KB Financial Group Inc (KB) 2009 Q1 法說會逐字稿

(Interpreted). Good afternoon. My name is Kyu Sul Choi, in charge of IR Department at KB Financial Group. I'd like to thank you for participating in Q1 2009 earnings conference despite your busy schedules.

This conference is attended by investors, shareholders and market participants and at the same time we have Internet and telephone connections and is broadcast live both at home and abroad. So if you cannot be physically here with us you can connect through telephone or Internet connections. And during Q&A you may pose your questions through those connections.

We have with us the Chairman of the BOD, Mr. Dam Cho and President Jung-Hoe Kim, President and COO and Mr. Kap Shin, Deputy President and CFO of KB Financial Group.

I'd like to go over the agenda for today. The CFO, Mr. Kap Shin, will deliver a presentation on the quarter earnings and after that we will have Q&A. So if you have any questions, ask your questions during that time.

And now I'd like to invite Mr. Kap Shin for his presentation on Q1 earnings results.

(Interpreted). Good afternoon. My name is Kap Shin and I am the CFO of KB Financial Group. Now I would like to give you a presentation on Q1 '09 earnings results of KB Financial Group.

First, I will talk about the key highlights of Q1 '09 and then I will move on to key financial performance of our Group during the first quarter. Lastly, I will touch upon our bank asset quality.

During Q1 our net income was KRW238.3b. This was an increase by KRW194.4b from the previous quarter. And our provisioning expenses decreased by KRW500b. And the total assets of the Group was KRW329 trillion, which is an increase by KRW9 trillion QoQ. The bank BIS ratio was 13.16%, Tier 1 10.29%.

During Q1 we did KRW300b of rights offering and also we issued KRW1 trillion in hybrid bonds which positively impacted our net income performance. The bank delinquency ratio was 1.05% and NPL ratio was 1.41% which was a QoQ increase.

We'll move on to the details of the key highlights. In the case of the gross profit, Q4 '09 (sic - see presentation) it was KRW2.27 trillion but Q1 '09 it was KRW2.017 trillion. So it was a reduction of about KRW253b. But if we exclude the one-off items during Q4, it was KRW2.12 trillion in Q4. The main effect was the NIM decrease.

In the case of the provisioning expenses it was KRW1.18 trillion in Q4 but it was decreased to KRW685b in Q1 '09. During Q4 last year, there was about additional provisioning due to corporate restructuring which amounted to KRW420b. Therefore if we exclude this factor it was a slight increase -- decrease QoQ. But if we include this corporate restructuring provisioning factor I believe that there was a slight increase in Q1.

The Group BIS ratio was 11.45%, Tier 1 ratio 8.28%. The bank BIS ratio stood at 13.16% which is almost the same level from the previous quarter. The Tier 1 ratio 10.29% which slightly edged up from the previous quarter. ROA and ROE stood at respectively 6% and 0.36%.

Now moving on to the details of our financial performance. First, in the case of the interest income there was KRW2.55 trillion (sic - see presentation) and during the previous quarter it was about KRW1.7 trillion. So there is a gap of about KRW300b. During Q4, there was BOK deposit interest of about [KRW9.9 trillion]. Therefore, even if we exclude this factor there is a difference of about KRW200b.

Of course NIM decrease had a significant impact of about KRW200b and in February there was a smaller number of days, business days. So that was another factor.

While in the case of the bank NIM, it fell from 3.03% in Q4 to 2.7% in Q1 '09 which was a quite steep decrease. As you must be well aware our CD rate in Q4 was about 5.4% but in Q1, it fell to 2.79%. 68% of our loans is linked to three-month or six-month CD rates, which means that we are heavily influenced by CD rate movements. Also this is the same for all the other banks in the industry as well.

Our duration is a negative duration. Therefore we have a very fast NIM contraction when the interest rates are falling. And according to our current expectations, actually we have more three-month rate linked loans than six-month rate linked loans. Therefore in Q2 as well, we will still continue to feel the impact of NIM decrease or interest rate decrease.

However, we have been making some effort to offset this NIM contraction. And probably by the end of Q2, we will be able to fully cover this NIM contraction impact. And in Q4 of course, there's going to be a further decrease. However, some time during June or July we expect to see NIM starting to edge up. In particular -- of course I will be touching upon this later on, in the case of the low cost deposits, its proportion is increasing. And market rated products' proportion is currently on the fall.

Moving on to the non-interest income side, from ITC products and Bancassurance, we earn commissions and fees and they have been falling. However, they are currently stabilizing.

Also in the case of the gain on securities, in Q4 last year, it was negative KRW446b. This is because of the loss on sale of KB Financial Group shares held by the bank which amounted to KRW596b.

And in the case of the credit insurance deposits fees and -- deposit guarantee insurance fees, in Q4 last year there were some one-off income factors, such as the gains on derivatives. Therefore it was normalized this quarter because we no longer have those one-off income factors.

Moving on to G&A expenses, compared to the previous quarter, it fell significantly and there was a slight increase in the labor expenses. As you must be all aware at the end of last year, due to the ERP we spent about KRW8.8b additionally for ERP expenses. Also our performance payment was drastically reduced. So there was a reduction factor. And due to the salary freeze there was some positive impact. So if you net everything, as you can see here, labor expenses of Q4 was about KRW367b. But it now decreased to KRW390b.

In the case of the administrative expenses, it's significantly down from KRW436b to KRW321b. However, in Q4 there was about KRW60b of contributions that we made. Therefore if we exclude this factor I believe that we still have made significant savings in administrative expenses.

G&A expenses also fell. And in the case of gain on equity method investments it shows a negative KRW105b. In Q1 of this year, we did valuation of BCC and we recorded KRW100b of impairment losses from BCC.

If you look at the bank cost income ratio, it was 50.5% from Q4 but it's down to 45.4%. Even if there was a decrease in the revenue, the expenses fell at a steeper pace which made it possible to see a smaller CI ratio.

At the start of the year, expense execution is rather slower. So I believe that the cost income ratio could slightly edge up as we move along. However, we are going to continue to control this tightly.

In the case of the bank profitability, actually bank profits make up for most of the Group profits. So I would like to skip and move on to the next page, which is the Group assets and liabilities.

Assets increased to KRW270 trillion. And as you must be well aware, at the end of last year, exchange rates was KRW1,257 and Q4 it was about KRW1,400. Therefore there is an impact from this exchange rate change.

And loans increased by KRW1.6 trillion. It reached KRW205 trillion. And KRW4 trillion out of this is about loans in won. And in the case of the deposits, it increased to KRW156b. (sic - see presentation) And in the case of AUM it increased to KRW56.6b, which is an 11.6% increase YTD.

And looking at the assets, including the loans and credit card. We have in household KRW98.4 trillion and in corporate, KRW80.7 trillion which is an increase of KRW12.9 trillion. And if we break this down, SME is KRW63.8 trillion and large corporates, KRW16.9 trillion. The loans to corporates increased very rapidly, but we believe that this trend is going to slow down in Q2.

And as for deposits in won, it's an KRW11.9 trillion increase to KRW163.8 trillion and for core deposits, it's a KRW2.2 trillion increase to KRW47.3 trillion. And MMDN decreased and core deposits increased as was mentioned. And the time and savings increased and the time deposits marked KRW75.9 trillion which is a very positive sign.

And now moving on to the asset quality. Looking at the delinquency ratio at the very bottom, the delinquency ratio for household, increased by 17 bp to 0.78% and corporate up by 0.68 percentage points to 1.26% and credit card 19 bp, up to 1.65%. So the overall delinquency ratio stands at 1.05% which is up by 40 bp.

So for delinquency ratios of cards it's very stable. And in the second and third round it was 9% during the economic crisis in 1997 and 8% after that, but it's now down to 1% and 2% range. And it's now on a downward trend. And it showed stabilization in March and April. So this is again a very positive sign. And the credit cost in cards can be contained.

So overall in household, corporate as of April compared to the Q1 trend, we believe that it's going to go down further. Of course we have to wait and see. The numbers look very good but you have to be aware that there's large corporate restructuring taking place. And depending on that the credit cost will be determined.

And looking at the loan loss provisions, household it increased to KRW96b and corporate it reduced from KRW940b to KRW434b. That's because of the rating changes and the corporate restructuring. If we take out that one-timer, we believe that the loan loss provisions increased slightly in Q1. And for card, it increased from KRW64.7b to KRW90b. So total, the loan loss provision stands at KRW620b.

And looking at the reserves, the credit cost compared to the asset is 0.94%. So we gave guidance that it's going to be lower than 1% and that guidance is still valid. And household 0.4%, corporate 1.74% and cards 2.92%, which is an increase. But as was mentioned earlier, it's in a very stable period and it's even going down.

With this I'd like to conclude my presentation on Q1 earnings. Thank you very much.

(Interpreted). Thank you very much, Mr. Kap Shin. And now we'll take questions. If you have a question, please raise your hand and you will be passed a microphone. (Operator Instructions).

We'll take the first question. Yes, please go ahead, sir.

(Interpreted) My name is [Hyun Chang Sang] from Morgan Stanley. It seems that there is some asset growth. You previously said that the asset growth target for this year is a middle single digit. Therefore are you changing your target for asset growth this year? And also given the current economic conditions, don't you feel burdensome in growing your assets?

And the second question is a technical question. All of the banks in terms of their G&A expenses are showing a marked decrease. So did you make some changes in terms of the accounting for this G&A expenses?

(Interpreted). Our asset growth rate mostly came from SME loan growth. As you must be well aware, according to an MOU that we signed with the government during Q1, our SME loan growth target was about KRW1.9 trillion. So actually we over-achieved our target. And starting from Q2 probably we will try to stabilize our loan growth. That's what we are trying to do. So I don't expect to see a steep growth in assets going forward.

And in the case of the G&A expenses, well, regarding G&A, it's just that we changed our accounting standard at the end of last year. Every year we select unnecessary assets and we write them off. So there was an impact from that, although it was not a significant impact. The reason there is a decrease in G&A expenses is basically because of these reasons.

Actually we're no longer adding new SMEs. That's a primary factor. And in the case of the asset growth, our target is still a mid single digit. There is no change on that. And we will control our volume growth significantly starting from Q2. So when we give out our earnings results for Q2, probably you will see a decrease.

(Interpreted). Yes, we will take the next question.

(Interpreted). I'm from Hyundai Securities. My name is [Yoo] and I'd like to confirm some numbers.

As for loan loss, NPL sales and disposal and -- there is a mismatch of substandard and normal and between financing and operation. What's the mismatch between variable rate and fixed rate? And in January, February and March what is the trend of loan loss provisions? The provisioning for these three months, please.

(Interpreted). As for the amount of write-off, in Q1 the write-off amounted to less than KRW400b. And the ratio of variable rate and fixed rate loans we will give you the material later. I don't have the data at hand.

And as for the loan loss provisioning trend for the first three months, generally it's about one-third and in April it's going to decrease. That is the general trend. So in Q2, if there's no impact from the large corporate restructuring the number is going to look good. That is our anticipation. Thank you.

As an add on, Q1 the write off was less than KRW400b at KRW384.3b and there was no sales and of our loans, BD linked was about 6.68% the loans.

Next question, please.

(Interpreted). From Kiwoom Securities, my name is Young Soo Seo. I have several questions. First, in credit card business you said that the delinquency ratio is stabilizing, if that is the case, then were there any methods that you took to stabilize this ratio or did you adjust the credit limits?

Secondly, you seem to have shown a growth in SME loans, out of these SME loans, how much of them are guaranteed by the guarantee fund? What is the proportion?

And thirdly, isn't there a fall in margin significantly? Obviously we know what the reasons are and how is margin going to be for the second quarter? What is your forecast for the margin for Q2? Thank you.

(Interpreted). Well, in the case of the credit card, I told you that that is going to stabilize and you asked about the methods that we took to see that stabilization.

Actually, in the case of the credit limit reduction, while unnecessary limits or unused card limits has been restructured partially, but rather than that, what we try to do was for the sake of delinquency management, there was some actions that we took to better manage our delinquencies. We have stepped up our delinquency management efforts.

And secondly, the proportion of the SME loans that are covered by the guarantees and how much of an increase there was for those loans, well actually, I'm looking at these numbers in Q4 '08 compared to that of previous quarter, there is a significant increase.

I believe that it was -- there was an increase of about 15.8% in Q1 so there was an increase of 7.6% overall. And in the case of the home equity loans, it is about 23.8%. So it increased. Therefore, in the case of the SME loans as well as the proportion of the loans that are covered or collateralized is increasing.

Of course, there could be some concerns regarding the health of the SMEs but as far as we are concerned, I believe that we are having these loans that are secured and we are thinking that the financial soundness of these SMEs are not that bad so I don't see any deterioration.

And your last question was about the margin forecast for Q2. As I said previously, it can go down to 10 bp level, so if you do the calculation, it is about 2.7% or 2.6% margin that we can expect probably in Q2.

(Interpreted). Thank you, we will take the next question.

(Interpreted). Good afternoon. I'm in Shinyoung Securities. My name is [Lee Deong Gwon]. I have two questions.

We are talking about NIM constantly so I apologize for that but we believe that the duration gap will disappear in Q2 and I think you did a good job of defending but compared to other banks, there was a growth in assets so I think there was an impact somewhat. There could be some industrial hazard employment insurance and so I'd like to know the exact impact, so duration gap and other factors may rebound in about the June time, that is inevitable.

So depending on how you increase the loans, that may change the outcome and according to the media, you could take some measures to match the assets. And looking at the rate of recovery in Q3 and early Q4, you have a lot of assets coming to maturity and we are sure that it will recover -- the economy will recover in Q3 but we are not sure about the rate of recovery so I'd like to ask your outlook on that.

The second question is for asset quality for banks and for credit card companies at the end of March, the delinquency ratio has come down somewhat and we do see some positive signs. So we become hopeful but we have to get to the bottom of this and find out the reason why before we get our hopes up.

So for SMEs, it is the same and it is not shown on the indicators yet but maybe we had excessively gloomy outlook so that's why it looks better or is this showing real signs of recovery so I'd like to get your objective opinion on this.

(Interpreted). Yes, for the issue of regarding the margin, the volume growth may have been hurried but 1% or 2% volume growth will not affect the NIM that much.

Then there's the duration gap and CD linked rate and we have the 3-month duration and we have some 6-months duration. We have the 3-months duration that are over with so we have to deal with some 6-month duration. And with the financial crisis, immediately, we took policies to expand our margins and so for the renewed loans, we could carry adequate level of margin so I think we got -- we received some impact from those measures. And if the economy turns around, we don't think that the economy will rebound with such great force.

For cumulative assets, the spread is -- was about 1% after the crisis and it is now back up to about 2% level and NIM, I think we are confident that it is going to get healthier and go up.

And as for the funding costs, the financial institutions are not engaged in volume competition and there is little likelihood in the future. So, the funding cost, I believe will continue to go down and will help the NIM recover.

(Interpreted). We are ready to take other questions.

(Interpreted). From Daiwa Securities, my name is Lee Chang Hee. Well, from the perspective of a bank, you can do lending to post growth and can you talk about your forecast in different segments especially given different types of economic scenarios for the future? Which segment do you see most promising for instance, SME or large corporate segment? Probably there is difficult for you to land more so the point of my question is as follows, LTV is low and our current economy probably needs to be further stimulated sometime in the future.

If that happens, because you have the largest exposure to mortgage and loans, so home equity loans and mortgage and loans, or household loans. Do you still see some room for further growth of your assets? And if you are not that negative about the future economic outlook, do you see further growth in those household loans in terms of the home equity loans and mortgaging loans especially given the risk appetite that you have?

How much are you willing to go?

(Interpreted). As you are well aware, given the current economic circumstances, aggressive volume growth is very unlikely for us.

If the economy starts to show clear signs of recovery and if the credit cost stabilizes, until then, probably deleveraging is a better way for us. But if everybody is going to go for deleveraging, then the economy could further slow down, so probably we cannot do so but I believe that we will probably see it hold on to the current status quo in terms of the asset growth and we will wait and see how the economy moves in the future.

I believe that asset growth is probably the most optimal and phenomenal GDP growth rate. Given the current situation, what we feel in our gut is that growth was too much in the real estate sector, therefore as far as the real estate sector is concerned, we will control our asset growth. And in segments other than the real estate sector, once we complete a restructuring process, probably in the manufacturing sector, there will be more active corporate activities. There will be -- therefore we will see some growth in that segment. And in the case of the LTV we do not intend to relax our current criteria.

(Interpreted). Thank you. We will take the next question from Mr. Philippa Rogers from Goldman Sachs. Please go ahead, sir.

Yes, I have two questions for you. But first, good afternoon, Kap Shin. The first question I have on the mismatch on the interest rate side, when that falls out of your balance sheet come this summer, does that imply that you are looking at a stabilization of margins or actually an uptick in margins?

And the second question is if we really are looking at a more stabilized economic environment, is the stability now sufficient enough for you to start refocusing attention on growth and what I mean by that is inorganic growth with potential consolidation in the landscape domestically?

(Interpreted). Thank you, Philippa, for your excellent questions. As for the mismatch, the margin may turn around and does this mean an uptake or does this mean stabilization of the margins? That was a very specific question so yes, it does mean an uptake.

For new spreads, it is not sufficient but compared to past, we have more -- substantially more so it will mean an uptake. And as for the second question, Mr. Kim will answer.

(Interpreted). We don't know how much the economy will pick up again but speaking from a conservative point of view, we want to manage our assets still conservatively and there will be no instant volume growth or anything like that.

What is the possibility of M&A in better times? If the times are like this, it is very difficult to talk about M&A at all, but in Q3 or in Q4, if the economy stabilizes and if the results come out better, then maybe we could consider the possibility.

(Interpreted). Thank you very much for your answers.

It seems that there is no further question -- we have a question through telephone connection.

From UBS Securities, [Kim So Young], please go ahead.

(Interpreted). Hello.

(Interpreted). Hello, yes, please go ahead, madam.

(Interpreted). With regard to BCC, I have one question and I have also another technical question. In the case of BCC, probably you could be doing a write-down or you could make additional investment there.

I understand those are the plans that you have, but when is the timing of you going in there and how much money are you talking about for investment? The Kazakhstan authorities are constantly recommending increasing ratios of banks so can you please comment on BCC?

And next, you said that you increased guarantees on loans and what is the amount of the contributions that you made extraordinarily in Q1 to this fund? And did you take an equity position or are you thinking of amortizing or depreciating this on a multiyear basis in terms of accounting posting?

(Interpreted). Regarding the BCC, we recognized KRW100b in impairment loss. Actually this compared to the book value versus the share value, there was a gap so we recognized KRW100b in impairment loss. And prior to the end of May this year, we are going to make a further investment of about KRW120m so that we can become the largest shareholder in BCC and until February 2011, we are going to expand our equity share to 50.1% level.

I know that some of the investors have concerns on our investment in BCC, however, as far as we are concerned, there is no reason for having any concerns.

Last year, there was about 6.2% of asset growth last year and their asset quality is quite sound. NPL ratio is around [2.3%] which means that BCC is quite sound in terms of asset quality compared to other banks there so we are not concerned.

Regarding the loans, guaranteed, what was your question, the increased amount --

(Interpreted). No, I wanted to know the amount of contribution that you made to this and have you put this in accounting?

(Interpreted). Well, we do not have the numbers with us now so we will address your question later on with the [three] numbers, we will give you an answer later on from the IR team. Thank you.

(Interpreted). We believe there are no further questions. With this, we would like to conclude Q1 '09 earnings conference call of KB Financial Group.

The presentation material and the video will be uploaded on the IR page of KB Financial Group tonight so you may access the materials starting tomorrow morning. And if you have any further questions, please contact the IR department, we will do our best to answer your questions.

Once again, I'd like to thank you for your participation. 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.