KB Financial Group Inc (KB) 2009 Q2 法說會逐字稿

(Interpreted). Good afternoon. I am Kyu Sul Choi, of the IR Department of KB Financial. I'd like to thank all of you for attending the 2009 first half earnings release of KB financial. This investor earnings release is attended by shareholders, investors and other market participants. Those of you who are not able to attend physically, it is being broadcasted live through Internet and telephone connections. So although you are not able to be here physically with us, through internet and phone connections, you will be able to take part in our earnings release and you can also ask questions through the internet and phone calls.

This earnings release is being attended by Mr. Jung-Hoe Kim, President and COO of KB Financial, and Mr. Kap Shin, CFO and Deputy President of KB Financial. Let me give you a brief overview of today's schedule. First of all, our CFO, Mr. Kap Shin, will deliver a presentation on the earnings release of the first half of this year and afterwards we will open the floor for Q&A. So if you have any questions, please ask your questions during the Q&A session. And now Mr. Kap Shin, our CFO, will deliver a presentation on the earnings result of the first half of '09. Thank you.

(Interpreted). Good afternoon ladies and gentlemen. I am the CFO. My name is Kap Shin and I'd like to give you the earnings release of the first half of 2009 of KB Financial Group. I'm going to talk about the highlights of the first half of the year and the financial performance of the period and then I'm going to talk about the asset quality of the Bank during the period.

In the first half of 2009, the net income of the Group is KRW348.3b and is decreased by KRW913.1b year on year. The reason is due to the economic slowdown triggered by the global financial crisis in the second half of 2008, and the provisioning expenses rose, and also the net interest margin decreased considerably and this led to lower revenues.

AUM and trusts included, the total assets of the group stands at KRW333 trillion. And the BIS ratio is 13.65% for the bank and the tier 1 ratio is 10.44%, which shows a very stable capital base. And the Bank's delinquency ratio went down considerably to 0.84% and the NPL ratio decreased slightly to 1.34%.

Looking at the gross profit, excluding the one-off item from the 4Q last year, we maintained a level of KRW2 trillion. But in the second quarter of this year it was KRW1.49 trillion and it decreased by more than KRW530b. That is because the NIM decreased by 54bp and so there was a loss of KRW300b, and in the non-interest income, we have lost KRW220b, and in the derivative products the valuation gain was large and -- sorry, the valuation loss was huge and I am going to give you the detail later.

And because of the restructuring, if we take out the KRW400b we had the KRW766b of provisioning expense in the fourth quarter but in the first half of this year we had KRW685b in the first quarter and KRW556b in the second quarter. Group BIS ratio was 12.11% and the tier one ratio for the group was 8.37%, the bank's BIS ratio was mentioned. ROE is 4.34%, ROA is 0.26% and they have bottomed out.

And looking at the financial performance, I'm going to give you the Group profitability overview, profitability analysis, the Group assets and liabilities and then followed by Bank assets and liabilities.

As was mentioned, the net interest income decreased by KRW300b. That's because the NIM decreased by 54bp in this quarter and our non-interest income decreased greatly from KRW264b to KRW41b.

When we acquired the shares of PCC, we wanted to pay in the Kazakhstan currency of tenge and we swapped that with the dollar first and then with the Kazakhstan currency and there was an offset, but looking at it on a quarterly basis, there was a fluctuation due to the FX ratio. So there was valuation loss and I'm going to talk about this later and you can expect this to turn around to a positive figure.

And covered bond of KRW1 trillion was issued, five-year maturity. And it was issued in the first quarter and when we are issuing the bond, the underlying asset was denominated in the won currency and the bonds were issued in the overseas market. And there was a derivative and even if Korea defaults the repayment can be made to the investors. So we have linked the derivative products that can protect the investors. And the valuation loss was KRW95b so there was this absent fee for the covered bond.

And looking at the subsidiaries, the Bank scored KRW386b of net income and investment securities minus KRW12.5b of net income. We had PF loans and some of them went delinquent and we had to have provisioning and we are in this process of selling this and most of this can be released and I'm going to cover the items line by line in the other slides. Looking at the graph on the right hand side, this shows the NIM downward trend and it went down to 2.43 on a cumulative basis and 2.16 on a quarterly basis.

And our assets are being repriced very quickly but the CD rate was 5.3% and it went down to 2.5%. And as the assets are being repriced, the profitability went down. And on the funding side, because of the negative situation in GAAP, repricing took place slowly, not as quickly and in the second half of this year, we believe there will be repricing on the funding side. And in the second half of the year, we have deposits that reach maturity and the cost is about 6% and we believe that it will be refunded at an average of 3%. So I the second half of the year, it will help the NIM recover.

And another factor is in December last year, the lending and borrowing rate margin was 0.26% but the margin is risen to 2.2% and so we have strong belief that the NIM will recover. It will recover slightly in Q3 and starting in Q4, NIM will recover quickly. It was 2.7% NIM in the first quarter. We don't think that it will recover to 2.7% in Q4 but we believe it will be close to the Q1 figure for the NIM.

And looking at the net interest income of non-banks, we see an upward trend. And looking at the next page, non-interest income for ITC products, because of the financial crisis, the commissions were reduced and starting in the second quarter, the commissions ticked up. And the reason is the stock market fared well and AV improved.

As for bancassurance, these products are sensitive to the financial crisis so they are still on the downward curve. And we recorded a minus KRW278b of other commissions and it was a minus figure in the first quarter. And we pay about KRW140b to KDIC and (inaudible) and we have the BCC valuation loss and we have also the upfront cost for the covered bond issued in the first quarter and they are all included in this.

Looking at the G&A expenses, if we add Bank and non-bank together, the cost or the expenses were above KRW1 trillion up to last year and in the second and first quarter of this year, it went down to KRW900b this year. Even though there is cost rigidity, we have paid a lot of effort and we are able to reduce the expenses.

Looking at the cost/income ratio, it is higher than 50% and as you can see, the cost came down but the top line went down also. So that is why the cost/income ratio is at the 50% level and we don't believe that it will come down to lower than 50% within the year.

On assets, there is KRW272.6 trillion and there was a KRW1.9 trillion increase compared to the previous quarter. What's of interest is that the loans has declined by KRW3.5 trillion. And loans in won, there was an increase of KRW0.1 trillion but deposits in foreign currency and core loans, that has been decreased so we have posted a minus KRW3.5 trillion.

And the case of deposits, there is an increase of KRW6.7 trillion. From January to this date there has been an increase of KRW11.3 trillion and this is of note. We have strong liquidity position as well and through this opportunity in the liabilities sector, we are going to focus on increasing deposits. I will provide further detail in the later sections of this presentation.

This is our loans in won and credit card assets. The total of this in second quarter as with the first quarter is a flat number. There has not been much difference in these. Household sector there has been a KRW0.1 trillion increase and a KRW0.2 trillion increase in the corporate sector. If you look at the corporate sector in more detail, there has been a minus KRW1 trillion in the large companies and SMEs has been about KRW1.2 trillion increase, and credit card assets have declined KRW0.3 trillion. So as you can see, we have maintained a tight control of our asset growth during the second quarter.

Deposits and debentures in won, as I've said, we have a strong growth in deposits. Especially in the core deposits during the second quarter, there has been a KRW2.8 trillion increase and in the first half there has been an increase of KRW8.6 trillion. In case of time and savings, there is a KRW2.6 trillion increase and at the core in the first quarter has been a KRW5.4 trillion. So we are undertaking restructuring of the funding side of our business. In the case of debentures, there's a decline of KRW0.9 trillion and there has been a decline of KRW3.8 as whole.

Let us look at the asset quality of the Bank. Looking at the asset quality and the loan loss provisioning status and the provisioning rates at the Bank will be explained to you in that order.

This is the delinquency trend of the Bank. It has risen to 1.05% in the first quarter but it has declined to 0.8%. Household has increased to 0.7% but it has declined to 0.61% so I think we are going back to the pre-financial crisis period. In the case of the corporate sector, it's 0.99%. Although it has declined significantly, but it still maintains a high level. In the case of the credit card business there is a slight decline with 1.62%.

Look at Bank provisions for the household and corporate sector, they are expecting this can decrease in the second quarter. But in the credit card direct sector, there has only been a slight decrease. And if you look at the coverage ratio, the household and the corporate sector have increased, but the credit card sector has declined. The credit card assets have been reduced and loan loss provisioning has been written back. And when the delinquency rate was high in the past, we can see that past delinquent assets have become NPLs.

Let's look at the credit card of the bank. During this first quarter, there has been a 94bp of credit card during the first quarter but in the second quarter, it is down to 56 basis points. About KRW42b in provisioning for (inaudible) has been added at additional provisioning and about KRW83b provisioning for sale of loan assets had took place.

We believe that the number will decrease in the third quarter and in the fourth quarter there will be a further decline. So during the first half, there has been a credit cost of 75 basis points. If you look at the household sector, the first quarter was 40bp but in the second quarter it was 25 basis points. And in the corporate sector second quarter it was dropped to [0.9%]. In the credit card sector was 2.92% but it has dropped to 2.64% in the second quarter.

Now this ends the earnings result for the first half of 2009 and we will now open the floor to questions.

(Interpreted). Thank you very much, we will now begin the Q&A. (Operator Instructions). We will take the first question. Yes, we have the first question.

(Interpreted). I am Lee Deong Gwon from Shinyoung Securities. I have two questions. One is I have a question on the NIM. You gave a forecast on the NIM trend going forward and I have several questions.

Looking at the reason why the NIM reduced slightly in the first quarter, it dropped significantly in the second quarter and why was that? Some people say that because of the six-month loans were prevalent, but inside the Bank what is your view on the significant drop of NIM in the second quarter?

And you talked about the NIM recovering in the later quarters but in KB Financial, you have time deposits of three months or six months and how much do they all charge for the total time deposits and how much do you have one year, the time deposits?

(Interpreted). Let me answer first and then the CFO will add a few comments. The NIM decreased significantly in the second quarter because of the lower interest rate starting in the last month of last year. And comparing QOQ, 50bp of NIM went down, but overall the Bank's NIM trend are similar. And in the first quarter, we had less of a drop that is why the drop looked significant in the second quarter.

And Mr. Shin talked about the impact and because of the market interest rate decrease, there was a minus 60bp in the first and the second quarter. And compared to the competitors, we have the six months products. We have more of those products so we will catch up but the catch up speed may be slower but in the fourth quarter we will be able to catch up and I believe the NIM level will recover to the Q1 level of this year.

On the funding side, we have had special time deposits giving high interest rates and those will be repriced in the second half of this year. And on the funding side, KRW48 trillion of time deposits and a total of KRW80 trillion of funds will be mature and when they are repriced in the second half of this year, the NIM will be at a very desirable level. That is our expectation. And as for the new loans, the borrowing and lending rate margin is stable at about 2.5% so we are not that much concerned about the NIM in the second half of the year.

(Interpreted). Yes, I don't have much to add to that. As I mentioned during my presentation, the borrowing and lending rate margin in the new loans is becoming wider and we have enough margin on the loans to household, and we have new loans given out and we are repricing the time deposit. So overall on the funding side, we are repricing our assets. So in the Q3, the NIM will not rise much compared to the second quarter because this is a quarter in which the rising trend and the decreasing trend are crashing, but in the fourth quarter we will have a considerable NIM recovery. And we believe in the first quarter next year we will reach 3% of NIM.

Thank you very much. We'll take the next question.

(Interpreted). For those of you who are listening in through the internet, there is somewhat of a time lag so we will wait a while. If you don't have any further questions, we will conclude today's session. If you have any questions, please raise your hand. Yes?

(Interpreted). I am from Morgan Stanley. My name is Hojoon. My question is to PF loans. Looking at the presentation, the FSS has issued a directive that NPLs should be sold with the reduction of PF loans. Do you have any plans of selling off these NPLs and what kind of impact would this have on KB Group?

And because we are heavily involved in the real estate market, what is your current opinion about the Korean real estate market?

(Interpreted). First, with regard to the PF loan, at the end of June the PF loan exposure is at KRW11.6 trillion. If you look at this KRW11.6 trillion in detail, about 70% of the loans in the metropolitan area. If you include the (inaudible) it's about 90%, and if you are look in more detail 84% of them are residential real estate so it is very stable.

As is reported in the newspapers the FSS have designated some areas as needing more control and about KRW300b of our real estate assets need such control and regulation. And we have written off or have been repaid or have set aside 100% of provisioning for these assets. For (inaudible) we have sold off only one item. So although we have a real estate asset of KRW11.6 trillion, the quality is strong and according to FSS review, we have very few of the cautionary assets.

And the next question pertains to the real estate, right, what is your view on the prospects of the real estate market? I believe that it will recover steadily and during the second quarter -- compared to the first quarter, in the second quarter we have maintained a conservative management of our real estate assets. And household mortgages in the first half increased by KRW1.6 trillion. In the first quarter, it increased by KRW1.7 trillion, but in the second quarter, it decreases by KRW0.1 trillion. So we are managing our assets in a conservative manner so that there is no bubble.

For your reference, our asset growth in the second [growth] -- in first half, we grew about KRW5 trillion and the second half our asset growth would be within that ceiling.

(Interpreted). We received a question from [Haitong Securities].

(Interpreted). I have two questions. In the non-interest income, you talked about the KRW75b in BCC and the KRW95b of covered bond. And when will they be turned into the positive number and could you explain the scheme once again?

And the second question is, of the provisions for the corporate, how much of the one-time items were recognized? Could you break them down item by item?

(Interpreted). We have invested in shares of BCC in Kazakhstan and when we are acquiring the shares initially we didn't give them in dollars but we gave them the Korean won. And the Central Bank of Kazakhstan deposited that won and so there was a complex swap of won to tenge to dollar. So KRW75b minus what is recognized in the second quarter but we believe that it will be settled soon in the second half. And as for the covered bond, the collateral is a variable asset. And the collateral as mortgage loans and we have a variable interest rate, and the investors in the covered bond has to be paid in fixed interest rates.

So there is this currency mismatch and there is the FX risk and the interest risk so we decided to hedge these two risks and the KRW95b is the hedging cost. And as Mr. Shin mentioned during his presentation, the hedging cost was recognized as the valuation loss of a derivative product. So this is a onetime loss and for the first time in Asia, not even Japan did this, covered bond was issued and this was the cost to attract KRW1b of funds.

And you talked about how much of the one-time items were recognized, I am going to look up the numbers. Please give me a moment. Yes, I have it. As for the one-timers, we have the covered bond and the BCC swap. So we had losses in these respective categories and that is why we didn't have the non-interest income. We have KRW170b that was excluded from the non-interest income. These are just one-time events. And according to the order, we had won a case in regard to income tax and as for the [Hyundai Construction], we have KRW70b and KB Life Insurance changed its status and we had also some one-timer.

As Mr. Shin mentioned, [Hyundai Construction], looking at it from the Financial Group perspective, it was KRW8.7b of gain as a one-time event. We will take the next question.

(Interpreted). We have a question from Philippa Rogers of Goldman Sachs.

Yes, good afternoon and thank you for your presentation. One question on the SME book. Could you let me know how much is incremental growth with SMEs guaranteed by the government and how much is unsecured?

And what relative margin difference between the two businesses are? Thank you.

So to repeat the question, how much of the SME loan was guaranteed by the government and how is the margin different from the non-guaranteed loan to SMEs?

Exactly.

(Interpreted). So according to the MOU, it was KRW4.6 trillion. In the second half, we were supposed to do KRW1.2 trillion and the first half, KRW3.4 trillion. And this year we have abided with the MOU with the government and that is the plan for our asset growth. And so on the loan side, according to our plan we believe the growth will be about 5%. And in the first half, we had KRW5 trillion increase, KRW1.3 trillion in household and KRW3.7 trillion in corporate and the second half, it will be about KRW9 trillion to be conservative. So a total of KRW9 trillion and a total of 5% growth. But looking at the economic situation and looking at the Group situation, we will be able to abide by the target flexibly.

And the government guaranteed loans, the CFO will talk about this part.

(Interpreted). As for the increase in the SME loans, we are providing guarantee and it is within 5% growth and in the second half of the year it will be about a growth of 3%.

(Interpreted). For your reference, even if there is government guarantee of the loan interest rate, compared to non guaranteed interest rate it is similar.

(Interpreted). Next question?

(Interpreted). Hong Yun Sook of Prudential Securities. This is a previously asked question. With regards to the loss provisioning, corporate restructuring and derivative related additional provisioning, do you have any?

(Interpreted). In the first half, provisions related to corporate restructuring as you are well aware. There has been about 40 companies that were subject to the corporate restructuring process and there were about one -- the first and second restructuring for the ship building sector and another restructuring that was undertaken by the government corporation for those with credit extension for KRW50b and less. And we have also our NPLs regarding [SanYong]. So if we add up all these, in the first half, our additional provisioning is about KRW70b.

Now what was the other question?

(Interpreted). With regards to the derivative, the provisioning gain in the second quarter, there was KRW42b (inaudible) ship building.

(Interpreted). With regards to the total derivatives risk exposure, these is about KRW10b satisfied for this risk exposure.

(Interpreted). Next question? Most of the questions has already been asked so thank you very much and we would now like to conclude the 2009 first half earnings release of KB Financial.

The presentation materials and the video can be accessed by you after today. We will upload the materials and videos on our website on KB Financial and if there is anybody who has not been able to asked their questions, please direct your questions directly to our IR dept and we will provide you with the necessary information. I'd like to thank all of you for attending today's earnings release despite your busy schedule. Thank you very much.

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.