E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2018-Q3

[Unknown Executive]

Dear investors, welcome to the conference call of E.SUN Financial Holdings for the third quarter of 2018. It's 8:00, so we will start now. And in the meeting today will be moderated by the IR, [ Chiwei and Matt ]. So first of all, allow me to introduce President and CEO, Mr. Joseph Huang, for a brief opening note.

[N. Huang, executive]

Dear investors, thank you for joining the web conference for third quarter 2018. Till September, E.SUN's net profit was TWD 13.4 billion, and the growth rate was 15.3%. We set another record high in net profit for the first 3 quarters. Return on equity was 11.63%, and EPS was TWD 1.23 per share.

We continue to focus on cross-border foreign currency and trade finance and offer a total solution that includes currency hedging, increased [ rare ] hedging and cash management. The noninterest [ net ] income remained strong in the third quarter and now account for 59% of total revenue.

On digital innovation, E.SUN is dedicated to creating a convenient digital life for our customers through innovative products, innovative services and innovative marketing. For example, we co-work with the big 5 e-commerce platform in Taiwan to launch a promotional campaign on November 11, the Double Singles' Day, which is now the biggest shopping frenzy in the world. In addition, according to statistics released by the regulator, E.SUN is now ranked #1 in number of electronic payment users. Market share of electronic payment transaction amount is more than 50%. Finally, I'm very happy to inform that the credit rating agency, Moody's Investor Service, has upgrade E.SUN Financial Holding Company's long-term issuer rating to A3 and E.SUN Commercial Bank to A2.

After the upgrade, both Financial Holding Company and the Bank are now rated high pick amongst its peers in the private sector of Taiwan. Moreover, E.SUN Financial Holding Company is the only A-rated financial holding company in the private sector of Taiwan. Moody's upgrade is based on affirmation that E.SUN had, number one, track record of sound asset quality; number two, improving profitability; number three, sound liquidity profile; and number four, increased market share. More information will be discussed in the presentation. Thank you.

[Unknown Executive]

Thank you, Joseph. And so now we will -- as usual -- I will walk you through the presentation, then we'll work on the questions if you have any for us.

So first up, please turn to the first page, it's the summary of E.SUN Financial Holdings. As of September, the assets of Financial Holding Company is TWD 2.18 trillion and for the Bank is TWD 2.16 trillion, for book value per share is TWD 14.47 and the double leverage ratio is 104%. For the distribution channel, we added 1 more overseas branch in -- located in Guangzhou, China, under the China subsidiary. And this branch is scheduled to open in November. So it will be the 27th overseas branch.

Please turn to the next page is the business and financial review of the first 9 months. So I think what E.SUN is very good at is to deliver long-term value for our shareholders. So we are the only one bank or financial holding company who can deliver consecutive profit growth for 7 years in a row. At the same time, we still maintain a very good asset quality and very strong management discipline. So long-term value for shareholder is something that we really care about.

The net profit for the first 9 months is TWD 13.4 billion. The growth rate was 15.3%. The net revenue was TWD 37 billion, and the growth rate was 8.5%. EPS was TWD 1.23 per share and ROE was 11.63%, ROA was 0.84%.

On our business operation, we focus on liquidity management. And we really focus on the acquisition of customers flow, the FX flow. And the flow business is important to E.SUN in a few ways. First, it help us to enhance our liquidity strength and also we are not only focusing on the FX flow from the corporate clients, but the individual clients as well. As we pointed out in our previous presentation in our previous investor meetings that our online banking channel is really helpful for us to acquire more FX flow from individual customers. And also, the flow will stay on their demand deposit account and all that contributed to the growth in foreign currency deposit. And FX flow is also, of course, a very stable revenue.

On the loan portfolio, our overall loan growth rate on a year-on-year basis is -- was 8%. However, if you look at the foreign currency, loan growth was 18.8%. So for these -- for these cross-border Taiwanese corporates, they have their demand in foreign currency loan. At the same time, of course, their demand -- their deposits are also in foreign currency. So we are targeting on the same group of customers on this and to target on the foreign currency flow. On the fee income both wealth management and credit card maintained a quite stable fee income.

The new branches opened, overseas branches opened this year, we opened a branch in Brisbane in July and also Guangzhou scheduled in November.

A few milestones that I will like to share with you is that Moody's rating upgrade. As Joseph just pointed out, we are now the highest rated bank and financial holding amongst private sector peers in Taiwan. And also, the E.SUN Financial Holding is the only A-rated financial holding company among private sector in Taiwan. And I think this is quite remarkable achievement for E.SUN.

And also Moody's pointed out that E.SUN is doing good in a few things. First is the track record of our sound asset quality. That means we can maintain growth. At the same time, we can maintain our asset quality good. Also, the profitability over years has been improving and a very clear path of improvement. And the liquidity still maintains strong. And Moody's thinks E.SUN is able to counter all kinds of volatility in the future because of the liquidity management capability.

And the last but not least is the market share. Now E.SUN has a very significant market share. So that Moody's think E.SUN is a bank of systemic importance in Taiwan. So that is also a very important reason why they decided to upgrade E.SUN this year.

And the second thing is our leadership in ESG. Once again, E.SUN is included in DJSI, and this is the fifth consecutive year that E.SUN is listed in DJSI. Moreover, E.SUN is -- this year, E.SUN is listed in DJSI World Index, which is a very rare among Asian companies. And we will continue to live by our vision is that we are not -- we're determined not only to be the best bank, but also to be the most respected company in Taiwan.

So please turn to the next page is the financial performance for the past 5 years. As you can see, a very stable growth trend.

Please turn to the next page is the net income of holding company and the subsidiaries. The contribution on the left-hand side by subsidiary, of course, the Bank is -- still dominate the net income of the holding company, 98.2%. And this year, the Venture Capital because the -- in the third quarter, the stock market was quite volatile and in our VC's portfolio -- because according to the accounting rule, you have to mark-to-market. So just because the stock market was not doing very well, so that the VC suffers from loss in third quarter.

Please turn to the next page is the net profit breakdown. The net revenue growth was 8.5%. At the same time, the expense growth was 3.6% and net profit growth was 15.3%. As you can see, we are still following by our guidelines. You have the revenue growth higher than expense growth and also the profits growth higher than revenue growth. As long as we can follow the guideline, then our profit will continue to grow.

Please turn to next page is the revenue breakdown. On the left-hand side, the pie chart, the total net revenue is TWD 37.3 billion and NII is -- was 40.9%, net fee income was 32.7%, fixed income, FX and others was 26.4%. I also want to note that if you look at the footnote number one, 53% of the other income was actually interest income from fixed income investment. So essentially, this is just interest income. So it's a -- also a very stable. So maybe some analysts will question that the grow in share of other income, fixed income FX and others, does that imply more capital gain? The answer is no, because the majority is still from interest income.

Please turn to the next page, Page 7, is the breakdown of net fee income. For the first 9 months, total net fee income was TWD 12.2 billion. Wealth management account for 49.8%. The credit card account for 30.6%, followed by brokerage and others, corporate banking and consumer banking.

If you look at the chart on the right-hand side, year-on-year comparison, wealth management growth rate was 4.8%, and the credit card growth rate was 5.1%. Of course, in the first half, we -- our wealth management growth rate was 19%, and it was partly from the low base in 2017. However, in the third quarter of 2017, we had a record high in wealth management fee income. So the first reason is high base, and the second reason is the third quarter stock market became more volatile. So the -- our customers, they turn more negative to their investments. So the mutual fund sale did not go very well. But if we look at the first 10 months till October, the wealth management fee income came up a little bit to 6.5%. So looking to the fourth quarter, we think we can still maintain our wealth management fee income at mid-to-high single-digit growth for the full year.

Please turn to next page is the credit card business breakdown. I will still talk about the 2 most important indicator of credit card business, the active cards and card consumption. We maintain top 3 in both indicator. And our -- especially, in card consumption, we maintained nearly 12%. So our card consumption growth rate was not the highest in the market as we used to be. However, if you look at the fee income -- net fee income, our growth rate was 5.1%. Among the top tier credit card bank, the growth rate was still quite good. So I think our credit card business strategy was slightly different than before. So what we are pursuing is more qualitative growth. That means we want profitable growth, not only the growth in market share and to lose money, we want our credit card business to be a profitable business. So 5.1% income growth, doing pretty okay.

Please turn to the next page for deposit and loan structure. First, I want to talk about the deposits. The highlight is still the foreign currency deposit, 8.6% year-to-date. For year-on-year is 12. -- is about 12.5%. On the total loans, the foreign currency loan year-to-date is 17.4%. On the year-on-year, it's 18.8%. So as I just mentioned earlier, the foreign currency business is the focus -- the foreign -- the FX flow business is our focus for this year.

Also, I want to note that on the unsecured personal loan, till September, we have exceeded TWD 100 billion in unsecured personal loan balance. So -- yes, so I think [ this business ] -- the unsecured personal loan now, about 25% of the new unsecured -- newly originated unsecured personal loan is from digital channel. And we still keep maintaining our market position as #1 in Taiwan. So I think this is a representation of how we utilize digital power to improve our business.

Please turn to the next page for deposit structure. For the NT dollar loan-to-deposit ratio is 88.8%. As long as it is lower than 90%, we think this is still okay. The overall LDR is 73.5%, and the LDR for foreign currency was 38%.

Please look into right-hand side for the deposit structure. And the foreign currency deposit grew by 12.8% on the year-on-year and is now 31% of our total deposit -- 31% of total deposit.

Please turn to next page for the loan portfolio breakdown. Till September, our loan balance is nearly TWD 1.3 trillion. If you look at the components, the SME is still the largest share with 26.4%, followed by large corporate is 23.8% and secured personal loan, which is basically very similar -- home equity or very similar to mortgage, is 21.1%, and mortgage is 20%. Unsecured personal loan is 7.8%. If you look at the year-on-year comparison, you can find that it's a very stable growth compared to last year.

Please turn to next page is Page 12, NIM and spread. The NIM maintained very stable with no movement this quarter at 1.36%. On our -- on the interest spread, loan spread just came down by 4 basis point. However, it is not due to the lowered yield, it is because the funding cost went up due to Fed rate hike.

Also, I want to remind you that for E.SUN, our loan-to-deposit ratio for foreign currency is quite low, that also will drive the -- this calculation of interest spread to come down. So based on 2 reasons, first is the higher funding cost and the second is the low loan-to-deposit ratio of foreign currency. So that caused our overall spread to come down this quarter.

On asset quality, next page, is the NPL ratio of E.SUN. The overall NPL was 0.24%, and the coverage ratio was about 500%, both are at a very healthy level. If we look at the NPL by different product, the corporate NPL ratio was 0.12%. And for mortgage, it was 0.24%. So for the full year, we forecast our overall NPL ratio will still maintain at a very similar level of about 24 to 25 basis point.

Please look at the next page is the asset quality over 3-year horizon. And the market NPL ratio is 26 basis point, and E.SUN was 24 basis point. So we still maintained at a lower NPL ratio relative to the market over a longer period of time.

Please turn to the next page is the cost-income ratio is 49.9% till September. And for the full year because in the fourth quarter, usually, we will recognize more expense in the fourth quarter, especially in November and December. So for the full year, we think the CI ratio will still -- at around 51%, which is very similar to what we guided in the beginning of the year.

For the next page is the capital adequacy ratio. We did not update CAR ratio in the third quarter. So for the Financial Holding Company, CAR was 136.6%, and the BIS ratio for the Bank was, for Tier 1, about -- around 12%, and the overall BIS was 15.2%. So this is it for this presentation. And we are headed to the Q&A.

[Unknown Executive]

Please submit your question in the input box on the webcast window and you will enter a queue.

So here comes the first question is about the wealth management fee income breakdown. The breakdown between mutual fund and bancassurance.

Well, for the -- for till September, the breakdown is it still quite even, 50-50 across mutual funds and bancassurance. So yes, thank you.

[Unknown Executive]

Well, here we have the second question is about the profit contribution of our overseas operation and also the loan growth for the overseas branches.

The profit contribution from overseas operation that includes subsidiary and branch was about 15.4% of the overall profit -- net profit. And the loan growth from -- for overseas branch was 28.5%. So a pretty good growth rate from the overseas branches. And actually, we feel -- because our overseas branches were just recently opened in recent years, so we think looking to the future, their growth rate will still be higher than our domestic operation.

[Unknown Executive]

Okay. Here, we have the third question is about the NIM movement and the spread quarter-on-quarter.

So yes, the calculation difference between NIM and spread is that the spread only consider the interest rate difference between loan and the funding costs. However, in calculation of NIM, we incorporate the interest income from fixed income investment. So on loan spread, if we look at the foreign currency loan and domestic NT dollar loan separately and we found that over time, our NT dollar interest spread was roughly at 1.5%. And recently, it came down by about 1 or 2 basis point, very, very slowly. So 1.5% to 1.49% to 1.48%, somewhere around that. So the price competition of NT dollar was -- still exist. And also because the Central Bank of Taiwan does not intend to increase interest rate this year or in short period of time. So that cost -- the interest rate spread for NT dollar continued to narrow. However, we forecasted Central Bank will make its first rate hike in the second quarter of 2019, which is going to happen maybe in June by [ 12.5 ] basis points. And at that time, our NT dollar spread will be likely to widen at that time. So we're still quite optimistic for the interest rate hike in NT dollar. However, on the other hand for the foreign currency, if we look at U.S. dollar-only because U.S. dollar loan accounts for around 80% to 85% of our overall foreign currency loan balance. Okay, over the past year, the foreign currency loan spread continues to widen in a very stable pace. However, well, there will be -- there have been some ups and downs, but the trend was still going up. And for this -- for the recent quarter because the funding cost went up higher than what we expected, so that caused the foreign currency interest spread to come down a little bit. However, if you look at the yield from foreign currency loan is still continue to grow. So comparing with NT dollar, the foreign currency loan is still quite profitable business for E.SUN. And we continue to expand through the share of foreign currency loan in our overall loan book from nice 16% last year, now it's 17%. And it is still an outperformer in our loan book. So yes, so we think the -- as long as we can follow our strategy and to expand our cross-border business, then we will see some -- more benefit coming from the foreign currency interest rate spread to continue to widen.

[Unknown Executive]

Okay. We have the next question. Quarter-on-quarter growth was strong. And how we gained market share in mortgage and foreign currency loan, the reason behind the growth?

Okay. Let me start with mortgage first. Last year, the regulator lowered the risk-weighted asset of mortgage from 100% to 75%. And also that was a type of mortgage. And the second type of mortgage is from 40% to 35%. So that help us to -- allow us more room to grow in mortgage. So if you look at the market -- overall market in Taiwan, you will find that the mortgage market was quite strong this year. So -- and also we shifted our focus to grow in mortgage more than to secure personal loan in response to the lower risk-weighted asset. So -- and also we think mortgage is just -- also for individuals -- it also serves as an anchor to build a relationship with individual customer and to understand a customer. So in Taiwan, if a household can afford a mortgage and to buy a house, then I think, the financial condition for that household is quite okay. And we can leverage that relationship and start to penetrate into these certain type of customers and to cross-sell. No matter in credit card or wealth management. So we think mortgage is still, in Taiwan, the healthy market. It's still very stable. So we think mortgage is quite safe. And it's a good timing for us to enter in mortgage. For foreign currency loan, I think, our foreign currency loan grow is for a number of reasons. First is, our overseas footprint. We started to rapidly expand our overseas branches since 2013. Before that, we only had 2 overseas branches, 1 in Hong Kong and 1 in Los Angeles. So for the past 4 -- about past 5 years, we very quickly added 2 subsidiary, 1 in China and Cambodia and also like 7 to 8 branches focused in Asia Pacific. Once we have that overseas network and it allowed us to build up the financial platform to serve our cross-border clients better. So most of our customers in overseas branches are still Taiwanese corporates. So that's the first reason why we can have such rapid growth in foreign currency loan because the network that we have. And the second is, we shifted our focus from loan to a FX flow business. So what we try to gain is not only loan, but also like FX hedging over trade finance, over cash management. And I think cash management is a very important product because it allows us to understand our customers much better. If you can understand your customer, then you will be more comfortable granting loan for -- to them. Also, because our online corporate banking platform is quite advanced compared with our competitors, so it becomes a very convenient for the -- for our corporate clients. So that will bring in more money flow into trade finance from our customers because the revenue will come -- they will setup an account with E.SUN and their revenue will come through that account because our online banking platform is very convenient and powerful for them to operate their money. And the third reason is, yes, so I think -- so based on the 2 reasons, the overseas network and our focus in trade finance, that contribute to the growth in foreign currency loan.

[Unknown Executive]

So investors, I think, we have answered all the questions that we have. So I think, I'll call an end for this conference call. Thank you for your participation in E.SUN Financial Holding Company's online conference. There will be a webcast replay within an hour. Please visit our company's website for more information. Thank you.