KB Financial Group Inc (KB) 2008 Q4 法說會逐字稿

(Interpreted). Good afternoon. I am in charge of the IR department at KB Financial Group. My name is Kyu Sul Choi. I'd like to thank you for joining the 2008 annual earnings release despite your busy schedules.

As has been announced during the previous earnings conference call, the 2008 annual earnings release is attended by the shareholders and investors, analysts face to face. And this is also broadcast live through the Internet and telephone line.

If you cannot join us today in the seminar room, you can listen in via phone or Internet connection. And if you have any questions, you can pose your questions directly through the phone during the Q&A.

Today's conference is attended by Mr. Jung-Hoe Kim, Mr. Kap Shin, Mr. Byung-Kun Oh. (Inaudible) We have all the management in attendance.

Let me go over the agenda today. The annual financial results will be discussed by the CFO Mr. Kap Shin. And after the presentation, we will have a Q&A session. So if you have any questions, please wait until after the presentation is over.

And now I'd like to invite Deputy President and CFO Mr. Kap Shin for the presentation.

(Interpreted). Good afternoon. My name is Hyun Kap Shin, CFO of KB Financial Group. We will now begin the 2008 annual earnings release conference.

I will be covering the highlights of the 2008 key business environment. It will be followed by the 2008 financial performance and 2008 bank asset quality and others. That will be the order of my presentation today.

As you are well aware, year 2008 was a year of many changes and volatility. On the macro basis, the global economic slowdown was triggered by the US subprime mortgage and the global financial crisis. And Korea was no exception in the level of difficulties it had to face. And during this period there was a sudden and huge drop of market rates.

At the same time, many think tanks around the world are having to announce new downward revisions about the 2009 economic outlook every day. And, as you are well aware, the outlook that is coming out is quite gloomy.

And the fourth factor under external environment was the corporate restructuring in construction and shipbuilding industries which heavily impacted our annual earnings.

And if you look at the internal changes, the Universal Financial Group as a financial holding company was launched for KB. And we have launched KB Investment and Securities. We have also broadened our overseas network during 2008.

At the same time, we have recorded three consecutive years of NCSI, customer satisfaction index, number one position, as well as two consecutive number one positions for KCSI. In the past we have also pursued to create as much synergy as possible between the subsidiaries. However, under the umbrella of the financial holding company structure, we expect to create even more synergy effects going forward.

Against such very dynamically volatile environment, our theme for 2009 will be Challenging and Overcoming.

The net income for 2008 amounted to KRW1.873trillion. At the end of the year we had to provision additional KRW1.4trillion at the end of the year. I will elaborate on that on later pages.

Including AUM, the total assets for the Group stood at KRW320trillion, which was a KRW55trillion increase year-on-year.

The Bank BIS ratio stood at 13.20%, Tier One 9.98% which is the highest level witnessed in the banking sector as of today.

The Bank delinquency ratio was 0.65% which edged up slightly. And last year it was 0.59%.

Our NPL ratio was 1.26% which went up quite a bit. Last year it was 0.74%. At the end of last year, as you recall, there was the restructuring impact amounting to KRW420b. And, according to the forward looking criteria, we had to conduct various credit level adjustments, which amounted to about KRW210b impact on our earnings.

The Group net income was KRW1.8733trillion which was a reduction year-on-year by KRW884b. As I told you it was because of the additional provisioning.

PPOP was KRW4.3871trillion which is less than last year by about KRW536b. But in 2007 we had about KRW158b gain from the disposition of LG Card shares. But if you exclude that, the net income before provisioning still increased slightly year-on-year, if you exclude that.

We added about KRW55trillion in asset to KRW320trillion. We added securities company which added KRW2trillion additional asset.

When it comes to shareholders equity it stands at KRW18.8trillion. We are holding about KRW2.7trillion of treasury shares and we are excluding that. So if you exclude that, it's about KRW8.8b. So on the balance sheet it would be shown as KRW11trillion.

ROA stands at 0.75%. ROE 11.92%. Group BIS 11.3%. Tier 1 7.88%. As I told you before, the bank BIS stands at 13.2%. Tier 1 9.98%.

The bank's Tier 1 versus Group Tier 1 differs quite a bit and the reasons are as follows. First of all if you look at the bank, the bank is applying Basel II standards, whereas the Group is applying Basel I standards. So that's the reason for such discrepancies. As a result the risk weighted asset balance change -- discrepancy is about KRW33trillion. And also the treasury share amounting to KRW1.7trillion, from the Group, it has been subtracted from the Group asset line item. But for the bank we only reflect it 50%. That's why.

So BPS went up to KRW50,654.

If you look at gross profit it stands at KRW2.27trillion during Q4 '08. We had KRW92b of interest on reserved deposit with BOK. So if you exclude such one-off items, it's about KRW2.123trillion. During Q3 it was quite small because we had KRW85b reduction in terms of marketable securities gain and because of the additional commission related items.

But you could assume that, even if you exclude such one-off factors, we are maintaining KRW2trillion, or slightly over that amount.

And G&A expenses are being maintained at about KRW1trillion level. At the end of last year because of early retirement issues, we spent about KRW97b. So if you exclude that, actually the end of the year expense total would be slightly below KRW1trillion.

Provisioning expenses stood at KRW1.186trillion as of Q4 '08. But because of the restructuring for the corporates we had to add KRW42b additional provisioning, KRW42b. And according to forward looking criteria we had to readjust the credit grades. So we added about KRW210b additional provisioning. If you exclude the two items, it's about -- it's a lot less than that.

And the Group net income stood at KRW44b for Q4.

Let me go on to the 2008 financial performance in detail. If you look at -- that was a 4.6% year-on-year increase on net interest income amounting to KRW7.4trillion.

Non-interest income amounted to KRW1trillion, which was minus 39.2% year-on-year. As I told you before, in 2007 we had the LG Card disposal gain. That was the base effect.

Gross profit, as I told you before, was KRW8.4trillion. I won't go into this right now because I will elaborate on later pages.

And also operating income before provisioning, as it says, is about KRW4.3trillion. Compared to the previous year it's less. Again, in 2007 we had the disposable gain on LG Card shares. If you exclude that, it's actually an increase by about 2.9%.

Provisioning expense increased quite a bit by about KRW1.4trillion additional provisioning expenses. I will elaborate. And I also talked about the net income already. So I'll skip that item for now.

Let's look at the bank side interest income. As you can see on the bottom line, the interest income increased by about 3.9% year-on-year. At the end of the year NIM was about 3.30% (sic -- see presentation).

At the end of the year the CD rates increased slightly. And during Q3 NIM was 2.98% but by about 14 bps it went up. On a full year basis the NIM stood at 2.99%.

And also let me go on to the non-interest income items. First of all, compared to the previous year, we recorded about KRW444b (sic -- see presentation) for the total year, which was a reduction by about KRW227b compared to the previous year. As you know, the ITC commission came down by KRW113b.

And also under other won commissions, compared to the previous year, we saw a decrease by KRW134b. NHF fees by about KRW37b it came down. And also commission on investment it was about KRW40b. So all these commission items came down slightly on a year-on-year basis.

And when it comes to gain or loss on securities it was minus KRW371.4b. During Q4 we had to sell our treasury shares and the disposal loss amounted to about KRW556b. So, if you exclude that, it was a plus. And we had the 2007 LG Card disposition as well. So we had the base effect. So please keep that in mind.

So the total for the non-interest income is, as can be seen here, if you exclude the LG Card issue, it's about [KRW930b -- KRW998b]. And it was a slight increase actually if you exclude these one-off factors.

Let me move on to the G&A expense items for the bank. The labor expenses on a year-on-year basis increased by -- actually came down by KRW62b (sic -- see presentation) on a year-on-year basis. As you know we froze the salary level. And, compared to the previous year, we paid out less bonus. Because of early retirement we had to reflect the KRW88b additionally. And stock option, because of the lower equity stock price level, we saw a reduction of about KRW37b. So on a net basis, it was a reduction by KRW65b.

Administrative expenses increased. Here we had the welfare expenses and also other types of small line items increased as well.

The cost income ratio for the bank is shown on the graph on the bottom. In 2007 it was 43%. And in Q4 '08 it went to 50.5% which was a big increase. But as I told you before we had the disposable gain on LG Card share disposition in 2007. So if you exclude that item, you can follow the dotted line. So as you can see it's about 46.2% for 2007. And again if you exclude the sale of the treasury shares for 2008, it amounts to 48.1%, meaning that the cost income ratio went up by 1.9%.

Let me now move on to the bank profitability overview. Because -- for net income it's about KRW1.5trillion. And we had the disposition loss of KRW432b because of the treasury share sales. So if you reflect that, you can see that our net income is standing at about KRW1.943trillion.

Let me go on to the Group's asset and liability status. Kookmin Bank's (sic -- see presentation) asset and liabilities is as follows. Asset stands at KRW267.549trillion. It includes the life insurance related asset as well. And if you add other subsidiaries within the Group, entire Group's liability is about KRW267trillion. And as you can see on the bottom, if you add other AE -- AUM, it's about KRW50.6trillion. So the total Group asset stands at KRW320trillion.

And now let's look at the growth trend of the Bank's asset and liabilities. As you can see from the graphs, from Q2 the volume started to slow down. And in Q3 the growth curve is flat. And as for corporate it was a steep increase, but it began to slow down from Q2 and Q3.

Let's look at the figures for the corporate, 22.4% (sic -- see presentation) increase, so it ended at KRW20trillion.

And as for credit card, the risk is high for cash advance. So there was zero growth. And as for credit sales, the credit card assets grew.

And of the banks' assets and liabilities, the deposits and debentures in won, as for the core deposits, year-over-year it decreased by KRW0.6trillion because of the land compensation and because of the development costs that had flown in, but it exited. So that's why it's reflected on the core deposit decrease.

And the debentures in won increased to KRW38.9trillion. That's because of the capital reinforcement and in order to gain liquidity we had issued the subordinate bonds amounting to KRW2.5trillion at the end of the year. And in 2009 the asset growth is likely to slow down. And the trend is expected to continue throughout the year. So we are interested in reducing the margin, interest margin.

And now the asset quality. As for the bank's asset quality, substandard and below loans is amounting to KRW2.6trillion. It's because of the corporate restructuring and FLC induced credit rating adjustment.

And as for the loan loss reserves it amounted to KRW3.5trillion, which is an increase by KRW1trillion. And the NPL ratio is 1.26%.

Compared to the increase in the loan loss reserves, the substandard and below loans decreased. And so the NPL coverage ratio is down to 133.3%.

And as for the delinquency rate, the figures look stable. As for household the delinquency rate decreased. And as for corporate, year-over-year it was KRW0.41b in December 2007. And at the end of last year it increased to KRW0.58b.

And as for the credit card it increased from KRW1.11b to KRW1.46b year-over-year.

So overall the delinquency rate increased from 0.59% to 0.65%.

And if you look at this in the graph format, in the past the delinquency rate was high and, compared to that, the delinquency rate is showing a steady trend. It looks very stable. The NPL is high and the loan reserves are also high because, relatively speaking, we reserved the loan loss provision very pre-emptively.

And as for the provision and coverage ratio by sector, if you look at household, it increased by KRW120b to KRW202b. And because of the -- and it was affected by KRW15b. And the net increase of the loan loss coverage is only KRW45b.

And as for the corporate it stands at KRW1.471trillion and that's because of the FLC induced credit rating adjustment.

Let's look at the coverage ratio. On the right hand side, on the very bottom, if you look at the household's coverage ratio it increased. But for corporate, because of the inclusion in the NPL, the coverage ratio is less than 100.

And as for the loan loss provision, if we look at the graphs by sector, and if you look at the total -- let's first look at the total. The credit cost is 0.72% out of the total asset. When we are doing our IR activities, what is the normalized credit cost? And the answer was always in the 0.5% range. But because of the bad economic recession it's 0.72%. And it's not as high in respect to the economic recession.

And if you look at the provision by sector, the corporate provision is increased greatly. But this is a pre-emptive measure taken by the Group.

And this year how much will the loan loss provision be? What is the outlook? It's very difficult to predict. But it will be in the range of 0.72% and it will not deviate that much from that range.

In 2009, KB Financial Group has the financial management strategies. If we take into consideration the economic condition, in 2009 we plan to build a platform for continued growth through quality driven management. We believe this is timely.

And we are focusing on four areas. First, Group synergy maximization. We want to build a platform for maximizing Group synergy and we share the customer base and distribution network. And we will share and utilize these resources amongst the subsidiaries. And because of the situation, which is very dire, we will focus on risk management so that we'll be prepared for future sustainable growth. And it is likely that the revenues will be hard hit. And so we will have to focus on enhancing cost efficiency.

And in the M&A market, corporate restructuring will be finalized. And it will lead to financial restructuring. And so, if there's an opportunity for M&A, we will not be too aggressive, but we will take into consideration the situation we're in. And we will take flexible measures.

And on the last page I'm sure you can understand the details. So I will not go into detail. Thank you very much.

(Interpreted). Thank you very much. That was the earnings presentation by our CFO. We will now begin the Q&A session. (Operator Instructions).

(Interpreted). My name is Chang-Bae Yoon from Hyundai Securities. Thank you very much for the earnings presentation. I have the following two questions. First of all, what do you mean by pre-emptively dealing with these challenges, because you have precautionary loans and -- are you saying that some of those precautionary loans have become just NPL altogether? Or are you just simply keeping the grade, but you just simply provisioned more?

And also I'm wondering have you had more sales or write-offs on the existing assets? So I would like to also ask about your future plans, about possible disposal or write-offs on your existing assets.

(Interpreted). Let me answer that question. When we mean pre-emptive measurement in terms of provisioning, it's as you have specified. Even if we have precautionary loans, if we feel that this year will be more challenging and on particular precautionary loans we might actually be more conservative and provision more.

Or even with these precautionary loans, if they have some other countermeasures in place we deal with it in positive manner, but sometimes we would downgrade it even further if necessary.

We are provisioning additional KRW420b for the restructuring of the corporation. Aside from that restructuring companies, additionally we are pre-emptively and conservatively provisioning additional KRW200b for extra provisioning.

At the end of last year in the amount of about KRW170b we had the sale of some of our assets. And also regarding write-offs and sales generally speaking we do not have any particular plan to conduct a major one. But generally speaking once in the first half and the second time in the second half, we are usually typically conducting such write-offs or sale of some of our assets.

(Interpreted). If I may elaborate slightly, during Q4, as was mentioned by our CFO, including the sale of the loans the total sale and write-off for the fourth quarter was KRW620b.

(Interpreted). Next question please. There is a 30 second delay on the Internet website. We'll take the question from behind, i.e. Chang Lee from Daiwa Securities.

(Interpreted). You talked about the 2009 outlook and the credit cost percentage guideline. You talked about 0.72%. If possible could you give us a line of reason why you came up with the guideline of 0.72% for the 2009 provisioning?

And in consideration with the capital increase, many financial holding companies are going with Tier 1 and you talked about the treasury stock. It's not -- I don't know if it's Basel I compliant or compliant with other standards. I was wondering what is the adequate level according to other standards.

(Interpreted). As for the credit cost in 2009, I mentioned 0.72% of the total asset. And I said that we will not deviate greatly from that range and that is our expectation.

And the reason why we are thinking that is because currently as was answered previously, we are pre-emptively reserving the provisions and there is a talk -- there's talk of secondary corporate restructuring. And the candidates for corporate restructuring if we look at the companies, we will not need that much of an additional provision, looking at the characteristics of the companies.

And as for the shipbuilding company that is a candidate for the secondary restructuring, the provision will have minimal impact on our book. So we believe that it will not deviate too much from the 0.72%.

If the economic recession prolongs into even next year, then the situation may be different. But by the year end or by Q4, we will see some turnaround signs or signs of recovery. And if that is the case the credit cost will not deviate too much from 0.72%.

And Tier 1 ratio is Basel I compliant and that's why it is low. But putting aside the Financial Group, the bank's BIS ratio and the Tier 1 ratio is more important. So you should look at the bank's number and you should just refer to the Financial Group's number. As for the Financial Group, we can only use Basel 1 as our standard.

(Interpreted). Yes, I would like to ask one more question.

Regarding NPL ratio, I believe that -- of course you cannot accurately predict the future. However, as the holding company continues to manage the bank I believe that you would have some type of threshold for the NPL ratio, so that if it exceeds certain threshold you would get involved even more. So do you have such a level?

For instance is there such a hurdle rate, so if it exceeds that rate would you actively and aggressively write-off and such? So if there is any such benchmark ratio please share that with us for NPL ratio.

(Interpreted). Yes. In the case of the NPL ratio it's moving beyond 1% range as we speak. Already internally we are sharing the sense of urgency. So we are focusing a lot of our attention to this matter so we are closely monitoring the situation.

Of course we're not too concerned about the rise of the NPL ratio absolutely but we are more concerned about the economic cycle. And accordingly, we are closely monitoring the NPL ratio accordingly. Thank you.

(Interpreted). We'll take the next question. It's from Seo Young Soo from Kiwoom Securities.

(Interpreted). Good afternoon. I am from Kiwoom Securities. My name is Seo Young Soo.

KRW420b of provisions was reflected. And when you reflected this for corporate restructuring, what is the exact exposure to the companies? Could you please share the details with us? And if not by individual companies, could you give an overall statement? And how did you pile up the provisions? I would like you to elaborate on this.

I think it's the same for KB Investment & Securities. I think it also has companies that is interested in restructuring. And I was wondering how it built up the provisions.

And the last question is for the delinquency rate or the BIS ratio, the trend -- the situation is not very good. And other banks are turning to state owned BCC. So shouldn't KB Financial Group also increase capital against this context?

(Interpreted). As for additional provisioning we allocated KRW420b for corporate restructuring. The construction company and shipbuilding company we had total exposure of KRW2.2 trillion. And the [SSS] has a guideline of you should have how much provision for Level C and Level D. And we abided by that standard and we had reserved the maximum amount.

And you asked about BCC. As you are well aware, Kazakhstan's delinquency rate increased and the housing price fell. But the status of the bank is very good for BCC, if you consider the situation in the nation of Kazakhstan. Even despite the high level of provisions there was a high level of profit in Q4.

And the FX liquidity in Kazakhstan is very worrisome. This year compared to the demands, the available foreign currency is only 15% and many banks are in a situation like that. But to the contrary BCC only has to pay back KRW93m -- sorry $93m and $707m will come in. So in this market BCC has a high foreign currency liquidity and can make profit.

And some of the banks have received government funding. Number one to number four, construction companies' exposure was very high for these banks in Kazakhstan and they were non-performing. But BCC had little exposure to the ailing construction companies. So in our opinion, relatively speaking -- of course we cannot be worry free. But in Kazakhstan I think BCC is faring well.

(Interpreted). I hope that answered your question.

We will proceed with the next question. Those of you with questions please raise your hands.

Yes, sometimes during these earnings conference we receive very few questions. But you might actually think of additional questions afterwards. So I would like to also remind you to once again raise your questions. Let us wait for the next question.

I believe we have one question pending by phone, so please bear with us.

Hello? Yes, we'll take the next question from Credit Suisse, Mr. Ha. Please go ahead, sir.

(Interpreted). Yes, I have a question about asset quality. Right now, the NPL the total amount compared to the third quarter has gone up quite a bit. And you said the sale and write-off amounts to about KRW700b. So if you add even that the new NPL formation amounts to about KRW1.7 trillion. So I'm just wondering what the breakout or the composition of such NPL is.

And could you share with us how much of that comes from the restructuring companies, in the shipbuilding and construction and how much of that comes from FLC adjustments? And also the breakdown information would be appreciated.

And the new NPL formation, it could have come from the precautionary loan category, but sometimes I believe that some loan items would come from the normal bracket right away to NPL. So I'm wondering how much of that proportion took place during Q4, normal to NPL.

(Interpreted). I believe your question was quite technical. First of all, thank you very much for your question. Unfortunately such detailed information is not here with us right now. So I would like to ask you to contact our IR department so that we could provide you with the more detailed numbers.

(Interpreted). Regarding the new NPL formation, as was mentioned by our CFO, we will provide you the extra information.

Next question please. Philippa Rogers from Goldman Sachs. Please go ahead, sir.

Yes, can you -- Hello?

(Interpreted). Yes, please go ahead.

Yes. I have a question on BCC.

Could you give us the outstanding goodwill that is currently held on balance sheet, what you anticipate that will be in 12 or 24 months time, once the 50% stake is completed and if you have any anticipated write-downs of that goodwill pending? Thank you.

(Interpreted). Regarding your question about the goodwill, I'm not exactly sure as to the exact amount of the goodwill amount stated on the balance sheet.

But when it comes to BCC we have invested about US$73m. So in our view I believe that it's about -- in Korean won it's about KRW80b.

And your question had to do with the reaching of the 50%. I believe your question was the amount of goodwill in case we reach 50% share proportion.

Yes, that's correct.

(Interpreted). Now first of all we're not exactly sure as to how much additional investment we will be making at which particular juncture. So I believe that we would have to wait until the actual investment is made because there are some events that could actually impact the pricing as well. So unfortunately we cannot share with you all those information.

(Interpreted). Next question please. From HSBC, [Seo Hyun Park], please go ahead.

(Interpreted). Hello, I would like to ask about the capital size. From the financial holding group level you said that -- you shared with us the data at the -- with the BIS standards. And as for future M&A is there any need to reinforce capital at the financial holding group level and do you have any schedule for treasury stock buyback?

(Interpreted). The BIS ratio is 13.2% and Tier 1 is 9.8%. And even when the asset quality goes down I think the BIS ratio is sufficient.

We do not have immediate plans to increase capital. We have to but prepare for the future so if there is a very promising M&A candidate out in the market then we will use our treasury stocks or we may ask consensus from the investors and we may increase capital. That's for the future. But as of now, we have sufficient capital in our opinion.

(Interpreted). Yes, we have no more questions pending online or in this particular conference hall as well. So we would like to conclude today's earnings conference. The presentation material that has been shown today as well as the VOD will be posted on the Internet so that you could always revisit these information. So those of you who have not had an opportunity to raise questions please contact the IR department if you have any further questions.

Once again, thank you for taking part.

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.