KB Financial Group Inc (KB) 2015 Q1 法說會逐字稿

Greetings. 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 2015 despite your busy schedules. 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 CFO, Yang Jong-Hee, and executives from KBFG subsidiaries. The conference will consist of the earnings presentation by our CFO Yang Jong-Hee on the business results of Q1 2015, followed by a Q&A session, at which time you may call in for questions.

Let me now present our CFO, Yang Jong-Hee, for the earnings presentation for Q1 of 2015.

Greetings. I am Yang Jong-Hee, the CFO of KB Financial Group. It has already been three months since our last annual earnings release in early February. And I'm joining you here today for the Q1 business results presentation of 2015.

To give you the highlights regarding Q1 performance, our sales capability became normalized after governance structure stabilization and growth showed signs of recovery.

In particular, SOHO-oriented loan portfolio enhancement efforts showed feasible results, which were a part of efforts to hike up profitability. Sound growth was realized, focused on corporate loans. In the case of household loans, Q1 growth may seem slightly sluggish, which mostly was caused by the over KRW2 trillion of loan securitization.

In addition, fee and commissions income showed a strong growth trend, centering on the strategic focal point of WM. Trust income grew by a great leap, thanks to factors such as ELX sales growth. And new fund sales volume is growing with the robust stock market, which is expected to grow, that represents securities fee income.

On the other hand, KB Kookmin Card sales capability, one of our main subsidiaries, became normalized to a great extent. Q1 card transaction volume posted KRW22.1 trillion, maintaining an upward trend of market trend -- market share. Through expanding new members through bank channels, and via diversification of member-soliciting channels, through savings and loan banks and others, we were able to achieve the highest number of individual credit card members in the industry in Q1. Also, the industry's highest level of capital adequacy was achieved in Q1.

As a result of continuous asset quality improvement efforts, Q1 provision for credit losses posted KRW193.8b, a 31.0% Y-o-Y and 33.4% Q-o-Q drop, a notable amount. For your reference, on January 15, the bank won the final lawsuit regarding corporate tax refund and KRW180.3b of corporate tax refund was reflected on our earnings.

Now let me cover KBFG's 2015 Q1 earnings results in more detail. Let's go to page two.

Q1 2015 Group profit for the period posted KRW605b, thanks to the corporate tax refund, the decrease of provisioning, while growing asset quality enhancement. It grew by KRW246b Y-o-Y and KRW402b Q-o-Q, respectively. Including trust and AUM, the Group's total assets marked KRW421 trillion as of now, up KRW16 trillion year to date.

Q1 Group NIM posted 2.38%, an 8 bp decline Q-o-Q, caused by factors including the base rate cuts in August and October of last year. Q1 bank loans in won and deposits grew by 1.3% and 1.1%, respectively, and the LDR as of end March posted 97.5%, and is being maintained at a stable level.

Let's go to the next page. The credit cost in Q1 posted 0.34%, a 21 bp Y-o-Y and 13 bp Q-o-Q improvement. Bank and card credit costs both improved Y-o-Y and Q-o-Q. This is the result of the past few years of aggressive NPL cleanup, as well as asset quality improvement efforts.

NPL ratios for the bank and card posted 1.28% and 1.43%, respectively. Delinquency ratio recorded 0.61% and 1.58%, respectively. In most cases, due to the large-scale NPL write-off and sell-off at the end of the year, there is a trend of slight increase in delinquency and NPL ratios in Q1. However, this did not take place this year, thanks to the positive asset quality trend.

The Group and bank BIS ratios posted 15.85% and 16.37%, respectively. In particular, the Group and bank CET1 ratio, which is a great focus of the market, posted 13.81% and 14.05%, respectively, maintaining the highest capital adequacy level in the industry. Group CIR improved slightly Q-o-Q, recording 59.6% despite our efforts.

Now let's go to page five. I will now discuss the Group profitability overview for Q1. Net interest income posted KRW1,536.9b, at a similar level compared to the same period previous year, but a 6.2% drop Q-o-Q. This was caused mainly by the NIM decline and decrease of business days in the quarter.

Other operating income incurred KRW112.3b of losses, which is not a big change Y-o-Y, but the size of the loss greatly contracted compared to the previous quarter.

Q1 provision for credit losses, despite no one-off factors, posted KRW193.8b, a decline 31.0% Y-o-Y and 33.4% Q-o-Q, respectively. It is at an exceptionally low level and it can increase slightly going forward, but it is expected to be maintained at a stable level.

Non-operating income posted KRW205.8b, a steep growth caused by the corporate tax refund. Profit attributable to controlling interests recorded KRW605b. As you can see on the graph on the right, both subsidiary performance, including bank, card and securities improved Y-o-Y.

From the next page, I'd like to elaborate in more detail about each section. As previously mentioned, Q1 net interest income posted KRW1,536.9b, recording a similar level to the same period last year. NIM dropped 8 bp, and there were two business days less in this quarter compared to the previous quarter. NIM declined KRW101.4b Q-o-Q, thus discontinuing its growth trend which has been maintained from Q2 of last year. You can see the Group NIM from the graph on the right; it went down 8 bp Q-o-Q posting 2.38% and bank NIM declined 7 bp Q-o-Q, posting 1.72%.

The repercussions from the additional base rate cut in March of last year is expected to be fully effective and the loan conversion programs, loans which were sold between March and April, is expected to be securitized in Q1. Actually the additional base rate cut was in March of this year, and that is why margin contraction pressure is expected to continue for the time being. KB will try to guard the net interest income by expanding household credit loans and SOHO loans, as well as continue efforts to improve the spread.

Now let's go to page seven. The Group net fee and commission income recorded KRW382.1b, a 21.9% Y-o-Y and 4.4% Q-o-Q increase, respectively. This was caused by the credit card fee income and trust income enhancements, as seen on the uppermost right side chart. In particular, there was a great increase in trust income which was a result of aggressive efforts to sell ELX products. Credit card fee income improved, thanks to factors including a drop in marketing cost.

Other fee income posted KRW36.8b, similar to the level of last year. It went down 37.3% Q-o-Q. And this was because approximately KRW22b of the investment financial fee and commission income went down. Investment financial fees and commissions have a structure of growing from when the [incubating] process related to the deal begins early in the year to when the deals become completed near the end of the year. So it is expected to show gradual improvement going forward.

Now I would like to elaborate on other operating income. Page eight. Other operating income recorded a loss of KRW112.3b, similar on a Y-o-Y basis, but the amount of loss shrank from the previous quarter by KRW198.4b. Line items show that net gains on securities increased 49.5% Y-o-Y to KRW132.9b. This is due to increased management yield of KRW56b due to bullish stock market and fall in the bond yield. On a Q-o-Q basis, the volume of impairment losses on securities including POSCO decreased, showing significant improvement. For your reference, impairment losses on securities in Q1 2015 include KRW49b from POSCO, KRW6b from Ssangyong E&C, and KRW5.1b from Keangnam Enterprises.

Net gains on derivatives and foreign currency translation amounted to KRW33.8b, down Y-o-Y but up Q-o-Q. It is in line with gains on foreign currency translation, affected by FX rate changes.

Now please turn to page nine. G&A this quarter stood at KRW1.77 trillion (sic - see slide 10 "KRW1.077 trillion"), up 8.7% Y-o-Y and 3.9% Q-o-Q. Employee wages went up significantly because of the KRW71b contribution to the internal employee welfare fund which had previously taken place in the second quarter. Other expenses were down by 20.7% to KRW261.8b from the previous quarter's KRW330.1b, when seasonal factors had occurred during higher -- including higher advertising cost for yearend sales promotion.

Upper right-hand slide graph shows the cost/income ratio to be 59.6% for the quarter. This shall be gradually improved by relieving the rigid cost structure and enhancing profitability. The quarter's provision for credit losses recorded KRW193.8b, down by 31% Y-o-Y and 33.4% Q-o-Q, maintaining a stable trend.

Yes. Let me continue. The bottom-right graph shows the credit cost at 0.33% for the quarter, showing a steady downward trend. Non-operating income for the quarter was KRW205.8b, propped up by one-off tax refund of KRW180.3b.

And now the Group's financial position. Group's assets as of March-end was KRW315.7 trillion, up 2.4% year to date. This was mainly due to the increase in loans in won. And Group's liabilities recorded KRW287.8 trillion, up 2.5% year to date. As of March end, Group's total assets including trust and AUM amount to KRW421.3 trillion, up 3.9% year to date. Please refer to the pie chart for subsidiary performance.

And now, about loans and deposits. Bank loans in won stood at KRW198.8 trillion, up 1.3% year to date. Household loans declined by 0.2% year to date because approximately KRW2.2 trillion won was securitized. Corporate loans, backed by SOHO loan growth, increased by 3.3% year to date.

KRW8.8 trillion of loan conversion programs sold during March and April was securitized, expected to bring down the mortgage loan balance. KB Group will take utmost care to growth and profitability by revising product management strategies in a more sophisticated manner, for example, by adjusting the growth target slightly higher into corporate loans.

Bank deposits in won as of March-end recorded KRW205.3 trillion, up 1.1% year to date. Demand deposit grew by 5.4% year to date as floating money in the market flowed in and the bank's efforts to engage more customers to open settlement accounts paid off.

Now, page 13. First, the bank's asset quality. The NPL ratio was 1.28%, similar to the previous quarter. Asset quality is showing a sound trend considering the mere KRW207.9b of NPL sales and write-off this quarter compared to the large volume in Q4 last year.

The lower-left graph shows the bank delinquency ratio of 0.61%, up 10 basis points year to date. Although corporate loan delinquency rate increased 18 basis points year to date, it is being kept at a lower level compared to the same period a year ago and two years ago. The lower-right graph shows the card delinquency ratio of 1.58%, continuing the nice downward slope.

Next, Group's provisions and credit costs. Page 14. Bank's loan loss provisions recorded KRW133.4b, down by 43.2% Y-o-Y and 29.9% Q-o-Q, respectively. There was a huge drop in household provisioning both Y-o-Y and Q-o-Q. In corporate provisioning, there was a large fall Y-o-Y but a slight increase Q-o-Q. Card loan loss provisions recorded KRW54.6b, down by 17.4% Y-o-Y and 17.5% Q-o-Q, respectively.

The bottom-left graph shows the Group credit cost having improved from 0.66% in 2013 to 0.53% in 2014. Continuous improvement landed this quarter's credit cost at 0.34%.

The last page lists the major business indicators of subsidiaries. Please make note of them as needed.

This concludes Q1 2015 KB Financial Group earnings conference -- earnings presentation. Thank you.

Thank you, CFO Yang. We'll now be taking questions.

(Conference Instructions). We'll take the first question from Samsung Asset Management, Shim Kyu Song. Please go ahead.

Good afternoon. I'm Shim Kyu Song. I have several questions. In Q1, despite the NIM fall, the interest gain was hurt. Was there another reason?

And as for credit cost, it was a bit low. And what were some of the factors?

And third, as for the loan conversion program, you sold a huge volume, and what will be the impact? Thank you.

Thank you for your questions. You asked three questions about the interest income, about the credit cost, and KRW8.8 trillion of loan conversion program which was of high volume and the impact of the loan conversion program.

Let me talk about the loan conversion program first and then the credit cost related question will be handled by Mr. [Ho Yin]. And as for interest income, it will be answered later.

As for loan conversion program, KRW8.8 trillion of product were sold. We have 24% mortgage loans, so we met the requirements. And what impact will it have on our book, I think it will be on two fronts. As for the interest rate on the mortgage loans and the MBS, there will be a gap. And there will be some cost related to loan origination. And we have 2% LOC and it will be reflected as 6 to 8 basis points lower on the NIM.

As for the credit cost, let me answer, I am the CFO of Kookmin Bank. For a few years now, we have been trying to cut down on the credit cost and our efforts have been intensified this year. Since yearend last year, delinquency ratio and NPL ratio, the growth have reduced significantly Q-o-Q and Y-o-Y, respectively. And so if we talk about the NPL ratio, it has been 12 basis points for retail and corporate about half of that. But it is a decrease on a Q-o-Q basis as well as on a Y-o-Y basis. So that's why we have lower credit cost. And we will be -- and we cautiously predict that we'll be able to maintain the same level.

And you asked about whether there were one-off factors. As for the credit cost this quarter, we did not have special one-off factors.

And why did net interest income not fall as much?

We had a bit of a growth in our assets and there was KRW2.3 trillion on interest income, and we did not suffer much in the card business, there was a fall of 30 basis points. So I think that netted off.

Thank you very much. And next question, from Hyundai Securities, Koo Kyung-Hwe, Team Leader. Please.

Yes, I'm from Hyundai Securities. My name is Koo Kyung-Hwe. For the loan conversion profile, I want to ask a few questions in more detail. In the case of [S] Company, in Q1 they said they had to write off loan-originating cost or LOC, in Q1. So, can you tell us about if any other costs will be incurred in Q2?

Second question is relevant to the question asked by Mr. Shim, Shim Kyu Song. So the decrease of the net interest income and the increase of the interest assets, well, it seems that there is a big gap. Of course there would be some operating income impact, but it still seems quite sizable. So, although it's not included in the NIM, maybe it is included in the costs or expenses. So, can you elaborate in more detail about those factors? Thank you.

First of all, related to the LOC write-off, for the loan conversion program, we, among the KRW8.8 trillion, we had KRW1.7 trillion that was written off. Regarding how it will happen in Q2, well, we need to think about the originating period of the loan, so that is why this happened.

Regarding the NIM margin, we had 8 bp drop overall. In August and in October of last year, there was a base rate cut which impacted about 6 bp decline, and 2 bp was because of the LOC write-off impact. So that is why we had overall 8 bp drop.

Thank you. Next question, from Dongbu Securities, Team Leader Lee Byung-Gun.

Good afternoon. I'm Lee Byung-Gun from Dongbu Securities. Thank you for your wonderful performance. It's been a while. I guess it's the same question over and over again as for the loan conversion loan program, I have one question, and I'm going to ask something else.

As for the loan conversion program, how will you fill the gap and how will you minimize the market impact? I think that's the relevant question. And different from the other banks, the volume is very large. So, I don't think it'll be easy to maintain your business plan that you set up originally. So, how will you and when will you make up for the loan -- the converted loans.

And the ten-year tranche takes up a lot of volume, so there will be a lot of pressure on the interest income and I think it'll impact the market greatly. So, how will you minimize that? And are you planning to sell off some of your debts? So, how will you fill up the gap for the loan conversion program and how will you hedge against the MBS? And the common equity Tier 1 ratio is very good and we did not get the dividend that we had expected and there's a lot of idle money sitting in the market. So, is there anything that you can say at the moment?

Yes, as for the loan conversion program, it's not just us but I guess the whole market is interested. KRW8.8 trillion is converted from mortgage loans to MBS, so, how will we increase our loan portfolio to make up for the gap? We are going to restructure our portfolio so that we can increase our NIM. And the second is to focus more on the fee income and focus on the non-banking side. And of course we will try to minimize the cost.

In this year, household loans and corporate loans, we had initial plans to add KRW1 trillion each to the loan portfolio. And with the appointment of the new CEO, the governance structure has stabilized and we're gaining momentum in our sales activities. So, SOHO loans and corporate loans are increasing. So with that, mortgage loans, credit loans, we will be increasing the loans by KRW1 trillion.

And as for the KRW8.8 trillion, how will we be able to rebalance? So we'll have to focus on the high-yielding assets and rebalance our assets accordingly, depending on the maturity. And we have set aside another team for investment in securities, so we are going to have that team work on gaining more.

And the new CEO is market-friendly and, as well as announced by the BOD, he's very shareholder friendly and he wants to maximize the returns. So as much as it allows, we will be looking favorably into the dividend policy. Thank you.

Thank you very much. Now we have a question coming in from Daishin Securities, Choi Jung-Wook, Team Leader. Please.

Yes, I'm from Daishin Securities. My name is Choi Jung-Wook. I want to ask you a question about household provisioning. In Q1 of last year it was KRW38.6b, but it seems that you had provisioned about KRW90b for the quarter. So it seems that in the past you had more for household, but in Q1 it's only KRW17.1b, so it's quite low. So is it, excluding all the one-off factors, I'm curious about the reason why. Were there other specific reasons? And do you think this can be maintained at this level as you mentioned before? Do you think in Q2 this can be as low as it is now?

The second question is a question I guess for all of the banking industry. It seems that, apart from the NPL, delinquency ratio higher in Q1. So I'm curious about, is it because of the Q1 characteristics, seasonal, or other one-off or special reasons behind this trend? Thank you.

The bank CFO will answer.

I'm [Ho Yin], the bank CFO. I would like to answer your question. For household provisioning, as was asked many times by the researchers, it went down in Q1, but you know that from the past it rose slightly in Q2. But in Q1 it is true that it shows market decline because we had asset quality improvement in collective loan and it seems that annually it is improving. And as was mentioned before, we do not have or we did not have any one-off or special factors contributing to this trend.

However, regarding whether this can continue in Q2 and Q3, well, we had KRW8.8 trillion of loan conversion program, so we will need to make more investigations into the borrowers, but we believe that it went to those more higher credit-worthy individuals. So we will have to wait and see what the repercussions will be. I believe that it will not go up by a steep increase.

Regarding NPL and delinquency, we are looking into why that trend is happening, and we haven't found any special reason why. And in particular for corporate, for the past several years we have been working hard. And it seems that the results are becoming realized and becoming more stable for our corporate. We believe that this trend will continue in Q2, so that is our cautious prediction.

Thank you. As for your reference, Samsung Asset Management and other analysts had asked something, and if I may, I would like to add that LOC or loan origination cost regarding the loan conversion program is in Q1 we had written off KRW10.2b and the outstanding amount of the cost is KRW37b and it will be written off in Q2. So, significant portion will be written off in Q2.

We do not have any questions on queue. We will be standing by. Thank you.

Thank you. We have taken all questions and I believe we have satisfied all the questions. We do not have any more questions at the moment.

We will now conclude Q1 2015 KB Financial Group's earnings conference. The presentation materials and the video will be uploaded on the IR website of KB Financial Group. So it will be able to -- you will be able to access.

And if you have any more questions, please contact the IR team directly and we'll do our best to answer your questions.

I'd like to thank you once again for your participation. Thank you.

Editor: Speaker statements on this transcript were Interpreted on the conference call by an Interpreter present on the live call. The Interpreter was provided by the Company sponsoring this Event.