KB Financial Group Inc (KB) 2008 Q3 法說會逐字稿

(Interpreted). Good afternoon. My name is [Kusa Choi] of the IR department at KB Financial Group. First of all, I'd like to thank you for participating in the 2008 third quarter earnings conference of KB Financial Group. Today's earnings conference is webcast live through the Internet and through telephone lines. And during the Q&A session, you may pose questions directly through the telephone.

Today, we have with us KB Financial Group's President Jung-Hoe Kim, Deputy President Kap Shin, Deputy President Byung-Kun Oh and other Group Deputy Presidents in charge of financial management, capital and loans. We will proceed with the earnings conference in the following manner. First, the CFO and Deputy President Kap Shin will present the third quarter results and, after that, we will have a Q&A session through the telephone. So if you have any questions, please hold on to them until after the presentation is over.

And now, I'd like to invite Deputy President Kap Shin, who will deliver a presentation on the third quarter results.

(Interpreted). Good afternoon. My name is Kap Shin. I'm the CFO of KB Financial Group. From now on, I would like to make a presentation on the third quarter results of KB Financial Group. I will first start with the Group financial highlights to be followed by third quarter '08 financial performance and Q3 '08 asset quality status.

The Group's net income in Q3 the '08 YTD basis recorded KRW1.829 trillion. Yoy, there was a change, a drop of 16.1%. Total assets recorded KRW264.7 trillion, which showed an increase of 21.9% yoy. Delinquency ratio recorded 0.68%, which edged down from the previous year. And NPL ratio stood at 0.82%, which also edged down slightly from the previous year.

ROA recorded 1%, ROE 15.65%, which showed a fall from the previous year. Group BIS ratio recorded at 9.57%, Tier 1 7.43%. For your reference, Bank BIS ratio was 9.76%, Tier 1 9.14%, because we are holding KRW4.2 trillion of treasury stocks, which caused a fall in BIS ratio.

Total gross profit, as you can see, climbed down. It's netting at KRW1.942 trillion. G&A expenses is maintained at KRW1 trillion level. Provisioning expenses increased. Therefore, the Group's net income fell. During the third quarter, we made gains from the sale of BII shares and, without those gains, our net income would have stood at slightly over KRW400b.

Net interest income is moving up every quarter, but non-interest income fell drastically in the third quarter. The details will be explained later on. As you can see here, interest on loans increased by 20% yoy. Interest income also rose by 20% yoy. However, interest expenses rose by 40%. All in all, net interest income showed an increase of 1.7% yoy. Competition is heating up, which led to a difficulty in the funding, which also caused to be -- causes these figures.

Moving on to the non-interest income area, as you can see, the stock market has contracted drastically, which caused a fall in the [beneficiary certificate] sales. And also, in the investment banking area, there was a fall as well. In terms of the securities, during the Q3, there was a fall in the gains of shares and there was a valuation loss on the fixed income side as well. Also, due to the exchange rate and derivates-related gains, which decreased, they caused a fall of KRW40b.

It seems that there has been a fall in the labor cost in the third quarter. The stock market fell and the stock option exercise price went below the -- actually, the stock price went below the stock option accessorize price. Therefore, expenses that we have been posting have been reversed. And the reason that we are seeing an increase in the cost income ratio is because of a fall in the revenue.

And most of the income of the Group comes from the Bank income. Therefore, I would skip the explanation regarding the Bank side, the income performance. Group asset and liability study -- status. Our assets increased by 18.7%. And as you can see here, the unrealized gains related to the spot transactions also was realized. Also, the valuation gains from the derivatives also recorded at KRW3.3trillion. This is incorporated into the other assets.

Also, on the liabilities side, there was the impact of the exchange rate on the foreign currency liabilities and there was KRW2 trillion in the payables and incurred expenses from the unsettled foreign exchange spot positions. And there is also valuation loss on derivatives, which stood at KRW3.3 trillion. Also, as you can see, [core money] (inaudible) and other borrowings showed a slight increase.

This is a graph that shows you bank assets liabilities overview and asset growth trends. Looking to the won loans and credit card assets, you are looking at this graph here. In the large corporate and SMEs side, there was a significant volume growth. As the loans increased, there was a greater demand for funding. Demand deposits fell slightly, but due to the seasonal factors there was this performance that you see on this screen.

Moving on to the asset quality side, about the Group asset quality. As you can see, the substandard loans increased greatly in the third quarter and there are two reasons. First, in the second quarter, there was the NPL disposal of 142, but there was none in the third quarter. And during the second quarter, there was significantly less delinquency. But in the third quarter there was the (inaudible) LCD prices [in the] construction company failure, Lehman Brothers failure and bankruptcy of (inaudible) and Yahoo [City Group] loans. But compared to the first quarter or the end of last quarter or the third quarter, it's not as bad.

And this is the Bank asset quality. Most of the Group assets is accounted for by the Bank assets, so I will not talk about the Bank asset quality separately. And this is a graph that shows the previous page, so please refer to the graph.

And this is the loan loss and coverage ratio by sector. The coverage ratio increased in the third quarter. The reason for the drastic increase compared to the second quarter is because it used to come in about KRW120b for every quarter and now we have KRW170b in the second quarter. So there was -- and also, there was an abnormally low delinquency rate in the second quarter, but the delinquency rate increased in the third quarter. And looking at the loan loss provision, the coverage ratio and the loan loss provision is plotted on the graph and we see a slight increase in the corporate side.

This is the first earnings conference that we are holding after we converted to a holdings group and so I included the organization chart of the Financial Group and the status of the subsidiaries. With this, I'd like to conclude the earnings conference of the third quarter in 2008. Thank you very much.

(Interpreted). Thank you very much. And now, we will begin the Q&A session. (Operator Instructions). Mr. [Ray Hung] from UBS Securities, please go ahead.

Hi. Can I ask a question regarding your foreign currency debt maturing profile for the rest of '08 and also in the first quarter '09? And also, how do you plan to fund the payment of this debt, given the current currency funding situation? Thank you.

(Interpreted). Coming from the treasury department of Kookmin Bank, my name is (inaudible). With regards to the foreign currency liquidity, I'd like to give you an overall explanation first, before moving on to the detailed issues. First of all, the foreign currency assets that we are holding compared to our balance sheet is a -- quite a small portion. Based on the month-end balance, out of the total assets, it accounts for about 7.5%.

And secondly, if you look at our assets liabilities, our maturity profile is very -- there is a very good match, so there's not much of a mismatch between the liabilities and the assets. And for short-term assets, we are utilizing our import [users] to provide a match between the maturities. And also, with regards to the mid to long-term assets and liabilities, we are holding on to the foreign currency securities so that we can remove much of the mismatch. So as I said previously, the structure of mismatch-related risk is almost non-existent given the overall picture of our asset liability profile.

Furthermore, with regards to our liquidity situation, starting from January and all the way until September, on a mid to long-term basis, we've already secured funding. Also, USCP -- our USCP program has issued CPs and we did funding that amounts to about $1b. Therefore, we have a surplus position of over $1b.

And one other thing that we are currently paying attention to is with regards to the BoK's and [Asian] bank's trade bills reutilization programs. And also, with regards to the short-term and mid to long-term funding, we have good relations with a private placement fund format and we are utilizing that format for new funding.

And we are also being very conservative with regards to the management of our assets as well. We have stopped the new borrowings in the foreign currency and we are also trying to do a good job of controlling the foreign currency asset growth as well. And including the rollovers, with regards to the liquidity in foreign currency, we believe that we are in a good position. Thank you.

Thank you for the answer. We'll take the next question. Analyst Lee from Shinyoung Securities. Please go ahead.

(Interpreted). I have three questions. First, the non-interest income was not good, so what was the change in the NIM? And if you look at the breakdown, what was the portion that reduced greatly in the non-interest income? And because of the treasury stock, NIM had to go down. It was inevitable. But because the regulatory agencies are easing the BIS ratio, this could have had a positive effect, so what do you think about the NIM trend going forward in the fourth quarter?

And the third question is 2% of the treasury stock you said you will buy back, giving it some time and, for the year-end dividend, what can we expect? I think there are two variables. One is the treasury stock buyback and the second variable is the soundness and asset quality of the assets. And today, at the National Assembly, a bill was passed to hold the dividend payouts, so how will this affect the dividend payout ratio at the end of the year?

(Interpreted). Okay. First, about the BIS ratio -- sorry, the non-interest income, the reason why it reduced is in the commissions, as Mr. Kap Shin said, in investment trust. The commissions reduced greatly, about KRW25b, reduced from the last quarter and we stopped the fund business, and so that reduced the commission by KRW4b. And the credit card business also increased the payment commission, and that's why we have a KRW60b reduction of non-interest income from the previous quarter. And securities or the gain or loss on evaluation, that was already mentioned by Mr. Kap Shin, so I will skip that.

You talked about the change in the AUM, so I will add to my -- to the answer. About KRW5 trillion of AUM was reduced and, in Bancassurance, the AUM increased by KRW370b. So the commission lowering in trust investment was caused by the decrease in the AUM in investment and trust.

And about the treasury stock and its effect on the net interest margin, as of the end of third quarter, we bought back the treasury shares and the amount used was KRW3 trillion, KRW3.4 trillion. And in the third quarter, only 1bp of influence was on the NIM and we believe it will affect the NIM by 10bp or 11bp -- 12bp in the fourth quarter. And the treasury buyback will have a negative influence in the fourth quarter.

And there was talk of liquidity. The won liquidity is very good because the national pension is buying back the debentures and the Bank of Korea has reduced the official rates and many bank debentures were included. And so, the liquidity is improving and the funding cost will reduce. And the capital market right now is very tight on the lending side, so we may not be able -- so we may pose a desirable net interest margin to our customers.

In the fourth quarter, we may maintain the current NIM or we may be slightly over that. That is our wish. And in the mid to long-term perspective, we will buy back the shares and we will have an 11bp-plus effect on the NIM and we may pose more margin on the lending side. So we hope that, in the next year, we will enter the 3% range of NIM.

And about the disposal of treasury shares or the swap of subsidiaries, we have to sell them within six months, so that is the minimum portion that we plan to sell. And we are meeting with the strategic investors and the financial investors. SMBC contract or the agreement is part of that effort and, to increase our funding, we will do our effort -- we will exert more effort.

And as for our payout policy or dividend policy, it is our guidance of maintaining the 30%. We have never gone off range. But because of the market condition and the policy coming from the supervisory agencies, we will review our policy and we may give it some thought. Thank you.

(Interpreted). Currently, there is no person who is standing by in the queue, so we will be waiting and standing by for next questions. Yes, we have the next question from City Securities. Mr. (inaudible), please go ahead, sir.

(Interpreted). Good afternoon. My name is (inaudible) and my question's with regard to the asset growth. You talked about (inaudible) LCD and (inaudible) construction related matters. I would like to know the Korean won amount with regards to those incidents. And also, it seems that there seems to be some credit recovery, so I would like to ask for your forecast on the asset quality. And do you feel that there is still some risk related to this going forward?

(Interpreted). Good afternoon. In charge of the Credit Group in Kookmin Bank, my name is (inaudible). During the third quarter, in the case of our Bank, asset quality fell. And we've had more provisioning during the Q3 and related to the (inaudible) of (inaudible) construction are KRW9.95b. Lehman related loss was KRW91b. And this is related to the bankruptcies of the companies that we've transacted with.

And during the second half of this year, our SME loans and mid-sized construction companies, with regards to these customers, we predicted that there could be some loan asset quality issues. Therefore, we made preemptive actions to do tight risk management. Let me give you some supplementary explanation. With regards to the (inaudible) LCD, we have categorized them as substandard and we've accumulated -- the rule is to accumulate a 20% provisioning, which we did. It's about KRW6b. And regarding the (inaudible) related to the bankruptcy of the Group loans, the loss was KRW49b.

(Interpreted). Thank you. We will take the next question. Mr. Ray Hung from UBS, please go ahead.

Apologies if you already covered that. Do you -- would you be able to give us a little bit more details about the [KK knockout], those FX exposures, impact to your financials?

(Interpreted). The Bank's FX position is, because the assets and liabilities are managed, the won dollar exposure does not exist. And in our credit department, in our trading department, the traders' opinion sees the chances for trading and we do manage the circumstances and we are managing the -- so there is no FX exposure.

(Interpreted). Next question. We will be taking it from Prudential, [Mr. Sung Gun So]. Go ahead, sir.

(Interpreted). Good afternoon. Yes, with regards to BCC in Kazakhstan, well, I understand that, for 23%, I understand you are taking an action. And by the end of the year, with regards to the remaining 30%, what are your plans? And are you predicting any changes to your existing plan with regards to this company in Kazakhstan? Thank you.

-- CFO for the Bank. In respect to Kazakhstan, in accordance with the plans we developed some time ago, we will -- are still expecting to increase our position in BCC up to the level of roughly 30% before the end of the year. We recognize that there is some instability in the market related to liquidity. However, when we look at our operations, we feel that we are very well-positioned and so quite comfortable in stepping up as planned. Thank you.

(Interpreted). Let me back up a little bit. Currently, according to our analysis, BCC's position, especially FX position, is not really too bad. And as of now, I think it's at a level that can be managed. Therefore, the additional 7% equity acquisition that's scheduled by the end of this year has not been changed. We are not seeing any particular reason to change the original plan. Going forward, with regards to our plan to increase our equity ratio up to 50%, there has not been any change. However, we will be monitoring the situation there closely. Thank you.

(Interpreted). We'll take the next question. [Mr. Song] from Merrill Lynch. Mr. Song from Merrill Lynch, please go ahead. We seem to have a poor connection.

(Interpreted). Thank you very much. I'm sure you have many more questions, but due to time constraint we will conclude the 2008 third quarter earnings conference of KB Financial Group. The presentation material and video clip will be uploaded on the KB Financial Group's IR website and you may view these materials at any time. And if you have any other outstanding questions, please contact the IR Department. We will do our best to answer your questions. Once again, thank you for participating in the earnings conference. 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.