E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2019-Q2

[Cai Yulin Tsai, executive]

Dear investors, welcome attending E.SUN Financial Holding 2019 Second Quarter Webcast Conference. Today's host will be myself. I'm Matt from Investor Relations. Also, we are pleased to invite President and CEO of E.SUN Financial Holding, Mr. Joseph Huang, to join us. Also in the room, we have IR team with Mr. Chiwei Hsiao and Mr. [ Harris Lin ]. Please note that this call is being recorded. And before I enter into the presentation, I would like to invite CEO Joseph to give us an opening note.

[N. Huang, executive]

Dear investors, thank you for joining the web conference of second quarter 2019. In the first half 2019, E.SUN's business momentum was healthy as we continued to deliver double-digit growth in profit. Preliminary net profit rose 10.5% to TWD 10.2 billion, set a record high profitability of the franchise. Return on equity, 12.6%; return on assets, 0.87%; and EPS, TWD 0.94 per share. Even in the first 7 months of 2019, we recorded 10.6% net profit growth to TWD 12 billion.

Asset quality was benign with nonperforming loan ratio remaining low at 0.18%, better than market average 0.24%. In this quarter, the highlight was fee income. E.SUN recorded the highest quarterly and first half net fee income ever. This great performance is driven by both credit card and wealth management compared with a year ago. Net increase of card consumption amount is the highest in Taiwan with 19.1% growth while fee income rose 24.7%. Card consumption's market share also rose to 12.8%.

Furthermore, wealth management fee rose 21.8% from previous quarter due to the precise consumer segmentation and overseas platform and cross-border site. Both foreign currency deposit and loan increased 15.3% and 20.7% year-over-year, respectively. We saw a great opportunity and capital repatriation from abroad. So we have established dedicated teams to offer clients a total solution. It will be one of the growth driver for the second half.

Finally, we are very happy to inform you that S&P Global Ratings upgraded E.SUN Bank's long-term issuer rating to A-. This upgrade reflects our strength to consistently increase market share while maintaining solid profitability and good asset quality. It has been the sixth straight year for E.SUN to receive rating or outlook update. Currently, E.SUN Bank has A- in S&P and A2 in Moody's rating. More information will be disclosed in the presentation. Thank you.

[Cai Yulin Tsai, executive]

Thanks, CEO, for the opening notes. And just as CEO Joseph mentioned about the achievement and milestone in the first half, then I will start with the presentation to show some highlights of what we have achieved and how we achieved that.

Briefly look at Slide 1 for the Financial Holdings summary. Preliminary total assets of Financial Holdings reached TWD 2.38 trillion in the first half 2019, which was 4.3% growth year-to-date. Key financial figures maintained a healthy level with book value per share TWD 15.18; double leverage ratio, 104.02%; and CAR ratio of Financial Holding was 125.22%.

In terms of distribution channels, both domestic and overseas channels remain unchanged than the previous quarter. As we have a good start of the year, we still continue to keep this momentum sustained into the second quarter.

So please turn to Slide 2 on the business and financial review. All along the way, E.SUN still keeps profitability for eighth consecutive year that we've set a record high profit of the franchise. So in the first half, total net profit was TWD 10.2 billion, with a 10.5-year -- 10.5% growth year-over-year; earnings per share, TWD 0.94; return on equity, 12.6%; and return on asset, 0.87%. And the net profit is contributed by the main subsidiary E.SUN Bank, which was TWD 10.1 billion, with 14.4% year-over-year growth.

As -- just as CEO Joseph mentioned, the spotlight of this quarter is coming from the fee income. So total net fee income, [ measured ] in the quarterly or the first half fee income, reached the record high. And the main driver are coming from wealth management and credit card business.

In terms of credit card, we can utilize the digital service to co-create the payment scenarios and build a payment ecosystem. So the net increase amount of the card consumption is the highest in Taiwan with 19.1% year-over-year growth and the fee income even rose 24.7%.

Regarding loan business, we still keep balanced between corporate and retail loan, which are mainly driven by foreign currency and mortgage loan growth. Apart from gaining market share in every main business, we still manage the risk well as the asset quality keeps benign with NPL ratio at 0.18% and coverage ratio at 662.4%. So I think E.SUN's good performance has been recognized by the international institutions, for example, like Joseph mentioned, the credit rating companies. And also, we are still a member of the DJSI for the 5 years in a row.

So please move on to Slide 3. We show the last 5 years' results regarding net profit, earnings per share, return on equity and return on asset. All the figures show a stable upward growth trend since 2016, and this has all the figures remain at historical high.

On Page -- on Slide 4, for the profit contribution by legal entities. E.SUN is still a bank-centered financial holding. As you can see on the left, E.SUN Bank delivered 96.7% of the group profits.

Then, please turn to Slide 5 on the net profit movements. On the left, net revenue rose 7% to a new high of TWD 26.7 billion in the first half. As well, we still keep the credit cost at a very low level so the profit net provision is quite low. And as a result, total net profit rose 10.5% year-over-year to TWD 10.2 billion.

The next slide, Slide 6, on the revenue breakdown. E.SUN still keeps the diversified revenue stream, including net interest income, 36.5%; net fee income, 32.4%; and fixed income, FX and others, 31.1%. And please take a look at note 1. Among the fixed income, FX and others, 52.8% is coming from the stable interest income from the fixed income investments. That is because the lowest interest income is classified as fair value through profit and loss, and according to IFRS 9, we have to book under the other income.

And if we added those interest income to the net interest income, you can see on the right, the total net interest income will rose -- will rise 4.5% year-over-year. And on the other driver of the revenue is coming from the net fee income. It was 3.1% growth year-over-year in the first half, and we still are targeting 8% to 10% growth for the 4-year target.

Please turn to Slide 7 on the fee -- net fee income breakdown. Just remind you that E.SUN total net fee income was TWD 86.6 billion -- TWD 8.6 billion, that is the highest fee income ever in the first half in company's history. And the leading segment was wealth management, 45.3%, and followed by credit card, 35%.

On the right, year-over-year comparison. The main driver of this quarter fee income coming from credit card, which increased 24.7% year-over-year. In terms of wealth management, the growth rate of the second quarter of wealth management fee was 21.8% quarter-over-quarter and is still in line with our guidance that the full year wealth management fee growth rate will project to be higher than 2018. And in the first half, the product mix of wealth management, including mutual funds, 59%, and bancassurance, 41%.

Please turn to Slide 8 on the credit card competitive landscape. E.SUN is the only top 3 players in terms of active card and card consumption with both figures above 12% of the market share and with the [indiscernible] of growing trend year-over-year. In terms of active cards, we increased by 11.7% year-over-year and make us 3.6 million cards.

And on the card consumption, the net increase amount was TWD 33 billion year-over-year and make us 19.1% growth. And right now our market share of card consumption was 12.8%. And that is because we have the Pi credit card and UBear credit card that we launched all through the online digital platform, and we can dig more into the customer's wallet share. So we can see that per card spending per month right now reached to TWD 9,392. That is the historical high in the per card spending.

Please turn to Slide 9 on the table of deposit and loan structure. Please see the second column from the right, the year-to-date baseline. Total deposits in the first half reached TWD 1.9 trillion with 3.9% growth. And right now the foreign currency deposit accounts for 20 -- 32.5% of the total deposits.

On the loan side. In the first half, total loan balance reached TWD 1.3 trillion with 3.8% year-to-date growth and is still in line with our guidance that our full year loan growth will be projected at 8% to 10% growth. And the growth is balanced between corporate and consumer from the foreign currency loan and mortgage.

On Slide 10 for the deposit structure. Overall loan-to-deposit ratio in the first half was 70.9%. And if we separate into different currency, NT dollars LDR was 85.7% and foreign currency LDR was 39.6%.

Moving on to Slide 11 on the loan portfolio breakdown. E.SUN still keeps balanced mix between corporate and consumer loan as the leading segment in the corporate loan was SME, 25.3%, and large corporate, 24.3%. And in terms of retail side, mortgage, 21.6%; secured personal loan, 20.2%; and unsecured personal loan, 7.7%.

On the right, you can see that all the loan categories remain a stable growth year-over-year, especially in the large corporate because we book the foreign currency mainly in the large corporate loan book.

Slide 12, on the -- within -- looking at the trend of NIM and spread. This quarter, we managed the NIM and spread per very well as the total NIM was 1.36%, is the same as the last quarter. And on the spread side, we still keep our funding costs low as the funding costs dropped 1 basis point and we keep the overall spread at 1.44%.

The following 3 slides refer to the asset quality of the bank. First, on Slide 13 of the overall asset quality. NPL ratio at 0.18%, which continued to perform very well. And on Slide 14, the NPL ratio for different major product lines, you can see [ measures ] in mortgage, 0.20%, and corporate, 0.01%, or even in credit card, 0.19%. That's only a very low level compared with the previous year.

The final page on the asset quality on Slide 15. E.SUN still maintained the asset quality better than the industry average over decades. Slide 16 is showing the cost-to-income ratio. In the first half, CI ratio was 51.2% as we still invest in tech knowledge, IT and even the core banking restructure, but we still maintain the full year guidance of the CI ratio in the range of 50% to 51%.

Last page is the capital structure of E.SUN Financial Holding and E.SUN Bank. On the left, we're still well capitalized with CAR ratio at 125.22% and the bank BIS was 14.64% in the first half and Tier 1, 11.71%, and all above the regulatory requirements.

The presentation will end here. And now we are open for the Q&A section. Thank you.

[Cai Yulin Tsai, executive]

Here, we have one question about the capital repatriation opportunity. How will this reflect in E.SUN and the fee reflect the higher loan growth on the domestic side or even a loan fee and FX income?

As we've known, right now, the government has many package for the capital repatriation. And in the first stage, E.SUN has still managed very well as we have received some requests from customers and we occupy some of the market share from the loan business.

However, we think that those impacts will be reflected in the second half. And in the first half -- the first stage, we think that both the fee income will increase a little bit. But we still not managed to know about the accounting classification of how those loan or lease fee income will be classified. So we'll still close watch on this impact.

Okay. Here we have the follow-up question is that -- the reason for the drop in CET1 ratio. It is mainly because first, the growth of risk-weighted asset for the first quarter, our loans still continued to grow, so by 3.8%. And for the full year, it will be like 8% to 10%. So -- yes, so we're still growing in our risk-weighted asset.

And the second reason is the -- in the second quarter, we need to distribute the retained earnings in the form of cash dividend. So that will charge off from the -- from our equity. So that is also one of the reasons. So we expect, in the third quarter, the capital ratio will come up and recover to a high level.

Okay. There are still a series of questions about the capital level. The minimum target level for CET1 would be 10%. So right now we are still well above that level. So I think we are quite comfortable with the current capital level.

Okay. There is a question about the Fed rate hike, the rate cut and will our foreign currency NIM be affected by the rate cut. And according to our sensitivity analysis, at -- if the Fed cut the interest rate twice this year, which means 50 basis points, and it will impact the NIM by 1 basis point.

And also, as CFO also explained our rate sensitivity to LIBOR, it is about 60% to 70%, which means when LIBOR moved by 1% and our yield will move about 0.6% to 0.7% accordingly. And the CFO also gave her opinion on the outlook of Fed rate movement. He -- she thinks the Fed only -- will only cut the interest rate once, and it is mainly for a more defensive purpose to prevent the economy from falling further. And she does not think it is the start of a rate cut cycle.

Yes. And there's a question about our overseas profit contribution as a percentage of our overall profit. The profit from overseas branches and overseas subsidiary in the first half accounts for about 21% of the overall profit. Comparing to the full year of 2018, the percentage was about 15%. So our strategy is still making some progress this year in the international expansion. And we hope to continue to grow in our overseas operation.

And here is a question about our fee income growth guidance and outlook for the full year. In the first quarter, our fee income was down by about 5%, but until the first half, has turned profit -- has turned positive and grew by 3.1% year-on-year. So in the second quarter, both our credit card and wealth management performed very well, especially in wealth management. In the second quarter, the fee income was 21% more than that of in the first quarter.

And as we guided in the beginning of the year, in terms of the growth rate of wealth management fee income, we expect to see sequentially getting better quarter by quarter. So we hope in the third quarter, the wealth management fee income growth rate will turn positive in the third quarter. And for the full year, we still guided a growth rate above 5%. That is on the wealth management.

And on the credit card, until the first half, the growth rate was 24.7%. And for the full year, we're still quite optimistic about our credit card business. And for the full year, we hope we can deliver a growth rate more than 20%. And credit card and the wealth management are the most important source of our fee income.

And combining all of the business -- fee income from all of the business, we hope we can deliver a high single digit nearly or nearly 10% of fee income growth for the full year. We're quite optimistic about fee income this year.

Okay. Here's the new question about the online bank. Does the -- does E.SUN expect any competition from online banks next year? 3 licenses have been given this year. What is the area of these new banks could target, payment, retail or loan?

We do not expect to see competition next year because their preparation period might take longer, so we don't expect to see much competition next year. And also, for the new online banks, maybe for the first 1 or 2 years, they will make a very heavy investment and set up their digitalization or their business operation.

So yes, so in short, we don't expect to see very intense competition next year. However, we still should be very well prepared for the competition from the 3 online banks. However, we see more upside from the -- from the open of online bank because we think the regulator will not give exclusive business right to these 3 online banks only.

If any new kind of business is open to the online bank, then we think the regulator will also open the new kind of digital banking business to all of the banks. They will treat all of the banks equal. So that will open up more opportunities for not only the online banks but for the current banks as well, especially for the banks who are investing in digitalization and fintech.

And right now E.SUN, I think we're still temporarily #1 in a lot of [ effect ] in digitalization, including our digital payment or digital credit card application or digital foreign currency exchange and digital online lending. We are currently #1 in market share. And also, there is also -- an advantage of E.SUN is that we have 139 branches across the country.

So as opposed to those online banks, they do not have any physical branches. So the integration of online to offline is actually one of the advantage, and it is something that the online banks are very -- cannot compete and cannot rival. Thank you.

There is another question about the capital raising. Is there any chance E.SUN will raise the capital in this year or next year?

The answer is no. We are now -- the capital level is -- we are now quite comfortable with the capital level that we're in right now. So we are not eager to make capital injection. And also, we are not considering any M&A at this stage. So we do not need more capital right now. Thank you.

Okay. Here's a new question about the provision level, why the provision is so low and it's even lower than what we had last year and the full year outlook of provision.

And indeed, the -- for the first half year, our net provision was only lower than TWD 1 billion. And last year, actually, our provision, our credit cost was already quite low. And this year, the asset quality and our risk management is even better than what we did last year. And it is also partly because there was a delinquent case in the previous year. It has been recovered this year.

So -- and it is a case from the corporate side. So just because the recovery and -- sorry, and caused the provision to come down this year. So for the full year, we expect the actual provision can be even lower than we guided at the beginning of the year. At the beginning of the year, we expect the net provision to be TWD 3 billion, and we're -- and as of now our outlook for the full year provision -- net provision will likely to be lower than TWD 3 billion.

Yes. And there's a question about the stock dividend since the capital level is quite sufficient. And we do not have M&A plan on hand, then why do we still issue stock dividend?

Because our strategy is to maintain our growth, sustainable growth and E.SUN is still growing at a pace faster than our peers. So every year, our loan growth has been at a range of 8%, 9%, high single-digit year-over-year and up -- and always, our growth rate is 2x higher than the market average.

And in Taiwan, just because the regulators set tighter regulation on the risk-weighted charges. So for loan, we are suffering from a higher risk-weighted charge than a lot of country. So we need to replenish our capital by stock dividend to retain some of the profit as retained earnings and all -- or as capital to sustain our growth for the longer period of time.

Thank you for your participation in today's online conference, and we will have a broadcast replay within an hour time. Please visit E.SUN Financial Holding's website for more information. And if you need any further questions, please feel free to contact IR team, including Chiwei, Harris and me. We will reply you shortly and wish you a wonderful evening. Bye-bye.