E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2022-Q2

[Chiwei Hsiao, executive]

Good evening and good morning to our investors around the world. Welcome to the second quarter earnings call of E.SUN Financial Holding Company. My name is Chiwei. I'm the IR of E.SUN. I will be the moderator of today. And first of all, I would like to invite the CEO and President of E.SUN, Ms. Magi Chen, to give us a short opening note.

[Magi Chen, executive]

Welcome, investors. Thank you for joining our investor conference. For the first half of the year, E.SUN's net revenue declined slightly by 8.4%. And net profit was TWD 7.1 billion, ROE was 7.52%, and EPS was TWD 0.53. In July, we sense a record high for monthly earnings. For the first 7 months, net profit was TWD 9.9 billion and ROE was 8.88%.

Taiwan's economy continues strong in the first half. [ H4 ] delivered positive growth for the eighth quarter and boosted E.SUN's loan business. Total loan balance grew by 13.5%, with foreign currency loan growing by 20.5%. Meanwhile, E.SUN has continued to incorporate ESG into its corporate business.

As of June, sustainability related loans accounted for 34% of the corporate loan balance. Asset quality remains benign with the NPL ratio at 0.16%. Net profit income was TWD 9.8 billion with corporate fee income growing by 40.4%, and credit card fee income growing by 8.5%. We expect credit card consumptions to recover when traveling restrictions are lifted.

We are positive we will see a strong momentum in card business. In July, E.SUN credit card consumption reached a monthly record high. For wealth management, fee income was TWD 4.1 billion. Customer AUM maintained stable growth despite uncertainties in equity markets.

ESG is a long-term commitment on E.SUN. On our way to [ second ] world development and net-zero emissions, E.SUN has reached a new milestone. E.SUN has joined the RE100 initiative and committed to using 100% renewable electricity across their global operations by 2040.

Last but not least, I would like to share some good news with you. E.SUN was awarded the Best Bank in Taiwan by Asiamoney for the fifth time. Meanwhile, the AI-enabled credit card fraudulent prevention system was awarded Best Digital Banking Innovation – Cyber Security, by The Banker. We appreciate and will continue to create more value for shareholders and stakeholders. Thank you.

[Chiwei Hsiao, executive]

Thank you, Magi. And now we will walk through the presentation for the second quarter. Please turn to Page 3 for the Financial Holding's company summary. As of June, the total assets of holding company was TWD 3.3 trillion, which was a 3.5% year-to-date growth. The bank -- total asset was also TWD 3.3 trillion. The growth rate year-to-date was 3.9%. The book value per share was TWD 13.7 per share. Double leverage ratio and holding company CAR ratio were both at an adequate level.

For the operating channel, there is no change for our domestic branches. However, we added 2 overseas sites. They are the rep office in Ho Chi Minh City, Vietnam, and Bangkok, Thailand. Now we have 30 overseas sites in Asia Pacific. We will continue to expand our overseas presence.

On the next page is the first half business and financial review. For the first half, the Holding Company's net revenue was TWD 25.7 billion. The net profit was TWD 7.1 billion, which was a 30.8% decline. EPS was TWD 0.53 per share, ROE was 7.5%, and ROA was up 0.4%. And in July, we set a record for our monthly earnings. The net profit as of July was TWD 9.9 billion, which was a decline of 21.7%. The EPS was TWD 0.74 per share, ROE has increased to 8.88%.

On business operations, the domestic economy of Taiwan has continued to be very robust, and the loan demand was driven by very strong need for investment in exporting sector. The balanced growth of loan and deposit helped boost NII by 22.5%. Both loan growth and deposit growth were double-digit, of which the foreign currency growth in both loan and deposit were more than 20%, especially in sustainability, which is the long-term commitment of E.SUN. And the sustainability-related loan accounts for 34% of our corporate loan balance.

The net income was TWD 9.9 billion, which was a decline of 5.4%, of which the wealth management fee income declined by 16%, which was mainly due to the high volatility in the second quarter of financial market. It also weakened the sentiment for investment of our customers.

However, for our credit card fee income, the growth rate was 8.5%, and the corporate banking fee income was even growing by more than 40%. And for the second half, we continue to have a good outlook for the fee income with a lower expected volatility and the recovery of tourism and consumption.

For the asset quality, the NPL ratio was 0.16%, the coverage ratio was more than 700%, both at quite benign level. For the highlights of the second quarter, we received Bank of the Year award by Asiamoney, FinanceAsia, Forbes and The Asset, which is a very high honor for E.SUN, and we will continue to be the best bank for the international media.

On credit rating, E.SUN Bank was upgraded by S&P Global to A rating, and now E.SUN Bank is rated A by both S&P and Moody's. Meanwhile, E.SUN Financial Holdings' A3 rating is also the highest among the private sector holding companies in Taiwan.

On sustainability, E.SUN is now officially a member of Renewable Electricity 100. And under this initiative, we have committed to use 100% renewable electricity by 2040, and we will continue to be on our way to net-zero by 2050.

On next page is the financial performance of E.SUN for the past 5 years. On next page is the net income of financial holding company and the subsidiary. The bank contributed 87% of the net profit, and the securities accounts for 7.7%; the venture capital subsidiary contribute to 5.4%.

On next page is the net profit breakdown. Our net revenue, it was a 8.4% decline, and on the net profit, it decreased by 30.8%. But as I just mentioned, in July, we had a very good month in July.

If we take July performance into consideration, the net revenue ‐‐ the decline of net revenue would have been narrowed to 5.5%, and the gap of net profit would have been narrowed from 30.8% to 21.7%. And we have a good start for the second half of the year. We wish the trend will continue in the second half.

On next page is the revenue breakdown. For the total net revenue, it was TWD 25.7 billion, which include 59.3% from NII and 38.73% from fee income, and the fixed income and FX and others account for 2.4%.

On the right hand side, is the YoY comparison. The net interest income increased by 22.5%. And as I just mentioned, and the second quarter, the high volatility in the financial market caused a very significant mark-to-market loss in our trading book.

However, in July, a significant part of the loss has recovered in July. If we take July's performance into consideration, the fixed income, FX, and others net revenue would have been TWD 2.6 billion versus -- in the first half, it was only TWD 600 million. It has -- the number is 4x as much of the number of the first half.

On the next page is the fee income breakdown. The total net fee income was TWD 9.8 billion, which includes 41.3% from wealth management, 30% from credit card, 16% from brokerage and others, and 10.7% from corporate banking.

If you look at the right hand side YoY comparison, the credit card grew by 8.5%, wealth management declined by 16%, corporate banking grew by 40%, and brokerage and others which mainly include the performance of E.SUN Securities has declined by 17%.

On next page is the credit card business breakdown. We used 4 graphs to illustrate the performance of credit cards. Both active cards and card consumption, E.SUN is on top 3 in Taiwan. The market share of active card was 13.2% and the card consumption was 13.8%. What I also want to mention is in July, the card consumption amount was a TWD 66.2 billion, and it was the historical high for single month credit card consumption amount.

On the next page is the deposit and loan structure. On total deposits, the balance was TWD 2.8 trillion, which was a 14.7% year-on-year growth. The foreign currency deposit was -- the growth rate year-on-year was 21%. For total loans, the balance was TWD 1.9 trillion, which was a 13.5% year-on-year growth, in which the foreign currency loan growth grew by more than 20%.

On next page is the LDR ratio. The very strong demand in foreign currency loan helped LDR ratio to increase in this quarter. As of June, the foreign currency LDR ratio climbed up to 33%. The NTD/LPR ratio was 19.7%, and the blended LDR ratio was 68.1%.

On next page is the loan portfolio breakdown, which includes -- SME account for 26%, large corporate accounts for 22%, mortgage accounts for 25%, secured personal loans was 18%, unsecured personal loans was 7.4%. On a year-on-year comparison, the large corporate loan balance grew by 19%, SME grew by 10.8%, mortgage grew by 13.7%, secured personal loans -- the growth rate for secured personal loan was 10%.

On next page is the NIM and spread trend. On the quarterly NIM, in this quarter, we see an expansion of 3 basis points, and now the NIM is at 1.23%. On loan spreads, there was a 6 basis point increase for the interest rate spread, and now the spread was at 1.4%.

On next page is the asset quality. The NPL ratio 0.16%, and the coverage ratio was more than 740%. Next page is the NPL ratio by different product. For the corporate, NPL ratio was 17 basis points, and mortgage NPL ratio was at 6 basis points, both at a very stable level.

The next page is the NPL comparison between E.SUN and the market. The asset quality has always been a strength of E.SUN, and we will continue to maintain our strength in asset quality and risk management.

Next page is the cost-to-income ratio of E.SUN Bank. Because the underperformance of the second quarter in our revenue, which caused an uptick in the CI ratio trend, for the first half, our CI ratio climbed up to 61.9%. However, as of July, the ratio has declined to 57% because of the recovery of revenue in July. For the capital adequacy ratio, the financial holding CAR ratio was 116%, and the bank BIS ratio was 13.67%. Our Tier 1 ratio was 11.1%.

We also want to share with you some of our progress and achievements in ESG. E.SUN has always been very committed to ESG, and we always want to benchmark to the highest standard and improve ESG in a systematic approach. And this year, E.SUN has become the first bank to have our carbon reduction target to be validated by SBTi. On top of that, we continue to make more programs in ESG, including now we're a member of TNFD and PCAF, and also Renewable Energy 100. E.SUN is also one of the first banks in Taiwan to implement internal carbon pricing for our loan asset.

On the next page is our long-term mission to net-zero by 2050. If you look at the pie chart, you can find out that out of the 4.8 million tons of carbon emission, 99% is coming from our lending and investment assets. And this is our mission to engage with our customers and to reduce the carbon emission, which is the Scope 3 carbon emission of the bank.

We are the first bank in Taiwan promised to phase out coal-fired projects by 2020 and also the first bank in Asia that is committed to coal phase out by 2035. And this quarter, we also become one of the first banks to implement internal carbon pricing. We will guide our corporate RM to sustainability related loans and to take a systematic approach to be net-zero.

E.SUN also have a mission to be the best ESG partners of SMEs. In sustainable lending, which includes ESG-friendly industries and also ESG-linked loans and also the project financing for clean energy power storage and diversified renewable energy.

As of the first half, the sustainability-related loan accounts for 34% of our corporate lending. On sustainable investment, 7.3 billion green bond issuance was made in this year. And also TWD 1.1 billion sustainable bond was issued this year.

Now we also reported the ESG risk of our portfolio. 99% of our portfolio was classified as mid- to low ESG risk. On social aspect, we will continue to release the financial products that can take care of our customers for every of their life stage. For example, the Elder Care Trust, E.SUN is among the top 3 banks and the leader in the private sector.

The last page is our long-term commitment to make positive social impact. We will continue to gather partners of ESG in the joint efforts of our customers, and E.SUN will [indiscernible] continue our efforts to the society and to make Taiwan a better place.

And this is all for our presentation. Now you can fill in your questions to the dialogue box, and me and Magi will answer your questions. Thank you.

[Chiwei Hsiao, executive]

Okay. Investors, we have the first question coming in. What is the guidance for NIM this year?

[Magi Chen, executive]

So we currently expect to have 50 bps hike in September and 25 bps hike in both November and December, and our -- the [ essential ] rates is corroborated by 12.5 bps in September and December. And so reverting the impact of these hikes, the NIM should be increased 5 to 6 bps in second half of this year. This means and increase an additional 10 bps in 2023.

[Chiwei Hsiao, executive]

The next question is about loan growth. Which area of loan was slow since management guidance for around 10% loan growth this year versus around 14-year growth now?

Okay. I think we also discussed this question with some of our investors before is that E.SUN now, we do not take the loan growth volume as the priority of our management indicator. Instead, we would emphasize more on RAROC management and the risk-weighted asset management.

We think the customer value is coming from if the borrower can contribute and create value for us. We hope to have more non-interest rate -- loan interest exposure business and slow business with customers rather than the growth rate of loan.

At the same time, we also put a lot of attention on the carbon emission management. For banks, about 99% of carbon emission is coming from the Scope 3 carbon emission, which mainly include the carbon emission from our loan and investment assets.

And we have already implemented the internal carbon pricing, and step-by-step, we will reflect the interest rate pricing and -- reflect interest rate price incorporating the carbonation of the corporate, and to slowly reduce our exposure and great assets into low carbon emission made in green assets. Which, if we translate it to our loan portfolio, we think our loan exposure for large corporate will slow down in the second half.

The next question is about the tax rate. Why was the tax rate high during the first half?

The main reason is because in the first half, we suffered from some mark-to-market loss in our investments. And for a large part of the investment, it's actually booked under OBU branch, which is a tax-free profit for banks. That is the reason why the tax rate is relatively higher compared to the same period of last year because our tax-free revenue is lower compared to last year.

Dear investors, since we have answered all of our questions today, thank you all for your participation. We hope to speak with you again soon. Bye-bye.