KB Financial Group Inc (KB) 2011 Q4 法說會逐字稿

(Interpreted). Good afternoon, my name is Kyu Sul Choi, the head of IR at KB Financial Group. Thank you for taking part in today's earnings conference of KB Financial Group for fiscal year 2011 despite your busy schedules. The access to this conference is being provided via internet and conference call being webcast real time for Korea and abroad.

During the Q&A, you may call in to ask questions. Joining us in today's earnings conference, we have with us, KB's president, Young-Rok Lim, and executives from KBFG's subsidiaries.

The conference will consist of the earnings presentation by our group CFO, Jong-Kyoo Yoon, on the earnings results for the fiscal year 2011, followed by a Q&A session at which time, you may call in for questions.

Let me now present our CFO, Jong-Kyoo Yoon, for the earnings presentation.

(Interpreted). Good afternoon, my name is Jong-Kyoo Yoon, I'm the CFO at KB Financial Group. Let me present KBFG's earnings results for fiscal year 2011. Let me begin with the financial highlights. The profit of KB Financial Group for 2011 reached KRW2,373b while the profit for Q4 marked KRW219.1b. The significant year-on-year expansion in profit for 2011 was driven by the improved asset quality and the resulting reduction in provisions together with the appropriate level of loan growth and interest income gained through the enhanced NIM.

The profit for Q4, however, as seen on the profit graph has come down quite a bit compared to the previous quarters. There are two one-off factors that led to such reduction. First of all, on the workout companies and for those companies subject to voluntary restructuring agreements, we have set aside additional provisioning and I will elaborate later on.

And also, in order to meet the FSS NPL guideline of 1.5%, we have conducted proactive NPL sales and write-offs of KRW1,220.3b, so as you can imagine, we ended up reserving -- provisioning more than we had planned. So that is the reason for such reduction for profit for Q4.

When it comes to the gross operating income for 2011, we have recorded KRW8,843.1b. As you can see on the middle graph, we are maintaining a steady profitability trend of over KRW2 trillion per quarter. Next page please.

The provision for credit losses for 2011 came in at KRW1,513b. Thanks to the efforts to clean up the NPL and strengthen risk management, there was a 47.3% reduction year on year from 2010's KRW2,871.4b. If you look at the graph, the Q4 provisioning may seem to have surged quarter on quarter, however the ordinary provisioning per quarter remains quite stable since Q2 of 2010, when the provisioning was the highest with restructuring and preemptive provisioning, the trend has been actually improving quite significantly.

The ROA and ROE for 2011 affected by the decreased profit for Q4 vis-a-vis previous quarters recorded 0.88% and 11.36% respectively. As of the end of December, the bank's BIS ratio and Tier 1 ratio reached 13.56% and 10.3% respectively. And the KRW600b redemption in hybrid securities and the increased dividend payable brought down the BIS ratio slightly but still, we are in the highest bracket when it comes to capital adequacy levels.

On page five, let me touch upon the highlights of the Group profitability. First of all, the profit and loss. The Group net interest income for 2011 rose 15.1% to reach KRW7,104.5b supported by the loan growth and the improved NIM, and the net interest income for Q4 also grew 2.6% quarter-on-quarter, continuing a sound trend.

Last quarter, the bearish stock price and the rising exchange rate lead to the lackluster net gains on FVPTL and net other operating income;, however, the Q4 number came in stronger for both line items as I will elaborate on the later pages.

The net other operating income may appear to show a larger loss quarter on quarter; however, it was due to the loss recognition on the forward exchange contract with Sungdong Shipbuilding and Marine Engineering and as you recall in the month of September last year, we decided not to take part in the additional support package for additional funding and we have decided to exercise our appraisal right and in the month of December, there was an additional support package for the company and we had notified as a final decision, not to take part.

So as a result, we decided to reflect the loss just in case the four contracts concluded with Sungdong Shipbuilding and Marine Engineering does not really come through. So that is why we have actually reflected in the liability line item for the derivatives. So as a result, the loss amount may appear to be larger.

The Group's G&A expenses marked KRW3,931.8b for 2011 and KRW1,084.2b for Q4. The quarter-on-quarter spike in the Q4 G&A was due to seasonal factors such as the higher employee salary, as well as the advertising expense increase. Again, I will revisit the employee salary amount later on but then again, the ERP payment of KRW77.8b increase and on 50 employees on a small scale, we have conducted an ERP program so that was one of this. And also, we had incurred advertising expense of KRW21.6b and this was a seasonal factor.

The Group's net operating income before provision for credit losses for 2011 recorded KRW4,911.3b, up 50.7% year on year. On the following pages, I will discuss the detailed analysis on the Group profitability per each business area.

Let me begin with the interest income. The bank's annual net interest income expanded 2.1% year on year to KRW6,149.8b, while the credit card annual net interest income came in at KRW764.7b. As you are well aware, of the credit card interest income, the portion before the spinoff in March 2011 was attributed to the bank while the results post-spinoff were reflected under credit card on the bottom of the page.

On the top right, you will find the graph on the group net interest income. The net interest income combining the bank and the credit card business showed a sizable improvement compared to 2010 and the quarterly trend in 2011 also reflected a steady upward trend. On the bottom right of the page, the graph shows the Group's NIM which combines the bank and the credit card results. During Q4 boosted by the year-end surge in the credit card usage, the NIM went up three 3 points to 3.1%.

On a cumulative basis, for 2011, the NIM reported 3.07%, up 33 basis points versus the previous year's 2.74%. Going forward, KB will refrain from overheated competition in the loans which could erode our profitability and continue efficient margin control efforts such as proposal enhancements, so that we could maintain the 3% range NIM for the long term. Next page please.

Let me now move on to the net fee and commission income breakdown for the Group. The bank's annual net fee and commission income amounted to KRW1,474.9b, down 7.2% year on year. It is mainly because the credit card fees and the commission generated after the spinoff of the card business was reclassified under the credit card net fee and commission income line item.

If we look at the more detailed breakdown of the bank's major fee business, the securities brokerage fees including ITC products experienced an NAV contraction of about KRW5 trillion, stemming from the bearish stock prices which led to increased redemption. As a result, the securities-related fees decreased KRW68b year on year. In the meantime, the proactive marketing efforts started bearing fruit for Bancassurance with KRW95.3b higher fee income year on year from increase in new business written.

Since the spinoff of the credit card business, the credit card agency fee the bank receives from the card company is around KRW60b to KRW70b per quarter. The fourth quarter net fee and commission income despite the increased yearend card usage and the relevant fee increase, had limited quarter-on-quarter growth because of the overall expense increase such as joint marketing expense and marketing expense of KRW3.7b.

I would now like to comment on the net gains on FVTPL which stands for Financial Assets Liability at fair value through profit and loss, and net other operating income.

First of all, the bank's Q4 net gains on FVPTL amounted to KRW321b, up KRW224.2b quarter on quarter. Especially with the rising stock index and the somewhat stabilizing exchange rate, the gain on derivatives is significantly improving. The bank's net other operating income still remained in the red during Q4 following the previous quarter. However, if you take out the one-off factors, then the general trend is quite improving.

More specifically, if you look at the gains or losses on sales of AFS/HTM Securities, there was the sales loss on treasury share of KRW196.1b during Q3 and a sales gain on Hyundai E&C share of KRW413.9b. Excluding such one-off factors, it's pretty similar quarter to quarter. There was a loss on FX and hedging derivatives of KRW207.1b but you should keep in mind that if the underlying assets of net gains on FVTPL and the derivative products in the hedging transaction offset each other which means things are pretty stable.

In the meantime, under the other items, there was a loss of KRW438.7b widening the loss quarter on quarter. This was mainly because of the credit value adjustment on the forward exchange contract involving Sungdong Shipbuilding and Marine Engineering being reflected as losses for the additional provisioning loss recognition of KRW203.5b. And once again, this amount is quite conservative and we are setting the maximum possible loss that we can incur. Next page please.

The bank's G&A for Q4 stood at KRW915.3b rising KRW81.9b quarter on quarter. The adjustment of the allowance for employee retirement benefits of KRW47.6b, the retroactive modification of the wage increase of KRW11.7b and the small-scale ERP expense of KRW14.8b were the seasonal factors leading to such increase.

For your information, the adjustment of the allowance for employee retirement benefits reflected the year-end discount rate drop from the previous year's 5.13% down to 4.32%. And the wage increase ratio of previous year's 4.8% was raised to 7.5% so during Q4, we reflected all these changes all at once.

And once again, as I told you before, all the expense items, KRW26.6b worth of advertising was increased. Now, with the introduction of the comprehensive new TV channels, we ran more advertisement and about KRW16b worth of advertising-related seasonal factors took place.

While the G&A expense of the credit card business also edged up for the seasonal factors, it is under control through various cost-cutting measures. The graph on the right is showing the Group cumulative cost income ratio for the year. Due to the seasonal increase in G&A and the Sungdong Shipbuilding related losses, Q4 cost/income ratio rose 2.7 percentage points to 44.5%.

For your reference, if you take out the major one-off factors, the ordinary cumulative cost income ratio for 2011 was between 40.5% and 45.5% depending on the quarter. We will not only expand the top line but also make efforts to manage the cost income ratio within the mid-40% range through efficient cost control so that we could sustain the early 40% range in the long run.

Please refer to page 10 for the bank's profitability overview which we have provided for you to compare with the past results, we will move on to the next page.

From now on, I will touch upon the Group's financial status. As of the end of December 2011, our total asset has increased by 7.3% to record KRW278 trillion and the total liabilities have increased year to date, [KRW15 trillion]. If you look at the total asset for the Group, it's KRW23 trillion compared to 2011. There has been an increase of profit of KRW2.4 trillion and there is an impact of sales of treasury shares so there was an increase of KRW3 trillion year to date.

For your reference, the total asset as of the end of December showed a slight decline compared to September end with a repayment of hybrid securities in the amount of KRW600b. As of the end of December, the Group's total asset including Trust and AUM was KRW362 trillion, this is a growth of KRW28 trillion year to date that is mostly due to the growth in loans and AUM of subsidiaries, i.e. asset management and real-estate trust like the funds.

Next, I will move on to the loans in won and in credit card. If we look at the bank loans in won as of the end of December, it is KRW184 trillion, it's a growth of 5.6% year to date. Considering the target for annual loan growth is within the nominal economic growth rate for 2011, loan growth has been within the adequate level.

For clarification, Q4 number seems to be relatively low compared to the previous quarters but it is a reflection of the NPL sales and write-off as well as the repayment of corporate loans which tend to occur mostly at the end of the year so there is the effect of the seasonality.

Looking at different sectors, household loan increased 4.9% per annum with mortgage and general loan growth relatively well balanced.

In terms of corporate loans, we showed a growth of 6.4% per annum, mostly driven by SOHO loans which is mostly collateralized and with good quality. For large corporation, loan grew 16.2% per annum but this is due to the fact that with the revision of basic (inaudible) SME., KRW1.15 trillion of SME loans have been reclassified under the large corporation loans. If this impact is taken out, loan growth for large corporation was also within an adequate level.

As of the end of December, the credit card receivables is KRW12.5 trillion showing a 0.8% annual growth. However, if corporate purchase card, as we have mentioned many times previously, after the spin-off, they have stopped sales of the corporate purchase card and it has been converted to under the loan under the bank. So previous year, there was a decline of KRW859b, so considering that, the growth rate is once again, within the appropriate level. Next page.

If you look at the bank's funding overview, as of December end, deposits in won is KRW189 trillion, growing 4.8% year to date. This is thanks to market preference for safer assets and the bank's active marketing activities driving the growth of time deposits by KRW10 trillion as compared to the end of the previous year.

Meanwhile, with the transition of holding company structure in '08 and the advent of financial crisis, debentures in won had grown to near the level of KRW38 trillion but with our continuous efforts, it has declined to KRW15 trillion and we are focused on improving the retail type and expanding the staple customer base and currently, that accounts for 93%. We are going to focus on low-cost deposits and retail deposits and we will continue to attract a deposit base to strengthen our stable funding source.

And also, if we look at the loan to deposit ratio, it is below 100% and we will continue to improve on this and we foresee no obstacles.

Next is page 15. Next is on the bank's asset quality overview. First on the bank. If we look at the bank's NPL ratio at the end of December, it fell from 1.88% at September to 1.43% which is an improvement of 45 basis points. NPL ratio declined significantly due to the sale and write-off of KRW1,097.7b of the NPLs and also, if you look at the new NPL formation, it fell considerably from KRW500b to KRW600b per quarter the previous periods, but it declined to KRW200b in Q4.

So substandard and below loans declined significantly while precautionary increased by around KRW470b. And this is mainly due to two reasons. One has to do with the fact that Kumho Industrial which was in the past, substandard, had been upgraded to a precautionary; it is in the amount of KRW130b. And also with regards to small and medium sized construction companies, and for reconstruction associations, just in case for further sluggish and slump in the real estate market and also to preemptively respond to sell [Citi's] various policies and we have reclassified them under precautionary.

So, there has been new addition into the precautionary line item so accordingly, therefore, the provisioning is very conservative and it is well reflected in the market. And also, if we look at NPL coverage ratio, it is 158.9% and showing a sustained improvement since the tentative decline affected by a conservative classification of 2010, the coverage ratio incorporated the reserve for credit loss and in Q4, the supervisory authority changed the guideline on calculation method, so there has been a significant change. So if you look at our provision, it's KRW4.4 trillion, and the reserve is about KRW1.8 trillion so that is the buffer zone that we have for us.

Lastly, the bank delinquency rate as of the December end is 0.8%, it improved 22 bp especially for corporate, the delinquency ratio moved from 1.3% in September to 0.84% in December and such decline of corporate is attributable to the sale of write-off NPLs but even if you exclude that impact, the real delinquency ratio is also showing a gradual quarterly improvement.

Next is on credit card asset quality. If we look at NPL ratio for the credit card as of the end of December, as a result of NPL resolution it improved 5 basis points as against the end of September to 1.1%. And NPL coverage ratio including the reserve for credit loss is 310.7% and delinquency for credit card, that's the write off of NPLs decreased from September 1.69% to 1.51% in December and also the real delinquency ratio also improved to 2.47%.

And just to elaborate, after the spinoff of our credit card business, with the corporate purchase card taken out and the denominator becoming smaller, the delinquency rate has somewhat increased but currently the purchase cards the balance is 89.7% and delinquency rate is around 26% so the problematic ones are with the credit card but the sound ones are with the bank. So if you were to take that factor out, the delinquency rates would be, as of the end of December is 1.3%.

At KB Financial Group, we are mindful of the macroeconomic environment, the economic recession and increase in household debt and are committed to responding preemptively against potential credit card asset quality decline. So through limit management and improvement of delinquent receivable management process, we are focused and committed on controlling the asset quality.

Next is on provisions by sector for banks and for credit card companies. First is on bank. If you look at the bank's annual LLP, it's KRW1,300b. So on the back of improved corporate loan soundness compared to the previous year, there was 51.2% decline while in Q4, there was a provisioning of KRW435.8b which is a 62.4% increase QoQ. By sector, for provisions for household it's KRW64.6b, a decrease of KRW24.1b. But for corporate LLP stands at KRW371.2b, a sizable increase from Q3 by KRW191.5b, and there are three major reasons.

Firstly, there has been a very active cleaning up of the NPLs in order to meet the target, we have been quite active in selling and writing off of the NPLs and so for the corporate, we handled KRW1.1 trillion for the bank, and so through write-off and sales, there was KRW24.2b of the NPLs so this is on the corporates and this had brought about KRW150b and the gain which had been KRW150b. So as I said before, the Korea Development and Sungdong Shipbuilding and Maritime Engineering, these are also companies that are either undergoing a workout or have entered into a voluntary restructuring agreement and we have taken a very conservative view and we have provisioned in the amount of KRW177b excluding the potential recoverable amount.

And according to the IFRS, there are a collective assessment and an individual assessment that is made and the guidelines relating to that had been eased so those that are financially difficult meaning, if one company is deemed that it is quite significant based on the judgment of the bank, one can convert that company from collective to individual assessment subject to individual assessment.

So about KRW290b worth of loans we were able to convert to individual assessments. When it was under collective assessment, it was an average of about 5% but if you convert to individual assessment, then that percentage will increase to 20%. So about KRW56.3b was additionally a provision. Now this is just in case preemptively for further degradation of economic situation, going forward with regards to the marginal company so these are additional provisioning that was done.

And in the Q4 LLP for credit card is KRW68.7b due to additional provisioning expenses incurred from write-offs, it increased KRW19.2b QoQ so there has been KRW52b of expenses.

Next, I would like to talk about the provisioning ratio by each sector of the Group. If you move to page 18, and if you refer to the upper left Group - Group provision for credit loss against Group consolidated total asset in 2011 is 0.56% on a cum basis. Compared to 2010's 1.1%, it is an improvement by 54 basis points.

Q4 provisioning ratio, as mentioned before, due to non-recurring factors, rose 31 basis points to 0.73%. By sector, household Q4 credit cost is 0.25%, 0.35% improvement QoQ from 0.35% from the previous quarter and on an annual cumulative basis, 0.29% so it's adequate.

If you look at Q4 credit cost for the corporate sector, as a very active resolution of NPLs, there were 76 basis points increase to 1.49% on an annual basis. Credit cost stands at 1.04%, it's an improvement by a large margin compared to previous year's 2.53%.

The Q4 credit card -- credit cost is 2.20% and 1.77% per annum for showing an increase on both compared to bases, YoY and QoQ, but we do not believe that it begs for concern on an absolute basis. Now, having said that, we are making preemptive responses and are committed to risk management in regards to cash advances and credit card loans and also limit management. We will be fully committed to risk management to counter any potential risks.

This has been KB Financial Group's 2011 performance highlight. Thank you very much for listening.

(Interpreted). That was an earnings presentation by our CFO, we will now begin the Q&A session. For those of you taking part through the internet, I would like to invite you to call the number on the last page of the presentation material to pose questions. (Operator Instructions)

The first question is from Mr. Byung-Gun Lee from Dongbu Securities. Please go ahead, sir.

(Interpreted). Good afternoon, my name is Byung-Gun Lee for Dongbu Securities. Can you hear me OK?

(Interpreted). Yes, we could hear you fine.

(Interpreted). Despite the challenging environment, I would like to congratulate you for the good result. I have the following two questions. The first question has to do with the NIM. Compared to other competitive banks, i.e. to have a better picture of your company, last year, compared to your company, I think that there has been other banks revising or modifying on the receivable interest but you have not been impacted about that so could you comment about that?

And also, regarding the FX funding ratio, the regulatory body has been quite stringent on holding on to more foreign currencies. Now, despite such challenging environment, KB had a very good result because you talked about the hybrid securities earlier but you did repay hybrid securities and also you were able to refinance in the low interest rate so can you elaborate about those situations and also, can you foresee the future quarters?

And my second question has to do with the possible acquisition of a life insurance company such as ING Life because the market is anticipating such a merger but when it comes to ING Life, it doesn't seem quote likely that you will be able to acquire because the size of the acquisition is quite huge.

And it is not like you could choose and pick just the business divisions that you would like, and of course, this is a story that goes back a long time but in the past, KB did sell the share of ING Korea back to ING a long time ago and back then, the share price that you received was quite high. Therefore, when it comes to paying the right price in order to enhance your ROE going forward, that would be quite challenging. So what is your view on the possible acquisition of ING?

(Interpreted). Yes, let me answer your question regarding NIM and regarding the ING acquisition. Mr. Park in charge of strategy or some other colleague will answer.

First of all, regarding NIM, you talked about the guarantee of the interest receivables. Under IFRS, even if there is a delinquency you are able to actually adjust it accounting wise and you can actually satisfy more provisioning. But if the delinquency is beyond 90 days then you have to cancel such results that you have captured. But I understand that other competing banks have been reflecting the capturing of such profit under IFRS per quarter, but we have been quite conservative by capturing that amount in an annual basis. So compared to other banks, KB was not as impacted because of such IFRS regulation change.

But I didn't quite get to hear your second part of the question. Can you repeat that once again, please?

(Interpreted). There are issues about giving discounts on the delinquent interest that you charge on the people and sometimes when you set collateral you sometimes -- you get to pay for the collateral-setting fees.

(Interpreted). Yes, that is correct. In the past, we used to charge for the collateral-setting activity to the loan holder, but because of the regulation change we are now having two burdens for setting fees. So that is not an interest income, but that used to be reflected under the fee income, so we won't be impacted under the net interest income line item. But going forward, we have to actually reflect it in the pricing appropriately. So, as you said, in the past we were able to charge additional money in setting certain collaterals. But again, we have to determine how we could preserve our profit, so once again we will do our best to preserve our NIM, but we will actively try to address these regulatory environment changes.

Now, going -- moving onto the foreign currency-related asset quality or soundness, first of all, regarding foreign currency-related liquidity, I think that every bank is facing difficulties. Now, we've been very preemptive in dealing with it. For instance, region by region we are not so reliant on the European region, period. Now, out of the total foreign currency reliance, the European continent takes up about 7%, 6%, 7% reliance. So we are trying to reduce it further in the future. Now, following the European continent, we want to control reliance on the US market as well, so we've been focusing more on Asia. So we've been diversifying recently.

And also the second change we have is that we have less reliance on the short-term funding, but rather two-thirds is long term and only one-third is short-term foreign funding that we are relying on. Thirdly, we've been expanding aspects for foreign-currency deposits so that we could reduce the reliance on external funding. Right now it stands at $3.8b, so right now $2.5b we have extra buffer in terms of the committed line, etc. So because we have been securing such buffer, as you have mentioned, I'm sure in such efforts we could possibly lose a little bit of the profitability. But again, because the foreign funding needs is quite limited out of the total funding requirement, this impact on NIM is quite limited as well. And again, on high-price bonds in the beginning of the year was about KRW7 trillion, and at the end of the year it reached up to KRW8 trillion.

So in 2012, rather in 2011, we have issued subordinated bonds preemptively. So in 2012 it will be about [6.32%] in terms of the yield requirement, and that has to do with the new issuance. Now, I don't think that the NIM improvement was too big because of the new issuance of new bonds. The NIM improvement was basically from the duration gap reduction rather and because of the interest environment. Again, we are constantly improving upon the pricing side, so we are actually making improvement in this regard.

And secondly, from the low-cost deposit side, we have about KRW50 trillion to KRW55 trillion. So we have added about KRW4 trillion to KRW5 trillion, so that has also added to our buffer.

(Interpreted). My name is Yim and I am the President of KB Financial Group. Let me talk about the M&A issues. Basically, what we can share with you is that when it comes to inorganic growth we want to make sure that bank and non-bank growth can be conducted in a balanced manner by creating the group synergy and by diversifying profit sources. So in that regard, our Group has been always interested in possible M&A, especially KB Financial Group, not only in the securities area but also in the insurance area. We have always been interested in possible inorganic growth aside from the banking sector. So going forward, whenever there are opportunities for good M&A opportunities we will closely monitoring the market.

(Interpreted). My name is Park. I am the CSO. So let me elaborate on that question. Just now, regarding ING, Dongbu securities representative has conducted certain assessments. But let me ask for your understanding that we cannot actually make detailed comments about this acquisition because from the ING side they only announced the fact that they want to sell the business but they have not announced the more detailed MOU terms or other terms and conditions. So once the detailed terms and conditions are announced we will be able to better communicate with you in the future.

(Interpreted). I hope that has answered your questions. Next question, please. From Citi Securities, Jinsang Kim, please go ahead, sir.

(Interpreted). Yes. Good afternoon. I would like to ask two questions. The first has to do with the credit-card-related fee structure. The government, I understand, is continuing to exert pressure and there is a talk about reducing that fee to 1.5% across the board. So what do you think is the possibility of that actually happening? And if that does occur then what impact would it have on your profitability?

And second, I understand that there is a five-year plan for shareholder-equity-related plans that's been requested by the supervisory authorities. It seems like government is very tightly and rigorously -- if they are to control the equity of a bank, banking institution, then to what extent would the bank be able to make its dividends payout? And is this going to be a significant impact or is it just going to be a guideline that's presented by the government? In your view, what do you think is the seriousness of this type of movement by the authorities?

(Interpreted). Yes, Mr. Kim, I will respond to your question. Relating to the credit card, as you know, the political party, the ruling party and the opposition party, they have maybe a slight difference in the view. But it seems like they have come to the agreement on reducing the merchant fees, but they are different on how to do it and the method by which it will be affected. So there are a lot of efforts that are being exerted from our side, but we think that we accept that there will be some decline in the merchant fees. And I understand that the discussion had not really been able to be conducted fully in the national assembly session until yesterday.

But one thing we need to explain is that a lot of people misunderstand that the merchant fees at this point currently stand at 2%, and when it comes to the actual benefit that goes to the customers it's about 80 basis points. Now, there is cost and marketing cost which account for about 1% and there are, well, funding-related cost burdens and also there are some credit cost element. So if you consider all of this, in the credit business, actually this fee is not the main source of our profit for the credit card companies. But then again, the sensitivities of the Korean public does not seem to understand that, so we do need to explain such basis. And also if there is a significant cost in the fee structure this could actually undermine the benefit that goes to the customers.

And we do need to explain this to the politicians. And, I understand the Credit Card Association is quite active in trying to advocate its position. So there are various different efforts that are conducted.

With regards to the loss, if -- at worst scenario, if it goes down to 1.5%, and we are analyzing various scenarios, in terms of the amount of loss, to date we say that if there is a decline by 10 basis points there is a certain amount of impact in the form of a loss. So we have been communicating that before. So I will not be able to provide you with a specific loss amount at this point, but from a preemptive perspective, from the industry's view compared to the competitors, on credit purchase it's about 50% to 60% for us. So we believe that compared to other competitors the impact or the loss impact that we would experience would not be as high as the competitors. And as we began last year, we've streamlined ourselves and we are much more advantageous in order to actively respond to such changes in the industry.

Regarding your second question on the shareholder equity controls or regulations, we disclosed it today. And just for your information, when it comes to payout ratio to mid to long term, it's 30% or 20% to 30% has been our payout ratio. We had -- on many occasions have communicated that to our investors, that that is our hope. However, this year, the global financial crisis that was initiated by the -- Europe and also a more strengthened regulation on the capital adequacy and also considering the uncertainties of the economic situation, as we have disclosed, if you look at the profit ex-reserve for provisions we are looking at about 15%. So that would be about KRW721 per share, and so -- which is 15%.

So I would like to first provide our apologies for not meeting the hope and expectation of the investors, but stating next year we will streamline ourselves and make our fundamentals more stronger. And I won't be able to give you a definitive number on the P&L ratio, but, within a scope as possible, we are going to -- as you know, have consistently voiced our commitment to further strengthen shareholder value.

When it comes to shareholder equity regulation, because the economic situation is uncertain and opaque, for a certain period of time we believe that it is good to have a stable level of shareholder equity. So we are in line with the position of the supervisory authorities. For this year, stress VAR had been applied, and on certain mortgage loans there has been more strengthened criteria. Stress VAR impact of 34 basis -- 43 basis points, and for -- there are 17 basis points on the mortgage-related household house loans. And we have been actually preparing for this movement already in advance.

Having said that, this year, let's say, for example, on domestic CP, I would think that Korea would adopt to domestic CPs in the near future. Already, on the CP level of shareholder equity we have been preparing for that advent of CP, so we do not think there will be a significant repercussion. However, to what extent CP will be adopted in Korea is something that is not clear as of a date. However, whatever the direction of the guideline when it comes to shareholder equity guidelines and regulation, we can comply with the expectations of the supervisors as -- and also at the same time we can -- we will do our best to have secure shareholder equity. And we see no problem in doing that, to the benefit of the shareholders and investors.

(Interpreted). Next question, please. From Franklin Templeton, Mr. [Chong Wi]. Please go ahead, sir.

(Interpreted). Good afternoon. My name is Chong from Franklin Templeton. I have the following questions regarding expenses. If I may share with you some numbers, if you look at the bank and the credit cards separately, for the banks you have G&A of card of about KRW180b, and together it's almost KRW1 trillion. Of course, you have a one-off factor regarding the retirement allowance, but if you exclude that it comes out to about KRW975.5b.

Now, last year, before the spinoff of the card company, the number used to be KRW1.5 trillion. Now, if you exclude the, well, KRW655.8b of that time, so this fourth quarter, it was about KRW955b. Now, back in 2010 there was about KRW823.5b. So last year your expense increase ratio was about 18%. In terms of amount, it increased by KRW150b.

So, despite the fact that your headcount is decreasing, why is it that your G&A is increasing like this? So relatedly, what is your guidance for 2012 expense trend?

(Interpreted). As you mentioned, last year it was about KRW650b worth of ERP expenses on 3,200 persons who chose early retirement. We had a base effect of reduction. So considering the headcount reduction you're saying that the increase rate is high. That was your point. And that is actually correct.

So if I may address that particular part of the question, in the past, regarding the trade union-related agreements entered into we talked about the profit-sharing agreement that we have already entered into with the trade unions. So once we reach a certain level of profit then we could give back more dividend to the shareholders, but some profit sharing can be made with the rest of the employees. So we have such a system in place. So we are currently making efforts to improve upon the system.

Of course, to address this issue we have to further discuss things with the trade union because this is an agreement which was already concluded. So we have to go to convincing and we have to have the understanding on the part of the employees as well. But in any case, when we exceed a certain level of ROE then we could go into profit sharing. Now, in the past we introduced this particular system with the trade union because our ROE was quite high, but this actually -- this entire fact has about 8% impact on the Company's situation. So because of this factor we try to control costs quite tightly, but nevertheless, we are still being impacted quite a bit from this profit sharing.

So, as I told you before, because of the already concluded agreement with the trade union I cannot tell you right now what could happen, but we will do our best and we will do our very best to control our cost so that we could limit the impact coming from that profit sharing to below 5%. So please bear with us as we make such efforts.

(Interpreted). Thank you. We will take the next question from Kyobo Securities. Mr. Hwang, please go ahead, sir. And when you ask questions, please slow down a little bit.

(Interpreted). Yes. Thank you. I'm Seok-Kyu Hwang from Kyobo Securities. I have two questions. The first has to do with credit card. Currently the market is very difficult and challenging, so from the industry's perspective it seems like monoliners' market share seems to be increasing where the credit card companies or the banks, their MS is either flat or is going down. You spinned off your credit card company last year, so, currently, are you in a transitional period? Also, do you think your market share can go up going forwards?

The second question has to do with the margin. Compared to other banks I would think that you have some space to have further improved the margin. When it comes to repayment of the high-rated or high-interest-rate set, could you elaborate a little more on that? And additionally, how do you intend to protect your margin going forward? Do you have more space to do so as opposed to other competitors?

(Interpreted). Yes, I will answer your question, Mr. Hwang. The first has to do with the credit card business. Unfortunately, after we joined the credit card business within the umbrella of the Bank we had lost our market share. So one of the reasons why we spun it off is because we wanted to further promote and facilitate our credit card business through various different efforts.

First off, relating to the market share, according to our numbers it's 14.8%. At 2010 it was 14.4%, so the -- it is -- it -- we have been converging into a upward trend, because considering the fact that in the past we had been losing 1% per annum, however we are now able to actually turn that trend around, especially when it comes to individual check card. And debit card, we have become number one and have surpassed other competitors, so we will continue to exert efforts towards this direction.

And if you look at January numbers, that number actually increased to above 15% in terms of market share. Of course, we will not be too reckless in expanding the market share at the expense of our profitability. We will continuously develop a good product and also strengthen our customer services. That will be our focus. And also, relating to credit card business, we believe therefore we are reaping the benefit from the spinoff.

Second question on margin, as you have mentioned, in the past there are high interest rate debts, but there are three types. The first is out of the divestures there are one that we had issued back in 2008. And, number two, there are sub debts -- I'm sorry. When we were going to the holding company structure there were some sub debts that were issued. And third is covered bond and some other so-called structured bond and credits. So we have these three types of vehicles.

Now, the covered bond, as you would know, the maturity date is May of 2014, so we do have ample time left. And there are bank divestures issued every one-year or three-year basis, and also some maturities came due last year. And when it comes to the subordinate debt, currently the residual interest rate for this year as of January end is 6.5%. But 2012, there is not big of a difference. So we do not think that we will be gaining more from this.

But, as I said with regards to last year, as you know, our -- most of the improvement in the margin on the loan interest have been the main driver behind this movement. So last year there was a capital premium system that was improved. And this year the industrial risk premium has been nearly set up so that we could differentiate by different industrial sectors. So we will continue to do that.

And also we make use of discounts on interest and that would be used -- and that would be restricted or it could be -- it will be made smaller with more stringent and various reviews. And also we believe that there are a lot of improvement room for collective group loans, so we would be focused there as well. And, as I said before, for low-cost deposits, at KB vis-a-vis other competitors, our competitive edge has to do with these low-cost deposits. So last year we had once again rebuilt the basis for us to reap the benefit and we are going to accelerate that effort this year.

Lastly, on duration gap, in the past the duration gap was minus, but with the interest rate falling and with our expected interest rate to fall, after Q3 and Q4 we are continuously going through the adjusting period. So if and when the interest rate does go down we will be able to minimize the minus impact. So we think that we will be able to keep the NIM at the present level.

(Interpreted). Thank you. We will now take the next question from JP Morgan Asset Management, (inaudible). Please go ahead, please.

Yes. Thank you. I have a couple of questions on the foreign currency funding picture. First one is in terms of how much of your total funding is comprised of foreign currency, if you can share that.

And also, can you provide also info on the foreign currency loan-to-deposit ratio as of the end of last year? Thank you.

(Interpreted). As we have mentioned before, if you look at the foreign currency assets the total size is about KRW17 trillion. As I said, it's about 78% of the total funding only. So absolutely we are pretty much reliant on the won funding. And also, in terms of foreign currency deposits, yes, we are steadily increasing that proportion. So when it comes to foreign currency deposit or loan-to-deposit ratio, currently we are maintaining about 132% range as of the end of 2011. In -- as of January 25 of 2012 it has improved even further to 115%. So LDR on the foreign currency side is also improving.

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.