KB Financial Group Inc (KB) 2006 Q3 法說會逐字稿

[Interpreted]. Good afternoon, ladies and gentlemen. My name is [Qui San Choi], in charge of IR at KB Kookmin Bank. I would like to thank all of you for attending our earnings conference for the third quarter, despite your busy schedules.

As you well know, in order to be in line with the online culture, KB Kookmin Bank has started to provide its earnings conference through the Internet and teleconference services. However, the annual earnings conference that will be held next time will be delivered through both online as well as offline channels, to have a face to face meeting opportunity with our investor community. At today's earnings conference, we have CEO Kang and the executive members of KB Kookmin Bank.

First of all, we will have a brief presentation from our CFO, Jung Kap Shin of our third quarter performance. And then we have prepared a brief video clip, about our SOD or Segregation of Duty project. That was planned, in order to provide a more specialized service, to the customers who visit our branches. This will be a video of about five minutes. After the video, we will receive questions from the audience through the telephone lines.

Now I would like to give the floor to our CFO, Jung Kap Shin, who will be presenting our performances, and the major issues of the third quarter 2006.

CFO Shin, please.

[Interpreted]. Good afternoon, ladies and gentlemen. My name is Jung Kap Shin. I am the CFO of Kookmin Bank. I would like to introduce to you the third quarter performance of KB Kookmin Bank. I will go over the financial highlights, assets and then the major issues.

Our net income until the third quarter increased by KRW430b, and reported KRW2.2 trillion. Our provisioning -- the major reason is that our provisioning expenses decreased by 54.3% to KRW474b. Our pre-provisioning income also decreased by 5.2%, recording KRW3.233b. Our NPL ratio decreased by an additional 65 basis points year-on-year, and came in at 1.33%.

Our provisioning expenses have decreased significantly this year, year-on-year. And these are signs of the fact that, we have been continuing our efforts to improve our assets. This has also had the result of decreasing our interest income. And that has once again had an impact on our pre-provision income. Our ROA, annualized, is at 1.60 ROE at 21.83%, BIS ratio, which is provisional, is at 15.01%, Tier 1 ratio is at 11.11%, also provisional.

Our gross profits, which includes both interest and non-interest income, is at KRW1.9 trillion. During the third quarter, it is slightly declined, quarter-on-quarter. G&A expenses in the third quarter decreased to KRW811b, because the second quarter had some special factors, such as the bonuses being recognized on an accrual basis.

Provisioning expenses increased by KRW99b and had KRW215b. This is because there were some reversal factors during the second quarter. Such as the re-classification of LG card assets, being reclassified from precautionary to normal during the second quarter. That had a reversal of KRW33b. Also there were some sales of NPLs during the second quarter, which had a reversal of provisioning of KRW44b.

And then there were some delinquent and [worked out] companies that were additionally provisioned for. And so, even though there was an increase of provisioning quarter-on-quarter, this is not a sign of any deterioration in our asset quality.

Our profitability overview, our interest income decreased by 1.1% due to a squeeze in NIM, however, with the increase of our interest bearing assets, on a cumulative basis, year-on-year, it increased by 3%. Our non-interest income during the third quarter, decreased by 3.1% quarter-on-quarter. But accumulatively we are at similar year on year levels. The details will be explained later on.

General and administrative expenses had a higher figure in the second quarter, versus the third quarter, because of some one-off factors during the second quarter. Our provisioning income increased 7.1% quarter-on-quarter, but actually decreased by 5.2% year on year. Our provisioning expenses were explained previously.

Operating income or non-operating income, during the third quarter decreased quarter-on-quarter. But on a cumulative basis until the third quarter, it increased by 55.6% year-on-year, and recorded a non-operating income cumulative until the third quarter of KRW354.6b.

Our interest income in detail is that, there was KRW6 trillion of increase in interest bearing assets. And that is why our quarterly interest income increased by KRW121.7b quarter-on-quarter. And cumulatively, year-on-year, we grew by about 3% in net interest income.

On the bottom line you will see the changes in our NIM. Accumulative NIM has decreased to 3.77%. Quarterly NIM decreased by 22 [bp] quarter-on-quarter. The major factor behind this quarterly NIM decrease is the increase of our high quality assets, the fierce competition, the time lag in our funding expenses, and also preparations to acquire [KEB].

The fees and commissions, during the third quarter, had the impact of increased marketing expenses for our credit card, and also a decrease in our trust fees. There was a decrease of KRW40.7b. For example, Bancassurance fees has increased, and year-on-year it increased -- commissions and fees increased year-on-year by 1.6%.

NHF, the National Housing Fund management decreased by KRW.6b, this is mainly because there was a recent decrease in new subscriptions, new signing on of the subscription accounts. On [inaudible] fees decreased by KRW229.1b. And Bancassurance until the third quarter accumulatively, year-on-year basis increased by 10.7%. The ITC products decreased by KRW7.2b quarter-on quarter, but actually, grew by 1.9% year on year.

Others for example, would include the increase of [disposition] or valuation gain on securities. And this was an increase quarter on quarter of KRW33.4b. And our -- accumulatively on the third quarter, we had a similar level to the previous year. And the ITC products decreased a bit during the third quarter, due to the market situation. But Bancassurance and ITC products, both actually, are showing higher performances than what we had originally expected.

The general and administrative expenses until the third quarter, actually decreased compared to the second quarter, because there were some special factors in the second quarter. On an accumulative basis year-on-year, it increased by 15.5%. Quarter-on-quarter it decreased by about 16%. If we exclude the special bonus factors, we are a bit below the nominal GDP growth rates.

The cumulative cost income ratio was slightly increased from the 42.5% of the second quarter to the 43% of the third quarter. Our non-operating income includes the losses of impairment on our AFS, and also there was a reversal of impairment losses due to the normalization of [inaudible] construction and engineering.

If you look at our assets growth trends, actually we had started a growth from the second quarter of this year. And our household assets have already grown by KRW1.1 trillion during the third quarter, continuing on the growth trends of the second quarter.

Our corporate loans, which include privately placed bonds, have continued to grow since the third quarter of 2005. And during the third quarter alone, there was a growth of KRW2.2 trillion of corporate assets.

Credit card assets grew by KRW0.4 trillion during the third quarter. And we expect the credit card assets to continue to grow, thanks to our aggressive marketing activities.

I would like to go through our balance sheet very briefly. Our total assets, during the third quarter, grew by KRW6.2 trillion including the KRW3.3 trillion growth in loans. And we closed the assets, as at the end of September, with a KRW198.2 trillion. Our loans in won and our liabilities and shareholder's equities have also increased to KRW198.2 trillion, mainly increases of deposits in won and bank debentures in won.

Our household and overall asset growth have continued to -- continued from the second quarter to the third quarter. Especially in the corporate side, [inaudible] and SME loans have continued to grow. And it grew by KRW2.8 trillion in year, -- compared to the end of last year. And our loans to corporates, mostly private placement bonds, have also grown by 5.9% year-to-date. And from the third quarter the growth rates are actually taking more acceleration.

Credit cards have also grown quite considerably. And overall corporate finance, on the last line, grew by KRW18.6 trillion year to date. Total deposits increased by KRW2.9 trillion. There was a decrease of KRW600b in core deposits. And time deposits have also increased slightly. The other funding has been done by debentures, and also market based deposits. And this trend has continued during the third quarter as well.

Next we move on to our asset soundness. The delinquency for our total assets, in the third quarter have maintained 1.28%, despite the fact that we had no additional sales of our assets or NPLs. Household had a delinquency ratio of 1.24, corporate 0.98, which is the level of the previous quarter.

Credit card saw an increase of its delinquency ratio of 3.63. The major reasons behind this increase is because there were some one-off substandard and below assets inflowing during this quarter related with the SPC. But if we exclude that it would have been 2.94% showing a stable delinquency rate quarter-on-quarter.

And as was previously mentioned, overall our asset quality is continuing to be improved. Normal assets increased by KRW5.5 trillion, precautionary actually decreased by a KRW100b quarter on quarter. And precautionary and [below] came to 1.38 bp decreasing -- 1.38% decreasing by 13 bp quarter-on-quarter. Our coverage ratio is at 111.8%, which is also a slight decrease. Our delinquency ratios have been already explained.

In the third quarter, total provisioning expenses stood at KRW429b, rising KRW183b quarter to quarter. I will explain the details in the later slide. As for the NPL coverage ratio, household was 140 5%. Corporate was 87.9%. Credit card was 114.3%. Overall it greatly improved from 105.6% to 111.8% year-on-year. Credit card coverage ratio went down, as I said before because of related to SPC liquidation. About KRW500m was classified as sub standard to result in some increasing provisioning, but excluding that the credit coverage ratio would stand at 105.6%.

Now asset quality of the bank is still very much improving, as you can see from the graph, NPL and precautionary and below loans stood at 1.33% and 2.71% each to continue its decline. Coverage ratio for NPL loans was 111.8%, a slight decline over the previous quarter. But coverage ratio for precautionary and below was 54.8%, a slight increase quarter-on-quarter. NPL coverage ratio dropped in third Q because we had no asset [recession] for the quarter, and because of the asset income resulting from SPC liquidation.

Net increase in NPL was stable to stay around KRW300b range by area. Although household and credit card rose slightly over previous third quarter, they were within normal range. As for credit card, as I said, it's a [bit] normal. As for corporate it was also a bit stable.

Loan loss provision ratio for this quarter rose slightly to stand at 0.5%, to be 0.3% on yearly average. Whereas last quarter's loan loss provision ratio declined, thanks to reversal of provisioning due to sales of NPL. Recovery of also -- reclassification of LG card and also some other factors resulting in substantial decline. However in this quarter, provision expenses rose in corporate, thanks to additional provision for [compense] of getting [inaudible] card. And we had to set provisioning in credit cards for assets acquired from SPC liquidation.

Now let me explain about major issues related to the bank. After about six months of preparation, KB is now offering Segregation of Duties or SOD at retail branches from September 8, and first in Korea. This is part of our effort to create the right foundation for KB to grow as a global leading bank, and to establish the right check and balance in our operation.

By separating sales analysis and operation, we do believe that we can strengthen independence and dedicate expertise in each area. It also helps improve internal control system at branch level, while reducing any risk related to accident, to ultimately strengthen our sales capability and improve our customer service level.

After this presentation, you'll be able to enjoy a video clip on SOD before starting our Q&A session.

In the area of corporate, KB diversified profit structure by creating new profit sources. Above all, in corporate banking, we expanded our customer base to public and multinational companies, by strengthening our marketing competency and developing wide range of products. We are also strengthening our ties to corporate customers by offering training programs to our best customers.

As for transactional banking, our competitive edge in CMS market is staying strong and growing. KB is also preparing to lead Customized Host Banking service, and create strong foothold in specialized banking and GTS market.

As for investment banking in many areas, including domestic real estate and SOD project financing, KB is the strong number one in the -- in terms of market share. To expand our operations globally, we are also entering aircraft, ship financing and also overseas SOD.

As for credit card, we have launched full-fledged marketing campaign, by fine tuning KB card brand identity and improving our product and service levels. We also propose to change the business model by promoting revolving system in debit card, while expanding our customer base. Our efforts paid off, and KB now has a strong foundation to build the business competency required to lead the maturing card market.

Korea Exchange will start to trade Korea's leading blue chip stocks as underlying assets, for single stock futures from December 2006. As a leading blue chip stock of Korea's stock market, KB will also be traded as future on new investment channels. This will allow even small investor to invest in future, and thereby maximize return at relatively lower trading cost.

As you can see, KB asset is growing very steadily. Our asset quality is also maintaining in a very attractive level. NIM is a bit going down but please understand it is mostly due to the market conditions. And we will try to do our best to increase our operating income, by increasing our non-operating income.

This concludes KB's earning report for the quarter. Thank you very much.

[Interpreted]. Thank you, CFO Shin. Now as I have already announced, we will watch a video clip related to SOD, Segregation of Duty service at our retail branches.

[Video presentation]

Yes, I hope you enjoyed the video clip. Now we will open the lines to answer any questions that you might have. Those with questions, please link to the number that you see on the screen. Of, if you are already in the teleconference room, please press number 14 before you ask questions.

Now if there are any questions please.

[Interpreted]. [OPERATOR INSTRUCTIONS]. For your reference, the Internet webcasting, there is about 15 seconds of lagging, between what is happening and it's shown on the Internet. So we'll wait a little bit. [OPERATOR INSTRUCTIONS].

Well, we have no questioners on queue yet. So we will wait for a couple of more seconds.

We will take a question from Nomura, Mr. [Kim Sang Kim] from Nomura. Go ahead, please.

[Interpreted]. Thank you very much for your presentation. Related with KEB, the deal with Lone Star seems to be a bit stagnant. What is the current status of that deal? And what is your outlook?

There are some talk in the market, including myself that, there won't be any negative situation unfolding. But still do you expect any major changes in terms of the terms of contract? Or the worst case a cancellation of contract. Is there no probability of that happening? What is the management's view about that?

The second point is also related with KEB. In funding your acquisition funds, what is the basic direction? I think there was a newspaper article that, the government would only allow internal funding, without allowing access to external funding. What is the exact direction of your funding plans for the acquisition?

[Interpreted]. Thank you for that question. Related with KEB, we are quietly talking with Lone Star. As the market thinks, we also believe that we will be able to close the deal without any situation unfolding. Funding is currently being considered with various options.

[Interpreted]. I hope that answered your question. Now we will accept the next question please. ABN AMRO has a question. ABN AMRO.

Okay, hi, it's Michael Cheng from ABN AMRO. Just one quick question, basically in relation to the net interest margins, they have fallen a fair bit in your third quarter versus the second quarter. Could I get a sense for which product segments you think experienced the most margin compression?

And I'm not sure whether you would give a view on the industry as such, but perhaps where you see fourth quarter NIM being relative to the industry? In the sense of, do especially think NIM pressure will continue, in the fourth quarter, or do you see it stabilizing already?

[Interpreted]. Well on the collective loan there is a lot of contraction on NIMs. And as you can see on the corporate banking our asset has grown very fast. So, on the corporate banking side, the high quality companies are focused in terms of our lending efforts. So margin contraction then depending on the margin situation, I think it was kind of inevitable.

And, because we need funds in ways that we use for our takeover of KEB, and in terms of bond issuance -- I mean we are holding this as a market security. So I think that results in some drop in NIM.

And I do believe that going forward the market -- unless the market interests goes up, I think for a few quarters in the future, I think five base points to 10 or so base points, it could actually go down more.

[Interpreted]. I hope that has answered your question. We'll take the -- we'll wait for the next question. As was previously announced those in the conference call [OPERATOR INSTRUCTIONS]. Yes we have a question for Global Securities. Go ahead Sir.

[Interpreted]. Yes, good afternoon. I've a couple of questions. The first question is the loan loss provisioning expense this quarter has increased. From KB's perspective do you think the expense could go up, or do you think this is a normalized level?

My second question regards -- about asset growth, which you had mentioned, but during the third quarter the NIM decrease was actually quarter-on-quarter much larger, much higher than what was expected. Do you think the asset growth that, you recorded this quarter, would have some correlation with your NIM trends going forward?

This could also be a bit redundant but CEO Kang, regarding the KEB acquisition mentioned that you are reviewing various funding options. But already, Kookmin Bank you've also mentioned, is -- has some funds in waiting for that acquisition. And so my question is when you acquire KEB, would it be inevitable to change your funding structure? Or can you acquire KEB without changing your current funding structure for KE Kookmin Bank?

[Interpreted]. I think there was three questions, first really was the credit cost, second was whether we expect any additional decrease for NIM, third was related with funding of KEB. The first two questions I'll be responding, the CFO will be responding.

Regarding our credit costs, actually our credits has been up until now quite low, because our asset quality was continuously improving. And also there were some reverse of provisioning on some special assets. But we were provisioning as we don't think there will be any future opportunities of frequent reversal of provisioning, or sales of MPL. And so, when we look towards the future credit cost will be normalized. Not because our assets are deteriorating, but because we don't have any of these special reversal of provisioning factors. And so we think that about 50bp versus total assets and about 80bp versus our total loans could be our normalized level of credit costs.

An additional reason why our NIMs went down is because, as you well know, the other banks in Korea, in order to fund, have been trying to attract deposits, they had some special deposit promotions. But KB Bank has never done a promotional deposit campaign this year. Our time deposits have decreased.

And in order to increase our assets and to maintain our customer base, we have from the third quarter offered some competitive rates to our time deposit customers. There was a partial impact on our additional decrease in NIM, and so the improvement of our asset soundness, on one hand. And also we also have some funds in waiting for acquiring KEB. And so if we consider all of these factors, I don't think KEB saw an especially large drop in its NIM compared to other banks.

And the last question about the funding structure, well we've already funded. It's because we did take some opportunities that we could take advantage of up until now, looking at the market condition. We are looking at the remaining funds, and we are considering various options to finance the remainder of the amount.

[Interpreted]. I hope that answered your question. We will now move on to the next question, Goldman Sachs. So you may ask your question.

[Interpreted]. Yes, good afternoon. [May I take] the position of KEB, you said there was some impact on the margin. So specifically for this quarter, what -- how much was that impact?

And secondly, is it going to be one off impact? Or do you think that to the next quarter or at least first quarter to next year, do you think that the impact will continue?

[Interpreted]. Well in relation to KEB, its impact on our net interest margin, I think we are thinking of four to five base points, and that's for this quarter. And I think that KEB will set -- that NIM will settle down. I don't know exactly when it's going to be. We can have wishful thinking but I cannot give you any specific numbers sorry.

[Interpreted] I hope that answered your question. We will now wait for the next question. BNP Paribas you now have the line.

[Interpreted]. Yes thank you. Relating with your corporate, your provisioning for corporate has increased quite a lot. There seems to be two major factors. One is the fact that there was a way of change in the way of evaluating these companies, and also there was an increase of your corporate assets. Could you break these two factors down?

I'm sure it's difficult for you to give a specific number. But which factor had a larger impact on the increase of your corporate provisioning, and also, the valuation assessments of these delinquent companies, which were the parts that were changed in that assessment method?

[Interpreted] I would like to give this question to the Loans Executive.

[Interpreted]. Regarding this difference of evaluating delinquent companies, that had an impact of 26b, so the rest was due to the increase of corporate assets.

[Interpreted] Thank you for the answer. Now we'll move on to the next question. [Shinong] Securities.

[Interpreted]. Yes I have two questions. First as you have already mentioned, the NIM impact also has something to do with competition. Therefore what kind of position are you going to take next year, because it's going to be very important? For the second Q and third Q, I think the loan has grown a bit, and I think we are seeing a bit -- it's gaining some speed. So asset growth, do you think, will continue for the next year?

And my second question is that acquiring KEB -- in acquiring KEB I think, you are giving a positive defer depending on your policies, or funding policies. So for dividends, what should we take into account [our] position? I think dividend you had a 10% or under for next year -- last year, a payout ratio I'm sorry, so could you give us a guidance on payout ratio please?

[Interpreted]. I think that this payout ratio is a very difficult and tough question to answer. Well, in terms of payout ratio I think that is depends on when the KEB deal is concluded. So I would ask for you to wait for a bit.

And in terms of asset growth, as in other banks, for KEB we are trying to come up with a plan for next year. Well, I think we would take a bit more time, so that we can be very cautious, and to come up with some more exact picture of assets. One thing that is for sure is that, for the last two years our loan quality and our loan control system have improved continuously. So, on a selective basis, I think we have now the foundation to take a bit more risk. So our risk appetite is -- can now be a bit bigger. This means that from the late last year our loan portfolio changes of that -- normal is increasing and the precautionary is decreasing and probably you know that situation.

Now the contraction of NIM in that regard, of course, with results of increased quality. But to take a bit more risk, we have a bit of excessive capital now and we have also the right control system. So I think, as I said, on a selective basis, we can be a bit more -- I think we are ready to be a bit more risky.

[Interpreted]. I hope that has answered your question. Next question -- we'll be waiting if we have any other questions. For the moment, if the major questions have already been addressed we will be closing the Q&A session shortly, if there are no further questions. We have a question from HSBC Securities. Please?

Yes, good afternoon. Two questions, one related to labor expenses or salary costs. You indicated that in the third quarter this year there are not any bonus costs. And yet on a comparison year over year that's up 40%. And it appears that your overall salary costs are up about 19% year-on-year. How are you trying to contain salary costs?

And then secondly, related again to KEB, what stands in the way, in terms of regulatory hurdles that Kookmin still has to overcome, to actually be able to close the transaction?

[Interpreted]. I'll be answering the first question. Regarding the labor expenses that -- during the second quarter there was an accounting of bonuses. The first and second quarter bonuses were accrued in the second quarter. Also the third quarter bonus was recognized during the third quarter as well.

Actually in the previous year in 2005, none of the bonuses were accrued, neither in the first, second or third quarter. This year we started to recognize the bonuses in each quarter from the second quarter of this year. So actually if we accounted different, it's an increase of only 5.2% increase in salary costs.

And so, last year in 2005 the bonuses for the entire year was accrued on the fourth quarter, recognized in the fourth quarter. On the other hand in '06, the first two quarters worth of bonuses were recognized in the second quarter. And the third quarter has also recognized the bonus expense that was accrued in the third quarter.

[Interpreted]. And regarding the second question of acquiring KEB, first of all, the prosecutor's investigation has to be completed. The prosecutors are looking into whether Lone Star had committed any illegal activities, in its acquisition of KEB stock. Once the prosecutor's investigation is closed, then we can go through the normal certification and approval processes.

[Interpreted] I hope that answered your question. We will now accept the next question. [Mr. O'Hare] from Morgan Stanley.

[Interpreted]. Yes, this is Morgan Stanley. My name is [Hare]. It's a similar question to one that was already asked. In terms of operating expenses, not only labor costs but also your non-labor cost is also increasing. And depreciation and amortization has declined, which means that overall there was a 15% increase, but I think in actuality it has actually gone higher. So what's your cost income ratio target for managing operating expenses? Do we have to regard that next year we'll also see increase in this area?

[Interpreted]. First of all in terms of expense increase on the labor costs I've already answered that question. And for this year, to increase our sales force we have made a significant investment, for example, IT investment compared to last year we did a bit more.

And we have also -- regarding complications, the part of [inaudible] services, to recruit the right people to handle that. Training and education costs we have also invested more in that area. And we have promotions, advertisement efforts have also been increased, and taskforce activities have gone also more. So investment in these areas that I've mentioned, I think compared to last year, has increased by about 25%. So the result is that year end '06, and it could have long time impact also going forward.

And cost to income ratio is going to be 43%. In our opinion that going forward, I cannot give you specific numbers but it could a bit go up, at least until next year. And until last year, in fact, our -- we didn't really focus [inaudible] competence we focused more on getting the systems and processes more efficient, and getting the right system in place. So to increase our competency, we are spending more money in that area and that impact could also be felt I think next year. But some two years on, I think our cost income ratio will be a subject of our more cyclical control. That's our expectation.

[Interpreted]. If I may add one thing, well, as you can see from our video clip, the segregation of duties at retail branches, online and bank branch sales has been separated. And if you can understand our reason behind it, from a longer perspective the net interest margin of the Bank, will experience inevitably from downward pressure. So, despite that, KB's this year accumulated NIM is 3.7%, which compared to our competition is quite high. So this NIM will come down -- we'll experience some pressure. And in Korea the growth of sales, I think, will depend on sales of products including fee income.

So that's why at retail branches we separate our sales from the operations, so that we are going to focus more on the product sales. And we are going to also offer more training to our staff members, to make them more knowledgeable and -- of the product and let them -- sell them better. So watch how our self-competency will grow. Loan products on a more selective basis, it can be sold more because we have the system in place. And for these -- I think we will -- you will see more products with fee income coming from KB.

I'm sure that has answered your question.

I think we've taken some of the major questions already from the audience. And now I would like to announce that the earnings conference for the third quarter is completed.

The presentation and the video clip, for this earning conference, will be available at our IR website for replay. Also, if you have any questions that you were not able to ask please forward them to the IR department of Kookmin Bank.

I would once again like to thank all of you for attending the earnings conference today. Thank you.

Portions of this transcript that are noted “interpreted” were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.