E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Transcript 2020-Q4

[Harris Lin, executive]

Dear, investors, welcome to E.SUN Financial Holding Company's Investor Conference for the fourth quarter of 2020. I am today's moderator, Harris from Investor Relations. Alongside, President of E.SUN Financial Holding Company, Ms. Magi Chen; and IR team members, Chiwei, Tim and Alex are also here.

The format for today's event will be 2 parts. First is the presentation of financial and business performance. Second is Q&A section. Before proceeding to the presentation, I would like to invite President Magi to give us an opening speech.

[Magi Chen, executive]

Dear investors, thank you for joining our investor conference for the year of 2020. E.SUN Holding net revenue rose by 3.2% and the net profit fell by 10.4%, an ROE of 10.17% record served among all financial holding companies.

Next for E.SUN Bank is ROE of 9.47% was the second highest among all banks under financial holding companies. For 2020, Taiwan's GDP grew by 3.11%, and Taiwan was one of the few countries to maintain positive economic growth. The growth reflected capital inflow from overseas Taiwanese companies and increasing domestic investments.

Driven by the strong demand from corporations, E.SUN total loan grew by 12.3%. Meanwhile, E.SUN closely watched the credit risk and maintained benign asset quality with an NPL ratio of 19 basis points.

As for revenue breakdown, E.SUN's net fee income hit a record high and has delivered positive growth for 12 years in a row, both gross fee income and increment fee incomes will rank second in the market. In addition, wealth management net fee income also reached new highs with 9.3% growth driven by penetration of high net wealth customers and online wealth management business.

According to the government's latest forecast, Taiwan's GDP growth rate for 2021 should be 4.64%. E.SUN aims to improve a more customer-oriented business model to capture market opportunity.

This February, we have reorganized our retail banking division and corporate banking division. We are strengthening [target] group customer management, the mechanism for job rotation of first-line employees and risk management. At the same time, E.SUN is also focusing on overseas business recovery and the development of digital banking to drive business momentum.

Apart from business operations, E.SUN's efforts in ESG has been recognized by many international institutions. MSCI ESG has rated E.SUN AA for 4 years in a row, and E.SUN has been listed in DJSI for 7 conservative years, the best records in Taiwan's financial industry. Looking ahead, we will continue to pursue sustainable development and create more value for our shareholders and stakeholders. Thank you.

[Harris Lin, executive]

Thanks, Magi. Now let's proceed to the presentation. Starting with Page 1. In 2020, total assets of financial holding company rose by 18.9% to TWD 2.97 trillion. Total assets of E.SUN Bank rose by 18.8% to TWD 2.95 trillion. Key financial figures remain healthy. Book value per share, TWD 14.44; double leverage ratio, 103.4%; financial capital adequacy ratio 136.54%. All physical channels remain unchanged compared to the last quarter.

Please turn to Page 2, business and financial review. In 2020, E.SUN Financial Holdings' preliminary net revenue rose by 3.2%, and net profit was down by 10.4%. ROE, 10.17%; EPS, TWD 1.43. ROE of main subsidiary, E.SUN Bank, was 9.47%, which was the second highest among all banks under financial holding companies in Taiwan.

As for business operations, net fee income rose by 5.9% and reached a record high. The total volume and the increment of fee income were both ranked #2 in the market. Wealth management fee income grew by 9.3% and reached a record high of TWD 9.2 billion. Credit card consumption grew by 9.8%. And the increase of the card consumption was ranked #1 in the market.

And E.SUN's business scale maintains healthy growth. Loan balance rose by 12.3% and foreign currency deposits rose by 14.2%. And at the same time, E.SUN maintained benign asset quality with NPL ratio at 0.19% and coverage ratio at 656.3%. As for the development of digital banking, the number of active digital customers grew by 20% in 2020. And E.SUN also launched digital banking membership e.Fingo to improve user experience.

On the other hand, E.SUN continues to incorporate ESG into business and has been listed on DJSI for the 7th year in a row. And in overall score, E.SUN was ranked 1st in Taiwan, 3rd in Asia in banking industry.

Please turn to Page 3, ESG performance. In environmental respect, E.SUN is the First Taiwanese bank to launch an ESG initiative with Taiwanese leading companies to taking action on sustainability. Also, E.SUN is the leading bank in the adoption of TCFD and green finance. In social respect, 158 golden seen libraries have been built, and E.SUN continues to promote education and sport events. In governance respect, E.SUN is the first Taiwanese company that adopted GRI and SASB for sustainable report to improve information disclosure.

Please turn to Page 4, financial performance. Net profit was TWD 18 billion; EPS TWD 1.43; ROE 10.17%.

Please turn to Page 5 net income breakdown by subsidiaries. E.SUN Financial Holding is a bank-centric financial holding company with 90.7% profit coming from bank, 5% coming from venture capital and 4.3% coming from securities.

Please turn to Page 6, net profit breakdown. For 2020, the net revenue grew by 3.2%. Operating expense grew by 7 point -- 8.7% due to the investment in IT infrastructure and fintech. The net profit was down by 10.4%.

Please turn to Page 7, financial revenue breakdown. Total -- E.SUN's total revenue was TWD 56.2 billion, with 37.9% coming from net interest income, 35.3% coming from net fee income and 26.8% coming from fixed income, foreign currency and others. And E.SUN for 2020, net interest income grew by 7.3%, and net income grew by 5.9%.

Please turn to Page 8. E.SUN's total net fee income was TWD 19.8 billion with 46.5% coming from wealth management, 32.7% coming from credit card business. And E.SUN's wealth management fee income grew by 9.3% year-over-year.

And please turn to Page 9, credit card business performance. The market share of active cards rose to 13.6%, and the card consumption growth by 9.8% year-over-year. And the increment of card consumption was ranking #1 in the market. And E.SUN advanced to the 2nd place in the market in terms of total card consumption in 2020. And both the card spending and gross fee income delivered stable growth.

Please turn to Page 10. Deposit and loan structure. Total deposits grew by 19.4% to TWD 2.4 trillion. Foreign currency deposit grew by 14.2%. Total loan grew by 12.3% to TWD 1.6 trillion. SME loans grew by 17.3%. Consumer loans grew by 14.7%.

And please, looking at Page 11, deposit structure. The overall loan-to-deposit ratio as of 2020 was 65.5%, NTD LDR was 86.9%, foreign currency LDR was 28.6%.

Please turn to Page 12. E.SUN's total loan was TWD 1.6 trillion. And E.SUN delivered balanced growth in both corporate and consumer loans. Regarding loan breakdown, on capital side, SME accounts for 26.6%, large corporate accounts for 21.2%; on consumer side, mortgage accounts for 25.3%, secured personal loan accounts for 18.7%.

And please turn to Page 13, NIM and spread. For the first quarter of 2020, E.SUN's NIM was 1.22%. And the interest spread rose to 1.3% due to well control of funding costs.

Please turn to Page 14. E.SUN maintained benign asset quality with NPL ratio at 0.19% and coverage ratio at 656.3%.

Please turn to Page 15. NPL ratio for corporate loan was 0.21%, and for the mortgage was 0.08%, for credit card was 0.11%. All of them stayed benign.

Please turn to Page 16. The market average NPL ratio was 0.22%. And E.SUN's asset quality has been better than the market average for a long time.

And please turn to Page 17. E.SUN's CI ratio rose to 58.1% due to an investment in IT infrastructure. And in 2021, we will tightly manage our operation expense.

Please turn to Page 18, capital adequacy ratio. Financial holding CAR ratio was 136.54% as of 2020. And the bank BIS ratio was 15.68%. And the TI -- Tier 1 ratio rose to 13.03% due to the implementation of LTB fast methodology for RWA calculation, and all the capital ratios were well above the regulatory requirements. And this is the end of the presentation. Now let's proceed to the Q&A section. [Operator Instructions]

[Chiwei Hsiao, executive]

We have the first question coming in. It's about the overall guidance, especially on loan and deposits for the year. Overall, what we see in the global economy this year is tends to be more positive this year. According to the forecast from IHS Markit, the global GDP growth is expected to be 4% to 5%, depending on the recovery of economy and when the border control will be lifted. So on Taiwan, in 2020, the global -- the GDP growth was nearly 3%. And going ahead in this year, it is even -- it is forecasted to be even more to 4.6%.

So the outlook of the macro is -- looks quite positive to the world and to Taiwan. So this year, we set a growth guidance for loans, high-single digit, 8% to 9%, especially on the corporate loan. We will put more emphasis on foreign currency loan growth this year. It is mainly because with the lift of border control and the recovery of the economy. And especially last year, the foreign currency loan was not very -- not performing very well last year. So this year, what we expected the foreign currency loan will be stronger this year. Does, Magi?

[Magi Chen, executive]

Yes. I think that Taiwan economic performance has been relatively strong recently. And in 4Q, our GDP also grown 3.92% to 4.94%. The rise reflects a continuous push to the IT and electronic components export, driven by the teleworking and the 5G development. I think that also strong export performance also drove [mainly pressured] to invest more domestically.

So including in semiconductor, green energy and the 5G-related industry, and also thanks to Taiwan's relatively effective management of the COVID-19 pandemic, the consumption has not been severely affected. So overall, as Chiwei just said, our 2020 economic growth was 3.11%. And this year, I think will continue to boost the domestic investment. And so I think this part is very important.

And last year, our foreign currency loan is if we actually -- in NT dollars, actually, it's minus 2%. But if you -- in U.S. dollar -- because NT dollars appreciation. So and then in U.S. dollars it grew 3.5%. And this year, we just mentioned, we think the growth is early and so we have better position. And so we will also focus on the Taiwanese export driven. And so we think the foreign currency loan for this year, we have some more digital growth in this year.

[Chiwei Hsiao, executive]

Okay. And for the deposit growth guidance, last year, our deposit growth was very strong, and mainly because our enhanced penetration into the market and better customer relationship with our clients. This year, we will put more emphasis on the optimization of asset and liability management. So this year, what we expect for the deposit growth will be mid- to -- low to mid-single-digit growth for deposits. But more importantly is to -- how to get a better management of the cost of funding. And also a question that is associated with loan growth is the credit cost.

Last year, the net provision for the E.SUN Financial Holding was TWD 3.2 billion. But there's one thing that I want to remind you is that in Taiwan, for the general loan, we have to set aside 1% provision for general loans. And for mortgage, the provision will be 1.5%.

So just because we have a very strong loan growth in 2020, so the general provision associated with the loan growth was TWD 2.2 billion, and that accounts for a majority of the provision last year. And this -- in 2021, we set a rather conservative growth target for loans. So there will be less general provision associated with the loan growth. So the credit cost for this year will be better.

[Magi Chen, executive]

I think the most important thing is we don't see the systematic and asset qualities can sore. So this year, I think our asset quality will be better than last year. So that's why we think the provision will be less than last year. So credit cost for this year will be less than last year.

[Chiwei Hsiao, executive]

Thank you. We have the second question coming in. It's about the investment of E.SUN. What is E.SUN's investment strategy for excess liquidity? How do you allocate U.S. dollar funds between long and short-term marketable securities?

[Magi Chen, executive]

Yes. I think yes, this is a very, very good and very important question, especially for last year. Because in last year, actually, E.SUN was relatively conservative for overseas loan business. So our loan-to-deposit ratio for foreign currency dropped a lot. But this year, we will continue to -- we just mentioned our foreign currency loan will increase double digit for this year, compared to last year actually is minus. So we have better position for our loan business.

And so for liquidity, actually, for -- we still are very -- for loans, asset liquidity, for foreign currency, we have 2 parts. One is those is -- those deposits are high-yield deposits, and we cannot use to the loan. We will do some asset swap -- or we will do the currency swap.

And then if the others, we will try to do some small parts for our purchase of some fixed income. But the fixed income is -- the asset base still is floating -- that will base the floating business. So the year for fixed income -- the duration for fixed income now is only 1.4 years. So I think this high is okay. Yes, and then?

[Chiwei Hsiao, executive]

Okay. And also a related question. If U.S. yields continue to pick up, is there a benefit from better interest income from higher yields or there will be mark-to-market loss?

[Magi Chen, executive]

I think up today -- because we just mentioned most of ours is floating. And we don't have 10 years of very -- we don't have 20 or 30 of years fixed rate, the treasury or others. So I think this part -- I don't think we will not have hit on our performance. But E.SUN now from the last fourth quarter will increase for some -- we were -- our trader will see some -- if the interest rates are getting higher, they will have more -- keeps more power in trading. So I think there is control -- it's under control.

[Chiwei Hsiao, executive]

Thank you. The next question is about NIM and spread. Why did spread move up? And is it sustainable? Overall, how will margin be relative to fourth quarter level?

[Magi Chen, executive]

I think the first question is the spread. I think E.SUN controls our cost of funds very well. If we'll see from the accounting, our costs actually reduced 31%, and our -- interest income reduced 17%. So that's why the rate go up, especially in fourth quarter, yes. Mostly it's from -- we control our cost of funding very well. And also, we believe from -- the spread will continue to go up in 2021.

And for the NIM -- but because in fourth quarter actually have a lot of the liquidity come in. So it then -- a lot is NT dollars. Even then, actually it's demand deposits, and some are so -- but still, we cannot use that because in Taiwan, our 10-year bond is very, very low. So actually, we cannot manage it very well. So the NIM has come down to 1.2%. I believe NIM actually in the last -- the fourth quarter, it should be at bottom. But I think this year, probably we can increase our NIM from second quarter.

[Chiwei Hsiao, executive]

Thank you. Okay. We have the next question about credit cost. We expect credit costs to be lower this year. And the guidance or the range of actual number on credit cost forecast? Yes. And…

[Magi Chen, executive]

Yes. I think this 2020, our credit cost was 16 basis points. And in 2021, I think it's around 15 basis points.

[Chiwei Hsiao, executive]

Slightly lower than 2020.

[Magi Chen, executive]

Yes.

[Chiwei Hsiao, executive]

Yes. Thank you. Yes. We have the next question coming in about wealth management of E.SUN. What is the product mix of fee income for 2020, and the outlook for the fee growth for wealth management?

Yes. For 2020, the stock market equity market was performing very well. And it also helped boost the sale of mutual fund. So last year, the mutual fund sale was doing very well. On the other hand, insurance -- the bancassurance was a little bit stopped. It's mainly because the -- there was the more strict regulation change applied. So on product mix of wealth management, it was 65% to 35%; 65% of fee income coming from the mutual fund sale versus 35% from bancassurance.

Looking ahead in next year, we still expect there will be some more regulation change associated with the insurance. The regulator mainly wants to make the insurance market in Taiwan healthier. So we still expect there will be a stronger wealth management -- sorry, a stronger mutual fund fee income. The percentage is also 65% versus 35%, around this percentage -- around this breakdown. And on the fee growth, we are targeting on a mid-to-high single-digit fee growth for wealth management. Do you -- okay. Thank you.

We have next question coming in about digital and virtual bank. Given that virtual banks in Taiwan have gradually come online, will these virtual banks be disruptive to E.SUN's business, especially wealth management and credit card?

[Magi Chen, executive]

Okay. I think actually, we are welcome we have the virtual bank in Taiwan. I think they will be open. A lot of the regulation has been changed. It's more suitable for the business. The first one -- because their business still very limited. Yes, they have to -- because in Taiwan actually it's different from other countries. Actually, they have to use -- they have to take more higher risk, credit risk, and to acquire -- to get more loan business and more fee -- interest income. But actually, it is very -- I think that's why E.SUN's -- we actually have -- because we just have a very successful for our core business…

[Chiwei Hsiao, executive]

Yes. Core banking, core banking system.

[Magi Chen, executive]

Yes. We actually launched in…

[Chiwei Hsiao, executive]

In august of 2020, it was renewed.

[Magi Chen, executive]

Yes. So now we have better position to do the business, especially in digital banking business, yes. So -- and that's why we just mentioned E.SUN, now we -- from this February, we do some organizational structure, try to be more customer-oriented. And then we can use the data analysis and the digital…

[Chiwei Hsiao, executive]

Data mining, to understand our customers' profile and behavior more.

[Magi Chen, executive]

Yes. I don't think for those virtual banks, they can have a wealth management in the first place. Actually, E.SUN, we already have a lot of very good customer. And also our credit card comes -- profile is actually a lot of the credit card customer. So E.SUN, we do the -- we have the corporate retail banking and corporate banking, and we do use our digital…

[Chiwei Hsiao, executive]

We formed a new division under Retail Banking group. It's called Digital and Customer Segmentation division.

[Magi Chen, executive]

Yes. And then we will try to -- for example, we still have 2 million of ours credit card holder, they only use the credit card. And we will try to do some analysis and to provide suitable -- use our data and also digital analysis to provide wealth management and other products to our customers. So this part is very important for us, yes.

So you can see -- and I mentioned in our wealth management last year, we grew 9.3%. And this amounted actually from so-called digital platform. So this is how we'll continue. I think this year, if we can totally increase the customer, if we increase the customer with more products with E.SUN, then the benefit will actually 3 or 4x for the business, yes.

[Chiwei Hsiao, executive]

Right. Thank you. I think that we have answered most of the question, and there's one final question. And there's one final message that I want to share with the investors is that about the organizational restructuring that Magi just mentioned.

We have formed Corporate Banking division and Retail Banking division. And there's also one move that we made during this restructuring is that we make a better integration between Private Banking and the Corporate Banking division. As you know that most of the Private Banking clients, they are actually owner of business. So we want to make a better integration between the Corporate Banking and the Private Banking. And we want to utilize a one-plus-one service model, which means 1 RM for corporate banking and 1 PBC, PBC means private banking consultant, and they will work together to deliver a total solution and better service for the Private Banking clients.

On the other hand, we want to extend our platform to include the product from the wealth management. And not only that, we want to leverage our expertise in treasury to offer more sophisticated product to the Private Banking clients. Also, we will also leverage on our security, E.SUN's security platform and their resources to deliver a more comprehensive service to our Private Banking clients. So we are very confident in Private Banking, and it will takeoff this year.

Yes. We -- yes. Okay. Thank you, investors, for your participation. We have answered all the questions today. And there will be a replay on the platform. It will be ready shortly. And so we hope to talk to you soon again. Thank you.