E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2020-Q3

[Alex Chiu; Manager, executive]

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

The event is composed of 2 parts. Firstly, I will give the presentation on our operation in the third quarter. Second part is Q&A session, where we will answer your questions.

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

[Magi Chen, executive]

Welcome, everyone. Thank you for joining our investor conference. During the first 9 months of 2020, E.SUN net revenue rose 4.4%, while net profit fell 11.8%. Thanks to the effective pandemic control and [indiscernible], together with the capital inflow from the overseas Taiwanese corporations have driven overall loan growth.

E.SUN total loan increased year-on-year by 11.2%, mainly driven by SME lending and mortgage. At the same time, E.SUN has been carefully managing risk. Asset quality has remained behind with the NPL ratio remaining at a low level of 20 basis points.

Fee income business has delivered robust growth. Both total net fee income and wealth management net fee income have reached new highs.

In terms of the credit card business, E.SUN has continued to deliver 11% year-on-year card consumption growth, even as the market has declined. This growth has been driven by the innovative service experience and the penetration of the online payment channels.

After 4 years of development, E.SUN launched its own core banking system in August, it not only greatly enhances the efficiency of the service launch, but it also bolstered the development of the online platform and AI technology.

Finally, I would like to share some good news with you. E.SUN has now been listed in DJSI for 7 consecutive years, which is the best banker in Taiwanese financial industry. At E.SUN, we will keep moving forward to create more value for our stakeholders. Thank you.

[Alex Chiu; Manager, executive]

Thank you, Mr. Chen. Now we will move on to the presentation, starting with Slide 1, summary of Financial Holding Company. For the third quarter, total assets of Financial Holding Company reached TWD 2.7 trillion, grew by 11.3% year-to-date. Key financial figures remain healthy. Book value per share TWD 14.07, double leverage ratio, 103.43% and financial holding company CAR ratio 122.57%, operation channels are unchanged.

Let's move on to Slide 2. For the 9 months of 2020 Financial Holding Company's net revenue were TWD 42.6 billion, grew by 4.4% year-on-year. Net profit was TWD 13.9 billion, decreased 11.8% year-on-year. Subsidiaries of E.SUN Financial Holding Company, E.SUN Securities and Venture Capital delivered outstanding performance for their profit growth, 78% and 276.9%, respectively.

As for business operations, I would like to highlight our net fee income with 6% year-over-year growth. Also, wealth management fee income reached TWD 6.9 billion, grew by 10% year-over-year. Both numbers were new highs for the 9 months.

Besides credit card business is a robust growth. For credit card consumption, the whole market declined by 7%, while E.SUN grew by 13.4% with the highest increase of volume and ranks #2 for accumulated consumptions. Besides E.SUN captured the opportunity of stable domestic investment momentum. Based on this momentum, loan balance grew 11.2% year-over-year and foreign currency deposit grew 7.2%.

Net interest in loan balance and foreign currency deposits were the second highest. At the same time, our asset quality stayed benign, NPL ratio is 0.2% and coverage ratio at 612.5%. Also, there are some highlights in the third quarter of 2020 that I would like to share with you. E.SUN has been a member of DJSI for 7 years in a row and ranked top 10 worldwide since 2017. As for digital transformation, E.SUN has launched new core banking system and the system went online this August.

Let's move on to Slide 3 for our financial performance. Key financial figures remain stable. Net profit reached TWD 13.9 billion and EPS is TWD 1.11. ROE 10.63% and ROA 0.7%.

On Slide 4, net income of Financial Holding Company is mostly contributed by E.SUN Bank with 91.8%.

Let's move on to Page 5. Net profit breakdown of Financial Holding Company. Net revenue grew 4.4% and operating expense were 11.4%. E.SUN has controlled expense growth well compared to the first half, and now there's an obvious improvement on our OpEx. For our bottom line, net profit decreased 11.8%.

Let's move on to the next slide for revenue breakdown. The total net revenue is TWD 42.5 million, with TWD 36.5 million coming from net interest income and 34.4% coming from net fee income and 29.1% from fixed income and others, net interest income grew 4.8% year-over-year. Net fee income grew by 6%.

For Slide 7, net fee income breakdown. Total net fee income reached TWD 14.6 million mostly contributed by wealth management with 47.4% and 32.2% on credit card business. For the 9 months, net fee income for wealth management grew 10% year-over-year, which reached its record high.

On Slide 8, credit card business breakdown. The credit card business growth momentum is strong for active cards. E.SUN has more than 4.4 million cards that ranks #3 in the market with 13.7% market share. Market share of card consumption increased to 15.9% and ranks #2 in the market.

Moving on to Slide 9, deposit and loan structure. Total deposits grew 10.2% year-to-date, and foreign currency deposit grew 8.7% for the past 9 months. Total loan growth of 9.1% and SME loan grew 13%, and the driver of consumer loans is mortgage with 19.1% growth.

Please move on to Slide 10, deposit structure. Overall LDR is 68.9%. NTD LDR rose slightly to 91% and foreign currency LDR is 29.6%.

Please turn to Slide 11, loan portfolio breakdown. E.SUN maintained loan balance between corporate side and consumer side. For corporate loan breakdown, led by SME loans was 26.3%, followed by large corporate with 21.8%. On consumer side, mortgage loans account for 24.7%; followed by a secured personal loan, 18.8%; unsecured personal loan 7.6%; and credit card revolving, 0.8%. The right chart shows that all loan categories had stable growth.

Moving to Slide 12. NIM and spread. NIM was 1.25% and interest spread was 1.25%. E.SUN managed its funding cost well. Cost of funding at third quarter is 0.47%. And by the end of September, our funding cost has lowered to 0.42%.

Turning to Slide 13, asset quality. E.SUN maintained benign asset quality at relatively low NPL at 0.2%. Coverage ratio is 612.5%.

Please turn to the next slide, asset quality by product line. NPL for major product line is stable with mortgage NPL 0.1%, corporate NPL of 0.19% and credit card 0.14%.

Moving on to Slide 15. For the 9 months 2020, NPL, 0.2%, while the market NPL ratio is 0.24%, demonstrating E.SUN's excellent asset quality management.

Please move on to Slide 16. Cost income ratio. For the 9 months of 2020 CAR ratio is 56.6%.

Turning to Slide 17. Capital -- CAR ratio for financial holding company was 122.57%, bank Tier 1 ratio was 11.54% and BS ratio of 14.12%.

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

[Alex Chiu; Manager, executive]

So we will begin the Q&A part. And the first question that we have is the investor wanted to provide our outlook on year 2021 on loan gross margins, OpEx and credit cards -- and credit cost.

And we do not disclose our guidance for the next year at this point. But what we see, no matter the domestic economy recovery or on the housing market in Taiwan or the domestic investment sentiment, everything looks quite positive. So we still maintain a good and positive outlook for the year to come, no matter on loan growth or margin or credit costs.

Okay. The second question is the outlook on new Taiwan dollar loan-to-deposit ratio.

The NTD LDR as of now is 91%. And the rate and the ratio went up this year. This is largely because most -- the majority of the increment of loan growth is coming from NT dollar loan. And so for the year to come, we expect the trend will still remain. So for next year, the outlook for LDR for NT dollar will still be somewhere around 90% at the same level.

And the third question is wanted to provide the update on OpEx growth.

For the first 9 months, our OpEx [Audio Gap] growth.

And the last question is about the promotion amount spent on credit card spending. And we do not disclose this number in analyst meeting. But what we can say to you is that we try to balance the revenue and the promotion cost associated with the credit cards. And so far, we still maintain that balance quite well.

Okay. We have the second question coming in. Can you provide some guidance on loan growth outlook for next year, especially in foreign currency?

[Magi Chen, executive]

Yes. I think next year, we still see a strong demand just because driven by our government package. So total loan growth, I think next year should be around maybe the same as this year. But the foreign currency loan, we hope we can -- after second half, should be in second half, we can increase in second half, maybe -- we hope we can over 35% of our foreign currency loan...

[Alex Chiu; Manager, executive]

Deposit ratio.

[Magi Chen, executive]

Deposit ratio. Yes.

[Alex Chiu; Manager, executive]

And the following question is about the cost growth and also asked how much of our digital spending plan is done already.

As you know that we repeated before is that our core banking system renewed plan has completed in August. In the future, and also the CBP project is the bulk of our digital spending this year. So in the future, we will still continue to invest in digital transformation, no matter in the improvement in processes or implementation of AI, we will continue to make the related investment in digitalization. But in the future, the cost associated with digitalization will decline in the future.

We have the next question coming in. It's about the reason why NIM goes down even when spread stabilizes. And I want to once again emphasize, and we also mentioned it in the analyst meeting this afternoon is that E.SUN maintained its foreign currency liquidity very well. And for E.SUN, foreign currency is also very important for our liquidity risk management.

So for our foreign currency investment, the first thing that we look at would be the risk management. So currently, we do not consider to extend our investment duration and also -- so this is on NIM.

And on spread, yes, in the third quarter, we have seen the signs that the spread has stabilized. But for NIM, it will take maybe a little bit more time for the NIM to hit the bottom and will slowly recover.

Okay. And also, a following question. If we were to see NIM trial out in the future, what are the potential factors, assuming Fed or CBC rates stay flat?

I think there is a very important factor that if the overseas credit quality has stabilizes and has become better, then it will help us to effectively to raise the foreign currency loan-to-deposit ratio, which means we feel more comfortable about the credit overseas and we can feel comfortable in making more loans in foreign currency. I think if that -- when that happens, and we expect the NIM will start to raise again.

Okay. We have next question. Are you seeing people moving from China back to Taiwan due to reshoring of industry? Is that driving mortgage growth?

Yes, for the first question. Yes, according to the statistics, the total amount committed to invest in Taiwan is now about TWD 1.3 trillion. So we definitely see a lot of companies and a lot of people are moving back to Taiwan and to invest. And that strong investment sentiment also reflects in our GDP growth.

I think in Q3, the investment growth is as high as around 5%. So it's still quite strong sentiment to invest. And of course, that is also a factor to drive the housing market to stay very strong in Taiwan. And also partly of the mortgage growth is coming -- is because of that reason.

Okay. The next question is about wealth management. Can you explain the reason behind the Q-o-Q decline in fee income.

And there are mainly 2 reasons. First is because of the high base reason for the same -- for the third quarter of 2019, it was a high base. And our wealth management fee income was at third highest in E.SUN's history. So on a relative basis, we see the wealth management decline on a year-on-year basis. However, on the Q-o-Q decline compared with second quarter of this year. And third quarter, the main reason is because of the regulation change against insurance. So that makes a lot of insurance product -- the saving type insurance product to become less attractive to the customers so that makes the insurance fee income to drop in the third quarter.

However, we also explained in the analyst meeting this afternoon that it takes time for the wealth management and insurance product to make the adjustment. And we see there are more and more customers are -- start to accept the new type of insurance policies, which are the protection-oriented insurance policy. So the willingness to buy insurance policy is coming back.

Yes. We have next question, is about the loan growth target for this year. Will we revise our loan growth target upward?

Yes. In the beginning of the year, we guided the loan growth to be 8% to 10%. But things have changed a lot since then. And as of now, the loan growth year-on-year is 11%. And for the full year, we expect our loan growth to be 10% to 11%, and that is the answer for the full year this year.

We have the next question. The regulators seem to be somewhat concerned about the mortgage loan growth for the system. Can the current robust mortgage loan growth sustain?

And the first part of the question...

[Magi Chen, executive]

Regulation.

[Alex Chiu; Manager, executive]

The regulation is not going to be a major impact on the mortgage loan growth. And that is for the first part of the question. And for the next year, I think this year, we have a very strong loan growth in this year. However, for next year, the loan growth is not our top priority. It's not our top concern. So that we also want to gear towards a more customer-oriented service model and for the loan yield that we will not compromise on the loan yield. So we will try to elevate the loan yield coming from the mortgage and to provide a more integrated service for our customers.

And for the -- and we also will target on the quality customers for E.SUN to provide -- to get more cross-selling opportunities.

The next question is about trading income. How should we think about trading income in the coming year? Assuming yield curve steepens, would there be lower realized gains?

As we told a lot of our investors before that E.SUN had put a lot of efforts into developing our flow business, which means we manage on behalf of our customers and to manage their portfolio and to make the trading gains out of the management of their portfolios so that -- so this part of our business, the foreign currency flow business will continue to grow in the year to come. And we still expect there will be a very stable revenue stream coming out of the management of customers' flow. At the same time, we will still also pay much attention to market risk, the volatility. So overall speaking, for the next year, we expect to see trading income to be quite stable.

Okay. The next question is about cost-to-income ratio. With digital improvement for efficiency, what is the medium-term cost-to-income ratio target?

Yes, we expect to see a lot of our digital implementation will improve our efficiency and to reduce our use of labor. For the medium-term CI ratio, in 3 years, we hope to see it come down from the current level to 52% in 3 years.

We have -- I think this is the last question coming in. It's about open banking in Taiwan and also electronic payment regulations.

And so far, the open banking has not started in Taiwan, and there are still a lot of factors that are uncertain. So it's not easy for us to call the impact right now. And -- but also, I would like to share with you is that we made a lot of improvement on our digital channel. So far, for a lot of transactions, no matter in wealth management or foreign currency or credit card, more than 60% of the transactions are made through our digital platform and still a lot -- still, we have a few AI projects that have been implemented. And we will still continue to be more prepared for open banking era and digital banking area.

So we have answered all the questions. Thank you for your participation. If you feel we did not answer your question, well, please feel free to e-mail us and to call us any time. And this call, there will be a replay prepared shortly. And so thank you for your participation. Thank you. Bye-bye.