E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2019-Q4

[Harris Lin, executive]

Dear investors, welcome to E.SUN Financial Holding Company 2019 Fourth Quarter Webcast Investor Conference. The conference will moderate by me. I am Harris from Investor Relations. Alongside, we have IR team -- IR Head, Chiwei and Matt. Also, we are glad to have President and CEO of E.SUN Financial Holding Company, Mr. Joseph Huang to join us. Please note that this call is being recorded. Before entering to the presentation, we would like to invite CEO, Joseph to give us opening note.

[N. Huang, executive]

Thank you, Harry. Dear investors, thank you for joining the web conference for the year of 2019. E.SUN Financial Holding Company continued to deliver sustained profitability for the eighth straight year. Net profit was TWD 20.1 billion, rose 17.8%; ROE, 12.07%; ROA, 0.84%; and EPS, TWD 1.73 per share. All performance mentioned above, keep new high.

Most importantly, main subsidiary E.SUN Bank delivered the highest net profit growth and ROE amongst banks under financial holding companies.

Thanks to all employees' efforts, E.SUN Financial Holding Company, net fee income rose to record high at TWD 18.8 billion. Also many product lines keep gaining market share. Take credit card business, for example. E.SUN focus on customer segmentation, technology and innovation, aiming to create a payment ecosystem, net increase amount of active cards, cards-in-force and card consumption were the highest in Taiwan in 2020. E.SUN's strategy will focus on 3 goals that is fintech, overseas expansions and risk management. E.SUN keeps investing in technology and digital transformation is in progress to rise operation and service efficiency, overseas and close borders business is another growth driver. In 2019, overseas branches and subsidiaries contributed 21% of E.SUN Bank's net profit. On risk management front, we will effectively enhance compliance, AML and CFT and risk management mechanisms to ensure a stable business development.

Last but not least, our ESG commitment and sustainability. E.SUN was named the most valuable brand in banking industry in Taiwan for the second year enrolled by The Banker's magazine. Moreover, E.SUN was ranked #1 in Asia Pacific and #3 worldwide in DJSI World Index. And received AA rating in MSCI ESG ratings. We will keep creating more value for customers, shareholders and the community making E.SUN the best and the most respected bank in Taiwan.

Thank you.

[Harris Lin, executive]

Okay. Thanks, Joseph. Let's move on to the presentation now. Starting on Slide 1 for the financial holding summary. Total assets of financial holding company reached TWD 2.5 trillion, growing by 9.2% year-over-year.

Key financial figures remain healthy level. Book value per share, TWD 14.9 and financial holding companies CAR ratio, 126.24%. All distribution channels remain unchanged.

Moving on to Slide 2. Business and financial review. E.SUN Financial Holding maintained solid growth in profitability. Preliminary net profit of 2019 was TWD 20.1 billion, rising by 17.8% year-over-year; EPS, TWD 1.73; ROE 12.07%; and ROA 0.84%, all hit new high.

Also the main subsidiary, E.SUN Bank's growth rate of net profit was 14.9% and ROE was 11.95%. Both numbers were the highest among banks under financial holding companies.

On the business performance, net income reached record high at TWD 18.8 billion, rising 14.6%. Net income of credit card increased by 33.4% and wealth management increased by 4.8%.

Credit card business continued expanding payment scenarios, contributing 26.6% growth of card consumption. Also the net increase of active cards, cards-in-force and the car consumption were all ranked the first in the market.

On the deposit side, foreign currency deposit balance rose by 20.1%. The net increment of foreign currency balance was TWD 123.6 billion, ranked first in the market as the business is positioned in Asia. Net profit of overseas branches and subsidiaries contributed 21% of E.SUN's total net profit in 2019. Moreover, E.SUN's asset quality was benign with NPL ratio at 0.19% and coverage ratio at 640.4%.

E.SUN's performance was recognized by international institutions. The Banker magazine award E.SUN the most valuable brand in Taiwan's banking industry.

Also, E.SUN was listed in DJSI Emerging Market Index again. And received AA rating from MSCI ESG, creating the best record in Taiwan's financial industry.

Please turn to Slide 3 for the financial performance. You can see net profit, EPS, ROE and ROA all hit the highest level in the history, and the net profit has maintained growth for 8 years.

Moving on to Slide 4 for the net income breakdown. E.SUN Financial Holding Company is a bank-centric financial holding company with over 97% net profit coming from bank.

Turning to Slide 5. The net profit breakdown. E.SUN Financial Holding Company's revenue rose by 10.4% year-over-year. OpEx rose by 15.2%. Net provision declined due to benign asset quality. On the bottom line, net profit increased by 17.8%.

Moving on to Slide 6. Financial holding company revenue breakdown. Total revenue in 2019 was TWD 54.6 billion, and the portion came from net interest income 36.4%, followed by net fee income, 34.4% and fixed income, foreign currency and others, 29.2%.

Please note that 54.6% of other income belong to stable increased income funds, fixed income investment.

Please turn to Slide 7 for net fee income breakdown. Total income reached TWD 18.8 billion, rising by 14.6% year-over-year. The majority of fee income came from wealth management 45.1% and credit card, 36.5%. Wealth management fee income rose by 4.8%, credit card fee income rose by 33.4%.

Moving on to Slide 8. Credit card business figures. E.SUN's credit card business was top 3 in the market in terms of active cards, card consumption. Our strategy focused on customer segmentation and fintech to expand market share. For example, we cooperate with largest e-commerce company, PChome, to launch credit card for digital customers. As a result, the net increase of card-in-force, active card and card consumption were all ranked the highest in Taiwan.

On Slide 9, the deposit and loan structure. Total deposit reached TWD 2 trillion in the end of 2019, a 10% growth year-over-year, mainly driven by foreign currency deposit with 20.1% growth.

Total loans rose by 7.9% to TWD 1.4 trillion. The driver from corporate side was foreign currency loan, growing by 7.8% and the consumer side was mortgage.

Please move on to Slide 10, deposit structure. On the left-hand side, overall loan-to-deposit ratio was 59.6%. And you can see the right-hand side, every deposit category grow steadily.

Please turn to Slide 11. Loan portfolio breakdown. E.SUN maintained balanced loan growth on both corporate and consumer side. For loan balance breakdown: corporate loan was led by SME, 25.4%; followed by large corporate, 23.8%; consumer loan was from mortgage, 22.6%; secured personal loan, 19.7%; and unsecured personal loans, 7.6%. On the right-hand side, all the loan categories delivered stable growth.

Moving on to next slide, NIM and spread. NIM slightly reduced 1 basis point. Interest spread reduced 4 basis points. However, the funding cost was well controlled.

Following the next slide, asset quality. E.SUN maintained benign asset quality, a relative low NPL ratio, 0.19%. Coverage ratio was sound at 640%.

Next slide, asset quality for each product line. All product line asset quality maintained benign. Corporate NPL ratio 0.08%, mortgage 0.15% and credit card, 0.2%.

Turning to Slide 15. E.SUN's NPL ratio has been lower than the market average for a long time, showing superior asset quality.

Slide 15. Cost income ratio. In 2019, CI ratio rose to 53.8% due to investment in IT.

And next slide, capital was adequate with CAR ratio of financial holding company at 126.24%, bank Tier 1 ratio at 11.82% and BIS ratio, 14.64%. This is the end of the presentation.

Now please feel free to ask any questions. Thank you.

[Chiwei Hsiao, executive]

Okay. Dear investors, now we have the first question coming in. The first question is about the annual guidance of growth for deposit and loan.

Well, E.SUN still maintain a similar growth rate for loan and deposit. And of course, E.SUN always maintain a pretty good, pretty decent growth rate in both loan and deposit for many years in a row that E.SUN maintained our -- the deposit in growth -- deposit and loan to grow of more of than TWD 100 billion. So that will equivalent to 7% to 8% of growth. So for this year, we still guide the growth for deposits, 5% to 7%. And for loan, the growth guidance would be 6% to 8%. However, due to the first quarter, the virus outbreak, so that adds some uncertainty to the environment. For now we tend to stay more conservative on the risk alert especially in our China subsidiary because the virus is still quite -- the situation is still quite severe. So now we take -- the precaution measures are more important than the business growth. So for China subsidiary, we do not set a growth target for now. But overall, the loan growth would be 6% to 8%. And especially, we will still focus on the growth in foreign currency loan.

And we have the second question about the wealth management of E.SUN. And what is the breakdown of wealth management fee income and the growth guidance for this year?

For 2019, the wealth management fee income still consists of -- mainly consist of 2, 1 is mutual fund and one is bancassurance. For the wealth management, fee income accounts for 56% of the total wealth management with insurance account for 44%. And for this year because some regulation change, so the insurance policies, especially the traditional type insurance policy becomes more expensive -- the premium becomes more expensive, which means the policies are less attractive for our customers. So we expect that the demand for insurance policy will weaken in 2020.

So for this year, we expect the mutual fund fee income will grow faster than insurance. The breakdown of fee income would be 60% from our mutual fund with -- and 40% from insurance.

And we have the third question about credit cost. Will E.SUN maintain its low credit cost same level as what we have in 2019 and the guidance for 2020?

Indeed, the credit cost for last year was very exceptional. And for this year, we expect the net provision -- at the beginning of the year, we still guide our credit cost to be somewhere around 20 to 25 basis points, the net-net provision. And so on average, E.SUN will make growth provision about TWD 3 billion to TWD 4 billion per year and will write back about TWD 1 billion per year. So the net provision will be somewhere around TWD 20 billion to TWD 30 billion per year. However, we still think the asset quality is still quite strong in Taiwan and also overseas. Thank you.

We have the next question about the January profit. It was lower year-on-year, and the revenue was also lower. And the reason for that?

And the main difference between the January -- between January in 2020 and 2019 is because last year, we had our Chinese New Year break in February. And this year, we have the Chinese New Year in January. So that will cause maybe 7 -- a difference of 7 working days. So we have less 7 less working days in January this year. And that is the first reason. And that cost -- just because less working day and also the Chinese New Year. So the corporates, they tend to repay their loan before the break. So that will drag down the net interest income. And the second reason because the banks are not open. So on our digital online banking platform, we cannot conduct any business and conduct any transaction for our retail customers. And as you know, some of the transactions that we conduct online, for example, foreign currency transactions were online, wealth management subscription, that cannot be done during the break.

So that will also cause some negative impact to our profit and our revenue in January. However, there is also some positive sign, especially in wealth management. We deliver a pretty strong fee income and wealth management fee income in January. The fee income comparison on a year-on-year basis in wealth management fee income, we have about a -- we have a double-digit growth. And for the first quarter, we still expect wealth management fee income will still be quite good on a year-on-year basis comparison.

Okay. We have our -- the next question coming in. It's about NIM and spread. NIM was lower Q-on-Q during the fourth quarter in 2019. What was the reason behind it? And also, the loan yield, what is the outlook for 2020?

Yes. NIM was down in the fourth quarter because the trend of LIBOR kept going down in 2019. So that cost us -- that cost our foreign currency loan, which is benchmarked to LIBOR and also some of our investment also benchmark to LIBOR, the yield to come down. So in the fourth quarter, the NIM went down slightly. That is the main reason. And the outlook for 2020. Loan yield is still quite difficult, mainly because of 2 reasons. First, Fed, we expect Fed to keep a very easy monetary policy -- monetary environment. So the interest rate is still at a quite low level. And that will cause the LIBOR rate to stay low. And so that is the first reason on the foreign currency loan. And the second reason is because of the -- coming back to Taiwan project, which encourages Taiwanese companies to move back to Taiwan to invest, and the loan associated with these investment project will be in NT dollar, which is lower in loan yield. That will also -- that will also be a drag for the loan yield for 2020.

What is the -- our next question is about the NIM guidance, the NIM guidance for this year.

Just as mentioned, the loan spread is still quite difficult for banks. However, at the same -- on one hand, we cannot control the loan yield. However, what we can control is we can manage the funding cost well. So in third and fourth quarter last year, our funding costs went down by 4 basis point in 2 quarters, and that is what we can do.

The guidance -- on the other hand, separate from loan is our investment. The yield for investment portfolio is still quite decent, it still pays a quite decent yield for us. So our guidance for NIM is we will try very hard to maintain our NIM at flat. That is our target for this year, the NIM target to be flat.

The next question is about the overseas earnings percentage. Will they continue to grow?

As we presented, the overseas earning now accounts for 21% of total net profit. Our near-term target in 2 to 3 years is to have overseas account for 25% of the overall. So -- because the entire E.SUN Bank will continue to grow, so that means overseas will outgrow the entire E.SUN Bank. So the answer is yes, of course, they will.

The next question is about the interest spread on mortgage loans.

Yes. The mortgage market in Taiwan is still very competitive, especially some of the state-owned banks are very aggressive in gaining market share and entering the market. So -- however, E.SUN still maintains its interest spread well. So for mortgage, pure mortgage, the spread, we still can maintain above 1.6%. For other -- for the secure personal loan, which is essentially, the mortgage loan, very similar to mortgage loan, just -- which is the personal loan secured by homes, the spread is higher, it's more -- is about 2%.

Okay. We have another question about the cost outlook. The growth target for operating costs, operating expenses for this year and the target CI ratio.

The operating cost for this year, growth guidance, we expect -- we hope to control it and to maintain it below 10% growth. And the CI ratio target, we hope to maintain it lower than the level in 2019. The target is to have it below 53%. And E.SUN still keeps investing in -- for the future, especially in technology and the talents associated with tech. So the majority of our expenses is still an investment in AI and IT, and the core system and also innovation. And also, on the other hand, our -- every of our business grow very fast. So we will also make some marketing expenses associated with some of our business line, for example, credit card.

Yes. We have another question. It's about the pressure on fee income. Is part of the pressure on fee income due to narrow spreads in ForEx hedging for insurance?

I think I have to clarify one thing, is that E.SUN is a commercial bank, and we do not manufacture insurance policies. So we do not burden the hedging cost for insurance policies. So it does not cost any pressure to our fee income due to narrowing spreads.

Okay. We have, I think, the next -- the last question is about the LDR, loan-to-deposit ratio of foreign currency. And the foreign currency LDR looks low right now. And what is our target for LDR?

And now, of course, we have a low LDR, not because our loan growth is slow, it's because the deposits growth is very fast. Last year, we had a 20% growth in foreign currency deposits, and the year before, we have 30%. And it is because we use different strategies to grow our foreign currency deposit and to keep our foreign currency liquidity well to maintain the liquidity well. That caused the LDR to come down over years. However, we still think it gives us a lot of room to make loans in foreign currency. And our near-term target is to enhance the LDR ratio for foreign currency from nearly 40% to 50% in short future. Thank you.

Okay. It seems we have another question coming in. First is to explain the loan growth guidance by different segments. It is a strategy for E.SUN to keep a balanced growth across corporate and consumer. And so for this year, the total amount growth in loan, we hope to reach TWD 100 billion. And on corporate, I think our main focus will still be in large corporates, especially the cross-border companies, Taiwanese companies. And mainly, their need will be in foreign currency loan. So the foreign currency loan is still our focus this year. On the other hand, on corporate, the SME sector, we will keep a -- somewhere around mid-single to high single -- mid- to high single-digit growth for SME because the competition in -- for SME loan in Taiwan is still very intense.

On consumer, the main growth focus will be in mortgage. And last year, we had a very good growth in mortgage loans. And this year, we continue to hope to have a good growth in mortgage loan.

[Harris Lin, executive]

Okay. Dear investors, we just finished all the questions from the message passed. Thanks for your participation in our online conference. Through this event, we learn a lot of valuable opinion from all of you. If you have any further questions, please feel free to contact IR team for more information. Thank you, and have a nice day. Goodbye.