KB Financial Group Inc (KB) 2014 Q1 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 earnings' conference of KB Financial Group for the first quarter of 2014.

The access to this conference is being provided via the 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, Woong-Won Yoon, and executives from KBFG's subsidiaries. The conference will consist of the earnings' presentation by our CFO, Woong-Won Yoon on the earnings' results for Q1 2014, followed by a Q&A session, at which time you may call in for questions.

Let me now present our CFO, Woong-Won Yoon, for the earnings' presentation.

Good afternoon. My name is Woong-Won Yoon, the CFO of KB Financial Group. Before going into the earnings' results, I would like to provide a brief overview of our business for Q1.

During the first quarter, due to the bank's stagnant loan growth, coupled with further margin compression, the interest income and the overall top line remained sluggish. However, our continuous asset quality improvement efforts to date resulted in the significantly lower provision for credit losses, while the G&A remained stable, through proactive cost control.

Starting from Q2, we anticipate an optimum loan growth and gradual NIM enhancement, as well as the ensuing top line recovery.

On the cost front, we expect ongoing stable trend as well. Accordingly, we foresee the overall upward trend in profitability, going forward.

Let me begin the earnings' presentation of KBFG for the first quarter 2014.

First, the financial highlights. KBFG's profit for Q1 2014 posted KRW373.5 billion, which was down 9.2% year on year. The contracting NIM led to the reduced interest income, while core commission income, including bancassurance, dropped during the period.

Compared to Q4 last year, when we had the BCC equity method valuation loss and other one-offs, profit went up 44.2% quarter on quarter.

Including trusts and AUM, the Group's total assets marked around KRW388 trillion, as of the end of March, up 2.1% year to date. The bank's loan in won remained on par with the yearend figure of last year. The card receivables, despite declining factoring receivables, fell 4.8% year to date.

The Group NIM for Q2 stood at 2.46%, declining 11 points quarter on quarter. However, if you strip out the one-offs, including the accounting change on card factoring during Q4, which had about 5 basis points impact, the ordinary quarter-on-quarter comparison showed a 6 basis point reduction. I will talk about the details on the following pages.

Next page, please.

The provision for credit losses for Q1 came in at KRW280.8 billion, decreasing 13.9% year on year, and 9.9% quarter on quarter. Boosted by many years of proactive cleaning up of the NPL, and asset quality enhancement efforts, both the bank's and Group's provisioning is trending down stably.

The provisioning ratio to the Group total asset for Q1 recorded 0.38%, improving 8 basis points year on year, and 4 basis points quarter on quarter.

If you look at the NPL ratio and delinquency trends on the top right, the bank and card businesses NPL ratios marked 1.82% and 1.76%, respectively, while the delinquency ratio posted 1.04% and 2.12%.

The Group and bank BIS ratios, as of the end of March, recorded 15.18% and 15.4%, respectively, sustaining one of the industry's highest capital adequacy.

I will discuss the Group profitability overview on page 6 by line item.

The Q1 2014 Group net interest income was KRW1,542.7 billion, mainly affected by the narrowing NIM coming down 6.5% and 6.2% quarter on quarter.

Net fee and commission income amounted to KRW313.4 billion, falling 14.6% year on year. It was mainly due to the weak bank commission income including the bancassurance commission. On a quarter-on-quarter basis, the credit card data compromise incident brought down the credit card commission income by 9.9%.

Net other operating balance posted KRW100.7 billion net loss, improving significantly both quarter on quarter and year on year.

On a year-on-year basis, there was the impairment loss on POSCO and HMM shares of KRW72 billion captured into Q1 last year. Compared to the previous quarter, there were the one-off factors including the sales loss on loans of KRW98.8 billion in Q4. G&A expense came in at KRW990.9 billion, only growing 0.5% year on year and dropping 3.3% quarter on quarter.

From next page I will go into more details about the Group profitability.

First, the Group net interest income. The net interest income, being affected by the contracting NIM, came down 6.5% year on year, and 6.2% quarter on quarter. For your information, if you consider the one-off gain in Q4 stemming from the accounting change on card factoring, it was around 3.7% reduction quarter on quarter.

On the bottom left you will find the interest income trends for the bank and credit card businesses. The quarterly bank interest income has shown an overall downward trend. However, starting from Q2, an appropriate level of loan growth and the maturing of the high yield debt will help raise the NIM to enable a turnaround in trend. The [Kookmin] card interest income is relatively stable in trend.

As can be seen on the top right, the Group NIM, including the merchant fees for Q1, marked 2.46%, coming down 11 basis points from the previous quarter's 2.57%. However, as mentioned earlier, the Q4 card factoring accounting change had a one-off impact of around 5 basis points. If you take that out, it was actually a decrease by about 6 basis points quarter on quarter.

Let me elaborate on the reasons for the Group NIM contraction. On the banking side, despite the narrowing loan deposit spread amidst stagnant loan growth, the NIM remained pretty much on par with the previous quarter. However, the card data breach incident resulted in the reduction in merchant fees. If you exclude the merchant fee reduction, the Group NIM posted 2.1%, down 7 basis points quarter on quarter. As explained, when taking out all of the Q4 one-offs, there was actually a decline of 2 basis points.

Let me move onto net fee and commission income.

The Group net fee and commission income for Q1 2014 recorded KRW313.4 billion, decreasing 14.6% year on year. Along with the agency fee income reduction such as bancassurance, the commission expense on card factoring expanded year on year, pursuant to the Q4 accounting change on factoring receivables. Since last quarter, the contribution to credit guarantee for card factoring is captured under the commission line item; that is the main reason.

Compared to the previous quarter, it decline by 9.9% quarter on quarter. The card data compromise in January had a negative impact on credit card fees, while the commission income from investment banking came down as well.

I will elaborate further on the bank and card net fee and commission income on the following pages.

If you first refer to the top left graph on Kookmin Bank's net fee and commission income trend, the net fees for the bank is showing a downward quarterly trend. It was mainly due to the weak representation fee on securities such as investment trust as well as the bancassurance fees.

As can be seen on the bottom table, Q1 2014 sales on bancassurance was KRW253.4 billion, narrowing 73.3% year on year, while the commission income reduced 57% year on year.

Against the backdrop of the low interest rate environment, the weakening competitiveness of the banca products, and the intensifying competition in the bancassurance market, resulted in an overall sluggishness in the bancassurance results, in the entire banking sector indeed.

While we anticipate such trend to persist in the foreseeable future, KB plans to manage profitability through new product development and strengthened marketing.

The fund new sales for Q1 marked KRW515.3 billion, down 34.5% year on year, while the commission income posted KRW37.1 billion, declining 8.8% year on year.

On the bottom right you will find the card transaction volume and net fee and commission income for KB Kookmin cards. The Q1 credit purchase and check card volume amounted to KRW18,694.8 trillion, rising 5% year on year, while dropping 8.2% quarter on quarter.

Net fee and commission income was affected by the direct cost of around KRW21.7 billion being recognized in Q1 relating to the card reissuance and SMS fee exemption derived from the data breach incident in January. As a result, it came down 60.7% year on year, and 26.8% quarter on quarter.

I will now touch upon the net other operating income.

The Group net other operating income for Q1 2014 improved both year on year and quarter on quarter, due to the dissipation of the one-off expenses recognized in Q4 last year, such as the impairment loss on POSCO shares and the sales loss on loans. Let me bring your attention to the main items.

Net gains on securities for Q1 marked KRW88.9 billion, rising significantly year on year. Despite the impairment loss on National Happiness Fund during Q1, the high base effect from last year's impairment loss on stock swap with POSCO, among others, led to such improvement.

Compared to last quarter, the increased dividend income for both the bank and card business boosted the number by KRW23 billion.

Net gains on derivatives and foreign currency translation amounted to KRW52.9 billion, going up year on year. However, the rising FX rate led to a reversal of [CVA] resulting in a quarter-on-quarter reduction of KRW48.3 billion. As mentioned before, the net gains on sales of loans jumped quarter on quarter, due to the lack of one-off expenses recognized in Q4.

Let me now move on to G&A, PCL and non-operating income.

The Group G&A for Q1 2014 recorded KRW990.9 billion, only growing by 0.5% quarter on quarter, which is a testament to our overall cost control measures paying off. During Q4 last year, there was the yearend seasonal early retirement expense, which led to the drop of 3.3% quarter on quarter.

On the top right graph, the Group cost income ratio stood at 54.4% (sic - see presentation, "56.4%"), gradually rising due to the weaker top line stemming from the lower interest income, among others. However, we expect the future NIM expansion to boost the top line and profitability and lower the CI ratio.

The Q1 provision for credit losses marked KRW280.8 billion, decreasing 13.9% year on year. Despite the KRW99.7 billion one-off reversal in Q4 last year related to Taihan Electric Wire, the PCL further came down 9.9% quarter on quarter.

The Q1 non-operating balance posted KRW14.7 billion, on par with the previous year. On a quarter-on-quarter basis, the dissipation of the one-off valuation loss on BCC during Q4 resulted in a significant improvement.

Now moving on to Group financial position.

As of March end 2014, Group total asset on the balance sheet is KRW297.8 trillion, increasing 2.1% year to date. For your information, after the acquisition of Woori Financial as of March 20, it became a subsidiary and we renamed the entity to KB Capital.

Accordingly, asset and liability of KB Capital is reflected in the consolidated statement from Q1. More details relating to KB Capital is included at the very last page to this presentation.

Group shareholder equity increased 1.6% year to date to KRW26 trillion.

As of March end, Group total assets, inclusive of trusts and AUM, is KRW387.6 trillion, increasing 2.1% year to date. Please refer to the size of the asset and AUM of each subsidiary on the right-hand graph.

Next is Group assets and liabilities.

First, bank's loan in won, as of end of March, stands at KRW187.5 trillion, maintaining the level of end of last year. Looking at each sector, for household loan there was Q1 seasonal impact and, due to January's credit card information breach, there were disruptions in daily operations, including loan origination by bank branches, leading to a 0.5% fall year to date. Whereas corporate loans saw a growth around sound SMEs growing 0.6% year to date.

In Q1, as I've mentioned previously, due to the repercussions of customer data breach, we were unable to post normal levels of performance, but we foresee our growth trend to stabilize starting with the second quarter.

For credit card receivables, as of March end, stands at KRW13.9 trillion, despite the increase in factoring receivables, credit purchase, and overall credit card was quite bearish, declining 4.8% year to date.

Next page.

As of end of March, bank's deposit in won is KRW195.6 trillion, increasing 0.6%, increasing 0.6% year to date. Due to the efforts to attract low cost deposit and settlement accounts, core deposits increased 1.2% year to date, and savings deposit, backed by time deposits, increased by a small margin

Bank's debentures in won, as of March end, is KRW12.3 trillion.

On the bottom left graph, bank's LTD, loan to deposit ratio, in won is 97.7%, as of March end, and we expect no significant difficulty in maintaining the ratio below 100%.

Next is on the Group asset quality.

This slide shows the KB bank's asset quality. The bank's NPL ratio is, as of end of March, 1.82%. Compared to 1.65% of December end it is 17 basis point increase, but it's mainly due to sizeable sale and write-off of bad loans in the fourth quarter of over KRW1.3 trillion, which significantly lowered the NPL ratio. And the NPL formation continues to decline with the overall asset quality showing a sound trend.

As of March end, NPL coverage ratio inclusive of reserve for credit loss recorded 111.1%, declining 9 basis points against the end of December.

March end bank delinquency ratio is 1.04% and, due to sizeable sale and write-off that took place last December, the figure did lie 27 basis points, compared to December, but real delinquency rate, excluding that impact, has shown improvements on a q-on-q basis.

On bottom right, the delinquency trend by each sector show that, as of March end, household and corporate delinquencies at 0.78% and 1.32% respectively, increasing 11 basis points and 44 basis points year to date.

Corporate delinquencies seems to have risen quite significantly, but this is mainly due to new delinquencies from some of the companies against whom adequate provisions have been made as they were categorized as NPLs last year. Therefore, additional provisioning from increase in delinquencies were minimal and, except for this impact, asset quality looks quite sound.

Next is on asset quality of KB Kookmin card.

As of March end, NPL ratio is 1.76%, increasing 20 basis points against end of December. This is mainly due to a decline in volume, leading to card receivables decline of KRW700 billion year to date. New NPL formation is still steady, quarter over quarter.

NPL coverage ratio, inclusive of reserves for credit loss, as of March end is 310.9%. Delinquency rate, as of March end, is 2.12%, a 27 basis point increase year to date.

Next is on loan loss provision and credit cost.

2014 Q1 bank's LLP, loan loss provision that is, is KRW234.9 billion, a decline by 10.8% year on year. But with the dissipation of one-off factors such as the write-back of Taihan Electric Wire, that equity conversion in Q4, on a q-on-q basis, the figure increased 27.2%.

Provision for household loans came in at KRW38.6 billion, a decline of respectively 57.2% and 65.2% on a year-on-year and q-on-q basis. With the overall improvement in asset quality, household provision is gradually showing a trend of decline.

Corporate LLP came in at KRW196.3 billion, an increase of 13.3% year on year and an q-on-q basis, due to the writeback related to the Taihan Electric Wire in Q4, and dissipation of one-off factors, increased 166%.

Q1 2014 credit card LLP is KRW66.1 billion, declining 3.1% year on year and 38.1% q-o-q.

Looking at the bottom left graph, Q1 2014 bank and credit card LLP over total asset is 0.56%, improving 7 basis points year on year and, on a q-on-q basis, it increased 2 basis points.

Following pages include KBFG's subsidiaries' main business matrix and indicators and information on KB Capital, which was newly added to our subsidiary companies last March.

This has been Q1 2014 KB Financial Group's earnings' presentation. Thank you very much.

That was an earnings' presentation by our CFO. We will now begin the Q&A session.

(Operator Instructions). Byung-Gun Lee, Dongbu Securities.

It is true that your NIM is not up to par with our expectations, but thank you for sound earnings' result. Two questions. Number one, I think that the market is quite concerned about the higher share of the fixed rate loans which is in line with the government policies. And I think that, as a result, you are showing more number of home equity loans, combining fixed rate and floating rate.

Of course, other banks have entered into this market more aggressively and I believe that KB is trying to defend the market. So including other banks in the industry, how do you achieve the market situation when it comes to the loans combining fixed rate and floating rate? And what is your performance in terms of this type of loan during February and March? And how would it ultimately impact your earnings, going forward?

My second question has to do with KB Capital, which was recently acquired. I guess you could anticipate certain synergies between your Financial Group and this company. And if you are assuming higher synergies, then are you thinking about possibly increasing the equity holding of KB Capital? So can you answer about the outlook for the KB Capital entity in your view?

Yes, let me briefly answer your questions. First, to address your NIM-related question and the impact on our earnings from the home equity loans combining fixed rate and floating rate. As you are well aware, the regulatory body has given us the guideline so that we could increase the share of the fixed rate loans out of the total loan portfolio.

So we are actually abiding by such guidelines. So when it comes to the loans combining fixed rate and floating rate, we have already reflected increasing portion of such type of products in our business plan already.

Yes, it is true that the ultimate net interest rate will be a little bit lower than our existing products, but then again, we are managing it according to our business plan.

It is true that this type of new product will yield less margin. However, our starting point is from the point where we have secured sufficient margin. So when to comes to the total net interest margin, you don't have to worry too much.

And in terms of the Q1 NIM, we had some impact from the card data compromise incident and, because of that, we had some sluggish results during Q1. But going forward, beyond Q2, we expect normalization of the operation, so it will recover.

And secondly, we have outstanding high yield debt that will come due, and it will be fully repaid mainly around the second quarter. So if you reflect that portion I think that, ultimately, net NIM will not be going up very sharply, but gradually we anticipate improvement.

And regarding your second question, about KB Capital, as you are well aware the KB Capital results after the month of April will be under consolidation, under KB Financial Group.

As you are well aware, KB Kookmin Bank has one of the largest branch networks nationwide, so I believe that that is one of our biggest strengths. So when combining with the retail network capacity of KB Kookmin Bank, we will generate a lot of synergies. So we have come up with a plan, and we are already implementing it, so we do anticipate some crystallization of such expectations.

When it comes to KB Capital, they will reinforce their retail businesses; of course, right now, they are focusing on the auto-financing activities at the moment. So we will further strengthen this strength already, but when it comes to retail banking, we will further reinforce the installment financing and other similar products, so we ultimately expect enhancement of our overall earnings, due to such merger.

Seok-Kyu Hwang, Kyobo Securities.

With regards to your credit card customer data breach, you could see that there was an impact on your performance and because of that, you weren't able to really grow in Q1. So in the second quarter and in the third quarter, can we look forward to growth, and I think that you would feel that pressure to compensate for the lackluster growth in Q1.

So in terms of Q2 and Q3, do you have any plans to upwardly revise your targets, do you have plans to do that?

And also because of the credit card incident, I would think that you will experience some declines in market share and number of cardholders; is it possible for you to share with us what the extent of that impact is? And also going forward, what are your plans to overcome and make up for such weakness?

Thank you for the questions; you've asked two questions. The first question had to do with our growth potential. As I briefly mentioned in my presentation, in Q1 our loan growth was stagnant that is true. But if you look at our monthly figure, after February we are seeing a trend upward and also, in April already, we've actually grown 0.3%.

So Q1 true, there was no growth, and with future growth we will be able to make up for that shortage. I guess that was your question.

In Q1 the growth was weak, but we're not intentionally going to be aggressive in trying to overcome, or make up for that gap. But as you know, the global economy is in a recovery trajectory, and also we are hoping for a real estate market recovery, and also improvement in the domestic demand.

So in line with that, what we are going to focus on household sector as well as retail financing. So we are considering and looking forward to some additional growth in retail financing.

And I take it that your second question had to do with the market share declines in credit card market. In the first quarter, and in credit card business, it is true that market share did edge down. However, if you look at our check card and our market share figure for that, on a monthly basis we are maintaining 21% market share month over month.

The suspension of credit card business operation is going to last until May 16, and things are going to normalize after that. So in line with that development, we are going to focus our efforts in trying to regain trust from our customer base. After the normalization, we are planning for different promotions, and we will focus on credit card new products as well as new services.

So new product and service launches are planned, but we do not expect steep improvement in market share, but we believe that the fall in market share did exist. But through launches of new products, new services and better promotions and better services, we hope to gradually make up for that shortfall.

I hope that answered your questions.

There is no questioner waiting in line, so we will wait a little bit longer. (Operator Instructions). Jin Sok Choi, Woori Securities.

I have one question. When it comes to loan loss provisioning for Q1, for Kookmin Bank it was about KRW234.9 billion, which was a 11% reduction quarter on quarter. Could you actually describe the details, that retail was about KRW38.6 billion and also for the corporate portion [KRW191.3 billion] was the portion.

So I think that, on a year-on-year basis, the corporate portion actually increased, while the retail was actually a little bit lower. So were there any one-off factors that led to such results, or, is the loan loss provisioning trend quite normal at this point? Is it normal trend; could you explain about the reasons?

Yes, let me answer your questions. I briefly touched upon it in my earlier presentation about the general direction. If you look at the overall picture on the asset quality, please understand that our asset quality is being enhanced. So out of the total loans outstanding, our credit cost is being managed quite stably.

But if you go into the details, more detailed information can be provided through the IR department later on, but if I may give you some highlights. During the first quarter, if you divide between the large corporates and the SMEs, there was some default. However, when it comes to the retail segment of our business, it's quite stable, especially the SOHO loans. Even on a quarter-on-quarter basis, and even against the budget, we are managing it quite stably.

If I may go into a little bit more detail, regarding the large corporates and SMEs, I believe that, starting from Q2, we anticipate more stable numbers going forward. We will be managing in that direction.

I believe that answered your question. [Hani Kim, Taishin Securities].

The first question is whether you have plans to increase your shareholding at KB Capital. I don't think you answered that question, so could you give us an answer? And if you look at the provision for KB Capital, it seems like it's about KRW10 billion higher than the normalized level, and that's why the figure was KRW2.1 billion. So I would like to understand whether this excessive amount of provisioning is just one-off this quarter, or is this trend going to continue into the future?

For KB Capital, and any plans to make additional acquisitions, we have not made any decision one way or the other. And in the Q1, if you look at the write-offs of that loans, it had to do with the corporate loans. And I'm sorry I cannot name the names of those companies. But two companies there were one-off write-offs that took place against two corporate names. But after the second quarter, things are going to normalize.

And for your information, after 2011, KB Capital, or since 2011, KB Capital had been recording very steady profit. And KB Capital, as it has become part of the KB Financial Group, it can leverage the retail networks, and we expect further synergies, going forward. So in terms of growth and profitability, I think we can really look forward to better performance.

(inaudible), UBS.

I have one question. Recently, in the press there have been a lot of the restructuring plans by financial institutions.

Excuse me, [Mr. Li]. We cannot quite hear you. Can you actually repeat the question a little bit slowly?

Yes, I will. If we listen to the media reports, I think that the lack of human resources in the reverse pyramid shape, there has been a lot of criticism. So what is your plan about restructuring?

And also, compared to Q4, it seems like you have added about 4,000 headcount in Q1. It seems like that you have turned part-timers into -- irregular workers into regular workers. So how can you actually translate that into the labor costs on an annualized basis?

Let me answer that question. When it comes to the reversed pyramid shape labor structure, I think that this is an issue that pertains to the entire industry, not only KB. We are preparing various programs internally, and we are implementing such programs already. What is important is that our big philosophy, going forward, is to recognize our human resources as real assets. And we will continue to reinforce training and reallocation of such workforces so that we could further enhance productivity gain.

Despite such efforts, there will be some increase of labor costs. So in order to manage it, including the labor costs even on the administrative cost, we are conducting various cost control measures. We have come up with the measures, and we are implementing it already. Especially if you look at the first quarter, there were some one-off costs that were not included in our business plan. So we are planning to further reinforce our cost control measures, going forward.

We are going back to the basics so that we could revisit the channel and the IT, and all around cost reduction-related measures. So we are currently conducting the monitoring and feedback system.

So if I may recap, when it comes to the expenses, yes, we did incur some one-off expenses. But, based on the revisited business plan, we will be tightly managing it in the future. Thank you.

I believe that answered your question. We have no questions in line; we will wait for a couple more minutes. Mr. Kim In, Eugene Securities.

Well, the other banks have not yet had earnings' presentation yet. But your NIM fell more, and there is no growth, and NII decline is also quite large. So we hope that things will turn around, starting the second quarter with lowered funding costs, but can you provide some more color as to the future movement?

If you look at bad debt loans, there's [2,800], but I don't think that figure can actually be sustained. Can you elaborate a little more?

Yes, I will answer the question. During the first quarter, yes, our top line was quite sluggish, and we are investing a lot of time in developing the action plans to really turn around the trend. As I mentioned previously, in the first quarter the NIM was relatively lower, compared to the expectation. And that's because credit card receivables assets actually declined, and also the usage volume declined. So that was the main culprit behind that. But we believe that, after May, business operation will normalize and we can predict that things will start to improve afterwards.

Now on the bank side, and if you look at the NIM, on a monthly basis, I can say that we've actually bottomed out. And as I also previously mentioned the high yield debentures that were previously issued, the funding cost is about 7%, but it's going to start to come due starting the first quarter. And in the second quarter the high yield debentures in the amount of KRW3 trillion is going to come to its maturity. So on that aspect, on the funding and financing aspect, we are now going to see positive factors coming in to support the NIM growth.

In terms of the provisions, in terms of the amount, it's quite difficult to say. But one thing I can say for certain is that, in 2014, I mentioned that there would be growth in assets. And in consideration of that growth in assets, even with that, we will maintain the provisioning at the level similar to the level of the previous year. We believe we can do that, and we will, or we have been, exerting efforts to make that happen. So rather than sharing with you the specific figure and the number, I can give you the answer by saying that the level will be similar to that of last year.

I hope that answers your question. We will wait just a little bit longer because there is no questioner in the queue at the moment.

Thank you. With that, we will now conclude the earnings' conference of KB Financial Group for Q1 2014. The presentation and [video] of this conference will be available for access any time on the IR web page of KBFG. Also, if you have more questions, please contact our IR department. 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.