E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2020-Q1

[Harris Lin, executive]

Dear investor, welcome to E.SUN Financial Holding Company Webcast Investor Conference for the First Quarter of 2020.

This conference will be moderated by me. I'm Harris from Investor Relations. Alongside, we have IR team, Chiwei's team and Alex. Also, we are glad to invite CEO of E.SUN Financial Holding Company, Mr. Joseph Huang, to join us. Before entering to the presentation, we would like to invite CEO Joseph to give us an opening note.

[N. Huang, executive]

Okay, thank you. Dear investors, thank you for joining our investor conference. For the first quarter of 2020, E.SUN Financial Holding Company's net revenue rose 3.6% to TWD 14 billion while net profit fell 12.9% to TWD 4.5 billion. Return on equity is 10.4%; return on asset, 0.71%; and EPS is TWD 0.39 per share.

Despite the headwind prevailing in the first quarter, main subsidiary, E.SUN Bank, maintained a stable net profit at TWD 5.0 billion with a 0.1% growth.

By revenue breakdown, net interest income rose 4.7%. We try to achieve a healthy balance sheet growth while maintaining reasonable level of funding cost. Asset quality stayed benign with nonperforming-loan ratio at 0.19%.

Net fee income rose 23.3% to TWD 5.0 billion, mainly driven by wealth management and credit card. Wealth management net fee income rose 36% to TWD 2.4 billion and set record high for the first quarter. Besides, credit card continued to gain market share through expanding diverse payment scenario, net increase of active cards and cumulative cards consumption were the highest amongst all banks in the first quarter.

Facing external uncertainties in 2020, risk management will be an important focus this year. We will pursue business development and growth. However, risk management and asset quality will still be the bottom that we will not compromise.

Finally, I would like to share some good news with you. E.SUN was awarded the Best Bank in Taiwan by Global Finance. It recognized our performance in business and sustainable development. Moreover, E.SUN was also ranked as Most Valuable Banking Brand in Taiwan by The Banker for the second straight year. While in this honor, we'll keep moving forward to create more value for our shareholders. Thank you.

[Harris Lin, executive]

Okay. Thanks, Joseph. Now let's move on to our presentation. Please look at Page 1 for E.SUN Financial Holding summary. Total assets of Financial Holding Company reached TWD 2.6 trillion. Total assets of E.SUN Bank, TWD 2.58 trillion. Key financial figures remained healthy. Book value per share was TWD 15.15. Double leverage ratio was 103.98%. Financial Holding Company CAR ratio, 126.1%. Our operation channels remain unchanged.

So next page for business and financial review. For the first quarter of 2020, E.SUN Financial Holding Company's net revenue increased by 3.6% year-over-year. Net profit decreased by 12.9% year-over-year. EPS was TWD 0.39; ROE, 10.4%; ROA, 0.71%. The main subsidiary, E.SUN Bank, maintained stable net profit. The net profit was TWD 5 billion, rising by 0.1% year-over-year.

For business operation, this quarter's highlight was net fee income. Net fee income increased by 23.3% year-over-year. The main driver was from wealth management and the credit card business. Wealth management fee income increased 33% year-over-year and set a record high and its -- fee income set a record high for the first quarter of E.SUN Financial Holding Company.

Credit card fee income grew by 4.1% year-over-year. And besides, E.SUN increase of active cards and card consumption were the highest in the market.

On the deposit side, total deposit rose by 9.6% and mainly driven by foreign currency deposits, 26.4%. Meanwhile, loan growth was 9.2%, and our asset quality maintained benign, with NPL ratio at 0.19%, coverage ratio at 615.5%.

For the dividend policy, the Board of Directors have approved to pay TWD 1.588 per share, including TWD 0.791 in cash and TWD 0.797 in stock. But the proposal needs to get approved in the Annual General Meeting on June 12. And due to the excellence in overall performance, E.SUN was awarded Best Bank in Taiwan by Global Finance and the Most Valuable Banking Brand in Taiwan by The Banker. Besides, E.SUN was listed in top 5% in Corporate Governance Evaluation by Taiwan Stock Exchange. And this performance are the best in financial -- among all the financial institution.

Next page for the financial performance. Net profit was TWD 4.5 billion; EPS, TWD 0.39; ROE, 10.4%; ROA, 0.71%.

And moving on to the next page for net income of Financial Holding Company and its subsidiary. E.SUN Financial Holding Company is a bank-centric financial holding company. Most of its net profit came from E.SUN Bank. And for the first quarter, E.SUN Bank and E.SUN Securities maintained stable net fee -- net profit. E.SUN Venture Capital has unrealized losses due to the drop of the market.

And turning to next page, Page 5. Net fee income breakdown. Compared to the last year, net revenue rose by 3.6% year-over-year. Operating expenses rose by 17.7%. Net profit decreased by 12.9%.

Next page for Financial Holding Company revenue breakdown. Total net revenue reached TWD 1.4 billion Out of the total net revenue, 33.2% came from net interest income and from net fee income and 27.8% came from others net fee -- other income. And for the first quarter, net interest income rose by 4.7%. Net fee income rose by 23.3% year-over-year. Due to E.SUN Venture Capital's unrealized losses caused by dropping of the stock market, other revenue decreased compared to last year.

Next page, net fee income breakdown. The majority of the net fee income came from wealth management, 47.9%, and the credit card, 31.2%. For the first quarter, credit card's net fee income rose by 4.1% year-over-year. Wealth management fee income rose by 36% year-over-year. Due to the growth of E.SUN Securities brokerage business, other net fee income increased compared to last year.

Next page for credit card business breakdown. E.SUN's credit card was ranked top 3 in the market in terms of market share, and growth momentum is continuing. For the first quarter, net increase of active cards and card consumption were the highest in the market. Therefore, the market share of active cards increased to 13.4%. And the market share of card consumptions rose to 15.4%.

And next page deposit and loan structure. Total deposit rose by 9.6% year-over-year, and the main driving -- mainly driving by foreign currency deposits, 26.4%. Total loan rose by 9.2%, with corporate loans rising by 8.0% and consumer loan, 10.3%.

And next page for deposit structure. For the first quarter, overall loan -- LDR ratio rose slightly to 70%; NT dollar LDR, 91%; and foreign currency LDR, 33.7%. And the deposit was mainly driven by foreign currency deposits.

And next page for loan portfolio breakdown. For the loan breakdown, corporate loans led by SME, 25.3%, and followed by large corporate, 24.1%. On consumer side, mortgage accounts for 22.9%; secured personal loan, 19.1%; and unsecured personal loan, 7.5%. Credit card revolving, 0.8%.

And on the right-hand side, you can see each category of the loan maintained stable growth.

Turning to next page, NIM and spread. For the first quarter, the NIM stay unchanged, and the interest spread dropped by 2 basis points.

And next page for asset quality. E.SUN maintained benign asset quality, with NPL ratio at 0.19% and coverage ratio of 615.5%.

And turning to next page, each product lines' asset quality. Corporate NPL ratio was 0.1%; mortgage NPL ratio, 0.14%; and credit card NPL ratio, 0.23%.

Turning to next page for NPL comparison with market. Market average NPL ratio was 0.24% for the first quarter. And E.SUN's asset quality has better than the market average for a long time, showing our excellent asset management ability.

And moving on to the next page, cost-income ratio. And for the first quarter, cost-income ratio increased slightly to 54.8%.

And next page, capital adequacy ratio. E.SUN's capital was adequate, with CAR ratio at 126.1%; BIS ratio, 14.62%.

And this is the end of my presentation. And now we are -- let's proceed to Q&A session. Please send your question through the message box, and we are happy -- we are glad to answer your question. Thank you.

[Chiwei Hsiao, executive]

Okay. We have our first question. It's about the fee income guidance and wealth management growth guidance for this year. What's your -- our view on wealth management growth in -- this year?

Well, it still remains strong for the rest of the year, and the main driver -- product in wealth management. And of course, in the first quarter, we delivered pretty good results for wealth management, especially we have 23% growth year-on-year on wealth management fee income. Especially our mutual fund demand is quite well. If we break it down into products, 64% of the fee is from mutual fund and 36% is from bancassurance. Especially in January, we had a very good result. February was also okay, even though there was a break of Chinese New Year. However, in March, it declined a little bit because since the second half of March, the global market became very volatile for about 2 weeks. So it also has some impact to investor sentiment.

For our product -- so for the first half, we still remain very optimistic about our fee income growth because on a year-on-year basis, we -- in 2019, the fee income was relatively weak in the first half of 2019. For the entire year, I think it pretty much depends on how the COVID-19 is going to evolve. If the situation can be contained, maybe in May or June, if it can be controlled to some extent, then we are quite confident we can deliver good growth in wealth management. But just like I said, it's a lot of uncertainty.

As far as product strategy, in the first quarter, we focused on investment-grade bond, mutual fund and also traditional-type insurance policies. However, in the second half, there was a regulation change about the reserve rate of insurance policies, which will make the insurance policy less attractive to our customers. However, we will also adjust our product strategy and move to protection-type or regular pay kind of insurance policies. Yes, so for the full year, we hope to deliver a positive growth for wealth management fee income and the overall fee income. Thank you.

Yes. For the second question, it's about credit card. In the first quarter, the E.SUN credit card fee income grew by 4%. However, the consumption amount grew by 22%. Can you explain the difference?

And yes, I think E.SUN still performed pretty well in credit card market, especially the overall -- the entire market, the consumption amount fell by -- dropped by 3%. However, E.SUN still maintained a very strong performance in terms of numbers of active cards and the increase of consumption amount. In both category, E.SUN is ranked #1 in the entire market. And our market share in consumption advanced from #3 to #2. The market -- sorry, the market share advanced from 13% to 15%, the market position from #3 to #2. I think the main difference is because we started to initiate series of campaigns since the fourth quarter of 2018. At that time, we released PI credit card, which was a big hit in the market, and we coworked with PChome. And in 2019, we continued to release a series of credit cards, including UBear Card, Only Card and another credit card that we co-branded with the leading department store in Kaohsiung.

All of those credit card, the accumulated consumption amount keep piling up. So -- and the associated expenses, which will be recognized as the negative in fee income will also increase. So that explains why the net fee income does not grow as much as the growth of consumption amount. However, we think our strategy is very -- is in a good way, and we also acquired very -- many quality customers through the series of campaigns. And our credit card will still continue to grow, no matter in consumption and net fee income for the months to come.

The third question is about expense. In the first quarter, the expense grew by 17%. Can you explain why the growth rate is high and also the CI ratio target and expense growth target for the year?

Yes, indeed. We actually have implemented a program to reextend. Reason why we expand so much. And however, we mentioned over and over, we will continue to invest in digital banking and IT so that the expenses associated with, for example, core banking system or digital banking platform will still be the main source of expense for E.SUN. However, for -- we are also studying how to improve the internal processes so that we can save some cost within our -- internally. And also because of COVID-19, the consumption sentiment is weaker during the month. So that will also -- so we will also consider -- reconsider the marketing expenses. And I think we can also realize some cost savings on marketing. For the year, the expense growth rate, we hope to lower from existing 17% to 10% until year-end. Thank you.

Okay. We have the next question about loan and asset quality. With weaker macro growth, which areas of credit risk is the management monitoring? SME and unsecured personal loans. How have the borrowers' cash flow behave in these 3 months?

Yes. In the first quarter, there is no sign of asset quality deterioration, which is a good sign. And also, there are a few industries that we will watch closely, including -- hold on -- sorry, including dining or tourism-related, transportation, retail and apparels, clothing or shoewears. There are a total of 14 industry categories that will -- that we will close-watch and monitor. However, as far as what we observed so far, the asset quality -- the overall asset quality is still okay. Because when we selected customers in these industries, we particularly selected those who are strong and sound in terms of their financial structure. And also, we have enough amount of collateral against their exposure. So as far as now, we are close -- we close-watch, and we also perform credit review case by case. So for SME unsecured personal loan, we do not see immediate threat.

And borrowers' cash flow, so far, is still quite okay. And there are actually 2 programs supported by the government. One is the bailout program, and one is the relief program. For the bailout program, the borrowers can be extended for their principal repayment for 6 months. And for the relief program, they can borrow additional loans from banks. And however -- as far as what we observed so far, actually, a lot -- actually quite a few number of customers, they are actually still quite healthy, but they just want to borrow some extra -- to apply some extra loan facility from the banks to make sure that they will get through the period of time. However, financial-wise, they are quite healthy and quite strong. So I think there -- in Taiwan, the virus situation is controlled quite well and the asset quality is still okay.

And the next question is, how has the virus outbreak changed or speed up E.SUN's digital banking progress?

And indeed, during the period of time, there is an increasing amount of transactions coming through our digital banking platform, especially, there are maybe like -- 60% of the transactions are coming from digital banking platform, including foreign currency exchange or application for credit card or online loans, 60% of the transactions are coming from digital platform. Also, in the analysis of the -- of our credit card consumption, of course, because of the travel restriction imposed by every country, so the travel-related or hotel accommodation-related expenses has dropped very severely.

On the other hand, the online shopping has been increasing over the past few weeks. So I think E.SUN's strategy, once again, we think it's on the right track because of our -- for our credit card strategy, we mainly focus on acquiring new customers who are willing to use digital payment and digital transactions. So I think the outbreak, the virus outbreak is -- we -- so we once again affirm that we are on the right track, and we will continue to invest in digital banking platform.

Yes. The next question is about loan. What is driving strong growth in mortgage loan growth? Are we seeing any slowdown in loan growth momentum?

For mortgage loan, I think it's highly related to real estate market. In fact, a lot of people are speculating that the -- how the market will drop during the period of time. However, there is some price correction, but the trend -- but there is no significant drop in terms of real estate price and -- due -- and in fact, for the past week, the transaction and the application for mortgage has actually increased. So that hard demand on properties is still very strong in Taiwan, especially when the interest rate is lower. In a low interest rate environment, for a society like Taiwan, I think the real estate is still -- some products that is the most sought for.

We still maintain a very positive outlook in housing market and mortgage, and the mortgage -- so the -- so in short, the mortgage driver is mainly driven by demand on houses. And for now, we do not see too much sign of slowdown in loan growth. Thank you.

The next question is about our foreign currency investment portfolio. Yes, the -- actually, we still -- we -- the investment in equity is very, very limited. That explains why we do not have too much -- we have very, very limited loss in stock market in the first quarter, and it is reflected in our revenue. The other income or the trading income does not drop too much. And also on our investment in bond, we still keep our duration short at 1.2 to 1.5 years and 99% are A-rated fixed income product. The overall yield for the investment is roughly 4%. Still the majority is floating rate, but the proportion has dropped from more than 90% to maybe 70%. Thank you.

The next question is about foreign currency deposits, the reason behind strong foreign currency deposit growth and the driver behind it. Is it because we acquired new customers or existing customers?

I think it can be discussed in 2 ways. First is from the corporate clients. As you know, overseas has been our main strategic focus for the past few years, and we have acquired a lot of cross-border Taiwanese companies. And the -- for the companies who only need NT dollar loan, they are no longer our target customers. And we focus on the cross-border companies who need not only loan in foreign currency, but also a wide range of products, for example, like foreign currency exchange or cash management. And for the corporate RMs, their KPI is no longer loan balance by itself. They will also be evaluated on the growth of their fee income and also the growth of their customers' deposit in foreign currency.

And secondly is from the individual, we have a good online personal banking platform. On average, every day, we have many foreign currency exchange transaction take place on it. And also the transaction amount can go up to more than USD 50 million on some particular days when the foreign currency rate are -- is very volatile. So it also helped us to have a very diversified base for our foreign currency deposit because as opposed to a lot of other banks who get their foreign currency deposit mainly from corporate clients. However, E.SUN is more balanced, because through that platform, we get to get exposed to many individual clients, and they are happy to make that foreign currency exchange and keep their deposit at E.SUN, just because that balance break in our foreign currency deposit clients. So we can keep delivering good growth in foreign currency deposits.

[Harris Lin, executive]

Okay. Dear investor, we just finished all of the questions from the message box. And thanks for your participation in our online conference. And through this event, we learned a lot of valuable opinion from all of you.

So if you have -- for any further question, please feel free to contact IR team for more information. And thank you and have a good day. Bye-bye.