E.SUN Financial Holding Co Ltd

TWSE:2884

Earnings Call Analysis

E.SUN's Record Profit, Expansion, and Dividend Payout

E.SUN Financial Holding reported a record high net profit in 2023, with overseas operations doubling profits and ranking second among domestic banks. Notable milestones include branch expansion in Japan and Malaysia, while wealth management grew by 17%, backed by strong credit card and insurance growth. The company has consistently been recognized for its ESG efforts, including maintaining capital well above the regulatory requirement. Asset growth targets for 2024 are ambitious, aiming for an 8-10% loan growth and 6-8% deposit growth. Fee income is expected to continue its double-digit growth, especially in wealth management and credit cards. The company aims for a cost-income ratio below 55%, with a capital adequacy ratio of 140%. Lastly, the dividend policy has shifted, now planning a 70% cash and 30% stock payout, reflecting increased capacity from previous years.

Record High Performance with Global Expansion

In the latest earnings call, E.SUN Financial Holdings painted a picture of robust growth and achievement. The year 2023 stood out as a landmark period, with the company reporting an all-time high in net profit. The Vice CFO highlighted the expanding footprint of E.SUN, notably with the establishment of its first branch in Fukuoka, Japan, and a new representation office in Kuala Lumpur, Malaysia, positioning E.SUN favorably to capitalize on burgeoning economic ties, particularly in light of TSMC-driven investments.

Strategic Developments and Fee Income Surge

E.SUN has demonstrated strategic foresight by launching a Private Bank and Wealth Management division, aimed at centralizing expertise in high-growth areas like wealth management and private banking. This move aligns with their 17% surge in wealth management fee income and remarkable reception of their branded credit cards in the market. Moreover, the firm's fee income reached a record peak, contributing significantly to the company's profitability.

Sustainable Growth and ESG Commitment

The company's commitment to sustainability and ethical practices doesn't go unnoticed. E.SUN has a repeated presence on the Dow Jones Sustainability Index, and the highest MSCI ESG rating of AAA echoes its ongoing promise to support Taiwan's ambitions of achieving net-zero carbon emissions by 2050.

Financial Metrics Spotlight

A deep dive into the numbers reveals a financial institution on the rise. Total assets surpassed TWD 3.6 trillion, marking a 4.5% year-on-year increase, and the book value per share showed a healthy uptick to TWD 15.08. Net profit scaling to TWD 21.8 billion underscores a 38.1% growth compared to the previous year, setting a new company record. E.SUN's return on equity (ROE) remained above 10%, with ambitions to push the envelope further.

Remarkable Subsidiary Performance

The subsidiaries of E.SUN, particularly in venture capital and securities, reinforced the company's success story with impressive growth rates of 13x and 28%, respectively. Such performance indicates E.SUN's adeptness at diversifying its income sources and boosting overall profitability.

Growing Pains Translated to Gains

Despite facing increased operating expenses driven by one-time items such as rights offerings and credit card-related marketing expenses, the bank converted these costs into gains. The strategic expenditure, particularly in marketing, paid back handsomely with credit card performance reaching new heights and contributing to a remarkable fee income growth. Furthermore, a spike in business tax, tied to rate hikes and ballooning interest income, was noted as another factor in the rise of operating costs. Nevertheless, net revenue outpaced these growing pains, leading to a sturdy bottom-line growth of 13%.

A Diversified Revenue Stream

E.SUN's revenue mix tells a story of diversification. Net interest income (NII) comprised 43.6% of total net revenue, with fee income at 32.3%, and the remainder due to fixed income and other earnings. The figures show solid performances across the board, suggesting a balanced and resilient business model.

Fee Income: The Growth Engine

The breakdown of E.SUN's fee income, totaling TWD 21.5 billion, with wealth management and credit card services leading the way, reflects focused growth strategies in high-potential segments. The company's confidence in duplicating this success suggests that they are well-positioned to continue thriving in these areas.

Wealth Management and Bancassurance as Pillars

E.SUN heavily leans on the wealth management sector, particularly Bancassurance, which alone generated nearly 46% of the wealth management fee income. Aggressive growth in high-net-worth client segments and the strategic sale of structured notes indicate the bank's edge in harnessing these affluent market segments.

Credit Cards: A Stronghold in the Market

The company's credit card business also shows robust health. E.SUN holds a top three market position with active card usage and consumption growth of 12.7% and 12.6%, respectively, pointing to effective consumer engagement strategies and a strong foothold in the competitive credit card market.

Earnings Call Transcript 2023-Q4

[Chiwei Hsiao, executive]

Dear investors, welcome to the E.SUN Financial Holding Earnings Call, the Fourth Quarter of 2023. My name is Chiwei Hsiao, I'll be the moderator today. Along with me, there is my colleagues, Mr. Alex Chiu and also -- at the beginning, I would like to invite Vice CFO of E.SUN, [ Mr. David Tsai ], he will give us a short opening note.

[Unknown Executive]

Good morning, everyone. This is David. E.SUN delivered a strong performance in year 2023, marking a record high in net profit. E.SUN's overseas business delivered a strong profit growth last year and record second among domestic banks. We are optimistic that the overseas branches will continue to grow this year. Last year, E.SUN established our Fukuoka branch, becoming the first Taiwanese bank to set up a branch in Kyushu, Japan. Taking advantage of the investment is dully driven by TSMC. We hope to promote economic and trade exchanges between Taiwan and Japan. In addition, we have obtained approval for the FHC to establish a ramp office in Kuala Lumpur, Malaysia.

Last year, our fee income achieved a record high in both net fee income and fourth quarter's net fee income. E.SUN's branded credit cards, with [indiscernible] where well received in the market, contributing to a strong growth in net fee income. Additionally, our wealth management record gross rate of 17%, driven by significant growth in insurance and overseas bonds. E.SUN is also the first to issue structured products, both domestically and internationally under the Wealth Management 2.0. With the issuance scale being the largest in the market, this year, we established the Private Bank and Wealth Management business division to integrate all of E.SUN's wealth management resources, including products, risk management and personal education and charity. We will also extend our services to Hong Kong and Singapore with better expertise.

Lastly, E.SUN has consistently received recognition in ESG in selected 10 times for the DJSI and achieving the highest rating of AAA from MSCI ESG. We will continue our efforts to support Taiwan's growth of net-zero carbon by year 2050. Thank you.

[Chiwei Hsiao, executive]

Thank you, David. And now I will spend a few minutes to walk you through the presentation of this quarter. On Page 1, E.SUN Financial Holding summary. On total asset of holding company and the Bank, we surpassed TWD 3.6 trillion, adding 4.5% compared to the same period last year. And the book value per share, we recorded TWD 15.08 per share, which at TWD 1.28 per share year-on-year. On double average ratio, it was 102.9%, and Financial Holding Company's power ratio is 140%. On domestic channel and overseas channel, now we have 139 branches in Taiwan. And also we have 31 overseas sites, which includes rep office in Vietnam, Hanoi, Ho Chi Minh City and Bangkok of Thailand.

On next page is the fourth quarter business and financial review. E.SUN's Financial Holdings net revenue was TWD 66.7 billion. It was a record high. And also net profit, we also reported a record high of TWD 21.8 billion, which is a 38.1% year-on-year growth. On the Bank, we also reported net profit of TWD 19.6 billion, which was a 32.3% growth year-on-year. On E.SUN Securities and E.SUN Venture Capital, respectively, they also made TWD 1.3 billion and TWD 1.2 billion in net profit. So all of the 3 subsidiaries had a very good performance in 2023. In January of 2024, the Financial Holding Company reported TWD 2.8 billion in net profit, which made the Financial Holding Company and the Bank to have the highest monthly earnings ever.

On business development, our loan balance had a 6.6% growth, which marks our loan balance to surpass TWD 2.1 trillion milestone in which the SME loan balance grew by 10%, and the deposit also had a 4.3%, which made it surpassed the milestone of TWD 3 trillion.

Fee income business was the highlight of E.SUN last year. The fee income, TWD 21.5 billion, it was a 11.6% growth year-on-year. And also it was the highest fee income of any year. On wealth management fee income, we reported TWD 9.3 billion. It was a 17.7% growth. And it will -- and it was the second highest in wealth management fee income. On credit card fee income, it was TWD 7.1 billion, and it was a record high for credit card.

On other business highlights, we are very honored to be awarded by National Quality Award in excellence and management. And this makes E.SUN the fifth time winner of National Quality Award, and that is the best performance of any company in Taiwan. We regard this as a very high honor. Also, in DJSI, we are listed in emerging market for the 10th time and the world index for the 8th time. This is the best performance in the banking sector in Taiwan. And last year, E.SUN was once again invited by COP 28 to deliver a speech in World Climate Summit, and we are very proud to make a voice on behalf of Taiwanese financial companies and also Taiwanese corporate.

On next page is the financial performance for the past 5 years. On net profit, we set a record high in 2023. On EPS, we climbed up to TWD 1.41 per share. In ROE, our ROE was above 10%, and ROA was 0.61%. We are not satisfied with this performance, and we will continue to work harder to drive our ROE and ROA better.

Next page is the net income of holding companies and subsidiaries. As I just mentioned previously, all of our 3 main subsidiaries had a good performance in year 2023. Especially in venture capital, the growth rate was 13x. And security, the growth rate was 28%.

On Page 5 is the net profit breakdown of 2023. In net revenue, the growth rate was 21.7%. The operating expenses, it grew by 14.2%, but allow me to once again remind you, there were a few onetime items took place in the year. First is the cost associated with the rights offering. Last year, in the first quarter, we issued the new rights spend and the amount was TWD 16 billion, and there was the costs associated with the employee subscription. And secondly, is the credit card related expenses. Last year, our credit card performance was very good and consumption amount, it was a record high. So there was some marketing spending associated with the credit card, but it also reflects in our fee income and our credit card consumption.

Thirdly is the industry sales tax -- and thirdly is the business tax. The reason for the increase of business tax is because the tax base is the growth interest income and because of the rate hike, so the interest income grew dramatically. And therefore, the tax base became quite high last year. So adding these 3 factors together, that contributed to the operating expense growth of 14%. And the bottom line growth, it was 13%.

Next page is the revenue breakdown. The total net revenue of financial holding company is TWD 66.7 billion, which includes NII of 43.6%, followed by fee income 32.3%, fixed income and others of 24.1%. On the right-hand side, what you can see the net fee income, we had a double-digit growth and also on other income, we also had a very good performance because of the mark-to-market and also the flow business.

On Page 7 is the net fee income breakdown. The total net fee income was TWD 21.5 billion, leading by Wealth Management of 43.3%, followed by credit card, 33.2%; brokerage, 13.3% and Corporate Banking, 8.7%. On the right-hand side are the 2 main drivers of fee income, wealth management growth rate was 17.7%, and the credit card, it was 12.3%. And we are quite confident that this year we will once again deliver quite good performance in fee income.

Next page is on Page 7 (sic) [ Page 8 ], it is the wealth management fee income structure. On the left-hand side of what you can see on the fee income breakdown, leading by Bancassurance of 45.9% followed by mutual funds and other products. On the right-hand side, Bancassurance performance was very good last year. It was a nearly 25% growth on the fee income. On other income, it also reflects our efforts in gaining market share of high-income customers, the VIP customers whose asset allocation tends to wait on overseas bonds or structured notes. So what you can see in the result is growth rate of fee income and other products is 41.1%. And these 2 sectors will continue to perform very well this year.

On next page is the credit card business breakdown. On the 2 most important indicator, active cards and card consumption, E.SUN continue to maintain top 3 in market position. On active cards, our market share is 12.7%. On card consumption, we grew by 12.6%, which put E.SUN's market share 13%.

On next page is the Page 10. We use -- we put some information about E.SUN's overseas business development. Last year, E.SUN's overseas business was performing very well. The overseas profit before tax grew by 73.8%, which accounts for 35.8% of the bank profit, and this profit includes our subsidiaries and our branches, especially our branches. If we count the profit of branch by itself, the profit was doubled in 2023. And E.SUN was also the second highest in terms of profit among all the Taiwanese banks.

On business development, in January, we made a financial investment into Thai Credit Commercial Bank, which is a relatively small-sized private sector bank, which is very competitive in personal lending and also have very high ROE. The investment amount is USD 43 million that we acquired 4.23% in its IPO. The investment amount is not significant. So it will not have too much impact to our financials. Also, last year, we opened the Fukuoka branch in Kyushu, and E.SUN was the first Taiwanese bank to operate in Kyushu, and Kyushu actually becomes a very important investment hub which attracts a lot of attention because TSMC has completed the first fab in Kumamoto, Kyushu and it plans to build other 2 fabs in Kumamoto. So we are very optimistic about the local economy of Kyushu and Fukuoka branch.

On next page, Page 11 is the deposit and loan structure. On total deposits, the year-on-year growth was 4.2%. On total loans, the growth rate was 6.6%, especially the SME loans, the growth rate was more than 10%. On consumer loans, the growth rate was 6.4%. In 2023, we spent some effort into optimizing our funding costs and deposit structure. So there is some decline in our foreign currency deposits. But this year -- but it also helped us to effectively lower the funding cost. And this year we have completed the optimization, and we will continue to get back to the growth path in deposits and loans.

On next page is Page 12, the loan portfolio breakdown. Our total loan is more than TWD 2 trillion, which is quite balanced across corporate and retail, leading by SME, which was 27.5%, large corporate was 21%, mortgage was 25.5%, secured personal loan, which is similar to mortgage or so-called home equity loan is 19.3%. As what you can see on the right-hand side, across every sector, we have growth in our loan business.

On next page is the deposit structure. The overall LDR is 69%. The NT dollar LDR was 86%. The foreign currency loan-to-deposit ratio is 35%. We still have a very affluent liquidity in supporting our foreign currency business. On the right-hand side, the NT dollar demand deposit growth rate was 4.6% year-on-year growth. And that makes our cost out ratio -- and our cost out ratio right now is 58%.

Next page is the trend of NIM and spread. In the fourth quarter, we added 1 basis point to our NIM. And the on spread, it was a 3 basis point decline from 1.29% to 1.26%. And it was mainly because of the increase of funding costs. And another reason is the loan-to-deposit ratio of foreign currency was lower at only 35%. So when we calculate the blended spread, it will make the blended spread downward.

On next page, Page 15, we used 2 graphs to illustrate our asset quality. The NPL ratio was 0.16%, which makes our coverage ratio at more than 750%.

On next page is our asset quality by product. On corporate, the NPL ratio was 19 basis points, and on mortgage, it's only 4 basis points, which our asset quality was still very stable. On the right-hand side, the NPL comparison with the market as well as you can see, we are on par with the market performance.

Next page is the cost-to-income ratio. The CI ratio improved a little bit at 57.1%. This year, we hope to implement some cost management and to contain the growth of our OpEx. Our target for the CI ratio for this year is 55% or lower.

Next page is the capital adequacy ratio. The financial holding card ratio was at 140%. On the bank BIS ratio, Tier 1 ratio is 13.1% and CET1 ratio is 11.6%. E.SUN Bank is very well capitalized, especially after the rights offering in the first quarter of last year. Now E.SUN's capital ratio is quite sufficient. It is even higher than the minimum of domestically bank of importance. So yes -- so in BIS ratio, we're quite good.

On the last page is a few awards and recognition that we received from ESG agencies and other regulatory related agencies. No matter in DJSI, MSCI, CDP, we all gained a very good performance and very high recognition from this agency, and we will continue to work hard towards our goal in sustainable development.

So this is all we have for the presentation of this quarter. And now we can head into the Q&A session. Please fill in your question in the box, and we will answer your questions. Thank you.

[Chiwei Hsiao, executive]

In the first question, please share E.SUN's 2024 guidance for loan growth, fee income, wealth management and credit card, OpEx and so on.

So on the growth guidance of E.SUN for this year, I think the most important is in asset growth. We guide to add TWD 180 billion in our loan balance, which is equivalent to 8% to 10% of the loan growth. On the deposit, we target to add TWD 200 billion to our total deposits, which makes the growth rate to be 6% to 8%. So once again, we set a rather slightly aggressive targets for this year, even though E.SUN has been growing quite fast for many, many years. But this year, we still continue to set aggressive targets.

And on fee income, as we just mentioned earlier, bancassurance, we are confident that we will continue to carry on the strong momentum into this year. On other products, including structured notes and overseas bonds, last year, the growth rate was 40%. And this year, we are confident we will have also double-digit growth in other products. And in mutual funds, the investment sentiment started to turn better since the second half of 2023. And in January, our wealth management fee income, the performance was very good, and it was largely contributed by the mutual funds. So putting all these 3 main product categories together, we are confident we can deliver double-digit growth in wealth management fee income as well as in credit card, we also set a quite high double-digit growth in car consumption. And also the credit card fee income, we also said double-digit growth for this year. So putting all these things together, the net revenue is likely to grow also at a double-digit.

On the operating expenses, as I just mentioned, we will put some control measures in containing the OpEx. So the target will be middle single-digit growth in the OpEx.

And on NIM and spread guidance, I will invite David to tell us about the NIM and spread.

[Unknown Executive]

This is David. For our NIM and spread, the cost this year for [ housing ] is that the Taiwanese Central Bank may not cut greater. But for the fact the market expected value will cut in the second half and maybe 3 quarters this year. So right now we have already doing something to lower our funding cost and higher and try to higher our loan rate because you bet to calculate that our loans will -- the rate of our loan may reflect best than the deposit. So right now within our effort on lower our funding costs and higher our loan rate, we are trying to achieve that for the average of NIM, we will try to maintain the current level or a little bit higher than year 2023.

[Chiwei Hsiao, executive]

We have the second question. There are 2 parts of this question. First is the NIM guidance and also the NII guidance. That's what David just spoke previously. The NIM guidance, we hope to maintain the NIM at least above the level of 2023, even with a little bit room of upside. And on the loan growth target, we set 8% to 10%. So adding this to factor together, we are confident the NII growth can be high single or even double-digit this year.

And the second question is the dividend payout ratio for this year. In the past few years, it has always been our dividend policy to pay 50-50 in cash and equity, balanced dividend policy. This year, something is different. First is, last year, we issued new rights of TWD 16 billion, which puts our capital adequacy ratio at a very sufficient level and also make our paid-in capital to be TWD 156.6 billion, which makes E.SUN one of the top 5 in terms of paying capital. So we are very sizable already. And we are thinking -- maybe it is time for us to rethink our dividend policy. So as the Chairman spoke in the earnings call this afternoon, our dividend policy for a cash payout, the proportion will increase. His target for the payout ratio this year is 70% in cash and 30% in stock. So compared with the balanced 50-50. Now we have the more capacity to pay more in cash, 70% in cash. At the same time, we still want to retain a little bit -- a portion in stock dividend to support our organic growth. This is the very significant change in our dividend payout policy this year.

[Unknown Executive]

And this is David. And Chiwei just mentioned that our dividend payout policy may change this year, but it's still subject to our board resolution.

[Chiwei Hsiao, executive]

And on the total payout. We used to reserve to retain -- sorry, to reserve 10% as legal reserve, which means if we make TWD 100, we only pay TWD 90 and 50% in cash, 50% in equity. However, in year 2022, there was a sudden rate hike, which makes E.SUN suffer in the loss -- in the market-to-market loss in equity, but the loss was reversed in 2023. So in addition to the net profit that we made in year 2023, we still have some more capacity, which is the reversal of the mark-to-market loss in equity allow us to pay more in dividend. So instead of the 90% payout, this year, we might have some more capacity to pay out in dividends.

We have the next question. It is about the CRE exposure in the U.S. How much do we have in CRE exposure in the U.S.?

For E.SUN, we only conduct CRE business in our Los Angeles branch. And the total exposure of CRE in Los Angeles branch accounts for less than 1% of our total loans. There is one thing that we want to note is that the asset quality of our CRE loan is very good. It is because there is a fundamental difference between our exposure to the recent CRE trouble. We do not -- in our L.A. branch, we do not do office buildings, CRE. And we also have some special rules to conduct CRE business. We do not only perform the traditional analysis to analyze the cash flow of the CRE.

On the other hand, we also checked the credit profile of the borrowers. Our main target customers are the Taiwanese immigrants who are wealthy and also who are interested in purchasing commercial properties, for example, like shopping complex or condos. So the loan type is very different from the recent CRE trouble that you might heard. So this is our answer to this question.

Okay. Thank you, investors. It seems we have answered all your questions. Thank you for your participation, and we look forward to meeting you once again in the earnings call of next quarter. Thank you. Bye-bye.