KB Financial Group Inc (KB) 2008 Q1 法說會逐字稿

(Interpreted). Good afternoon, ladies and gentlemen. My name is [Kusa Choi] of the KB Kookmin Bank IR team. First of all, I sincerely thank all of you for attending our 2008 first quarter earnings conference call. This conference is being provided over the conference call line as well as the webcast line. We will also entertain your questions later on during the Q&A session. Today, we have our CEO Chung-Won Kang as well as the executives of KB Kookmin Bank.

The order of today's conference is, first, a presentation by our EVP [Ho Chang Kim] on behalf of our CFO MacKenzie presented. And following the presentation, we will be taking your questions over the telephone lines, so please be prepared to ask questions. Then, I would like to give the microphone to our EVP Ho Chang Kim, who will be giving you the first quarter result of 2008.

(Interpreted). Well, good afternoon. My name is [Ho Chang Kim], the EVP of Kookmin Bank. I would like to introduce to you the 2008 first quarter results of KB Kookmin Bank. We'll start from page three, the financial highlights.

The net income of the first quarter 2008, on a quarter-on-quarter basis, increased by 8.9%, reporting KRW631.5b, which on a year-on-year basis appears to have been a large decrease. But when you consider the one-time factors in the first quarter of 2007, such as the LG card sales gain, it's only a slight decrease. The pre-provision income also increased, on a quarter-on-quarter basis, 2.1%, recording KRW1,109.8b, and the provisioning expense decreased by 13% quarter on quarter. KRW270.6b was the provisioning expense.

And the NPL ratio, which was 1% at the end of '07 first quarter, decreased by 21bp to 0.79%. The annualized ROA and ROE were 1.11% and 15.88% respectively. And even though it's provisional, the Basel II BIS ratio was 12.3%, tier one at 10.38%. And as you have already heard, KB Kookmin Bank is the only Korean bank to have received the FIRB approval on the credit risk Basel II from the FSS. And based on the FIRB, we will be calculating our BIS ratio, and this will have a positive effect on increasing our capital adequacy ratios, unlike other banks.

Now, the profit and loss statement. The gross profit, as you can see in the graph, actually has been maintaining a KRW1.9 trillion to KRW2 trillion per quarter level, when you consider the one-off factors that existed in the first quarter of '07.

Our G&A has been on an increasing trend, because of our increased investments in our IT system and branch renovations, but actually in the first quarter of 2008, we have been able to decrease some of our expenses, such as provisions for severance payments and ad expenses. We've also had quite a cost saving effort around the Bank and we were able to reduce our G&A by KRW129b and recorded KRW883.9b.

Our pre-provision income has, quarter on quarter, decreased, but there was a slight increase of our corporate loan related provisioning in the previous quarter and this has to be considered. And when that is considered, the quarter-on-quarter increase is only somewhat limited and most of the assets there was increases due to increase of lower normal loans. We believe that such increase of provisioning expense will be only temporary and then it will come back to normal levels from the second quarter.

The net income of the first quarter 2008 was, as you can see in the graph on the bottom right hand based on a normalized trend, seems to be a slight decrease, mainly due to increase of some one-time provisioning. But because, as we explained, we believe the provisioning will be stabilizing from the following quarter, our net income would also be stabilizing from the next quarter.

Some of the profit and loss major factors. The interest income, thanks to increase in interest-bearing assets, has increased on a year-on-year basis by 1.9%. The non-interest income, year-on-year basis, is maintaining a similar level of KRW272.4b, when you consider the one-time factor that existed in the previous year of the LG card sales gain. The details of the non-interest side will be explained in detail later on.

The G&A, as I previously explained, has increased year on year by 3.2% because of increased investment in IT systems and branch expansions. But on a quarter-on-quarter basis, thanks to our efforts to decrease and save -- decrease costs, we have been able to decrease our G&A quarter on quarter by KRW129b.

Our pre-provision income increased quarter on quarter by 2.1%, recording KRW1,109.8b. And if you consider the one-off factors, this is similar to the pre-provision income of the previous year. The provisioning expense during the first quarter did increase year on year by KRW154.7b, mainly due to increase of assets and increase of corporate-related provisioning. But on the non-operating side, actually, it decreased year on -- or, excuse me, it increased by 45.9% year on year due to decrease of expenses such as return of dormant deposits and donations.

In all, the net income of the first quarter, despite the various one-time provisioning factors, increased quarter on quarter by 8.9% and we believe that, in the second quarter, it will return to a more stable net income trend.

Next, we'll look into the detailed segments of our profit. First, the interest income side. With the increase of the Bank assets, quarter-on-quarter basis, our interest income increased by KRW128.1b. Our interest expense also increased by KRW231.3b, mainly due to increased funding costs, and our NIM has therefore decreased. If you look at the margin on a quarter-on-quarter basis, because of the high interest deposits and increase of market funding, our margins have decreased quarter on quarter by 31bp, recording 3.08%. Currently, KB Kookmin Bank is taking strong measures on a wide variety of options to expand our margins and we believe that, as we approach the second half of the year, the margins will be improving than current.

On the non-interest side, the fee income, the investment trust product and bancassurance-related fee income, despite the slowing down of the growth rate, is maintaining the previous levels. The housing fund and the won fee others have decreased, but overall our fee income have decreased 5.2% year on year and 22.2% quarter on quarter.

The IT product sales fees, compared on a year-on-year basis, have increased by 9.3%, but on a quarter-on-quarter basis have decreased quite significantly due to sluggish fund product sales. The bancassurance fees have been maintaining levels similar to the previous year, thanks to the sales of a variety of insurance products. On the other hand, the national housing fund fee has decreased year on year by 25.4%, due to decreased house-related transactions and the issuance of national housing bonds and the decrease of new loans. But actually, on a quarter-on-quarter basis, this increased significantly because, in the previous quarter, there were some adjustments related with the decrease of the fee criteria.

On the gain or loss of securities, there was increase on the bond valuation and a disposition gain on the visa card and there was a large increase quarter on quarter on gain or losses of securities. On the other side, there was increases of the credit guarantee commissions that contributed to the increase of the losses on a quarter-on-quarter basis.

Our G&A, thanks to our efforts to save costs and raise efficiency, has decreased by KRW129b quarter-on-quarter basis. Also, on the labor side, there was decreases on our severance pay provisioning and special bonuses. Also, we also had a decrease quarter on quarter by 11.1%, year on year by 4.7% on our labor side. Also, on the administration cost, there was decreases on ad and other consumables and, on a quarter-on-quarter basis, it decreased by 13.9%. Depreciation also decreased quarter on quarter by 20.1%, thanks to decrease of the depreciation that's generated from the ATM machines and other facilities on our leased branches.

The cost/income ratio, as was previously mentioned, has, as you can see, decreased by one percentage point quarter on quarter when excluding LG card sales gain and recorded 45.2% in the first quarter. KB Kookmin Bank will continue such cost saving efforts and will continue to do its best in managing its costs and expenses.

Now, on page nine, we will go on to the non-operating side. The equity method gain and losses decreased 29.9% and 41.2% respectively, year on year and quarter on quarter. On the other side, there was decrease of expenses, such as the return of dormant deposits and donations, and so overall our non-operating profit has increased by 45.9% year on year and 2.3% quarter on quarter.

Our assets and liabilities are on page 10. As you can see on the graph, our asset growth during the first quarter was mainly driven by our household and corporate loans. If you look -- divide that into different sections, the household loans actually increased by KRW21.6 trillion year to date (sic - see presentation), which is a 3% year-to-date increase, mainly because some upward prospects on the housing market and increase of other non-house-related household loans. On the corporate side, there has been continuous increase on both SMEs and large corporate and we are recording KRW67.8 trillion as of end of March. The credit card side is seeing more competition, but we have continued to grow, mainly around card loan assets.

Next is our balance sheet. As of end of March 2008, our total assets has increased by KRW14.2 trillion year to date and is recording KRW233 trillion. There was increase of won-related loans, including private placement bonds, of KRW6.9 trillion and won securities of KRW4.2 trillion. On the funding side, mainly the funding-related increases came from won deposits, increased by 6.5% year to date.

First, let me talk about the won-denominated loans and credit card assets. As for household, thanks to increase in mortgage loans and increase in general loans owing to popularity of products in order to satisfy customer needs, the growth trend is continuing to result in 7.1% or a 3 point increase quarter on quarter. As for corporate lending, thanks to higher demand for large companies owing to more M&A activities and [operations fund] of SMEs, it rose 6.6% quarter on quarter. As for credit card, increase in card loans resulted in growth of one percentage over the end of last year.

Next is total deposits in won. This grew, led by savings deposits such as time deposits and marketable deposit products, by 5.8% quarter on quarter. More specifically, demand deposits dropped 4.2% over the end of last year, due to seasonal factors experienced in the beginning of year, when one-off growth in demand deposits normalized. Demand deposits spike up at year end as business experience concentration of settlements due at the end of the year. As for savings deposits, with the intensifying competition in the market, time deposit led growth to post 8.4% growth quarter on quarter. CD and RPs and other marketable products increased 7.5% (sic - see presentation) quarter on quarter.

Next is asset quality. Please turn to page 15. First is the delinquency ratio. As you can see from the graph, overall loan delinquency rate is stable to remain at low level of 0.65% as of March 2008, so it's showing very stable trend. By area, household lending was 0.7%, corporate 0.53% and credit card 1.12%. In other words, the household and credit card remain at similar level as of end of 2007, while corporate delinquency ratio rose slightly over last year, but it still remains at a very low level.

Next is coverage ratio. As you can see from the graph, ratio of sub-standard and precautionary and below loans have risen slightly quarter on quarter, but it remains very stable. So all in all, you can say the asset quality of KB is very healthy. Coverage ratio for sub-standard and below as of the first Q 2008 is 181.2%, while coverage ratio for precautionary and below is 90.6%.

Next page. NPL ratio has improved by 21bp to 0.79% over 1% of first Q 2007. Compared to end of last year, it has risen by 5 basis points. But considering that, realistically speaking, absolute NPL ratio is very, remains very low and only increased due to one-off factors, but this is within the range of our control. And delinquency ratio was mentioned already, so I'll skip the explanations here.

Next is loan loss provisioning. Loan loss provisioning for first Q rose 2.6% quarter on quarter, owing to increase in assets such as increase of normal credit subject to provisioning and temporary increase in number of corporate bankruptcies. In the second quarter, as I said before, one-off factors will normalize, so we think that the loan loss provisioning level will also remain very stable.

More specifically, in corporate sector, you see a big increase year on year. This is, as said, due to increase in provision requirements owing to bankruptcies of some companies. But this is, again, one-off phenomenon and cannot be interpreted as over-worsening of asset quality. KB will be vigilant in asset quality control. It will continuously monitor any signs of credit abnormality in companies with large loans to strengthen risk management. As for the NPL coverage ratio, household was 205%, corporate 149.8% and card 283.8%. So overall, it has -- it stands at 181%.

Next is credit cost. As mentioned, growth in loan loss provisioning made credit cost for first Q 2008 0.44%, to be at similar level as last quarter. More specifically, credit cost for household loans was 0.19%, to post slight increase quarter on quarter. Credit cost for corporate dropped 11 basis points to stand around 0.9% range. As for credit cards, compared to quarter on quarter, it dropped 12 basis points to stand at 0.57%. So total credit cost for the bank remained at a very low level to remain at -- to maintain its stability.

Lastly, let me explain the asset quality analysis for SMEs. It's page 21. In this slide you see a graph we have prepared to explain some concerns voiced by market participants on the quality of SME lending. The graph on the upper left is the SME vintage analysis. It has been steadily going down from 2004. But nine-month vintage figures have increased owing to one-off delinquency of some companies. We are closely monitoring these companies as part of our effort to prevent any losses.

Real delinquency of SMEs, described on upper right, is delinquency ratio reflecting write offs and sales during that period. It is showing continuous downward trend and has remained stable at a very low level since end of 2006. Portfolio by credit rating at bottom left shows good increase of healthy asset with over [BD] minus rating. This means increase of corporate customers, strong against excellent changes of economic conditions. Graph on bottom right is COK data, showing trend of dishonored bills and number of bankruptcies in Korean companies for the last eight years. You can see overall downward trend.

This concludes earnings presentation of KB for the first quarter of 2008. Thank you.

(Interpreted). That was the presentation by our EVP Kim. Now we will entertain your questions.

(Interpreted). (OPERATOR INSTRUCTIONS). We will take the first question from Morgan Stanley. Mr. Hwang, would you like to go ahead, sir?

(Interpreted). Yes. Good afternoon. This is Hwang Chan Young of Morgan Stanley. I have two questions. The first question is on your NIM which has decreased more than I expected. There was an expectation that in the second half your NIM would improve, and you would work to improve your NIM. Specifically I'm wondering how you plan to improve your NIM.

The second question is a couple of years ago there was a disclosure related with a finance company. And I think there's about going to be a KRW20m increase which means that, as a shareholder, Kookmin Bank would have a bit of a concern. So in the future, the treasury stock Kookmin Bank will come in to, so what are you planning to do with the treasury stock?

(Interpreted). Now, who should take that question?

(Interpreted). Well, in general we think that the NIM has decreased more than we had expected. You have to look at what happened at the end of the fourth quarter last year, last quarter, at the end of the fourth quarter, we had increased our deposits entirely. And that did return us a debt burden on our interest payments or deposit interests.

And also in this year, in the first quarter, we thought that it was a timing for us to be a bit more active on the sales side. So in the first quarter we continued to attract and build our deposit base. In the process of doing that, our deposit rate did decrease, but our loan interest rates have gone less up compared to the increase of our deposits -- deposit rates.

So, on the loan side, what we're trying to do in terms of NIM and delinquency ratios trends, what we're trying to do on our loans is to perhaps extend some more loans to the lower credit ratings while looking at the delinquency ratios, and also provide some unsecured loans with a bit more active position. And so in the second half, with the second and third quarters passing, we think that the deposits that were sold at the end of last year would come to maturity.

And on the loan side, we will be able to charge higher prices on our loans. And by a combination of these two factors, as we approach the second half of this year, our NIM is expected to increase compared to the first quarter of this year.

Your second question was about our plans to convert to a financial holding company. And that means that the holding company -- excuse me, on the Bank side, the Bank would have -- would come into the stock of the holding company. The Bank would own the stocks of the holding company. Now your question seems to be what would be done with such treasury stocks. I think that is a decision that should be left for the BOD of the holding company. But whatever decision they reach, we will not take measures that give unfavorable results to our existing Kookmin Bank shareholders.

(Interpreted). I hope that answered your question.

(Interpreted). We'll move on to the next question. [Mr. Lee] from Daiwa Securities. Please go ahead, sir.

(Interpreted). Well, I think one question has already been mentioned. So on the credit cards, you emphasize one-off factors. So you said the one-off factors, divided by credit card factor, what are the amounts? You said you expect it will normalize in the future. Then when do you think the normalization will actually happen? That's my first question.

The second relates to net interest margin. Growth and margins, it's important to keep balance between the two. So how are your rated deposits coming to maturity, and then repricing is also going to be time. So ultimately, on the growth side, for the last three quarters, what's your strategy going to be?

(Interpreted). Well maybe [Mr. Oh] could answer related to -- question related to credit cards.

(Interpreted). My name is Oh. I'm in charge of the Credit Business Group of KB. One-off factors on the credit cards going up, this is because on the household and credit card side we are maintaining stability. But in terms of one-off factors, on the corporate side, SME bankruptcies is going -- had gone up. And secondly, asset has also increased. I think these are two main reasons.

So in the first half, large -- because there was large asset growth, that resulted on about KRW5.4b one-off provisioning requirements, and these third party auctions or bankruptcies also resulted one-off [KRW100b] one-off factors. And in the second quarter the bankruptcy is actually going down, slowing down.

And as such, the credit cards and asset quality, if you look at the ratio compared to other banks, it's very low level. In other words, asset quality is still very good. So on the asset quality side, 80% has a very appropriate credit rating. And because our [health] portfolio is overall very not good, I think the asset quality will remain to be stable and good going forward.

(Interpreted). On the second question related to the balancing of growth and margin, well, it's one of the issues that we are faced with. And meaningful, significant growth, we -- I think needs to be achieved in organic ways. But before going there even, some efforts will be needed, considering that we need to maintain our side as a leading Bank. What I mean is that since fourth quarter last year, the funding market situation has not been very good.

So in the first quarter of this year, significant decline on NIM was the result. So Mr. Hwang from Morgan Stanley, as my answer to him has stated, I do believe that in the next quarter the situations will improve.

(Interpreted). I think that has answered the question and we will move on to the next question.

(Interpreted). The next question comes from Nomura Securities, Mr. Kim Jin-Sang. Please go ahead, sir.

(Interpreted). Well thank you for your presentation. And first of all, our CEO has mentioned that he considers inorganic growth opportunities too. Even though it is a bit too early, but there is a lot of talk about privatization, even though the scheme of how to privatize are not yet decided. And so I guess it is a bit too early to give you -- give us comments. But what about the banks that would come up for privatization? Are you considering M&A with them?

And about this possibility of converting to a financial holding company, then your investment limits would decrease quite significantly. How are you planning to address that decrease of investment? It's 30% of your equity, shareholders' equity. But your investment opportunities or investment capabilities in the subsidiaries would decrease.

Also on end balance basis, the balance sheet looks quite good. But what on an average balance? So regarding M&A and in large companies, your loans or your deposits are not average balance basis. Could you give me the quarter-on-quarter comparison?

And during the first quarter the write offs and NPL sells were exactly how much?

(Interpreted). Well, about the average loan balance and the write offs, I think would be better responded by our executives. And I will take the first question which was about possibility of acquiring banks that are privatized, or going to be privatized, whether we will be interested.

As I've said every time, I was given the opportunity, until the KB deal is closed, we would be most interested and prepare for that opportunity. But at the same time, we are continuing to watch other opportunities. I guess that's not just for Kookmin Bank. But I think other domestic banks will probably have a similar position.

And then the decrease of the investments limit, whether it would decrease once we become a holding company, I don't think that's necessarily true. It may not always decrease. And we do need to pursue opportunities that are beneficial to the Bank. And if there is a limit in the shareholders' equity, that keeps us from going into that opportunity. I'm sure if the shareholders also believe that it's a good investment opportunity, the shareholders would be more than willing to, for example, have a paid in capital increase to enable us to pursue the opportunities that are beneficial to the Bank. I have that conviction. And we are reviewing various opportunities under that conviction.

And then the question remains about the average balance quarter on quarter. And, yes, we do have the average balance figures. Our total deposit average balance-wise last year, December average, was KRW141.7 trillion. And as a first quarter average balance was KRW153 trillion, and so on an average balance, our increase would have perhaps been larger, at KRW11.5 trillion. Loans, the average balance and end balance are almost similar, so there's almost no gap between an average balance versus an end balance Q-on-Q figure for the loans.

And I think there was a question about provisionings and write offs and sales. What was our write offs and sales? Yes, our first quarter NPL sales and write offs was the last question.

Maybe I can give the analysis in a slightly different way. The provisioning related to asset increase was KRW85b. The provisioning related migration, KRW280b, write backs KRW116b. Write backs by portfolio household, the net of those three factors was KRW43b per household, corporate KRW191b, credit card KRW15b, for total provision expense KRW249b.

(Interpreted). I'm sure that this answered your question about the write offs and sales of our NPL. We will get back to you with the details after the conference call.

(Interpreted). As far as I remember, there was no NPL sales, and about KRW280b was the write off amount, but we'll get back to you.

(Interpreted). I suppose most important factors related to our performance in first Q have been already covered by the questions posed. So we will wait for a few more minutes and if there are no more questions we will close this conference.

Well, thank you for participating in our earnings conference for the first Q of 2008. Thank you for your participation, again despite your busy schedule. The presentation material and video will be available from our IR website. And if there is any more questions, please contact IR team of KB. Thank you again for your participation and interest. 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.