KB Financial Group Inc (KB) 2013 Q2 法說會逐字稿

Good afternoon. My name is Kyu Sul Choi the head of IR at KB Financial Group. Thank you for taking part in today's earning conference of KB Financial Group for the first half of 2013.

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 KBFG's CFO Jong-Kyoo Yoon 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 the first half of 2013 followed by a Q&A session at which time you may call in for questions.

We now present our CFO, Jong-Kyoo Yoon for the earnings presentation for the first half of fiscal year 2013.

Good afternoon. My name is Jong-Kyoo Yoon, the newly appointed CFO of KB Financial Group. Let me begin the earnings presentation of KBFG for the first half of fiscal year 2013. Let me begin with the financial highlights.

KBFG's profit for the first half 2013 recorded KRW575 billion. Profit for the first half declined 50% year-on-year mainly due to the narrowing interest income from the NIM contraction and sluggish loan growth as well as the one-off losses including impairment loss on securities.

Profit for 2Q marked KRW163.5 billion, down around 60% quarter-on-quarter affected by the factors such as equity method loss on BCC.

The Group's gross operating income for the first half came in at KRW3,662.9 billion. As you see on the graph, the quarterly gross operating income is hovering slightly below KRW2 trillion lately. It is attributable to the margin compression and slow loan growth leading to the lower interest income, as well as the non-interest one-off losses resulting in the slight weakening of the top line. However, the Q2 numbers were supported by the resilient loan growth and averaged enhanced fee income coming in on par with the previous quarter.

Including trusts and AUM, the Group's total assets marked around KRW376 trillion as at the end of June.

Next page please.

The Group's provision for credit losses for the first half 2013 posted KRW677.5 billion (sic - see slide 3 "KRW677.6 billion"), down 2% year-on-year. Thanks to our proactive and continuous stance to address NPLs and to enhance asset quality by way of conservative provisioning policies, our quarterly provisioning trend remains quite stable.

The Group ROA and ROE posted 0.4% and 4.64% respectively.

On the bottom of the page, please find the capital adequacy trend. Although this is just an estimate for now, the Group BIS ratio as of the end of June rose and also the -- as for the Bank BIS ratio boosted by the rising capital credit and the reduction of RWA, it went up by 23 basis points quarter-on-quarter.

Also, the Group and the Bank's tier one and core tier one ratios posted 10.93% and 11.21% respectively, maintaining one of the highest capital adequacy in the financial sector.

On page 5, let me discuss the Group financial performance for the first half in more detail.

First of all, the Group net interest income for the first half 2013 stood at KRW3,300 billion affected by the narrowing NIM and the overall slowdown of the loan growth leading to the lower average outstanding interest bearing asset among others. The NII came down 7.2% year-on-year.

The net fee and commission for the first half remained pretty much unchanged year-on-year while the Q2 numbers climbed 6.9% quarter-on-quarter boosted by the growing credit card fee income.

The net other operating income for the first half scaled back significantly year-on-year mainly due to the one-off losses including impairment loss from the downward trend of the stock prices and CBA related losses on forward contracts from the rising interest rate, or exchange rate that is, among others. I will elaborate on the details in the latter part of the presentation.

The Group G&A expenses for the first half reached KRW2000.9 billion growing by 2.1% compared to the same period last year. However, if you take out the labor cost increased accrual effect, the Group-wide expense is well under control.

Next is the breakdown of the Group profitability on the next page.

Let me start with the net interest income. The Bank's net interest income for the first half marked KRW2636.8 billion declining 10.7% year-on-year. On top of the narrowing NIM from the market rate drop, the Q1 negative loan growth and the Q2 loan growth mainly taking place at the quarter end resulted in the average balance of interest bearing asset reduction by around KRW5 trillion. The current net interest income for the first half posted KRW510.7 billion up KRW36.2 billion year-on-year mainly helped by the lower interest expense from lower funding rates.

Please refer to the Group NIM graph on the bottom right. Please be advised that whereas the previously disclosed NIM numbers included merchant fees to ensure backward comparison, starting from this quarter however the NIM numbers will exclude the merchant fees.

If you look at the graph including the merchant fee, the Group NIM for the quarter actually inched down -- posted 2.65% inching down 8% quarter-on-quarter.

On a cumulative basis, the NIM came in at 2.69%. We have been estimating additional NIM contraction for Q2 from the policy rate drop in May and narrowing interest spread from fierce competition. Due to the lower recovery of the delinquent interest however, the NIM contraction became somewhat more pronounced. Going forward, certain degree of competition for loans among banks seems unavoidable.

If you also consider the various regulatory issues, further NIM compression to a limited degree may be a possibility. However, we will do our best to proactively recover delinquency and to improve loan deposit portfolio to meet the NIM of 2.7% for the year.

We may now move on to the next fee and commission income. The Bank's net fee and commission income for the first half recorded KRW564.7 billion, falling by 12% year-on-year. It was mainly due to the drop in both the Bancassurance fees and the credit card agency fee.

First of all, the Bancassurance fee edged down 41.8% year-on-year. During Q1 last year, the strong marketing efforts led to extraordinarily high sales of single premium products. Also, the commission scheme changed for Bancassurance since April last year also played a role in the Bancassurance fee reduction. Especially during Q2, the Bancassurance fee fell 44.8% quarter-on-quarter.

The tax benefit revisions implemented in February 2013, especially regarding the immediate annuity products, together with the low interest rate environment, deteriorated the crediting rate competitiveness of the insurance products leading to the bank industry-wide contraction in the new business written.

The credit card agency fee came down somewhat year-on-year. However, this represents the agency fee paid to the banks by the Card company making the net impact on the Group minimal.

The first half card net fee and commission income jumped by 104.5% year-on-year despite various regulatory pressure to lower fees thanks to our efforts to minimize fee related expenses such as core marketing services. As for Q2, the expanding merchant fee income boosted the net fee and commission income slightly quarter-on-quarter.

I will now touch upon the net other operating income. The Bank's first half net other operating income inched down year-on-year due to one-off losses. First of all, the net gains on securities posted KRW14.1 billion in losses during the first half. During this period, the recognition of KRW121 billion impairment loss of POSCO and HMM shares held by the Bank took up the lion's share of the loss along with the overall underperformance of the marketable securities affected by the rising bond yield and stock priced decline and others.

Under the others category, excluding the insurance fee on deposits and contribution to credit guarantee fund, the remaining net gains on derivatives and foreign currency translation and others trended down 73.5% year-on-year due to the exchange rate factors.

During the first half of last year, the exchange rate drop yield to date led to the reversal of around KRW42 billion from the CBA fair value assessment on forward contracts. This year, however, the rising interest rate led to around KRW24 billion worth of additional provisioning. However, if you take out these one-off factors, the value of the marketable securities underlying asset and the valuation of the derivative or hedge transactions pretty much offset each other, help maintaining a stable level.

As for the other operating income for the Card business, the upward adjustment of the expected usage ratio of the reward point led to the provisioning of KRW15.2 billion resulting in the increased losses. However, the recognition of the KRW31 billion sales gain on loans sold to the National Happiness Fund during Q2 helped improve the overall other operating income year-on-year.

The other operating income for the other subsidiaries widened the loss year-on-year, mainly due to the insurance related income contraction.

Please turn to the next page.

The Bank's G&A expenses for the first half was KRW1716.2 billion going up 2% year-on-year. Considering the quarterly reflection of the wage increase estimates, the G&A is well under control I believe. The Card and other subsidy area's G&A numbers on the bottom are quite healthy as well.

Despite the Group-wide cost control efforts, the cost income ratio for the Group edged up slightly. If you look at the graph on the top right, the Group cost income ratio is showing a modest upward turn since 2012 due to the lower interest income and the one-off losses from the non-interest category.

KBFG will do its utmost to further minimize various administrative expenses, while minimizing the labor cost hike to further enhance our profitability and efficiency.

The Bank's non-operating income for the first-half posted KRW109.9 billion in losses, mainly reflecting the KRW120 billion equity method loss on BCC during Q2. This is the result of our conservative accounting treatment of the BCC financial due diligence conducted on BCC from the beginning of this year, aligning the provisioning accounting differences with BCC in line with that of KBFG.

Please turn to page 10 for the Bank profitability in details.

I will now touch upon the Group asset liability. First we will take a look at the Group balance sheet. As of June end 2013, Group's total asset based on the balance sheet is KRW29.4 trillion (sic - see slide 11 "KRW293.6 trillion), growing 2.7% year-to-date, driven by loan receivables. Gross total liability is KRW269trillion, with shareholder equity at KRW2.5 trillion (sic - see slide 11 "KRW25.0 trillion"). Group's total assets including the Trust and the AUM, thanks to the growth of the Bank's loan receivables and asset managers, AUM increased 3.4% year-to-date.

Next is KB Kookmin Bank's loans in won and KB Kookmin Card. First, Bank's loan in won as of end of June is KRW185 trillion, increasing 0.6% year-to-date and 2.4% against end of March. Looking at each sector, with prolonged property market recession, the pressing growth potential and the impact from the securitization of qualified loans, household lending declined 0.1% year-to-date. For your information, if -- inclusive of the securitization, the growth rate is 2.8%. On the back of government's housing market normalization plan, which was introduced in the beginning of April, the demand was put up and so that there was a growth of about 2.1%.

Corporate loans showed a growth of 1.4% year-to-date and 2.8% compared to March end. In light of the economic conditions and the concern for household debt, growth rate for shareholders has been moderated with growth mostly coming from loans to good quality SMEs such as from loans with letter of guarantee as collateral.

We will continue to employ conservative loan policies for cyclical sectors in line with our risk management stance, but in the meantime, we will identify high quality SMEs and apply sophisticated credit valuation systems and interest rate schemes to selectively explore growth opportunities in corporate lending sector.

For credit card receivables as end of June stand at KRW13.3 trillion, growing 1.5% year-to-date and 3.1% against March end, mostly driven by factoring receivables.

Next is on the Bank's funding overview. As of end of June, Bank's deposits in won is KRW190 trillion, showing a decline on a year-to-date basis, but it increases 0.8% compared to end of March.

Due to the efforts to attract low-cost deposit and settlement accounts and on top of low interest rate and equity price decline, which led to increases in stand-by funds in the market, core deposit increased 6.1% year-to-date and 4.9% compared to March end. However, time deposit has been declining in line with our funding stance that reflects overall sluggishness in loan growth and due to the impact of lower demand.

The Bank's debentures in won as of June end stands at KRW12.8 trillion.

On the bottom right corner you will see that the loan to deposit ratio as of end of June is 98.5%. Due to the negative loan growth end of last quarter, the figure declined to 96.9%, but with the regained growth in loans, as of June end, we've recovered to the ordinary levels.

From page 15, I will talk about Group's asset quality. First, this Bank's asset quality overview. Bank's substandard and below ratio at the end of June is 1.92%, compared to March end's 1.55%. There was an increase of 37 basis points.

The NPL ratio's large increase is in line with FSS's reclassification -- a conservative reclassification guideline, whereas some precautionary loans were moved and reclassified to substandard bucket. As such, KRW616 billion of impact took place.

Taking this impact aside, NPL ratio 1.62% in line with regular credit ratings review on corporates, there was KRW78 billion impact on NPL increase. So, compared to the previous quarter there was a slight increase, but overall the trend is stable.

NPL coverage ratio calculated inclusive of reserve for credit losses as of end of June is 136.9%. Bank's delinquency ratio as at end of June is 1.01%, falling by eight basis points. On the back of improvement and soundness of collective loans, household sectors, delinquency ratio fell 10 basis points QOQ. Delinquency for corporate loan is 1.01%, a slight decline QOQ, maintaining a stable level.

Next is on -- at the quality for KB Card. As of June end, credit card NPL ratio is 1.8%, a rise by eight basis points against March end. The reason why NPL ratio increased is because, as of last quarter, the Company's write-off criteria changed from over three month delinquent to six month delinquent, which had an impact of increasing the NPL ratio and the residue impact is still lingering. It is by no means due to the deterioration in overall asset quality.

NPL coverage ratio inclusive of reserve for credit losses, as of June end, is 312.9%. Credit card delinquency ratio increased by a large margin temporarily in Q1, because once again of the change in write-off criteria as previously mentioned, but as of end of June, the ratio is currently stable at 2.15%.

Next is on loan loss provisions for the Bank and KB Kookmin Card. The Bank's LLP in first half was KRW525.4 billion improving 10.8% year-on-year and KRW262 billion in Q2, similar to the previous quarter. By sector, first half LLP for household loans was KRW134 billion, falling 34.5% year-on-year and Q2 LLP came in KRW43.8 billion, a 51.4% decline QOQ. Overall migration of asset quality reduced provisioning burden and there was a slight increase in recovery of written-off loans.

On the corporate side, first half provisions came in at KRW391.4 billion, similar on a YOY basis. However, Q2 provisions were KRW218.2 billion, inching up 26% QOQ. This is due to the fact that there was additional provisioning of KRW38.6 billion from reclassification and an addition of KRW32.4 billion coming from the regular credit review of large corporates. So, if these factors are excluded, provision for the corporate sector is also quite stable.

First half LLP for credit card was KRW151.1 billion, showing a decline of KRW13.8 billion year-on-year. Q2 figure looks as though there was a large increase compared to the figure of the first quarter, but as said before, with the change in write-off policies, there was a one-off impact of reduction and provisions of around KRW38 billion in the first quarter. So, Q2 figures should be construed as a recovery to ordinary level for the quarter.

The graph at the bottom shows the NPL coverage ratio for the Bank and Kookmin Card as of June end, one is 136.9% (sic - see slide 17 "114.9%") and 312.9% respectively.

Last slide is on provisions by each sector. On the top left graph, you will see that the Group PCL over group total asset is a cumulative 0.47% for the first half, improvement of nine basis points over 2012 full year credit cost of 0.56%.

By sector, household loan loss provision recorded 0.27%. Compared to previous year's credit cost, it fell by 12 basis points, with second quarter's credit cost improving significantly to 0.18%.

First half corporate loan loss provision rate is at 0.79%. By actively cleaning up bad debt and through conservative provisioning policies, the figure which was at 2.54% in 2010 and 1.04% in 2011, has been maintained at a steady level every quarter since 2012.

Loan loss provision for credit card except for the one-off factor that took place in the first quarter has been displaying a steady trend as well.

Now, there still is concern for economic recession and household debt and asset quality issues around problem prone sectors. As such, we will continue to stick to our conservative approach. So, rather than significant improvement this year on the provisioning side, we expect the level to be similar to or slightly lower than that of last year.

This has been first half 2013 earnings presentation by KB Financial Group. Thank you very much for your attention.

Thank you. That was an earnings presentation by our CFO. We will now begin the Q&A session. (Operator Instructions). From [Hana Investment Securities, Mr Shin]. Please go ahead, Sir.

Good afternoon my name is Shin. First of all, I believe that you emphasized about the importance of growing your retail credit growth, so what is the change in your direction for the growth going forward? And also how do you foresee the margin outlook towards the end of the year? And also at what level do you think that your margin will be stabilizing?

Yes, let me address your questions. When it comes to the retail loan area our main sector will be our mortgage area, and in the mortgage sector we will continue to have our dominance. And also in the general line and also when it comes to the unsecured loan sector, we will be targeting high quality potential buyers who are mostly professionals with higher income, so that we could further reinforce our marketing efforts.

And secondly, regarding our margin outlook towards the end of the year, as you are well aware, the two NIM was 2.65%, which was an 8% -- eight basis points lower quarter-on-quarter, so it was slightly below our annual guidance. However, it was mainly due to the end of June situation where the month end happened to fall on the weekend. Therefore, it led to less recovery of the delinquent interest. So this was a one-off factor, so if we actually take it out in the Q3 trend, I believe that the Q3 NIM will be recovered back to the normalized level of Q2.

So going forward we will further reinforce the recovery of the delinquent loans and we will further acquire low cost funding deposits, as well as the settlement accounts in the process. I think that that will all boost our margin going forward.

If I may elaborate just a little bit, until the end of the year I believe that as for the loan growth on a year-on-year basis, well we are anticipating and we have the estimate of about 2% growth year-on-year.

And for your information, there is a 30 second time lag between the phone call and the screen shown on the web page.

So first of all, thank you for your first question. We currently have no questions in line, so please go ahead with your questions.

Yes, I think we have a question from JP Morgan, [Theo], please go ahead.

Hi, yes, thank you for the call. I have two questions. One is in terms of the NPL, there's a slight pick up. You mentioned there is a chance of certification from special mention to substandards. Can you comment on overall -- is there any other concern on asset quality?

And secondly, in terms of the securities income, there were also some swings in the second quarter. Can you elaborate more on what contributed to those changes in the trading and also AFS income? Thank you.

Yes, let me address your question. Regarding the rising NPL, I would like to elaborate slightly on this point. They mainly had to do with the shipbuilding companies. The provisioning ratio for those particular companies happened to be above 20%, but their asset classification sometimes fell under normal or precautionary.

But according to the FSSS guideline, the asset quality classification should be better aligned with the provisioning ratios. Therefore, regarding the payment guarantees related to RG, which is refund guarantee insurance covers, so we further upgraded the provisioning requirement and also we wanted to realign it to the right classification. That is why we reclassified it as NPL. So that actually amounted to about KRW616 billion.

Let me address your second question. With regard to the impairment laws on the securities income, now most of the impairment laws arose from POSCO or HMM, and regarding available for sale, it amounted to about KRW44.6 billion. And I think that the more detailed answers can be provided through the IR department.

I hope that answers your question. We will wait for others to request a question.

From [QM Securities], Mr [Yong Suso].

So I am Yong Suso from QM Securities, I have one question I would like to ask. As you know, government has taken initiative to come up with cost reduction methods and we even heard that from the news articles, that there is a taskforce team that was installed. And also I think one of the methods is to do away with branches that recording loss.

And also second has to do with increasing the fee structure, especially on new origination and also on private mortgage products. Now, these methods, I mean how realistic are these efforts and how could they -- to what extent do they contribute to your profitability?

Yes, for reducing the number of branches that's generating loss, you first would have to be able to define what those branches are, who those branches are.

In the course of the ordinary business, business as usual, I think that that would be one of the requirements. If there is change in the business or commercial district, or if there's a large amount of loss that's been created, making the branch record in the red or maybe with new branches and there could be a branch that takes a long time to reach a BEP point, breakeven point. We believe that the operational environment that becomes more difficult, thereby the branch also experiencing difficulties, we'll try to relocate them and put in more effort and rapidly respond to those situations for branches that are facing difficult operational environment.

Number two, with regards to fee increase, now this requires social consensus and there also would have to be various analyses on the cost structure for the Bank as well. So for this methodology, it does beg for very specific and detailed consideration, and at this point we are not at a point where we could share with you any specifics.

Next question from Prudential Securities, [Ishinari Watemara]. Please go ahead, Sir.

Yes, I have one question. I read an article and there has been an article about the M&A strategy about your Company. There are some reports that you might be interested in the [Udi] Investment Securities related acquisition, or that you might be interested in the overseas acquisition. Now, if that is actually true, could you actually touch upon your plans for funding for such M&A?

Thank you for your question. As for the participation in the process of Udi Financial Group privatization, I believe that everything will be decided under the overall Group-wide strategy for the growth.

First of all, our strategy is to further diversify our portfolio and also our Group has been always focused on making sure that our non-banking subsidiaries are reinforced. So that's the criteria in making the determination. And we have to make sure that we could further create synergy upon finishing the completion of the M&A. And more than anything, we want to make sure that all our M&A decisions could contribute to the shareholder return.

So at this particular juncture we have not come to any particular decisions yet, so unfortunately I cannot give you any more color on this.

Regarding the overseas expansion, likewise I believe that our overseas strategy is under review at the moment and when it comes to the more specific ways of overseas expansion and the strategy, we are still in internal discussions. So once things become more finalized we will make sure that we communicate it with the rest of the market.

We will take a question from Mr [Chin San Kim] from [SE Securities].

During the presentation you talked about the delinquency rate for collective loans are declining, bringing down the provision for household debt and also improving your NPL figure.

For this collective loan, I would think that the delinquency rate has turned its direction. And for credit card, come this year with emergency decrease, we had been thinking about a lot of pressure for the credit card business but it's not been that bad yet.

So then should we think that the impact is not too negative, the squeeze is not too big? If you look at credit card loans and the interest rate is being monitored by the government and also the tax benefit has been reduced; it's been reduced from the previous 15%. So this could actually stifle the industry to a certain extent. At KB Financial Group, what are your plans to counter such movement?

If you asked three questions, the first one has to do with the collective loans. There are different types of collective loans. What I was trying to talk about was the collective -- the installment loan. Due to many difficulties, for instance, the bad construction market, the real estate market, the delinquency rate had increased significantly of recent, but we've been very active in collection activities on the collective loans and for prime construction companies and also we have been able to identify some positive opportunities. So we do not expect any further delinquency formation.

Second has to do with credit card. With the change in the merchant fees, yes, that will drive down the profit to a certain extent, but if you look at our funding rate we were able to maintain that rate at a quite low level and also for credit card products we had employed many methods to gain competitiveness in terms of the cost structure.

Those have to do with the credit card loans, as you know, the interest rate we expect will go down -- continue to go down going forward, but through our product competitiveness and our sales competitiveness we believe we can overcome these shortcomings. I hope that has answered your question.

Currently we have no questions waiting in line so we will wait just a little longer.

Thank you. It seems like there are no further questions so with that we will now conclude the earnings conference of KB Financial Group for the first half of fiscal year 2013. The presentation material and a VOD of this conference will be available for access any time on the IR website of KBFG. Also if you have more questions, please contact our IR department directly. We will do our best to address your questions.

Thank you once again for your participation today. Thank you very much.

Statements in English on this transcript were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.