KB Financial Group Inc (KB) 2015 Q3 法說會逐字稿

Good afternoon. My name is Kyu-Sui Choi, the Head of IR at KB Financial Group. Thank you very much for joining our earnings conference of KB Financial Group for Q3 2015.

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, 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 Q3, 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.

Good afternoon. I am Jong-Hee Yang, CFO of KB Financial Group. Before I go into the business results, allow me to first walk you through some highlights for the third quarter.

From the start of the year, with operational normalization that led to solid loan growth and thanks to visible results from our efforts to improve asset quality, our business results have improved.

Such trend was well maintained in the third quarter and we expect it will continue into fourth quarter as well.

With that, allow me to now walk you through our key performance highlights for Q3, centering on main issues.

You will see the Q3 net interest income continued to trend up, though marginally, driven by solid loan growth. This is mainly driven by solid bank loan growth of 2.9% and with NIM being flat on a Q-o-Q basis.

Next is on efficient cost controls. As you know, in the second quarter, we implemented ERP to enhance efficiencies which led to KRW345.4b of expenses.

Excluding such one-off factor, on a recurring basis G&A has been KRW 1,077b in Q1, KRW1,023b in Q2 and KRW998.9b Q3, clearly showing improvement.

Next is on stable control of credit cost. Q3 PCL, provision for credit loss, came in at KRW165.8b, a significant drop on a Q-over-Q basis, driven by our multiple years of asset quality improvement efforts. And, as the voluntary restructuring agreement for Electric Wire with the creditor has ended there was a write-back of KRW44.3b which led to a reduction in provision. Although in Q3 credit cost recorded a very low level on a one-off write back, as mentioned multiple times, we are mindful of delayed economic recovery going forward. So on a per annum basis, we will be controlling the figure around 40 to 50 basis points.

Next is our key one-off items. We continued to see drop in POSCO equity prices which led to a recognition of KRW87.7b of impairment losses. Except for this factor, there aren't any special items to be noted.

On page 3 I will outline the Group's performance. Bank loans in wons stand at KRW203,300b as of September end, arising 3.6% year to date and 2.9% Q-o-Q. By sector, driven by sustained growth and housing transactions which led to continuous increase in demand, household loan increased 3.6% Q-o-Q.

On the face of it, it looks as though household loan growth was a mere 0.1% year to date which is due to the impact of KRW14.5 trillion of securitization, including loan conversion of KRW8.5 trillion. So real household loan growth up to month of September, after considering for securitization, is quite solid at 13.1%.

For corporate loans, our efforts to improve profitability such as improving the portfolio around SOHO loans have paid off, leading to a 8.3% year to date and 2.0% Q-o-Q increase. In Q4 we will continue to pursue profitability and soundness so as to continue the steady loan growth trend.

Next is on the P&L. Group's Q3 cumulative net interest income came in at KRW4,637.1b, dipping 2.9% year over year, mostly driven by Group's accumulative NIM decline of 20 basis points over the same period.

However, in terms of Q3 NII, on solid loan growth and with NIM defending its level, increased slightly on a Q-o-Q basis.

In Q3, net fee and commission income recorded KRW1,173.5b, up 15.4% Y-o-Y. For the quarter, net fee and commission income grew 0.9% Q-o-Q.

Cumulative net fee and commission income grew significantly, mainly thanks to enhanced trust income and fund sales commission. Trust income rose on the back of the increased sales of the ELS products. Also, higher fund sales helped to boost the fund sales commission and fees to grow at 9.1%.

The cumulative other operating income recorded loss of KRW266.8b with the size of the loss smaller compared to the same period last year. However, in Q3, the loss in other operating income came in at KRW244b, this being a vast difference from the previous quarter.

The difference stems from KRW55.3b increase of impairment loss on POSCO stake as well as CVA provisioning of KRW22.2b due to higher exchange rate. Furthermore, there were not one-off factors such as disposal gain of KRW138.2b from Korea Housing and Urban during the quarter and sales gain of KRW61.8b from government loan conversion program.

The Q3 cumulative G&A came in at KRW3,444.3b, up 15.9% compared to the same period last year. However, G&A for Q3 was only KRW998.9b, down 27% Q-o-Q.

Cumulative G&A increase was relatively large, as mentioned before, because of the ERP in Q3 incurred KRW345.4b in expenses. Excluding this factor, G&A in Q3 dropped by about 2.4% Q-o-Q.

Cumulative PCL in Q3 posted KRW624.4b, improving 33.4% Y-o-Y. Provision in Q3 was KRW165.8b, declining 37.4% Q-o-Q, showing a stable trend.

For your reference, page 13 on Group's asset quality shows that the bank and credit cards NPL ratio and delinquency rate are on a continuous stable downward trend.

There was sizable Q3 cumulative non-operating income increase Y-o-Y thanks to corporate tax refund of KRW203b which had been recognized in Q1. As you have heard, with the overall business result improvement, Q3 cumulative net profit attributable to controlling interests recorded KRW1,351.7b, increasing 12.9% Q-o-Q.

Net operating profit for Q3 stood at KRW407.1b, improving 19.9% from the previous quarter.

On page 4 I would like to run through some of our main business indicators. In Q3 2015, Group's ROE and ROA respectively posted a 6.47% and 0.58% year-to-date. This being an improvement over the same period last year. As mentioned before, this is mainly due to a continuous improvement in net fee and commission income and decline in provisions driven by asset quality improvement.

Q3 ROE and ROA were also up Q on Q to 5.78% and 0.52% respectively.

Group third quarter NIM stood at 1.88%, at a level similar to the previous quarter.

LOC amortization impact was absent, while the effect of base rate cut back in June was still very much in place.

Additionally, there was extended impact of reduction in interest income due to handling of loan conversion program. All these reasons helped to put the Group's NIM at a similar level as the previous quarter.

We will endeavor to improve NIM in the earliest day as possible to do so. Efforts will be made to increase household or secured lending and SOHO loans, as well as to improve the portfolio through securing more low-cost deposits.

In terms of the credit cost in the bottom left graph, improved -- the Group's cumulative credit cost in Q3 recorded 0.37%, improving 20 bp from the same period last year when the credit cost was 0.57%.

The bottom right graph shows Group's and bank's BIS ratio as 15.72% and 16.12%, respectively.

Market especially has keen interest on common equity Tier 1 ratio for the Group and the bank and the figures are 13.70% and 13.86%, respectively, maintaining the highest level in the financial sector.

The following pages elaborate on the details of what I have explained so far so I will not make further elaboration.

This has been the 2015 Q3 business result for KB Financial Group. Thank you very much for your attention.

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

(Operator Instructions). Junho Lee, UBS Securities.

Yes, hello. My name is Junho Lee from UBS Securities. I would like to ask some questions relating to your improvement or G&A. In the second quarter, there was an extensive ERP, with cutting of about 1,000 employees. I believe that that could help in improving your costs, but according to a press article, I understand that people who wish to actually go on an early retirement could be up to 5,000.

And so there are some people who believe that there would be additional ERP going forward and some that do not believe so. So with regards to your plans to reduce the G&A, inclusive of the ERP program, if you could elaborate, it would be greatly appreciated.

Yes, Mr. Lee from UBS, thank you very much for the good question. Now, when we conducted the early retirement program, the candidate group had to do with the wage peak system. As you know, that age has been extended to 60 years of age.

As you know, every year, that target group has increased year over year, so with regards to how we're going to handle this group of people, as permissible and as possible, we do believe that it would be best to conduct this as necessary on an ongoing basis.

Thank you very much for the answer.

[Seok-Kyu Hwang, Kyobo Securities].

Good afternoon. My name is Seok-Kyu Hwang of Kyobo Securities. I have two questions. Question number one, the large companies and the subsidiaries of the large companies, there are some problems with them, and the government is talking about restructuring these companies, and the government is making recommendations for provisioning to the banks. But in Q1, I don't think there is some impact from these measures from the government. But in Q4, I think there would be impact on provisioning, so could you talk about that?

And second question is this. Of a non-interest income, with the new Chairman, I understand there was efforts to increase non-interest income, but on a Y-o-Y basis. The number seems to be quite encouraging. However, I think there needs to be more efforts to be made on this aspect, so what are your plans and strategies or goals in terms of increasing non-interest income?

Thank you very much, Mr. Hwang from Kyobo Securities. About the companies -- the marginal companies, in Q3, we had or established a committee on loans. And we did two things at this committee.

One, this marginal companies, for the companies who are expected to be marginal companies, we had taken -- it's difficult to explain. We have been proactive, taking proactive measures, to leave and to make the repayment. And as for the companies with worth more than KRW3b, we've reviewed all these companies and readjusted their credit rating.

So we -- so for companies with possible problems, we are trying to lead them or encourage them to make repayments on a preemptive basis.

And our CCR is going to be about 0.3%, and Taihan Electric Wire, another company, they do have a condition in -- they had for the reversal. So in Q4, as I said in my presentation, this year is going to be on an annual basis about 0.37%, and so we are trying to provision about 40 bp on an annual basis in order to be conservative.

And as for the non-interest income, well, about the fee income, commission and fee income, as our capability of sales are improving, the income is also increasing in trust and bancassurance and [funds], where they have done quite well, and therefore the fee and commission incomes are also increasing steadily.

As for other incomes, the marketable securities, also because there are volatilities related to them, like finance bank, we want to reduce the volatility so that we can create a meaningful earnings for the performance of some marketable securities. We have in this market an investment department, so that we can create a stable income from marketable securities.

HMC, [Jin Seong Kim].

Yes, hello. Now, the Hyundai Securities deal I understand has broken off, and it's now out in the market as an asset to be purchased. You've already shown your interest in Daewoo Securities, so I'm wondering, would you be interested in strengthening your securities business, even inclusive of the Hyundai Securities? So that's the first part of my question.

And with regards to these M&As, now, is your dividend policy separate and independent of the M&A approaches, or would we need to consider the M&A possibility, since you would need to expend on such capital a certain amount of M&As. Would you need to readjust your dividend payout ratio? I would like to understand your approach and the balance between M&A and dividend payout.

Thank you very much for the question. Are we looking at the Hyundai and the Daewoo as a comprehensive package? And we could only provide you with an official position is that as a non-banking industry, we are currently interested in the opportunities.

And then you asked about the dividend and the investment into the M&A. If you look at our capital ratio and the size of our capital, the market clearly understands that we do have excess capital.

Through our stress testing, the adequate level of capital equity ratio and what is the adequate level of the capital structure, shareholder equity? And in order to increase our securities capabilities through the M&A and also there is treasury share buybacks, opportunities for our KB Insurance, so we would need to consider all of these factors.

And yes, these factors are meaningful by themselves and independently, but we believe that we will be able to provide the market with a payout that the market expects. So I don't think that M&A is going to bog down our dividend payout ratio, but we would be -- we will do our best to provide the dividends that could meet the expectation of the market.

[Sian Bop] of CIMB.

Good afternoon. I have two questions for you. Question number one is related to assets of ALM. This is a question related to ALM. I think because of the conversion program that the asset duration, I think might have become longer, so what is the asset maturity duration? What is it like? So in terms of ALM, what are your management goals?

And second question is related to write-backs, I think you just -- you mentioned this briefly, Taihan Electric Wire, and are there (inaudible) companies. I wonder what their write-backs are like.

About the loan conversion program, we have received long-term MBS, and so that will impact the overall duration. However, when it comes to debt, our on demand is increasing, and so there will not be any significant change in terms of duration of ALM.

And in terms of for risk-management purpose, because we move between zero and upwards and downwards, and because of the government's measures, there is an increase in the fixed rates of household loans, and so we are trying to be stringent when it comes to duration of management.

As for the write-back, well, Taihan Electric Wire, there was about KRW44b and [so ASP] about KRW44b of write-back. [Significantly, KRW4b] of write-backs. I hope that answered your question.

(Operator Instructions). [Chunguk Che], Taishin Securities.

Yes, hello. My name is Chunguk Che from Taishin Securities. I have two very simple questions. First, in terms of your accounting securities, yesterday, Shinhan had mentioned the Samsung trading related -- Samsung Corp. related aspect, and they have booked the asset revaluation. Now, you have SK C&C shares, which has changed to SK, but there is no accounting treatment with regards to this change. So I would like to understand whether you recognize or whether you apply a different accounting approach compared to Shinhan, so if you could elaborate that.

And secondly, your NIM, your Q2 number seems to be slightly different from what you have presented last quarter. So is there a reason why that figure had changed?

In the case of Samsung Corp. now and with regards to SK C&C, in the case of available-for-sale securities, it's under capital gains, and it's comprehensive P&L. But once you dispose of it, it goes under the gain or the profit-related accounts.

For Samsung Corp. for Shinhan, already, it's part of the others comprehensive gains. But if you look at Samsung Corp. and [Chelu] Trading, now, they're exchanging their shares, and the accounting treatment is that they're selling Samsung Corp. and they're buying Chelu Trading. So what happens is that the other comprehensive gain has been captured as a gain from disposal.

For SK C&C, we do have a significant amount that is booked. If we look at other comprehensive profits, once we dispose of it, it will be captured as gain on disposals. Now, on SK C&C, we have made some sales. About KRW12b has been captured as a gain from this position.

Second question, with regards to NIM, well, there is a different method. If you were to include even the credit card merchant fees, then it is from 2.20% to 2.25%, and if you base it on interest-bearing assets, it's 1.88%. And if we just look at bank, it's 1.60% to 1.69%.

Now, so we've disclosed a figure that's inclusive of the merchant fees, so if you base it based on that, then it's from 2.26% to 2.25%. But if you look at other competing holding companies, they just look at the bank and the credit card business, excluding the merchant fees.

So we believe that 1.88% is going to be the data that we will disclose going forward, based on those relevant criteria.

Thank you very much for the answer.

(Operator Instructions). Chan Young Hwang, Macquarie Securities.

Good afternoon. My name is Chan Young Hwang of Macquarie. I have a very simple question. About credit cards, the Shinhan Card and Samsung Card, at the end of September, there was less operational days, because of the provisioning increase, but KB did not get the increase. And is it because KB did better job than that, or are there other issues? So do you expect this provisioning to be at a similar level in the next quarter?

Let me give you the answer. Well, in terms of provisioning, there was a special bond. We have recovery of a special bond, and the asset qualities is improving, and that is why there is less provisioning for loans loss or credit loss.

The answer was just provided by Mr. [Jun Si Kim] of KB (inaudible) Cards.

We'll wait a little longer. Thank you very much for your questions. We do not have any more questions relating online, so thank you. We will now conclude the earnings conference of KB Financial Group for Q3 2015. The presentation and VOD of this conference will be available for access any time for you on the IR webpage of KB Financial Group.

Also, if you have any more questions, please do contact our IR department. We will do our best to address your questions. Thank you once again for your participation 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.