E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2017-Q4

[Unknown Executive]

Okay, dear investors, welcome to the web conference of E.SUN Financial Holding 2017 Full Year Results. And this conference today will be moderated by me, I'm [ Chiwei ]; and [ Matt ] [ Tai ], our teammate from the IR team.

So first of all, let's welcome Mr. Joseph Huang, the CEO and President of E.SUN Financial Holding, for a brief opening note.

[N. Huang, executive]

Dear investors, thank you for joining the web conference of full year result.

In 2017, we once again delivered profit of historical high for the sixth consecutive year. With establishment of cross-border and digital platform, we continue to expand our scope of services and make better integration across every line of business. Integration is the key competitive edge of E.SUN. In 2018, we will keep facilitating integration of cross-border services and digital platform to push E.SUN forward. On cross-border, we are now operating 25 branches in 9 countries. We will keep enhancing our product capability to offer a total solution, including FX hedging, cash management and cross-border loan to our corporate customers. We also found that many SME owners are now approaching retirement and need advisory service for [ succession ]. We will also leverage our expertise in financial planning and wealth management to assist SME clients to make their family [ succession ] plan.

Finally, we are very excited to introduce the Chief Technology Officer and the Commissioner of Technology Advisors of E.SUN: Dr. Chen Sheng-Wei. Dr. Chen is an expert in data science and artificial intelligence. He is now research fellow of Academia Sinica, CEO of Taiwan AI Academy and Chairman of Taiwan Data Science Foundation. He is known for his insight in AI and applying AI into solving problems. We are very excited that he can join E.SUN and become the first CTO ever appointed by any financial holding company in Taiwan. We sincerely welcome Dr. Chen onboard. And we really look forward to the chemistry in the convergence of AI and fintech he will bring to E.SUN. More information will be discussed in the presentation. Thank you.

[Unknown Executive]

Okay. Now let's begin with the presentation.

Please turn to the first page. It's the key financial numbers of E.SUN Financial Holding, at a glance.

As at December of 2017, both E.SUN Financial Holding and the bank, the asset side has surpassed TWD 2 trillion. And it's a 10.3% for E.SUN Financial Holding and its assets compared to the previous year 2016, so we still maintain to deliver another year of very robust growth.

On the book value per share, it's TWD 14.62, and double leverage ratio is 104.46%, and capital adequacy ratio is 142.97%. On our domestic channels, we still maintain our branch count at 138, unchanged. And our overseas branches, we are now running 25 branches across 9 country or region.

And please turn to next page. It's the financial and operation highlights.

In 2017, our net profit reported TWD 14.7 billion. It's a 12.2% growth compared to the previous year. Our net revenue is 4.58 -- TWD 45.8 billion, and the growth rate is 11.5%. As Joseph just mentioned, this is the sixth consecutive year that we maintain a growth in net profit. And we hope that, that growth streak will still continue in 2018.

And also, I want to mention that according to the January monthly net profit that we just disclosed yesterday, the monthly net profit for the month is TWD 1.92 billion. And this is the highest number that we ever had in E.SUN Financial Holding's history for a single month net profit. It's a 58% growth compared to the same month in 2017. So we started off this year with a pretty good January.

And our EPS is TWD 1.49, and ROE is 10.51%. ROA is 10 -- is 0.74%.

On our main business, the 2 main revenue streams still maintain a very stable growth. On our NII, the growth rate is 8%, and our net fee income growth is 1.4%. On our loan balance, the growth rate is 8.2%. This is mainly helped by our increased presence in overseas branches and also our capability in product offering and also our ability to acquire the Taiwanese cross-border corporate clients. So our FX loan growth is 16.5%.

On our deposit growth, the overall deposit growth rate is 9.9%, with the -- especially the foreign currency deposit growth rate is over 30%, and the net increase amount is more than TWD 110 billion, so -- and our 30% growth rate is the highest in Taiwan.

And our business highlights of 2017. On our overseas, now we are running 25 branches across 9 countries. And hopefully, that we will open 2 more branches in the second half of the year, which is the Brisbane branch in Australia and Guangzhou branch in China; and hopefully, that we will open another branch in China, Shanghai in 2019.

Now we think our overseas platform is pretty much in place, and we will slow down our pace in opening new branches and focus in digging into the local business and generating more profit.

On our digital banking initiative, last year our mobile payment has already started cooperation with the 4 major convenience store chains. Most of the mobile banking -- mobile payment service providers can now be accepted by the convenience stores through the platform that E.SUN built with the convenience stores.

And also, we launched our -- the first AI chatbot in Taiwan. And the AI chatbot can provide real-time financial service consultation and application of loans online. And this is a quick -- this is a pretty innovative step for Taiwanese banks.

And also, we revamped our iOS mobile banking app, which makes the transactions much easier. And it is also reflected in our superior growth and FX transaction taking place on our online banking platform.

So E.SUN is taking advantage of the technology to respond to customer need. And we believe after our new CTO, Dr. Chen, onboard, he can use his capability in AI and to help us to solve a lot of difficulties that we're facing along the way of product development and to provide a better product through our digital banking platform.

And also, on our honors and recognitions, we are ranked in DJSI-World once again. And also, we won the Best Bank in Asia Pacific by The Asian Banker. And also, 2 Best Domestic Bank in Taiwan from The Asset and Global Finance. And also, we are voted as the best -- as the most honored company in the institutional investors pool. And we appreciate for your continuing support.

Please turn to the next page. It's the -- our profitability over the past 5 year. As you can see, it's a growing trend and a very stable trend upward.

Please turn to the next page. It's the E.SUN Financial Holding and its main subsidiaries. On our bank, the net profit growth is 11.2%. And on our other 2 subsidiary, also we -- they also deliver a pretty good performance in 2017.

Please turn to the next page for the breakdown of -- and comparison of our net profit. On our net revenue, the growth rate is 11.5%. And the operating expenses, the growth rate is 12.5%. And also, I want to note that, as there was a onetime expense due to rights offering, then the amount was TWD 199 million. If we took that piece out of the calculation and -- the growth rate would have been 11.6%. And we will try to stay with our guiding principle, that to maintain our net profit growth higher than the net revenue growth and our net revenue growth higher than the net -- higher than the growth of operating expenses.

Please turn to the next page for the net revenue breakdown. For the year 2017, the net revenue is TWD 45.8 billion. The net interest income account for 43.8%; followed by net fee income, 34.4%; and fixed income, investment and others, 21.5%. As you can see, all of the sectors were growing in the year.

And the next page is the structure of our net fee income. The total amount is TWD 15.8 billion for the year. The wealth management is still the largest piece of the pie chart with 48.8% of the share. And the credit card was growing at a double digit, so it's overtaking a larger piece of the pie, and it's 30.4%.

And if we compare to the previous year, as you can see on the right-hand side, the credit card growth in net fee income is 13.1%. On wealth management, it declined by 6.4%. It was mainly because of the cut in commission paid by insurance companies when we sell their insurance policies. And that is a onetime event, so it will not occur again this year. So we hope -- so we believe that our wealth management will regain its momentum this year.

Please turn to the next page for the competitive landscape of our credit card business. As you can see, the 2 main indicators, the active card and cards consumption, E.SUN still maintains its growth. On active cards, now we have 3.22 million credit cards, and the growth rate is 7.6%. And on card consumption, the growth rate is 5.9%.

Please turn to next page on the deposit and loan comparison. On our deposit, the total -- the balance is TWD 170 billion and 100 -- 1 point -- sorry, TWD 1.7 trillion, and the growth rate is 9.9%. Especially, as you can see, in foreign currency deposits, the growth rate is 30.2%, the highest in Taiwan.

And our loan balance is TWD 1.2 trillion. The growth rate is 8.2%. And as you can see, we performed quite well in SME loans and foreign currency loan, and we expect these 2 sector will still be the outperformers of our loan business.

Please turn to the next page for the deposit structure.

On the loan-to-deposit ratio, the overall LDR still maintain at 70% the level, and the NTD LDR is at 85.9%. And we still feel the LDR for NTD is not too high. We think anywhere between 85% and 90% is a range that we feel comfortable with.

And on our deposit structure, we still maintain our CASA ratio, 63.2%, the highest among all the private sector banks in Taiwan. And in our foreign currency deposits, we had a very good year in generating growth in foreign currency deposits, 30%. And the foreign currency is now also 30% of our total deposit.

Please turn to next page on our loan structure. The loan balance for the year is TWD 1.2 trillion. It's -- the leading one is the SME with 27%, and followed by large corporate and secure personal loan and mortgage and unsecured personal loan. And if you look at the same year -- the same period comparison on the right-hand side, you can see that it's a growth trend across all the sectors of our loan book.

On next page is the NIM and spread of E.SUN. In the first -- in the fourth quarter, our NIM dropped slightly by 1 basis point. And it was mainly because the increase in our funding costs, because the Fed increased the interest rate in the fourth quarter and it's immediately reflected in our funding costs. So that will cause some drop in our NIM and also our loan spread. And even though our blended loan spread dropped by 2 basis point from third quarter to fourth quarter, but I also want to note that, in our NTD, if you look at our NTD and foreign currency loan spread, it's up -- in our NTD, it's flat; in our foreign currency loan spread, it actually went up. But the blended went down, is because our foreign currency deposit growth is higher than the foreign currency loan growth, so that caused the LDR for foreign currency drop. And as a result, the blended spread would drop by 2 basis point.

On our -- on next page is the asset quality. Our NPL ratio is 0.23%. The coverage ratio is 140%.

On the next slide is the asset quality by the different product line. On our mortgage, NPL still pretty stable at 20 basis point. And our corporate loan NPL ratio is at 18 basis point. And you might notice that there was a spike from June of 2017 to the end of 2017, and it was merely because 2 isolated cases went default in the third quarter, so the spike happened in the third quarter and we haven't written it down, so it still maintain -- so it still remained in our NPL.

On the next slide is the E.SUN asset quality. Over the period of 3 years, as you can see, E.SUN was always able to maintain a better-than-market average NPL ratio.

On the cost-income ratio, it's 53.6%. And I still want to remind you, once again, if we took the onetime expense due to rights offering, the adjusted CI ratio would have been 53.1%, so it still maintains at the same level of 2016.

On capital adequacy ratio, the financial holding CAR ratio is 143%. On our bank BIS ratio for Tier 1 is 11.73% and the overall BIS ratio is 14.91%, both increased compared to the third quarter of 2017.

And this is all for the presentation. And we expect for your questions. Now we begin the Q&A session. Please submit your question in the input box on the webcast window, and you will enter a queue.

[Unknown Executive]

Okay. Now we have the first question came in. The investor is curious about our strong performance in the January this year.

And I think E.SUN still maintain its business as usual, and all of the line of business were pretty stable in January; especially in wealth management and treasury, they both have a very extraordinary January this year. On wealth management, we -- they have a -- compared with the same period -- same month last year, the fee income growth is one -- is more than 120% fee income growth. So our wealth management had a very strong year in the first month of the year. And going forward, for the full year, we hope our wealth management will have a double-digit growth in fee income. Also another important revenue stream of fee income is the credit card. Credit card has a 13% fee income growth in 2017, and we hope to carry on this momentum this year to -- and also a double-digit growth in credit card. So both in wealth management and credit card, our guidance for the year is double digit.

Okay. We have a second question. The investor is curious about our growth rate in terms of volumes for wealth management.

And for 2017, our wealth management fee income was down. It's mainly because of the bank insurance commission rate cut. Even though we still maintain a very strong sales momentum last year, our sales volume in wealth management across mutual fund and bancassurance, it was 19% increase. So our sales volume actually increased by 19%. And in terms of product mix, it was pretty balanced across mutual fund and bancassurance, about 50-50. And for this year, 2018, we still expect that the product mix will still roughly 50-50. Thank you.

Okay. We have another question coming in. It's about the corporate NPL pickup in the second half of 2017. And the investor is curious about the formation of the NPL and the outlook for those accounts.

So the NPL was increased mainly due to 2 cases. One is -- one borrower is a manufacturing -- it's a manufacturer of batteries. And another case, the borrower is a hospital. So -- and I also want to highlight that both of the cases, the loan is fully secured by properties. So we expect the loss ratio would be very low after we dispose the collateral. And now we are in negotiation with both of the borrowers, and we hope the pledged asset will be disposed maybe in the second or third quarter of this year, and we expect our loss will be fully written back. Thank you.

Now we have another question came in. It's a question about the CI ratio, and also wonder if the CI ratio can fall below 50%.

We think it's our guiding principle to have our revenue growth rate higher than the expense growth rate -- sorry, our profit growth rate to higher than the revenue growth rate and higher than the expense growth rate. In that case, we can maintain our profit will keep growing and the CI ratio can be well managed. And we will keep following that guiding principle. By doing so, that we think our services through the digital channel is a good way to lower our costs. Right now, more and more services have been provided through our digital channel. And I can give you an example for -- take unsecured personal loan, for example. The services provided through online lending platform, the expense associated with origination of a loan deal, the cost is 37% lower than the cases originated through physical channels. So the cost-saving efficiency is quite apparent, so it can obviously help us to lower our cost through the digital channel. And also, as I just mentioned earlier, we now have 25 branches overseas. And in the future, I think we will slow down our pace in opening new overseas branches. So that means there will be less depreciation associated with it and less launching cost of new branches associated with it. So that will also help us to control our expenses. So I think for -- in the recent year, our medium-term goal, the CI ratio will be 51% to 52%, and it's less likely to go lower than 50%. Thank you.

Okay. Now we have another question coming in. Does E.SUN expect any rate hikes from Central Bank and the NTD NIM higher this year? And how about the foreign currency NIM expectation?

Our outlook for the Central Bank rate hike is that, since the new president of Central Bank will take office in February, so we think it's quite unlikely for him to take any action into raising the interest rate for Taiwan. And for this year, I think that the -- in Taiwan, the GDP growth will still be pretty moderate, about 2 -- 2.3%. And the chance for inflation is still not very high. So we think there is no very strong incentive for the Central Bank to raise the interest rate in the first half of this year. But going forward, into the second half of the year, we think the opportunity will be higher, but it's still mainly subject to the interest rate movement in China and United States, and the Taiwan Central Bank will follow up on their steps.

For the foreign currency NIM expectation, I especially want to note that both our loan book and investment book, our assets are [ holding ] basis. So even though the Fed hike its rate, and it will also benefit both in our loan and our investment book. And according to the sensitivity analysis that were performed for the foreign currency rate hike, for every 25 basis point rate hike in U.S. dollar, it will result in NIM increase for E.SUN by 1.33 basis point.

Okay. Now we have another question. Is there any country or region for which the foreign currency deposit base has come from, or is it only from Taiwan?

So I think Taiwan is still the main base that we generate our foreign currency deposit. But last year, we see a very substantial growth from our overseas branches, especially from Hong Kong, from Singapore and from Los Angeles branch. So both. I think it's both, both from Taiwan and our overseas branches. And as we have a longer history in those overseas branches and we have deeper relationship with the local customers, and I think there will be more growth from -- and deposit from those overseas branches.

Okay. Now we have another question, mainly about our wealth management. Is the growth rate in wealth management profit due to timing of Chinese New Year? And also, did E.SUN add new partners for credit card, mutual fund or bancassurance to explain the big increase in fee income in January?

I think, generally speaking, the macroeconomy environment for January this year was pretty good. And the investors, their assessment has been quite positive, both in equity market and also other market. And so we also took advantage of the timing, and we released a few products and campaigns to work with our customers. And the -- our customers, they were quite positive to our campaigns, so that leads to a very extraordinary growth in fee income in January. And it is not -- actually, it is not due to the timing of Chinese New Year, because the Chinese New Year this year will happen in February. So in February, there will be less working day, less business day. And so the fee income growth, especially in wealth management fee income for February, is expected to be lower this year. And for wealth management, we did not add new partners for mutual fund or bancassurance. Thank you.

Okay. Now we have another question coming in. It's about the update of our UCD branch in Cambodia, and will it contribute profit to E.SUN this year?

I think, in the past, that UCD can generate the PPOP, profit before provision and tax, at about USD 7 million to USD 10 million per year. But during the past 2 years, there have been some challenge occurring in Cambodia. First is the provision regulation, because for Cambodia, they adopt a rather special provision rule in the country compared to the developed countries. So for their loan, the provision can be as high to 100% regardless of collateral or not. While in Taiwan, if the loan is the collateralized loan, the provision is as high as 10%. And that will cause us to reserve a very high amount in provision for UCB. And the second reason is, for the past 2 years, there has been some economic turmoil in Cambodia, so -- and the housing market was not going that well also, so that also lead to the probability of default to increase. But we think that all of our loan portfolio in UCB Cambodia is collateralized loan. So all of the loan is pledged by property. So we expect the loan loss ratio will be quite low. And we think this year, 2018, our UCB can stabilize and return to maybe slightly profitable this year.

Okay. Now we have a question. It's a question about our guidance for this year. I think our revenue growth will -- our guidance will be a double-digit growth. And for fee income, both in wealth management and credit card, we aim for also a double-digit growth. And on our deposit and loan growth, I think E.SUN has been able to maintain a growth of 2x of market average, and this year is no exception. On our loan growth, we are aiming for a 7% to 9% growth. And our deposit growth is 5% to 7% growth. And in our deposit, we will focus mainly in demand deposit and foreign currency deposit. Thank you.

Okay. Now we have another question about our technology and online service. And also under the leadership of the new CTO, how will we leverage his expertise in AI and big data to improve our product and processes?

I think in E.SUN, our technology organization can be divided by 3 main division. One is the digital banking division, and one is IT division and one is the big data team. So all the 3 combined, it's the technology consortium of E.SUN. And I think in E.SUN, we will still maintain our focus in 3 dimensions. First is fintech, that means the financial product provided through technology channel or digital channel. As I just previously mentioned in our presentation, now we can work with all the -- all [ 4 ] convenience store and to let the third-party mobile payment service providers to be accepted in convenience stores through the platform provided by E.SUN. And I think E.SUN is the leading bank in digital payment. And also, we have extended our service to online lending from secure personal -- from unsecured personal loan, to online mortgage, to the loan for small business. And also, on the online banking channel, the foreign currency exchange was very extraordinary last year. On average, there was more than 10,000 transaction took place on our online banking channel. And the aggregate amount for the year, the foreign currency exchange took place on our online banking was more than TWD 60 billion in 2017. So we think we have a few achievements in fintech, and we will still deliver our service through the power of technology. And the second is regtech. Reg refers to regulation. And I think the risk management for banks is quite important, so we will leverage the power of technology to prevent suspicious money laundering transactions and also to prevent some malicious software attack and the cyberattack. And I think during the past year, we have witnessed some banks in Taiwan have breached the relevant regulation in anti-money laundering or cyberattack. So we think that as a commercial bank, our risk is not -- is on the top of our agenda. So we think regtech will still be very important element in our technology. And the third is mark tech. Mark refers to marketing, so the technology-enabled marketing campaign. So we want to deliver the product, the right product through the right channel to the right customer at the right time. So that will help us to target on our customers more precisely and to deliver our product to the customers, and also the products that they need. And I think our new CTO, Dr. Chen, he is the expert in artificial intelligence, and he will help us along the 3 dimensions in fintech, regtech and marketing tech. Thank you.

Okay. We have an investor. He asks about -- of our history in Mainland China, running our business in Mainland China, and do we have a long-enough track record of profitability in Mainland China?

We had our first branch in Dongguan, Guangdong province of China since 2012, and the branch was upgraded to subsidiary starting 2016. And because it's been upgraded to subsidiary, so the business scale is totally different, and we need to have more IT infrastructure, we need to hire more people. So the overhead was much higher than branch. And also, the Chinese regulator started to adopt higher provision requirement by 2.5%. And in our Mainland China loan book, the average loan spread is also 2.5%, so it's quite challenging for our China subsidiary to be profitable last year. But before we had our subsidiary, our branch in China was quite profitable. So we think, even though our Chinese subsidiary is having some challenge in recent 2 years, but we hope it will turn profitable starting this year.

And also, there is a question about our CAR -- about our dividend payout ratio policy. And in the past, our average payout -- cash payout ratio is about 30%. And since last year, E.SUN had a rights offering. And now our capital is quite sufficient. Our capital is now more than TWD 100 billion. And we think we -- E.SUN is already at a very decent level, and we -- and also at a very comfortable level, capital level. So we think in the future, we will pursue a more balanced dividend policy. That means balanced across dividend and cash. And we will slowly increase our cash payout ratio from -- to 30%. And so -- but for the cash payout ratio for this year is still uncertain. This is still subject to the decision by the board. Thank you.

And also, there is a question about a single case. Any exposure to the Carillion collapse in the U.K.?

No, we don't have.

So we think that we have answered all of the questions, and so I think this is the end of our web conference for this year. And thank you for joining, and thank you for supporting E.SUN. And we hope to talk to you soon. Bye-bye.