.2%. It's the spotlight of the first quarter, which was mainly driven by the strong demand on bancassurance. If we see the product mix, bancassurance accounts for 55% of the wealth management fee income, and the mutual fund accounts for 45%. And bancassurance, the most popular product of the bancassurance is from the foreign currency products.

Please turn to Page 8 for the competitive landscape of credit card business. Now E.SUN still maintains the top 3 credit card player in the market in terms of active cards and credit card consumption. Both, as I mentioned, account for nearly 12% market share.

And on Page 9, for the table of deposit and loan structure. We see that year-to-date growth, our total deposits increased 1.8%, which is mainly driven by foreign currency deposits, 3.3%. And our foreign currency deposit now accounts for 30.6% of total deposits. On the loan side, it increased by 2% year-to-date, which is mainly driven by SME loans, increased 3%; and foreign currency loans, increased 2.7%. Also, our foreign currency loans account for 15.8% of the total loan balance.

Next page, Page 10, on the deposit structure. The loan to -- the first one on the left-hand side is the loan-to-deposit ratio. The overall LDR was 70.8%, still keep the figures nearly 70%. And also, the NTD LDR was at 86.1%. We still feel comfortable that the range from 85% to 90% of the NTD LDR is very comfortable for E.SUN. On the right-hand side, the total rate of the deposit now is 63.4%.

Next page on the loan portfolio breakdown on Page 11. Total loan balance now reached TWD 1.2 trillion, and the leading factor was SME lending, 27.3%. Large corporate also followed by 23.1% and only consumer lending side. Secured personal loans account for 21.3% and mortgage at 19.5%. On the right-hand side, if you see the year-over-year comparison, only loans sectors delivered positive growth.

Next page, Page 12, for NIM and spread. The first quarter, our NIM up 1 basis point to 1.35%, while our spread is down by 1 basis point, now it's 1.59%.

Next, the following 3 pages, we're talking about the asset quality of the bank. The first one is the NPL ratio of the bank. The first quarter was 0.24%, and the coverage ratio was 489%. For the different product lines of the asset quality. You can see the mortgage now is 26 basis points and the corporate loan NPL was 15 basis points. If you -- you may be wondering why the mortgage NPL ratio is climbing. But we -- however, we have to elaborate that we did not see any systematic risk on the mortgage, that's only come from some of the individual cases. And as the transaction of the mortgage volume is still shrinking, we think that will still take some 2 to 3 years for us to foreclosure the transaction -- property. On the right-hand side, the credit card NPL ratio was 0.26%.

The next page, on Page 15, for the E.SUN NPL ratio compared with the market. The market outlook -- market figures until February was 0.29%.

Next page, Page 16, for the cost-to-income ratio, now at 49.1%.

The last page, for the capital adequacy ratio. This number is the audit figures of -- by the end of 2017. So the Tier 1 ratio was 11.77%; BIS, 15.01%; and the CAR ratio of financial holding company was 143.69%.

So that's the end of this presentation. If you have any questions, please feel free to submit your questions into the input box, and we will move on to the Q&A section. Thank you.

[Unknown Executive]

All right. It seems that we have our first question coming in. It's a question about the annual growth -- goal of our loan growth for the year. And so for quite a period of time, E.SUN has always been able to maintain the loan growth of 2 to 3x of market average. And I think for this year, our loan growth target is still quite similar to what we have last year, about 8% to 9%. And more specifically, it's not about the quantity of the loan, it's more about the composition of the loan. This year, we will more focus on SME lending, also foreign currency lending. And for the past 2 to 3 years, E.SUN has been focusing on the cross-border Taiwanese corporates who -- or the company to have multiple currency needs. And we think these companies will have a better prospect than those companies who chose to stay in Taiwan. And these companies will also be more competitive. Also, their finance needs are in multiple currency, which means they have more types of financial demand, for instance, not only in loan but also in cross-border cash management and also foreign currency hedging. So these are the customers that we will want to explore further in the future. And our goal for foreign currency loan growth will be double digit this year. And also, the loan growth for SME will also be double digit.

And we have -- the second question came in. It's about how does E.SUN maintain its growth rate in SME lending. I think E.SUN has been very persistent in SME lending. So currently, we're still ranked #1 among the private sector banks in terms of SME lending. And the gap between E.SUN and our immediate follower is still quite large. So I think KYC has -- is one of the most important factors in SME lending business because the -- when -- it's hard to understand an SME only through the financial statement. You have to understand the business owner's integrity and also understand its business. On the other hand, we also developed multiple product penetration with the SME customers. For instance, cash management is what we think a very good tool for us to have the full visibility of operation of an SME company. So I think, yes, it's quite important for a bank to have a cross-selling product relationship with an SME customer, and that is, I think, one of the key for E.SUN to maintain the growth in SME lending.

We have a next question about the outlook for NIM. For this year, I think that the trend of NIM is pretty much dependent to Fed rate hike and the rate hike of Central Bank of Taiwan. And it seems that the Central Bank of Taiwan will likely to raise interest rates maybe in second half of this year, but it's still not certain. And for the -- but what's more certain is the USD rate hike. And I think USD rate hike, of course, will benefit E.SUN to raise the NIM. However, in our asset only -- in our loan asset, about only 70% is foreign currency loans, and the rest is NTD loan assets. So NTD assets still account for a large part of our total assets. So our outlook for NIM is that there is room to go up, but not by too much, maybe 1 to 2 basis points.

And here is another question about how the trade war affect -- impact thinking -- management's thinking of future growth. Yes, of course, the trade war will post a threat to the growth of Taiwanese export and the Taiwanese companies who are operating in China. And in fact, about 2 months ago, our corporate banking department -- division also performed a thorough check about our customers and how our customers will be impacted by trade war. And it turns out that there are a few sectors will take a hit more seriously, for example, the steel manufacturing industry and also some sectors in electronic manufacturing, including LCD and including LCD panel, PCB. However, after a thorough check, we think the impact is still manageable. So we still maintain our forecast for the growth for the year.

Okay. We have the -- next question is about cost-to-income ratio and growth of cost. Will the cost-to-income ratio decline this year? And also, the guidance for cost growth this year. And it's also -- it's always our guiding principle to have our revenue growth higher than the growth of expense. And this year, our guidance for cost growth is single digit. And the cost-to-income ratio will decline compared to what we had last year. Last year, we had 53% in cost-to-income ratio. And this year, the guidance is at 50 -- about 51%. Thank you.

Okay. The next question is about the previous investment in fintech of E.SUN. And the investor wonders if the previous fintech investment and the KPI for digitalization also helped and if it is sustainable. I think fintech will help E.SUN in 2 ways. First is to cut the cost. I can give you an example about the digital loan that we grant through our online lending platform. And it would cost -- it will reduce the cost of the newly originated unsecured personal loan by about 37% versus a new loan originated from a physical branch. That's from the cost-facing side. And currently, there are -- about more than 30% of the newly originated unsecured personal loan is from our online lending platform. And we further extend our online lending from personal loans to mortgage and to small business loans. And about 10% of our mortgage loan is now from the online platform. So it will also save E.SUN a lot of acquisition fee in gaining new customers.

And there is another initiative of E.SUN's fintech, and it's in online foreign currency exchange. I believe that we mentioned it, also touched upon it, in our previous conference call. Right now, about more than 90% of the foreign currency exchange transaction was -- were from the online banking platform. And the daily transaction volume is USD 15 million to USD 40 million equivalent amount. So that adds up to a very huge amount for years. So as you can see, our foreign currency deposit grow -- grew very rapidly last year by about 30%. So I think our investment in fintech has -- is eventually going to pay off, and we still think the digitalization is the future of banking, the future of finance. And we believe that the banking should be just like the use of water or electricity, and it's easily accessible anytime and anywhere. Thank you.

Here is another question about the tax rate change this year. We think the tax rate will -- maybe will move up a little bit, but not by much and it's mainly due to the new tax code in Taiwan. The value-added tax rate went up from 17% to 20%, so it will have some impact but not by much.

And here is another question about our dividend policy. And the investor is curious why E.SUN doesn't pay all in cash instead of cash and stock dividend. I think that E.SUN is still at a growth phase, so that means we're still thinking that E.SUN will continue to grow. So we want E.SUN to be maintained -- to have organic growth instead of raising capital from the market, so that we try to maintain our dividend policy at a balance. So -- but we also understand that a lot of investors will prefer higher percentage of cash dividend, so we raised our cash dividend percentage to 50% this year. So for the dividend that we will distribute this year, it's TWD 0.61 per share in cash and TWD 0.61 per share in dividend. So we make the dividend balanced. Thank you.

Here comes another question about the mortgage NPL and the trend for the year. Yes, of course, the mortgage NPL picked up by 6 basis points this quarter, and it was mainly due to some individual cases with large amounts that went delinquent in the first quarter. However, we maintain our loan-to-value ratio very low, about 40% to 41%. So the expected loss for these cases will be very, very little. And so we're not much worried about the expected loss but the -- of course, the NPL ratio went up. However, we don't see a systematic risk. And we think at the end of the year, the NPL ratio will come down to the same level as what we had last year. In fact, in April, the NPL ratio has gone down by 1 basis point. So it will -- we think the NPL ratio for mortgage will be turning better going forward. Thank you.

[Unknown Executive]

It seems that there's no questions. So we will close our presentation today. Thank you for your participation for today's online conference. And we have learned a lot of insights from the meeting. And if you have any questions, please feel free to contact with us by phone or e-mail, and we will get back to you promptly.

And this conference call will be replayed, within our time, and please visit our E.SUN Financial Holding Company's website for more information.

Thank you very much for attending the meeting and wish you have a wonderful evening. Thank you.