E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Analysis

E.SUN's Strong Growth and Expanding Loan Balance

In the first nine months of 2023, E.SUN generated TWD 48.2 billion in net revenue and TWD 15.9 billion in net profit, marking a 36% increase in profits. Earnings per share (EPS) reached TWD 1.04. The net interest income (NII) and net fee income contributed significantly to the revenues, with net fee income growing 8.3% to TWD 15.8 billion, driven by wealth management and credit card services. Loans saw a stable growth of 4.6% year-on-year, crossing TWD 2 trillion. E.SUN anticipates net fee income to hit double-digit growth by year-end. Despite increased competition, credit card business maintained robust growth. The bank's asset quality remains strong, with a non-performing loan (NPL) ratio of 17 basis points and a coverage ratio above 700%.

Introduction to E.SUN's Earnings Call (Q3 2023)

Investors were welcomed to E.SUN Financial Holding Company's third-quarter earnings call of 2023, moderated by Chiwei, who was joined by notable executives including Vice CFO, Mr. David.

Strong Asset and Revenue Growth

E.SUN exhibited steady growth with total assets increasing by 3% and book value per share rising significantly to 14.58%, signaling an increase in intrinsic value. The lack of change in domestic and overseas branches suggests a focused approach on current operations. Net revenue reached TWD 48.2 billion, with a net profit of TWD 15.9 billion representing a 36% growth. Notably, their loan balance surpassed TWD 2 trillion, indicative of the company's accelerated growth pace.

Highlighting Net Fee and Wealth Management Income

E.SUN reported a robust 8.3% increase in net fee income, reaching a record of TWD 5.6 billion in a single quarter. Wealth management fee income grew by 13.8%, marking six consecutive quarters of positive growth in this area. The credit card fee income also showed a 14.6% growth.

Diversified Earnings and Venture Capital Growth

The bank constitutes 86% of E.SUN's net income while both securities and venture capital segments have seen strong growth throughout the year, diversifying income streams.

Positive Financial Performance Amidst Rising Expenses

Net revenue grew by 20%, outpacing operating expenses which increased by 16.4%. Despite the 36% growth in net profit, the company observed an unexpected rise in operating expenses influenced by capital raising costs, sales tax on high-interest income, and growth in credit card consumption rebates.

Credit Card and Deposit Market Dynamics

In the competitive credit card market, E.SUN managed a 15.2% year-on-year growth in consumption volume. The deposit growth stood at 2.3% year-to-date, with an impressive 25% increase in time deposits offset by a 10% decrease in foreign currency deposits due to clients' hesitancy amidst rising U.S. interest rates.

Loan to Deposit Ratio and Foreign Currency Deposits

E.SUN maintained a loan to deposit ratio at 85% in NTD and 68% blended. Foreign currency deposits, however, experienced a 12.5% decline year-on-year, now composing about 34.3% of the total deposits.

Stable Net Interest Margin and Superior Asset Quality

The company maintained a net interest margin (NIM) of 1.3%, with an expectation to hold this position by year-end. Despite the challenging interest rate environment, E.SUN achieved an extremely low non-performing loan (NPL) ratio of 17 basis points, with a coverage ratio exceeding 700%, reflecting exceptional asset quality.

Consumer Loan Portfolios and Efficiency Ratios

Consumer loans saw a 4.2% growth rate while mortgage loans increased by 4.1%. However, unsecured personal loans decreased by 7.6%. With a current cost-to-income (CI) ratio of 58.7%, efforts are being made to lower this figure to a more comfortable level through cost-saving capital expenditures (CapEx).

Capital Adequacy and Commitment to ESG

The capital adequacy ratio for the financial holding company and the bank stood at strong levels - 138% and 15.48%, respectively, with a CET1 Ratio at 11.35%. These figures are indicative of a solid capital buffer and financial resilience. Additionally, E.SUN displayed its commitment to environmental sustainability by hosting an ESG initiative with over 150 companies, collectively aiming to reduce carbon emissions significantly by 2025.

Forward-Looking Expectations and Targets

The company is set to achieve a 5% to 6% growth rate in deposits and maintain a near 15% growth in credit card fee income. Amid interest rate hikes in the U.S., E.SUN has capitalized on trading gains, with significant contributions from FX swaps. Looking to 2024, the company anticipates benefiting from potential mark-to-market gains if the Federal Reserve cuts interest rates. Their foreign currency investment portfolio is positioned more for short-term sensitivity, potentially aligning with these expected market dynamics.

Projected Expansion in Wealth Management

E.SUN anticipates a 15% full-year growth in wealth management fee income, driven by strong sales in bancassurance and a significant contribution from overseas platforms in Hong Kong and Singapore. While fund sales have been modest, positive feedback from financial consultants suggests an improving trend.

Earnings Call Transcript 2023-Q3

[Chiwei Hsiao, executive]

Hi, Investors. Welcome to the earnings call of E.SUN Financial Holding Company 2023 third quarter. I'm Chiwei; I'll be the moderator today. And also in the meeting room with me are my colleagues, Mr. Anthony Chen, Mr. Alex Chiu, and the host of today, Vice CFO of E.SUN Mr. David [indiscernible].

[Unknown Executive]

Welcome, everyone.

[Chiwei Hsiao, executive]

Okay. So at the beginning, I will spend a few minutes to walk you through the presentation of the third quarter earnings. On the first page, the page number is number 2, the FHC summary. On the total assets, both of the assets of financial holding company and the bank, the growth of year-to-date is 3%, maintain a very stable growth. On the key financial numbers, the book value per share is 14.58%. There is a significant increase compared with the end of 2023. On distribution channel, there is no change on the domestic and overseas branches.On Page 3 is the financial review of E.SUN in the third quarter. For the first 9 months, E.SUN's net revenue was TWD 48.2 billion and the net profit was TWD 15.9 billion, which was a 36% growth. EPS was at TWD 1.04 per share, ROE is 9.96% and ROA is 0.6%. On the bank, we also have a very good growth at nearly 30% in net profit.On business operation, our loan balance, there is a very stable growth by 4.6% year-on-year and the loan balance exceeded TWD 2 trillion. And I also want to note that since the founding of E.SUN, we spent first 23 years to exceed the first NTD trillion in our loan balance, which happened in 2015, and we spent another 8 years to surpass TWD 2 trillion milestone. So this is what you can see, it's like a flywheel and the flywheel is spinning faster and faster.Okay. And on the loan -- SME loan, the growth rate is 8%, consumer loan is 5.3%. On the second bullet is the net fee income, which is a business highlight of E.SUN in this quarter. It was reported TWD 15.8 billion, which was an 8.3% increase. And also in the third quarter alone, the net fee income was TWD 5.6 billion. This is a record high of any single quarter in E.SUN in net fee income.The main contributor is the wealth management fee income, which was TWD 6.9 billion, a 13.8% growth and credit card fee income was 14.6% growth. And I also want to note that the wealth management fee income, this is the sixth consecutive quarter that we maintained a positive growth in wealth management fee income. And as you can see, the growth momentum is quite strong.And on this next section is the business highlight of E.SUN. On honors and recognitions, we are the biggest winner of The Wealth magazine in Taiwan Financial Awards, including the winning of Sustainable Finance Award. We are the winner for the seventh consecutive year. And also a winner in Fintech Innovative Applications, The Most Influential Trust Service and the Most Recommended by domestic clients.And we also are the winners of the Jade Award presented by The Asset and also the Most Recommended Retail Bank by The Asian Banker. And this year, E.SUN also held the E.SUN ESG Initiative. This is the third consecutive year for E.SUN to hold this very meaningful event to invite 157 companies to respond to the ESG commitments and they collectively to reduce 1.57 million tons of carbon emission by 2025. And E.SUN is the frontrunner and leader in ESG and we will continue to make more commitment in ESG.On the next page is the financial performance for the past 5 years. The net profit is TWD 15.9 billion and EPS is TWD 1.04 per share. On the next page is the -- a breakdown of net income of financial holding companies and the subsidiaries. That's what you can see on the left-hand side. The bank represent 86% of our net income. And on the right-hand side, where you can see both the security and the venture capital has a very solid growth in this year.Next page is the net profit breakdown of E.SUN. On net revenue, we grew by 20%. And on operating expenses, we grew by 16.4%. On the net profit, the growth rate was 36%. And on the operating expenses, the growth rate is a little bit higher than what we expected because there are a few reasons causing the growth in operating expenses. First of all, is the capital raising that happened in the first quarter and there is an employee subscription costs associated with the capital raising. The amount is TWD 400 million.And also there is a sales tax associated with the interest income. The tax base is in the gross interest income. And because there is growth in our loan volume and the interest rate is much higher than the previous years. So the sales tax of the interest income also increased and the amount is about TWD 470 million. And also the credit card, the business is going very well this year. So there's also some cash rebates and some associated with the growth in credit card consumption. And all of the 3 reasons lead to the increase in operating expenses this year.On next page is the net revenue breakdown. The NII, net interest income, represents 44%, followed by net fee income is 32.7% and fixed income and others represent 22.9%. As what you can see on the right-hand side, net fee income grew by 8.3% this year and we expect to reach double-digit growth, 10%, by the full year in net fee income.The next page is the breakdown of net fee income. The total net fee income is TWD 15.8 billion. The wealth management account for 43.4% followed by credit card, which was 33.5%, and brokerage is 12.6%. On the right-hand side, the 2 main fee income drivers are both performing very well this year. The credit card growth rate was 14.6% and the wealth management is 13.3%.Next page, we use 4 graphs to illustrate our market position on credit card. On Active Card, the market share is 13.4% and the card consumption is 13%. There is some drop in the market share in credit card consumption because of the market competition is very fierce. But our credit card consumption growth volume is 15.2% year-on-year. So we still continue to maintain a very robust growth in credit card business.On the next page is the deposit and loan structure. On total deposits, the year-to-date growth was 2.3%, of which the time deposit growth rate was 25% and the foreign currency deposit was minus 10%. And this is because that we are trying to optimize our funding cost structure -- our funding cost and our deposit structure.On total loans, the year-to-date growth rate is 3.7%, of which the corporate loan growth grew by 3.2%, SME loans grew by 5.8%, foreign currency loans dropped by 2.9%. And the foreign currency loan, the reason for the drop is because the high rising interest rate on U.S. dollar. So the -- our clients are more hesitant to borrow in U.S. dollars.On consumer loans, the growth rate was 4.2% and of which mortgage loans, the growth rate was 4.1% and unsecured personal loans, it dropped by 7.6%.Next page is the deposit structure. On the left-hand side, the loan to deposit ratio on our NTD LDR is 85%. The blended is 68%, and the foreign currency was 36%. On the right-hand side is the deposit structure. Our cost rate in NTD is 57.4%. The foreign currency deposit, there was a decline of 12.5% year-on-year. And right now, the foreign currency deposits account for about 34.3% of the total deposits.Next page is the loan portfolio breakdown. The total loan of E.SUN is nearly TWD 2 trillion. There is a very balanced break between corporate and the consumer. But what you can see on the right-hand side, we have a flat growth on large corporate, 8% growth in SME, 4.5% growth in mortgage. Unsecured personal loan, there is a drop by 10%. Secured personnel loan, there is a growth of 12.5%.On NIM and spread, in this quarter we maintained a very stable NIM at 1.3% as what we indicated in the previous quarter earnings call, and we expect the NIM level will continue to be flattish by the year-end. On quarterly interest spread, it dropped by 3 basis points, even though the loan yield increased by 4 basis points. But the funding cost also grew by 7 basis points. So there was a drop in the interest rate spread by 3 basis points. And we expect the spread will continue to be flattish until the fourth quarter, until the year-end.On next page is the asset quality. The overall NPL ratio is 17 basis points and coverage ratio is more than 700%.Next page is the asset quality by product category. On corporate side, the NPL ratio is 17 basis points and the mortgage was 5 basis points.Next page is the track record of E.SUN's asset quality. As what you can see, we always can maintain a very benign, very good asset quality.Next page is the cost to income ratio. As of the third quarter, the CI ratio is 58.7%. We are not quite satisfied with the level of the CI ratio. And we will continue to implement some cost-saving CapEx to maintain the CI ratio at a more comfortable level.On capital adequacy ratio for the financial holding company, it was 138%. On the bank BIS ratio, it was 15.48%, of which the Tier 1 ratio is 12.89%. The CET1 Ratio is 11.35%.And on the last page is a picture of the ESG Initiatives that we held in September of 2023. And we will try to gather some of the very good companies in Taiwan to promote the awareness of ESG through the collective efforts with the client. And more than 150 companies participated in this very meaningful event. The total revenue of these -- all of these participating companies, more than TWD 5 trillion. So it's a very sizable scale and the very good companies who joined us in this very meaningful event. And collectively, they commit to reduce 1.57 million tonnes of carbon by 2025, and we try to make a positive impact on decarbonization through providing ESG consultation engagement and sustainable financial products.So this is all of the presentation today, and we can get into the Q&A section. Please enter your question in the dialogue box and we will answer your question. Thank you.

[Chiwei Hsiao, executive]

Okay. We have the first question. It was about our deposit goal. We indicated that the annual growth target for deposit is 5% to 6%. Do we still plan to maintain that target? The third quarter, the year-to-date growth rate is 2.3% on our deposits and on a year-on-year basis it's about 4%. So I think it is achievable in the remaining one quarter to reach 5% to 6% of the growth rate in deposits.And the second question is about the credit card fee income. Do we still maintain a growth target of 12% to 15%? And indeed, yes, as of the third quarter, the growth rate of credit card fee income is nearly 15%. And in the first quarter, it is traditionally the shopping season. So we are quite positive that we can maintain a very strong growth rate in credit card fee income. Thank you.And we have the next question is about the trading gain. How many percent of the trading gain is coming from swap transaction? And we will invite David to answer this question.

[Unknown Executive]

Hi, everyone. Basically, our trading gain comes from 3 parts. The first part is the commercial goal just like from FX swap from our retail clients and our corporate clients. And the second part is for our traders trading game, and the third part is coming from the FX swap. And FX swap, as we know that this year the United States a hike 21-1/4 interest rate. So the difference between an external interest rate and U.S. dollar are very high. So swap can contribute a lot for our trading game. So right now, maybe more around half of our trading gains come from FX swap. Thank you.

[Chiwei Hsiao, executive]

Okay. We have the next question. If the fed starts to cut interest rates in 2024, shall we expect E.SUN to record decent and mark-to-market gain?

[Unknown Executive]

This is David again. So for the mark-to-market gain, in fact they do start to cut rate in 2024 because some of our portfolio, our expect rates, so we may have received some mark-to-market gains from the [ financial ] cut rates.

[Chiwei Hsiao, executive]

Okay. Thank you, David. Okay. The next question is, does the mark-to-market gain has higher sensitivity with the 10-year yield or 2-year yield? Again, please David?

[Unknown Executive]

Okay. Because our foreign currency investment, the duration is around 3 to 4 years. So our sensitivity is more focused on the short term.

[Chiwei Hsiao, executive]

Okay. Thank you, David. Okay. We have the next question about the wealth management fee income. The wealth management -- the bank assurance sale is strong this year and the fund sale is flattish. And how do you see the growth momentum in the fourth quarter?To answer this question, first of all, I would like to provide a breakdown of the fee income. Among the 3 categories, the fund -- the mutual fund contributed about 36% of fee income. Bancassurance contributed about 46%. And other financial products, which include overseas fixed income products and structured notes, represent about 18%. Among these 3 product category, the bancassurance demonstrated a very strong fee income growth of 25% this year. This is followed by more than 30% growth in the previous year. So for the 2 consecutive years, we continue to have very strong growth in bancassurance sales.And on overseas debt and structured notes, the relevant fee income growth is also very good, 36%. And on mutual funds, the growth rate is weaker. It's about maybe like 2% or 3% minus. But we are quite positive judging from the recent feedback from our financial consultants. So we expect the growth rate of fund sales will be positive for the full year. And we are also very happy to see that our overseas platform, which includes our Hong Kong and Singapore fee income from wealth management, the growth rate is also 50%, 5-0.So the growth momentum from overseas is quite strong. So we are very optimistically estimate that the overall wealth management fee income will be 15% growth for the full year. Thank you.This is the final call for additional questions. If you still have any questions for E.SUN, please fill in your question in the dialogue box. And if there is no additional questions, then we will call it a day.Thank you for your participation in the earnings call of E.SUN today. We hope to see you soon in our next earnings call. Thank you. Bye-bye.