KB Financial Group Inc (KB) 2011 Q3 法說會逐字稿

Good morning and good afternoon. I am Kyu-Sul Choi, Head of the IR Department at KB Financial Group. Despite your busy schedules, thank you for taking part in the KBFG 2011 Q3 earnings release.

This earnings release is being broadcast live via webcast and on the phone and you may call in with questions during the Q&A session at the end.

We have with us, KBFG President Young-Rok Lim, and other members of the KBFG management with us.

To walk you through today's agenda, first we will have the Group's CFO, Jong-Kyoo Yoon, elaborate on the Q3 business results of 2011 and then we're going to have a Q&A session with your questions being called in via phone line.

Now, I will invite our CFO to elaborate on the Q3 business release of 2011.

Good morning and good afternoon. I am Jong-Kyoo Yoon, the CFO of KBFG. I would like to walk you through the 3Q earnings release of KBFG. I will first elaborate on the 3Q key highlights and then on the financial performance and then conclude with the Group asset quality in Q3.

2011 Q3 cumulative net income recorded KRW2.1539 trillion and the quarterly net income recorded KRW579 billion. As you can see on the graph, 2011 net income rose by a big margin y-o-y due to the top line improvement caused by appropriate loan growth and widening of net interest margin or NIM and also due to the decline provisioning.

Quarterly wise, compared to Q1, Q2, Q3 net income seems to have shrunk, but this is because in Q1, and Q2, as you're well aware, there were substantial one-off factors, including the write back of National Housing Fund commissions from the winning of the lawsuit and the Hyundai E&C securities sales gains. So the recurring net income level excluding these one-off factors are being maintained at a relatively stable level. I will cover in detail the major one-off factors in Q3 in the following slides.

The net operating income before provision for credit losses representing the Group's income generating capability in Q3 cumulative recorded KRW6.789 billion. Taking into consideration the one-off factors in Q1 and Q2, it is being maintained at a stable profitability level at a KRW2 trillion level.

Group total assets, including AUM, as of end September recorded approximately KRW364 trillion, a 9% growth compared to end last year.

Let's go to the next page. Q3 provision for credit losses recorded KRW1.62 trillion, a big drop compared to KRW2.2594 trillion last quarter. Looking at the graph, the quarterly provisioning, which is on a downward trend after recording the highest level in Q2 2010, when we had the corporate restructuring and preemptive provisioning, is being maintained.

Q3 ROA and ROE respectively recorded 1.07% and 14.13%, a decline from the first half of 2011. This was mostly because of the net income going down compared to Q1 and Q2. However, with the disposition of the Bank's treasury stocks in July, Group total assets and shareholders equity rose KRW1.85 billion, which also partly affected this number -- actually, it was KRW1.85 trillion. In particular the ROE went down 33 bp with the treasury stock disposition, and Tier I was 11.32% and core Tier I a 63 bp increase q-o-q and BIS ratio 14.57%, a 124 bp rise q-o-q.

As afore mentioned, the BIS ratio for the Group and the Bank all grew substantially with the disposition of treasury shares and the Group BIS there was a 100 bp improvement effect and in the Bank BIS a 130 bp improvement effect, which shows that we have a very stable funding structure.

Now, I would like to elaborate on the Group's financial performance from page 5. The Group's net interest income, thanks to the loan growth and NIM improvement on a cumulative level, grew 16% year-on-year and 4% q-o-q, showing soundness. 3Q net fee and commission income recorded KRW401.9 billion, a slight drop q-o-q, but it's a maintaining a KRW400 billion quarterly level.

For your information, there is KRW37.6 billion of write-off of National Housing Fund income fees included in the KRW137.6 billion of net fee and commission income. Regarding the net gains/losses on FVTPL and other operating income, with the stock market drop and surge of the FX rate, there were some losses in beneficiary certificates and derivative products, which pulled this down. And I will elaborate on the details later on.

Q3 G&A expenses recorded KRW967.3 billion and the one-off factors in Q2 did not occur and it slightly increased, and provisioning for credit losses went down with the consistent asset quality improvement efforts. So it went down 56% year-on-year since 2010. And the asset quality improvement efforts since 2010 are materializing and is showing quarterly stability.

Now I would like to walk you through the profitability in more detail. First interest income. The Bank's Q3 cumulative net interest income recorded KRW4.5674 trillion, which rose on a simple comparison basis 4% year-on-year thanks to the loan growth and NIM improvement. However, with the credit card spin-off in March of 2011 taking into consideration that the interest income for credit card was only included for January and February, this signifies that the real interest income improvement was much higher. You can see this on the top right hand graph, which shows that the net interest income adding the Bank and credit card has risen substantially compared to 2010 and is steadily improving each quarter.

As you can see on the graph on the bottom, the Group NIM, adding up the Bank and credit card, recorded 3.07% in Q3, which is maintaining a similar level compared to last quarter. NIM from 2010 Q3 has risen rapidly, reflecting the rise of the policy interest rate. But from Q2 this year, the liability re-pricing impact has been realized which is causing the NIM to be pulled down and at a slight standstill.

However, in the case of KB, we're refraining from excessive competition and focusing on profitability and managing the loans and maintaining an appropriate level of new loan-to-deposit spread.

If we continue on with this strategy, we believe that we'll be able to maintain the current status of NIM or even have a higher number next quarter. Also, we will work to refrain from excessive competition and to strive to improve our portfolio so that we can maintain a 3% or so NIM in the long-term.

Let's go to the next page. I will now cover the Group net fee and commission income. The net income and commission income of the Group in Q3 has improved by 8% y-o-y, but q-o-q has slightly dropped due to the drop in credit card fee income and ITC product sales income.

In the main banking income categories, in the case of commission of represent securities, including ITC, including investment trust products in Q3, with the increase in fund redemptions, including ITC products and net asset value drop following the stock market drop, it went down slightly q-o-q, but thanks to active marketing activities for bancassurance it has risen by KRW90 billion q-o-q and also risen by 39% y-o-y and is maintaining a performance recovery momentum.

In the case of the credit card net fees and commissions income, adding up the Bank and credit card, despite the increase in the fee income due to some of the fees, including the affiliated work fees and cost (inaudible) fees, it went down slightly q-o-q. For your information, as I mentioned before at the last earning release, when you look at the Bank credit card fee income it seems that the 2011 business results have dropped hugely q-o-q. But this is because the related gains and losses have been classified as the credit card net interest income separately, as you can see on the bottom of the slide.

Instead, the credit card business commissions category, which is given from the credit card to Bank, has newly been installed and KRW160 billion is included in the FX commissions and others, which is in the 5th category in the slide graph.

Let's go to the next page. The Bank's net gains on FVTPL in Q3 recorded on a cumulative basis KRW668.4 billion and has increased compared to the KRW400.969 billion in the same quarter last year. On the other hand, the Q3 net gains dropped KRW195.3 billion q-o-q because the current stock market index dropped and the FX rates surged, which made the beneficiary certificate income and derivative related gains go down.

It may seem like Q3 Bank other operating income has dropped q-o-q, but to elaborate, in Q2 Hyundai E&C disposition income of KRW413.9 billion have been included. However, in the case of beneficiary certificate deposition gains, KRW196.1 billion of treasury stock disposition losses which occurred in Q3 is included, and if we exclude these it is of nearly a similar level.

For your information, treasury stock disposition on a Group consolidated basis has an effect of increasing shareholders equity and the disposition losses are reflected on to the capital. But on a Bank basis it has the characteristic of disposition of disposable beneficiary certificate so the disposition losses are reflected on the net gains.

The others category in Q3 recorded a KRW203 billion loss q-o-q with the recording of losses. But this was because of KRW49.3 billion of credit liabilities related to the derivate product fair price adjustment, which occurred in Q3 and because of the KRW54.8 billion of disposition income for the disposition of account receivables occurring in Q2.

For your reference, the net gains on FVTPL and the gain or losses on sales of AFS/HTM securities and the gain on FX and hedging derivates, these are accounts which are set off against the assessments of underlying assets related with derivatives and hedge transactions. Thus, if it is not in a special case, it shows relatively a stable trend. So please take this into consideration.

Let's go to the next page. Bank Q3 G&A expenses recorded KRW833.4 billion and dropped KRW38 billion q-o-q. One-off factors inducing overtime payment and expenses in establishing mobile net utilizing smartphones did not occur this quarter, but with the acquisition of tangible assets related to sales including leased branch facilities the depreciation costs went up slightly. So we had KRW72 trillion of other depreciation costs.

You can see that the G&A of credit card is being controlled well thanks to the multifaceted cost cutting measures. As you can see on the graph on the right, the Group Q3 cumulative cost income ratio recorded 41.7%, which is a very stable level.

However, compared to the first half, the Q3 CIR may seem to have gone up slightly because in the first half there were large-sized one-off income factors included in the denominator, such as the fee write back and the Hyundai E&C securities sales. If we exclude the one-off factors, the Q3 CIR is at a 44.3% level, and we will maintain the CIR to be within the mid-40% range through profitability increase and efficiently manage this to reach the early 40% range in the long-term.

Lastly, in the case of the Bank non-operating income in Q3, it has improved with the removal of one-off factors related to the one-off factors including the establishing of the Public Foundation in Q2 and the contribution to the [Lisel] Finance in the previous quarter.

Now page 3 -- page 10 deals with the Bank profitability overview and has been provided for your reference. The Bank net income is quite different from the Group net income because, as previously mentioned, the Bank has recognized the treasury stock sales losses because it is reflected on the short-term income, and it is recognized as, as mentioned before, gains or losses from sales of securities, transaction gains or losses in the P&L calculation. So that is why there is a difference.

Let's go to the next page. Now let's look at the Group asset and liabilities. As of end September 2011, the Group's total assets with loans receivables and cash and due from Bank, the total assets recorded KRW280 trillion, a 8% increase compared to late last year. In the liability side with the saving deposits and in particular with the increase in time deposits, deposits went up KRW8 trillion compared to late last year.

Total equity recorded a KRW24 trillion, a KRW4 trillion increase compared to last year. And because capital increased by about KRW1.85 trillion in Q3 with the realization of net income and the sale of treasury stock, the Group's total assets including trust and AUM stand at KRW364 trillion, which has gone up 9% compared to late last year, which is mainly due to increase of bank loan assets and the asset management and real estate trust, which also was affected.

Next let me now go over the Bank's and the credit card funding status. The Bank's loan in Korean won, as of end of September, was KRW182 trillion, an increase of 4.7% compared to the end of last year and an increase of 0.9% quarter-on-quarter. In Q3 relative to first half of the year, loan growth rates subsidized slightly. However, given the fact that Bank's annual loan increase target is to be within the nominal GDP growth rate, the current loan increase has been quite adequate.

As for different sectors -- for the household loans, due to contracted property market downturn, general loans such as the home equity loan outgrew mortgage loans. As for the corporate loans, the Bank has increased loans to SOHO since the SOHO has higher percentage of collateral and better asset quality. We are implementing a very conservative loan policy which limits the exposure to cyclical industries as well as the industries that have lately been in the news such as the real estate, PF, construction and small and medium-sized ship builders.

As we have a loan policy that emphasizes risk management and the overall economic slowdown, the loan growth rate to the corporate in the second half of the year is expected to be lower than that of the first half of the year.

As for the credit card, due a decline in purchasing card receivables, which is about KRW610 billion, which are included as credit card sales, compared to the end of last year there seems to have been a decrease of 2.4% compared to the end of last year. And when the purchasing cards are excluded the growth record stands at 3.5%. And for your reference, purchasing card receivables which are found asset quality are being converted to the Bank's corporate loans.

And now on to the Bank's funding status. As of the end of September, total deposits in Korean won was KRW188 trillion, up 4%, showing a rather healthy growth trend. Increasing preference for safer assets by customers due to Saving Banks incident, KB has actively conducted marketing activities that resulted in increase of time deposits of about KRW11 trillion.

As can be seen from the graph on the right bottom hand side, the Bank's LDR as end of September stands at 98.3%. The KB Financial Group will focus on increasing low cost deposits -- deposit accounts such as the ones used for receipt of salary or for settlement in order to enhance profitability. The Group will further strengthen its funding basis by concentrating on increasing personal deposit products that have potential for creating additional profits through auxiliary transactions rather than focusing on receiving larger deposits from institutions.

On page 15, I would like to discuss the asset quality of the Bank. The Bank's NPL ratio slightly rose from previously 1.84% to 1.88% at the end of September. In Q2 NPL ratio dropped significantly due sale and write-off of KRW816.7 worth of NPL. However, in Q3, there was only KRW442.2 billion write-off without any sale. Given such sale and write-off of NPL, NPL ratio has actually improved.

Substandard and the doubtful loans have gone up slightly compared to the end of June because the businesses that were included as a household delinquent account in Q3-- excuse me, in Q2, saw a KRW74 billion worth of substandard collection of loan increase. In the corporate sector rating declines of some companies and proactive rating adjustment for NPL write off caused the increase in these types of loans.

However, estimated loss also dropped rather significantly, therefore, our NPL increase has been relatively limited.

And as for the delinquency rate, it showed a slight improvement from 1.1% to 1.09% over the same period. In the household sector it is maintained at a stable level, with a 6 bp drop quarter-on-quarter due to a collective loan delinquency rate improvement.

Corporate delinquency increased by 5 bp q-o-q, but still kept at the safe level. NPL coverage ratio recorded 120%. It has been a continuously improving quarter-on-quarter since the temporary decline caused by the conservative asset quality classification in 2010. And for your information, coverage ratio calculation included reserve for the credit losses.

Next page please. And this is related to the asset quality of credit card business. Credit card NPL ratio stood at 1.15%, a 4 bp increase compared to the end of June. And this is due to the fact that the normal purchasing card receivables have been converted to the Bank's corporate loan, as I have mentioned earlier. There has been a so-called reduction of denominator effect.

The card's NPL coverage ratio including vis-a-vis the credit loss recorded 299%, and delinquency rate grew significantly to record 1.69% at the end of September compared to 1.49% at the end of June. Along with the denominator reduction effect, the recent economic slowdown led to increase of credit card delinquency.

And for your information, delinquency rate at the end of September excluding the purchasing card stands at 1.48%. The impact of purchasing card on this delinquency rate is about 21 bp.

Looking at various assets quality indicators, I can tell you that the overall asset quality of the credit card business is quite good. However, given the recent macroeconomic circumstances, such as the economic downturn and household loan burden increase, we will proactively respond to potential asset quality deterioration. We are readying ourselves for such an even by strengthening underwriting limit management and delinquency receivable management of processes.

Next I would like to talk about the Bank and the credit card's provisioning status. The Bank's Q3 cumulative provisioning recorded KRW868.9 billion, which is 59% decline compared to the same period of last year. In Q3 provisioning was KRW268.4 billion, an increase of KRW8.26 billion compared to the last quarter. In Q3 provisioning in the household sector was KRW88.7 billion, similar to that of last quarter.

Corporate provisioning slightly rose from last quarter to KRW179.7 billion. However, given the fact that there was a recovery effect in Q2, thanks to NPL sales, provisioning in the corporate sector is actually stabilizing at a lower level, and in Q3 provisioning decreased slightly compared to the last quarter to stand at KRW49.5 billion. We expected to see an increase of the provisioning. However, because we for the corporates -- we have provided -- we have done the readjustment of the rating and we have also seen some recovery of the receivables, and that is why we actually saw a decline in the provision in the credit cards.

Now I'd like to talk about the loan loss provisioning per sector in the Group. Credit card cost in relation to the total consolidated total asset recorded 0.50% cumulatively in 2011 and about 0.30% in Q3. The graph on the left hand side shows that the credit cost has been showing a downward stabilization since peaking in Q2 of last year when the asset addition of provisioning had been reserved.

Household's Q3 provisioning is 0.35%, which is similar to the previous quarter. As for the total for the three quarters of the year, it stands at 0.31%, which is quite a appropriate level. And as far the credit cost on the corporate side, it recorded 0.73%, similar to the previous quarter. It is expected to improve gradually, and cumulatively it reached 0.88%, which is a 2.53% drop from the last quarter -- excuse me, last year.

For the credit card, credit cost for the Q3 stands at 1.57% and cumulatively at 1.64%, which is slightly higher compared to the same period of last year. However, it does not call for any concerns. Thanks to active efforts to have write-off and sale of NPL, credit cost in terms of total assets of the Group as of 2011 improved drastically to reach about 42 bp to 60 bp per quarter. We expect credit cost to improve even further in 2012, however, the drop in credit cost will not be, we expect, a dramatic one, but rather a gradual improvement.

This has been the presentation on the earnings result of Q3 2011 and I thank you for your attention.

Thank you very much, CFO. Now we will have a Q&A session. (Operator Instructions). From Hyundai Securities, we have a question coming in.

Yes, I am Koo Kyung-hwe of Hyundai Securities. Can you hear me well?

Yes.

I actually have two questions. And my first question is about the financial authorities, because the financial authorities are asking for extra provisioning and asking to strengthen asset quality? And investors are very concerned about this possibility because we believe that extra provisioning will be needed with the IFRS implementation.

Well, it seems that although adjustments can't be made very easily, while there can be some extra provisioning that may be needed. So in Q4, if we have a more conservative yardstick, can you give us a ballpark figure of what kind of extra provisioning that maybe occurring in Q4?

And for the NPL ratio, you told us about the preemptive credit rating that you've done. So I know that in Q4 there maybe some cost related to this and some sell offs or write-offs. And I think that the G&A was actually a bit bigger than we've expected for Q3, because when we see one your competitors numbers, it was about KRW900 billion their G&A.

However, your number is bigger than their number. And in Q3 -- well, I think that on a cumulative basis, the G&A until Q2 was similar to your competitor. However, in Q4, because of seasonal factors, new recruits or G&A one-off factors may lead to your yearly G&A, which will surpass KRW3.5 trillion and naturally almost reach KRW4 trillion. And if that happens, then next year's forecast will change as well.

I know that you are having some containment in the cost income ratio, but I would like to hear your thoughts on the G&A expenses?

Well, [Kim-lye Lee Pyoouan] asked about the provisioning and the financial authorities asking us to maybe have more provisioning. And I think that we are -- and there is a task force team organized for this end and they are the individual valuations. And when we, for example, assess the PF loans, if they are going to be precautionary and below or less than two level credit rating -- well, we haven't had any finalities on this, and if there's going to be impairment or other symptoms. Well, what are going to be the standards? They haven't been said yet.

Also, in IFRS, there is a loss emerging period, so we have to think about what this will be. And there are four main topics related to this area. And while in the task force we have been hearing that KBFG has been implementing conservative measures until now, so the real estate PF individual assessments standards have been quite conservative compared to our competitors.

And for the impairment -- or other periods. We have done ample provisioning compared to our competitors. So although we cannot make hasty decisions, it seems that there are -- we don't have a high possibility of us needing to have extra provisioning. And in the fourth quarter -- well, will this an effect? Well, we don't know yet. But at this current juncture, we believe that this will not be true.

Next, there are the loan loss reserves and there was the household, corporate and credit card that were classified and there were the FSS set amounts and the IFRS set amounts, and if there was a difference then we need to have this difference as a reserve.

And going one step further, we have five standards of normal, precautionary, substandard and below. So if there are lacking amounts in each classification -- well --I know that this lacking amount needs to be set as a reserve. So, there are many alternatives and we don't have a final standard yet. But when we look at the loan loss reserves, well, it seems that if FSS has the stringiest regulation for loan loss reserves, then we will need KRW400 billion of extra loan reserves to meet their demands.

And to summarize, in the case of provisioning, it seems that we will not have many changes, but for loan loss reserves, we may be affected. And regarding the amount, well, it will depend on the government policies but it will fall within the KRW400 billion range. And you also asked about Q4 forecasts.

And first about the costs and for G&A expenses. Compared to the previous quarter it went down, you said, but what will happen in Q4? Well, we have been expecting 3% of salary increase and it seems that our actual increase amount will be higher than 3%. And it is true that with the recruitment of new employees, we will have some seasonal factors. So we will work hard. But it seems that in Q4, our G&A will go up slightly but it will not surpass KRW4 trillion a cumulative level. Maybe, within the KRW3.9 trillion range is our forecast.

And G&A will be contained on a continuous manner, and we are going to maximize our productivity and have better efficiency for us to have lower G&A. And the write-off and sell-off of NPLs -- well, have a 2% NPL ratio. So we have to actually cut away 0.5%, so it seems that we need to write and sell off 1.5%. And the Chairman always emphasizes that we must maximize our cash flow, even though in the short-term we may be overburdened.

We believe that we will need to write off a substantial amount. And there are some types of bonds or debentures which are most effective when they are being sold off, because they have been made collectively. So it will depend on the ratio between the write offs and sell-offs. And as mentioned by Team Leader Lee, probably within KRW200 billion of provisioning for this area. Thank you very much.

I hope that answered your questions. We will now receive questions from Mr. Choi of Daishin Securities.

I also have two questions. Question number one is related to provisioning. My question is related to Q3. In Q2 -- because there was a recovery of about KRW780 billion. However, in Q3 compared to Q2, there was a drop. So is there is an one-off item? And also additional provision, there was a bit of write backs. So can you tell us the amount and what that was about?

And the second is related to dividend. I know that it may be difficult -- you may find this difficult to answer, but the government is asking to refrain from high payout ratio and the government -- well, I think that -- is your thinking about the payout ratio per share or is it overall payout trend or the total amount? So I wonder what the KB's position is when it comes to dividend? So those are my two questions.

As for provisioning, I think our CEO will talk to you about the dividend. Let me just talk to you about provisioning. When it comes to provisioning, it seems that people have about two questions. One question is related to NPL ratio increase and the delinquency rate increase.

And, however, the overall provisioning, loan loss provisioning is decreasing. So that's the first question. And second -- and they're also asking whether that trend is likely to continue into future. I think those are questions.

Well, we believe that the delinquency rate and the NPL ratio although they are increasing slightly, however, last year we have preemptively accumulated the provisioning. And in case of IFRS, the provisioning standard is to be done -- well, by the -- according the government we have to do that one time. But IFRS are asking to set of provisioning based on the past experiences.

That is to say, for the guarantees if it' downfall, then we are to set this at 20%. But according to IFRS then we only have to have a 4% to 10% of provisioning. The is same true with the credit cost. And we issue the provisioning to 50% to 100%, according to government, but our past loss experience shows that it's about 30%.

And as for the collective loans, there are no collaterals. so we have to have more than 50% of provisioning. But our past experiences shows that the loss is about 4.12%. So our loan loss provisioning would be based on that. And as for the PF write backs, there was some write backs.

I think that has had some impact. And as for the write backs of other provisioning, I will find that out and I will ask our Mr. Choi, the IR Team Leader, to get back to you personally.

And as for the forecast for the provisioning and loan loss reserves, we think that the provisioning will be stabilizing at a lower level. We're looking at various indicators.

The delinquency rate -- net increase is actually declining, and so we have to wait and see whether that will continue in Q4. And same is true for the NPL. It's stabilizing in Q3 and Q4. Well, we will have to wait and see whether this trend will continue. But at this point in time, we believe that this trend is continuing, so we expect these two numbers to continue to stabilize at a lower level. And for the NPL to be at 2.5%, we may do a bit of write-offs early on. And because of that, in terms of absolute numbers, there could be a bit of increase in the next quarter compared to this quarter. And as for the dividend, our CEO will give you the answer.

My name is [Yim Yong Now] of KB Financial Group. Our position is that we will always provide adequate level of dividend so that we can maximize the value of our shareholders. But as you know, recently the financial market, and because of the increasing uncertainties in the global market, the Financial Supervisory Organization has been emphasizing the adequacy -- capital adequacy. So at this point we will need to talk closely with the financial Supervisory Organization and we will work on improving our shareholder's value, but at the same time keeping our capital status at a healthy and safe level.

Next question from Hana Securities, [Shen Yu Sun], senior researcher.

Yes, I am Shen Yu Sun of Hana Securities, Hanwha. Well, I think -- well, you were a bit fast about the security gains and losses. And for non-interest income gains and losses, can you tell me more about them? And for the one-off factors leading to gains and losses in this quarter, can you elaborate more on them?

Well, when you look at this quarter's financial statements, for securities and other gains and losses, there has been KRW200 billion difference. And regarding the KRW200 billion of difference, I think that is what was requested by Researcher Shen Yu Sun.

Well, there has been KRW269 billion of 2Q Hyundai E&C sales securities disposition gains. And when we exclude this, it's about KRW200 billion. And there has been KRW580 billion of this disposition gains in the previous quarter.

So there was this difference in this quarter because we did not have disposition gains this quarter. Secondly, we had made a KRW500 billion securities investment. We invested in stock.

And it actually -- currently, it has surpassed the breakeven point. But as of end September, we had seen valuation losses of KRW29 billion. Thirdly, with the derivative products, in particular for ship building companies and others, the foreign exchange rate surged above KRW100. So because of this there was CVA, which is counter party risk for the other. And we had KRW48 billion of CVA.

And lastly, we had restructuring against Kumho Group and we had some convertible bonds for Kumho Petrochemical and Kumho industry that we've acquired. And their stock prices actually went up dramatically. So this led to valuation gains in the last quarter. However, with the stock market plummet, we have seen losses of KRW29 billion. So that is why we have the KRW200 billion of difference.

Regarding the one-off factors in Q3. Well, we do not many one-off factors -- and the stock price plummeting led to some one-off factors. Or because of the financial FX rate that surged, well, this actually affected our numbers as of end September, although the situation has changed around currently.

Mr. Choi also asked about the others and write back. And they are the uncommitted amounts, which are actually put as allowance in the credit card. And there have been many regulations against growth. And because we need to preemptively manage the risk, there are some uncommitted amounts which have not been used. And if there is low possibility of use and if the customers are not using this, well, we have actually decreased the limit on use credit limits. So this was the write off -- the write back.

Let's take the next question. Mr. Jin-Sang Kim of Citi Securities.

Since other people have asked very good questions, I will only ask a few questions that I have. On page 2, in Q2, the recurring income is about KRW580 billion, and so quarterly -- well, if you look at Q -- this has been decreasing since Q1 if you look it on a quarterly basis. Are there are special reasons for such a decrease or is it -- and this recurring gains downward trend is that meaningful? That's my first question.

And my second question is that, in Q3, given the one-offs-- and it's same with the other banks as well. It seems as though there is very little -- less provisioning that we had anticipated. And you said the provisioning will continue to decline.

Whenever we talk to banks, they say that they will have a provisioning of around KRW350 billion to KRW450 billion per quarter. However, it seems now that you're expecting the provisioning to be lower than this. How are those macroeconomic uncertainties increasing. So I don't know where -- I wonder where you got your confidence to decrease the provisioning? So could you tell us about this?

Yes, Mr. Kim, you have asked two questions. The first question is related to provisioning level and second question was related to the recurring profit trend. Well, for the recurring profit trend, in case of this quarter, the exchange rate changes and the capital market fluctuations caused the recurring profit that we have. And so there was -- let me say, a negative impact.

So I believe that are our abilities were better to make the profits because -- however, because of the stock market and the capital market, there was a bit of a decline. And as for -- the recurring profits. And as for the provisioning level, as I said before, we expect it to be around 50 bp to 60 bp. That was the guidelines we gave to the investors. And it has been stabilizing at a lower level.

And given the economic situation and the circumstances of the companies, that trend will continue rather on a slow pace. And so that is why we are saying that it's going to continue to decrease. But in terms of absolute number, because of the write backs -- of the write offs, which is a one-off items, so when all of that -- I mean that -- all of that has already been included. So we expect the provisioning to be stabilizing at around KRW300 billion to KRW350 billion.

Of course there are many concerns about the economic situation. And as we've said before, we do not have much loans to the large corporations. And when it comes to the construction, ship building and the real estate, PF, we have preemptively handled any problems.

However, there are some SMEs that are experiencing difficulties and we've already provided guidelines based on the potential difficulties that may experience difficulties. So our guidelines should not change by much. However, the economic situation is changing very rapidly. If the overseas international markets become really bad, then we will have to expect to see some bad results.

Yes. [Kwang Zu Ku, Global Securities]. Please, Senior Researcher Kwang.

Yes, I am Kwang, the senior researcher at Global Securities. Well, there has been some social criticism and there is pressure to lower your fees. And what impact will it have on your Bank and on credit card?. And this will lead to less profits. And can you contain costs with the profits going down? Can you continue your expenses?

Well, as you previously mentioned, we always are interested in the news because it changes and it affects us in deciding our profit level. And it seems that we will be gravely affected from next year. And regarding the amount of impact we will have? Well, I will let you know in the visual meeting. And the Bank and credit card will be probably affected within a KRW100 billion basis. And there are three ways that we will be affected. First, well, we are trying to come up with ways to make up for the fee decrease. For example, the credit card fee income may go down, but we may think of other ways to increase the cost selling of our customers, because the Bank hasn't been truly involved in other activities because of the law that separated the financial services being offered.

But now, with a new consolidation law, we will be able to do this. And because we need to make up for the decrease in the fee income, we will try to maintain a favorable NIM as previously mentioned.

Well, we will strengthen our funding capability that we're traditionally strong at and we will also strengthen our efforts in other ways. And this has actually led to better results on our side compared to other competitors and this will lead to more interest income.

We also will focus on non-interest income. We had bancassurance, beneficiary securities, retirement pensions. Well, we are actually number one in all of these three areas, but still we have some room to grow. Accordingly -- well, in custodian or trust or FX. Although we had seen market improvements this year, we are going to accelerate our efforts to improve these areas.

And, as aforementioned, because the economy is unclear and because we do not have predictions into the future, we will need to make cost-cutting measures. And regarding how to lower the credit cost, well, we need to make continuous efforts to do so.

Well, I have explained numerous times about the credit cost, so I will skip that. And regarding the G&A, well, there is administrative and labor. And labor, well, it is inelastic and it is not easy to change. But in the administrative costs, we have been making efforts to lower the costs. But we need a more integrated IT plan, and if we execute it, then we believe that we can cut off some administrative costs going forward.

Accordingly, although we had some cost containment in G&A compared to last year, we will maintain efforts to contain G&A costs in the future as well. We will try to recover the loss fee income through these various measures. Although the top line is single digit, we will try to aim for double digit bottom line. Thank you.

My name is Park, the Vice President. Let me give you additional explanation. The macroeconomic situations are deteriorating, as you know, and there are some negative situations taking place in Korea. So because of the commission reduction, this may have negative impact on the profitability. And to overcome this situation, we are coming up with our own measures.

For instance, next year in our business plan, we are going to be focusing on the productivity so that we will have more efficiency in terms of management of the Bank. And we believe we have some room to improve when it comes to productivity. So we will find ways to enhance our productivity. And if we could do that, we will be able to compensate for the loss in the profit due to reduction in the fees and commissions.

And we will also work to enhance our competitiveness so that our ability to generate profits will also be improved -- and recently when we have started Star Table as part of the asset management of services. And through such a service we're trying to attract high net worth individuals so that these high net worth individuals will manage their assets through KB. And we're also trying to improve the competitiveness of our private bankers.

And for the corporate banking -- and through this [Hidden Star 500] we are trying to improve our technology level and our -- excuse me -- we have been able to track SMEs that would have a large market share and high level of technology. So by doing so, we hope to help the SMEs to grow and our Bank to improve its profitability.

Beginning on this year, for the large corporate, our services that we have provided for the large companies beginning this year have improved, and so we have been receiving much mediation or brokering of fees. And then we expect the brokering fees to improve. So these attempts and efforts would, I hope, would compensate for the reduction in the profit.

Thank you, very much. Next question from JP Morgan Asset Management, Seo.

I have two questions. One is, if you can please provide general comments on your foreign country funding mix this for the next one year? And also, secondly, what is your general approach in terms of meeting this foreign currency funding needs? Thank you.

Well, thank you very much. And it seems to me that for FX because of the European crisis many Korean banks may be increasing their loans and we may be having troubles with funding because of these difficulties. However, when you see the FX liabilities, it's only 7% to 8% of our total liabilities. So the impact is quite minimal.

And our funding sources have been diversified. Our European funding sources are actually quite limited so the European impact will not be great on KBFG. However, we don't know what will happen in the future, so we will need some ample room in funding. So regarding the funding mix, well, we had the short-term ratio of going up to 43%, but we had dropped it to less than 40% and we will try to push it down, the short-term funding to the early 30% or so. And we are going to do some tweaking for the short-term and long-term funding to have more proportion for the long-term funding.

And if we do this -- well, if it's too much leaning for the long-term then it have a cost burden. So it will not be three year or a five year basis, but maybe one or two year basis. And for even long-term, we're not going to have extra long-term maturities. For example, it's going to be one to two years, even in the case of long-term. There are the long-term debentures that we've issued but we will not do so in the near future. And we will not increase our funding rate greatly, and we will do our best to respond to these challenges.

Secondly, regarding our funding sources. Well, we have some room to maneuver because Asian companies haven't been much impacted. And some of it was from the US, but a lot of it is being transferred to Japan. US, Japan and other Asian countries are some of our funding sources. So we are going to have a stable mix. So even if there is a crisis in one of these regions or countries, we're not going to be greatly affected.

Another effort that we are making is that for other banks -- well, their FX deposits actually went down. But in our case, we believe that FX deposits increase will help us respond to challenges. So we have about $800 million of FX deposits that went up and we are going to strengthen our funding mix on this side as well.

So in the short-term and long-term, we're going to put more emphasis on the long-term and in particular on FX deposits. And based on this funding, we're going to not focus -- we are going to have a strategy to squeeze the liabilities and our assets. Thank you.

Yes. Thank you very much.

Mr. [Sung-Wa Cha], Barclays Securities.

Internally, you're generating a lot of capital and you have many -- you've made profit and you have also sold off treasury stocks. So what is the appropriate capital adequacy ratio in the long-term? That is my first question. And my second question is, what is the appropriate level of ROA and ROE for you going forward? So that was my second question.

And related to capital ratio, we are very cautious of the recent situations that are taking place. In order to achieve ROA and ROE targets, of course we need to improve our capital adequacy. But now the situations, as you know, are very uncertain. The customers trust and funding -- we will have more favorability if we have good capital adequacy.

As I said before, by selling off the treasury stocks, we have improved Tier I and BIS ratio by about 1%, and I think we are well prepared for Basel III as well. And we believe that the profits will be generated on a continuous basis, which I believe will help us to deal with any regulatory capital, including Basel III. However, we do not want to have excessive capital because of the shareholders' values.

And our Chairman has promised to our shareholders' that our financial growth would continue to maximize shareholder's values. At this point we do not know whether we have excess capital or not, but we have to look at the economic situation and we also have to look at the measures from the regulatory organization. And about the market risk, the government is thinking about applying stress bar, and if that is applied, then we will have about 57 bp point impact on the BIS.

And about related to household funding, we have plans to improve the RW, and so we have to think about the capital that may be needed for that. So we have to wait for these two regulations to be fixed by the government. And if we have excess capital, we would like to utilize that to maximize shareholders' values. And I think that if it's better to have inorganic growth, if that's better for the shareholders, then that's the direction that we are going to take.

And we can -- If there are room to improve the ROA and ROE, then we will appropriately allocate the assets. And if we do have a capital adequacy or excess capital, we will find some ways to return this capital to the shareholders.

As for ROA and ROE, our shareholders have been showing us their confidence in us so ROA has to be more than 1%. ROE has to be more than 12%. And ROE, as for that being 12%, if we exclude one time -- one-off of gains, I think we need to constitutionally improve, make improvements.

So we will double our efforts next year so that we will be able to reach our targets. Internally, we have a higher target than 12% for the ROE, but our goal is to reach ROA 1% and ROE over 12% at a minimum. And as I said, internally we have even higher goals.

Thank you very much. It seems that we had many questions coming in and because we have no other questions coming in, I would like to conclude our Q&A session. And with this, I would like to announce the conclusion of the 2011 Q3 earnings release.

This presentation and the webcast will be uploaded on to the KBFG IR website so please revisit it whenever you need to. Also, please direct your additional questions to the IR Department at KBFG and we will do our best to answer your questions. Thank you very much for participation. Thank you.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.