KB Financial Group Inc (KB) 2014 Q3 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 call of KB Financial Group for Q3 2014. 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 Acting Chairman Woong-Won Yoon and executives from KB Kookmin Bank and Credit Card. The conference call will consist of the earnings presentation by our CFO/Acting Chairman Woong-Won Yoon on the earnings results for Q3 2014 followed by a Q&A session at which time you may call in for questions.

Let me now present our Acting Chair 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 Q3 2014. After posting rather lackluster Group results for Q1 of this year, operations normalized from Q2, sustaining an improvement trend into Q3. Across loan growth, NIM enhancement, and improved G&A, the overall operational results showed an enhancement trend. We anticipate stable earnings going into the next quarter as well, and we will do our best to minimize earnings volatility to further heighten the earnings visibility.

Let me begin the earnings presentation of KBFG for Q3 2014. First, the financial highlights. KBFG's cumulative profit up to Q3 2014 posted KRW1,221.4 billion, while the Q3 profit marked KRW456.2 billion, up 16.5% year on year. The drivers for the Q3 profit increase are as follows. First of all, as can be seen on the graph on the right, NIM continued expanding, boosted by the lower funding cost resulting in higher interest income.

Secondly, following the previous quarter G&A and PCL were well controlled this quarter as well. Lastly, there was a one-off of KRW23.7 billion corporate tax refund related to the R&D.

As of the end of September the Group's total asset, including trusts and AUM, marked KRW399 trillion, rising 5.2% year-to-date. The bank's loans in won continued an optimum level of growth during Q3, rising 1.2% compared to the end of June and up 2.7% year-to-date.

Next page, please. The cumulative provision for credit losses up to Q3 came in at KRW937 billion, while the PCL for Q3 posted KRW323.8 billion, improving 2.6% year on year, sustaining a stable level. The Group total asset to PLC ratio improved from the previous quarter's 0.45% to 0.43%, enhancing by 2 basis points.

If you look at the graph on the right, the NPL ratios for the bank and card business recorded 1.71% and 1.54% respectively. The delinquency ratio came in -- came down to 0.88% and 0.86% (sic - see slide 4, "1.86%") respectively, maintaining sound asset quality indicators. Please find the BIS ratio on the bottom. As of the end of September the Group and bank BIS ratios were 15.63% and 15.96% respectively, sustaining one of the industry's highest capital adequacy, especially the common equity which excludes Tier 1 and other capital marked 13.26% (sic - see slide 4, "13.36%") for the Group, and 13.36% for the bank which are the highest in the industry.

I will discuss the Group profitability overview on page 6 with comparisons with historical figures. If you compare the cumulative profit up to Q3, there are three relatively big changes compared to the previous year. First, the gross operating income came down by 2.8% year on year. The reduced interest income from narrowing NIM and the weak fee income attributed to such decrease. Such trend bottomed out in Q1 and the NIM started trending up from Q2, auguring well for interest income expansion and operational recovery which will ultimately lead to higher fee income as well.

Secondly, provision for credit losses decreased 17.2% year on year. Also on a quarter-on-quarter basis the PCL is stabilizing at a lower level. This is a testament to our steady efforts over the years to improve the asset quality.

Lastly, the non-operating loss of KRW122.3 billion last year same period turned to profit this year, making the cumulative non-operating income up to Q3 KRW8.8 billion. This was due to the lack of the one-off factors such as the BCC equity method loss of KRW120.3 billion from Q2 last year.

On a quarter-on-quarter comparison, aside from the across-the-board improvements, there is also a one-off gain by KRW23.7 billion from the tax refund for R&D expenses. Please refer to that fact.

From the next page, I will go into more details. First, the Group net interest income, the cumulative net interest income up to Q3 declined 2.1% year on year due to the contracting NIM. In the meantime, the Q3 net interest income edged up 1.2% quarter on quarter, continuing an upward trend. Despite the lower interest income from the policy rate decrease and the ensuing contraction in those spread, the favorable funding cost lowered the interest expense at a larger pace.

If you look at the right graph, the Group NIM inclusive of the merchant fees for Q3 posted 2.52%, rising 4 basis points quarter on quarter. The bank NIM was 1.85%, up 3 basis points quarter on quarter.

As mentioned before, the main driver for NIM enhancement was the lower funding cost. The maturing of the high-yield bank-issued bonds is continuing to have positive effect while efforts to secure low-cost deposits are reaping results with 2.2% demand deposit increase quarter on quarter.

Following August, the policy rate was lowered once again in October which will likely further compress the loan deposit spread going forward. However, through persistent expansion of core deposits, the management of loan portfolio and the recovered sales capacity of the credit card business we will continue to make efforts to enhance NIM.

Let me move on to the net fee and commission income. The Group net fee and commission income for Q3 marked KRW1,016.8 billion, down 10.1% year on year. As shown on the table at the bottom, of the other net fee and commission income there was the high base effect of the Q4 last year's accounting change on credit card factoring receivables commission while bank assurance commission dropped significantly.

The net fee and commission income for Q3 came in at KRW351.3 billion, down 0.2% quarter-on-quarter. Although trust related fee income expanded, the commission income from investment banking decreased while the credit card fees inched down from rising marketing expense and customer acquisition costs.

Next page please. If you first refer to the top-left graph on the bank's net fee and commission income trend, the overall downward trend started edging up since Q2. By line item, both securities representing and bank assurance commissions inched down quarter on quarter while trusts posted KRW59.7 billion in the third quarter, bolstered by the bank's ELS increase it rose 33% quarter on quarter, showing a steady upward trend.

The fund fee and commission income table on the bottom left showed a sizable increase in Q3 as with the previous quarter. With the bullish index however the redemption volume increased, reducing the outstanding sales balance, narrowing the fee income slightly. As shown on the bottom-right, the transaction volume for both credit card and debit card rose 4.4% and 7.5% respectively, supported by our efforts to normalize our card operations. The fee and commission income decreased 40.3% quarter on quarter due to the higher marketing and customer acquisition costs mentioned earlier.

KB Kookmin Card will do its utmost to pursue efficient marketing based on profitability during Q4 in order to recover our sales capacity and market position. The cumulative other operating income for Q3 improved from the dissipation of last year's impairment loss on POSCO shares, going up KRW58.7 billion year on year. The other operating income for Q3 had a CVA provisioning due to the higher exchange rate quarter on quarter.

However, the gain on partial sale of Kumho Tire shares and the small increase in gain on sales of loans resulted in the other operating income on par with the previous quarter. By line item under Q3 other operating income, the net gains on securities and net gains on derivatives and foreign currency translation partially offset each other from the volatility of the stock price, interest rate, and exchange rate.

If you combine the two items, the amount for Q3 stood at KRW150.4 billion, decreasing KRW30.2 billion from the previous quarter's KRW180.6 billion. As mentioned earlier there was a CVA reversal last quarter due to the exchange rate drop by KRW21 billion while this quarter saw a CVA provisioning of KRW21.4 billion from the rising exchange rate.

Next page please. Q3 cumulative G&A came in at KRW2,972.9 billion, similar on a year-on-year basis thanks to cost control efforts, and Q3 G&A decreased 3.6% quarter over quarter. This year with improvements in profitability on a quarterly basis and better cost controls, cost income ratio in Q3 recorded 51.7%.

Going forward, in the fourth quarter we expect G&A to inch up somewhat with seasonal factors such as increases in wages and A&P spending. Q3 cumulative PCL came in at KRW937 billion, declining 17.2% year on year and 2.6% quarter on quarter being quite stable.

Q3 cumulative non-operating profit came in at KRW8.8 billion, a large reduction in losses year on year. It is mostly driven by dissipation of BCC equity method loss expenses which were incurred in the second quarter of last year.

Next is on the Group's financial position. As of September end, Group's total asset on the balance sheet stands at KRW301.7 trillion, mostly driven by a growth in loan asset and inclusion of KB Capital as a subsidiary last March, increasing 3.4% year-to-date. Group's shareholder equity is KRW27.1 trillion increasing 5.9% year-to-date.

As of September end, Group's total asset inclusive of trust and AUM stands at KRW399.4 trillion, rising 5.2% year-to-date. Please refer to the right-hand graph for each subsidiary's asset size and AUM figures.

Next page. First bank's loan in won as of end of September is KRW192.6 trillion increasing 1.2% against end of June. For household loans in Q3 as was the case in Q2 mortgage loans showed a growth of 1.8% compared to end of June and for corporate loans underpinned by SOHO loans we saw a growth of 0.4% compared to end of June.

Going forward, in Q4 we will continue to drive stable lending growth in consideration of profitability. Credit card receivables as of September end stand at KRW14 trillion inching down 4.1% year-to-date basis, but with growth in credit purchases and card loan volume, thanks to our efforts to normalize operations, increased to 0.7% on a Q-o-Q basis.

As end of September, bank's deposit in won came in at KRW196.9 trillion, increasing 1.3% year-to-date. Although there was a decline of 0.1% compared to end of June whereby savings deposit decreased 1.3% with continuous focus on attracting settlement accounts demand deposit increased 2.2% contributing to improvement and funding rates.

As of September end, bank's debenture in won stands at KRW12.1 trillion. Bank's LTD, loan-to-deposit ratio, as shown on the bottom left graph is 98% as of end of September, sustaining a stable trend.

Next page. Now this slide shows KB Bank's asset quality, Bank's NPL ratio as of September end of 1.71%, improving 4 basis points against end of June. NPL coverage ratio inclusive of reserve for credit losses is 114.8%, rising 3.6 percentage points compared to end of June.

Bottom-right graph shows bank's delinquency ratio at 0.88% as of end of September, falling 11 basis points compared to end of June. In terms of each sector, household delinquency rate is 0.63%, falling 15 basis points Q-o-Q, and corporate delinquency rate is 1.18%, also inching down 5 basis points Q-o-Q, continuing on a stable trend.

Next is on the asset quality of KB Card. As of September end NPL ratio is 1.54%, improving 21 basis point against end of June, sustaining a positive trend. NPL coverage ratio, inclusive of reserve for credit losses as of end of September stands at 345.9%, showing an improvement of 27.7 percentage points compared to end of June.

September end credit card delinquency rate improved 23 basis points against end of June, coming in at 1.86%. New delinquency formation is declining and migration rate to 30-day and 90-day delinquency is also declining, with overall credit card asset quality continuing to show stability.

Next page. The bank's Q3 cumulative LLP is KRW684 billion, decreasing 22% year over year, and Q3 LLP came in at KRW206.1 billion, declining 15.2% Q-o-Q. By sector, there was on a Q-o-Q basis 14.1% increase for the household sector due to write-offs on some collective loans during the third quarter which was then provisioned.

For the corporate, with overall quality improvement and increases in write-back from the sale of the loan assets there was a reduction by 29.4% Q-o-Q. Q3 KB Card's cumulative LLP is KRW214.9 billion, declining 10.6% year on year. And Q3 provision came in at KRW77.3 billion, slightly edging up on a Q-o-Q basis.

The bottom-left graph shows bank and credit card LLP over total asset on a cumulative basis coming in at 0.55%. And Q3 credit cost improved 6 basis point on a Q-o-Q basis coming in at 0.52%, showing a clear stability in asset quality compared to the past.

This has been Q3 2014 KB Financial Group's Earnings presentation. Thank you very much for your attention.

That was an earnings presentation by our acting chair. We will now begin the Q&A session. (Operator Instructions)

Koo Kyung-hwe, Hyundai Securities.

Looking at the earnings results, regarding credit cost, if you look at the outstanding amount, LLP has come down by about KRW50 billion, but the reserve for loan losses has actually gone up by about KRW150 billion. So overall, I believe that your earnings is higher than anticipated. It is partially because of the lower LLP than we anticipated, but actually reserve for credit losses has increased quite a bit.

So under the former accounting basis the overall picture is not that great, but under the new IFRS basis, it may actually appear to be better than what it is. So what is your view on that?

On that point, I will have to check the detailed numbers. So I will get back to you through the IR department because I didn't get to check the details about the actual number on the reserve for credit losses. But as I told you before in the earnings presentations, regarding delinquency ratio and NPL ratio and the credit cost, it is quite true that we are maintaining all those three factors. But when it comes to the specific numbers I will make sure that we get you the answer through the IR department. Thank you.

[Chunguk Che], Taishin Securities.

Your Q3 margin I think is better than your peers and you have mentioned that that is due to the repayment of the high cost debt. And I believe that in Q4 there is about -- going to be about an impact of KRW1 trillion upward, but because policy rate had been cut two times I think this impact is going to be weaker in Q4. So could you elaborate and provide more color on your margin prospects for Q4 and next year? If you look into your asset and liability structure, if the rate cut was the last one in -- if we're not going to see any more additional rate cut, what do you think is going to be the impact, going to be on the margin?

Yes, policy rate had been cut once in August and once in October, you are correct. And as you know, our high cost debt had matured, and thanks to that we were able to enjoy lower funding costs afterwards. And another aspect is that in terms of our core savings deposits, core deposit, we had actually been impacted quite positively because of the lower funding cost.

Now, you asked about what our margin forecast is for Q4. We believe that with the lapse of time the policy rate cut is going to of course accumulate. However, despite that we are continuously attracting the settlement type of account. And also in terms of our loan spread we have many measures in place to control and manage our loan spread.

Also in terms of our investment management, we are preparing to adjust our portfolios, and there are preparations that are ongoing, to be a little more specific, in terms of credit loans. Starting from Q3, the unsecured loans, we are seeing a growth trend. As you know, that product has a higher margin.

To sum it up, in Q4 we believe that because of the policy rate cut there could be some negative impact on the margin admittedly. However, we have many measures and preparations in place to defend our margin as much as possible.

Your second question has to do with how much our margin is going to be impacted with the rate cut for next year. If we look at our asset and liability structure ,on an annual basis there is about an impact of 6 basis point downward impact on our margin. However, in order to improve our margin base, we are exerting many different types of efforts, and once we have more detailed information that we can provide to you we will do so next year. We will communicate that to you.

At this point, regarding our margin for next year, in terms of a more specific or more detailed direction please understand that it will be difficult to provide more elaboration above what I have just said, but we will do our best to make sure that we satisfy the expectations of the market and the investors. Thank you.

(Operator Instructions) [Na Inik], Nomura Securities.

I have two very simple questions. First, regarding the acquisition process of LIG Insurance, what's the update?

Number two, what is your dividend policy for this year, any changes to be anticipated?

Yes, let me address that question. Regarding the acquisition of LIG Insurance, we are proceeding at a very normal procedure. From FSC, we have to obtain the approval to include LIG as our subsidiary. And in order to get to that point we have to submit diverse documents. And we are in the process of submitting such paperwork and we are addressing any additional follow-up requests on the paperwork. So there is always a likelihood that it could be delayed slightly. But we would do our utmost to expedite the process so that we could acquire the approval as soon as possible so that we could reap good results.

Now, the second question had to do with your dividend. As you are well aware, KB's common stock BIS ratio is relatively high compared to other peers. And also the government is promoting pro-dividend policies at the moment. So we are fully aware of such market dynamics. And also we realize that the shareholders are constantly seeking higher dividend. So we will be working very hard to come up with some positive end results ultimately. Thank you. Next question, please.

[Han-he Kim], Taishin Securities.

I am looking at -- I cover capital companies, so I have two questions related to KB Capital. In Q2 you got 12.8, but there is only KRW7 billion. Is it because of certain credit cost or provisions? What are some of the expenses?

And after Q1, we've heard that there will be normalized level of profit going forward after the first quarter shock but I think with higher level of provision there is a concern. So I am concerned whether in the fourth quarter there will also be more increases in the loan loss provisions.

And also from a holding company's perspective what is the Company's policy to provide momentum to your capital company? I understand that you provide certain linkage operation support. And we saw a lot of press coverage on this aspect in the first half of the years. But I would like to understand little more about your unsecured loan related cooperation.

Yes, I will respond to the question. You've asked me questions about the figures from KB Capital. In the first quarter the net profit was low and was lackluster. Because as we acquired the entity, as you would know, in the initial phase there is relevant M&A and acquisition related expenses that's going to be incurred.

In Q3, the performance was relatively, once again, lackluster, and that is because on our book there is a corporate finance related assets, meaning the loans, and we were in the process of cleaning up those loans. And we have built-up the provisions to respond to that. And this year this is an aspect that we are really going to focus on to enhance on the asset quality. And we believe based on those efforts we will see more stable profit coming in in Q4. And we can expect better profit and income for next year.

And your second question had to do with what is the holding company's plan to support KB Capital. In terms of sales operation based on cooperation or linkages. As you know, we are in the process of stabilizing these link-based business operations and the overall framework had undergone certain changes. And there were trainings and education that was provided on the sales people. And there are some time that would be required to really facilitate such cross-selling or such cooperation. But in terms of the figures and the performance, we are seeing stable upward trends. So we have greater hope for the coming year.

Other than that, at the holding company level in terms of recapitalization or expanding or solidifying our capital base, we do have certain measures and once those become more specific we will communicate with the market.

I have one more follow-on question. After the deregulation on LTV in the non-bank industry I would think that was there more volume that is being originated from the banking industry rather than the non-banks?

Admittedly, there is a certain impact, yes. However, the extent or the size is not that significant. Fundamentally, with the higher LTV ratio, the loan -- the limit on the loan size is increasing. So with regards to the policy on real estate, there is new demand on the new loans. So those are two-fold impacts from the LTV deregulation.

[Juno Lee], UBS.

Thank you very much for good results. I have a question regarding your credit card business. What is your internal market share figure on the overall credit card volume? I believe that it has gone up by 0.1% to 0.2%, compared to the previous quarter. If that is the case, what you lost during the first half in terms of market share has not fully recovered yet. So up to which market share point do you think that you could possibly regain your position?

Yes. Let me respond that question from the credit card business. You talked about the market share of the credit card business in your question. In the month of April, our market share was at the lowest point, at 13.9%. But after that we pursued very proactive sales momentum. So it's steadily increasing. As of the end of September, although this is tentative figure, we believe that is about early or mid 14% range. So assuming that the current pace continues, we believe that we will continue to expand our share in Q4 as well in terms of customer numbers. So at the end of the day we believe that we could recover our market share. Thank you.

Thank you very much. We don't have anyone waiting to pose the question.

Thank you. With that we will now conclude earnings conference of KB Financial Group for Q3 2014. The presentation and VOD of this conference will be available for access at any time for you on the IR webpage of KBFG. Also, if you have any more questions, please do contact our IR Department. We will do our best to address your questions. One again, thank you very much for participating today. Thank you.

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.