KB Financial Group Inc (KB) 2010 Q2 法說會逐字稿

(Interpreted). Good afternoon. I am Kyu Sul Choi IR team leader for KB Financial Group. First of all, thank you for joining KB Financial Group's first half 2010 earnings conference despite your busy schedules. Today's earnings conference is being cast live through the Internet and telephone lines. And you may ask questions through phones during Q&A.

Today we have with us the CFO of the KB Financial Group, Mr. Kap Shin, and the management members of the Financial Group. Let me now introduce to you how we plan to proceed today. Our CFO, Mr. Kap Shin, will make a presentation on the Group's first half earnings results. And next we will have a Q&A session through telephone lines. Those of you who have questions please wait until the Q&A. Now let me invite our CFO for a presentation on KB Financial Group's first half results.

(Interpreted). Good afternoon. I am the CFO of KBFG, Kap Shin. (Technical difficulty) the first half earnings release. (Technical difficulty) comment on the Bank's asset quality of the first half of 2010.

First 2010 first half key highlights. KBFG in the second quarter saw a minus KRW335b of net income. The main reasons were because of corporate restructuring including construction industry as well as project financing in the construction industry and the shipbuilding provisioning. We had to have additional provisioning for those industries. The net interest margin, NIM, also declined, which affected this figure. So, on a cumulative level, in the first half of 2010 our net income recorded KRW237.7b.

Our total assets including AUM KRW327 trillion. The Bank BIS ratio and Tier 1, TCE ratio all went down. The main reasons I will get into later on.

In the case of the Bank the delinquency rate was 0.95% and the NPL ratio 1.98%. In particular, the household delinquency ratio was 18 bp going up recording 0.82%. For the credit card and corporate, they went down slightly.

Our operating income went down KRW26b QoQ. It was because of the NIM decline and this had an effect as well as the volume increase. So this was partially offset. So the total operating income went down KRW26b.

And the provisioning was KRW1.5 trillion. And on a normalized level we thought that it would surpass KRW500b or so. But we had to have more than KRW990b more of provisioning because of third round of the construction industry. We believed that it would be about KRW184b. And the Orient Shipbuilding precautionary classification happened, so we thought the 19% would be the right ratio. But we had to reclassify it into presumed loss, estimated loss which led to KRW330b. The others were for construction, PF and for shipbuilding we had reclassifications as well and this was KRW480b. So we had to have KRW990b extra provisioning. Because of this we have seen a net loss of minus KRW335b in net income.

Also Tier 1 and TCE ratio went down. And we have seen KRW469b of subordinated debt which was not acknowledged also. Because of our net loss -- net income loss our retained earnings also went down.

Now let's go to the key highlights once again. And when you look into the condensed I/S you can see that our operating profit went down KRW26b. But we also saw an SG&A going down. So the PPOP went up by KRW26b QoQ. And I will go into the details line by line later on.

The interest income for the bank. On the right hand side you can see the NIM graph. And in the first quarter it was 2.82%. So we saw the NIM going up but in the second quarter the CD interest rate went down. And because of this our quarterly NIM went down to 2.69%. However, recently because of the interest rate hike of BOK, and because we are expecting another round of interest rates hike in the second half of this year, we expect the NIM to hit the 3% line within the year.

The interest income you can see KRW40b going down. And, as I mentioned before, it was because of the NIM decline and KRW71b went down. However, when you see the impact and offset, we closed with KRW40b going down.

For the non-interest income we have nothing particular to note. Bancassurance improved slightly and this trend is continuing. And the ITC and Trust the direction is not clear yet.

This is the SG&A. In the case of SG&A, in the second quarter compared to the first quarter the G&A went down. And KRW70b went down for labor. In the first quarter we had KRW570b (sic - see presentation) of operating income. So we believed we had to pay performance linked compensation. So we accrued this. And in the second quarter we reversed it. And there is nothing else in particular to note.

And in last year the cost income ratio surpassed 50%. But in the second quarter, as you can see, it went down. It's on a cumulative basis 46.2%. And it was 43.9% on a quarterly in just the second quarter.

Regarding the bank profitability, well, you can see the KRW40b decline in net interest income. And you can see it went up for non-interest income. So the level remains similar. And we have seen KRW68b going up for the operating income before provisioning.

Next the Group's assets and liabilities. On the next page, our assets increased by KRW2.6 trillion and loans increased by KRW1.1 trillion (sic -- see presentation). Out of liabilities, deposits increased by KRW3 trillion. And debentures decreased by KRW1.9 trillion.

Next loans in won and credit card assets. It increased by KRW1.4 trillion in Q2. Household and corporate each increased by KRW0.7 trillion. And for credit card assets in Q2 there was flat growth from Q1.

If you look at the graph on the right hand side on the upper side these are deposits in won. In Q4 2008 it was 81.7%. However, in Q2 this year it increased to 94.3% level which shows much more stable funding for the Group.

And if you look at the graph below this shows deposits and debentures in won. The proportion of the deposits and debentures in won as a proportion out of the total funding recorded 65.8% in Q4 '08. However it increased to over 80% in Q2 2010.

You can also find the loan to deposit ratio trend on this page. Excluding CDs and other market-related deposits it came down to 105% level in Q2 this year. Our yearend target is below 100% level. That's our target. To achieve that target I believe that there will be no major difficulties.

Next let's move on to the Bank asset quality in the first half of 2010. Starting with the Bank, as you can see on the graphs on the right hand side, the delinquency ratio has gone up in Q2 slightly. Especially there was an increase of 18 basis points for households due to some problems related to a collective loan. And that's just one project. Excluding that project, there is a change of 53 basis points. So the delinquency ratio is stabilizing. And the corporate and credit card delinquency ratios have come down slightly.

Next Bank provisions. For the corporate side, corporate loan loss provisions there was an increase of slightly over KRW1 trillion in Q2 vis-a-vis Q1 due to corporate restructuring, and real estate, project financing and construction, and our conservative asset reclassification that we carried out in Q2.

Next provisioning ratio. Because we've accumulated provisions substantially, in Q2 credit cards has gone up substantially. Especially for the corporate side the credit card has gone up quite substantially. And for the credit card and household sectors the trend is stabilizing.

Next page is the last page that shows our four core management strategies of the new management team at KB Financial Group. This slide was attached for your reference.

This concludes my presentation on the first half earnings results of KB Financial Group. Thank you.

(Interpreted). Thank you very much, CFO. Then we will have a Q&A session. (Operator Instructions).

Yes, from HI Securities, Mr. Shim Kyu Sun. Please go ahead, sir.

(Interpreted). Yes, good afternoon. My name is Shim Kyu Sun from HI Securities. You made some comments regarding provisions, but can you give us the details. In the second half, what is your projection for provisioning in the second half? Can you give us some guidance?

(Interpreted). Yes, let me give you more details regarding our provisions. For construction and shipbuilding third round corporate restructuring was carried out. The provisioning was about KRW184b. And for Orient Shipbuilding, because it recently filed for corporate receivership, it was classified as precautionary in the past. However it's now reclassified as estimated loss. So there is the impact of KRW330b. And real estate, PF and construction industry companies were reassessed for their credit ratings. And we've accumulated an additional (technical difficulty) as provisions. Due to these factors, KRW990b was accumulated as additional provisions during the quarter.

You asked a question regarding the guidance for the second half provisions. Our credit cost in the first quarter was in the range of 70 basis points, but in the second half I believe that the cost will come down slightly from that level.

(Interpreted). Next question from Kyobo Securities, Hwang Seok Kyu. Please ask your question.

(Interpreted). Hello. I have two questions. I also want to ask questions about provisioning. Especially for PF loans I would like to know your loan size, and the provisioning for PF, and how much was accumulated until now.

I also would like to ask you a question regarding Woori Bank's news about privatization that was in the news today. In the media it is reported that maybe you will not engage in M&A within the next two years. So it seems to us that KBFG is not interested in M&As in the near future. So can you tell us your position towards M&As in the future.

(Interpreted). Regarding the provisioning, I will first answer that. And regarding the M&A question we will have our COO Eddie Choi answer the question.

Regarding the provisioning, the volume of PF loans in the second quarter stands at KRW8.2 trillion. We have about KRW950b of provisioning. So it is about 11% or 12% of the exposure.

(Interpreted). Regarding the M&A, hello, I'm the CSO, Mr. Choi. And as of now KBFG is concentrating on maximizing our efficiency. And we are concentrating our efforts to reach our goal. So I would like to answer your question with that comment.

(Interpreted). I hope your questions are answered. We will now wait for next questions. We are ready to take your next question. From KBW Securities, [Ryan Hunseker]. Please go ahead, sir.

Okay, thank you. Yes, I just wanted to understand better how you arrived at this provision for the project finance. So as per the previous question you mentioned that the coverage now of PF loans is 11% to 12%. Can you give us some explanation as to how you -- why you think that's an appropriate level, and why could it not be higher than that? Thank you.

(Interpreted). Well, in our credit group, our loan group we review each project especially for the major projects. (Technical difficulty) appropriate level of provisioning for each site. If we find that we need to have a higher coverage rate, then we accumulate it. So I think that you can understand that our provisioning comes from a more conservative stance compared to the past. Of course in the case of precautionary it's between 7% to 19%. So it's on the maximum 19% and NPL it's 20% to 49%. So it could be 49%. But we have our own provisioning policies and we adhere to that policy, but we still have a conservative viewpoint. So I hope that answers your question.

Thank you.

(Interpreted). Just to add on to that, real estate PF loan balance, as was mentioned by Mr. Shin, is down to KRW8.2 trillion. And in the process of reducing the loan to that level many problematic projects were resolved. Therefore, I believe that our provisioning level is appropriate.

(Interpreted). From Kiwoom Securities, Mr.Seo Young-soo. Please go ahead.

(Interpreted). Good afternoon. My name is Seo Young-soo from Kiwoom Securities. My question is regarding NIM. First, the NIM seems to have come down more substantially compared to other banks. Probably CD rates down -- fall impacts could be less for the KB Financial Group because a proportion of the CD rated linked loans are smaller in KB Financial Group. So why was that?

And secondly, you mentioned that there could be the impact coming from the policy rate increase in the second half. What would be that impact? So CD rate went up by 16 bps, however the debenture rate have gone up much more substantially afterwards. Therefore, given this fact, the impact of the policy rates increase could be negative for the Group. Still you said that the policy rate increase expected in the second half would be favorable for the Group. So why did you say that?

(Interpreted). The reason why we're seeing a drop in the CD interest rate drop is because of our three months linked CD loans. We have a large proportion of it. And if we don't fund it using three months CDs, we will see a mismatch. So when the CD rate goes down our duration gap sensitivity causes the NIM to drop. However, when the CD rate goes up, due to our loan structure it is immediately reflected on our NIM. And when we did some modeling we saw that in the fourth quarter we would have a NIM ratio that's nearly 3%.

(Interpreted). We will take the next question from CLSA Securities Mr. [Oh Jon Win]. Please go ahead.

(Interpreted). My name is Oh Jon Win from CLSA. Precautionary and substandard loans increased substantially. Corporate restructuring and asset quality reclassification were conducted. And what was the impact of those two exercises?

And you talked about your efforts to maximize management's efficiency. Can you be more specific about those efforts, for instance asset growth or synergy maximization could be your target. Then what are the specific efforts that you are making to achieve those targets.

And if you are not going to do M&A for the time being, then you could be accumulating retained earnings quite substantially. So what would you do with that?

(Interpreted). Regarding how much of an increase there was for precautionary and etc., the detailed figures will be delivered to you through our IR team.

Next, regarding our efforts to maximize management's efficiencies, of course, here with us today is our new CSO Mr. Park Dong Chang. He has formed a task force which was newly set up. And the specific initiative will be produced by this task force in the near future. Probably by the next earnings conference, we will be able to give you the detailed efforts regarding that.

(Interpreted). We are waiting until the next question comes in. The next question from Citi Global Marketing Securities, [Kim Dong Tung]. Please ask your question. Hello?

(Interpreted). Regarding the question about the M&A, I think you talked about pulling in your effort to maximize efficiency as your answer, regarding the possibility of M&A. Then it seems that you are not forcibly refusing to have an M&A. So did I understand your intention behind your answer?

Second is about the time gap and your conservative reclassification of the assets. Compared to other banks your provisioning has gone up steeply. So why is this conservative? So can you tell us the meaning why, and can you tell us about your differentiating aspects of KBFG, especially in terms of provisioning.

Lastly, you talked about the collective loan that led to the decline. And can you tell us about whether that can be normalized in the near future.

(Interpreted). Regarding the M&A the issue has already been made public in the media. So at this point in time there is nothing else for us to elaborate upon apart from those news. We can only tell you that we are concentrating our efforts on maximizing our efficiency and in maximizing our profitability. And we have nothing else than that to comment regarding the M&A.

Regarding our conservative provisioning, as you know for precautionary the maximum amount is 19%. Compared to the last quarter for precautionary we had provisioned near the 19% level. So that makes it more conservative QoQ.

Regarding the normalization of the collective loans, well, the delinquency has just started for that loan, so we are reviewing this from all aspects. And we will tell you more about this after we see some results.

(Interpreted). The next question is from Templeton Asset Management Mr. [Jung Byu]. Please go ahead, sir.

(Interpreted). Yes. My name is Jung Byu from Templeton. My question is concerning the asset quality. What of third round corporate restructuring and other one-off factors, if you exclude all that, the provisioning expenses seem to be KRW446b. Still this is higher than the previous quarter. Furthermore if you look at the trends in other banks the normalized provisioning level is coming down, but the KB Financial Group seems to show a different trend. So for the KB Bank is it true that your asset quality is improving? You could be saying that it is improving or it is not improving, but if it is the case that your asset quality is not improving what would be the reason for that?

And also one of the previous question was not answered. If you're not going to do M&As what would be your plans with the retained earnings that are accumulated. Because we are a shareholder in KB Financial Group and we have many concerns regarding that. Therefore, can you please address that part of the question?

(Interpreted). Concerning the provisions, as you must be well aware, construction, real estate, project financing and shipbuilding industry exposures are quite substantial in our case. Due to the economic recession, it is quite difficult for us to make any projections for the future. Until now we have been quite conservative in determining the provisioning level. However there are additional factors that are coming into play that make us accumulate more provisions. However for the second half we expect our provisioning level to come down.

If we are not going to do M&A, there could be a surplus capital on our hands. Early this year regarding the earnings from '09, our dividend payout ratio was 15%. The new management of KB Financial Group is in a position that we are going to adhere to the previous payout ratio of 30%. That is the basic position of our Group. And by the end of this year our new management will make a favorable decision on that front for the sake of shareholders, particularly the new Chairman and CEO is placing a top priority on maximizing shareholder values. Therefore, I believe that he will try to observe the previously determined payout ratio, to say the least. Thank you.

(Interpreted). Let me add a comment on the answer that was just given. Provision situation will improve in the second half that was mentioned by our CFO. Normalized credit cost, the timing of that will be advanced in our opinion.

(Interpreted). We'll wait until the next question comes in. It seems that all questions have been asked. Then with this we will conclude the 2010 first half earnings release of KBFG. The presentation will be uploaded to the KBFG IR website, so please access the presentation and the presentation materials on line. If you have any additional questions please contact our IR team and we would be more than happy to answer your questions. Thank you very much for taking part in this IR report. 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.