KB Financial Group Inc (KB) 2012 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 2012. The access to this conference is being provided via internet and conference calls, 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 KBFG's President Young-Rok Lim and executives from KBFG's subsidiaries. The conference will consist of the earnings presentation by our CFO Jong-Kyoo Yoon on the earnings results for Fiscal Year 2012, 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, the CFO of KB Financial Group. Let me begin the earnings presentation of KBFG for Year 2012. First the financial highlights. KBFG's profit for Fiscal Year 2012 recorded KRW1,774.5 billion while the Q4 profit alone marked KRW213.8 billion. Profit for year 2012 declined year-on-year mainly due to the narrowing non-interest income including fee and commission income and lower income from investment securities.

In 2011 the proceeds from the NHF lawsuit related reversal and sales gain on Hyundai E&C boosted the one off gains where this year many one-off losses occurred instead. Notably in Q4, profit as shown on the graph was compressed compared to the previous quarters. It was mainly due to the Hyundai Merchant Marine and POSCO related impairment losses and other extraordinary losses. I will elaborate on the one-off factors in the latter part of my presentation.

The indicator representing the Group's profit generation capacity, the gross operating income has sustained a KRW2 trillion level per quarter in the past, but the Q4 results fell short of the KRW2 trillion level. However when excluding the one-off losses the overall trend remained pretty much unchanged. Including Trusts and AUM the Group's total asset marked around KRW364 trillion as of the end of December, up KRW2 trillion year-to-date. Next page please.

The provision for credit losses for 2012 came in at KRW1,513.3 billion remaining on par with the previous year. As shown on the graph the NPL ratio guideline from FSS of 1.35% had to be complied with leading to a sizeable NPL sales and write-offs. Nevertheless the provisioning amount only remained at KRW383.7 billion maintaining a stable quarterly trend. Year 2012's ROA and ROE marked 0.62% and 7.46% respectively.

If you look at the capital adequacy trend on the bottom at the end of December BIS ratio of the bank rose 44 basis points versus the end of September to 14.42%. The tier 1 and core tier 1 ratios recorded 10.89% and 10.82% respectively, boasting the highest capital adequacy in the financial sector. On page 5 I will discuss the Group's financial performance in more details.

Please turn to page 5. The 2012 Group net interest income stood at KRW7,115.9 billion. Affected by the narrowing NIM and stagnant loan growth, the growth was only 0.2% year on-year. The Q4 net interest income marked KRW1,751.3 billion down 1.6% quarter on-quarter. The annual net fee and commission declined 11.3% year-on-year but if you exclude last year's proceeds from NHF lawsuit, the decrease was by 3.9%. The Q4 commission income mainly came from the investment banking and bank assurance related commissions. If you exclude the one-off factors it was by about 3%. So again, though Q4 commission income mainly came from investment banking and bank assurance related commissions. Although the results were slightly less than the previous quarter, the ordinary trend was maintained if you exclude those one-off factors.

As you are well aware the biggest difference from the previous years mainly came from the net other operating income. As you are well are this net other operating income tends to have high volatility associated with securities, derivatives and FX gain or loss. And I will actually elaborate on the details later on.

The Group's G&A expenses for the year came in at KRW3.885.3 billion, down KRW46.5 billion year-on-year. The Q4 G&A expense was KRW878.8 billion decreasing KRW162 billion quarter-on-quarter. During Q4 there were some one-offs but considering the seasonally high G&A at year end, the Q4 results can be seen as a positive result of the Company-wide efforts to cut costs. Lastly, non operating balance for Q4 posted KRW112.8 billion in losses mainly due to extraordinary losses such as impairment of goodwill of KB Savings Bank et cetera.

Next is a breakdown of the Group profitability on the next page. Let me start with the net interest income. The Bank's net interest income for year 2012 reached KRW5,895.3 billion. The net interest for the Card came in at KRW974.4 billion. Compared to the previous year the Bank's income narrowed 4.1% while the Card income expanded 27.4%. As mentioned in the previous earnings' conferences, it is because the Card business earnings prior to the spin-off in March 2011 is included in the prior year number. The graph on the top right shows the Group net interest income breakdown by business. The net interest income combining Bank, Card and other subsidiaries is tending down quarterly in 2012. It is mainly due to the declining NIM of the Bank and the resulting net interest income reduction. The Card and other subsidiaries are showing healthy trends.

On the bottom right graph the Group NIM comprising bank and credit card businesses is shown. The market rate drop along with the narrowing loan to deposit spread continued compressing the margin, making the cumulative NIM for 2012 2.88% down by 19 basis points compared to last year's 3.07%, and the NIM for Q4 was 2.79% decreasing 3 basis points quarter-on-quarter. Amidst the challenging market faced by the banking sector in growing their loan portfolios, the interest rate drop and the expanding low margin loans such as fixed rate loans are adding margin pressure. However KB will focus on improving the funding side by broadening the low cost deposits and by enhancing the deposit portfolios. And on the fund operating front we will refine the pricing policies while further rationalizing the rate system to minimize the margin squeeze.

Let me move onto the net fee and commission income. The Bank's net fee and commission income for the year recorded KRW1,274 billion falling significantly by 13.6% year-on-year seemingly. During 2011 however there was the one-off gain of the proceeds from the NHF litigation as well as the pre-spin-off income from the credit card business prior to March that was captured under the Bank's performance. So if you actually consider that, that's a 4% increase. The Q4 net fee and commission income also declined 13.6% quarter-on-quarter. More specifically the funds sales income suffered from the stock market uncertainties and the volatile market and experienced lower fresh inflow of funds. So although the fund redemption came down by 18% year-on-year the quarterly redemption trend remained flat.

As for Bancassurance, thanks to the proactive marketing activities and increased new business, the commission income spiked by 20.4% year on year. However during Q4 the contracted sales of the single premium products and the commission rate cut reversed the trend downwards. The FX and others for Q4 fell due to the high base effect from the previous quarter when there was the one-off gain from investment banking business. Other than that there was no anomaly.

Please turn to the next page. I believe that the biggest differentiating portion compared to the previous quarter and the previous year -- I believe that the net other operating income showed the biggest difference. First of all if you look at the details the net gains on securities for 2012 recorded KRW56 billion, showing a big gap with KRW507.5 billion of 2011. In the previous year there were the sales gain on Hyundai E&C shares of KRW413.9 billion and other one-off gains, whereas this year however the impairment loss on Hyundai Merchant Marine and POSCO shares of KRW206.1 billion and other one-off losses took place. When taking away such one-offs the net gains on securities actually kept rather stable.

Also if you look at the others category, the losses climbed during Q4 versus Q3. It can be attributable to the shipbuilders' credit risk being reflected through fair value adjustment on the forward exchange contracts, ultimately recognizing KRW112.1 billion in losses. Unlike Q3, during Q4 there was a sale of loans amounting to more than KRW500 billion resulting in the sales loss of KRW124 billion on loans as well.

Let me remind you of two factors. First of all on the loans extended to the above mentioned shipbuilding companies as well as the forward exchange contracts, we have already provisioned up to 90% level. Therefore, in case the second tier shipbuilding companies face difficulties we feel that we are already fully prepared. So even if there are issues that emerge again in the future you could rest assured that we are prepared.

And also when it comes to the loss on the loan receivables, we actually reflect the previous quarter's results in the following quarter, so we actually have to consider both the provisioning amount and also the reversal amount together. The net other operating income for credit card business for Q4 inched down quarter-on-quarter. It is because there was a dividend income from the assets sold to the credit recovery support program such as [Hi Mung Moa], which is a bad bank program.

Please turn to the next page. The Bank's G&A expenses for 2012 as a whole was KRW3,305.7 billion. The G&A for Q4 marked KRW731.1 billion down 3.2% year-on-year and 18% quarter-on-quarter. The factors affecting the reduction in the annual G&A compared to the previous year include reduction of miscellaneous labor cost related expenses and Company-wide cost cutting measures. During Q4 there was the reversal of the education tax in the amount of KRW82.7 billion as well as the reversal of the retirement benefit allowance. But even after considering those reversals, the G&A showed only a limited increase by KRW8.5 billion. The fourth quarter's G&A fell markedly supported by the earlier mentioned one-offs as well as the early recognition of the retirement benefit allowance adjustment.

On the top right graph we have the Group cost income ratio and since 2011 the gross profit mainly driven by the rising NIM steadily kept the CIR at the mid-40% level. In 2012 however despite efforts to control the G&A the contracting NIM and sluggish loan growth led to weaker top line results gradually pushing up the cost income ratio. Accordingly, we anticipate the cost income ratio to remain in the high 40% range for some time until our top line results improve significantly.

As for the non-operating balance for Q4 for the bank, due to Kazakhstan banking regulators expected move to strengthen the asset quality of restructuring loans, we preemptively recognized impairment loss of KRW33.8 billion for BCC. Also there was the KRW57.5 billion non-operating balance for other subsidiaries. On KB Savings Bank we recognize goodwill impairment loss of KRW35.2 billion while there was the additional KRW8.8 billion provisioning for KB Asset Management for the ongoing litigation. These items led to non-recurring losses.

Next page please, in page 10 the KB Kookmin Bank profitability overview has been provided for comparison purposes with past data, so please refer to this data.

Next I'd like to speak about the Group's assets and liabilities, this is page 11. First to the Group's financial status. In brief, as of the end of December 2012 according to the balance sheet total, assets of the Group should add approximately KRW282 trillion, only a 1.6% increase year-on-year. The main reason was the slow growth in loans and receivables. For your information, from this year if we were to include the loans that we underwrote but were securitized such as qualified loans like securitization to KHFC, the annual growth rate of total assets is 3%.

So if we include the qualified loans with the increase in the off-balance loans, for the analysts' purposes, in the future the off-balance qualified loans, such as (inaudible) loans and also from the second half of the year the NVS is going to be handled by the Bank. And the NVS regulations have recently been revised, so for these aspects the off-balance loans data will be continuously provided to the analysts.

Next is the Kookmin Bank loans in won and the KB Kookmin Card. First the Bank's loans in won as of the end of December stood at KRW184 trillion which is almost the same level as the end of the previous year. [Weaker] growth limited for household loans due to the depressed property market and the sale of qualified loans for securitization to KHFC led to a decrease in household loans.

With concerns of a sluggish economy and the household debt -- the growth rate of SOHO loans was controlled which resulted in a somewhat limited growth in corporate loans as well since the first half of the year. Especially during the fourth quarter loans in won declined by 2% quarter-on-quarter. This is due to the fact that in addition to the factors just mentioned earlier there was the sales and write-off of more than KRW1 trillion of NPLs as seasonally many corporations repay their loans at the end of the year to manage their debt ratios. By sector household loans decreased year-on-year by 1.8%, but as mentioned earlier if we were to include the qualified loans for securitization and the loans securitized, it grew by 2%.

Our Company, in order to increase the share of fixed interest rate loans to 30% we will be handling an appropriate level of qualified loans for securitization. Corporate loans grew by 2.5% year-on-year mainly due to SOHO loans. However in the second half of the year overall due to a conservative loan policy and control of the exposure limit in light of the sluggish economy, the growth in corporate loans was somewhat slow.

As of the end of December, credit card receivables grew by 4.8% year-on-year to KRW13.1 trillion. As we newly entered the factoring business in September related assets grew rapidly whereas cash advance and card loans decreased because of a conservative loan policy. And so this year there was a slight decrease that's why despite the increase in factoring assets it only grew by 4.8%.

Next page please, next is the Bank's funding. As of the end of December the Bank's total deposits in won amounts to approximately KRW192 trillion, which is a year-on-year increase of 1.2%. Thanks to efforts to attract low cost deposits and settlement accounts, core deposits increased by 4%. But time deposits declined modestly year-on-year due to funding control in line with the overall slowdown in loan growth. So it was a slight decline. Debentures in won stands at KRW13 trillion as of the end of December. If you look at the graph on the upper right, deposits in won, the share of retail -- as you can see from the graph in the lower right, loan to deposit ratio is 98.7%.

Next I'd like speak about the asset quality of the Group on page 15. First is asset quality of KB Kookmin Bank. The ratio of sub-standard and below loans of the Bank which was 1.75% as of the end of September improved to 1.34% as of the end of December. In order to meet the FSS guideline of NPL ratio of 1.35%, KRW1.2 trillion of NPLs was sold off. But the new NPL formation which excludes the effect of the NPL sales and write-offs used to amount to approximately -- which used to amount to KRW600 billion to KRW700 billion has now decreased significantly to approximately KRW300 billion, indicating a rather healthy migration of asset quality.

As of the end of December the NPL covered ratio is 160.9%. As of the end of December the Bank's delinquency ratio was 0.97%. Due to those NPL sales and write-offs it improved substantially by 25 basis points quarter-on-quarter. Household and corporate delinquency ratios fell by 21 basis points and 31 basis points respectively.

Next is the asset quality of KB Kookmin card. As of the end of December Card NPL ratio stood at 1.12%, a slight fall quarter-on-quarter. But precautionary loans increased significantly quarter-on-quarter by about KRW500 billion. This is because in the quarter of some FSS guidelines with respect to card revolving receivables approximately KRW500 billion of receivables that had used their credit limit by more than 80% were classified as precautionary loans, and so we also had to provision against them. Including the reserve for credit losses the NPL coverage ratio is 458.2%.

Also the delinquency ratio of KB Kookmin Card led -- due a decrease in the amount of write-offs compared to the previous year slightly rose from 1.24% as of the end of September to 1.29% at the end of December. However, if we were to exclude the write-off effect the actual delinquency rate in the fourth quarter improved slightly quarter-on-quarter.

The KB Financial Group in light of recent macroeconomic climate such as the economic downturn and rise in household debt has preemptively addressed any possibility of deterioration in card asset quality. We have made strenuous efforts to manage the asset quality through proactive credit limit management and improvement in processes to manage delinquencies.

Next is Group provisions and NPL coverage ratio by sector. KB Kookmin Bank's loan loss provisions for the year stood at KRW1,156.3 billion and was recorded as KRW271.9 billion in the fourth quarter, thanks mainly to improvement in quality of corporate loans. This was an 11.4% decline year-on-year and an 8% decline quarter-on-quarter. By sector the loan loss provisions for household was KRW92.3 billion a modest decline quarter-on-quarter. The overall quality of household collective loans which have put pressure on the quality of household loans all along and household asset quality in general has improved gradually from the fourth quarter.

The fourth quarter corporate loan loss provision stood at KRW179.6 billion and compared to the third quarter it was a decrease of KRW15 billion. The reason corporate loan loss provisions has decreased is a [mix] and overall improvement in asset quality thanks to the pre-emptive and conservative loan loss provisioning thus far. The additional provisioning burden following the NPL clean up was not very significant, despite the NPL sales and write-offs of almost KRW1 trillion during the fourth quarter. The KB Kookmin Card loan loss provisions also amounted to KRW85.7 billion during the fourth quarter marking a reduction of KRW2.5 billion quarter-on-quarter.

Lastly I'd like to speak about Group provisions by sector. If you look at the graph on the upper left the Group provision for credit losses against Group total assets was 0.53% on a cumulative basis for 2012. This was a modest improvement compared to the 0.56% in 2011 and the ratio was also quite stable each quarter. The credit cost and household during the fourth quarter was recorded at 0.36% a slight decrease quarter-on-quarter. But on an annual cumulative basis it stood at 0.39%, a rise of 0.29% year-on-year. Delay in economic recovery and prolonged depression of the property market has led to an increase in provisions, mainly due to unsecured loans and household collective loans.

The fourth quarter and annual credit costs for the corporate sector stood at 0.71% and 0.75% respectively as a result of the active NPL clean up and conservative provision policy. It has shown a steady decline. The annual credit cost improved significantly compared to the 1.04% recorded in 2011. The KB Kookmin Card annual credit cost was recorded at 2.76% a rather significant increase year-on-year. But starting from the fourth quarter it has shown a slowdown in growth. Over the year efforts have been made in terms of risk management such as tightening criteria for cash advance and card loans and proactive the limit management. Thus we expect the credit cost will be contained at current levels instead of any additional increases.

This has been the 2012 business result for KB Financial Group. Thank you for your attention.

(interpreted) That was an earnings presentation by our CFO. We will now begin the Q&A session. (Operator instructions). We will now take questions from Franklin Templeton, Mr Chong.

(interpreted) Good afternoon, Happy New Year to you. My name is [Woo Yoo Chong] from Franklin Templeton. I have the following two questions. Looking at your payout ratio compared to the previous year it seems like it is edging up slightly. It was 11.7% in 2011 and in 2012 it was about 13.1%. So it's good that the payout ratio is going up, it's a good thing. But your capital adequacy is quite good and recently the Basel III and LCR regulations have been delayed quite a bit. So my guess is that your dividend policies going forward could be changing for the better. So could you explain why your payout ratio still remains relatively low?

The second question is the following, with the incoming administration taking power I believe that there are some financial sector related regulation changes that can be expected. So can I ask about KBFG's stance on the expected regulation change that is proposed by the incoming Government?

(interpreted) Yes, let me first address your question about the payout ratio. First of all I must apologize to all the shareholders for the relatively low dividend ratio. Because I believe that all the shareholders have been asking for higher earnings for the financial group and it is of course our goal and aim to give back to the shareholders. And it is only right for us to give back as much as possible. As mentioned by Mr Chong, last year's payout ratio -- now we had to actually calculate 15% of the payout ratio after calculating all the credit loss related provisioning and reserves. And this year of course we only raised the payout ratio by 1% only.

So in the mid to long term perspective we still have the view that our payout ratio should reach all the way to 30% ultimately. However, economic uncertainties still remain and household debt related concerns are mounting. So including the Government's view also the financial sector still feels that we need to still maintain a relatively high level of retained earnings. Of course within the BoD, we are having extensive discussions about the payout ratio. Of course you might be slightly disappointed right now, but then again, please be understanding, because our goal mid to long term is to raise the payout ratio much further. But we had to make this decision because of all these uncertainties, so I apologize for not being able to give you better news.

Now regarding the M&A issue, could Mr Park answer?

(interpreted)Yes, I'm charge of the strategy, my name is Dong Chang Park I'm a CSO. During the past one year or so we worked very hard to acquire the ING Korea business but because of various factors we were not able to carry through all the way. But when it comes to our basic strategy, mid to long term strategy to further diversify our non banking subsidiaries, through M&As possibly, it's still quite open. Especially under the new incoming administration, I believe that everybody is aware that the domestic financial sector is reaching the saturation point. So going forward I could also reassure you that we will be looking into the global expansion as well.

(interpreted) Yes we'll take the next question from JP Morgan Asset Management, (inaudible).

Thank you for taking my call. I have a couple of questions. The first one is can you talk about your foreign currency funding situation in terms of foreign currency loan to deposit ratio? The size of your foreign currency assets, funding and also what -- how much of funding is short term? And secondly if you can talk about your escalation of loan growth for this year, thank you.

(interpreted) Yes, let me first give you the answers. After 2009 because of the uncertain global economic situations, not only other countries but also Korea tried to prevent any further financial crises. So in order to avoid the same situation that we experienced back in 1997 we actually funded sufficiently in terms of the fund foreign currency quite early on. First of all we have been trying to diversify funding sources in -- when it comes to foreign currency. Because European banks were very unstable we diversified into Asia. And also we actually converted our short term funding to that long term funding quite a bit. Not only funding in foreign currency we also tried to make efforts to expand the foreign currency assets, in other words the deposits.

Yes, let me also elaborate on this. Regarding LDR in the beginning of last year it reached about 180% but during the past one year when it comes to foreign currency funding we have put in a lot of efforts to get more foreign currency deposits. So we -- it actually went up all the way to 101%. So in other words we have in a way kept our promise that our foreign currency LDR would meet at least 100%. Yes, once again, as was mentioned by our CSO Mr Park, when it comes to the FC currencies we will continue to work on increasing the deposits in foreign currency. We are experimenting with leveraging our overseas branches as well. So again the foreign currency LDR, I believe that ultimately we have to maintain around 100% level so that we could ensure stable foreign currency funding.

And when it comes to the breakdown between short term, long term. Short term is about one third and long term is about two thirds. And within this year if at all possible we plan to expand the long term foreign currency funding even further. I think that our efforts to that end has already begun. So we will closely monitor the situation. We will look at the funding structure and the rates and we will continue to improve upon our foreign currency funding situation.

I believe your second question had to do with our outlook on the loan growth going forward. As you are well aware this year until now I believe that there are mounting concerns about the household loans and debt situation and that concern has not been alleviated. Even on the macro side the global economy is still quite sluggish, so we have to be rather cautious. So this year we will be very much focused on the high quality business management. In other words on both household loans and corporate loans I believe that we will be growing our loan portfolio in low one digit numbers by about 4% level. But as I told you before, we still have to watch very closely how the interest rate trend will evolve going forward.

And also we have to think about the qualified loans securitization to KHFC. So we have to think about the loan rate's competitiveness as well. So we have to balance things. So, about half of the loans would be our own loan underwriting, whereas another 50% would be probably for the qualified loans securitized to KHFC. So if we could sufficiently balance those two groups of loans I think that we will be able to meet that 4% target.

(interpreted) I hope that answers your question. Up till now there are no further questions, so we'll wait for a little bit for any further questions that may occur.

(interpreted) While we wait, if I were to just add one more thing. I mentioned about the dividend payout -- but 16%, although that's an unsatisfactory level to our shareholders, a 16% payout ratio. But our intention is to go all the way up to 30%. Although it may take a little bit of time, we will work persistently towards the 30% and to increase the payout ratio for our shareholders.

Ladies and gentlemen, as you are well aware this weekend is the Lunar New Year's holidays and I believe that people will start going back to their home towns starting from tomorrow. As far as I understand, all four major financial holding companies and two additional banks, including KBFG are holding earnings conferences right now at this same time. Therefore, I believe that the market participants are having to attend to and listen to various earnings conference calls right now. So as was expected, I don't think that we have too many questions for today's conference. But we will wait, just a little longer before possibly closing the Q&A session earlier than usual. We will wait just a little longer.

Yes I understand that starting from 4.30 on Shinhan Financial Group will be beginning their presentation. So I believe that we could actually close today's earning's conference. So thank you very much. With that we will officially conclude the earnings conference of KB Financial Group for Fiscal Year 2012. The presentation and VoD of this conference will be available for access any time on the IR webpage of KBFG -- so it is prepared for your convenience. Also if you have more questions, please contact our IR department directly, then we will do our best to address your questions.

Thank you once again for your participation today. Thank you very much and Happy New Year, 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.