KB Financial Group Inc (KB) 2009 Q3 法說會逐字稿

(interpreted) Good afternoon. I am Kyu Sul Choi, the IR team head of KB Financial Group. Thank you for attending KB FG's third quarter earnings release despite your busy schedules. The KB FG third quarter earnings release is broadcast live via webcasting and phone line. During the Q&A session you can ask questions via the phone line. Along with CFO Kap Shin, all of the management of KB FG are here for the earnings release. The agenda for today's earnings release will consist of our CFO Kap Shin walking us through the Group 2009 third quarter earnings release. After the presentation we will have a Q&A session, so please hold on to the questions until the q and a session and use the phone line. Now KB FG CFO Kap Shin, will walk us through the 2008 third quarter earnings release.

(interpreted) Good afternoon. I am Kap Shin, the CFO of KB Financial Group. Now I will begin the presentation on Q3 2009 of KB Financial Group's earnings release. I will first go over the Q3 2009 key highlights and go over main financial performance and follow that by Q3 Bank asset qualities.

As of September 30, 2009 cumulative net income was KRW522b, which was a fall from KRW1.3 trillion year-on-year. That is because net income decreased due to the economic slowdown and NIM was very low and credit cost was relatively higher. And NIM in Q3 was 2.2% which was a slight increase by 4 bps. And total assets of the Group stands at KRW331 trillion. The Bank's BIS ratio is 13.85% and Tier 1 10.65%. And delinquency ratio was down by 0.04 percentage points and the NPL ratio rose by 0.07% quarter-on-quarter.

The gross profit was increased to KRW1.625 trillion. That is due to a slight increase in NIM. And compared to the past quarter there were several negative one-timers, but the effects were gone, so the gross profit was increased. And the details will be explained later. Provisioning expenses were similar to the previous quarter at KRW552b. Of course the level is similar but NPL ratio 1% had to be met by the end. So we started adding more provisions, about KRW40b. And if you take that out, it is similar, or so the provisioning which was very high in Q4 2008, you see a steady decrease. And as for net income, top line has been improved and the net income is increased by KRW64b to KRW174b. I will not go over the BIS and TCE, but the ROA and ROE are similar to the previous quarters.

And now the financial performance for Q3. If you look on the graph on the right-hand side NIM increased by 4 bps. And as was mentioned, there were negative one-timers excluded. So we have normalized non-interest income. And the details will be mentioned later. As was mentioned, NIM was improved by 4 bps. In Q2 we hit bottom at 2.16%. It was a turnaround for this quarter for NIM and at the end of the quarter in September it was in the range of 2.3%. Our expectation is in the fourth quarter NIM will reach a 2.5% range. That is our expectation as of now, for the fourth quarter.

Looking at the Bank's non-interest income, it is KRW163b, because we have the non -- negative one-timers effects that are out. And we have an increase in the non-interest income coming from ITC products and bancassurance. And looking at the SG&A expenses, in 2008 in Q2, Q3, Q4, the SG&A expenses were in KRW900b range. And this year we have been maintaining the expenses. And it is in the mid of KRW800b range. But despite that, in this graph on top the cost income ratio has steadily increased. That is because the non-interest income is weakened. That's why we have a high cost income ratio. And with the improvement of NIM that is showing some signs. And NIM is expected to improve faster, so next year the cost income ratio will be down to 40%. It will be in the mid to latter half of 40% range, starting next year.

For the Bank profitability overview, because it is similar to the Group's profitability overview, I will skip this slide.

Now, let's go to the Group assets and liabilities. And for the Bank it's KRW279.4 trillion, and KRW2.3 trillion for KB Life Insurance. These are the growth of loans in won and credit card assets in the third quarter it went down KRW0.6 trillion, so it's KRW190.1 trillion. It seems to have gone down, but we had issued KRW1.8 trillion of NBS, so it seems to have gone down. But when we take it into consideration, KRW1.2 trillion has gone up for Household. It went down KRW1.2 trillion, so it's KRW97.3 trillion. And because we issued KRW1.8 trillion of NBS, it went up by KRW1.6 trillion. For corporate loans it went up by KRW1.6 trillion posting KRW81.5 trillion. It went down by KRW1 trillion for large corporations and KRW0.3 and KRW0.4, the SMEs and for the SOHOs.

Credit card is similar to the last quarter. And these are the deposits and debentures in won, the deposits in won. In the third quarter it went up by KRW2.4 trillion to KRW172.7 trillion, 8% year to date increase. To note for the positive it went up by KRW2.2 trilllion, posting KRW52.3 trillion. (inaudible) deposits went up by KRW5 trillion, and the time and savings deposits went up by 7.5%, posting KRW90.8 trillion. However, for marketable deposits and debentures in won it went down respectively by KRW11.3 trillion. To note we want to increase the deposits by the customers and we went (inaudible) actually decrease the market funding.

Now for asset qualities. Delinquency ratio is going down gradually. It was 0.8% in the third quarter. It went down by 4 bp for households, 55 bp, it went down 6 bp quarter-over-quarter. Corporates went up slightly, went up by 3 bp to 1.02%. For credit card the delinquency ratio went down substantially. Because of the write-off effect, it resulted to 13 bp. And because we had improvements in our asset quality, the credit card delinquency ratio increased greatly. The normal payment rate is the highest in the third quarter after the financial crisis. And the credit card normal payments are actually improving day by day.

Next are the bank provisions and coverage ratio by sector. The household loan loss provisions are going down. For the corporate side it has gone up slightly. But as I before mentioned the NPL 1% has to be met by the end of this year. So in the third quarter we had KRW40b of extra provisioning. So excluding that it is similar to the level of the second quarter. The credit card provisioning amount went down.

Last page is the Bank provisions. The credit cost for the Bank is 0.7% compared to the total assets, 70 bps as we had mentioned from a long ago, normalized credit cost is about 45 bp to 55 bp. We hope to see improvements in the future. And for the household credit cost it's 30 bp and it is going down consistently. For the corporate LLPs it's 1.25% and for the credit card LLP it's 2.58%. The credit cost, although not at a bad pace, is improving. And we believe that we will have better credit costs from next year although the speed may not be very fast.

To recap the NIM that has been going down is showing signs of recovery. And we believe that the NIM will recover at a fast pace for the next quarter. So we believe that we will see evident top line improvement next year. And non-interest income is being normalized and next year in the cost side we believe that in a limited scope the costs will go up. And we believe that the provisioning will continue to go down as long as the economy improves. So we believe that next year we will show you much better figures compared to this quarter.

I will end my presentation, thank you very much.

(interpreted) Thank you very much for the presentation. And now we will take questions. (Operator Instructions). In the case of Internet casting there is a 20 to 30 second lag, so we will wait for the questions to come in. We will receive question from Goldman Sachs, Philippa Rogers. Please ask your question.

Good afternoon, Kap Shin, thank you for taking my call. I have two questions for you. The first is, could you give us some guidance on what you think the incremental credit cost or provisioning will be to get the NPL ratio down to 1% by the end of the year?

And my second question on margins, could you again repeat the guidance for the margin. Was that 2.5% for the end of this year? Or was that guidance for 2010? If you could just clarify your guidance, thank you.

(interpreted) Thank you very much, Philippa Rogers, for your insightful question regarding the credit cost. In order for us to meet the 1% NPL, as aforementioned in the third quarter we had provisioned extra KRW40b of provisioning. And for the fourth quarter the credit cost line will take in KRW100b. And we will need to accumulate KRW100b more. And in the case of NIM, I mentioned that in the fourth quarter we hope that it will be 2.5%. So at the end of this year we would like to see and we believe that 2.5% NIM will be achieved.

(interpreted) I hope that answers your question. We will wait for the next question. We'll take the next question from [Kim] Securities, Mr. [Toyong Su].

(interpreted) Good afternoon, I am from Kim, Toyong Su. I have two questions. The first is you talked about the increase of NIM. But compared to the other banks, this is smaller than other banks'. So what could be the reasoning? And if that is the case, if that NIM increases by smaller margin in Q4 or in 2010, you -- do you expect the margin to grow by a larger amount? And you swapped treasury stocks with POSCO. And is this going to continue? How are your plans for sales of your treasury stocks?

(interpreted) Thank you very much. The NIM increment may be slight, you said, but the NIM fell slower than other banks'. That is because in operation and in funding we are biased to more long-term positions. And so the other banks have a V-shaped curve of NIM movement. But we have a U-shaped NIM movement. And in Q4 NIM will grow and it will continue to grow throughout next year. And during a certain quarter in 2010 we expect the NIM to grow to 3%. So we do have a lot more room left for the NIM to grow. And as for the plan, we're selling treasury stocks after the rights offering we did an equity swap. And until the beginning of next year we will not engage in these activities unless they are strategic investors for exceptional cases like POSCO.

And as for what we'll do next year, we will have to keep an eye on what the market will be like in the M&A space. And if we do conduct M&A we will need the money and in that case we will be able to use the treasury stocks one way or another. Thank you.

(interpreted) Thank you very much for your answer. We will take the next question from [Daichin] Securities, Mr. Trey Jong.

(interpreted) I am from Daichin Securities, my name is Trey Jong. I have two questions. Margin is margin, but I believe that asset qualities is not improving as much as other banks', and I am curious about that, the reason why. And the second is in the third quarter, because of equity method evaluation there were some losses. And is it because of BTC? And I'm curious about what's happening at BTC.

(interpreted) To improve the asset quality, regarding whether our improvement is lower than other banks' we are not informed of the asset quality improvement ratios of other banks. And I believe that standards of accumulating higher asset quality is different for different banks. So I cannot tell you concretely. But I think that we are in the direction of long-term asset quality improvement. We will continuously improve our asset quality. And regarding the losses for equity valuation method, for the non-operating side, we acquired the securities subsidiary. And there was the goodwill. And so we are writing the goodwill off each quarter. For the third quarter there was KRW5.7b of write-offs of goodwill for the securities.

And at the bank as we launched the Financial Group, the Bank had some securities which were valued at market price and that they were encapsulated in the capital adjustment. So at the bank they saw the securities, if they saw the securities and had seen, then the Financial Holdings Group already had in its capital adjustments in its accounts. So it reverses the gains of the bank. So because of that effect the non-operating side has those types of adjustments.

Regarding the BCC, the losses in the third quarter, we did not post any losses in regards to the BCC. BCC currently is normally operating. But this year until now we haven't seen any losses as yet for BCC. Kazakhstan country risk has been quite high yet at times when the oil price was $40 per barrel. So at that time the Kazakhstan country risk was quite high. However, because of the oil price hike, the country risk went down drastically. And BCC compared to other major banks in that country, is showing the financial performance. Because of those reasons, we believe that BCC will post great results after the financial crisis effect.

(interpreted) Thank you. We will take the next question. Mr. [Hung So Kyoo] from Global Securities.

(interpreted) Good afternoon, I have two questions. To meet the 1% NPL in Q3, Q4, how much effect was going to be put on provisions? And I was wondering whether the write-back was included.

And the second question is, as for the new NPL increase, what is the trend for the new NPL increase?

(interpreted) I am very, very sorry, but the sound quality was very poor. Could you ask your second question again?

(interpreted) Yes. As for the new NPL, what is the trend for Q1, Q2, Q3, etc?

(interpreted) The numbers are with the IR department. So maybe I can share that. To meet the 1% NPL requirement was the write-back effect reflected. That was the first question. I talked about the additional provisioning that we have to do. And as for sales and write-off, in Q4 there will be an increase in sales and write-off. It will probably be double the amount that we usually sell in write-off.

And as for the new NPL, I will answer very briefly. In Q1 new NPL was KRW750b. Q2 and Q3 it was less than that, about KRW600b. That was -- that's the figure up until Q3.

(interpreted) Next question, please? From Hai Securities, [Shinju Shok]. Please ask your question.

(interpreted) Hello, I have two questions. First you mentioned the margin, 2.5%. And I'm curious about whether it's cumulative, average or as of November -- as of December. And you talked about NIM recovery next year. And I'm curious about how high the NIM can go up to.

Second question is about the M&A. There are a lot of rumors but I'm curious about your direction ahead.

(interpreted) Regarding the margin, I would like to answer to that question. And regarding the M&A, I think that our CSO Choi In-Gyu in charge of strategy can answer that question. The 2.5% of margin that we mentioned, we will be able to post. It is for the fourth quarter of this year that we expect. And regarding the NIM and how high it can go, I believe that it may go up to 3.0% within next year. But I think that's the best explanation I can make.

In-Gyu Choi (interpreted) Regarding the M&A, in September of last year after the launching of the financial group, we wanted to expand our portfolio to the non-banking sector because it was so focused on the banking side. So we are now thinking of some securities companies as potential candidates. But we are not seeing much progress. However, we are reviewing several securities companies and going forward for the banking side including KEB, that we almost signed with, we are always looking for an opportunity for an M&A in the banking as well.

(interpreted) Thank you. We will wait to see if there are any more questions. As there are no further questions we will conclude the Q and A. Please stand by until we have additional questions. We have the next question from Samsung Securities, analyst [Choi Yung Hung].

(interpreted) Good afternoon. I'm Choi Yung Hung from Samsung Securities. I have a follow-up question on M&A. You mentioned that you're interested in a couple of securities firms and the asset management type securities and their brokerage type securities companies. So if you divide the securities firms into these two types of business models, looking at it from KB Financial Group's perspective, which business model is more attractive to you? And you mentioned that you're reviewing two candidates. And so which business model are these securities firms more focused on?

(interpreted) As was mentioned they're -- I don't think it's appropriate to talk about the M&A candidates in detail. But as to whether they're wealth management type securities or whether they're brokerage houses, we believe that more synergy can be created by joining forces with a wealth management type securities firm. I mentioned that we are watching carefully one or two securities companies. And of the two, one may be closer to a brokerage house and the other may be closer to a wealth management type. So we have a couple of candidates and they have both their strengths and their features that are standing out.

Thank you very much for your answer. As I aforementioned, this has been broadcast live via webcasting. So you can always call in while another person is asking a question. It seems that we have no standing by questions. And because we have had a lengthy Q&A session, we believe that there are no other questions. So we will end the Q&A. Thank you very much, and with this we will end the KB FG 2009 third quarter business results presentation. We will put up this presentation material and video on our website. So please get access to the presentation materials and video and you can ask outstanding questions to our IR department. We will do our best to answer your questions. Thank you very much for attending our earnings release. 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.