E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2023-Q2

[Chiwei Hsiao, executive]

Dear investors, welcome to the earnings call of E.SUN Financial Holding Company for the year 2023 second quarter. The time is 8 O'Clock, so we will start now. At the beginning, I would like to invite Executive VP and Deputy CFO of E.SUN, Ms. Sara Chen. She will give us a short opening note, then we will start to discuss the results of our second quarter.

[Sarah Chen, executive]

Hi, I'm Sara Chen, Deputy CFO. Dear investors, thank you for joining our investor conference. For the first half E.SUN Financial Holdings reported a high-end quality earnings in history. E.SUN Holdings net profit grew by 48.9% with an ROE of 10.06%. E.SUN Bank grew by 51%. E.SUN [ Security ] and Venture Capital net profit grew by 8.1% and 52.1%, respectively. We delivered a good performance in the first 6 months, and we will carry out our good work. Fee income was robust growth in both wealth management and credit card.

For credit card, this grew by 13% and have double-digit growth for the fourth quarter in a row. The main driver is overseas travel and consumption, which increased by 80% Y-o-Y. Wealth management fees in the first half is 9% Y-o-Y growth. Momentum has improved significantly in the second half of 2022. E.SUN issued the largest ESG-related charter product under Wealth Management 2.0 for high net wealth customers, updated to July. Wealth management fee is 13% Y-o-Y growth, and we expect wealth management to deliver mid-teens for the full year. In response to the recent global economic slowdown Taiwanese corporate are also acting prudently to deal with the cycle and inventory level. E.SUN provides corporate clients with financial total solutions, including loans, FX hedging, [indiscernible] business and ESG advisory for SMEs. The total loan growth was 4.8%. The ESG-related loans now account for 35.1% of corporate loans.

Lastly, I would like to address recent strategy. We focus on overseas expansion, high net wealth customer risk management, and ESG. We will work hard to create more value for all shareholders. And we are confident E.SUN will have a good performance this year. Thank you very much.

[Chiwei Hsiao, executive]

Thank you, Sarah, for the opening. So before we get into the presentation, I would like to introduce my colleagues also joining this call, Mr. Anthony Chen; and also Mr. Alex Chiu; and I'm Chiwei, I will be the moderator of this earnings call today.

So please flip to Page 3 for the summary of E.SUN Financial Holding Company. On total assets, in June, the asset of holding company was TWD 3.56 trillion. For the bank, it was TWD 3.53 trillion, both demonstrated a more than 2% growth year-to-date. On the key financial numbers, on book value per share, we grew substantially to TWD 14.76 per share, and it is largely due to the right offering in March and also the contribution of our profit this year.

On double leverage ratio and the CAR ratio, we still maintain a very benign level. On operating sites, we have 139 branch in Taiwan. And overseas, we added 1 branch in Fukuoka, Tokyo -- sorry, Fukuoka, Japan, this is the 31st overseas operating site of E.SUN and also the second branch of E.SUN in Japan.

On the next page is the business and financial review for the first half. For the first half, the Financial Holding company revenue was TWD 31.3 billion, and profit was a 48.9% growth, and we also set a record high for the first quarter. The EPS was TWD 0.72 per share, ROE was above 10%. And also for the bank, the net profit grew by 51%, and it is largely contributed by the growth of overseas profit, which contribute to 33.2% of the total profit. On the next section is business operation. Fee income grew by 3.1% year-on-year, among which credit card grew by 13%, and it is mainly because of the growth of overseas spending with the lift of international travel ban. Many people started to travel overseas and also contribute significantly to the credit card spending.

On Wealth Management, we had a pretty good performance in the first half. The fee income was TWD 4.4 billion, the growth was 9%. As of July, the fee income for Wealth Management continued to grow to 13%. So we have a very good year in wealth management, and we will continue to carry on this growth momentum for the rest of the year. And for the other income, including FX, fixed income and other revenue, it was TWD 7.2 billion, and the growth was very significant. And it is mainly because of we have a good trading strategy to capture the opportunities in the first half and also the robust customer flow also contribute to the transaction income coming from structured instruments, currency forward and currency swap. And all of these transactions, they contribute to a very stable and also risk-free profit for E.SUN.

On the loan and deposit, we try to optimize our loan deposit structure and to enhance our interest rate spread. The loan growth, it was a moderate growth at 4.8%. The SME loan growth, it was 6.2%. I also would like to especially mention the ESG loans now accounts for 35% of the total corporate loan. The asset quality was very sound and very benign. The NPL ratio was 0.17%.

On some of our business highlights for the first half and the second quarter. As I just mentioned, Fukuoka branch, we opened a second branch in Japan and also the 31st overseas branch of E.SUN, and we will continue to leverage our platform in Japan and to enhance the business cooperation between Japan and Taiwan in the private sector or the public sector. At E.SUN also in this quarter, we announced to form a technology advisory committee, which includes -- we invited experts from different areas, including AI, digital empowerment and e-commerce. And we hope that this company -- committee, they will give us a lot of very valuable advice when it comes to development of fintech and also technology.

On ESG, E.SUN Financial Holding was very honorably ranked by this corporate governance evaluation to be named top 5% among all the listed companies in Taiwan. Both E.SUN Bank and E.SUN Security were both recognized in fair treatment of customers by the regulator, Financial Supervisory Committee. So we continue to deliver good results in ESG, and we will continue to put more efforts into corporate governance.

On Page 5, this is the financial performance of E.SUN for the trailing 5 years. But you can see we have a very stable and very good year for the net profit. And on ROE, we delivered more than 10% ROE for this year.

For Page 6, it is the net income of holding company and subsidiaries. On the left-hand side, our bank contributed to 88.7% of the total profit of the financial holding company. On the right-hand side, as where you can see the bank growth rate was 51%. Venture Capital, the growth rate was more than 50%. On Securities, the growth rate was 8%. So across the board, all of our subsidiary delivered very good results for the first half.

On the next page is the net profit breakdown. The net revenue growth rate was 21.9%. Operating expenses, the growth rate was 13.3%. And on the net profit, the net growth rate was 48.9%. And I also want to talk about the operating expenses, the growth rate was more than 10% and it is mainly because a few reasons. First is, we had a rights offering in the first quarter, and there is some costs associated with that because the subscription of the new rights among the employees. So there is some cost associated with that activity. And also on credit card, as we just saw, we have a very robust growth on credit card fee income and also the credit card consumption. So there is also some marketing expenses associated with that growth. So these 2 reasons are the main 2 reasons that contribute to the operating expenses growth in the first half.

On next page is the revenue breakdown. In the first half, the net revenue was TWD 31.3 billion. The net interest income accounts for 44.7% followed by fee income was TWD 32.3 million and other income was 23%. On the right-hand side, the net fee income, it was a 3% growth year-on-year, and we expect on the second half, we will continue to have very good performance in the fee income sector. And also on the other income, as was just discussed earlier, we had a very good performance in the first half, and the growth was very significant.

The next page is the fee income. The total fee income, it was TWD 10.1 billion, which comprised Wealth Management, 43.8%, followed by credit card, 33% brokerage and others, it was 11.9%. What you can see on the right-hand side, the 2 main sources of net fee income, credit card and wealth management. both performed very well in the first half. And we expect the growth momentum will continue to carry on for the rest of the year.

On Page 10, we try to use 4 graphs to illustrate the competitive landscape of credit card markets in Taiwan on Active Cards and Cards Consumption, the 2 main the most important indicators for credit card. E.SUN maintain top 3 in market position in Taiwan. On Active Card, our market share was 12.4%, and Card Consumption, the market share was 13.5%, especially the Card Consumption in the first half, the growth rate was 33.6%, and it is mainly due to the overseas spending. And also, we had a very successful campaign in paying your income tax by credit card. And that campaign also allowed E.SUN to draw a lot of valuable VIP customers to have them to become customers of E.SUN. And also, I want to note on the left bottom corner, the per card spending -- the per card spending for the first half of this year, it was more than TWD 10,000 per month. So yes, this is another indicator to show this year, the credit card performance was very good.

On the next page, Page 11, that is the chart of deposit and loan structure. On total deposit, the balance was TWD 2.9 trillion. The growth was mainly coming from the time deposit, the year-to-date growth rate was 22%. The foreign currency deposit declined by 9.5%. It is mainly because we try to optimize our deposit structure and to replace the high interest rate deposits by lower interest rate deposits, and we can discuss that later in more detail. On total loan balance, it was nearly TWD 2 trillion. The year-to-date growth was 1.4%, among which the corporate loan growth rate was 0.8%. SME loan was 2.1%. Foreign currency loans decreased by 4%, mainly because the high interest rate on U.S. dollar deterred our client from borrowing more months in U.S. dollar. But going forward, we will continue to drive more growth in corporate loans, especially in foreign currency loans. On consumer loans, the growth rate was 2%. On mortgage loans, it was also 2%. Unsecured percent loans, it was slightly -- it was a decline of 5.9%.

On Page 12, it was -- it is the deposit structure of E.SUN on LDR, loan-to-deposit ratio. The foreign currency LDR raised by nearly 2% in the first half. Now our LDR for foreign currency was 35%. For the NT dollar LDR, it dropped to 48.7%. On the deposit structure as what you can see on the right-hand side, the NT dollar demand deposit, the CASA now the ratio is about 40 -- sorry, 57.8%. The foreign currency deposit now accounts for nearly 35% of our total deposits.

Next page is graph of our loan portfolio breakdown. As of June, the loan balance was TWD 1.9 trillion. As what you can see on the pie chart, we have a very balanced break between corporate and consumer. The leading sector was SME, which accounts for 26.8%. And the large corporate, it was 22%. On the consumer side, the mortgage accounts for 25.4% followed by secured personal loans accounts for 18.7%. On the right-hand side, as the year-on-year comparison across every sector of our loan [ growth ].

Next page, Page 14, is the graph of our NIM and spread trend. In this quarter, we did not have any movement on our NIM. We still stay at 1.3% for the NIM. On the quarterly interest rate spread. We expanded the spread by 3 basis points, and it is mainly because the loan yield continue to rise and also, we implemented a lot of deposit optimization treatment and also to contain our funding cost at a moderate level.

On the next page is the asset quality. The NPL ratio was 0.17%. The coverage ratio is 690%. Next page is the asset quality by product line. On the corporate NPL, it was 19 basis points. And on the mortgage, it was only 4 basis points. Next page is a time series of our NPL performance. Asset quality has been an advantage and strength of E.SUN, and we will continue to maintain very good asset quality going forward.

The next page is the cost to income ratio, the CI ratio for E.SUN is 57.3%. In the second quarter, we had some increase in operating expenses. But going into the second half, we will try to contain the growth of operating expenses. And for the full year target, we want to lower CI ratio from the current level to 55%.

Next page is the capital adequacy ratio. For the financial holding company, it was 138%. And for the BIS ratio, we had a rights offering to inject TWD 14 billion into our bank, which enhanced our CET1 and Tier 1 of the bank. Now the CET1 ratio of the bank was 12.95%, and the total BIS ratio was 15.5%. E.SUN Bank is very well capitalized, and the strength of our capital is very strong.

Next page is some of our achievement in ESG. And this year, we obtained the ISO certification for the carbon-neutral ATM. And we are the first bank in Taiwan to have this initiative, and we will try to realize more carbon-neutral operations across different sectors of our business. And we also sponsor a documentary production, and this is the documentary related to the biodiversity. On the S, E.SUN was included by Bloomberg Gender Equality Index. And we will continue to improve January quality at E.SUN among our employees. On the G, governance, we are rated by corporate governance evaluation for the 8x to be ranked top 5 among all the listed companies in Taiwan.

And the next page is some of our honors and recognition by international ESG entities, and we will continue to maintain our leadership and continue to work closely with our clients and to make greater good for our society and the world.

So this is all what I have for the presentation. And now we can head into the Q&A section. So dear investors, if you have any question for E.SUN Bank, E.SUN Financial Holdings, please fill your question into the question box, and we will start our discussion later. Thank you.

[Chiwei Hsiao, executive]

Okay. We have our first question about the wealth management fee income. For the first half, the growth of fee income was 9%. What is the full year guidance for the wealth management fee income growth for the full year?

Yes. For the full year, I think the wealth management business has started slow in the first quarter because the market volatility and the investment settlement was not very strong [ since ] -- at the beginning. However, in the second half, the -- our clients started to regain their confidence in investment. So as what you can see, we have very strong results in the second half and also in the first half -- sorry, in the second quarter in the first half. So for the full year, we are very positive about our wealth management fee income. We forecast the full year fee income were somewhere between 15% to 20% growth. And it is mainly because of the few reasons. First is we are approved by the regulator to be one of the banks to have the Wealth Management 2.0, which aimed at the wealth management of the VIP customers. And we also roll out a series of new products targeting on the needs of those VIP customers. For example, we are -- so for example, we issued the first ESG-related on structured bonds for the Taiwanese customer under the policy of Wealth Management 2.0 program. and the issuance amount is the largest in the market right now, yes. And also secondly, we also did some financial plan. And this year, in the first quarter, we have had more financial consultants and are dedicated to -- for the bank assurance selling. And the amount of the financial planner is about 120 employees, and that would be deployed to all the branches [ ILO-wide ]. So I think in the first half, our bancassurance sale has grew significantly. And so far, our product breakdown has been more even between the bancassurance and investment type of products. For the product breakdown, our interest is accounted for 46% of the wealth management fee income, total of wealth management fee income and rest will be the investment type of the products, including mutual fund sales and also fixed income and other products. Mutual fund sales accounts for about 34% of the wealth management fee income and the other financial products, including structured notes and overseas bonds accounts for about 20% of the wealth management fee income. And another new product or new service that I want to mention is the [ Grace ]. This is a system that we just enrolled out this year. The full name is called global rebalancing core engine -- global rebalancing advisory core engine. And so mainly, this is an efficiency tool that allows our financial consultants to produce their advisory pitch book to -- for our customers, in a shorter time. It used to take about 2 hours to produce the pitch book for our customers. And with this system, we can shorten that time for preparation to 15 to 20 minutes. It will help our financial consultants to serve more customers in a more efficient way. Given that, on average, each of our financial consultants need to cover 250 clients on average. So if they can do their job more efficiently, and it will greatly help our potential consultants to do their job better. So it also can help us to transform our business model from product push to portfolio management because in the past, if they needed to take such amount of time to prepare the pitch document for our customers, then they will not have too much time to understand what their customers truly need. So their approach will be more product push. But now with the help of this great system, they can spend more time on understanding their customers and to develop more in-depth dialogue with their customers and also can help them to transform to a more customer-centric and portfolio management centric approach. So this is our answer to the wealth management question.

We have a few more questions coming in from investors. The first question is where can loan growth come from during the second half?

In the first half, we have quite moderated loan growth. The year-to-date loan growth was -- year-to-date was around 2%. We still guide 7% or 6% to 8% loan growth for the full year, which means we are quite positive about the loan growth in the second half of the year. So mainly the loan growth will be coming from a few sources, first is ESG-related loan. E.SUN has been very proactively engaging our customers in ESG. And we found that many of our customers, they are highly concerned about the ESG and the potential opportunity or threat to their business. So they have a lot of interest and a lot of demand in having those ESG-related loans or green loan. So this is the main source of the loan growth in the second half. Another very important driver is the loan coming from our overseas operation. In the first half, the main growth driver for the loan is already from our overseas operation. In the second half, the momentum will continue to carry out.

And the second question is about tax rate. Why is tax rate higher this year?

For the income tax, the first half, the income tax amount was TWD 2.7 billion. The year-on-year growth was 5. -- sorry, TWD 556 million. The growth rate was 26%. And that is mainly because the growth of our pretax earnings so that makes the income tax to raise.

The third question is the sensitivity -- rate sensitivity. What is the sensitivity to rate cut by the fed and CBC?

[Sarah Chen, executive]

Well, we think the economic situation in U.S. is still fairly resilient. And the Chairman Powell said maybe they will keep the interest rate for a longer, lower term at had -- higher level. So maybe the timing for the fed for the rate cut may be well after Q2 2024 maybe -- or maybe longer. Even in CBC in Taiwan, the core CVl in Taiwan is still very high. So we do not leave the CBC will cut rate down soon. So the high rate will be -- that will for a longer period. So we think maybe the [ check ] for the rate cut is very, very small even the rate cut because we will still keep the interest revenue for a period of time. So it will not hurt our interest income very immediately.

[Chiwei Hsiao, executive]

The next question is about E.SUN's China exposure. What is your China exposure and the exposure related to the real estate sector?

The regulator, they asked all the banks in Taiwan to monitor our China exposure and the main indicator is the China exposure as a percentage of book value. And E.SUN maintained our -- the maintained the ratio level at 32% compared with what it was 1 year ago, it was 48%. So there was a significant drop in China exposure as a percentage of book value. And also on the risk in China, as of now, we do not see noticeable risk in our portfolio. And it is mainly our choice of clients. So we can divide our clients in China into 3 categories. First is Taiwanese corporate. And mainly, we would target to choose the cash-rich clients and also the listed company in Taiwan Stock exchange. So for this part of the Taiwanese corporate, we have a better understanding into their operation and more visibility into their operation. So this is the first type of our clients. And the second category is the foreign companies, which means they are not Chinese companies or they are not Taiwanese companies. And they are the foreign companies who invest in Taiwan or they -- some of them are the companies invested by foreign PE funds. So for this part of customer segment, their asset quality are also quite good. And the third category is the Chinese companies. For the choice of Chinese companies, we mainly choose the industry leaders or the SOEs, state-owned enterprises. And this part of the customer segment only accounts for 23% of the entire China exposure. And of course, asset quality wise, they are also very, very good and very strong. So we are quite comfortable with our loan book to China exposure. This is on the loan side. On the investment side, we have 0 concerns about our investment portfolio. For example, the bond investment is mainly made to the state-owned enterprises, for example, like China Development Bank. The credit rating is sovereign rating. So we have -- we are very comfortable about our investment portfolio and loan portfolio in China.

And we have the next question. It is about our investment portfolio. Can you give us some color about your investment portfolio?

[Sarah Chen, executive]

Well, for the whole investment portfolio, over 90% will enjoy the rating of A-. About the accounting purposes such as PL, OCI and AC. For the AC, position is around over 40%, and the average duration is around 2.4 years. So I think our -- I think the main reason is that because the market situation is still volatile then maybe as we previously mentioned, the interest rate will be kept at a high level. So we closely monitor and management of the whole duration of our investment portfolio. But as we still mentioned, the interest rate is there at high level. So we probably will take the chance to [indiscernible] portfolio to knocking the interest rate spread and get the potential capital gain. So that's our -- transform our achievement for our investment portfolio.

[Chiwei Hsiao, executive]

Thank you, Sarah. Okay. Thank you, investors. It seems like we have answered all of our questions for this evening, and thank you so much for participating in the earnings call with us today. We hope to speak with you soon. Bye-bye.