E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2019-Q3

[Cai Yulin Tsai, executive]

Dear investors, welcome to E.SUN Financial Holding 2019 Third Quarter Webcast Conference. And the conference will be moderated by me. I'm Matt from Investor Relations. In the room, we have IR team's IR head, Chiwei and Harris. Also we are very glad to have President and CEO of E.SUN Financial Holding, Mr. Joseph Huang, to join us. Please know that this call is being recorded. And before entering to the presentation, we 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 the third quarter 2019. In the first 9 months of 2019, we continued to see solid growth in many areas and on track to achieve full year target. Preliminary net profit of E.SUN Financial Holding Company rose 18.2% to TWD 15.8 billion, which hit a new high in the history, while ROE, 12.79%; ROA, 0.89%; and EPS, TWD 1.36 per share. The main subsidiary, E.SUN Bank, net profit rose 16.4%, marking the highest one amongst banks under financial holdings. Besides asset quality benign with nonperforming loan ratio remained low at 0.19%, which is better than industry average.

During the quarter, the highlight was fee income momentum. Total fee income recorded the highest in single quarter and first 9 months ever. This great performance was driven by both credit card and wealth management. Compared with a year ago, card consumption amount rose 23.5% and the net increment was the highest in Taiwan led to a 30.3% growth in credit card fee income.

In wealth management, we continue to focus on customer segmentation and overseas platforms. Business momentum in close-border business continued to be strong thanks to the integration of overseas and domestic operation sites. Both foreign currency deposit and loan increased 23.1% and 15.6% year-over-year, respectively, especially our foreign currency deposit increased market share to top 3 in Taiwan.

Finally, moving to ESG commitment and sustainability. We are very glad to inform you that E.SUN was once again recognized by Dow Jones Sustainability Index World. This year, E.SUN ranked third worldwide and first in Asia Pacific. We have been listed in DJSI since 2015 -- 2014 and in DJSI World for the fourth time. Besides, we have been named as the Most Honored Company in Taiwan by Institutional Investor since 2017, marking our effort to create more value for customers, shareholders and the community. More information will be disclosed in the presentation. Thank you.

[Cai Yulin Tsai, executive]

Thanks, Joseph. We will go right through the presentation now. Starting on Slide 1 for the Financial Holding summary.

Total assets of Financial Holding now reached TWD 2.46 trillion. It was 7.9% growth compared with the end of 2018. Key financial figures remained at healthy level, including book value per share, TWD 14.55; double leverage ratio, 103.95%; and the CAR ratio of Financial Holding by the end of June reached 125.2%. All distribution channels, both domestically and overseas, remained unchanged quarter-over-quarter.

Move on to Slide 2, Business and Financial Review. E.SUN still maintained solid growth and profitability as preliminary net profit for the first 9 months was TWD 15.78 billion, rose 18.2% year-over-year. And on top line, net revenue reached TWD 40.81 billion, rose 9.3% year-over-year. Also the main subsidiary E.SUN Bank, net profit reached TWD 15.53 billion; and the growth rate 16.4% is the highest among banks under Financial Holdings. Also the E.SUN Bank's ROE, 12.9%, is the highest in Taiwan. E.SUN is still underlying overperformance and continue to be strong as the net fee income increased 12.9% year-over-year, marking the highest fee income in the first 3 quarters and any single quarter in the history. And the main driver coming from wealth management and credit card, just as Joseph mentioned.

The net increase of card-in-force, active cards and card consumption are all ranked first place in Taiwan. Leading net fee income of credit cards grew by 30.3% year-over-year. On balance sheet side, total loan balance increased 8.8%, mainly driven by foreign currency and mortgage. Also we still mainly focus on liquidity and online digital platform to receive foreign currency deposits. So the total foreign currency deposit balance increased by 23.1% year-over-year and marking our foreign currency deposit market share advanced to top 3 in Taiwan. Besides for the business expansion, we still maintain asset quality benign, NPL ratio at 0.19% and coverage ratio at 612.4%.

E.SUN's recognition and our ESG commitment has been recognized by international institutions. For example, like DJSI, we ranked third place worldwide and first place in Asia Pacific. Also we have the highest rating, AA, by MSCI ESG. Also we have been recognized as the Most Honored Company, best CEO, best CFO by the Institutional Investor since 2017.

Please take a look at Slide 3 for the financial performance. You can see that all the 4 categories, including net profit, earnings per share, ROE and ROA all hit the relative high level in the franchise.

Slide 4 shows the net -- net income breakdown by legal entity. E.SUN is still a bank-centered financial holding, and E.SUN Bank contributed 97.1% of the group profit.

On Slide 5, turning to the net profit breakdown. On top line, we increased 9.3% year-over-year, and the OpEx increased 13.5% due to the IT investment and the core banking transformation. Also you can see the credit cost is still at very low level, only 0.15 bps, which leading -- or in total net profit increased by 18.2% year-over-year.

Moving on to Slide 6. Net revenue breakdown. Total net revenue reached TWD 40.8 billion in the first 9 months this year, and the majority of the portion coming from net interest income, 33.3% (sic) [ 36.3% ]. Followed by net fee income, 33.8% and fixed income, FX and others, 29.9%. Please note that on Note 1, we disclosed that 53.9% of the green part, fixed income, FX and others belongs to interest income from a stable growing fixed income investment. As we discussed earlier, in every quarter's earnings call that due to the IFRS 9 accounting classification, we book the fair value through the P&L of the fixed income investment under these green parts. And lastly, a stable interest income from the fixed income investment.

Then, please turn to Slide 7, on fee income breakdown. Total net fee income reached TWD 13.8 billion, which is mainly driven by wealth management and credit card business. And wealth management now accounted for 45.7%; and credit card also reached 35.3%. You can see our wealth management fee income now turned positive on the growth rate, which increased by 3.7% year-over-year. And the product mix of the wealth management is coming from mutual funds, 57% and bancassurance 43%. Also the highlight of the fee income is from credit card business increased by 30.3%. So in the next slide, Slide 8, we will show you the competitive landscape of the credit card business.

E.SUN now ranks top 3 in the market in terms of active cards and card consumption. So you can see that our growth momentum is continuing. On active card, now that market share reached to 12.3%, and card consumption also reached to nearly 13%. And we have the strategies on diversified product offering. For example, we have co-brand with the largest department store in the southern part of Taiwan, Nanshan shopping plaza. And also we cooperate with the highest -- the biggest e-commerce store, PChome in Taiwan, to promote the Pi credit card. So you can see, we cooperate with different large partners to grab many users' wallet share. So you can see the per card spending is still increasing.

On Slide 9, the deposit and loan structure. The table show you the year-to-date growth on deposit and loans. Total deposits now reached to TWD 1.98 trillion, increased 6.9% year-to-date. And the main driver is coming from a foreign currency deposits, which has increased 11.4% year-to-date. And right now, the foreign currency deposits accounting for 34.5% of total deposits. On the loan side, total loan now reached to TWD 1.39 trillion with 5.8% growth year-to-date. And we are very balanced between corporate loan and consumer loan growth.

On corporate side, the main driver is coming from foreign currency loans, which increased 11.4%. And also right now, foreign currency loan accounted for 18.2% of total loans. On consumer side, mortgage is our driver, which increased 14.8% and the net increment of the mortgage ranked #2 in the markets.

Slide 10. Moving on to the deposit structure. On the left-hand side, the loan-to-deposit ratio, the overall LDR was 17.2% (sic) [ 70.2% ]. And split between NT dollar and FX LDR, the NT dollar LDR was 87%, and foreign currency LDR was 37.2%.

On Slide 11, we show you the loan portfolio breakdown. You can see E.SUN's total loan is very balanced between corporate and consumer, and which is leading by SME, 25.3%; and followed by large corporate, 24.3%; mortgage, 22.1%; secured personal loans, 19.8%; and unsecured personal loan, 7.6%. And on the right-hand side, you can see all the loan categories show a stable growing trend.

On next page, Slide 12 for NIM and spread trend. Our NIM this quarter at 1.35%, dropped 1 basis points compared with last quarter. And the spread now reached to 1.42% in this quarter and dropped 2 basis points compared with last quarter. However, we still managed our funding cost well, so you can see our funding cost now dropped to 0.89%. The following 3 pages, we will show you the asset quality of the bank.

The first page is on Slide 13, the overall NPL ratio and coverage ratio. Right now, E.SUN's NPL ratio at 0.19% in the first 9 months and coverage ratio at 612.4%. And looking to the different products on -- product lines' asset quality. We still managed our asset quality well as the mortgage asset quality now is 0.19% for the NPL ratio and the corporate NPL ratio is still in the relative low level at 0.06%. And compared with the market on Slide 15, E.SUN continued to keep our asset quality benign and has the superior asset quality compared with the market.

Slide 16 on cost-to-income ratio. In the first 9 months, CI ratio reached to 52.1%. That is due to the investment in IT and core banking transformation.

And the last page, on Page 17, we ended the first half of the capital with BIS at 11.71% and Tier 1 ratio -- sorry, our Tier 1 ratio at 11.71%; and BIS at 14.63% of the bank and the CAR ratio of Financial Holding at 125.2%.

And that's the end of the presentation. Now we are happy to answer your questions. Thank you.

[Chiwei Hsiao, executive]

Yes, we have the first question coming in. It is a question about the breakdown of wealth management fee income, the percentage of mutual fund and bancassurance, respectively.

And for the first 9 months, and the breakdown, well, mutual fund accounts for 57% -- 57%, while bancassurance at 43%. So this is also a characteristic of E.SUN's wealth management compared with some of our peers who are under an insurance-centric financial holding company. And for those banks, the percentage of their bancassurance revenue fee income can go as high as 60% or even 70%. However, our wealth management fee income is more balanced.

So there are some discussions about the restriction on insurance policies and potentially, that will lead to the insurance policy more expensive and less attractive for the investors, for our customers. So when that policy is implemented, that will somehow limit the sale of insurance policies. However, the impact on E.SUN will be smaller compared with some of our peers.

Okay. Now we have a second question about the NPL ratio on corporate. The NPL ratio picked up from 0 -- from 1 basis point to 6 basis points, even though it is still at a very low level. However, there is a hike of 5 basis points, and that is mainly due to a case of an SME in Taiwan. This is a stand-alone case, and the company went delinquent in the third quarter. However, we are in discussion with this client and try to settle this deal.

We have the third question about the OpEx. The growth rate on a year-on-year basis was 13.5%, which is higher than what we expected. And this -- there are 2 main sources lead to the increase of operational expenses.

First, of course, the most important is from the investment of IT. Of course, we will keep investing in digital banking. And also we have -- many projects are going on. And artificial intelligence and also the transformation of our core banking system. And the biggest single project will be the core banking system, which is expected to complete in 2021. So just as we guided earlier, our CI ratio will maintain at a range around 51% or slightly higher until the completion of core banking system project.

And of course, there is the second reason lead to the increase in OpEx is from the marketing fees -- marketing expenses, sorry, of credit card. We have a lot of success in credit card this year. No matter in card-in-force, active cards or consumption, E.SUN all ranked #1 in the market. So yes, we think the consolidation of credit card market is still going and it's going faster. So it's quite important for E.SUN to gain more market share at this time. And in Taiwanese credit card market, only the top 3 players account for nearly 50% of market share in credit card in Taiwan. So this is a very important investment for us.

Okay. We have another question about our outlook on the foreign fixed income investment and also want us to elaborate on the portfolio of our foreign fixed income investment. As we -- as what we told our investors many times before, in our portfolio, in fixed income, about 95% is floating and our -- and we intend to keep our foreign currency very liquid, and so it can show from our foreign currency deposit increase. And we want to keep our foreign currency liquid so that we can respond to any kind of circumstance. So just because of the reason, it also reflects in our portfolio, first, our -- the duration, the average duration is quite short, only 1.5 years; so that we can undermine the interest rate risk and also to reduce maturity mismatch. And we do not -- or we only hold very, very limited fixed rate, long-tenor bond.

And as what we showed in a slide, in one of our slides showing the cost of funding, the cost of funding this quarter lowered by 3 basis points in third quarter. And this is also the second quarter -- so the second quarter in a row that we can maintain our cost of funding low. So yes, this is something very important, especially in an environment where interest rate is low.

Yes. We have another question. It's about the foreign currency market share and want us just to tell more about the top 3 market share and where do we get the data from. So we got -- the data is from the statistics published by Banking Bureau, and the data is published every month. And I can send you the link so that you can check upon it. And so the latest data is up to August. Our foreign currency deposit passed Bank of Taiwan. So we advanced from #4 to #3. Our market share in foreign currency deposit is 6.8%. And just as we said many times, our cross-border platform and our digital platform really helped us a lot in terms of getting more market share in foreign currency deposits. And everyday through our personal online banking platform, the foreign currency transaction can go up to USD 30 million to USD 40 million per day. So you can imagine that kind of -- that amount of flow can contribute to -- a lot to our foreign currency deposit.

And our foreign currency deposit in terms of market position went up very, very quickly in just 3 years, from #9 to #3. So it shows -- yes. So this is a quite important part of our strategy. Thank you.

And we have seemingly the last question about the recent update in banking regulation. I can come up with one, which is related to the risk-weighted asset calculation of mortgage. There will be 2 policies going to kick off in 2020. And both -- and these 2 policy will help us to improve our CET1 by 50 basis points -- by about 50 basis points. So it is some capital relaxation policies relating to mortgages.

[Cai Yulin Tsai, executive]

Okay. Dear investors, we just finished all the -- answering all the questions from the input box. So thanks for your participation in our online conference. And through the meeting, we have learned a lot of valuable opinions from all of you. And there will be a webcast replay within an hour's time. Please visit our company's website for more information. If you have any questions, please feel free to contact with IR team's Chiwei, Matt and Harris for more information. Thank you, and have a nice day. Goodbye.