E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2018-Q2

[Unknown Executive]

Dear investors, welcome to the Second Quarter Web Conference of E.SUN Financial Holding. The time is 8 o'clock Taipei time right now, so we will start. The conference today will be moderated by me. My name is [ Chei Wei ], and also my team member, Mr. Matt Tsai. First of all, I would like to invite CEO and President of E.SUN Financial Holding, Mr. Joseph Huang, to give us a brief opening note.

[N. Huang, executive]

Dear investors. Thank you for joining the web conference for second quarter 2018. This year, we, once again, delivered double-digit growth both in profit and in revenue. Net profit grew by 23% to TWD 9.2 billion, marking another record high. Return on equity was 12.24% and EPS was TWD 0.85. Fee income remained the main driver with a 10.4% growth, moreover, the net increase amount of fee income is the highest in the market. We saw much progress has been made in our cross-border business and digital innovation. I would like to take the opportunity to share what we have done in the last quarter. On cross-border, our 26th overseas branch just opened in Brisbane, Australia in July. Brisbane is very vigorous city of commerce and also has the largest Taiwanese community in Australia. I believe, the branch will work cohesively with our Sydney branch and make our service network in Asia-Pacific even stronger. On the other hand, we also added 1 more domestic branch, which is located on the 33rd floor of the new landmark in Taipei, the Nanshan Plaza. The new branch will be featuring our private banking and cross-border corporate banking service. SMEs and their owners have been very important drivers for E.SUN in lending and in wealth management. We will leverage our expertise in financial [ training ] and wealth management to provide customized products and to assist our high-end clients making their family succession plan.

On digital innovation, E.SUN is dedicated to creating a convenient digital life for our customers through innovative products, services and marketing. This month, we partnered with e-commerce giant in Taiwan, PChome to release the innovative Pi credit card. The credit card can be linked to Pi e-wallet very easily and will bring user so much convenience. Following Pi credit card, we will also plan to release a series of innovative credit cards to gain more market share in the fast-growing e-payment. More information will be discussed in the presentation. Thank you.

[Unknown Executive]

Thank you, Joseph, and now we will get into the presentation itself. So first let's turn to Page 1. It's financial holding company's financial summary of the first half. Till June, the financial holding company assets is TWD 2.16 trillion, the bank asset size is TWD 2.15 trillion, both are 4.4% higher than the end of the previous year. On book value per share, it's TWD 15.01 per share. And also on double leverage ratio is 104% and the capital adequacy ratio of the financial holding company is 136%.

On our domestic branch count, we added a new branch this year, and just as Joseph mentioned earlier, it's a branch located in -- on the 33rd floor of Nanshan Plaza, and it will be featuring private banking service and also cross-border corporate banking service. As we believe, the corporate banking clients, the business owners, will be a very important source of our private banking clients, so we put them together and hope they will work together, because the teamwork has been one of the most important element of E.SUN.

And also on our overseas channels, we added one more branch in Brisbane. Following in the fourth quarter, we expect to open a new branch under our China subsidiary in Guangzhou, and we plan to apply for a license also under China subsidiary in Shanghai. However, we don't have any intention to set up new branch in any new country that we have not entered.

Please turn to next page, it's the business and financial review of the second quarter. The net profit for the first half was TWD 9.2 billion, which marks a record high for E.SUN. It's a 23% growth and the net revenue growth was 12.4%. EPS was TWD 0.85 per share, ROE was 12.24%, while ROA was 0.87%, all the 3 indicators are very well performed. On our business operation, the 2 main revenue streams, net interest income and net fee income, increased respectively by 2.8% and 10.4%. The wealth management and credit card still act as the main driver of our fee income growth, especially in our wealth management, we have the 19.3% growth year-on-year.

The loan growth, we specifically focus on the SME growth and the foreign currency loan growth, as our cross-border platform has expanded eventually. And we can also see that in the foreign currency deposit, the growth rate is 6.2% year-to-date and the foreign currency loan is -- the growth rate is 9.6% year-to-date. At the same time, we still maintain our asset quality at a very benign level, the NPL ratio is 0.24%.

On the honors and recognitions, this time, we are very happy to announce that we are recognized by The Banker as the Technology Project of the Year, in the risk management category. We widely apply technology into not only fintech, new products, marketing, but also in regtech -- in regulation tech that -- or the so-called regtech. And the detection and the monitoring of fraudulent account is a very important KYC process of the bank. The process used to be performed manually however, we adopt machine learning technique to do the job and to let technology to make our process more efficient and to -- also to improve the accuracy.

On the other -- on other awards and recognition for the recent quarter, we were also recognized by Asiamoney, as the best bank and best digital bank. Also we really appreciate for your support in the Institutional Investor's poll, and, we, once again, were voted as the most honored company in Taiwan, best CEO and the best CFO.

On sustainability and ESG, this year, we -- for the first time, we won the highest honor presented by Enterprise Asia, as responsible business leadership. Also we maintain our listing in DJSI and also MSCI ESG. Our goal is to be the best bank and the most respected company in Taiwan, so we will continue our efforts in ESG and sustainability.

Please turn to the next page for the financial performance of E.SUN for the past 5 years. On EPS, it's TWD 0.85 per share in the first half, however, I would like to bring this to your attention that the TWD 0.85 is the retrospective adjustment for the distribution of stock dividend. Before the adjustment, the EPS should have been TWD 0.91.

Please turn to the next page, it's the net income of the financial holding company and the subsidiary. The main subsidiary, E.SUN Bank still contribute to nearly 95% of the net income to the financial holding company, however, the 2 smaller subsidiaries also performed very well this year, so the share of their profit contribution expanded to nearly 5% jointly this year. The bank -- by the way, the net income growth of the bank by itself is 15.8%.

Please turn to the next page for the net profit breakdown comparison between this year and the previous year. On the net revenue, the growth rate was 12.4%. On the operating expense, growth rate was 3.1%, this is a quite low number. And I think this -- that represents that the implementation of our cost control measures is quite effective. However, I still would like to remind you that we still maintain our full year guidance for the OpEx growth to be high single-digit, because we still keep investing in fintech and also rebuilding of our core banking system. However, we will maintain -- follow our principle to have the revenue growth higher than the expense growth and also the net profit growth to be higher than the net revenue growth. That's what we demonstrated in this year.

The next page would be the revenue breakdown of financial holding company. In the first half, the revenue was TWD 25 billion, which contains net interest income 40.7%, net fee income 33.7% and fixed income, foreign exchange and others 12 -- 25.6%. On a year-on-year comparison, the NII growth rate was 2.8%, net fee income was 10.4% and fixed income foreign currency was 35.7%.

On the next page is the breakdown of net fee income. The total net fee income for the first half was TWD 8.4 billion and the net increase amount of this year, E.SUN is still ranked #1 among all the banks in Taiwan. In the breakdown, it includes wealth management, which accounts for 51.2% followed by credit card 29% and consumer banking, corporate banking, brokerage and others. As you noticed that the wealth management growth rate was 19.3% while credit card growth rate was only 5.2%, however, we think the credit card performance will be better than the first half and in fact, till July, the credit card fee income growth rate has grown to 8% versus the 5.2% till June.

Please turn to the next page. We want to use 4 charts to illustrate our competitive landscape in credit card market in Taiwan. First, let's look at the 2 most important indicators, active cards and card consumption. In both indicators, E.SUN is ranked top 3 among all the banks in Taiwan. In active card, we have 3.26 million cards and the market share is 11.4%. On card consumption, our market share is 11.9%. Joseph just pointed out earlier, we released Pi credit card with PChome, and following the second half of the year, we will still leverage our expertise in consumer segmentation and we will work with a few different occupational groups that includes architect, dentists and to release a few more credit cards. And we believe, that will help the credit card consumption to grow even further in the second half.

Please turn to the next page for the deposit and loan structure. The total deposit for the first half was TWD 1.7 trillion, the year-to-date growth rate was 2.2%. Especially in foreign currency deposits, it's year-to-date 6.2% growth, and year-on-year, it's 15.6% growth. On loans, the total loan is TWD 1.25 trillion, the year-to-date growth was 4.2%. Also -- I also want you to notice that in foreign currency loan, the year-to-date growth rate was 9.6%, however, the year-on-year growth rate was 12.8%.

Please turn to next page to look at the deposit structure of E.SUN. On the left-hand side, the loan-to-deposit ratio, the overall LDR is 72.1% and the NT dollar LDR was 87.5%. On the right-hand side is the deposit structure, our CASA still remains high at 63.4%. And the foreign currency deposit growth much faster than the overall deposit, so the foreign currency deposit now accounts for 31.4% of the total deposit.

The next page is the loan portfolio breakdown. The loan balance till June is TWD 1.26 trillion. The largest portion still comes from SME, which accounts for 27% followed by large corporates, secured personal loans, mortgage and unsecured personal loans. If you look at the right-hand side, both large corporate and SME grow at 8.6% on a year-on-year basis.

Please turn to the next page to look at the NIM and spread. In this quarter, our NIM expanded a little bit by 1 basis point, however, on the interest spread, due to the high rising funding costs, the interest spread narrowed by 3 basis points. However, I would like to remind you, once again, that our NT dollar spread was pretty much flat, however, the foreign currency spread went up. And the reason why the spread narrowed is because the calculation, and we -- as we have the low LDR in foreign currency. So when we calculate the blended spread, it will cause the factor to narrow down the spread.

On the next page is the asset quality, the overall NPL ratio is 0.24%. The coverage ratio is 495%. If we look at the NPL by different products, the mortgage NPL ratio came down by 3 basis points, and it's because we noticed that since April, the newly formed mortgage NPL has come down. So actually, the asset quality still remains very stable.

On the next page is the asset quality over the time horizon of 3 years. And we still maintain a better than the market NPL ratio, so asset quality still remains the strength of E.SUN Bank.

Please turn to the next page for the cost income ratio. Till June, the CI ratio is 49.9%, as we have a higher growth in revenue than the growth in cost, so the CI ratio came down. However, as I just mentioned earlier, we still guided that the cost -- the operational cost growth to be high single-digit, so we expect the CI ratio to remain at somewhere around 51% for the following year.

On the next page is the capital adequacy ratio, the financial holding company CAR ratio is 136% and the bank BIS ratio for the Tier 1 ratio is 11.97%, and the overall BIS ratio is 15.24%. And that is it for the presentation today. Now, we are open for the Q&A.

[Unknown Executive]

So we have the first question coming in is about our cost guidance and growth. And the investor is wondering, in which area the E.SUN is still investing, in technology or digital, et cetera. And if cost grows low then where does the cost saving come from?

[Unknown Executive]

Till 2016, we just ended our investment in the first stage of fintech, that means we have launched a series of digital payment. And starting in 2016, we launched another project of technology that is to rebuild our core banking system, and this is a project that will last 3 to 5 years. So for the -- so till 2020, we will still keep investing in core banking system and also other initiatives in digital banking. So for the recent year, our CI ratio will be somewhere around 51%, but the bottom line is as long as we can maintain our revenue growth higher than the cost growth then we will have the ability to invest and without worrying too much about the CI ratio. And also the question about the cost savings come from, so for example, on our fintech product, the online lending, it has decreased our cost for unsecured personal by more than 50%, and also the award that we won this -- earlier this year by The Banker, the Technology Project of the Year. So even the KYC process that was -- that used to be performed by man, now can be replaced by IT. So that would be another factor of cost saving, so both in fintech, regulation tech and the marketing tech, and also to streamline the process to cut down the costs.

[Unknown Executive]

Okay. We have the second question coming in, it's a question about margin and net interest income growth. The investor is wondering why the net -- the NII growth is low and also when the margin expansion will start to happen.

[Unknown Executive]

So you can turn to Page 6 on the revenue breakdown. And our net interest income growth is 2.8% year-on-year basis. However, if you notice the note that we put under the pie chart, in the slice of the pie, fixed income, foreign exchange and other accounted for 25.6%. In this part, a 52.5% comes from the interest income of fixed income investment. Just because these financial assets are classified as FVPL, fair value through profit and loss, so according to accounting rules, the net -- the interest income associated with these investments will go into these piece of the pie. So if we carve that piece out from fixed income and others and combine it into net interest income and the NII would have been 54.2%. And the growth rate, on a year-on-year basis, will be higher than 2.8%. So it's mainly a -- the result of accounting rule and also when the margin expansion will start to happen. And actually -- we think that Central Bank of Taiwan will less likely to increase the interest rate very soon. In our forecast, at earliest, maybe it will start to hike the rate of NT dollar in December.

[Unknown Executive]

We have the third question, it's about the credit cards guidance for this year.

[Unknown Executive]

We did not change our guidance for this year, the credit cards will be 25 basis points as opposed to 28 basis points in the previous year. So there is definitely some improvement in credit cards. And it's mainly -- and it's mainly because last year our subsidiary in Cambodia was suffering from higher provision due to the regulation -- due to the local regulation actually. And also our China subsidiary was required to make higher provision to 2.5% according to also local regulation. And this year, because the asset quality of our China subsidiary, we still maintain 0 NPL. So we are allowed to reverse the -- we are allowed to lower the requirement for provision from 2.5% to 1.5%. However, we will not reverse the provision to profit, but we -- that allows us to reserve less provision this year into China.

[Unknown Executive]

Okay. We have the following question about the profit contribution of our overseas contribution.

[Unknown Executive]

Till the second -- well, till the first half, our profit contributions from overseas branches and subsidiary was 15% of overall profit. So we are very positive about the result and we hope, very soon, the -- our overseas contribution will come to 20%. And this year, so far, we have 15%, and we hope to see it will increase eventually and get to 20%.

[Unknown Executive]

Okay. We have next question about the tax expense. The tax expense for this year is TWD 1.7 billion compared to what it was -- in the same period, it was a TWD 860 million, it was a nearly TWD 900 million increase and the reason is why?

[Unknown Executive]

I think there are mainly 3 reasons that lead to the increase of our income tax: first is from our overseas subsidiary. Last year, our 2 subsidiaries in Cambodia and China were losing money, so we get to enjoy the tax benefit from their loss, and this year, they have turned profit, so we do not have the luxury of the tax benefit. And the second reason is the higher corporate income tax rate from 17% to 20%. And I think that that factor applied to all the companies in Taiwan. So there is an additional amount in income tax due to the reason. And the third reason is our increase in profit, and naturally, it will lead to higher income tax. Also there is a side reason is that the -- our profit combination between OBU and DBU. The profit from DBU, the percentage is higher than what it was in the previous year. So as the OBU is tax-free and DBU, we have to pay tax. So there is another reason why the tax expense is higher this year.

[Unknown Executive]

Okay. We have the next question about our guidance in fee income.

[Unknown Executive]

So till June, our fee income growth was 10%, and for the full year we still maintain our guidance in fee income growth to be double-digit. In wealth management, the first half was pretty impressive with a 19% growth, however, getting into the second half, we see more challenge ahead, because of the higher base and the volatility in the equity market. So -- Even though there are -- there is a lot of challenge, but we will try hard to deliver a double-digit growth in wealth management. In credit card, the fee income growth was only 5.2%, which is not very satisfactory, but as I just mentioned earlier, we have a series of campaigns and new products and we are very confident our -- the credit card performance will be better in the second half than in the first half. So hopefully, our credit card fee income will also reach the goal to hit double-digit growth. So for the full year, we still maintain our double-digit guidance for fee income.

[Unknown Executive]

Okay. It seems that we have answered all of the questions. So thank you for your participation in the online web conference. And there will be a webcast replay within an hour. Please visit our company's website for more information.

Thank you for your participation, and we will talk to you next time. Thank you. Bye-bye.