KB Financial Group Inc (KB) 2007 Q3 法說會逐字稿

My name is (inaudible), in charge of the IR team at KB Kookmin Bank. First of all, I sincerely thank you for attending the third quarter 2007 earnings conference call despite your busy schedules. This conference call for the third quarter is being delivered through the webcast as well as the conference call telephone lines. Also, during the Q&A session, we will receive your questions over the conference call telephone line.

At this earnings conference call we have Chairman Chung Dong Soo of the BOD. Also we have Director Joe. We have our CEO Kang and the executives in charge of the various business lines of Kookmin Bank present.

First of all, I would like to ask our CFO, Shin Jung Kap to deliver the third quarter earnings presentation. After the presentation, we will receive your questions through the conference call telephone line. Therefore you can ask your questions during the Q&A session. Now I would like to give the floor to our CFO, Jung Kap Shin, who will be delivering the presentation of our third quarter earnings.

Well good afternoon. My name is Jung Kap Shin, CFO of Kookmin Bank. Now I would like to present to you our third quarter 2007 earnings. First the financial highlights.

Until the third quarter, our net income was KRW2.1938 trillion. This does appear to be a slight quarter-on-quarter decrease by about 2.8%. However, if you exclude the one-off factors between both the third and second quarter, actually the third quarter net income would have been KRW2.120 trillion which is similar to the same period of the previous year. Our pre-provisional income was KRW3.770 trillion, which is 10% year-on-year increase. Our provisioning expense did decrease 34% year on year and was KRW313.5b. Our NPL ratio was 0.56% decreased and was at 0.77%. Our ROA annualized was 1.44%, ROE annualized 19.63%. And even though it is tentative, our BIS ratio is estimated to be 13.42%, Tier One, 10.42%.

Our third quarter P&L highlights. First of all our gross profits, which would include both the interest and non-interest income, has been continuing a stable trend of KRW1.9 trillion when excluding the special factors that occurred during the first quarter. Our G&A is maintained at around KRW900b. And there was a slight decrease during the second quarter, but there were some sales of NPL during the second quarter and we have been maintaining the level at about KRW100b until the third quarter. Therefore if we exclude the one-off factors, our net income quarterly would be around KRW700b. This quarter our net income appears to be a bit slow because there were more holidays during the third quarter and this decreased our delinquency interest income. And the fee income was also slightly smaller because there were a fewer number operating days on a quarterly basis.

On our interest income there was an increase of our interest-bearing assets and there was the day effect. And this did increase slightly our interest income. And on to the third quarter, accumulatively our interest income was KRW5.1322b (sic -- see presentation) which is similar to the previous year. Non-interest income there was the special effect of the LG Card sales during the first quarter which is pre-tax based, KRW595.5b and therefore year-on-year there was 68% increase of our non-interest income. And quarter-on-quarter there was a decrease of KRW59.5b. This is because there was an additional KRW60.4b of LG Card related gains during the second quarter. And if we exclude this special factor in the second quarter, quarter-on-quarter it has been maintained at a similar level. The details of our non-interest income will be explained in detail later on.

During the third quarter, there were some one-off factors such as payment of special bonuses. And our G&A therefore recorded KRW897.7b. And in the second quarter we had to contribute to the employee welfare fund, which did not occur. And therefore there was, compared to the previous quarter, a decrease of KRW28.9b. Our pre-provisioning profits were similar to the previous quarter. And if we exclude the reversal of provisioning due to the sales of NPL that occurred in the previous quarter, the provisioning expense was similar quarter-on-quarter as well. Also the non-operating income during the third quarter appeared to have increased significantly. And this is mainly because during the third quarter we had the proceeds from the ING Life sales and because, during the second quarter actually we had to pay additional income taxes.

The interest incomes in the third quarter, which will be explained in more detail later on, compared to the same period of the previous year, there was a 13.2% increase in loans in won including credit cards. However the interest income only grew by 1.6% and this was the major cause of the contraction of our margins.

As you can see on the bottom part, our net interest margin continued to contract in the third quarter, because our assets have been growing, but mainly around the lower margin loans. And also, our funding expenses have increased. Because the holidays were concentrated towards the end of the quarter, we had fewer number of operating days during the third quarter, and this did have an impact on our collection of delinquencies as well as the interest income generated by our credit card sales.

The fee incomes in the third quarter decreased quarter-on-quarter by 4.7%. However in the bancassurance or ITC fees, the core products, their fee income was either slightly better than the previous quarter or similar quarter-on-quarter. The bancassurance fee income has certainly decreased quarter-on-quarter, but accumulatively, year-to-date bancassurance fees have grown by 25% which is quite significant. Also ITC fees did increase quarter-on-quarter by 11%, mainly increase of the fund fees and also, year-on-year there was an increase of ITC fee income by 83%.

In terms of securities income and loss, there was the LG Card sales gain during the first and second quarter which was, during the first quarter, pre-tax KRW595.5b, second quarter pre-tax KRW60.4b. And this did increase the one-off factors compared year-on-year. However, quarter-on-quarter, due to these special factors on the second quarter, we do see a decrease quarter-on-quarter in securities income or loss.

And [regarding] the G&A as I mentioned, quarter-on-quarter the G&A did decrease by [KRW28.9b] but year-on-year it did increase by 10.9%. There were special bonuses that were recognized. And this caused a quarter-on-quarter increase of our labor cost by 8.1%. However, in the administrative expenses, there was a contribution to a welfare fund during the second quarter and this did have a quarter-on-quarter decrease of our administrative expenses by 20%. In our depreciation, there was an increase of 11% quarter-on-quarter mainly because of increases of depreciation on ATM and other equipment. The cost/income ratio, if we exclude the LG Card income, slightly increased and recorded 45.6% of cost/income ratio excluding the LG Card effect.

Our non-operating in the third quarter increased significantly. This is because during the second quarter we had paid KRW482b in income taxes. And also, during the third quarter, we had proceeds of the ING Life sales of KRW161.1b.

Our asset growth, during the third quarter, we have continued to grow our corporate loans, especially around the SMEs. And actually our household and credit card segments have continued to grow. If we look at the different segments, first of all household, their asset growth was small because during the first half, because of the stagnant real estate market. But actually the household loans have turned around to a slight increase during the third quarter. Corporate loans are continuing to grow throughout the third quarter. And credit card assets, we're expecting that to grow as it did during the second, third quarters.

Our balance sheet, total assets at the end of the third quarter. Including private placed bonds, there was an increase of our loans in won by KRW14 trillion and won securities by KRW2.1 trillion. And year-to-date our total assets increased by KRW17.8 trillion and recorded KRW213 trillion.

In terms of the funding or liabilities we had -- won deposits increased by KRW2.6 trillion, debentures KRW7.4 trillion and foreign currency liabilities KRW2.7 trillion. And compared to the end of the year -- year-to-date our liabilities increased by KRW17.3 trillion and we recorded KRW197.4 trillion.

Our household loans I mentioned have continued to grow around the home equity loans during the third quarter. And, compared to the previous quarter, our household loans increased by KRW1 trillion. And year-to-date it grew by KRW1.2 trillion. Our corporate loans also continued to grow 8% quarter-on-quarter and 27% year-to-date, including SOHOs. On the credit card side, our loans increased by 1% quarter-on-quarter. And so the growth phase of our credit card assets are continuing since the second quarter. And we expect our credit card assets to continue to grow throughout the fourth quarter. Also the corporate segment is summarized on the last line, and year-to-date it has grown by 25%.

About won deposits, it did grow by 1.9% year-to-date around market rated deposits. While demand deposits did actually turn around to a slight increase as the outflow to CMA accounts started to slow down. Our savings accounts have slightly decreased quarter-on-quarter because of fierce market competition. Our financial debentures in won did increase by KRW2.1 trillion quarter-on-quarter and KRW7.4 trillion year-to-date due to increase of our loan assets. Our loan assets are growing, however our time deposits or demand deposits have remained stagnant or slightly decreased. And we had to make up the gap by debentures or market marked financial instruments and we believe that this trend would probably continue for the time being.

As you can see from the graph, the delinquency ratio in total has been significantly improved since late 2004 to stand at 0.69% as of end of September this year. Third Q delinquency ratio has also slightly gone up quarter-on-quarter but -- while sales of receivables NPL contribute to significant decrease of delinquency ratio, considering that there was no receivables NPL sales in the third quarter, the health of asset quality is being maintained.

For your reference, KB has been calculating delinquency ratio based on the new delinquency classification standard in force from January 1, 2007. So, since 2007 new standard has been applied at the Bank. Thanks to continued improvement of our asset quality, NPL ratio decreased quarter-on-quarter to stand at 0.77%. NPL coverage ratio in particular was 177.4%, which is the highest for the Bank. I will not explain the delinquency trend in detail as it was covered in previous slide.

Loan/loss provisioning for third quarter was KRW112.4b. Loan loss provisioning looks to have increased quarter-on-quarter. However, this is mainly due to reversal of reserves from NPL sales. If we assume that there was no such reversal factor, then it is a similar level quarter-on-quarter. Aggregated loan/loss reserve for household and credit card up to the third quarter 2007 decreased year-on-year while reserve for corporate rose. This is owing to one-off factors such as reversal of provision related to LG Card which is about [KRW33b], recovery of special bonds and increasing the (inaudible) amount related to loan receivables. Especially this year, corporate side has increased, thereby having impact.

As I mentioned before, NPL coverage ratio is continuing its upward trend. As you can see from this graph, ratio of precautionary and below lending in continuing its downward trend while NPL coverage ratio is rising steadily. Net increase of new NPL rose slightly over previous quarter but it is still maintaining stable levels. In 2006, net increase of NPL, which was around KRW300b per quarter, rose slightly during the fourth quarter owing to one-off factor of SPC lending. But excluding such factor, net increase for the fourth quarter was KRW261.6b. This shows slight decline. In 2007 net increase of NPL stand at less than KRW200b range. By sector also you can see the stable trend is continuing.

Thanks to continued improvement in asset quality and upward trend in recovery of special bonds, credit costs for loan/loss provision, aggregated up to the third quarter, was 0.2%. By sector household was, up to third quarter aggregated, 0.09% showing great improvement compared to last year's average of 0.46%. Credit costs for corporate lending was also 0.43%. It post decrease over last year's average of 0.47%. Credit card -- in particular credit cards declined significantly to 0.54% over the last year's annual average of 3.12%, thanks to increase of reversal of special bonds.

Let me now turn to key issues for the Bank for the third quarter. Currently we are preparing for the Basel II regime. So on that front, as you are well aware, for the market risk we obtained FSS approval for internal model approach at the end of 2005 and have been using it ever since. So subject to a new Basel II regime will be credit and operational risks. Our current plan is to use F-IRB for credit risk from 2007, towards Advanced IRB approach from 2009. So that is currently subject to approval by FSS and we are taking appropriate steps to obtain that.

For operational risk also, standardized approach, or TSA, will be used in 2008 and advanced measurement approach, or AMA, will be used from 2009. KB is internally already using ARB from 2006 which will be officially adopted from 2009 and TSA from 2007, which is scheduled for implementation in 2008. AMA will be adopted internally from 2008 before official adoption of 2009. This concludes my presentation. Thank you.

Thank you very much CFO Shin Jung Kap. Now we will take your questions. (OPERATOR INSTRUCTION). We will take questions. Yes, the question comes from Mr. Chan Young Hwang of Morgan Stanley.

Yes good afternoon. I have about two questions. The first question is about the NIM, which I think has contracted more than I thought. What about the various -- how much of the impact was there due to the changes of the contribution rates to the guarantee funds? And it seems that somebody said that the bottom is expected to be about 3.33 or 3.35. Has that estimation changed?

And it seems that the costs are going up to the 46% ranges. And could you give us some of the guidance related with your costs?

Well, thank you very much for that question. First about the guarantee deposits, the guarantee fees, whether that impacted the decrease of NIM. I think that did decrease our NIM by about 3bp.

In the past, the reason why our NIMs have contracted more than what we had thought, is because recently there was changes in the market, especially the funding side of the market has been volatile, as you know. The demand deposits have moved quite a lot to the CMA accounts. And funds, investment products, have become quite popular. And we think that some of our time deposit supply has contracted quite significantly due to this population of investment products. And so, while our assets are growing quite rapidly, our deposit growth has been relatively slower. And so that difference has to be funded through market marked deposits and debenture issues. And this has made us pay a relatively higher funding cost.

On the other hand, there was very fierce competition on the loan market. And it was difficult for us to completely hand over the increase on our funding side to our loan pricing. Also, our credit card assets, which offer a higher margin, did -- were impacted by the stagnation of the household, or housing market. That was one factor why we could not increase these higher margin assets higher. And our SOHO loans, which are collateralized or securitized, are relatively lower margin as you know. So the volume on these sides have increased and so that is why overall the NIM appears to have decreased more.

We think that this trend itself will continue for the time being. But we also have plans being implemented. For example, we are continuing to price-in our funding cost increases to our loan pricing. We have already started that and we will continue to reflect more of our funding cost to our loan pricing. So maybe the NIM will decrease a bit further, but the pace of the decrease we believe will slow down.

About the cost/income ratio. Up till now KB has been involved in various new initiatives. For example, we had a project to automize our processes and to integrate our imaging system. We also have launched a next generation system project. And we have opened about 16 new branches up till this year. And all of that has effected to a higher cost/income ratio. But on a C/I rate we will be maintaining -- we are conscious of maintaining our cost/income ratio. However on a product base, we may need to make investments to enhance our sales capability. And if these investments are necessary, on a case by case basis we are still willing to commit and invest if that is necessary for better sales power. Thank you.

[You used] about a word called BAU and that's business as usual. Let me add that (inaudible) for that.

(Interpreted). Next question, Philippa Rogers from Goldman Sachs.

Yes, I have two questions for you. The first question pertains to capital management. Can you give us some guidance on your thoughts and considerations on capital management from here, particularly pertaining to a potential upcoming bid for KB if you have the opportunity, and how you're thinking about capital in that context?

(Interpreted). Well, early this year we said that given no special things happening in the future, that we were thinking of dividends of 30%. And as for KEB, well thank you for your interest and we are keeping tabs on the situation. However, as of now, our judgment is that 30% dividend would still give us enough room to prepare for anything related to KEB.

Any possibility of share buybacks?

(Interpreted). From City Securities, Ms. [Chiang Yun].

(Interpreted). Yes, good afternoon. My name is [Chiang Yun] from City. I have three questions. The first is the net interest margin has decreased quarter on quarter. You did give us some details of the contributing factors. How much of the margin was impacted because of the number of operating days. For example originally, what was your recovery target? Could you go over the actual and the difference?

The second is the volume growth. It seems especially the corporate volume is growing strongly. Looking out to the future in your volume and margin, where will you place your priorities on?

Third question is related to what capital management. I'd like to lead on to that question. I'm thinking that you're still interested in non-bank M&As. Securities it seems, seems to be the most imminent area. But on the non-banking side where, which industries would be your M&A priorities? And what is the progress about M&A possibilities in the securities sector?

(Interpreted). Well, the first two questions, I think I'll answer the first two. Third question I'd like to give that to our CEO.

About the decrease in our NIM, at the end of the quarter, at the end of the third quarter, there was a concentration of holidays. And we think that that contributed to about 2bp to 3bp decrease, which would then also have the opposite effect during the fourth quarter.

About the volumes and margins, the trade-off of the volume and margin and where we place our priorities. We think that when we look on to 2008, of course we have not finalized our business plans for that yet. But on a rough basis for 2008, we are thinking of a system growth level for next year which will be about 7% to 8%. Within that range of a volume growth is what we are considering for next year. So we don't have any intentions of growing or outgrowing the market, organically at least. And so next year our margins will be a bigger focus or an emphasis for us probably.

(Interpreted). And about the non-bank sector where we are considering investments, as we had made a disclosure, on the securities there is Hannuri Securities. And we are thinking of not only M&A but also a possibility of establishing our own business, which could reach a decision within this year. And then in addition to the securities sector, we could think of looking at opportunities as well.

(Interpreted). Thank you. We'll move on to next question, from Templeton, Mr. Chong.

(Interpreted). Yes, good afternoon. My name is [Chong], I'm from Templeton. I have three questions. First relates to -- banks with securities companies are watching the move towards CMA accounts to block any customer attrition. So do you also have plans to -- I think you have plans also run CMA based salary deposit accounts. What's happening on that front?

And secondly, according to media reports I think consumer banking will be some area that you are looking into or especially consumer lending. So if you are prepared to go into that area how do you see the market going forward? And are you going to have that as a subsidiary once you become a holding company? What would be the structure?

And thirdly, the banking structure is changing very rapidly. So this question is to the CEO. What do you think of the banking industry will be like for 2008? Any implications or guidance you could give to analysts or your investors?

(Interpreted). First about the CMA and the deposit account products. I would like to ask Mr. Lee from the Marketing department to answer.

(Interpreted). Yes, the CMA funds, yes it's moving away from the banks. So we are at KB also keeping a close watch on the market trend. However, we are trying to avoid any interest based competition. But we are trying to create bundling products so that we can have more competition based on our better quality of products. For example, for any preference for demand deposit or other ways to guarantee certain level of yield or income to customers is what we are looking at. So for the CMA related products again we are keeping close watch about what's happening in the market.

(Interpreted). Well in addition to that I also read in the newspaper today that the CMA account at KB, it was reported that we are not interested in that area for the time being. As for the consumer lending, we have started to review but I think it's going to take some time. And to enter this sector I do not think we have to wait until we have holding company established.

Lastly about the question about the implication I could give about banking industry for the next year, well, to analysts I want to actually ask you that question to prepare for the next year. But you have given me the question first. So the -- I think sales of the banks in Korea is going to get tougher and more challenging next year. So creativity and proactiveness in sales effort will become more important.

And also the bank side up to now has become quite big over the time. So in that regard I think analysts maybe, rather than focusing too much on financial analysis, you should also consider how the risks are managed at banks and the internal control, how much investment the banks have made while also growing in size.

(Interpreted). Yes, we'll take the next question from Shinyoung Securities, Mr. Lee. Please.

(Interpreted). Yes, good afternoon. Hello?

(Interpreted). Yes, please go ahead.

(Interpreted). I have two or three questions. The first question is about the NIM, which is a favorite topic it seems today. What about your liquidity ratios? For KB, what is your liquidity ratio being managed at?

And some related questions, still liquidity. It's because CFO Shin mentioned, it seems that costs and the issue is how much you can pass over your funding costs to your lending or loans. Related with liquidity, one way of managing the NIM may be by changing the composition of your assets. Is there no room to do that, or how much?

And for the liquidity ratio, I think was a bit of a challenge for KB at the end of September. Of course it's not a serious issue but there was some talk about it in the market. So I think it's good for you to comment.

And about the non-interest income third quarter, even if we consider the LG Card proceeds or the income, I think the non-interest income was not as strong as what I had expected. And the fee income from the ITC products, considering that the share of the upfront fees has increased, at least compared to the previous ITC fees, it's not that high either. And so on the non-interest income why is it as strong as I expected or is this according to your plans on schedule?

And the third question is about the cost/income ratio. You mentioned that in the BAU perspective it could be maintained at current levels, but there could be some projects, individual projects, case by case project demand. But when we look G&A and other aspects, the cost/income ratio I think would have to go up. There's no way that it cannot go up. Especially if you want to increase your non-interest income, you would need to make investments, and you probably may not be able to increase your non-interest income without increasing your cost/income ratio. And so 2008-2009, what would be a good defense level for your cost/income ratio this next year and the following year?

(Interpreted). About the liquidity ratio, I think we were -- our liquidity ratio is increasing rapidly just as other banks. We are closely watching the liquidity ratio increase. And next year our growth target is probably going to be system growth rather than higher. And I think that also is not totally unrelated with our liquidity ratio.

At the end of the third quarter, our liquidity ratio you said was a challenge, but which is I don't think true. And currently we have totally no problem in keeping our liquidity ratio ceilings. However, in the market still there is a very strong tendency for the volume driven business. However, we would like to take a different stance and if necessary we are willing to sell assets or issue MBS if necessary so that we can reduce our funding cost and also diversify our source of funding at the same time. And by doing that, we would improve or at least we will gain room to improve our NIM.

About non-interest income, the reason we are not growing there is as you pointed out, our non-interest income is mainly contributed by bancassurance and ITC. They are growing quite strongly. However, this year the housing market, the property market, was quite stagnant and therefore there was a decrease of housing fee income. And there was also a decrease of our guarantee fees. There was an increase though about our contributions to the guarantee trust. And there was a bit more of a marketing expense necessary on the credit card side because of serious marketing competition. And during the third quarter since the sub-prime crisis the rates had rapidly increased during the third quarter and there was some valuation losses on our trading bonds. All of these factors have contributed. And the non-interest income appears to have not grown that much.

But regarding the housing fund and the trust side, we have, I think, hit the bottom already. And about the trust guarantee fee, it probably will not go any higher. It will probably be maintained at current levels. And so when it comes to non-interest income we do see that it will be increasing in the future.

(Interpreted). Thank you. We don't seem to have any more questions. I think because the presentation was very good. And maybe there seems to be no more questions forthcoming. So this concludes the third quarter earnings conference for KB for the year 2007. The presentation material and the video presentation of our earnings conference will be available from our website from this date on. And if you have any more questions, please contact KB's IR department. We'll be more than ready to help you. Thank you for your participation.

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.