KB Financial Group Inc (KB) 2009 Q4 法說會逐字稿

(Interpreted). Good afternoon ladies and gentlemen. I would like to start the presentation of the 2009 earnings of KB Financial Group. I will first look at the key highlights of 2009 results, followed by the 2009 financial performance and the 2009 Bank asset quality.

In 2009, the Financial Group's net income was KRW539.8b. Due to the weak economy, credit costs had increased and the NIM had contracted. These were the major reasons for the NI decrease and the NIM.

Total assets was KRW316 trillion. You can see that our BIS ratio, Tier 1 and TCE have all improved. Bank delinquency was at 0.63% and NPL ratio at 1.11%. The NPL ratios have decreased quarter-on-quarter.

These are the key highlights. The gross profit. As you can see in the fourth quarter our gross profit was KRW1.844 trillion. So we are -- we appear to have started the increasing trend. We had maintained around KRW2 trillion gross profit per quarter until the first quarter of 2008. And then it had gone below KRW1.5 trillion per quarter due to the market situation and lower margin. And now we are coming back up to about KRW1.5 trillion. We believe that this trend will continue in 2010.

The provisioning expense in the fourth quarter was KRW744b. Compared to the third quarter, the provisioning expense did increase. The major causes is the Kumho & Asiana Group's related provisioning of KRW250b. There were additional one-off provisioning made during the fourth quarter. If we exclude this one-off provisioning factor, you will see a trend that our provisioning expense has been continuously declining since the peak in the fourth quarter of 2008. In 2010, our provisioning is expected -- or we are looking forward to less provisionings.

As you can see, our gross profit has increased. However, because in the -- at the end of the year there were one-time provisioning increases, there were also some expense increases due to seasonality, our net income therefore had decreased significantly. ROA and ROE is at 0.2% and 3.2% respectively. The BIS ratio and TCE ratios have continuously been improving.

The financial performance of 2009. If you refer to the right hand graphs, our interest income in the fourth quarter improved by KRW263b quarter-on-quarter, and this is a reflection of the improving NIM.

The non-interest income was full year KRW560b, which is a considerable decrease year-on-year. The major reason for this decrease is that in 2009 there were some one-time negative impacts. About the non-interest income in 2010, we are not expecting major non -- one-time effects. So we also have a positive outlook for the non-interest income.

On the lower hand side, you have the net income by subsidiary. Noteworthy would be Investment and Securities which had a minus KRW41.5b. The major reason is the provisioning of KRW85b related with real estate project financing exposure. Actually we're expecting a large portion of the KRW85b provisioning to be wrote back. So we are actually looking forward to some -- a much better performance by the Investment & Securities subsidiary this year.

There's also the NIM graph on page six. Until the second quarter our NIM, you can see, had declined quite rapidly over a six months period. In the third quarter it started a slight turnaround. And in the fourth quarter of '09 it had improved by 41 bps. And our quarterly NIM had come up to 2.61%. We are expecting this trend to be maintained. And in 2010, on a quarterly basis, we expect to hit a 3% range on a quarterly basis. In the previous quarter's earning conference call we had expected a fourth quarter NIM of 2.5%. We've overachieved on that because our fourth quarter NIM was at 2.61%.

If you look at the cumulative, you can see the cumulative NIM has also started to turn around.

As you can see on the chart on the left hand side, our interest income increased by KRW138b. And there was a decrease of interest expense by about KRW120b (sic - see presentation). So you can see that during a six month period, the CD rates had increased by about 30 -- 300 bps. And that was the major reason for the crunch on our NIM because our funding costs had not declined as fast as the rate decreases. Now we're seeing a consistent decrease in our funding side. And we are actually seeing an improvement now on our NIM.

The non-interest income, as I previously mentioned -- on the non-interest side there are -- we are not seeing any clear signs of the improved economy being reflected on the non-interest income. We are expecting and looking forward to improvements on the non-interest income side this year.

In the ITC and Bancassurance, on the bottom of the right hand side, Bancassurance is not showing a clear sign of recovery. And even ITC, it had contracted largely in the first and second quarter. It did improve due to the NAV improvement, but I think it's a bit too early to say that it is on an upward trend. But in 2010 we will focus and look forward to improvements in the commissions and fee income this year.

If you look at the upper right hand graph on page eight, you see the Bank cost-income ratio. Because our operating profits have been improving rapidly, our cost-income ratio though did not come down during the fourth quarter, mainly because during the fourth quarter there were some KRW95b increase in expenses due to seasonality. There were overtime payments made at the end of the year, and contributions to the employee welfare fund, and increases of advertisements. These were some seasonal factors at the end of the year. And this had kept the cost-income ratio from coming down.

We are expecting the cost-income ratio to improve in 2010. We will continue to work to reduce our cost-income ratio -- our SG&A. And we are expecting our cost-income ratio to come down to 50%. Our target is to bring down the cost-income ratio to around the 45% range until year 2012.

Until the fourth quarter of '08, our G&A expense on a quarterly basis was around KRW900b per quarter. But you can see that during the first three quarters of '09, it had come down to around KRW800b per quarter. This is a reflection of our efforts to reduce our G&A expense. And these programs will continue in 2010.

The Bank's profitability is not very different from the Financial Group's performance, so I would like to skip this slide which is page nine.

Group assets and liabilities there was a decrease by KRW5 trillion because of loans in won. And credit card, although there was no decrease, the foreign currency loans decreased by KRW3.6 trillion. The foreign currency loan volume itself also decreased. And also there was the FX rate impact. And in other assets, there was decrease by KRW4 trillion. This is because of derivative assets. And we saw a reduction in unsettled spot transactions.

And in liabilities there was a decrease of KRW5.3 trillion. And in deposits there was a change by KRW10 trillion. And in derivative related liabilities they were decreased by KRW5 trillion and unsettled spot transactions liabilities also decreased. And that's why other liabilities were reduced.

And including the loans in won and credit card assets, the trend was YOY flat compared to 2008. Household loans seemed flat. RMBS KRW1.8 trillion was issued. And if we include that -- reflect that, there was a slight increase.

And corporate assets looked flat YOY. We signed MOUs and the asset growth remained flat. This is because of the deleveraging effect that kicked in due to the recession.

And in credit card the trend is also flat. Because of the economic recession there were risk factors, and so we increased new sales, credit sales. And there was a decrease in cash advance and card loans.

And deposits and debentures in won, looking at the chart on the left, core deposits increased by KRW4.6 trillion. This was a 10% increase. So this is a very good sign. And as for time and savings it increased by KRW7.8 trillion. It's a 9% increase.

And on the right hand side, the upper side graph shows that core deposits, time deposits and savings deposits take up a lion's share. It used to be 81.7% in Q4 '08. But in Q4 '09, the portion has increased to 84.4%.

And looking at the funding structure on the bottom graph, the core deposits, time deposits and savings accounted for 65.8% in Q4 '08. But this portion has increased to 7.4% (sic - see presentation) in Q4 '09. So in 2009, the funding structure has been improved. So this was a good year in 2009 in terms of improving the funding structure.

And moving on to the Bank asset quality, looking at the graph on the right hand side, the delinquency ratio in Q4 fell to 0.63%. In household, it was 0.55% in Q3 and in Q4 it slightly increased to 0.63%.

At the end of the year, there was a change in guidance for deposit collateralized loans. So there was an additional KRW64b of provision. But because the deposit is collateral, we do not expect that we will not be getting the payment back. But because the guidance changed, we added the extra provisions. And if we take that factor out, the delinquency ratio for household is 0.38%. And for corporate the delinquency rate fell to 0.56%. And in credit card it was low. It dropped to 1.08%.

And looking at the loan loss provisions by sector, household there was an increase by KRW60b because of the economic recession. And this is showing up in the 2009 figures. But the KRW60b increase is not something that we are concerned about.

And as for corporate there was a decrease by KRW900b -- KRW90b. And we believe that things will improve this year.

And as for credit card, there was an increase by KRW145b. The absolute amount is not large at KRW282b. So credit card provisions is not worrisome.

And as for the coverage ratio it increased by -- it increased to 153%.

And looking at the credit cost, it was 0.73% or 73% to total assets. We consider it normal to be in the range of 45% to 50%. We believe that we will approach the normalized credit cost this year in 2010.

And as for household it was at 27 bps, which is a slight increase, but still it's very low.

And for corporate it's 1.38%. And we believe this will come down in 2010. It increased at the year end and this is because of the provisions related to Kumho Group. So if we take that into consideration this was not a considerable increase.

And as for credit card LLP we see a downward trend. Nevertheless on a full year basis it was 2.29%, and this is higher than the previous year 2008. So we believe and we expect that the downward trend will continue.

With this I'd like to conclude my presentation. And as a recap in 2010, the NIM will steadily improve. And we believe that there will be a strong momentum in gross profit and in the top line. And we will control SG&A. So the cost-income ratio will come down to below 50%. And we don't see problems with that. And provisions will be decreased, that is our expectation. So the bottom line in 2010 looks sound, and that is our expectation.

With this I'd like to conclude 2009 financial results presentation. Thank you.

(Interpreted). We'll take the first question from Kyobo Securities. Mr. Hwang Seok Kyu, would you like to go ahead sir?

(Interpreted). Yes, good afternoon. I have three questions.

About the NPL, there is the 1% --

(Interpreted). Excuse me sir. Could you speak a bit away from the telephone? We're getting a bit of an echo here.

(Interpreted). I have a question about the NPL guideline. What is the impact that that guideline had in your bottom line in terms of provisioning expense as well as the non-interest income? It seems that your nominal default rates have decreased. Delinquency rates have decreased. But what is the real delinquency rates doing and what are your outlook there?

Related with taxes, the pretax is [KRW401.5b]. But there's a minus if you put that on a post-tax basis or after tax basis. Could you explain why that happened?

(Interpreted). About the NPL guideline, because of that on a net basis, there was a KRW100b additional provisioning that occurred. And we think that the impact on the non-interest side was about KRW40b to KRW50b. So on a net basis, because net is KRW100b, that would be the answer to your question.

The second question was about the real delinquency ratio trend. The real delinquency ratios on the household side versus corporate, both household and corporate are increasing slightly. Credit cards real delinquency ratios have slightly decreased. If you need the details we can forward them to you separately.

You've also asked about the tax. I couldn't understand the point of that question very well, I'm sorry.

(Interpreted). Your pretax net income is [KRW41.5b] on a consolidated basis. Well, it's the Group net income or gross income. There was a tax refund of KRW93b during the third quarter. Were there one-offs during the fourth quarter related with the tax?

(Interpreted). During the fourth quarter I don't recall any special tax related one-offs during the fourth quarter.

(Interpreted). Thank you.

(Interpreted). If I could add a bit about the real delinquency ratio. The real delinquency ratio, as you know Mr. Hwang, is as of end of -- there are many ways. You could do it at the end of the year, or you could do that quarterly and reflect the sales and write-offs. We monitor the quarterly closing.

The real delinquency ratio, on the household side during the third quarter real delinquency ratio was 0.65%, and at the end of fourth quarter it was 0.85%. In the corporate side at the end of third quarter it was 1.39%, and fourth quarter it was 1.56%. Credit card was 2.62% at the third quarter and fourth quarter 2.02% respectively.

(Interpreted). We will take the next question from HMC, Mr. Koo Kyung-hwe.

(Interpreted). Good afternoon. My name is Koo Kyung-hwe. Okay, I'll go ahead with the question.

I have a question about Kumho Group, about the provisions and the loss, the impairment loss. And what is your total exposure to Kumho Group? If not in detail, at least a ballpark figure.

(Interpreted). The exposure is about KRW1 trillion at the year end. The provisions were KRW250b for the Kumho Group. And for [workout] groups they were substandard and there was KRW49b. And others were classified as precautionary. And so it was 19% for non-workout and 49% for workout companies. I hope that answers your question.

(Interpreted). We will take the next question. From Kiwoom Securities, Mr. Seo Young-soo.

(Interpreted). Good afternoon. I have questions about the NIM.

In Q4, the NIM increased drastically and what was the reason? Was it because of the funding or because of lending? And until when will the NIM increase continue? Could you give a guidance to until when we can expect the NIM increase?

And because there was an increase in NIM for -- the government is expending efforts to reduce the lending rate. And as for the COFIX, it seems that for the new loans the rates are expected to be lower. So what is your policy on this?

(Interpreted). The reason why the NIM increased is as follows. You can look at it this way. When the NIM falls, as was mentioned earlier, in 2008 in Q4 the CD rate was 5.44%. And in Q2 '09 it fell to 2.41%. So in two quarters time there was a fall by 300 bps. And in our lending, 73% of our loans are CD linked. So with the CD rate falling by 300 bps we were impacted greatly. And because there is a negative duration gap, the funding cost was not directly hit. And so the NIM was compressed.

The funding cost is steadily decreasing. And in Q4 the CD rate increased by 39 bps to 2.8% in Q4. And so this had a positive effect on the interest income. And in order to improve the NIM we secured additional margins. And because the economy was slow, we did not -- the volume itself did not grow, and there were not that many difficulties in securing additional NIM.

And in interest income there was an increase of KRW140b every quarter, and the expense reduced by KRW100b every quarter. And so that's why the NIM was improved.

And with the introduction of the COFIX, the COFIX will have the impact or the effect of re-pricing our tenure. And this will help in managing the duration gap. And I believe this will help in reducing the risk. By leveraging the COFIX effect, the three month or short term loans will be re-priced on a longer basis, like in six months duration. We don't believe that COFIX will have the effect of lowering the NIM.

(Interpreted). We're waiting for the next question. We'll wait a minute for the next question. As I had mentioned you could always call us and you will be placed on the waiting queue for questions. If you have any questions please call in. Thank you.

There seems to be no further questions. No, now we have one more question. We just got a question in. From Credit Suisse, [Maggie Chandra]. Please go ahead, ma'am.

Yes, hi. I had a question regarding your mergers and acquisitions strategy. I see that you haven't really mentioned anything about this. But I'm sure you're aware that there has been a lot of talk with regards to KB Bank and Woori and Hana being interested in being M&A candidates. Does KB have any response to the market with regards to this?

(Interpreted). This is EVP In-Gyu Choi in charge of our strategy. I think I mentioned this in the last conference call. But as you know in the Korean banking sector, there are a lot of talk around potential M&A deals in the Korean banking sector. But once again I don't think this is a place where we can easily talk about what we're considering about it.

So my answer could be only the same textbook answer, that regarding M&As or other structures we are interested, as always. We are closely watching for potential opportunities to create synergies with the KB Financial Group. This is a textbook answer, but we are looking at many different options and structures and we are very closely watching. However, I cannot give you any details regarding our plans and I hope you will understand our position.

Thank you.

(Interpreted). I hope that answered your question. We don't have any questions on queue. We will wait a few more minutes or seconds. Yes, from HSBC [Ms Park Soo Han].

(Interpreted). Good afternoon. I am Park Soo Han from HSBC. I have questions about the business plans in 2010. You are expecting NIM in the 3% range. What about your loan strategies? And what is your guidance for NPL? And what is your net income expectation?

(Interpreted). I mentioned the NIM trend already. And what I can say is that, other than loan growth, it's difficult to share with you the details. And I hope that you will understand.

And as for asset growth, we are targeting approximately this year the growth rate of nominal GDP growth rate. But looking at the circumstances, we believe that it will not be higher than that. The asset growth may be lower than the nominal growth rate, the GDP growth rate.

Net income are sensitive numbers that we cannot share with you upfront.

(Interpreted). We don't have any questions on queue. We will wait for the next question.

There are no further questions, so we will end the 2009 earnings conference for KB Financial Group. The presentation and the video of today's conference will be available on the website of KB Financial Group for your access any time. If you have any further questions please forward them directly to the IR team. We will be more than happy to respond. Once again thank you very much for joining us.

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.