KB Financial Group Inc (KB) 2007 Q4 法說會逐字稿

Good afternoon. My name is (inaudible) Choi of IR department at KB, Kookmin Bank. First of all thank you for taking part in today's earnings conference of KB for 2007 despite your busy schedule. This 2007 earnings conference is being held in the presence of many shareholders and investors in the audience. It is also being simultaneously webcast through the Internet and conference call for participants from home and abroad. Therefore, those of you who were unable to take part in person, could also take part through the Internet and conference call lines. And you could also ask questions through the phone lines available. For your information today's earnings conference is being held at KB auditorium because of the [KRX] site access issue at the moment.

At today's earnings conference we have with us BOD Chairman Chung Dong Soo, Director [Jor Dam], CEO Kang Chung Won and heads of business units. Today's agenda is as follows. The 2007 earnings presentation will be made by EVP [Ok Chang Kim] in charge of financial management division in finance group, after which we will have a Q&A session. So please do raise your questions during the Q&A session. For your information the earnings presentation will be made by our EVP Ok Chang Kim on behalf of our CFO Donald MacKenzie. EVP Kim, please go ahead sir.

Good afternoon ladies and gentlemen. My name is Ok Chang Kim, EVP in charge of the financial management division. I would like to give you the 2007 performance of KB Kookmin Bank.

First the financial highlights. In 2007 our net income was, despite the additional pay of corporate taxes in the second quarter, was KRW2.745 trillion, which is an 11.1% growth versus the year before. Our pre-provision income was KEW4.857 trillion which is a 8.4% year-on-year growth. Our provisioning expenses decreased by 51% recording KRW624.6b. Our NPL ratio also decreased by 2 -- 0.29% year-on-year recording 0.74% continuing our improvements in asset qualities. Our annualized ROA and ROE were 1.32% and 18.05% respectively. And even though tentative, our BIS ratio was 13.12%, Tier One tentatively 10.23%. And also KN Kookmin Bank was the only bank in Korea to receive Basel II credit risk FIRB approval by the Financial Supervisory Service. And under FIRB our equity ratio is expected to slightly or somewhat increase.

These are the major highlights of our P&L. Our gross income, as you can see, which combined both interest and non-interest income, was about KRW1.9 trillion to KRW2 trillion on a quarterly basis. Also, during the fourth quarter it was KRW2.1 trillion which is the highest quarterly income throughout the year.

We have also been opening new branches. And have been increasing our investments in IT system. And so our G&A expense has been increasing. And during the fourth quarter there was additional provisions for our severance pay and advertisement and promotions pay and it was KRW1.0129 trillion.

Also our provisioning on the fourth quarter, quarter-on-quarter increased by KRW189.5b. This is because of the adjustments of the guidelines for provisioning for corporate loans. And if we exclude this additional provisioning, our provisioning expense in the fourth quarter would have been similar to the previous quarter. And if we had, for example, exclude these one-off factors, including the adjustments of provisioning guidelines for corporate loans, as you can see it would have been closer to the green line, which is a very stable line continuing on from 2006.

And this is the profitability overview. If you look at the major P&L, our interest income seems to increase [over] interest-bearing assets, increased by 2.7% year-on-year.

The non interest income has impact by the first quarter LG Card sales gain and increased by about 71% year-on-year and recorded KRW1.5887 trillion. Also quarter-on-quarter basis, there was increases on our ITC sales as well as investment financial fees, and increased quarter-on-quarter by 58%. The details of our non-interest income will be explained later on.

Our G&A expenses as I previously mentioned, did increase by 14.5% year-on-year due to increase in our IT systems and expansion on our branch network. The interest -- our income before provisioning increased by 8.4% year-on-year. Our provisioning expense during the fourth quarter, despite the increase of the provisioning guidelines for corporate loans, was able to decrease 51% year-on-year.

Our non-operating income increased about 27% year-on year-due to the ING Life sales gains that occurred during the third quarter. Also during the fourth quarter there were donations and also payments of dormant deposits. And this was why our quarter-on-quarter basis is decreased compared to the third quarter.

On our interest income there was increases of our loan in wons and this increased by 2.7% year-on-year. On the other hand there was a 26% improvement. And overall our interest income increased year-on-year by only 2.7%. But as you can see, on a quarter-to-quarter basis, there was an [MOR] and marketable securities improvement. And there was, in the second half -- excuse me, compared to the third quarter, 6bp improvement and recorded 3.39%.

And then on the fee income and bancassurance income there was improvements of 9.9% year-on-year and a 25% q-on-q basis. If we look into the details, our ITC sales fees has increased by 97.3% year-on-year and 41.5% quarter-on-quarter, which are major increases. Our bancassurance related fee income also increased by 21.7% year-on-year which is also quite considerable growth. On the other hand, the fees related with the Korea Housing Fund decreased 29.2% year-on-year. Especially during the fourth quarter the KNH fee decreased by KRW35.1b. This is because the adjustments for the fees resulting from the revision of the implementation rule of the Housing Act made in December had to be made during the fourth quarter.

On the LG Cards related sales and gains there was therefore these one off factors that has a large increase in our securities related gains and losses. Also in the others there was an increase of the credit guarantee fee, but there were additional increases on the exchange as well as the derivative related gains. And we are maintaining levels similar to the previous year.

Our G&A increased year-on-year by about 14%. If we go into the details, on the labor side we had hired new employees. And on the labor side there was a 12.9% year-on-year increase. On the administrative expenses there were increases on welfare and IT related expenses. And overall our administrative expense grew by 12.5%. On the depreciation there was increase in depreciation such as ATMs and other electronic and machinery equipment. And this increased by 30.3%.

Our cost-income ratio, if we exclude the LG Cards sales gain, was 46.2%, which is a slight increase quarter-on-quarter.

Our non-operating income increased year-on-year by about 27.3% mainly due to the ING Life sales gain that occurred during the third quarter.

Next we will go into the page 10 which is the asset and liability slide. If you can look at our assets, the main growth came from corporate loans, but also household and credit cards have continued to grow. If you look into the different segments, under household loans, even though the assets growth was a bit slow until the first half due to the slow real estate market, we're actually seeing an improvement of household loans from the third quarter. And 2007 end we recorded KRW88.9 trillion of household loans which is a 4% year-on-year growth. Our corporate loans have also continued to grow and recorded KRW63.6 trillion at the end of 2007. Our credit card assets also grew by KRW1 trillion just in the fourth quarter alone.

Next is page 11, which is a brief explanation of our balance sheet. Our total assets was KRW19.4 trillion (sic - see presentation) of loan in wons including private placed bonds. And credit cards have grown by KRW1.7 trillion. And so, compared to the previous year end, we -- our total assets grew by KRW27.6 trillion (sic - see presentation), recording KRW218.8 trillion. On the funding side, it grew by 12.6% and recorded KRW202.8 trillion (sic - see presentation). And the details will be explained later on.

Now I would like to go into our won loans and credit card assets. Household loans as you have seen, despite the slow real estate business climate, started to turn around to a growth from the third quarter around housing related loans. And our household loans therefore grew by 4% compared to the end of 2006. On the corporate side, there was continuous growth on the SMEs and various large corporates and grew by about 34% compared to the end of 2006. On the credit card side, both credit card sales and card loans have increased. And credit card related assets have grown by about 15.6%. Also corporate in general, as you can see on the bottom line, grew by about 33% compared to the end of 2006.

Now I would like to go into deposits and debentures in won. Our deposits in won grew by about 5.5% compared to the end of the previous year, mainly around the time and savings deposits and the market [rated] deposits. There was a huge movement of core deposits to securities' companies' CMA accounts, but this transfer started to slow down from the second half. And actually the fourth quarter increased compared to the third quarter by KRW1.5 trillion. Our time and savings deposits did experience severe market competition and grew by 4% compared to the end of previous year around the time deposits. Our debentures in won increased by KRW9.7 trillion due to increase of our loan assets.

Let me now move on to asset quality. If you look at page 15, I will show you the details. If you look at the delinquency ratio trend, as you can see on the graph the delinquency ratio for the total loans as of the end of December '07 stood at 0.59%. By loan type, the retail loan was 0.68%, corporate loan 4 -- 0.41% and credit card 1.11%. As you can see the delinquency ratio trend is continuously improving year-to-date and quarter-on-quarter. For your information we followed the new delinquency categorization criteria which was to be implemented since January 1 of 2007.

Thanks to the continuous improvement in asset quality, our NPL ratio also came down 0.29bps year on year to record 0.74%. Especially our NPL coverage ratio hit the record high of 193%. And, as you can see, our asset soundness is improving. Therefore our NPL coverage ratio of 193% was our highest record so far. And delinquency ratio was already mentioned, so I'll skip over this part.

Let me now talk about the loan-loss provisioning. In line with the upward adjustment of provisioning for corporate loans made in December 2007, we reserved additional KRW131.7b for normal corporate loans before tax basis. Despite the upward provisioning adjustment, the '07 provision for loan losses amounted to KRW544.6b, which was a KRW403.9b reduction year on year. The NPL coverage ratio for retail was 218.1%, corporate was 158.6%, credit card 281.4%, improving the total ratio from previous year end 150% to 193%.

Next is our coverage ratio. As you can see in the graph, the sub-standard and below ratio and the precautionary and below ratio are on a steady downward trend while NPL coverage ratio is continuously improving. As at the end of 2007, the sub-standard and below coverage ratio stood at 193% while precautionary and below coverage ratio was close to 100%.

Next let me talk about the ratio of provision to assets. Annualized credit cards in 2007 recorded 0.26%, down by 24bps from 2006. If you take out the impact of provisioning rate hike in December 2007, it goes down to 0.20% showing a big fall from the previous year figure. The accumulated credit cards for retail loans was 0.10% up to Q4, showing a significant drop from the average credit cost of 0.46% of last year. Credit cards for corporate loans was 0.61%, up by 4bps from the previous year, but it goes down by 20bps to 0.41% if we take out the effect of increased provisioning rates for corporate loans in the fourth quarter. Especially the credit cost for credit card assets came down to 0.58%, which was a big drop from the previous year's 3.12% thanks to increased reversal of write-off.

Please turn to page 21. The graph on the left hand side shows the vintage trend from 2002 until now. As you can see the peak was in 2002 followed by a steady downward trend until 2005, then stabilizing ever since. The graph on the right shows the trend of real delinquency ratio which is calculated by adding write-offs and sell-off of assets to the delinquency amounts. These figures also show the improving trend of KB's asset quality.

The graph on the upper left shows the vintage trend of SMEs and it has been steadily going down since of June 2004 when the graph surged due to one-off loans related to [June] industry company. The graph on the upper right shows the SME delinquency ratio trend by industry. And it shows that all the industries have been on a stable trend. The portfolio trend by credit rating, as seen on the lower left, shows that good quality assets of BB minus or above have been steadily growing. The real delinquency ratio on the lower right has been on a steady downwards trend since 2006, but it rose a little at the end of 2007. But these ratios are still considered quite low.

Please turn to page 23. The graph on the left shows the vintage trend from 2002 until now. And since 2002, thanks to KB's efforts to improve asset quality the trend is further stabilizing. The graph on the right shows the trend of real delinquency ratio improving steadily.

Lastly, let me share with you the four major initiatives pursued by KB during the year 2007. First of all we have put in our utmost effort to upgrade our customer satisfaction through sales capability enhancement. As a result we will rank number one in two consecutive years in NCSI Customer Satisfaction Survey. We went through also sales capability enhancement through reorganization of sales forces and growth and profitability centric sales network expansion.

Secondly, by expanding the loan customer coverage area, we expanded the margin and also we enhanced business capabilities. And we developed more number of products to better meet customer needs therefore further improving profitability.

As I mentioned earlier we are continuously improving our asset quality and we are continuously receiving the highest credit rating possible from three major global credit rating agencies. And we are establishing a sales force SOD and realizing the lowest level of financial incidents, therefore achieving the goal of clean bank.

And lastly, among domestic banks we were the only bank who were approved for Foundational IRB in Basel II Pillar I credit risk management area. And also we are beginning the first phase projects for next generation IT system and IFRS systems. And we have further advanced our operational systems and we have opened up overseas branches and offices therefore setting the right groundwork for global business.

This concludes the 2007 earnings presentation. Thank you for listening.

Thank you very much. We will now receive your questions. (OPERATOR INSTRUCTIONS). Now we'll take questions from the audience. I would appreciate if there will be -- the first person to ask the question will be yes, over there.

My name is Lee from Shinyoung Securities. Thank you very much for your good results. I have two questions. One is related with the past. Well, anyway regarding the dividends, I'm sure you've had some talk or discussion about the dividend. Of course there's dividend for 2007 but also what should we expect for your dividends in 2008 and onward? The ROE at current rates is inevitable it seems to drop and what is related with that?

And then the second question is the NIM. You were saying that there was a 6bp improvement of NIM in the fourth quarter which is quite good, I must say. But at the end of September there was I think about a less recognition of fees on the credit card side. And so if we reflect what has happened in September 6bp improvement in the fourth quarter may not be that much of an improvement either. And there seems to have been about a 6% savings interest rate that was offered and that was used to fund about KRW5 trillion. And so in January if you look back NIM could deteriorate quite a lot. I'm wondering what impact that would have left over also in February and March. And so the question is what is your outlook of your future NIM and what is the NIM trend that you're experiencing in January?

Well, you've asked several questions. Regarding the dividend payments, we did have a BOD meeting this morning. And the payout ratio has been decided to be 30%. In the future, well, we said at the start of 2006 that unless there's special circumstances we will be maintaining a payout ratio of around 30%. That was what we said at the start of 2006 and the 2007 payout ratio of 30% is also consistent with that policy.

About our NIM improvement in the fourth quarter of 2007, we are also not placing too much of a meaning on that improvement of NIM during the fourth quarter. But we believe that this does show that this decreasing trend of NIM has now bottomed out. At the start of 2008 we did go through some active funding because in 2008 both domestically and internationally the financial markets are expected to experience high volatility. And that is why it's a bit early to say any outlook that we have about the first quarter NIM. We did raise about KRW5 trillion this year and this accounts for less than 10% of our total deposits for savings and time deposits. So we still have a strategy of taking a more conservative posture on our funding. And our NIM trends in January, I think we're not prepared to talk about that yet.

Next question please.

I'm from Nomura Securities. My name is Kim. I have the following two questions. First of all regarding credit card, during Q4, it seems the asset size has grown quite a bit, more than anticipated. Of course the credit card asset growth did contribute somewhat to your margin improvement. So on an average balance basis do you have any information as to how much it has increased as an average balance? Or is it only the ending balance based? So my question is whether it is a steady growth or just an end of the year growth.

Second question is as follows, it has to do with SMEs. I am sure it goes same for other banks as well, but for KB, SME loans are growing and that is leading the growth of the overall asset size. Of course if you look at the global economy and if you look at other climate it's quite worrisome. And on page 22, you discuss NPL write-offs. Now before the write-off takes place your SME portfolio doesn't seem that sound. Now you have seen an increasing SME loan growth and also the new NPL formation might be worsened in our view. So what is your strategy going forward, regarding SME loans going forward?

Also on the credit quality trend what is your view on the SME loans?

I think that these questions should be taken up by the relevant BU heads. First of all we have the head of the Credit Card Division and that should be answered. And also regarding the SME questions, I'm not sure whether it should be answered by the Loan Department or by the Sales Department.

Yes let me answer the credit card question first. On the average balance based, it's about the same. The only thing is between September until the end of the year, during third quarter to fourth quarter it seems like it has grown quarter on quarter. Now credit card sales, that is reflected on weekends, then it is reflected on the following weekdays. Therefore it's the same effect took place. So relatively speaking, 3Q -- the Q3 seems smaller than Q4. But aside from that particular factor I would say that asset size for credit card has been steadily growing.

My name is Oh, representing the Loan Department. Last year in terms of loan business for SMEs, compared to the year end of 2006 in the case of KB, as you saw from the graph it has grown by about KRW13 trillion. As you are well aware there has been the sub prime issue in the U.S. and there's an outlook of sluggish economy going forward. So we do have some concerns about credit risk.

However, we are currently extending loans to SMEs only for good quality borrowers only. So the portfolio has been improved already and also the delinquency ratio so far has been quite encouraging. So there is no reason for big concern yet. And in the case of SMEs when we say good credit qualities we're talking about 80% of our entire SME portfolio is consisting of good credit rating companies. And also in the future we will continue to pursue pre-monitoring so that we can make sure that risk management and asset soundness can be maintained throughout. Thank you.

Thank you very much. We'll take a question from the conference call, from Deutsche Securities, Mr. Scott Lee. Please go ahead, sir.

Good afternoon. I have a question. Thank you very much for your dividends answer. I would like to actually make a comment about the expectations in the market. We think that three conditions are satisfied. One is that the price being traded at is quite low and versus earnings it's about 10 times multiple. And there's excess capital sufficient. And the organic growth rate seems to be not justifiable for the excess capital. And so what the market is saying is that perhaps it is a nice timing to do a buyback and we would like to know what CEO Kang perhaps thinks about a buyback program at this time.

Well, this year I don't think there will be no opportunities for us to use our shareholders' equity this year. We could have some overseas opportunities. And we believe there are opportunities for us to increase our assets with better Tier I and BIS ratios. But of course as you pointed out there's also opportunities for us to use our shareholders' equity more efficiently. And we are considering these other ways of using our shareholders' equity more efficiently. I think that is a way of answering that question.

I hope that answered your question. Next question, please.

I do believe that our results were quite positive and the presentation was quite thorough. So I see that we don't have too many questions. Since we have no question awaiting on the conference call line either -- yes, I see that there is one more question.

My name is Hwang from Morgan Stanley.

I believe that there were plenty of comments about the results -- business results. But recently there has been a lot of news report on the Kazakhstan related investment. I believe that there hasn't been anything finalized yet. And I spoke to many global investors and there are high level of concerns. So I'm wondering whether the price that is being discussed currently in the newspaper, can it be further adjusted downward going forward?

On November 6 of last year, we have disclosed this item. And we discussed Kazakhstan and other Middle Asia and South East Asia related business opportunities. And the fact is that we are reviewing various opportunities to further diversify our business in those respective regions. But at this particular juncture no specific condition or terms have been finalized on any particular deal. So at this point I apologize that we have nothing further to really elaborate.

Thank you very much.

If there's no further questions, according to my information I think there's also other earnings conferences that you need to attend. I am very happy and thank you for attending despite your busy schedules. And this completes our 2007 KB Kookmin Bank earnings conference call. The video will be available on our IR website any time.

Also if you have any questions you have please forward them to the IR department and we will be more than happy to respond. Once again thank you very much.

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.