KB Financial Group Inc (KB) 2015 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 Q2 2015. 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 Hee Yang, and executives from KBFG's subsidiaries. The conference will consist of the earnings presentation by our CFO, Jong Hee Yang, on the earnings results for the first half of 2015 followed by a Q&A session at which time you may call in for questions. Let me now present our CFO, Jong Hee Yang, for the earnings presentation for the first half of 2015.

Good afternoon. My name is Jong Hee Yang, the CFO of KB Financial Group. In the earnings conference I will only touch upon the key highlights of the earnings.

First of all the process of integrating KB Insurance under KBFG was completed on June 24. KB Insurance is a top-tier P&C company with a 60 year history with assets and capital base of KRW23.9 trillion and KRW1.8 trillion respectively as at the end of 2014. With this inclusion, further solidified KBFG's position as a total financial group with 12 subsidiaries under its umbrella. The P&L of KB Insurance will be reflected in the Group's financial statements from Q3. We are doing our utmost to unleash all the synergies we have been steadily preparing for.

Next let me touch upon the key points for Q2. First of all, the actual loan growth. The bank loans for Q2 edged down 0.6% compared to March end due to the KRW7.5 trillion securitization of the government loan conversion program. If you exclude the securitization effect, the actual Q2 loan growth marked 3.8% which is a resilient growth following Q1.

Secondly, the real NIM trend. The NIM for Q2 narrowed 11 basis points quarter on quarter and as a result the NIM recorded 1.61%. Taking out the 8 basis points impact from the government loan conversion program, the actual NIM contraction was by 3 basis points. We will continue to defend the margin through continuous loan portfolio improvement.

Thirdly, I will discuss the major one-off factors for Q2. The early retirement program. The early retirement program implemented in Q2 with the aim of enhancing efficiency and productivity incurred KRW345.4b in expenses. Next, the impact from the government loan conversion program in Q2 included a KRW56b in interest income drop and KRW61.8b disposal gain, and net-net we posted KRW6b in gains. Lastly, the sales gain of KRW138.2b on our stake in Korea Housing & Urban Guarantee Corporation, which was recognized in Q2.

Let me move on to page 3 to discuss Group performance. The bank loans in won came in at KRW197.6 trillion as at the end of June which rose by 0.7% year to date, but down 0.6% compared to March end.

Notably the household loan amount dropped significantly. As was mentioned before, it was mainly due to the securitization of KRW7.5 trillion won of government loan conversion program and KRW1.2 trillion of conforming loans during Q2. When excluding the securitized amount, the actual Q2 household loan growth rate was a steady 4.8%. As for the corporate loans, our efforts to improve the loan portfolio around SOHO loans began to reap results, growing the corporate loans by 6.2% year to date and by 2.7% quarter on quarter.

Next is the P&L summary of Q2. The Group net interest income for the first half posted KRW3.0854 trillion, expanding 2.1% year on year, but down by KRW66.3b in amount. It was mainly due to the 17 basis points NIM contraction year on year during the first half. In the meantime the Q2 net interest income sustained the previous quarter level despite the decreased NIM affected by the government loan conversion program and the muted loan growth. The quarter-on-quarter expansion of the interest bearing asset coupled with the more number of working days made it possible.

Net fee and commission income for the first half recorded KRW776.1b, up 16.6% year on year.

Other operating income for the first half recorded a loss of KRW22.8b, significantly narrowing the loss year on year. Especially during Q2 there was a gain of KRW89.5b, showing a sizeable improvement. The disposal gain of KRW138.2b on our stake of Korea Housing & Urban Guarantee Corp was recognized in Q2. Also the sales gain on government loan conversion program of KRW61.8b was recognized during Q2. For your information, we recognized the impairment loss on our Posco stake of KRW49b in Q1 and KRW32.4b in Q2.

Next is on G&A. G&A has increased quite largely on both year-over-year and QOQ basis. The reason for the increase as you know is due to early retirement program in Q2, which led to KRW345.4b of expense, leading to steep increase in employee payroll.

Provision for credit losses for the first half of the year was KRW458.6b, improving 25% year on year, but Q2 provisions were KRW264.8b, up around 37% QOQ. This is not to say that Q2 soundness deteriorated, but in Q2 we took a conservative stance in preparation for IFRS 9 and, considering one-off impact from provisioning for DSME amounting to KRW29.7b, now considering this factor provisioning is still quite modest and steady.

For your information page 13, Group asset quality slide shows continued downward trend for NPL and delinquency ratio for both the bank and the card business.

First half non-operating profit with card-related corporate income tax reversal of KRW203b recorded a significant year-on-year increase. Thanks to such factors, despite ERP expense of KRW345b in Q2, we recorded in the first half KRW959.6b of net profit.

On page 4, I would like to run through some of our main business indicators. First half Group ROE and ROA was 6.83% and 0.61% respectively, posting a year-on-year improvement. This is mainly due to continuous improvement in net fee and commission income on the back of stronger sales capabilities and decline in provisions driven by asset quality improvement. On the other hand, Q2 ROE and ROA was 4.88% and 0.44% respectively, declining QOQ due to ERP expenses.

As the NIM graph shows on the top right, Group's second quarter NIM declined 12 bp QOQ. The biggest impact came from government backed loan conversion amounting to 8 bp, with loan origination cost amortization of 6 basis points and conversion of loans to [NVC, NVS] amounting to 2 basis points downward impact. Decline in the policy rate also worked against the NIM. But as the impact from loan conversion is already priced in and with increases in household unsecured lending and SOHO loans, as well as low cost deposits, we expect NIM to start to recover even slightly starting next year -- next quarter, excuse me.

In terms of the credit cost in the bottom left graph, driven by continuous efforts to improve our asset quality, Group's credit cost improved from previous years 0.58% to 0.4% in first half, improving 17 basis points.

Bottom right graph shows bank -- Group's and bank's BIS ratio at 15.86% and 16.31% respectively. Market especially has keen interest on Common Equity Tier 1 ratio for the Group and the bank and the figures are 13.82% and 14% respectively, maintaining the highest level in the financial sector.

The following pages elaborate on the details of what I have explained so far. I will not make that further elaboration as they overlap with what I have just presented. This has been the 2015 first-half business results for KB Financial Group. Thank you very much for your attention.

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

Byung Gun Lee, Dongbu Securities.

Good afternoon. My name is Byung Gun Lee from Dongbu Securities. First of all, thank you for such good earnings results. I have the following two short questions. First of all, in the case of KB Insurance, which is now an affiliate of your Group, in order for KB Insurance to become an official affiliate of your Company, according to the Financial Holding Company rule, you have to increase your stake to 30% and you have to think about the IFRS-4 phase-II-related requirement going forward for KB Insurance, which requires additional capital. So appropriate level of shareholders equity would be necessary.

So what is the shareholders equity level of KB Insurance that you think is appropriate? And also going forward you will have to increase the stake in KB Insurance. So in what method are you planning to increase the share? Just some framework would be appreciated.

My second question is as follows. I believe that your actual loan growth was quite healthy so we thank you for that result. But yesterday the government made certain announcements in which it described the new household-loan-related policies. Persistently the fixed rate loan ratio of 40% is going to be maintained according to policy, which is quite high. Relatively, because KB Kookmin Bank is quite large, in order to meet that ratio you will have to pay quite a bit of the cost to do that. So that is a concern in the market.

So that fixed rate loan ratio policy guideline of the government, now how are you planning to deal with it and how would that eventually impact your NIM going forward?

Mr. Lee from Dongbu Securities, thank you very much for the excellent questions. Of the two questions, I will invite the CFO of KB Insurance to answer that question and the answer regarding KB Kookmin Bank will be answered by the bank.

Now you asked about the share increase in KB Insurance. As you are well aware, according to the relevant law, we have to acquire an additional stake in the company within the first year of acquisition. So we will have to do that shortly.

Now when it comes to the RBC ratio for the P&C industry, you're asking what ratio would be the most effective. If the treasury share sale alone would be able to meet that capital base requirement that would be great, but if it's lacking certain capital we will resort to other methodologies.

As of Q2 the capital ratio, RBC ratio is about 140% -- 180%, that is, but in the future we will have to consider various situations of the industry to come up with the optimal target amount. For your information, the industry average is, requirement by the law is about 150%.

Currently it's about 35% -- 31% right now but we have to meet about 35% going forward. So when it comes to how we are going to defend profitability of the loans I would invite my bank representative to answer that question.

Yes, my name is Ha Yung from KB Kookmin Bank. Regarding the rising fixed rate loan ratio requirement and how it will impact the NIM of the bank, let me address that question. First of all, we are in close consultation with the government relevant agencies. As at the end of June, 31.4% of the fixed rate loan ratio is being met right now, but the requirement is 35%. So according to the current guideline we will have to increase the share of the fixed rate loan going forward.

During the first half, as you are well aware, the government loan conversion program had to be implemented. So after that program for the second half we expected less pressure on the part of the fixed rate loan ratio expansion. And we have been in contact with FSC quite closely and currently the requirement of 35% still feels very high. Now initially they had proposed about 37.5% at FSC, but we convinced them to actually lower it to 35%.

Secondly, even if we meet that 35% fixed rate loan ratio, we have to still take quite a bit of sacrifice. For instance, the methodology with which we qualify certain applicants for fixed rate loans has to be modified etc. So that's why we are in the process of suggesting modifications to the relevant regulators.

During the second half in case our suggestions are reflected in the policy and in case where it is not reflected, we have to prepare for both scenarios and we are coming out with two separate plans in those scenarios. Under the current circumstances we believe that during the second half, the new home equity loans and also mortgages, at least half of that has to be under the fixed rate loan structure.

And when it comes to NIM, when we sell fixed rate loans right now compared to the floating rate products, we are planning to actually charge higher fees. Although there is a gap between the short end and the long end of the interest rate curve, we believe that we still have to improve our bp, basis points by about 10 to 20 basis points higher than the floating rate products in order to sell our fixed rate products. So if we do that from the second half this year and also from next year onward, we believe that there will be even some positive impact coming from the increased portion of the fixed rate loans.

Now the key question is how are we going to implement it going forward and how will the interest rate or policy rate move into 2016 and 2017 would be the key factors. Now according to our internal scenarios and simulations, we believe that at least for the first two years, the increased proportion of the fixed rate loans will actually help us in terms of the profitability, but from year three on the interest rate increase impact might take place. In that case, compared to the floating rate products, we might incur certain losses on the fixed rate products. So in that regard we are researching various measures to hedge such risks for the mid to long term perspectives.

I hope that answers your question. We will take the next question from Kyobo Securities, Mr. Seok Kyu Hwang.

Yes, I am Hwang Seok Kyu from Kyobo Securities. I would like to ask three questions. If we look at your margin, now compared to the decline that was talked about in the market I think it was much less. I think the biggest impact was from loan conversion and I think the policy rate cut did not have as big an impact. But if we look at the funding side, your interest expense did decline quite significantly. I would like to understand the reason behind that.

And also on the funding side, the decline in margin, can this continue? So with regards to your forecast for the margin for Q3, what is your forecast? Will the policy rate cut impact continue? I would think so. But I think the Q2 impact was not so big. So could you elaborate on the future direction or the trend for your margin?

Second question has to do with DSME. You've mentioned that you were conservative in the provisioning and of course the creditors are currently exerting efforts to resolve this issue. So we do not know in the market at this point how things will play out. So I would like to understand the provisional impact because it's very difficult for us to have a clear understanding in the market so if you could elaborate that will help us.

And if we look at your card business, your growth has been quite stagnant. Now is it because of the impact of the MERS starting from June or maybe there are some other impacts? But the growth in your card business, I would think would be very important for your overall business. What is your forecast for your card business going forward?

Thank you very much Mr. Hwang for those three questions. I will respond on your NIM question. Overall in the second quarter there was an 11 bp decline and LOC amortization impact was around 6 basis points. So one-off factor is about 6 basis points so we think that in the third quarter there will be an adjustment commensurate to that amount.

In the case of the funding side, how big of an impact will it have, it's low interest rate so there's a lot of movement and liquidity. So we see a lot of deposit in the low cost deposit product and we were aggressive in attracting the accounts, especially for payroll, money transfers, and transfers so on the funding side we think the interest rate will continue decline.

Overall on the household unsecured loans or SOHO loans, once again we have focused on those products and we have exerted our sales capabilities and they have actually solidified. So we think that going forward, the margin, the extent of the margin improvement will be better. If the market rate does not really fluctuate there will not be any significant impact. But on top of the LOC amortization, which is a one-off, credit costs will also be reflected.

So with regard to DSME, currently there is no specific credit event. So it would be difficult for us to provide you with a detailed explanation. But recently because the credit ratings has fallen there was about KRW29b of additional provisioning that was done against DSME. We are closely monitoring the decisions made by the KDB side and we will make accordingly the decisions.

On the credit card business, it's true the growth has become stagnant. I think there are three factors. Number one, last year there was a breach of confidential information and there was a suspension of business operation. And basically, a credit card has to be issued and the cardholders will have to use that credit card. So from issuance to the use there is a lag effect and last year our operation was hindered and hence we weren't able to increase our receivables or the asset size.

And secondly, there was an impact of MERS. There was a consumption suppression so overall credit card usage volumes did not grow.

And the last factor is that in the non-bank sector, the loans especially the mortgages, as they moved to the banking sector, in the non-banking there was a lot of fierce competition on unsecured lending.

So as a result basically there was an impact on the credit cards business and so as a result our asset was not able to grow. But after the fourth quarter the credit card business operation has resumed and there were a lot of efforts. Do we think that since the second half of the year, we believe the credit card assets will start to grow. Thank you.

Thank you. There are no questions in line at the moment.

We will wait a little bit longer to wait for the next question, before we close the Q&A session.

Jung Wook Choi, Daishin Securities.

Yes, my name is Jung Wook Choi from Daishin Securities. Before I ask questions, I have the following request. The disclosure on your earnings came out at 3 p.m., but on your home page it was only opened at 4 p.m. when it comes to your earnings presentation. So we would appreciate it if you could actually post the earnings presentation a little bit before the earnings conference because it's a little bit too tight for us to review them. So if it is possible, we would like to ask you to please post the materials a little bit earlier.

Now on the retail side your asset quality seems to be improving quite a bit. During Q2 your provisioning expense was quite low. We thought it would actually expand in Q2, but it was actually to the contrary. And when it comes to NPL, it came down quite significantly. Are there any special factors that we have to understand behind that? Could you elaborate?

Secondly, in your previous answer you mentioned that regarding mortgages, you said that fixed rate products will be sold at a higher rate compared to floating rates. So in the near term you will not have any negative major impact on NIM and profitability. However, realistically speaking, if you actually charge more then will you be able to actually sell necessary fixed rate products so that you could actually meet the fixed rate guideline. My question is, just like the first half or the early part of this year, you might have to actually lower the rates even further in order to sell the products to meet the ratio. What do you think about that?

Mr. Choi, thank you very much for your questions. Let me first of all answer your first question regarding the retail side of the asset quality. There are no one-off factors to really address. As you are well aware, in the past collective loans were the culprit behind the asset quality issue, but that's been pretty much disappeared. So on the retail side we don't really have major issues threatening our asset quality. Overall even in the future I don't foresee any major factors affecting us negatively. Again the mortgage loans, they were usually collective loans.

Now to answer your second question about the higher rate being charged on the fixed rate products going forward, after we conducted the government-backed mortgage loan conversion program in the past we actually raised the fixed rate product guideline ratio. Now in the past there was fierce competition between commercial banks in Korea in order to meet that ratio. But I think that the market is stabilized in terms of the competition. So I think that going forward, it will not be that difficult to meet that ratio.

I hope that has answered your question. Per your request when it comes to the fact book and also the earnings presentation, we are posting the materials immediately after the management disclosure at 3 p.m. But we will review the process so that we could expedite the process for you.

We will wait another second for another question possibly before we close the Q&A session.

Thank you very much. We do not have any more questions on the queue. So with that we will now conclude the earnings conference for KB Financial Group for the first half of 2015. The presentation and the VOD 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.