KB Financial Group Inc (KB) 2005 Q2 法說會逐字稿

Good afternoon. I am [Chu Win Sook], Head of the IR team at KB Kookmin Bank. I would like to thank you for coming here despite the hot weather, to the earnings conference for the first half of 2005 held by KB. Currently we are in the large conference room at BKRX, and this earnings conference is being broadcast live via web and conference call.

This earnings conference is attended by the top management of KB, including our CEO, Mr. Chung Won Kang, and we also have our outside independent directors attending. Before we begin, our CEO will be giving you an update on our major initiatives for this year, to be followed by a presentation by our CFO, on our performance results and areas of interest during our business operation in the first half of 2005.

After the presentation you will see a demo on Cyber Branch which is a leading, integrated, cash management system developed by KB. Now Mr. Chung Won, our CEO.

Good afternoon. As was introduced, I am CEO of KB Kookmin Bank and my name is Chung Won Kang. I’d like to thank you all for coming despite your busy schedules, to our 2005 first half earnings conference. Before I go into a report on our performance, I would like to first take the opportunity to offer my most sincerest apologies regarding the recent incident at KB, which caused grave concerns among our investors and customers.

The 3-hour long IT failure that took place on the 15th will be taken care of. We are asking the firm that provided us with the disk to take responsibility, and we’re double checking our hardware and softwares, as well as bringing in outside experts to audit our IT system.

As for the CD incident that took place on the 26th, we’re working closely with the supervisory authorities as well as the police. We believe this case will be resolved. And it will be a blessing in disguise in that it provides the impetus for us to look back on ourselves, and redouble our efforts to build a strong, internal control process and system. Once again, I would like to ask our investors, customers and related parties our sincerest apologies, and we ask for your continued trust and support.

Now without further ado, allow me to briefly talk to you about our focus areas for 2005. As you're well aware, in the first quarter our major task was reforming our organization. This included reorganization of head offices as well as management, and also includes integration of labor unions. We've also restructured our workforce and work to improve our asset quality, and that effort continues to this day.

Since March, for about 2 months this year the management and employees at KB, all of the 24,000 on the payroll, have attended IBP training courses. So that we can redefine and build a renewed corporate culture. During the second quarter, our main emphasis was on process improvement, which includes building MIS and ALM systems, improving our credit management process, as well as reinforcing our customer service. To this effect, we've completed a project to improve our customer service for 3 months, as well as to build a risk management culture.

In the second half of this year we will focus on building a customer oriented system. Currently we are setting up the integrated CRM system, as well as the product management system. And by the end of the year, we will be able to finish building the integrated CRM and product management systems. Using these 2 systems, we will be able to offer the optimum product and services per customer segment. And for efficient management of branches and personnel, this system will also bring great benefits.

Last but not least, we will be reinforcing our internal control system and put them into practice. That will be another area of our effort. By the end of the year, once our efforts are complete starting from next year, we believe that we will have built the basis for sustainable growth.

Now this marks the end of my presentation, and now I will hand over the microphone to our CFO who will be speaking on our financials.

Thank you Mr. Kang. Next we will hear from our CFO, Mr. Jung Kap, who will give a presentation on our operating results during the first half of this year.

Good afternoon. As was introduced, my name is Kap Shin with the Financial Group inside KB. Now I will give you a presentation on our earnings and business performance results, during the first half of this year.

In the first half of the year KB achieved KRW909.9b in terms of net income. Compared to the KRW240.8b last year’s first half, it’s an increase of 280%. I will go into this in more detail later but the major causes are as follows.

Whereas the provisioning to total assets was KRW2.4 trillion last year, this year this amount decreased by a large margin. If you look at our NPL ratio it’s 2.52%, which is 1.14% improvement over last year’s figures and our NPL coverage ratio is 94.1%, which is about a 20% increase year-on-year. As of the end of June, our annualized ROA is over 1%, and our ROE stands at 18.2%.

Our estimated BIS ratio was 12.25% as of the end of June, and our Tier 1 ratio also has increased by over 2 percentage points compared to last year. Earnings per share stands at KRW5,884 and as of the end of June, our BPS is KRW31,484.

Compared to last year our net interest income increased by -- excuse me, decreased by about 12%. The major reasons are as follows. Our loan assets decreased in average balance by about KRW4.1 trillion, and our credit card loan average balance decreased by KRW2.5 trillion. There was a continued decrease in interest rate and, because of our negative duration gap, given the situation our NIM continues to decrease.

Furthermore, our card assets decreased by KRW2.5 trillion, as I mentioned. So in summary, the NIM decrease accounted for this decrease in net interest income. In the second quarter you can observe that there was a slight increase in the net interest income, which is a reverse of the trend until the first quarter. As for our non-interest income, it remains on the same level year-on-year, and I’ll go into more detail on this later on.

The fact that general and administrative expenses can be explained as follows. In the first quarter we gave out Treasury shares with the launch of our early retirement program, and there was also an adjustment regarding unused vacation time, which amounted to a payout of KRW19b. And also KRW36b was spent for the employee welfare fund. So setting all these one-time factors aside, then we stay at the same level as last year.

Our income before provisioning increased by 14%. In terms of interest, non-interest, and general and administrative expenses, we've seen a 10% increase in terms of provisioning amount. And the provisioning also [vary] in terms of amounts. We see an increase in provisioning because during the first quarter there was a reversal of KRW107b. Taking that into consideration, during the first quarter the amount that went into provisioning was KRW357b.

And in the second quarter, because we have financial statements available as of the end of March based on those figures, we adjusted the rating. So in the rating adjustment process we saw an additional increase in the provisioning amount.

Moving on to operating income. It increased to KRW1.242 trillion, and in terms of non-operating income there was a cost factor involved with the early retirement program. So that decreased compared to the previous year.

Moving on to net interest income. I mentioned that this decrease compared to the previous quarter. If you look at this in more detail, interest on loans compared to the previous quarter increased. On the other hand, interest expenses are on a continued decrease trend, and interest on deposits decreased quarter-to-quarter. The reason being the following interest rate had an effect on our interest on deposits.

If you look at the chart, as I mentioned earlier, the interest rate on loans started to turn around in the second quarter, and the interest on deposit is on a continued downward trend. So in the end NIS and NIM both picked up slightly in the second quarter. As a one-time factor, in Q2 there was a KRW7.4b repayment on the maturity of the KT bond. But even setting that aside, NIM slightly increased in Q2.

Our commissions and fees increased slightly by 4.5%, and 1 thing that requires your attention here, is the KRW13b one-time factor of June [second day ABS] maturity repayment. As well as the [indiscernible] [Modus] KRW5.6b. Even setting aside these one-off factors, our commissions and fees in the trust sector did not increase. Whereas it was on a continued downward trend in the past, this quarter that trend stopped. As for commissions and fees in credit cards, there was a slight increase.

With improving delinquency rates we saw delinquency related costs decrease and, therefore, the fees and commissions in credit card front increased.

Moving on to bank assurance and beneficiary certificates, we continued to see a high growth rate in both areas as well -- as for other operating income. Because of the rising interest rate, there was a slight loss in terms of bond valuation, as well as a decrease in the expected sale proceed. On the other hand, there was a slight offsetting factor in terms of bond to sales, but on a net basis it was a slight loss.

Moving on to general and administrative expenses. As I mentioned, there was a program which gave out KRW89.5b worth of Treasury shares to the employees, in terms of [ESOP], and wage increase also reflected in our increased labor expenses.

Moving on to the administrative expense. There was an expenditure of KRW36b to the employee welfare fund, and whereas last year we were on a stringent budget, this year our focus was on building a new platform for operation. And we also increased budgets on TV commercials, for instance. So that led to an increase in administrative expense, which led to an increase in overall general and administrative expenses..

Moving on to non-operating income - the loss on sales of loans. If you look at this when we were selling the NPLs, there is an increase in the collateral value. So the sales proceeds were higher than expected, so we realized a gain on sales of loans. Moving on to the disposal of AFS Securities. Compared to previous year, we saw an improvement of KRW35b in stock sales.

Moving on to BC sales - it increased by KRW26b year-on-year, and in other non-operating income there was the early retirement program which required payout of KRW205b during the first quarter.

Moving on to loans. Compared to the end of last year, we saw a KRW3.1 trillion decrease in loans, and the proportion of corporate loans is KRW1.7 trillion in that amount. And whereas household and car loans were on a rapid decrease trend, that trend has been stabilized. So overall our balance sheet no longer shows signs of decreasing on that front.

Deposits in won increased and in particular core deposit, which are a low cost item, increased, followed by time deposits which is a high cost item. On that front we saw a decrease, and we also funded through CDs and RPs.

Moving on to shareholders’ equity, you can see there is a significant improvement compared to the end of last year. In household loans there was a decrease by KRW1 trillion, and as you can see, in Q2 the trend has no longer decreased. So this is an exemption. On the household loan front, which we've witnessed a continued decrease, the new loans in the household sector were slightly less than KRW1.6 trillion per month.

But this year until Q1 the amount was KRW1.9 trillion and, as our CEO mentioned earlier, because of our loan process improvement and our service improvement, and the introduction of a systematic way of doing ALM as well as risk based pricing. We saw an increase in our product competitiveness, and a new asset acquisition process took root.

As a result, in May and June we saw new household loans increase by KRW2.4 trillion respectively. On the other hand, in 2003 when we had a lot of collective loans, a lot of that was repaid this year. So compared to our expectations, the balance on the household loan front did not increase by a large margin.

Moving on to corporate loans, we found the large corporations are accounting for a more larger portion of our business. And on the SME side, although their soundness is improving, and we are also attracting sound SMEs’ business. However, on the other hand, some SMEs have not witnessed an improvement in their asset soundness. And starting from the second half of the year, there will no longer be a decrease on this front, and our strategy will be to have more volume increase on the large corporation front.

Moving on to credit cards. Cash advances and card loans are still decreasing, but the margin by which they fall has been stabilized compared to the past.

As I mentioned earlier, the demand type deposits compared to last December increased by KRW1.8 trillion, and this is due to the fact that the low cost core deposits increased by KRW2.1 trillion, and NMDA slightly decreased. As a result, our -- it contributed to the lower funding cost, and the savings type deposit decreased by KRW5.2 trillion year-to-date. The reason being, according to our understanding, that demand has been [honored] to CDs and RPS.

Whereas some of the demand has been diverted to other areas. So all-in-all we've seen an increase by KRW2.6 trillion in terms of deposits.

Moving on to a breakdown of provisioning for loan losses. On the household front there was a KRW600b provision, which stood at KRW240b in the first half of this year. As I mentioned, there was the reclassification of housing loans, which lead to a reversal into provisioning of KRW107b. Even taking that into consideration, we can see that the soundness on the household front has improved.

On the corporate front we've seen an improvement by KRW20b, which as I mentioned, is due to the following. We rated loans to companies based on the figures of -- in Q3 and Q4, but we've now accelerated that and the rating takes place in the second quarter. So this is, mind you, not an apple to apple comparison but we do see a slight improvement in the soundness.

Moving on to credit cards, we’ve seen a decrease by a significant amount, and the coverage ratio for household stood at 107%, but in June last year it was significantly lower. So this is an improvement, and our coverage on the corporate front improved to 79%. As you are well aware our corporate loans, over 45% of that is secured with real estate.

So in the case of mortgage backed loans, even if they fall to NPL level, we only have about 20% in terms of provisioning and it cannot be degraded further in terms of classification. So there's only a certain extent to which we can go, to improve the coverage ratio of the corporate sector.

Moving on to credit cards, the coverage ratio is 120% and all-in-all the total coverage ratio improved to 94.1%. If you look at the graph on the right, it shows in Precautionary -- that the volume of Precautionary loans has fallen significantly. And as a result, Substandard and Below volume is also on the decline.

Moving on to delinquency ratio. Overall the delinquency ratio is falling, and also if you look at credit card in June of last year, was 10.9%. But now it has fallen to 4.2% which is a significant improvement. Some people have said that KB Kookmin Bank has a lot of revenues and its asset quality has improved substantially. But still, if you look at delinquency ratios, there is still a long way to go to get back on track.

That is what some people have said from time to time. But among our competitors, the market that our competitors are targeting are -- is more the upper market, while the market that we’re targeting is more the mass market. And so the business model is different. So I explain that by saying that the business models are different from bank to bank, and I hope that you will understand that too as well.

The banks that target the upper market, their profitability is low and also the credit cost is low. But in our case because we target the mass market, profitability is high and also credit costs are high as well.

Substandard and Below Loans - their share is falling continuously, and coverage ratio is going up continuously. And Precautionary and Below ratio is also falling as well, and in the coverage ratio for Precautionary and Below loans is also improving. With respect to NPLs, please refer to the graph that you see here. And then with respect to provision expenses, I already explained this as well, so please refer to the documents that you have.

Next, moving on to quality asset increase in household. The share of secured loans is quite high in household loans. And also in car loans, as I mentioned, cash advances and car loans their share is falling, whereas credit sales is being increased. And also in the corporate sector we’re continuously increasing the share of companies rated Double D minus and above. And we’re continuously reducing our loans to industries sensitive to the economy, not by a large margin, but they're continuously reducing.

I mentioned the improvement in our credit management process. For risk management at the acquisition stage for household, we've developed a new CSS model for household loans, and we've applied that from April. For all loans including secured loans credit scoring is conducted, so that healthier assets are secured in a pro-active manner. And also for corporations we've developed a new SOHO model, so that SOHO loans can be processed in a system dedicated to SOHO loans.

Household loans are monitored on a monthly basis automatically by the VSS model. The corporate loans are also monitored at all times by the credit analysts that are in charge of those loans. And also we have converged our -- the 43 bank and credit card NPL centers into 22 centers. And also we have a comprehensive management system by borrower for IT integration, and we have standardized our NPL management process to improve efficiency. And through various NPL disposition strategies our asset quality is improving.

In the investment trust products, especially in the first half of this year, we have focused on the savings type funds and overseas funds. And so if you look at the average monthly fee income, it is increasing quite rapidly. And in term -- and in bank assurance, rather than the bullet type, we’re focused on sales of savings type products. So the average monthly fee income is continuously increasing, as you see here.

Increase in fee income - to increase fee income and to expand the corporate customer base, we have released CMS which is an integrated cash management service for corporations. So for large corporations we have a product called Cyber Branch which was released in April of this year. And currently we have acquired 118 clients, and by the end of this year we are targeting for 200 clients.

And also in October of last year we released a Cyber CFO product targeting SMEs. Currently we have 3,400 corporations as our clients. By the end of this year we aim to acquire about 10,000 clients, in order to expand our corporate customer base. Details about this product will be explained by a demonstration of this product, for about 5 minutes after this presentation.

At the end of 2003 we brought Treasury shares from the government. It was 27.4m shares. We sold the entire shares to investors both at home and abroad in June of this year, and we received KRW1.26 trillion from the sales of those Treasury shares. And as you see here, in the first half of this year the income was KRW909b. So as you can see, that our capital adequacy is improving, and the IS ratio 12.32% and Tier 1 is 8.75% as at end of June. So we are very much on the ranks of an advanced bank.

The management focus for the second half of 2005 is, in order to establish an advanced financial system, we will continue to improve our products and processes, centering on our customers. We will reinforce our customer service, and we will especially focus on improving our internal control system. And focus on enhancing efficiency of the organization and personnel related matters.

And so by the end of this year we believe that we will lay the platform for sustainable growth. This concludes my presentation. Thank you very much.

Thank you very much CFO, Mr Shin. Next let’s show you a demonstration of our Cyber Branch and Cyber CFO.

[Video played]

This marks the end of the presentations and the demo. So we will now take questions. We will first be accepting questions from the floor of the conference room. If you have any questions please raise your hand so that we can hand the microphone to you.

The person seated in the middle, if you could kindly hand over the microphone.

I'm from Deutsche Securities. If you look at page 24, you have 2 charts regarding bank assurance. And it says that the savings type figures continue to increase, and how is this increase in the savings type product helping your operations? If you could be a bit more specific?

If you look at the co-selling fee and other areas, it doesn’t seem that like the growth is significant. So my question is whether there is a substantial change to the composition of how these are structured?

Senior EVP Oh, would you like to take that question?

During the first half of this year, there was [indiscernible] regulation so our focus was on profitability, and not really growth in terms of quantity. In other words, in order to achieve growth by quality we looked at profitability, and focused on savings type products in our bank assurance sales strategy.

If you look at the fees and commissions, it’s about 3.5% but were bullet type. But the profitability for a savings type is about 8 times higher than that of bullet type. So as you can see in the chart, the volume has not increased significantly whereas we’re seeing a big improvement in profitability. I wonder whether that answered your question, was that sufficient?

I have something else to point out for you. The bullet type product, once the customer withdraws the money it’s the end of that product. But the savings type product also serves to maintain that particular customer. So it contributes to profitability as well as maintaining that customer at KB for the long-term. So that’s why we focus on selling savings type products.

We’ll be taking the next question. Yes, by telephone there are some participants who have asked to raise questions, so we’ll take their questions first before we come back to the audience here. Operator, please link us to the person who will be asking the question. Hello? Yes, go ahead.

Hi. It’s Andrew Reynolds here from CLSA. I've got 3 questions if you could, most of them related. The first 1 is on net interest margin. If you could just give us a little more color on that, and potentially some future direction? Where you think margins are going to go to from here? That’s the first 1.

The second 1, related to that. Do you see asset growth going forward which will obviously improve your margins, because you had contraction in 2 relatively high yielding assets - SMEs and credit cards? Is that going to change going forward?

And then finally on the provision charges, do you -- what do you think is a sustainable level, and do you think that the low charges that we see now is going to be sustainable for the foreseeable future? Thanks.

With regarding the first question on NIM. As you saw earlier, NIM was not falling any further and the -- during the analysts conference of the first quarter, as we mentioned earlier this year, NIM on a full year base will be making at 3.25%, is what we said during the last earnings conference. But in the second half of this year too, likewise, we believe that the funding cost will decrease and also the hired assets of the past are contracting.

But we believe that there will be turnaround in that contraction, and so NIM, we don’t think it will fall further than 3.25%. And also with respect to volume growth, as I mentioned earlier, by the end of this year we’re at -- in the middle stage of reaching sustainable growth. So in household loans, from the second half of this year we believe that there will be a slight increase.

And corporate loans, large corporates already are on the increase, and in SMEs we don’t think that there’ll be any further contraction. Actually there will be a moderate increase, and card assets will -- won't decrease any further. So overall, on the second half of this year we believe that 2% to 3% growth. We foresee 2% to 3% growth.

And lastly, with respect to provision costs, overall compared to our assets in the first half of this year, 1.1% credit cost we had. Compared to our loans, it was 1.5%. We believe that 0.8% to 1% of that range of -- we will see in production and provisions in that range. I hope that answered your question?

Thank you.

Mr. [Huff] from CSFB is on the line.

Good afternoon. The income prior to provisioning increase year-on-year, and there's a significant improvement in margin. During Q3, Q4 and next year, what kind of trend do you foresee in the income prior to provisioning? Do you think it will be on a continued, upward trend or will there be another factor?

The way we will get it we don’t foresee a drastic upward trend, it will be a relatively slow but good way in which it will be increasing. I think that answered your question.

We’ll be once again accepting questions from the floor. Or by telephone from Goldman Sachs, Philippa Rogers is linked from Hong Kong. So we will take another question by phone.

Hello, can you hear me?

Can you speak a little louder?

My first question is could you comment on capital management going forward? And in particular your dividend policy in context of forecast risk rated asset growth, and also Tier 1 targets over the next year or 2? And secondly, when you gave that provisioning estimate of 80 to 100 basis points on assets. Is that a long-term forecast or a long-term target, in terms of normalized provisioning? Thank you.

Yes, I’d like to answer that question. First of all, in terms of capital management our dividend policy and the Tier 1 ratio. The dividend policy is such that the management, together with the BRD, are looking at a mid and long-term policy. We are studying the mid and long-term dividend policy, and the Tier 1 ratio we believe 9%, maintaining at about 9% we think would be an appropriate level.

And lastly, with respect to credit costs, the CFO mentioned 80 to about 100 bp credit cost, that’s a long-term target. And third quarter, fourth quarter, as we move -- go forward, to what extent it will stabilize. We believe that we will get a sense of to what extent it will stabilize. Hope that answered your question?

It does.

We will now be taking questions from the floor once again. If you have any questions, please raise your hand so that we can hand the microphone to you.

[OPERATOR INSTRUCTIONS].

I think we are still online. No, we’re no longer online. In that case, from SJ Securities we have Mr. Yu, and that will have to be postponed as well. Well, we will be taking questions from the floor. If there are no questions. We’ll be accepting 1 last question before we wrap up. I don’t see any hands and I'm assuming that there are no longer any questions. So this marks the end of the earnings conference. Thank you very much for your time and attention.

The presentation given at this earnings conference will be available at KB’s website. And if there are any questions that were not asked today, please feel free to contact our IR team via email or phone, and we will be more than happy to take your questions. Once again, thank you for coming and I would also like to thank the investors who joined us via the Internet and phone. Thank you.