KB Financial Group Inc (KB) 2006 Q4 法說會逐字稿

This is the IR Team Leader of KB. I would like to thank everyone for being with us this afternoon for the 2006 Earnings Conference, despite your busy schedules.

As was announced at the last earnings conference for the year-end earnings conference, we want to come closer, go closer, to our investors, analysts and reporters, so we have organized at this venue. And this is also being telecasted through Internet and teleconference. So if there is any questions, you can also use the microphones at the venue or through teleconference or Internet.

We also have our CEO and CFO and our Executive team with us today.

Let me brief you on today's schedule. First you will watch a video about top 10 news of KB for 2006. And then our CFO, Shin, will present you on the 2006 performance followed by a Q&A session.

Now for about six minutes we will play the top 10 news of KB for 2006. Please enjoy.

[Video Presentation].

Brand power, number one for five consecutive years. Customer satisfaction, ranked first for 2006. Going beyond number one in Korea. Wisdom to open a new future KB.

Top 10 news of KB for 2006. In 2006 we've developed our future growth engine while ranking number one in customer satisfaction. This is all thanks to the hard work and dedication of 24,000 KB employees to become the best bank in Korea. In 2006 KB ranked the number one in the national customer satisfaction index, a precious accomplishment thanks to the hard work of 24,000 KB employees.

On September 1, KB became the first bank in Korea to adopt SOD or Segregation of Duty System at retail branches. A dedicated window means you can receive service faster. It has become more professional. In the past the teller had to ask the next counter for help. Thanks to the combined efforts of headquarters and branches we were able to successfully adopt the SOD System.

The story of 2006 does not end here. We will show that today's number one can still be number one 10 years later. The top 10 news of KB for 2006.

Despite a fast-changing business environment home and abroad, KB maintained the leading bank position in 2006. KB was always described as the first and the best.

In September we launched [Luxury Passbook for Women products] which broke the KRW1 trillion mark in just 26 days of sales. Before that, in April, KB became the first financial institution in Korea to reach the 1m customer mark in mobile banking to attach to its unassailable market share.

In June, KB was chosen as the best retail bank in Korea for the fourth consecutive year by the Asian Banker. In September, Finance Asia selected KB as the best bank in Asia. In December, KB was chosen as the Bank of 2006 in Korea by The Banker. KB, in other words, is growing as the global bank representing Asia.

To fulfill our corporate social responsibility as the largest bank in Korea, KB designated 2006 as the starting year for fulfilling its social responsibilities and contribution through a strategic and systematic community service activity.

Remember there are just too many good news to forget. Top 10 news of KB in 2006.

[Inaudible] better than the traditional image of a bank. During the 2006 World Cup games, KB's TV commercial was showing exercise steps for enjoying the World Cup games was a big hit. Then other top stars of the day were featured in KB commercials and made part of a viewer response as a bank shed its old square image to become young and hip.

In 2006, KB also focused on customer-oriented cultural and sports marketing events, such as KB-Star 2006 Korean Golf Championships, [Kart Rider] Game Contest and [B-Boy] Contest were big hits. KB Sport Kings in shooting, football and basketball, also performed well.

KB also focused on strengthening its global competitive edge. It adopted a new training system from January 1, to increase its professional expertise and to [reduce] global mindset and overseas training program to improve overall consistency of KB employees.

Global Bank KB, leader of Asia. Opening new chapter of Korea's financial history. We'll continue to challenge ourselves to be always a step ahead.

Thank you, I hope you learned more about what KB stands for last year. Now let me introduce our CFO, Shin Jung Kap, who's going to present on the performance of KB for 2006.

Good afternoon. I'm Shin Jung Kap, CFO of KB Bank. Let me now start the presentation on KB's 2006 earnings release.

First of all, KB's major achievements in 2006 will be talked about and then we'll look at some of the performance numbers and then we'll look at some strategic directions that we have for year '07.

KB Bank has adopted 2006 as an important year for strengthening our competencies, sales competencies. We also tried an exerted effort to gain reliability and trust from the customers. And we ranked number one in terms of NCSI.

We were able to segregate duties for the retail branches. We adopted Luxury Passbooks for Women and [inaudible] cards which are very competitive products. And also for a better organization efficiency we achieved significant results. And also we were able to adopt the internal control system and we expanded the IBP-based practices.

So, as you can see, 2006 was an important year for us to lay the foundation for and becoming a clean bank. As a result, last year we were able to enter into an asset growth momentum year. You will see that our loans in won and credit cards increased and grew by 8.7% to record KRW142.1 trillion.

We also continued on increasing profitability. And we were able to report net income of KRW2.472 trillion. We were also able to achieve ROA of 1.29%.

And also looking at the asset quality, NPL Ratio was 1.03%, NPL coverage ratio 150.8%, showing a very continuous improvement since year 2005.

First of all, let us take a look at our financial highlights. As I have mentioned, net income for year 2006, once again, is KRW2,472.1b. This is an increase by KRW219.9b which is an increase rate of 9.8%. This is due to provision expense of KRW1,275.6b. Compared on a year-on-year basis this is a 9.6% reduction.

And operating income before provisioning was due to tightening in and increases in SG&I, there was a slight decrease of 1.8% on a year-on-year basis, to record KRW4,347.3b.

For our NPL ratio, thanks to continuous efforts towards asset quality improvement, it fell by 0.67 percentage points to record 1.03%.

ROA 1.29%, ROE 17.48%. And the BIS Ratio before dividend is tentatively 15.13%. Tier 1 ratio, 11.05% which, as you can see, is a significant improvement compared to the previous year.

If you look at the trend of main line items from the P&L statement, you'll see the gross profit, the combined interest and non-interest income has been maintaining a stable trend since Q3 of 2005. And in the fourth quarter it turned into a slight upward trend.

In order to increase quarterly profit visibility and reduce fluctuation, we at KB are applying accrual basis accounting as much as possible. So the G&A expenses which used to soar in 4Q now have stabilized.

If we look at 4Q's provisioning expense, it increased KRW486.9b from the previous quarter. But if we take out the effect of increase in the provisioning ratio, the number is a stable KRW171.8b. Therefore 4Q net income, if we consider the effect of increased provisioning ratio is -- also continues to be showing a stable trend.

Let's now look at the profitability overview. For net interest income, thanks to increases in interest-bearing assets there was KRW10.8 trillion, so it was a 2.4% increase on a year-on-year basis. Non-increase income, due to decreases in other operating income fell slightly year on year. And the details I will talk more later on.

For G&A Expenses, due to increases in employee benefit, advertising and promotion [technical difficulty] it increased 7.9% year on year. But by aggressively applying accrual basis accounting, however, it showed a stable trend as it fell slightly compared to the third quarter.

As a result, operating income before provisioning continuing on an increasing trend in the 4Q, but on annual basis there was a slight decrease of 1.8% year on year.

Thanks to the efforts to enhance our asset quality and also in the 4Q, if you look at the higher provisioning rate in 4Q, there was a 9.6% decrease year on year. However, non-operating income due to impairment losses of note and refunds and dormant deposits and also the 13th and 17th dividend income was not received, recorded as KRW2.2b in loss, but on an annual [accrual] basis it increased 66% to record KRW352.4b.

If you look at the Q4 net income it is KRW214b. Under the higher provisioning ratio under the revised banking supervision rule, there was an additional provision of KRW629.8b. And if that number was reflected on an after-tax basis, it will increase by KRW456.6b. So we can say certainly that we are showing a very stable profitability.

If you take a look at the interest income, with the increases in interest-bearing assets, it was about KRW10.8 trillion in volume, so a 6.9% increase. But the market interest rate hike was reflected on the liabilities in a delayed fashion, interest expense was higher than income at 13.3%. So net interest income year on year increased only 2.4%.

So, as you can see, our volume expanded and increased but the net interest income did not increase significantly. And that tells us that things were not as easy in the market. And on a quarterly basis NIM improved, 2.9% increase quarter-on-quarter, so the rate is improving.

The graph on the bottom shows the new trend. The cumulative NIM fell to 3.73% in 4Q of 2006 from 3.92% in 2005. The quarterly number increased by 3 basis qQ on Q. This is a higher improvement than expected. And thanks to reduction in securities and low interest assets and increases in credit card and high rate assets, and also increases in market interest rates contributed to that number.

For non-interest income, for commissions and fee income, despite increases in marketing spend and a decrease in trust commission, thanks to growth in fee income from ITC products and Bancassurance, you will see that on a year-on-year basis it increased 1.2%. Q on Q increases of 16%, showing a very strong recovery.

For commissions and fees you will see that the NHF Fund declined -- fees from NHF declined 4.3% year on year. For the trust fees it seems as if it reduced significantly in terms of trust commissions, but considering extraordinary income in 2005, the marginal fall is not as big. And it bottomed out in 3Q and we're seeing some signs of turning towards an upward trend.

In terms of commission in won, it rose 11.9% year on year. This is due to the rise in commissions coming in from ITC products and investment finances and commissions from Bancassurance.

The commissions for ITC rose significantly due to increases in commissions income from equity-type and off-shore funds. So it recorded 91% year on year and Q on Q it also had shown a continual trend towards growth.

For G&A expenses, due to special bonus payouts and ad and promotion expense increases, grew 7.9% year-on-year basis. The fourth quarter labor cost dipped. And the reason is because the bonus accrual we conducted until the third quarter, but we changed the criteria for provisioning. So the total volume --expected volume fell. And the bonus volume also was reduced. So you will see that the bonus payout amount was not as big as was expected.

And another point that we, at the beginning, assumed a certain percentage of wage increase. But things settled down much at a lower percentage in November, and that was reflected in the fourth quarter, all at once. And those are some of the reasons for that number.

As I said, today, you will see that the expense fell a bit and income increased. So from a cumulative percentage, the cost to income ratio is slightly lower than the previous year of 42.5%.

And for non-operating income for 2006, despite decreases in gain or loss on sales of loans and securities, there was recognition of ABS dividend income and reduction in honorary retirement in 2005. But there was that factor in 2005, but in 2006 we didn't have that factor. So it resulted in the increase of KRW140b year on year.

For others it looks as those this increase, KRW250.3b year on year. But, considering a one-off payment of honorary retirement benefit, you will see that the number will remain similar to last year -- or is similar to last year's number.

If you look at the asset qualities, from the second quarter of 2006 there has been steady growth in the household and corporate loans and credit card assets. In terms of household loans, thanks to increases in mortgage loans, continued on a growth path since first quarter.

As for the corporate loans, since 3Q of 2005 there has been a sustained growth in the private placement and [inaudible] line. And as of end of 2006, it recorded KRW47.6 trillion.

For credit card assets, thanks to increases in credit sales and card loans, sustained its growth from the second quarter. And, going forward, in order -- further strengthened re-mortgage service and product upgrade and aggressive marketing promotion, all of these activities will help us with that continuous growth.

A brief look at our balance sheet. Total assets in 2006, if you include private placement bonds, there were increases in loans in won, which was about KRW10.8 trillion. Thanks to that, on a year-on-year basis it increased 8.7% to mark KRW195.2 trillion of total assets.

Liabilities, with increases in deposits in won and debentures in won that include sub-notes increased on a year-on-year basis at 7.7% to mark KRW180.1 trillion. I will share with you the details later on.

For household, as I explained, the household assets since the first quarter have continued on a growth path into the 4Q. Corporate assets with increases in SME loans, which also includes [SoHo] grew constantly. And it grew by 19% year on year.

Loans to large corporations declined slightly. However, the private placement bond, which is mostly providing credit similar to loans, increased KRW3.8 trillion.

Credit card assets due to increases in credit sales and corporate loans increased 7.1% year on year.

For your information, corporate total increase is at 22%, as you can see from the last line on this table.

Deposits in won increased 3.4% year on year. If you look at the details, with new products -- the demand products or -- it increased by KRW1.8 trillion, the core deposit. However for savings deposits, due to fierce competition and coming of maturity for installments types, it fell by KRW2.3 trillion year on year.

The asset increased and we used the demand deposits to deal with it and the rest we used marketable deposits and also bond issuance to manage the supply and demand.

If you look at the delinquency trend, you will see that it was 1.7% end of last year and it fell to 0.95% which is a falling of 75 basis points. You will see that, on a quarterly basis, it's moved from 1.28% to 0.95%, which is a 33 basis point difference.

For household loans you will see that each sector is improving. For credit cards, the delinquency rates in the third Q, there was an SEC liquidation, about KRW59.1b was included in the delinquency rate. Therefore there was a soar in this number. But that asset was written off in 4Q so now the number has been lowered.

Looking at the asset quality. Asset quality is steadily improving in our areas. And the NPL ratio stood at 1.03%, 67 basis points lower than the end of last year. With the continual growth of assets, normal class loans rose around KRW17 trillion or to the extent of [KRW18.4] trillion year on year, while substandard, precautionary class loans declined substantially. With upper adjustment of loan loss reserve rates requirements from December 2006, NPL coverage ratio recorded high growth at 150.8%.

Owing to upward adjustment of loan loss provision requirement, in December 2006, KB set up additional total KRW629.8b as loan loss reserves including KRW401.9b for loan loss and KRW227.9b provision set aside of utilized for unutilized line of credits.

Despite increase in provision requirement, loan loss reserve for 2006 stood at KRW948.5b to record a KRW113.6b drop year on year. I -- we've talked about NPL coverage ratio.

As you can see from this graph, the ratio of substandard and precautionary & below are continuing to decrease and [technical difficulty] ratio is also improving.

Net increase of new NPL posted a more stable trend compared to previous year. NPL seemed to increase during the fourth quarter, but this is due to write-off of KRW281b which were SPC credit lines that were initially classified as estimated loss in corporate loans. Except that one-off items, a new NPL [inaudible] in 4Q was KRW261.6b.

Looking at it by sector you can see it's very stable to continue its downward trend. Yearly average loan loss provisions stood at 0.5% in 2006 to show a slight decline over the previous year, which was 0.6%, excluding an additional KRW401.9b provisioning for -- made during December 2006. Yearly average loan loss reserve was 0.3%, to show a significant decline year on year.

Looking at it by sector, loan loss provision for household loans was 0.5% to increase over previous year's 0.3%. And when taking into account the additional provision, it actually declined a bit to 0.2%. Loan loss provision for the fourth quarter in particular shows a significant decline thanks to tranche back of ABS sales and increase in recovery amount.

In corporate also, when excluding additional reserve, it declined year on year as well as quarter on quarter.

As for credit card, loan loss reserve on yearly average posted significant improvement from previous year's average of 4. -- 5.2%. Even excluding additional reserves made in 4Q, it stood at KRW84.5b to show a slight upward trend. But this is mainly due to increase in cost owing to 4Q write-off of assets acquired during SPC liquidation at 3Q.

Then we now talk about KB's strategy for 2007. As 2005 was the year for overhauling our system, focusing on improving asset quality and organizational and HR system. 2006 was the year of enhancing our competency to increase organizational efficiencies, strengthen sales competency by expanding the base for becoming a clean bank and to attain momentum for growth. The leverage on the efforts of the last two years, we want to make 2007 the year for completing the roadmap for new take-off.

First, we will strengthen competency for product research and development and use CRM system to increase our sales power, and expand online and offline sales channels to increase our sales competency.

Second, KB will improve revenue structure by going down interest income sources by increasing sales of investment trusts and Bancassurance products and by improving FX marketing.

Third, we'll focus on becoming clean bank by continuously improving asset quality, setting up clean and sound sales practices based on IBP and enhanced ethical awareness of our employees.

Fourth, we will develop global standard competency by training regional experts, upgrading our IT system and by establishing concrete plans for expanding our footprint in other Asian markets.

Let me then explain how we are going to expand overseas. Let me begin by explaining the need for overseas expansion. When looking at Korean domestic banking industry, now is the time to seriously consider overseas advance as growth of Korean banking sector is showing signs of slowdown. And we need to fulfill growing global financial service needs of our customers.

From global perspectives, thanks to accelerating integration of global economy, a number of newly emerging Asian economies opening its market is growing. If we can expand our business overseas, leverage on the fast growth of Asian markets, we will be able to further enhance the status and role of Korean financial industry.

Considering such steps, KB's strategy forward is expansion east, KB will first enter markets where we can sell to local customers and local companies, step-by-step approach. We will then develop our advanced plan with consideration for all risks involved. Considering the different market situations of each country, KB will deliver locally competitive service to first establish footprint in newly emerging Asian markets to go as a strong regional player.

This concludes earnings presentation for 2006. As you can see, KB has improved in asset quality, profit this [technical difficult]. I think we have really entered the growth phase and we will focus continuously on identifying new growth engines. Thank you very much.

Thank you very much for the presentation. From now on we will begin the Q&A session. If you have any questions, please raise your hand and we will hand you the microphone.

[OPERATOR INSTRUCTIONS].

Thank you very much for asking a question which I have prepared an answer to. In year [technical difficulty] for the fiscal year, in the BOD of this year we have decided on 50%, which is 3,651 per share. And on March 23, we are going to go to the resolution of the shareholders' meeting and we'll come up with the confirmed decision.

Going forward, according to our articles of [incorporation], it will be something that will be determined by our BOD and the general shareholders' meeting. However, I could say that the position of the executive body is that we will go on par with the global bank standard. And considering the current Korean banking environment, our dividend ratio we are targeting at 30%. So unless there is any significant reduction within the Korean environment we will keep to that target. That is our decision.

I hope that was a clear answer to your question. We will take the next question.

[OPERATOR INSTRUCTIONS].

[Kim Sang] from Nomura Securities. On the 4Q, the margin seems to be improving or recovering which we have been waiting for a long time. So my first question is this. In terms of interest income, was there any one-off item that impacted margin improvement?

And secondly, it might be too early to say this, but this year's margin, does that -- what kind of prediction do you have or what kind of analyses do you have?

And thirdly, to protect your margin, what kind of strategy are you going to employ?

Yes, on the 4Q as you can see from my presentation, KB -- the amount that we held in market securities, as you know, because of the [KEB] factor, we held it in reserve. But some of that money has been -- now been reclassified as a credit card or loan asset. So that's contributed to increase of margin.

And the -- our business group at the year end, which means that it's year end, the collection becomes more active. So on the interest receivables, we collected more on that. And on the market side, housing market, we sought a more tighter control on that which contributed to increase of the interest. So that's why 3BP increase was the result.

But, overall, I think this year's new -- we booked new assets already. The margin that we had very good in the past has been replaced by lower spread. So this year the downward pressure on them will continue. However, as you have seen in the past, the decline will not be as fast as we have seen in the past. So I think it will become more stable towards the year end.

And what kind of strategy are we thinking about protecting margin going forward? The market actually really heated up last year. But I think this year there is tighter regulation in place, so I think it will be -- or our expectation is that it will be less heated. And, as I already said on the cost side, [inaudible] loans or card spending volume, that we will push upwards. And this year also we have a lot of competency. So in growing volume I think we can do that while protecting our margin. I think that is our expectation. So this year compared to last year I think there is less factor for losing margins.

I hope that answered your questions. We have a question via the phone. Mr. [Tamo] Lee from Deutsche Securities.

Good afternoon. First of all, the dividend payout ratio. We expected that figure, so thank you very much for giving or confirming that. And also for Tier 1 -- not only for Tier 1 ratio but also ROA, ROE, I think [inaudible] you will see that this year ROA increased slightly, but ROE fell from 20 to 17%.

So if we calculate the gearing of financial balance, it's about 19, more than 19 multiples, 19 moving from 19 to 13. So I'm wondering, is the CEO, when it comes to capital efficiency or capital management, whether you're going to emphasize on those going forward in order to deal with this issue.

And also in relation to that, with respect to KEB, acquisition of KEB, we predict it's going to be time-consuming, it's going to take more time than expected. So are you going to give up and try to conduct capital management and efficiency in a more aggressive way by giving up your KEB effort?

You want us to give up KEB? As you know, KEB last year, beginning of last year that was -- it was, we conducted analyses and we had discussions with the BOD. And when we came up with our decision on the bidding process, and we have said that KEB will contribute to KB Bank. And nothing changes in that rationale.

And also Lone Star, because it's another situation or factors, on November of last year, as you know, they terminated the agreement, but this is an asset that has to be sold at the end of the day, eventually. So I've never thought of giving it up. And I actually believe that we should not give up that initiative.

And, as you know, this year 50% payout ratio had been decided by the BOD -- a result by the BOD. And that is to show that we want the most efficient capital management under the current situation. It would be nice for you to understand it that way. That number reflects that.

As you said, Mr. Lee, if we -- I don't think we are in a situation where we can have a lean capital even without that type of an effort. But the 50% payout ratio is not a low payout ratio, you would agree. So if you combine these two elements and factors, and if you could reflect this as much as possible, you expect that the relevant elements to determine the payout ratio.

So as I said, the members of the executive body said that we will maintain the 30% guidance. Of course, we do not know what's going to happen in the future and the fact that we have a bit of capital stock, we will think very cautiously. We are thinking very cautiously in managing our capital. I think it would be best for you to understand it that way.

Yes, we'll move on to next question.

[OPERATOR INSTRUCTIONS].

My name is Hung, I'm from Morgan Stanley. Looking for long-term perspective I think in Korea there is not much of liquidity in deposits. So I think savings products are [at the end of the day] don't have much difference in their funding costs. But there is a voice of concern towards that end. So maybe you could securitize your assets. But I think that can only be done by KB in Korea. So to MBS or other securitization, do you have any plans to make some improvement? And if you do so, how do you see any changes of the future of KB?

Well, MBS or mortgage loan, we're actually preparing for that. So I think a large size securitization probably will happen very soon. And what I also agree is that Korean banks' future asset management needs to focus on asset securitization to increase margin. I think more emphasis needs to be put on that so, toward that end, maybe what is beneficial is that the MBS markets being open towards overseas. I think it's very encouraging. Yes, I hope that answered your question.

I'm from JP Morgan. Since you have been managing the bank for about three years, if you look at cost and the loan out provision, what do you think is the adequate level between the two?

Against the total asset, the credit cost is almost fully stable, is -- I'm sure you are very -- are aware of this. But against the total asset it's 40 basis points. I'm sorry, excuse me, just give me a minute.

Against the total asset it's -- well, as you know recently the provision ratio increased so it's about 50 basis points against the total assets. Against total loan it's about 70 basis points. For in the second quarter of last year it's stabilizing at around that rate. For general expenses, for G&A expenses, compared to the operating income against total asset, it is about 1.7%. 2.7 -- 1.7%, since the second quarter of last year.

I believe that for this year at least we will maintain that rate. It used to fluctuate but now it has stabilized. So [bring] about a year and a half, after about one year and a half it has started to stabilize. So we believe that it will continue on at this rate for one more year at least.

I hope that answers your question. Well, our good performance for 2006 and I think the BOD has also made a very good decision. Any other questions, please?

Yes, I think it's a margin contraction concern on the credit card. I think Hyo Sung Won could answer because he's responsible for credit card business.

Good afternoon, my name is Won, I'm responsible for credit card business KB. As for credit card, many think it's still very profitable business. So I think last year, this year and also going forward it's going to stay as a core business of KB which will mean intense competition. And, as you have said, demand for a credit card has not really been that bad. The -- in terms of merchant fee I think it might go down considering various factors that we are seeing now.

So at KB, what we are thinking is that given that environment we would send a fee income which is impacted by various factors, maybe needs to be reduced in terms of profit source, and increase profits from rapidly evolving and other things. and create or [stem] some businesses where we can increase customer satisfaction or fulfill customer needs. And we are maintaining such efforts for this year. And if those efforts continue and become more efficient, I think on the credit cards, any sharp drop in NIM I do not think will be seen.

And in terms of asset quality that you have mentioned, well, currently it's actually being managed quite well. And overall if there's no major shakeup in the financial market then I do not think there is any expected factors arising from the credit card sector. So we will manage our risk and continue with our strategy and efforts which will maintain our NIM at a stable level.

Thank you very much for that answer. Thank you very much for coming. I'm sure you might have some more questions, but we would now like to wrap up 2006 earnings release presentation.

The performance presentation and the video that we have used today will be posted on our IR website. If you have any additional questions, please feel free to contact us at KB's IR team. Once again, thank you very much for coming despite your busy schedules.

Speaker statements on this transcript were Interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.