E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2020-Q2

[Harris Lin, executive]

Ladies and gentlemen, welcome to E.SUN Financial Holding Company's 2020 Second Quarter Investor Conference. This conference will be moderated by me. My name is Harris from Investor Relations. IR team members, Chiwei's team and Alex are also here. Besides, we are glad to have our President, Ms. Magi Chen to join us.

Today's event is composed of 2 parts. Firstly, I will give a presentation on our operation in the second quarter of 2020. Second part is Q&A section where we will answer your questions.

Before entering to the presentation, I would like to invite President to give us an opening speech.

[Magi Chen;President, executive]

Dear investors, thank you for joining our investor conference. For the first half of 2020, E.SUN Holding net revenue rose 8.3%, while net profit fell 5.8%. Net revenue in the first half of the year and net profit in the second quarter, each reached record high. The net profit of subsidiaries, E.SUN Securities and E.SUN Venture Capital both set a record high. Banking business had maintained steady growth, thanks to the well-controlled COVID-19 situation in Taiwan, E.SUN's opportunities provided by supply chain and capital migration leading to the deposit and loan growth.

Meanwhile, E.SUN has managed its funding cost well in the face of the interest rate cuts. Asset quality stayed benign with NPL ratio low, net fee income had enjoyed robust growth driven mainly by wealth management and credit card business.

Wealth management net fee income rose 21% and set a record high for the first half of the year. In terms of the credit cards, the whole market has declined, while E.SUN has maintained positive growth through a diverse payment scenario.

Net increase of the cards-in-force and accumulated cost consumption were the highest among all banks in the first half.

In 2020, the low interest rate environment has highlighted E.SUN's ability to manage the funding cost and showcase our advantage of the diverse growth drivers. Cross-border flow business will be the driver given current circumstances. While risk management is the key to coping with the uncertainty, we will keep the business growth and asset quality in balance.

Finally, I would like to share some good news with you. E.SUN has been awarded the title of the Best Performing Bank in Taiwan by The Banker. The award recognized our performance in business development and risk management. We will keep moving forward to create more value for our shareholders. Thank you.

[Harris Lin, executive]

Thank you, Ms. Chen. Now let's move on to the presentation. Starting with Slide 1 financial holding summary. For the first half of 2020, total assets of financial holding company reached TWD 2.7 trillion, growing by 7.9% year-over-year to date.

Key financial figures remain healthy. Book value per share, TWD 15.9 (sic) [ TWD 14.9 ], double leverage ratio of 103.38% and financial holding company's capital adequacy ratio, 122.69%.

As for operating channel, E.SUN Securities branches decreased to 17 (sic) [ 16 ] because 1 security branch was merged into head office. And other operating channels were unchanged.

Now let's move on to Slide 2, business and financial review. For the first half, E.SUN Financial Holdings preliminary net revenue was TWD 28.9 billion, rising by 8.3% year-over-year. On the bottom line, net profit decreased by 5.8% year-over-year. EPS TWD 0.83, ROA 0.75%. ROE was 11.18%, which was the second highest among all financial holding companies.

Also, ROE of the main subsidiary, E.SUN Bank was 10.63%, which ranked #3 (sic) [ #2 ] among all banks under financial holding companies.

As for business operation, I would like to highlight net fee income. For the first half, net income rose by 13.5% and reached a record high. The main driver came from credit card and wealth management. Net fee income of wealth management increased by 21% and reached a historical high. Besides, credit card outperformed in the down market as the net increase of both cards-in-force and card consumption were the highest in the market.

On the other side, net growth of loan and deposit were both top 3 with loan growing by 9.8% and foreign currency deposits rising by 23.8% year-over-year. Meanwhile, our asset quality stayed benign with NPL ratio at 0.19% and coverage ratio at 627.3%.

Next, I would like to talk about E.SUN's AI development. E.SUN is the first to adopt AI for fraudulent credit card transaction detection and bank check authentication. Moreover, Professor Roger Jang from Computer Science and Information Engineering Department of National Taiwan University was appointed as Chief Technology Officer by the Board of Directors of E.SUN Financial Holding Company. And he will lead E.SUN's AI development in the future. As E.SUN delivered excellent performance in business operation and contribution to ESG, E.SUN was awarded Best Performing Bank in Taiwan by The Banker magazine, Best in CSR world by Asiamoney magazine and Best Sustainable Bank by FinanceAsia.

Please moving on to Slide 3 for the financial performance. Key financial indicators maintain stable. Net profit was TWD 9.7 billion; EPS TWD 0.83; ROA, 0.75%; ROE, 11.18%, which was the second highest among all financial holding companies.

Please turn to Slide 4 for the net fee -- net income breakdown by legal entity. E.SUN Financial Holding Company is a bank-centric financial holding company with 92.6% of the net income coming from main subsidiary, E.SUN Bank. For the first half, E.SUN Bank delivered a stable net income, and net income of both E.SUN Security and E.SUN Venture Capital was the highest compared to the past.

Let's move on to Slide 5. The net profit breakdown. E.SUN Financial Holding Company's revenue rose by 8.3% year-over-year. OpEx rose 15.9% due to investment in IT infrastructure and fintech. On the bottom line, net profit decreased by 5.8%.

Please turn to Slide 6. Financial holding company revenue breakdown. Total net revenue in the first quarter reached TWD 28.9 billion, with 35.2% coming from net interest income, 34.0% coming from net fee income and 30.8% coming from fixed income, foreign currency and others.

In the right chart, as you can see, each income grew steadily and net fee income rose by 13.5% year-over-year and reached a new high.

Please turn to Slide 7. Net fee income breakdown. The majority of fee income came from wealth management 48.3%; and credit card, 32.7%. Wealth management fee income rose by 21% and credit card fee income increased by 6.1%.

Let's move on to Slide 8. Key indicators of credit card business. E.SUN's credit card business was top 3 in the market in terms of cards-in-force, active cards and card consumption, and the growth momentum is continuing. As of June of 2020, active card were over 4.3 million, and market share rose to 13.6%. Market share of card consumption increased to 15.7% and advanced to 2nd place in the market.

Moving on to Slide 9. The deposit and loan structure. Total deposits rose by 12.4% year-over-year, mainly driven by foreign currency deposits growing by 25.6% year-over-year. Total loan rose by 10.9% year-over-year. The driver from corporate side was SME loan rising by 11.1% and the driver from consumer side was mortgage rising by 19.3%. Net increase of mortgage balance was the highest in the market.

Please move on to Slide 10. Deposit structure. Overall LDR rose slightly to 70%; NTD LDR was 91.8%; foreign currency LDR, 32.5%.

Please turn to Slide 11. Loan portfolio breakdown. E.SUN maintained balanced loan growth on both corporate and consumer side. Regarding loan breakdown, corporate loan led by SME 25.4%, followed by large corporate, 23.7%.

On consumer side, mortgage accounted for 23.3%; followed by secured personal loans, 19.2%; unsecured personal loans, 7.6%; and credit card revolving, 0.8%. The right chart shows all the loan categories maintained stable growth.

Moving to Slide 12. NIM and spread. For the second quarter, NIM was 1.29%, and interest spread was 1.3%. As of the end of June, the funding costs dropped to 0.57% due to wealth management.

Turning to Slide 13. Asset quality. E.SUN maintained benign asset quality, has relatively low NPL at 19 basis points. Coverage ratio was found at 627.3%.

Please turn to next slide. Asset quality by product line. All product lines NPL maintained benign and stable with corporate NPL of 0.12%; mortgage NPL, 0.13%; and credit card NPL 0.19%.

Moving on to Slide 15. For the first half, market average ratio was 0.23%. And as you can see, E.SUN's NPL ratio has been lower than the market average for a long time, showing excellent risk management ability.

Please move on to Slide 16. Cost income ratio. For the first half, cost income ratio rose from 54.1% to 55.5% mainly due to investment in IT infrastructure and fintech.

Turning to Slide 17. Capital was adequate with CAR of financial holding company at 122.69% and Bank's Tier 1 ratio at 11.55% and BIS ratio 14.13%.

This is the end of the presentation. Now let's proceed to Q&A section. We will be happy to answer your questions. Thank you.

[Chiwei Hsiao, executive]

Okay. We have a few questions coming in from investors. I'll start from the first one. Could you discuss the outlook for 2020 regarding loan growth, NIM, fee income, OpEx and credit costs?

For the loan growth, which is pretty much the same as what we guided in the beginning of the year, which we want to have 8% to 9% loan growth this year. However, for the first half, we are a little bit ahead of our target. So in the second half, I think we will be more selective in terms of the credit quality of borrower and pricing. For NIM, as of now, it has dropped 5 basis points due to rate cut. However, this is pretty close to the bottom, we believe. And for the full year, I think it will be 2 more basis point drop on NIM. For the fee income, which is very well performed at E.SUN in the first half, we have 13% fee income growth in the first half and also on wealth management, there's a 21% fee income growth, which I believe is the highest among all the Tier 1 banks. And we hope to maintain stable fee income growth for the second half. However, there will be some uncertainty and some headwind, for example, the insurance sale for wealth management. However, we will still try to maintain the growth momentum on fee income.

For the OpEx, in the first half, the growth rate was 15.9%. However, we have done some measurement to manage the growth of cost. As of July, the growth rate has dropped from 16% to 13%. So I think for the full year, our goal is to contain our OpEx growth and make the growth rate to around 10%. On credit cost, for domestic, asset quality is still very good. But for overseas, we keep very high alerted.

In the first half, there is still not much significant asset quality deterioration situation. However, in the first half, the loan growth is very significant. So about 70% of the increment of credit cost is coming from the general provision of loan growth. I want to keep it -- keep you in mind that for mortgage, we need to set aside 1.5% provision. And for other loans, we have to set aside 1% provision, which is a quite strict regulation in Taiwan. So that is something that I want to keep you in mind. If we have high loan growth, then we will also need to reserve the high credit cost.

Yes. The second question is do we do any promotion to boost credit card spending in the first half or in the second quarter of this year and the amount of the credit card promotion. And of course, E.SUN has done a very good job in credit card, no matter and increased growth of net -- cards-in-force or growth of credit card consumption, we are all ranked #1 in all the banks in Taiwan. So of course, we did some promotion. However, I think the increase in OpEx is still manageable. In the first half of the increase...

[Magi Chen;President, executive]

Y-o-Y.

[Chiwei Hsiao, executive]

On a year-on-year basis, the OpEx growth was TWD 2.2 billion, among which about TWD 600 million is associated with credit card promotion. This number is on a year-on-year basis. However, if we compare this number to second half of 2019, the number has actually dropped. So at the same time, we want to keep our credit card growing, but we will keep cautious on the expenses associated with the promotion.

The third question is about the -- it's about the Taiwanese companies repatriation program and what has been the response of Taiwanese companies on this program.

In fact, the program is very well received by Taiwanese companies. So far, there are already more than 600 companies have enrolled in this program, and the total amount committed for investment in Taiwan is over TWD 1 trillion, which will be a very important boost to Taiwanese domestic economy in the 3 years to come. And for E.SUN, we have approved about TWD 40 billion of loan under this program. And we expect the total drawdown amount until the end of the year will reach TWD 20 billion, which is roughly 15% to 20% of the total loan growth this year.

Yes. And there is a fourth question. It's about our portfolio management. What is the amount of unbooked mark-to-market gains on bond portfolio, will we book the profit this year?

Yes. I would say the vast majority of our bond portfolio has been mark-to-market. And there is a very, very little portion of the profit is not mark-to-market yet. However, I think that will be a discretion of our asset and liability management, and we will not necessarily realize or book the profit this year. But I would like to highlight once again, the vast majority of the portfolio and the profit has been mark-to-market.

We have next question. What is our guidance for foreign currency loan growth?

For the full year, we set a high single-digit for foreign currency loan growth. However, I would like to note that the NT dollar currency rate went up very quickly this year. So that might have some impact on the foreign currency loan growth denominated in NT dollar.

And second question, the margin -- will the margins stabilize here or much downside?

I think we just answered this question. There will likely to be 2 basis points downside for the full year.

And next question is the guidance for cost growth for this year.

And the cost growth for the full year, we hope can lower to 10%.

The credit -- and the next question is the credit cost rise this year and the reason why the credit costs rise this quarter.

And I just -- and we also answered that this is mainly because of the increase in loan. Yes. And also, they're all performing loan. And the increase in general provision would explain about 70% of the increase in credit cost in the first half.

We have the next question, is about OpEx. Can you please elaborate a little bit on how you plan to achieve the OpEx growth rate to be 10% for the full year?

I think we will do it from -- I will explain in a few ways. First is the core banking system, which has been -- yes, which is a program that started in 2017, and we expect the project to last for 2 to 3 to about 4 to -- 3 to 4 years. And actually, the first stage of the core banking system has already completed in August, and everything goes very smoothly. So for the few months to come, there will be not much more increment associated with CBP program. And that's the first reason.

And the second one is from credit card. We know that we did very well in credit card. And also, we did some promotion. And of course, the expenses associated with that. But we have already implemented some measures to contain the further growth on credit card expenses. So that is the second part. And the third one is we will try to implement more technology into our operations and to make much more operation to be centralized, and there were also some cost savings on that.

And also, I would like to remind you that on a year-on-year basis, the second half of 2019, the cost -- the operating cost was a high base. So on a relative basis, it is much more likely for us to achieve a much lower cost growth in the second half.

Yes. And the second question is, the investor wants to double check the loan growth for the full year, given that we already have 6.4% year-to-date growth in the first half. And of course, that, as I just mentioned at the beginning, because our loan growth is ahead of our target, so in the second half, we will be more selective in terms of choosing borrower and choosing the pricing. We might raise our target a little bit to 10%, but there is not much -- there -- it doesn't make much sense to exceed 10% or much.

Yes. We have a next question, is about our outlook for second half due to the impact of COVID-19.

And -- yes, the COVID-19 impact came into play since March. However, for the first half, I think there's one thing we think very positive is that we still maintain a growth, 8.3% growth in our top line, our revenue. So for the full year, we still hope that we can maintain a very stable operation for the second half.

And as I just mentioned, we want to maintain the revenue momentum in the second half, especially from fee income and other income. And also, we have implemented some cost-saving measures so that we want -- we hope to realize more cost savings in the second half. So our outlook for the second half is conservative, but still prudent and positive.

And I also want to add one note on our outlook on the second quarter, which is on asset quality. Of course, there is still so much uncertainty in the macroeconomy, especially overseas asset quality. So -- but -- so the NPL ratio is likely to go up by 1 or 2 basis points. So from 19 basis points to 20 to 21 basis points. But there will not be a mass asset quality deterioration.

[Harris Lin, executive]

Dear investor, we just finished all the questions from the message box. Thanks for your participation in our investor conference. Through this event, we learned a lot of valuable opinions from all of you.

If you have any further questions, please feel free to contact IR team for more information. Thank you, and have a nice day. Goodbye.