KB Financial Group Inc (KB) 2010 Q1 法說會逐字稿

(Interpreted) Good morning and good afternoon. My name is Kyu Sul Choi, in charge of the IR department at KB Financial Group. First of all, I would like to thank you for joining our Q1 2010 earnings conference despite your busy schedules. Today's earnings release is webcast live through the Internet as well as the telephone and, during the Q&A, you may ask questions on the phone.

Today's earnings conference is joined by the CFO, Mr. Kap Shin, and the management of the Financial Group. And today, we will proceed with the earnings conference in the following manner. First, the presentation will be delivered by the CFO, Mr. Kap Shin, which will be followed by Q&A through the telephone. So if you have any questions, please wait until the presentation is over. And now, I'd like to invite Mr. Kap Shin for his presentation on Q1 earnings results.

(Interpreted) Good morning and good afternoon. I am the CFO of KBFG, Kap Shin. Now, I will describe KBFG's first quarter earnings results. I will first cover the first quarter key highlights and then the first quarter financial performance and then the first quarter Bank asset quality.

The first quarter KBFG net income was KRW572.7b. NIM increased and the provisioning cost decreased. Group's total assets including AUM was KRW326 trillion. Bank BIS ratio dropped slightly and the main reason for that was about KRW600b of subordinated debt which was not recognized as Tier 2 capital. And we are maintaining the highest level of BIS and Tier 1 ratio in the industry.

And the bank delinquency ratio and NPL ratio have risen slightly from the last quarter. It's because, in the fourth quarter of last year, we had about KRW1.2 trillion of write-offs and sales, but, in the first quarter of this year, we had around KRW300b of write-offs only. So in the last quarter, the delinquency and NPL ratios went down, but, because of these reasons, it rose slightly during this quarter. But it was not because of problems in our asset quality.

Our gross profit is nearing the KRW2 trillion level. During the second quarter of last year, it was less than KRW1.5 trillion, but, for three consecutive quarters, we are seeing an increase, so we have almost recovered to year 2008. The main reason behind this is the NIM improvement. Regarding provisioning expenses, it is KRW412b. And when we exclude the one-off factors, we are seeing a continuous decrease.

Regarding the net income, it went up drastically. It is because our gross profit has improved and our G&A expenses and provisioning expenses went down, so we saw a dramatic improvement. ROA and ROE improved as well, so it is near the level of our mid to long-term projections.

Now is the first quarter financial performance. Our net interest income has been improving, as I mentioned before. But for the non-interest income, it is showing signs of improvement, but it hasn't reached the level of the past. So we will need some more time for non-interest income to pick up. And you can see the net income for the subsidiaries on the slide and you can see that the net income for our subsidiaries has increased as a whole.

And this is the Bank NIM trend. During the second quarter of last year, it hit the bottom, with 2.16%. However, it is improving for three quarters straight and it has risen 21 bp this quarter and has posted 2.82%. Currently, when you look at the market, the [exit] strategy has been delayed, so the policy interest rate hasn't gone up. Also, the market CD interest rate was near 2.8%, but now it has gone down 40bp to about 1.4% (sic).

Accordingly, we believe that we will see a slight downturn in NIM improvement and we will have to watch the market interest rate. And we will have to wait and see how the market interest rate moves and how it will affect our NIM. So in the second quarter of this year, we expect the NIM to have a slight decrease, but on the whole, on the long term, the NIM upward trend will probably continue. And the Bank's interest income has been increasing and is more than KRW300b (sic - see presentation) of improvement q-o-q.

Next is the non-interest income. As I mentioned before, for the non-interest income, we have seen some improvement, but we have some more time -- we need some more time for it to reach the normalized level. Also, we are seeing some improvement in other areas as well, but in the first quarter we saw a slight decrease in the ITC products. It is because the number of working days were less than other quarters. And we have seen a drop in our fees percentage, so that also affected us.

The cost income ratio was in the 50% range last year, but this year, from the first quarter, it has gone down to the 40% range. Along with the NIM improvement, you can see that we have seen more profits. And the G&A expenses, during the last quarter of last year, it went up, because of seasonal effects, but G&A expenses reached the normalized level and have gone down. We believe that this -- with -- in this year, we will maintain a 40% range for the cost income ratio. In the mid to long term, we have a target of 45%, so we will work towards 45%, which is our mid to long-term target for the Bank's CIR ratio.

And the G&A expenses went up in the fourth quarter last year because of seasonal effects, then went down. However, it is not as low as last year, because, during last year, we had the financial crisis aftermath, so we had cut down on the salaries of our employees by 5%. Also, with the financial crisis, we did not have any bonus accrual. However, this year, with our normalized sales business, the salaries and the bonuses were recovered, so you can see that's why it is not as low as last year.

And please look at Bank profitability overview in your spare time. And now, Group assets and liabilities. The assets grew by about KRW4 trillion and as for the -- and this was because of the factor from -- coming from the securities side. And looking at the liabilities, deposits increased.

And looking at the loans in won and Credit Card assets, it is similar to last quarter's figures. Household, Corporate, Credit Card, all three of them did not show any significant changes. Because of the economic recession, we had plans to increase quality loans and we could not increase our loans, and there is also the deleveraging effect in play. This year, as for the loan growth, we target about 3% to 4%. It is a conservative target.

And of our deposits, the customer deposits are increasing, and this is a very positive sign. And of the funding, we are seeing more and more of core deposits and time savings funding, and this is also a very good sign. And loan to deposit ratio is 100%, including CD, and we have plans to continuously decrease the CD volume.

And now, the Bank asset quality. As was mentioned earlier, there was huge NPL sales and write-offs in 4Q last year, so the delinquency ratio was artificially down. But in this quarter, there was only sales, and that a very small volume, and so, it looks like the delinquency ratio inched up. Especially, the Corporate side had a lot of NPL sales and write-offs in Q4, and that's why the Corporate delinquency ratio is showing some signs, but rest assured that this does not mean that asset quality has worsened.

And as for the loan loss provisioning, we are seeing a decrease in Household and Credit Card, but in Corporate sector we do not see signs of decrease yet. It is showing signs of stagnancy. And as for credit cost, in Q1 it was 57bp. For a long time, the normalized credit cost would be in the 40 to 50bp range, and so we are now approaching the guidance numbers. And as for Household and Credit Card, the credit cost has steadily decreased. And as for the Corporate credit cost, it is stagnant and it will take some time before the Corporate credit cost will decrease.

With this, I'd like to conclude my presentation. And to sum up and to recap, with the recovery of the NIM, gross profit has grown significantly. And SG&A and provision, these are the expenses, and they will be well-maintained throughout the year. So we will have a significant improvement in the net income in 2010. Thank you very much.

(Interpreted) Thank you, CFO, for the presentation. And now, we will have a Q&A session. (Operator Instructions).

Yes, we'll take the first question. Mr. Jinsang Kim from Citi Securities.

(Interpreted) Hello?

(Interpreted) Yes, go ahead, sir.

(Interpreted) Thank you for the good results. What's the loan to deposit ratio excluding CD? And by the year end, what is the target for your loan to deposit ratio?

And looking at loan growth of 3% to 4%, this is very low compared to the nominal GDP growth. And is that your policy or are you thinking of M&A or other non-organic growth measures and that's why your loan growth plans are low at 3% to 4%?

And on the M&A front, did your stance change in any way? Thank you.

(Interpreted) Thank you. If we exclude CD, the loan to deposit is 114%. If we exclude CD and -- as well, we are targeting 100%. And by the year end, we believe it will be in the range of 105% to 110% for our loan to deposit ratio excluding CD.

And as for asset growth of 3% to 4%, we believe that, compared to the other years, during which asset growth took place very fast, we have to take into account the deleveraging effect this year. And because we want to just focus on the quality assets, we plan to grow our loans at a lower rate than the nominal GDP rate. And we are not too strong on the loan growth and we are focused more on potential M&A. But as for the M&A, Mr. Choi In-Gyu will answer on my behalf.

(Interpreted) Thank you. I am the CSO. Let me explain the M&A stance. As has been repeated, if there is a very good M&A opportunity, we will proactively weigh the consequences. But as of now, there is nothing material that we can comment on the M&A and there is no stance change in M&A. Thank you.

(Interpreted) Thank you for the answers. I hope you were satisfied. Next, from HI Securities, Mr. Shim Kyu Sun.

(Interpreted) Hello. I am Shim Kyu Sun from HI Securities. I have a few questions. First is about the one-timers and can you tell us about what they are in more detail?

And my second question is about the second half NIM. You said that there can be some improvements of NIM in the second half and can you say that you still maintain that position?

And my third question is about the Chairman appointment schedule for the KBFG Chairman and CEO seat. Can you tell us when that process will be completed?

(Interpreted) Regarding the one-off factors, we had one in regards to the tax line. It was about KRW112b, so there was [due in] industry or SPC-related taxes and -- we had a dispute with the national tax service. However, we received a decision in our favor, so we could recoup those taxes. So that is about KRW112b recoupment.

And for the second half NIM forecast, well, I mentioned before that we probably will exceed the 3% NIM level in one of our quarters this year. But as you know, the market interest rate, after last quarter's business result presentation, has gone down greatly and, for CD, it has gone down nearly 40bp. About two-thirds of our loans are CD-linked, so, if the CD rate goes down, our yield is gravely affected. That's our structure.

However, I believe that this trend will not continue. I believe that the interest rate can move quickly as soon as there are discussions regarding the exit strategy. However, since the interest rate has fallen, the speed of NIM increase will probably be deferred for a while and then go up.

Regarding the time period needed for NIM to take on an upward trend, well, we will need to keep a more keen eye on the interest rate fluctuation. Regarding whether we will be able to reach a 3% NIM level this year, well, I think it is too early to tell at this point. Maybe during next quarter's business results presentation, we can give you more information.

And regarding our CEO and Chairman appointment schedule, we have formed a CEO and Chairman nominating committee and they will probably set the date and procedure, so it is too early for me to inform you of the total schedule.

(Interpreted) Thank you. I hope that answers your question. Next question, please. (Inaudible) from Credit Suisse.

Hello, good afternoon. I have three questions. I see that your BIS ratio at the Group level has decreased slightly. Can you please explain your current core capital position with respect to that?

The second question is regarding the IFRS implementation which is going to be coming up in 2011. I wanted to know what measures are being taken by the Bank and the Group in order to adapt your current accounting positions to this IFRS implementation.

And the third question is regarding the NPL ratio. I see in your presentation that it has slightly gone up, but I wanted to know what is a complete breakdown of your NPL sales and write-offs. Were there any particular companies for which your provisioning has gone up? For example, with the construction and shipbuilding companies, the restructurings for these companies, were there any specific costs related to that that went up? Thank you.

(Interpreted) Yes. As far as the BIS ratio, first, at the Group level, as well as at the (technical difficulty) level, because there was the subset of KRW(technical difficulty) was not recognized and there was no significant (technical difficulty).

And your second question about IFRS, there was a taskforce for IFRS, there has been steady preparation and starting (technical difficulty) each IFRS entity will receive an audit (technical difficulty) starting in next year we'll implement, we will be ready if and when (technical difficulty).

For the NPL ratio, there was (technical difficulty) last year, Q4, there was a total of KRW1. (technical difficulty) trillion of write-offs. Sales were (technical difficulty) write-offs [KRW300b], but there was a peak of write-offs this year, so this is not (technical difficulty).

(Interpreted) Thank you. Now, before we receive the next question, I think you asked about the write- and sell-offs of the last quarter. For the last quarter, the write-off was KRW868.8b and the sales were KRW356b. And for this quarter, the write-off was [KRW207b]. Now, we will receive the next question. Seo Young Soo from Kiwoom Securities.

(Interpreted) Yes. I am Seo Young Soo from Kiwoom Securities. Thank you for your good presentation. I have two questions. First, the provisioning for corporations is still occurring. I believe it is mostly for PF and construction, so can you elaborate on the details?

I would also like to know about your PF exposure and I would like to know about your precautionary and low loans. I would also like to know how much you have provisioned for precautionary and low loans. Construction companies have been going bankrupt, so there are worries about PF deterioration, so do you have any plans to control the asset quality for the PFs?

And this is my second question. The G&A expenses have gone down a bit, but compared to other banks your G&A level is still high. Do you have any plan to control the G&A and can you tell us about your target for G&A this year?

(Interpreted) Thank you. Regarding the provisioning for corporations, the PF exposure is about [KRW2] trillion. To be exact, KRW2 -- KRW9.2 trillion. And precautionary and low loans, well, regarding that exposure, I don't have the information with me right now, so I will ask the IR team to give you more concrete numbers.

Regarding the G&A expenses, it was about 48.8%, so we are trying to control it to not exceed 50% and we have many measures to control the G&A expenses. So we expect by the end of next year it will reach 45%, which is our mid to long-term target. Regarding the detailed breakdown of G&A and regarding the detailed measures, well, I am not at liberty to say right here, but I hope that you can watch us and see our numbers improve.

(Interpreted) And for the real estate PFs, it's about KRW9.5 trillion and --KRW9.2 trillion and, as our CFO has mentioned, we will send you more detailed information from the IR team. We have no questions on queue. We will stand by. As I mentioned earlier, if you have any questions, you may call in and your questions will be placed on queue, so please call any time. Thank you.

Thank you. Since we have no questions coming in, with this we will end the 2010 KBFG first quarter business result presentation. The presentation can be accessed at the KBFG website at your convenience. For those who did not get an opportunity to ask questions, please contact KBFG IR department and we will do our best to answer your questions. Thank you once again for your participation.

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.