KB Financial Group Inc (KB) 2005 Q4 法說會逐字稿

[Translated]. We would like to thank all of you very sincerely for attending the earnings conference today, despite the very cold weather. We are gathered at the 21st Floor of the [Gerrard] Building for this conference. This conference is also being broadcasted live through the internet and the conference call. We will also entertain questions from our conference call audience during the Q&A session later on.

Today at this earnings conference we have our Chairperson Chung of our BoD. We have our CEO Kang and all of the major executives of the Bank. If I may introduce today's program. First we will hear from CEO Kang of the major focus points the Bank emphasized during the past year. Then, we will be hearing the 2005 business performance from our CFO Shin. After the performance presentation, we would like to show our audience a very brief introduction of our new CRN system which will be implemented from this year and then entertain your questions. Now, I would like to give the floor to our CEO Kang.

[Translated]. Good afternoon, ladies and gentlemen. My name is Kang Chung Won. I am the CEO of Kookmin Bank. It's a great pleasure to meet you all again and I would like to thank all of the shareholders and the analysts for your continued support during the past year. On behalf of our 24,000 employees, I sincerely thank all of you for your support. With your help in the year 2005 -- could we flip the slide? In 2005, the Bank has focused on stabilizing its profitability and raising the quality of its assets, improving its services, enhancing its HR management system, pursuing a system improvement and also strengthening its internal control systems.

As you can see on this slide, which is on page three, our asset quality was improved quite considerably. Our profitability was stabilized and, in our customer satisfactory index survey, KB has been ranked as one of the top satisfying banks in Korea. Also, we have had many programs in terms of training to improve our corporate culture. We have separated our Credit Group from Sales and we have made various efforts in order to enhance the soundness of assets in the front line.

Also, we have updated our customer relationship systems. Once this is completed we will be able to have separation of our loans and sales. We will be having the very basic division of the three roles basic to the commercial bank and that will strengthen the basic fundamentals of the Bank.

Also, in terms of our internal control systems, we were the first financial institution in Korea to adopt a full-time internal control monitoring system at the branch level. And also, we have been producing various business management data and have integrated various customer control systems as well.

In conclusion, as we start the year 2006, KB is fully prepared to leverage its profitability and enhance profitability and we are now going to be entering a new phase of growth. For details, I would like to ask our CFO to explain. Thank you very much.

[Translated]. Good afternoon, ladies and gentlemen. I am the CFO of KB, Shin Jung Kap, and I would like to now introduce to you the performance of KB in 2005. First is page five, which is the financial highlights, and then we will go into profitability, fund management and asset quality.

In 2005, our net income was KRW2,252.2b, which is more than a five times increase compared to the net income of year end of KRW360.5b in 2004. We had provisioning expense of KRW1,410b, which is a decrease of 57.2% year-on-year. Also, the NPL ratio came down by 94 basis points compared to 2004. We have an NPL ratio for 2005 of 1.70%. The NPL coverage ratio was at 105.6%, which is an eight percentage point improvement. According to this, our ROA came down to 1.24, ROE 20.35. The IAS ratios, Tier 1 ratio, these are provisional figures, but the BIS ratio was 12.84, Tier 1 was 9.60.

When we go into the details of our income, the net interest income was decreased by 6.3% year-on-year, but this is mainly due to our focus on raising the asset quality. Our won loans decreased by KRW4.1t and the more profitable assets such as [time rate] linked loans and credit card assets have also decreased, which has resulted in the decrease of our NIM. Our overall non-interest income, which is the fee income, increased by 1.2% and the details of this fee income will be explained later on.

General administrative expense increased by 8.6% year-on-year, but the main reason for these increases were because last year we had an ESOP program, which was about KRW90b, and at the end of the year 2005, because of the good performance, we paid out special bonuses of KRW140b to our employees. These are mainly non-recurring one-off factors explaining the increase of the G&A expense. If you actually exclude the G&A expense, our G&A expense would have decreased by 1.8%. G&A expense increased by 8.6%.

Our net income -- [main] factors behind our net income is because our provisioning expense decreased by 57.2%. The provisioning expense was able to be reduced considerably because the quality of loans on all categories were improved and also because we had recovery of some written-off loans. Also, the non-operating would be broken down into the ERP package offered in February, which cost about KRW255.3b, but then, in the private placement fund, we had a gain of KRW187.9b and the loan asset sales brought in an income of KRW165.3b. And therefore we were able to improve the KRW1.1t loss of non-operating income last year to a KRW212.4b plus. Our net income grew, therefore, by 524% year-on-year.

If you go on to the details of the interest income, the interest income decreased slightly because of our focus on raising the quality of assets. Our asset size decreased and our interest income decreased by 9.9%, but you can see quarter-by-quarter it is on an upward trend, the asset sizes. Next page please.

Our NIS and NIM. Our NIM decreased by 24 basis points [sic - see slides] compared to 2004, due to the decrease of the high profitable, high margin assets such as credit card assets, but over the year of 2005 it is on an upward trend. We also see an increase of market rates and also the increase of low cost deposits of KRW6.7t and these were the major factors behind the gradual increase of our NIM throughout the year 2005.

We think, considering the economic conditions and the market conditions, that in the future the NIM will probably remain stable or decrease slightly, rather than increase.

The non-interest income, most of that is the Bancassurance or the beneficiary certificates, the commissions in won, which grew considerably, and the credit card fee income also increased. And overall, the commission and fees was able to grow by 5.7% year-on-year.

In detail, in the -- there were some one-off factors, but the Trust fee -- up till now, historically, the Trust assets under management have been on a declining trend, which made the Trust fee income also decrease, but this year, or last year 2005, we were able to see a growth in our Trust-related fee income. Also, there was a decrease of [inaudible] management fees and there was a decrease in the fees of other [inaudible] management in the Credit Cards and that was why it only grew by 7%. Also, in the National Housing Fund Management, there was some increase of the volume of these NHF management-related loans, which contributed to an increase by 11.6%. And we see the Bancassurance and beneficiary certificates continuing to increase and the others are also increasing.

There were the increases of interest rates and we had some losses on our bond yield. That's the main reason why we have a negative in the other figures under the non-interest income. We had of course the plus effect to [the raise] of the stock prices, but we had some losses on the bond-related transactions overall. Therefore our [positive outlook] on the market [for] securities-related transactions decreased by KRW144.7b.

The high growth areas of our fee income is, of course, the ITC products and the Bancassurance products. And in terms of ITC products, as you can see in this bar graph, the savings type and overseas funds AUM increased by KRW2t and KRW1t respectively. However, the bullet type have decreased by KRW2t and, overall, our AUM increased by KRW1.1t, which is a 7.8% growth. Also, if you look at the savings type overseas these are the high fee [bearing] products and, due to the growth of the AUM here, we were able to increase our fee income by 89% in 2005.

In Bancassurance, the monthly premium decreased by 13.8%, but, because we now have a high issue of savings type of Bancassurance products, the fee income grew by 47% year-on-year.

G&A expense. As I previously mentioned, we had some one-off items, which is explained in the bottom table. We had the ESOP program and the special bonus paid out in the end of last year. These are non-recurring one-off factors and, if you account for that, actually our G&A expense would have decreased.

Our depreciation and amortization has decreased, because our [type of] spending has been continuously decreasing over the past several years. Our cost income ratio in year 2005 was 40.3%.

Now we go on to the non-operating income details. We did have the ERP package in February, which cost us KRW255.3b, but we also had some plus factors such as the repayment of the private placement fund and the gains on the sales of our loan assets. And it grew by KRW1.3t, coming in at KRW212.4b. In the others, I think most of the details have already been explained and so I will move on to the next page.

This is the condensed balance sheet on page 13. As I mentioned several times, our total assets in loans in won have decreased by KRW4.1t and our securities in won and foreign currency assets have increased by KRW2.8t and KRW1.9t respectively. So overall, we are at a similar level as we did last year.

In terms of raising, the profits have been growing quarter-on-quarter and so we see an overall slight growth compared to 2004, but bank debentures in won have decreased considerably. And, in 2005, we had a sizeable net income. We also sold some treasury stock and our shareholders' equity has increased in 2005 by about KRW3.2t. Our loans in won and credit card assets decreased by KRW5.2t, but once again last year we focused on improving the quality of our assets and this is the result of that focus.

Household loans, we see a considerable increase of home equity loans. In corporate, we did focus on improving the quality of SME assets and that's why it's decreased, but on loans for large corporations we focused especially on the very high quality customers and we grew our large corporate assets by 16.7%.

Credit card assets has been decreasing for several years in the past, but we see that it has turned around into a growth since the third quarter. Also, credit sales has been growing from the second quarter of last year.

When we look at the total corporate exposure, which is the bottom line, even though our loans in won have decreased by KRW2.4t, our private placement bonds, guarantees and bills in foreign currency have actually helped to increase our corporate exposure by 6.8%.

Our deposits in won have grown by KRW2.5t. Excuse me. Core deposits have significantly grown by KRW6.7t. Time and savings deposits have decreased, but the CD and RP, the more market rate based products, have grown significantly. On the other hand, bank debentures, which are relatively higher cost, have been have been less used and so debentures, whenever they [came through], we tried to maintain a policy of repaying them and that is the main reason for the decrease.

In terms of provisioning, the overall asset quality improvement and increased write-back of written-off assets led to provision of loan losses which was KRW2t less compared to last year and reached KRW1,062.1b. There are a couple of factors, for instance we had additional provisioning of KRW300b at the end of last year.

In terms of NPL coverage ratio, retail increased 141%, 77% for corporate, 141% for credit cards, leading to a significant improvement for the year end, 87.6% all the way to 105.6%.

As mentioned earlier, the overall improvement of the asset quality led to the reduction of not only precautionary assets but also sub-standard and below NPL assets. And the size of the precautionary and below asset, which most of you are interested in, has decreased 43.3%, down from the year end's 9.7t to 5.5t. NPL ratio was 1.70%, which was down 94bps compared to the previous year.

In terms of delinquency, the overall loan delinquencies as of the end of last year were 2.67% and has come down 97bps to 1.70%. Per business line, the Retail showed 1.65%, Credit Card 3.01% and Corporate 1.56% delinquency rate, which points to a continuous positive momentum in both a quarter-to-quarter and on year-on-year terms.

If we look at this graph, as mentioned earlier, the sub-standard and below to total loans ratio and the precautionary and below to total loans ratio fell to 1.7% and 4.03% respectively, thanks to the improved delinquency rate and the sale of NPLs. The coverage ratio increased to 105.6% and 44.5% [sic - see slides] respectively.

The net addition of new NPLs is continuously shrinking due to the quality improvement of asset quality. However, the Q4 figures edged up slightly quarter-to-quarter. More specifically, the net increase of new NPLs for Corporate was KRW351.5b, Household minus KRW75.1b and Credit Card KRW118b. The reason for the hike in the Corporate portfolio was due to the lowering of the ceiling for SLC from the previous KRW1b down to KRW500m in loan amounts, which led to the new NPL formation of KRW114.1b. In the case of Retail, a significant reduction took place following a reclassification of KHSC guarantee-related assets of KRW128b from the previous sub-standard to normal.

The annual average provisioning ratio dropped from 2004's 1.6% to 0.6% in 2005. As mentioned before, it was thanks to the continuous asset quality improvement efforts and the enhanced write-back of written-off assets. The average provisioning ratio is now within the normalized credit card range of 0.6 to 0.8%.

This graph shows the less provisioning due to asset quality enhancement and the increased write-back of written-off assets. Although there exists a slight quarter-to-quarter variation, the moving average graph of the two quarters on the right shows a steady downward trend of provisioning for loan losses, as well as the continuing strong write-back of written-off assets.

Next, let me touch upon some other areas of interest. I will talk about the profitability trend and also the improvement of customer satisfaction, credit rating and improved corporate governance, CRM, social responsibility crystallization and key focuses by business.

To help your understanding of KB's P&L trends, we listed the ratio which divides the sum of income, G&A and provisions by average total assets, as well as the improvement trend of ROA and ROE. First, on the left, please note that the income to total asset ratio has been on the rise since last Q1. Although the G&A edged up slightly during the Q4 due to the one-off factor, the trend is quite stable. Once again, we had a KRW140b special bonus as the one-off factor. Our ROA and ROE are markedly increasing due to the big increase of net income.

[The members of] KB Bank is doing its utmost to not only achieve our quantitative business results but also to grow as a customer-friendly and wise Bank. This graph is attesting to that. Notably, our year-long efforts to improve customer service paid off, with an unprecedented leap in customer satisfaction index. In the second half of 2005, KB was ranked second by Korea Productivity Center and, as you can see, we are ranked quite high in terms of customer satisfaction. Also, the number of customer complaints lodged at FSS has continued to fall, almost halving from the first half of 2004, only recording 189 complaints per month in the second half of 2005.

The credit rating for KB, which shows the credit worthiness of the Bank, has been upgraded by both S&P and Fitch, from A- in September to A in October. The Moody's rating is maintained at the A3 grade, which is at par with the Sovereign Rating of Korea.

Also, to ensure transparency, KB's Board has been working hard to improve the corporate governance. As a result, S&P has given a very strong point of 8 out of 10, after the 2005 Q4 corporate governance assessment. As far as I understand, this is not a common assessment taken by major corporations in Korea, but within Korea this is the highest ranking so far. And many renowned companies around the World are being assessed and, of all those global figures, even, we are ranked quite high, almost second in ranking.

In order to enhance customer marketing capabilities of the Bank, KB completed its proprietary CRM system development during the second half of 2005, for the first time among Korean banks. The new CRM system is now enabling an integrated management of previously distributed customer DBs of the Bank and the Credit Card businesses. Not only that, but sophisticated customer segmentation criteria will enable the most optimum product recommendations at each branch, focusing on the customer tendencies and needs, as well as more systematic and efficient campaigns. To help you better understand the system, we will show an eight-minute video on this integrated CRM system after this presentation.

KB has always pursued the fulfillment of corporate social responsibility through diverse social contribution activities. KB Bank has added vigor to its volunteer group and has donated KRW16.6b to social welfare institutions. In the long term, we plan to institutionalize the social contribution activities to reinforce local community voluntary activities and support programs for financial education parties, among many diverse CSR programs.

If you look at the Retail Banking strategy for 2006, we will reinforce customer management based on the integrated CRM system, which will upgrade the products and services through optimum product offerings. We will do our best to achieve channel efficiency, competitive interest rate policy and continuous improvement on asset quality, ultimately leading to higher profitability of the Bank.

In terms of Corporate Banking, we will continue to strengthen our products and services to secure quality customers and expand cross-selling to existing customers. We also plan to increase the loans through risk based pricing, based on corporate risk. We will increase the SOHO specializing branches to enhance marketing, develop differentiated products for suppliers of large conglomerates and steadily expand the investment banking to maintain our top ranking. Also, we will continuously upgrade our credit-scoring model and increase the proportion of the quality [PB-] or higher assets to ensure continuous improvement of asset quality.

In the Credit Card business, we will strengthen customer relationship management through realignment of customer segmentation and focus on acquisition of new customers for asset increase, while expanding wallet share for profit increase. To secure sales capability, we will reinforce sales channels, improve products and services, while continuing with asset quality enhancement.

Thank you very much.

[Translated]. Thank you very much, CFO Shin. Now we would like to show our audience the new integrated CRM System of KB, very briefly.

[Video played]

[Translated]. Thank you very much for your attention, and now we will open the floor for questions. Anyone with questions, please raise your hand and we will pass the microphone to you.

[OPERATOR INSTRUCTIONS].

[Translated]. Usually it's the first question that is difficult to get out. Please, are there any questions?

[Translated]. My name's [Nee Gon Gwan] of [Kowang Securities]. I have two questions. The first question is the G&A expense. Of course, the depreciation did increase during the fourth quarter, but, compared to your budget, your IT expense execution was very small compared to the previous year. And this year, there will be some ATM replacements necessary. But, as soon as we move that out, I think that, overall, your IT-related expenses this year may increase.

Also, last year, there was [somewhere in the] KRW30b of bonuses paid out at the end of last year, which you say is one-off. But if we assume that this year KB's performance will be not so bad either, then wouldn't you have to do something else, such as bonuses, or contribute to welfare funds for the employees? I think it's difficult to look at that simply as one-off factors.

And so, overall, I am a bit concerned about the possibility of the G&A expense increasing quite considerably this year. Of course, there is the KRW250b of ERP-related expenses, and if we do [compare] that, the cost income ratio is not very low. But couldn't it actually go higher this year? So I would like to hear your expectations in terms of the G&A expense this year.

The second question is the NIM. I think everyone agrees that the NIM will probably be stabilized or decreased slightly. But if you look at the materials, the CD rates in the fourth quarter of 2005 actually increased considerably, but your household loan rates have actually decreased during the fourth quarter. Maybe that's because of the home equity loans increasing, and in the fourth quarter many of these home equity loans, there were some -- at least, compared to other banks, [inaudible] KB had a higher starting point in terms of your home equity loans. And that's maybe why [there was a big] decrease.

But considering the increase in the CD rates in the fourth quarter, your decrease in the loan rates is a bit notable. The deposit rates this year have more of an upward pressure this year, and so should we expect your Household loan rates to go down further this year or not? And this is before the change, but what about the cash expenses and the credit card loan fees -- are probably not -- or are included there, but if we just exclude the credit card related interest income. If we just look at the loan and deposits, what is the NIM that you are expecting to see, when you just look at the banking business without counting in the interest from the Credit Card business?

[Translated]. I am very impressed. It seems that you are analyzing KB's business very well, and I would like to defer that answer to our CFO, Shin.

[Translated]. Whether that bonus at the end of the year is one-off or not -- Well, it may not be one-off, but I think that's more temporary, to be more exact. If we have good performances this year as well, of course, this bonus could recur. And so I think, rather than calling it a non-recurring or one-off, it would be better described as being something temporary.

The cost income ratio, we think we'll be able to contain that within the last year's level. Last year and this year we will continue to expand our business base. We are planning various initiatives to expand our business in sales foundations, and so we will have some expenses from that area. And, as you mentioned, we probably would be making more IT-related spending this year.

About the NIM. When we look at the competitive situation, squeezing the NIM is something inevitable, I think. Because of the squeezed NIM, we will try to absorb the losses by increasing the share of our low cost deposits. And that would be a factor that decreases -- and we would also try to decrease our interest expense. We will also try to leverage the volume in order to absorb some of that interest income decreasing pressure.

And, as you've seen, the credit card assets, I think, have now turned around to an, at least, not decreasing trend. And so we will be able to maintain high quality of assets and also to maintain the profitability of our interest margins. And so, even conservatively approached, I think this year the NIM decrease, even if there is, would not be very large. And overall we are in an interest-increasing trend, and our asset and liability structure actually gives us a gain if the interest rates increase.

And even if we -- If you consider the positive effect of an increasing interest, according to KB's [AL structure], I don't think there's a serious need to be concerned.

[Translated]. Next question please.

[OPERATOR INSTRUCTIONS].

[Translated]. Good afternoon. My name's [Hu Yan] from JP Morgan. I have a question about your provisioning. In the case of last year, we had unused limits and also guaranteed portions. I understand you accumulated all the provisioning. NPL coverage is right now about 100%, I understand. In the case of this year, [excluding] the expected losses, you have to set up the provisioning according.

And so, my question is how much will be the normalized provisioning this year? And if you are to set aside additional provisioning, how much more would that be for this year?

[Translated]. As far as last year is concerned, as you have pointed out, there was the unused provisioning, which amounted to about KRW300b. If you exclude that amount, we're looking at about KRW1.68t for last year's provisioning in total. But as you saw in the detailed graph, we had more write-backs of written-off assets. That's why the overall provisioning decreased. And we had some sales of assets, and in that case some of those provisioning earlier [need some time] to reverse.

Therefore, as far as the variability is concerned, it all depends on how much asset sale we make for this year and how much write-back of written-off assets we could achieve. And those two indicators are quite difficult to predict. Therefore, if you consider all those other factors, I would say that we would remain within the normalized current range of 0.8% compared to the total assets. So if you divide the provisioning from the total assets, I'm looking at about 0.8% range or so.

[Translated]. I hope that has answered your question and we will take the next question.

[OPERATOR INSTRUCTIONS].

[Translated]. It seems that our presentation was so complete that we have left no room for questions.

[Translated]. I have a couple of questions. You did pay out a sizeable bonus to your employees, and what's your plan of dividend payment to your shareholders, considering the good performance?

The second question is the following. Concerning the coverage ratio, what are the targets at the end of year 2006 for your coverage ratio or the NPL ratio? Could we hear if you do have any targets by the year-end?

[Translated]. Regarding dividends, our dividend principle is just stable dividends. There are some restructuring in the banking sector this year. There are some uncertainties in the banking business concerning these factors. This morning, at the BoD meeting, there was a resolution to pay out KRW551 per share, which is the dividend last year as well.

Regarding the coverage ratio targets by the year-end, substandard and below versus provisioning expense, I think that's your question. We have 105% coverage ratio, which is what you saw today. Probably you can expect to have the coverage ratio improved throughout the year 2006.

[Translated]. I hope that answered your question. The next person in the back, please.

[Translated]. In the previous IR you mentioned something about the asset size principle. You said you don't have any plans to increase the asset size, but recently KB has announced its intention or possible interest in acquiring KEB. So could you share with us any plans or your view going forward with regards to KEB?

[Translated]. When it comes to the acquisition of KEB, we are in the process of reviewing that option. I am afraid that I will not be able to share with you any more on this matter. I am sure you understand.

[Translated]. You talked about KRW551 per share dividend. That's a lot less than the market expectation. So reversely speaking, I would say that you are trying to prepare for the possible KEB acquisition, trying to secure a capital [base]. That's the only way we could interpret it.

Of course, the CEO says that you have nothing to share with us as of yet, with regards to KEB acquisition, but what if you do not end up acquiring KEB? Then what would you do with the surplus capital? Within this year, you could possibly give out half-year dividend or quarterly dividend. So would there be any such possibilities as well?

[Translated]. Well, as soon as we have less uncertainties in the market, we would be reviewing the interim dividend or any other options. Of course, there is always room for such discussion going forward within this year.

[Translated]. I'm sure that has answered the question. We did provide the details during the presentation and I would -- Well, we have one more question.

[Translated]. My name's [Chu Chong] from [E-Daily]. Related with the acquisition of KEB, you said that you would not make any further comments. But there is some news in the financial circle that you, or KB, is participating in a due diligence process that started from the sixth. Also, I heard a disclosure that the BoD meeting this morning had resolved on stock options, but we don't get the details. So did the BoD actually resolve on the resolution -- resolve on an agenda related with stock options?

[Translated]. My recollection is that the BoD did not discuss any matters related with stock options this morning. Related with KEB, we are reviewing and I am not in a position to say anything other than that. Please, I ask for your understanding.

[Translated]. If there are no further questions, this concludes the Q&A session. If you have any further questions and, if necessary, please contact our IR division directly and we will respond as much as possible. And today's earning presentation and the content of the Q&A is shown on the website, so you may also visit the data at a later point. Thank you very much for taking part.