KB Financial Group Inc (KB) 2006 Q2 法說會逐字稿

[Translated]. Ladies and gentlemen, my name is [inaudible] at KB Kookmin Bank. I would like to thank all of you for attending this earnings conference despite your busy schedules, that is being conducted through teleconference and video conference. The first half performance announcement is being provided through telephone connections and Internet webcast. This is our effort in order to be in line with the Internet culture and also the recent trends. This is the first time being attempted by Kookmin Bank. In the future, when there are major events or in the future earnings conference, we will also conduct offline earnings conferences in parallel so that we have the opportunity to meet our investors face to face.

At this earnings conference we have the chair of our [POD], Chairman Chung, our CEO Kang Chung Won and also the executives of the major divisions of Kookmin Bank.

I would like to first of all briefly introduce today's agenda. First of all, we will hear from our CFO Shin Jung Kap, our first half performance through our presentation and then receive your questions through the teleconference.

Now I would like to give the floor to our CFO, Jung Kap Shin, who will be introducing us to the first half financial performance and major issues. Thank you very much.

[Translated]. Good afternoon, ladies and gentlemen. My name is Jung Kap Shin. I am the CFO of Kookmin Bank.

Now I would like to introduce to you the first half performance of KB Kookmin Bank. First I will go into the financial highlights and then look at the profit and loss situation of each of our business divisions, look at our assets and liabilities and then lastly look at our asset quality.

First, the financial highlights on page four. Our first half net income was KRW1,580b, which is 77.5% growth on the previous first half's KRW890b. Our provisioning expenses was KRW259.3b, which decreased by 71.3%, year-on-year. Pre-provisioning income was KRW2176.4b, which was an increase year-on-year by 1.6%. NPL ratio has decreased year-on-year by 1.13 percentage points to 1.93% [1.39% - press release] thanks to our continuous efforts to enhance our asset quality.

Our ROA annualized was 1.71 and ROE was 23.52%. Our BIS and Tier 1 ratios have also recorded 15.17 and 10.94% respective savings to our increased income.

If you look at the major indicators in our P&L for the first half, our gross profits in the second quarter recorded KRW1,894b, a very stable trend [performing] during the first half. The G&A expense during the second quarter had -- for example, the KRW600b of contributing to the welfare fund and also the accrual based recognition of our year-end bonus. For example last year, our year-end bonuses were recognized all at the same time in lump sum at the year-end. Now we will be recognizing throughout the year on an accrual basis. And also our advertising expenses increased by 12b.

Provisioning expenses have decreased thanks to the reclassification of the LG card assets and also the improvement of our asset soundness. We are maintaining a very low level of our provisioning expenses continuing from the first quarter.

With the decrease in provisioning expenses, increasing or stabilized gross profits as you can see, our net income has sustained levels above 700b on a quarterly basis.

This is the profitability for each of our major business lines. Now our interest income compared to -- year-on-year has increased by 5.5%. This is first of all because our interest bearing assets have increased by KRW8t on an average balance basis. Overall, the first quarter and second quarter showed similar net interest income.

Non-interest income increased by 0.2% year-on-year, 3.5% quarter-on-quarter. Details of the non-interest income will be explained later on in more detail. Our G&A expense increased mainly due to the contribution to the employee welfare fund and also the increase in advertising expenses and because the first half bonuses -- or excuse me, the first half portion of the year-end bonus was recognized during the second quarter. And that is why the G&A expense increased 9.7% year-on-year and 30.6% quarter-on-quarter.

Operating income before provisioning decreased quarter-on-quarter by 17.1% but was maintained at a 1.6% growth year-on-year. Our provisioning expenses decreased by 71.3% year-on-year and 19.4% quarter-on-quarter. This is mainly due to the fact that our assets have continued to improve. And also because the LG card assets were reclassified to precautionary which had an impact of 33b. Also there was an [ABS] sale, which had an effect of increase -- of a 43b effect. Also there was a one-off factor, non-operating wise. Last first quarter of 2005, there was a one-off factor of ERP expenses and there was for example some gains on sales of assets. And therefore, our non-operating income in the first half recorded 264.8b. There was for example, sales of loan assets during the second quarter and also reversal in the reduction of the amount [inaudible] construction and engineering which had an effect of 81.4b.

With all of these factors, net income increased by 77.5% year-on-year but decreased by 3.2% quarter-on-quarter.

If you look at more detail of the interest income, the interest on securities had a major increase of about 3. -- 6.3t in average balance. That was a major effect. The NIM trend on the bottom of the page maintained about a 3.95% level annualized. But there was a decrease of 13bp on a quarterly basis and 7bp on an accumulated basis during -- from the first to the second quarter.

This is mainly because of the improved increase in high quality assets and because most of our new assets were bonds which have a relatively smaller margin, and because group loans, which in the past had a larger spread, currently have squeezed their spread to quite a small amount. And there was a negative duration gap, which in the past -- so in the past our liabilities cost -- grew slower than our assets income. But now it has -- this effect has now decreased. And that's another reason why our margins in this second quarter have decreased.

And then commissions and fees. Our commissions and fees grew 6.7% year-on-year. But on quarter-on-quarter the decrease in the NHF management fee had an impact and therefore quarter-on-quarter the commission and fees have decreased by 3.4%.

From last November, there was the first-half purchasing loan, which in the last year, had increased quite explosively. But in February -- last February the qualifications were strengthened and this had had an impact of decreasing that NHF management fee.

And the trust and commission -- trust decrease year-on-year by 33.6% but with the increase of the valuation gain on the Kia Motors warrant and other factors, the trust quarter-on-quarter increased by 23.2.

Bancassurance and ITC products both have grown by 5.4% and 3.0% quarter-on-quarter. Year-on-year Bancassurance and ITC product commission fees in Won have grown by 7.4 and 134.9% respectively.

Others -- there was a decrease of the valuation gain on equities and bonds but on the other hand there was a valuation gain on our derivative products that was a put option on semi-conductor companies that had an increasing or a plus factor. And overall on the others we were able to offset that decreased effect from the equities and bonds valuation gains.

So total non-interest income grew 3.5% quarter-on-quarter. G&A expense increased by 9.7% year-on-year and 30.6% quarter-on-quarter. This is because marketing expenses during the second quarter has increased. Also we contributed to the employee welfare fund by KRW60b. And also as we mentioned the year and bonus for year 2006, will be recognized quarter by quarter. Both the Q1 and Q2 portions of that year-end bonus have been recognized during the second quarter.

And our cost income ratio on an accumulated basis increased to 42.5% in the second quarter. We think that in the second quarter, overall depreciation and amortization would probably increase because most of the IT investments have been delayed to the second half of this year. And so in the second half we're expecting our depreciation to increase.

Also our marketing and other investments would be more concentrated in the second half. And so overall we are expecting to see a higher depreciation in the second half compared to the first half of this year.

And then non-operating income. As you recall, in the first half of last year, there was an ERP that cost us 255.3b of our one-off factor. We did not have that repeated this year. We actually had gains on sales of loans and securities. And we had one-off -- in the second quarter, we had a gain on some of our loan assets and also the reversal on the decrease of the losses [inaudible] construction. And therefore we were able to increase our non-operating income by 191.8b quarter-on-quarter.

Now we go into the assets and liabilities analysis. If you look at the asset growth trends, as you can see from the second quarter, we have started to grow significantly and meaningfully in our assets. Our household loans continued to decrease until the first quarter but from the second quarter with the increase of house -- home equity loans it had reverted to a growth trend.

From year 2002 to 2003, there was a lot of group loans that had been recorded. But last year, 9.2t have come to maturity. Most of them have been extended to a securitized loan and that was a major factor in this increase. About half of the loans that were -- in the second half we think that only about half of the group loans that we saw in the first half will come due in the second half.

Corporate loans have continued to increase. This includes the privately placed bonds and increased by KRW3.1t during the second quarter. Credit card assets have also grown by KRW0.3t and is recovering the asset size of the end of the last year. We think that credit card assets will continue to grow at a moderate pace.

This is the condensed balance sheet. Total assets grew by 6.9% year to date, increasing by 12.4t coming in at 192t. It was mainly 4.1t growth on our securities in won. Also 3.9t growth in loans and also 1.6t growth in assets in foreign currency. Liabilities -- there was a bank debenture in won increase by 5t, liabilities in foreign currency increasing by 1.1t. The details will be explained later on.

Household -- the household assets were already explained in more detail. If we go into corporate, it grew by 4t year to date. The SMEs, which include [inaudible] have continued to grow and it increased by KRW1.6t year to date. Large corporates decreased by KRW200b. But overall most of the large corporate assets or private placed -- privately placed bonds which has increased in their balance, grew by KRW6t. And loans in won have grown by KRW3.9t. And we think the loans in won will continue to increase in the second half.

Overall corporate, in the last line, on the bottom line, which would include loans in won, foreign currency and private placement bonds, all of these factors have increased. And that is why 5.2t in corporate banking assets has grown year to date.

Deposits in won decreased by KRW400b. Core deposits increased by KRW2.2t year to date and have recovered to the end of last year's level. But CDs and RPs grew by 23.1%, but savings and time deposits have decreased slightly around the high cost of deposits and decreased overall by minus 4.2%. A lot of the other banks have run promotional deposit products but we did not run such promotional deposit products. And we focused more on debentures, which therefore is the reason why our debentures have increased.

Next, is the asset soundness. Overall, the delinquency [inaudible] in terms of total, we had a 33[bp] reduction from previous quarters, from 1.62 to 1.29% as of end of this quarter. This is mostly due to improvement in our asset quality.

By sector. Household it stood at 1.32 and corporate at 0.98. As for credit card, it's also showing very much stable trend.

As I mentioned before asset quality is also continuously improving. Precautionary asset has been reduced by KRW500b and the percentage wise has been reduced drastically from 1.96% to 1.651%. And NPL is also reduced year to date 0.31%. And NPL coverage ratio has been increased to around 150 percentage rate.

Improvement -- continuous improvement of the quality and with more collection the provision by sector has also reduced. And quarter-to-quarter in total by 69.5%. This is mostly because of the reduced [inaudible] in forward provisioning thanks to improved situation and also because of the more collection of -- there was a reversal on the provisioning. Especially on the LG cards credit rating has been changed from the precautionary to normal.

So there was a lot of improvement on the corporate side quarter-on-quarter by 166.4 [inaudible] and credit card was also reduced by $23.3b. So coverage ratio, household 150%, corporate 83.7, credit card 151.8% and total coverage ratio was slightly - was drastically improved from 90. -- 94.1 from the last year to this year's 113.9. Coverage ratio I will skip because I've already explained.

Now in terms of net increase on the NPL thanks to improvements in asset it is also improving. And the total, end of this quarter was KRW307b, which is KRW6b reductions over previous quarter.

I will not go into details but on the corporate side you see a bit of fluctuation. This is because the expanded implementation of forward looking criteria reduced NPL and I think -- that was at the end of last year. And I think the second Q numbers are around the normal range.

Thanks to continuous efforts to improve asset quality, loan [loss] provision has been improved year on year from 0.6% to end of this quarter 0.2%. One-off elements like NPL sales which resulted in reversal of provisioning, I think keeping it a lower level, this might prove to be difficult. And that is a one-off factor.

Now let me move on to some major issues that could be of interest to shareholders and investors. I’m going to talk about vintage analysis by sector, SME loan quality improvement trend, key initiatives for 2006 and other matters.

Delinquency ratio and net -- as you’ve seen our delinquency ratio and net increase in NPL, if you look at the vintage analysis which shows delinquency rate from that period of loan extension you can see in all areas we’re seeing reserve or decrease. So asset quality going forward, I do not think will be a problem. Our screening through system is working very well and that is attested from this graph.

More recently a lot of investors are very much interested in the quality of SME loans. So let me share you some information on this. And on the left you see delinquency trend actually going down and you can see by all industries the situation very much improving. On the right side you see the asset portfolio by internal credit rating. And you see good rating the assets are on the increase.

Now let me talk about the key initiatives for 2006. In terms of customer satisfaction, in the first half of this year we were chosen as the best customer satisfaction company by Hankyung Marketing Awards. So we are putting our focus on improving customer satisfaction. And that will continue to be our high priority for the second half of the year.

We will also continue to segregate duties at retail branches. Currently a pilot test is ongoing. And I think this will both improve our internal control and our sales and marketing competency.

From January, we have been introducing newly integrated CRM system. And thereby having more scientific and efficient analysis of customer information. I think fee income could be increased and thereby our asset quality through continuing efforts in this area in the second half.

And we are also doing marketing based on CMS. We have launched Customized Host Banking. And Global Transactional Service will be launched in the second half of the year.

Now in terms of our deal with KEB we signed SPA on May 19th. And deal will be closed and -- so there is going to be further integration hopefully from the second half of the year.

Lastly, let me wrap up our performance for the first half of the year. I think in the first half we were able to maintain asset quality and high profitability. I think we will continue focus on that. And plus we will also focus on attaining a reasonable asset growth.

So I think while maintaining stability, we will be able to gain momentum more on the growth. So that we can have asset growth of 5%, which is our yearly target. And we will again focus on continuing profit stability. Thank you very much.

Yes, that was the presentation by our CFO Shin. Now we will receive your questions through the teleconference. [OPERATOR INSTRUCTIONS]. When we have the earnings conference at the [KRF] as well as while doing here, I think it’s always tough to ask the first question. [OPERATOR INSTRUCTIONS]. Yes. We have a question from Deutsche Securities. Mr. Lee, please.

[Translated]. Yes, Good afternoon. My name is Lee [Sang Hoon] from Deutsche Securities. I have a question. You said that it was KEB, it was a Korea Exchange Bank takeover. In the second quarter the government will probably give you an approval. Related with the Fair Trade Commission, would you expect any qualifications or preconditions to be attached to that approval?

My second question is , according to my calculation, after you buy KEB, your leverage on the balance sheet would probably grow by 14 to 16 times. Now with such high gearing, from the management perspective, you think such increase in gearing would have any impact on your asset growth, loan growth or your dividend policy in the foreseeable future?

[Translated]. The KEB -- if I may respond to that question briefly. We have submitted all of the application related documents. We’re waiting. And so we don’t know what conditions will be attached to that approval either.

And related with -- if we do buy the equity stake in KEB, yes, our leverage for the time being will go up. Well, in a sense our BIS ratio would go down, our leverage would go up slightly. But our current judgement is that it will not have any excessive burden on our balance sheet. And once we go past that initial phase and if we complete the consolidation very effectively, I don’t think we will face any future problems either.

I hope that answers your question. Any details, if information becomes available, we’ll provide it to you. We will move on to the next question. Mr. Kim [inaudible] from Nomura Securities.

[Translated]. Yes. Good afternoon. Thank you for the presentation. As in like other banks in second Q a lot of banks showed their margin going down. For example, the company -- the banks with the high lending have a lower margin. Maybe because they’ve been competing very hard. For KB you don’t really have much of growth in terms of lending but still your margin has gone down. So in the second half, or next year do you think the same trend will continue?

And secondly as a growth target, 5% is actually very low. So you have a very low target. Of course I can understand because of your deal with KEB that might be so. So is there any changes in your lending policy?

And lastly, like you said you have paid out bonus. So how much did you pay out in terms of bonus?

[Translated]. I will give you a very short answer. First second Q margins in our opinion too probably all banks had a lower margin compared to previous period. For KB our -- we didn’t really focus on external growth. I think that is the biggest reason for lower margin.

And our annual growth of 5%, you said might be a bit low. But in our opinion -- if we can -- the higher the goal for the bank, the overall margin for the banking industry will actually go down. So I have already stated before that for KB meaningful growth in assets is something that we need to do in the overseas market.

And lastly in terms of bonus it was given on accrual basis. So for the last year and the year before, we paid out at the fourth Q. But this year we made an estimation in [personal accrual] basis but I cannot share with you the numbers.

I’m sure that has answered your question. And we’ll take our next question. It’s Mr. Yi from [Shinon] Securities.

Well thank you very much for your wonderful performance in the first half. I have three questions. First is, on page 15 of your presentation, we look at various Korean won deposits and credit card assets. Yes, your assets has increased. But your won securities have also increased quarter on quarter. What in the reason why your securities in won has increased quarter on quarter?

The second is related with losses. Even though your expenses have been relatively small but once again there was the reversal effect from selling of NPL. And also because of the LG card re-rating. On a recurring basis what has been your provisioning expense? And provisioning is almost close to none. But your annual provisioning expense target was quite high. Does that mean in the second half you will be expecting how much of a provisioning expense?

And then third question is looking at the fourth quarter of last year, yes, there was a special bonus that was recognized in the fourth quarter. And considering the excellent performance you’ve recorded until the first half, is there a possibility that you would have such a special bonus once again, recognized at the end of this year too?

[Translated]. Well about the reason why the securities denominated in won have increased quarter on quarter. We are on the brink of a major MNA deal and therefore we needed to have our funds in waiting. And so that is why we have a bit more funds that what we usually have. And we have them invested in securities.

The reason why our losses are less is just one answer. It’s because LG card was reclassified. And there was a reversal of KRW33b. And some of our loan assets were sold off. Which had up till there was about KRW43b of reversal provisioning year to date. And so if we take out these two factors, our provisioning expense would be roughly calculated.

What was the last question? That was the possibility of paying out another special bonus at the end of this year considering the good performance that we have been recording up till now. As the CEO has mentioned previously, this year the performance is quite good. And we are expecting to pay out a bonus. But it is difficult for us in this time to disclose how much of a bonus we are contemplating.

Yes thank you. I hope that answered your question. And we will move on to next question. Next we have [inaudible] Brian Hunsaker. Mr. Brian. Please go ahead sir, Mr. Brian.

Yes, thanks. I’ve just got a question about the financing for the potential KEB deal. Have you made any decisions with regard to -- if you’re going to be issuing securities, what type of securities would be issued?

[Inaudible – technical difficulty].

I hope that has answered your question.

Yes. Thank you.

Currently we have a queue lined up on the teleconference. [OPERATOR INSTRUCTIONS]. And we currently have noone on the queue. And so we will wait to see if anyone has requested. And if not, we will have to end the conference here. If there’s no one else asking for questions.

For your reference, any detailed questions about the earnings performance, you are always welcome to direct your questions directly to the IR department here at Kookmin Bank. We will do our sincere best to answer your questions any time.

And I have a public announcement. The video image and a presentation of today’s earnings will be uploaded on our website this evening. So that you can always access the presentation and the conference any time at your leisure from tomorrow.

I assume that there are no further questions. I thank you for your participation and questions. And this completes the first half earnings conference of Kookmin Bank. Thank you very much for attending.