E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2022-Q1

[Chiwei Hsiao, executive]

Good evening and good morning to our investors around the world. I welcome joining the earnings call of E.SUN Financial Holding Company. The time is 8:00 Taipei time, so we will start now.

I'm Chiwei, along with my colleagues, Mr. [ Tim Huang ] and Mr. Alex Chiu. First of all, I would like to invite President and CEO of E.SUN, Ms. Magi Chen, to give a brief opening note.

[Magi Chen, executive]

Greetings, investors. Thank you for joining our investor conference. For the first quarter, E.SUN net revenue slightly declined by 1.1% and net profit declined by 16.9% to TWD 4.3 billion. ROE was 8.86%, and EPS was TWD 0.32. Taiwan's economy continued to be strong in the first quarter, which contributed to a 22-month growth streak for exports. The strong loan demand for capital expenditure and investment in green energy, boosting E.SUN's loan business. Total loan balance grew by 13%, with SME loans growing by 12.2% and foreign currency loans by 20.8%. Asset quality remains in line with NPL ratio at 0.15%.

Net fee income slightly declined mainly due to market volatility in the first quarter. However, cost AUM maintained stable growth in the same quarter. We remain positive in our outlook for the second half of this year and for the positive fee income growth for the whole year.

ESG is a long-term commitment of E.SUN. We had planned our sustainability road map to reach the goal of net 0 by 2050. E.SUN is the first bank in Taiwan and the third in world to receive validation of its science-based target from SBTi. We are also the first bank in Asia to commit to the coal phase-out by 2035. E.SUN is committed to being the first ESG partner for SMEs in Taiwan. Under this [ initiative ], E.SUN will provide ESG advisory services and innovative carbon calculator and implementation of internal carbon pricing. As of the first quarter, sustainability-related loans account for 36% of the corporate loan balance.

Last but not least, we would like to share some good news with you. Last week E.SUN's credit rating was upgraded to A rating by S&P Global. Moreover, E.SUN has been awarded as the Best Bank in Taiwan by Forbes for 2 years in a row. [ Meanwhile ], E.SUN was voted as the top financial institution in Asia, by FinanceAsia, Best Managed Company poll.

We appreciate, and we'll continue to present more value for shareholders and stakeholders. Thank you.

[Chiwei Hsiao, executive]

Thank you, Magi. Then now we will -- I will walk you through the presentation, then we will proceed to Q&A. Please flip to the first page, the financial holding summary. On total assets for the holding company, the asset was TWD 3.3 trillion, which was a 12.4% growth year-on-year. On the key financial numbers, the book value per share was TWD 14.7 as opposed to TWD 14.5 in the end of 2021. For the double leverage ratio, it was 102.8%. The holding company capital adequacy ratio was 128.5%. For the operating channels, there is no known change in our operating sites in the first quarter.

Please look at the second page, the business and financial review. For the first quarter, the Financial Holding's net revenue was slightly down by 1%. The number was TWD 13.6 billion. The net profit was a 16.9% decline. For the EPS, it was TWD 0.32 per share. ROE was 8.86%. ROA was 0.53%.

On business operations, the strong economy of Taiwan contributed to the very strong loan growth for the first quarter. On a year-on-year basis, the loan balance grew by 13%, which includes 12.2% from SME loans, and the foreign currency loan growth was 20.8%. Also, I would like to note that ESG has been a long-term commitment of E.SUN. As of the first quarter, the sustainability-related loans account for 36% of corporate loan balance. ESG is a long-term commitment for E.SUN, and we will continue to invest in ESG.

For the net fee income, it was slightly down by 1.9%, which includes the wealth management fee income of TWD 2.2 billion and corporate banking fee income TWD 0.6 billion. What's worth mentioning is that the corporate banking income was 36% growth on a year-on-year basis. For the asset quality, it was maintained very well. The NPL ratio was 0.15%. On the business highlights for the first -- of the first quarter, the dividend payout has been announced. The Board of Directors have approved to pay TWD 1.34 per share, which is evenly splitted into -- okay. Sorry. Yes, the dividend payout ratio is still subject to the resolution from the AGM.

For the credit rating, as Magi just announced that E.SUN Bank once again received a credit rating upgrade to single A from S&P Global. And the rating upgrade was mainly because of the strong credit profile of Taiwan. So there was an upgrade in the Taiwanese sovereign rating. And also S&P recognized that E.SUN important to the banking system, so that also give E.SUN this credit rating upgrade. On overseas branch expansion, the FSC, the regulator of Taiwan Banking Bureau, also proved our application to set up a new branch in Fukuoka, Japan.

On the honors and recognition that we received in the first quarter, we are very proud to announce that we received recognition from Forbes, from FinanceAsia and also from TWSE's Corporate Governance Evaluation.

On ESG, E.SUN is the first bank in Taiwan, second in Asia to receive a validation from SBTi for our science-based target that has been set to reduce our carbon emissions and to reach net 0 by 2050. And E.SUN is also recognized as ESG top 50 in Asia by Sustainalytics.

Please flip to the next page, the financial performance. As you can see, this is E.SUN's profitability performance for the past 5 years. On the next page is net income of holding company and subsidiaries. The bank contributed to 83.3%. The venture capital contributed 10%, and the security house has contributed to 6.6% of the profit.

On the next page is a net profit breakdown. The net revenue was down by 1.1%. The operating expense was contained very well, it only grew by 0.7%. So if you look at the PPOP of E.SUN, it was mainly flat. However, the net provision for the first quarter was higher compared to the same quarter last year. It was TWD 700 million increase in provision, and the increase in provision in the first quarter was mainly due to the increase of loans, and we need to reserve the general provision against performing loans. The general provision accounts for 90% of the increase in provision for this quarter, so that result in a weak profitability on the bottom line.

Next page is the revenue breakdown. The E.SUN recorded TWD 13.6 billion in net revenue, including NII accounts for 54.5%, fee income accounts for 38%, other income accounts for 7%. As you can see on the right-hand side, the NII increased 21.4% year-on-year. The net fee income was down by 1.9%.

On the next page is the breakdown of net fee income. In the first quarter, E.SUN reported TWD 5.2 billion in net profits, includes a wealth management 43.3%, credit card 28.3%, brokerage and others accounts for 16.4%. Despite the headwind in the first quarter in financial markets, E.SUN still maintained a relatively stable growth in its fee income business. The credit card net fee income was up by 1.3%. Wealth Management was down by 10%. Corporate Banking was up by 13 points -- sorry, 36% and brokerage was generally flat. For the second half, we still maintain a positive outlook for the fee income business, and we are still faithful that the fee income will be a positive growth for the whole year.

And next page, I would like to use 4 graphs to illustrate our market position in credit card. The 2 most important indicators, the active card E.SUN has 4.5 million credit cards. Market share was 13.4%. On card consumption, it was TWD 108 million. The market share was 13.8%. And we are also very positive about the credit card performance in coming months as the international traveling is slowly going to reopen. So we are quite optimistic that the credit card consumption will be performing better in the coming months.

On the next page is deposit and loan structure. Total deposits, the balance was TWD 2.7 trillion. It was a 11.4% year-on-year growth, of which the foreign currency deposit grew by 17.2%. In total loans, the balance was TWD 1.8 trillion. It was a year on -- 13% year-on-year growth, of which SME loans grew by 12.2% and foreign currency loan grew by 20.8%.

On next page is the loan-to-deposit ratio. As we just mentioned, the foreign currency loan growth was quite strong in the first quarter. And that also result in an uptick in loan-to-deposit ratio for foreign currency loans. In the first quarter, the FX LDR went up to 33.9%. The overall LDR went up to 68%.

On next page is the loan portfolio breakdown. The loan balance of E.SUN was TWD 1.8 trillion. And it was quite evenly distributed into consumer and corporate. The SME banking accounts for 26.7% of the loan portfolio. Large corporate was 21.8%. Mortgage was 25.2%. Secure personal loan was 18.1%. As you can see on the right-hand side, the loan growth was quite strong across every sector of E.SUN's loan business.

Next page is the performance of NIM and spread in the first quarter. The NIM was up by 2 basis points. The spread was up by 4 basis points, and the upward trend was mainly coming from the increase of foreign currency loans and our -- and the very well-contained funding cost. The funding cost was well maintained at 29 basis points in the first quarter.

Next page is the asset quality. The NPL ratio was 0.15%. The coverage ratio was 811%. And if we look at the NPL ratio by product category in the next page, the corporate NPL ratio was 17 basis points. The mortgage NPL was only 5 basis points.

Continue on next page is a graph that would tell you that the asset quality has always been the strength of E.SUN, and we will continue to manage our asset quality in a very prudent manner.

Next page is the cost-to-income ratio. For the first quarter, the cost was very well controlled. However, the revenue was slightly weaker in the first quarter for the bank, so the cost/income ratio was 59.9%.

Next page is the capital adequacy ratio. E.SUN is still -- is very well capitalized. The BIS ratio for the bank was 13.97%. Tier 1 ratio was 11.74%.

For the following 4 pages are our achievements in ESG, and we would like to take a few minutes to tell you more about E.SUN's achievement and our results in ESG. And I would like to hand it over to Mr. [ Tim Huang ]. He will cover the ESG section.

[Unknown Executive]

Yes. ESG is a leading -- E.SUN is a leading company in Taiwan in terms of sustainability. Moreover, from Taiwan to Asia, we keep improving and take lead to follow sustainability standards. For example, E.SUN has been the first financial institution to be listed in DJSI since 2014. After a few years, there is more than 10 Taiwan financial companies listed in DJSI in 2021. Furthermore, E.SUN became the top 3 banks to receive the confirmation from SBTi among global banks. Moving forward, we will continue to follow the highest standard and make E.SUN more competitive.

Next page on facing climate change. We always consider we can do more from a bank to an influencer, from a planner to a doer. Since E.SUN set a target of becoming a net 0 bank by 2050, we conducted many internal climate management, including by 2035, we will phase out all the coal-related financing and investment. Second, adjust our portfolio emission, turn great assets, like high carbon emission loans, into green assets, like renewable energy project finance.

Finally, we think only if our customers towards low carbon over [ net 0 ] transition, then E.SUN can reach our net 0 goal. So E.SUN provides ESG consulting services and carbon footprint calculator. We try to encourage and engage more companies to start their role to [ climate ] transition.

Next page. Sustainability is not only our vision, but also our important strategy. We integrated ESG factors into every business. Please see on the left-hand side, on lending business, E.SUN has ESG funding loans, ESG-linked loans and green loans. The total balance of ESG-related loans account for 36% of total corporate lending. Our investment business, E.SUN is the biggest sustainable [ bond issuer ] among financial institutions in recent years. Finally, we are also the first and the biggest carbon neutral credit cards issuer in Taiwan. Through providing carbon solutions, we aim to be the best ESG partner of our customers.

Please turn to next page. In terms of social impact, E.SUN believes long-term commitment and incidents can have enormous impact. For instance, we start to help elementary school to build first E.SUN library since 2007. After 15 years, now we already built 168 libraries in elementary schools in remote areas. There are more than 100,000 users to benefit from E.SUN library. This is our long-term philosophy. In the future, we will keep having positive social impact and invite more customers and stakeholders to create a bright future. Thank you.

[Chiwei Hsiao, executive]

Now we will proceed to the questions. [Operator Instructions]

[Chiwei Hsiao, executive]

We have our first question coming in. The first question is, can you please provide breakout NIM trend Q-o-Q between NT dollar NIM and for FX NIM. Also the guidance for NT dollar FX and overall NIM for this year and next year?

[Magi Chen, executive]

According to our sensitivity analysis, for each bank hike of 25 bps, the NIM should be increased 0.7 basis to 0.8 basis points over the year. And each of -- each 25 bps increased by the Central Bank should lead to a 6 basis point increase in the NIM over the year. And -- okay, now according to the market expectations, with the first [indiscernible] interest rate, a total of 2.5% over 10 quarters this year and the [indiscernible] interest rate, a total of 0.75% over 3 quarters this year. Reversing the impact of this hike, the NIM should increase 15 basis points by the end of this year, and the NIM should increase an additional 10 basis points in 2023. That's the first question.

[Chiwei Hsiao, executive]

Okay. The second question is about cost growth and cost-to-income ratio for this year. The cost growth for the first quarter was controlled very well. It was not more than 1% growth. And for the rest of the year, I think the cost growth will still be very well managed. We guide -- the guidance that we give is a low single digit of operating cost for the year, and mainly the investment will be made in digitalization. And as you can see, E.SUN has been investing in AI and automation of processes. So as you can see, it has already started to feed back to E.SUN's performance and start to have some implication on our cost. And the cost-to-income ratio still maintained as our original guidance, 53% to 54%.

[Magi Chen, executive]

Yes. I think -- yes, our IT-related cost increase a lot for the first quarter this year [indiscernible] can give you because we increased a lot of the IT tenants. And now the total IT people in E.SUN is accounting for 12.5%. Let me -- we have over 1000 of our IT engineers. And that's the first part. And second, if we [indiscernible] the accounts IT related includes salary and included...

[Chiwei Hsiao, executive]

Depreciation.

[Magi Chen, executive]

Yes. Total is accounting for around 15% of our expense and is accounting for around 8.5% of our revenues. Yes. So this is the main reason for the -- of course, our income [indiscernible] cost income ratio increase a lot. But I think we will continue to improve that.

[Chiwei Hsiao, executive]

Yes. The third question is about the performance of other income. Please explain the performance of other income in the first quarter, including April.

[Magi Chen, executive]

I think the very important part is from last year. Actually, as we move some of our [ structural ] investment through -- from FVPL to the [ OCI ] something like that. So the amount of the fixed income are shrinking a little bit. And for no matter in the first quarter or in April, mostly it's because the interest rate increased a lot, so it makes the mark-to-market loss in the fixed income. And also our equity trading also have some loss in this part and the derivative. But the most important is the FX and derivative from customer size, actually increased steady. Yes. So that's the answer.

[Chiwei Hsiao, executive]

Okay. The next question is about capital. What is the minimum regulatory CET1 and Tier 1 ratio requirement. Compared to peers, E.SUN's Tier 1 ratio seems low. If E.SUN becomes [indiscernible] and if the loan growth accelerates, it might -- E.SUN might need to have a capital increase in the future.

[Magi Chen, executive]

Okay. And regulatory minimum CET1 is 7%, and the Tier 1 is 10.5% Tier 1 -- it's 8.5%, yes. So this resolution is the regulatory requirement. Compared to others, yes, because I think the different holding actually has different business strategy, yes. And because before we put a lot in the SME and SME has no rating. So this is probably one of the reasons, yes. And we'll continue to increase our profit, and we still hope with our -- we can use our profit to maintain to boost our loan growth. And if E.SUN become -- okay, actually, E.SUN is well prepared for [indiscernible] internal calculation, something like that. So as our -- there might be an increase our capital CET or something like that. Every ratio is around 3% to 4%, something like that. So I think if you combine my answer for the first part and the second part, I think we can deal with the [Indiscernible], something like that, yes.

[Chiwei Hsiao, executive]

Okay. The next question is about our investment strategy. Are there any hedging in place to reduce the impact of rising rates on investment portfolio?

[Magi Chen, executive]

I think we already have the -- not huge, okay? We already have the hedging for the interest rate -- the interest rate hedging already did, yes. And yes, I think we still have to wait and see a very important part if everybody thinks the interest rate will go up a lot. So we have hedged some position for our portfolio, yes. But not fully hedged, yes.

[Chiwei Hsiao, executive]

Investors, it seems like we have answered all the questions for us. So -- okay, we have a new question, and it is about the outlook for security business and venture capital business this year and next year.

For the security business, the vast majority of our revenue for the security house is from the brokerage of stock trade, and it is highly related to the trading volume of Taiwan stock market. And the volume has dropped a lot by...

[Magi Chen, executive]

Dropped a lot, so we're still pretty okay for this year.

[Chiwei Hsiao, executive]

Yes. But this year, I think our performance is still okay for VC...

[Magi Chen, executive]

Venture capital?

[Chiwei Hsiao, executive]

Venture capital.

[Magi Chen, executive]

The venture capital are closed up to this year because the equity -- all our venture capital, they put everything even the [ OTC ] still into the fair value the mark-to-market, most of them are put in the mark-to-market. And in this recent -- I believe, this recent year, our venture capital performance is probably the #1 or #2 among the holding, those who have the venture capital. So their performance is relatively good. Of course, this year, compared to last year, they still suffered a little bit just due to the [ market ] is not so good.

[Chiwei Hsiao, executive]

Yes. The next question is about the wealth management fee income. Do we expect the wealth management fee income growth to accelerate in the rest of the year?

And of course, in the first quarter, there were a lot of noises in the financial market, including the rate hike and also the geographic -- sorry, the geopolitical turbulence. So that caused some -- the confidence of the customers has been impacted in the first quarter. So the wealth management fee income was not performing quite well in the first quarter. However, our outlook for wealth management is still quite stable. And if you look at the AUM and a number of customers for E.SUN, we still have a double-digit growth, especially for the customers of high AUM for the customers with AUM of more than TWD 100 million, both the AUM and the number of customers grew by 20%. So the VIP customer is still the main area that E.SUN wants to penetrate. And we believe that the wealthy and the affluent customers will continue to contribute to the wealth management fee for E.SUN.

Okay. Thank you, investors, for your participation, and we have finished all your questions. We look forward to speak to you soon. Thank you. Bye-bye.