E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2019-Q1

[Unknown Executive]

Dear investors, welcome, everyone, to E.SUN Financial Holdings First Quarter 2019 Earnings Conference Call. And today's host will be IR team, including IR head, Mr. Chiwei Hsiao and Matt Tsai.

Before entering into the presentation, please allow me to invite President and CEO of E.SUN Financial Holdings, Mr. Joseph Huang, for an opening note.

[N. Huang, executive]

Dear investors, thank you for joining the web conference of first quarter 2019. In first quarter of 2019, E. SUN has had a good start to the year as business momentum was sustained.

Net profit reached TWD 5.2 billion increased 9.1% year-over-year, set a record high profitability of the franchise. The aggregate net profit of all financial holding companies in Taiwan declined by 20.4% in the first quarter, however, E. SUN still delivered with faster momentum in every product line even in the first 4 months of 2019 we delivered 14.1% profit growth.

On cross-border side, we find a stable demand in foreign currency flow service, driven both foreign currency deposit and loans increased by 15.4% and 26.7% year-over-year respectively. Total fee income was TWD 4.1 billion.

Ranked Top 3 in the market, the spotlight of the first quarter fee income came from credit card. E. SUN's credit card delivered good performance with 15.1% growth in consumption amount, while 18% in fee income growth. We're able to offer convenient payment service through payment scenario and mobile.

Furthermore, E. SUN maintained asset quality benign. The nonperforming loan ratio was 0.18% by the end of March, better than market average 0.25%. Coverage ratio was 660%.

We're also very proud to share some great information with you. This year,1 E. SUN Bank was ranked #1 in Taiwan Banking sector in Top 500 Banking Brands by "The Banker" magazine. Most importantly our brand value grew 57% in 2019. It has been the second consecutive year for the brand value grew by 50%.

On the corporate governance side, E. SUN is the only financial holding company in Taiwan to be named in top 5% of corporate governance evaluation by Taiwan Stock Exchange for 5 years in a row. These recognitions will drive us moving forward to our goals to be the best and most respected bank in Taiwan. More information will be disclosed in the presentation. Thank you.

[Unknown Executive]

Thank you, Mr. Joseph Huang, for the briefing. Then the presentation will begin now.

Please turn to Page 1 on financial holdings summary. On total asset size, both for Financial Holding and E. SUN Bank, the total asset size reached over TWD 2.3 trillion by the end of March. And key financial figures remain in a healthy level. Book value per share TWD 15.4, double average ratio was 103.8%.

On the distribution channel side, all these distribution channels at home and abroad remain the same amount compared with the end of 2018. And right now we have 139 branches in Taiwan and 28 operating sites across 900 regions and mainly focus on Southeast Asia.

Please turn to Page 2 for business and financial review. E. SUN had a good start of the year of 2019 as our net profit was TWD 5.2 billion and compared with a year ago it was 9.1% growth rate. On top line net revenue reached TWD 13.5 billion with 7.9% year-over-year growth. Earnings per share TWD 0.48, return on equity 12.75% and return on assets 0.89%.

Also we would like to highlight the net profit of the main subsidiary, E. SUN Bank that was TWD 5 billion in the first quarter with a 10.6% year-over-year growth.

Then on business operation. Foreign currency flow businesses is still our core strategic focus and it can generate stable revenue stream of E. SUN, as we can provide more cross-border and cross-platform foreign currency flow business for both corporate and individuals, which driven the growth rate of the total deposit to 10.5% and foreign currency deposits to grow even further to 15.4%.

On the loan side, we still keep balance between corporate and consumer loans and total loan grew by 9.6% and foreign currency loans driven -- increased by 26.7%.

On fee income side, as we can provide more convenient payment experience through the payment scenario and mobile, the active credit card the number extended 3.5 million cards and consumption amount grew by 15.1% year-over-year.

Apart from pursuing business growth, we still keep asset quality benign, NPL ratio at 0.18% and coverage ratio enhanced to 660%.

Now we want to share with you some of the highlights in the first quarter. First is the balanced dividend policy. As we mentioned before, the board of directors approved to pay TWD 1.421 per share in which TWD 0.71 in cash and TWD 0.711 in stock and all this proposal have to subject to decisions from the AGM on June 14.

Then on the brand value just to add, Joseph mentioned earlier, right now we are ranked #1 in the brand values through "The Banker" magazine brand value evaluation. And in 2019 we also received the highest AA rating among all the Taiwanese bank.

And we also did some good job in ESG and corporate governance as we're still the member of Dow Jones Sustainability, DJSI for short for the 5th straight year in 2014 and we have been listed in DJSI World for the 3rd time.

Please turn to Page 3 on financial performance. If we look at the 4 on bar chart in terms of net profit, earnings per share, ROE and ROA, E. SUN still delivered a growing trend in the past 5 years.

Then on Page 4, the profit contribution from different legal entity, E. SUN still is bank-centric financial holdings. On the left, we can see the bank contributed 95% of the group profits.

Please turn to Page 5 on the profits movement. On top line, total net revenue increased by 7.9% and on the operating expense we increased 10.9%. We would like to remind you that, that is because we booked some of the employment cost in the first quarter. And the net profit increased 9.1% year-over-year.

Then on Page 6, the revenue breakdown. Total net revenue for the first quarter was TWD 13.5 billion and we can see the 3 main revenue streams, including net interest income 35.8%, net fee income 30.2% and fixed income, FX and others accounts for 34%.

Please take a look at Note 1. Along this fixed income investment, FX and others, about 47.6% are stable growing fixed income investments and that can generate a stable interest income. And if we added this interest income to net interest income, then the total net interest income will increased by nearly 3%.

And on the other hand, you can see that the net fee income was subdued in the first quarter. However, if we calculate the net fee income in the first 4 months 2019, then the growth rate turned positive.

Please take a look on Page 7, the net fee income breakdown. The total net fee income raised to TWD 40.7 billion and the leading segment was wealth management at 43.4%; followed by credit card, 37%. And the hot spotlight of the first quarter fee income came from credit card business that increased 18% year year-over-year.

And you may also be wondering why the wealth management is subdued in the first quarter? That is due to the high base of the first quarter last year, as the first quarter 2018 that is the record high wealth management fee income of the franchise.

And if we look at the product mix of the wealth management, in the first quarter this year mutual fund accounts for 55% and bancassurance accounts for 45%. And we still maintain our guidance for the full year wealth management fee income growth rate that should be better than last year.

Then please turn to Page 8 on the competitive landscape of credit card business. E.SUN's credit cards still maintain a Top 3 players in terms of active cards, credit card consumption. And there's a good sign that only figures on active cards and credit card consumption, the market share is growing. You can see that compared with the end of 2018 the market share of active card increased to 11.7%, and credit card card consumption even further increased to 12.2%. And even only -- mostly per card spending -- right now, the per card spending reached to TWD 8,700, so this figure is the highest in the past 5 years.

On Page 9, for a table of deposit and loan structure, if we look at a second column from the right, the year-over-year comparison, you can see the total deposit right now reached TWD 1.9 trillion with 10.5% growth, which is driven by foreign currency deposits increased by 15.4%. And right now, foreign currency deposit accounts for 32.1% of the total deposit.

On the loan side, total loan reached TWD 1.3 trillion, increased 9.6%. And in the first quarter consumer loans, our growth rate is a little bit higher than the corporate loan. And this -- the corporate loan is driven by the foreign currency loan, which increased 26.7% year-over-year. And right now, the foreign currency loan accounts for 18.2% of the total loan. On consumer side, mortgage is still the spotlight that increased 17.3% year-over-year.

Please take a look on Page 10 for our deposit structure. On the left, we delivered a trend of LDR, for a overall LDR, NTD LDR and foreign currency LDR. You can see that the foreign currency LDR is still at 14%, a quite low level. So we can still use the excess foreign currency deposits in the foreign currency fixed income investments.

Please turn to page 11 on the loan portfolio breakdown. On the left, the largest segment belongs to SME, 25.5% and large corporate accounts for 24.5%. And on the other hand, mortgage accounts for 20.9% and secure personal loan accounts for 20.5%. And it's still in line with our strategies that we more focused on the cross-border Taiwanese business. So the foreign currency loan is mainly booked under a large corporate. So you can see on the right all the loan categories show a stable growth rate year-over-year.

Then please turn to Page 12, for the NIM and spread trend. On the left, compared with the last quarter, we still manage or NIM very well as we keep NIM at 1.36%. And on the right, for the overall spread, although it's dropped to 1.44%, however, that is because the local LDR of the foreign currency. If we separate for the U.S. dollar and NTD spread, the U.S. dollar spread is around 2.2% and NTD spread is around 1.44%. But as the calculation, the blended spread is dropped to 1.44%.

Then the following 3 pages were talking about the asset quality of the bank. On Page 13, overall NPL ratio 0.18% and coverage ratio enhanced to 660%.

On page 14, the asset quality by different product lines. You can see that a mortgage still maintain at 0.21%. However, on the corporate side, the first quarter NPL ratio dropped to 0.03%, that is because we got the recovery from one individual -- one corporate cases.

On page 15, for the NPL ratio compared with the market, E.SUN still managed risk well and delivered a best asset quality for over a decade. So in the market, the first quarter was 0.25% of the overall market NPL, and at E.SUN we are 0.18%.

Please turn to Page 16 on the cost-income ratio of the bank. In the first quarter, our cost-income ratio was 15.4%, and that is still at a very low level compared with the previous year.

The last page on Page 17, the capital adequacy ratio, we disclosed the number by the audited number of -- at the end of 2018. And at that time the CAR ratio was 137.28%, and the Tier 1 ratio of the bank was 12%, and total BIS was 15.13%, and all this number are comfortably made to the regulatory requirements.

So that is the end of the presentation. Then we will head to the Q&A section. Thank you.

[Unknown Executive]

So right now we don't have too many questions coming in. But I think I'll just highlight a few things that we discussed during the analyst meeting earlier this afternoon -- the Chinese session.

First question is about a wealth management. And of course the wealth management fee income this quarter has underperformed and it's partly because of the high base that we have in 2018, the first quarter, and it was a abnormal level for E.SUN. Because the pattern for wealth management usually been -- the first quarter been the lower quarter than it will be sequentially getting -- it will be getting better sequentially. And so this year we're coming back to a more normal pattern.

And in the first quarter the breakdown of wealth management fee, 55% come from mutual fund sale and 45% come from bancassurance sale, which means we still have more room for us to improve in our bancassurance sale. So since second quarter on, we will try to improve our sale in insurance and to make that proportion more evenly like 50% to 50%.

And our overseas wealth management still is performing quite well. In our Hong Kong platform -- Hong Kong branch, the wealth management fee income growth was quite substantial and we also set up the wealth management centers. Our second wealth management center in Singapore commenced in the first quarter of this year and we expect it will take a few months for its business to sizzle and it well start to contribute more profit since the second half of this year.

And if you do some math on our wealth management fee income, then you will find that per month the wealth management fee income is about TWD 590 million, which is lower because in February we have the Chinese New Year. But in April the wealth management fee income for the single month was TWD 780 million, which is a good increase compared to the first quarter. So this year, we still keep faith and still maintain our confidence in our wealth management and we still expect the growth rate will be better than what we had last year.

Okay. Our target on CI ratio would be -- okay, there's a question about our target in CI ratio. It will maintain in the range 50% to 51%. And for -- and the target will sustain till [ 2012 ] because, we have a few projects going, including our transformation of core banking system and that project will expect to be completed by 2021. So we hope to see our revenues start to pick up faster in 2022 and our CI ratio will start to drop since 2022.

Okay. Here we have our second question. In which area or sector of -- that of Taiwan are showing stronger foreign currency loan growth?

A few places of Hong Kong and Vietnam are the outperformers and also from a growth rate perspective because we are -- we have a very, very low base in Myanmar or Australia or Tokyo. So from a growth rate perspective, the growth will be very strong.

And on the other hand, also a lot of foreign currency loan growth were generated from our OBU, which is the -- from the Taiwan corporates who are based in Taiwan or they are based in other countries, for example, like Cayman Islands or Virgin Island.

Okay. And second question, mortgage loans still growing strong and would it normalize level at some point?

And yes, I think our mortgage loan is still going very strong in the first quarter. But our growth guidance for mortgage is somewhere around -- somewhere similar to our overall loan growth. So I think at the end of this year, it will still be somewhere around 8%.

Okay, here's another question about NPL ratio for credit card.

And it is purely because of the seasonality. In the first quarter, traditionally, we have higher NPL ratio for credit card. But it will come down to more normal level in the second quarter.

Okay, here's the question, it's about the -- our growth in foreign currency, fixed income and others.

Of course, in the first quarter, the gain from this segment is quite huge. But just as Matt just explained in his presentation, if you look at Page 6 of the presentation, about 47.6% of other income is from interest income. And why -- the reason why it is interest income and we put it in other income, it is because it is the interest income generated from our fixed income investments. And those fixed income investments are classified at fair value through profit and loss. So according to accounting rule, we have to put it in other income. However, essentially, this is just interest income. So it's a very stable source of income.

And CFO, in the Chinese session of the analyst meeting this afternoon, she also explained that, if we put all of the income associated with fixed income investment, that includes mark-to-market gain or loss or realized gain or loss, then the profit -- and then the percentage will be somewhere around 60% to 65%. It depends on the market condition. So that means 47.6% for this quarter is from interest income. And normally, all the gain or loss or interest income associated with our bond investment will be somewhere around 60% to 65%. So I hope that explains the question.

Okay, and here's a question about trade war and how it is going to impact our loan growth or wealth management fee income.

And I think the trade war will impact the loan growth in 2 ways. First, it's good ways because it drives Taiwanese companies to come back to Taiwan to relocate from China to Taiwan -- back to Taiwan. So if they choose to come back to Taiwan, then they will have some capital expenditure and some -- make some investments. So that will be actually a contributor of our loan growth. If they choose to relocate to Southeast Asia, then they will also need to invest locally because we also have our branches there, so it can also contribute to us. However, potentially it might damage the Taiwanese economy. So there's also good things about it and also bad things about it.

For our wealth management, I think that the impact will not be direct. It will impact our wealth management through the macroeconomy. So yes.

Yes, okay. So I will continue to highlight a few more things that were discussed in the analyst meeting this afternoon and about our credit cards targets for this year. The CEO Joseph, he guided that the credit cards will be lower than what we had last year, so it will be somewhere around 20 basis points. And for E.SUN, I think our loan policy is more conservative. And even if we are now -- expand our business go to overseas, however, we don't want to be very impulsive.

So if -- so, we want to maintain our asset quality good even if we need to sacrifice some spread to -- so as you can see, in our NPL ratio for corporate loan, it's only 0.03%, only 3 basis points. So we always put asset quality first and profit second.

And also there's a discussion about our capital. Here's some information that I want to share with you. It's that, in 2020, as we were informed that the regulator will impose a new regulation on the calculation of capital. So for a long-term investment of the banks, under the current regulation, it will be charged from our common core equity -- 25% will be charged from the CET1 and 25% will be charged from Tier 1 and 50% be charged from Tier 2.

However, since 2020, under the new regulation, if the long-term investment of the bank, the amount exceed 10% of its book value, then the entire piece will be charged from CET1. If it is less than 10%, it will be applied to a 250% weight and to incorporate into the risk weight asset.

For E.SUN, our investment only include 2 subsidiary and one fintech company and the total amount is less than 10% of our book value. So we will -- so under the new regulation, it will even help us to improve in our capital ratio by -- especially our CET1 by 5 to 6 basis points. However, for some banks who have a larger oversees subsidiary, they will confront a problem if they need to inject new capital.

And also on the foreign currency deposit, in the first quarter, there was a slight drop in the foreign currency deposit and the main reason being the price competition for foreign currency deposit is too intense. That also caused the funding cost in the first quarter to go up very rapidly. So for E.SUN we do not want to dive into in this competition at this point. And we put the funding, to maintain our funding cost stable prior to the growth of foreign currency deposits, so strategically we want to slow down on the foreign currency deposit.

However, in April in this single month, the foreign currency deposit increased by TWD 14.5 billion, so that make the year-to-date foreign currency deposit to increase by TWD 10 billion. And as we guided earlier this year, the full year goal for foreign currency deposit is still growth. We still maintain our growth target.

Okay. Here's another question about our online and fintech. How many percent of new loan origination is purely online? And new credit card issued how many of them is from online -- apply online?

[Unknown Executive]

Yes. For the overall loans origination as online, if we separate purely personal loan, the unsecured personal loan right now is about 50% of the loan on digital. And for the credit card business, the average credit cards approved from online is about 50%. However, if we look at like the Pi credit card -- that is a credit card that we link with the Pi digital e-wallet and that number will increase to 70% of the credit card applied online.

[Unknown Executive]

Yes. And there's the final point that I want to share with you is that about something related to trade war and the implication on Taiwanese company. And in fact, the Taiwanese government is encouraging Taiwanese companies, who are suffering from the trade war, who are worried about the trade war -- they encourage -- the government encourage the companies to come back to Taiwan to invest.

So the government agencies they provide a program called, the homecoming Taiwanese companies program. And so far there are 47 companies have applied and got approved and the total amount permitted to invest in Taiwan is TWD 240 billion. And this is the biggest homecoming trend and homecoming investment in -- I think, in recent 10 years.

I think this is a very good opportunity to Taiwan and also, for the banks as well, because it will bring much more demand for investment and to borrowing from the banking system.

And also there's another big project that's going in Taiwan, which is the energy transformation -- the green energy. The offshore wind farm is booming right now in Taiwan and it is estimated the total investment size would go up to TWD 1 trillion. And about 70% of TWD 1 trillion -- the fund will be borrowed from the banks. So for the full year 2019, we're quite positive about the loan demand and long growth. So in the earlier this year the guidance loan growth is 8% and at that time we did not factor in these 2 factors -- homecoming factor and we did not know when the offshore wind farm will start to contribute to our loan growth. So I think there's some upside to our loan growth for this year.

[Unknown Executive]

Thank you for your participation in today's online conference, and we will have a broadcast reply within an hour time. Please visit E.SUN Financial Holding's website for more information. And if you have any further questions please feel free to contact IR teams and we will reply you shortly. And thank you very much for attending the meeting and wish you wonderful evening. Goodbye.