KB Financial Group Inc (KB) 2016 Q1 法說會逐字稿

Greetings. My name is Peter Kwon, the Head of IR at KB Financial Group. We will now begin the KBFG 2016 Q1 earnings release presentation. Thank you very much for joining in today. The access to the conference is being provided via the Internet and the conference call and being webcasted 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, Huh Jungsoo and executives from the Group. The conference will consists of earnings presentation by our CFO, Huh Jungsoo on the 2016 Q1 earnings results followed by a Q&A session at which time you may call in for questions.

Let me now present our CFO, Huh Jungsoo for 2016 Q1 earnings presentation.

Greetings. I am Huh Jungsoo, the new CFO of KB Financial Group. Before going over the business performance, I would briefly like to look at the overall business overview in Q1.

First of all, following KBFG's integration of KB Insurance as a subsidiary in the previous year, we signed the SPA or share purchase agreement for the acquisition of Hyundai Securities. KBFG now has a complete balanced portfolio as a comprehensive financial group. We will do our best to expand synergy through cooperation between subsidiaries in insurance and securities and utilize our diversified profit base so that we can push up our Group's profitability with stability.

In business performance, the quarterly NIM, which was on a long downward track, showed a rebound. Asset quality stably continued and credit costs went down. Overall, sound earnings flow continued.

Now I will walk you through Q1 business presentation results, focusing on the main highlights. Please go to page 2.

As you may know through the media, KBFG on April 12, 2016 signed a SPA to acquire 22.56% stake of Hyundai Securities. After finalizing the final acquisition price through thorough due diligence and after the supervisory authority's approval is given, we expect to have the deal closing in late May and have Hyundai Securities integrated as our subsidiary.

Hyundai Securities is number five in the industry currently, based on shareholders equity and when it merges with KB Investment Securities, number three large-scale securities firm will be created. We expect a higher level of synergy through cooperation between subsidiaries including cross-selling in hybrid branches.

Now the highlights of Q1. First, sound loan growth continued. Regardless of the seasonality which leads to a deceleration of loan growth at the beginning of the year, a solid growth trend was maintained in Q1. Corporate loans also grew due to steady demand of the SOHO loans. In Q1, overall won-denominated loans grew 1.7%.

In addition, Group's Q1 NIM recorded 1.84% and improved 3 bp QoQ. This was a result of the portfolio improvement efforts after the policy rate cut in 2015 including the loan re-pricing and low cost deposit growth for NIM improvement.

On the other hand, there was a positive trend in maintaining provisioning costs. Provisioning costs in Q1 posted KRW119b and showed a significant improvement.

There were two one-offs behind the provisioning. With the change in the LGD calculation method, which is used to calculate provisioning there was KRW170b of write-back. On the other hand, there was approximately KRW130b of additional provisioning to be prepared for any deterioration of large corporations in shipbuilding and marine transport sector.

From page 3, I will touch upon the Group's loan growth and profitability. Bank loans in won posted KRW210.8 trillion as of March end and grew 1.7% YTD. Taking into consideration that this year's growth goal is around 5%, it seems that an appropriate level of growth was accomplished.

Looking at the breakdown, household loans usually show low results with the seasonality, but there was continued demand leading to 1.3% growth YTD. Corporate loan book is pursuing SOHO centered loan growth to improve profitability. Also, with the continued loan demand it grew 2.2% YTD.

Next, the Group's profitability overview. Net interest income in Q1 posted KRW1,506.3b and declined 2% YoY and 3.8% QoQ. Interest income declined despite the NIM improvement in the previous quarter. This was caused by one less working day or business day compared to the previous quarter and also because of the interest expense increase related to the principal guarantee trust following the market interest rate cut.

For your reference, the increase in interest expenses for the principal guarantee trust was offset by the securities disposition gains increase, so its impact to the overall operating income was very limited.

In Q1, the net fee income came to KRW368.2b, falling 3.6% YoY. This was mainly due to the decline in credit card fee income impacted by the cut in merchant fees. On the other hand on a QoQ basis, trust, Bancassurance, fund sales commission grew slightly, so there was an improvement of 1.9%.

In Q1 other operating income posted losses of KRW33.8b resulting in an improvement QoQ and YoY.

Aside from the gains on disposal of securities related to capital [preserve] trust, the profitability is at recurring levels without any significant one-off items.

In Q1, the G&A posted KRW1,053.8b declining 2.2% and 2.4% respectively on a YoY and a QoQ basis. Especially in Q1 taking into account that we have recognized KRW62b in internal employee benefit fund, we can say that the G&A is being controlled at a healthy level.

In Q1 provision for credit losses reached KRW119b falling significantly YoY and QoQ.

As has been noted, in Q1 the LGD loss given before, the calculation method has been changed so that KRW170b of provisions has been written back. And in shipbuilding and shipping sector, taking into account the deteriorating business environment, a number of large companies have had their credit rating downgraded. And in relation to our exposure to a few such companies, we have set aside provisioning of KRW130b.

Even when such one-off items are considered, the credit cost is maintained at a low level and the NPL ratio as well as the delinquency rate are all quite stable allowing us to continue the present trend of stabilizing asset quality.

In Q1 the non-operating income posted KRW51.9b, down 74.8% YoY, 38.2% QoQ. But this is due to the removal of large one-off gains such as the corporate tax refund from Q1 of last year of KRW180.3b and recognition of KRW165.3b in negative goodwill of KB Insurance Co.

As such, backed by cost reduction mostly in G&A and provisions for credit losses in Q1, the Group's net income attributable to controlling interests posted KRW545b. Due to the large one-off gains last year, on a YoY basis, it's down 9.9% and on a QoQ basis it is up 57%.

Next on page 4, we will go over the main financial highlights. The ROE and ROA of the Group in Q1 of 2016 posted 7.57% and 0.67% respectively. And on a QoQ basis there has been improvement of 270 bp and 24 bp respectively. As I explained previously, this was mainly due to the improved cost control efforts in G&A and provisions for credit losses.

The Group's NIM in Q1 posted 1.84%, up 3 bp QoQ. If we look at each individual factor contributing to an improved NIM, first last year after the benchmark rate cut, re-pricing of our debt was undertaken contributing plus 1 bp and owing to the growth in low cost deposits, the improvement in the portfolio also contributed plus 2 bp.

If one takes a look at the loan/loss reserve ratio at the bottom left of the slide, the ratio stands at 0.18% in Q1 showing a significant improvement.

Going forward, owing to the economic slowdown, restructuring undertaken for insolvent companies in some sectors may lead to an increase in credit costs. However, as we have done so last quarter, in Q1 as well we have been preemptively engaged in setting aside additional provisioning based on a conservative point of view. Therefore we do not expect any major impact from such an occurrence.

On your bottom right, the Group's and the bank's estimated BIS ratio at the end of the month of March comes to 15.28% and 15.81% respectively. In particular, the CET1 ratio of both the Group and the bank which is an object of much interest from the market posted 13.53% and 13.80% maintaining the highest level in the financial sector.

Starting from the next page you will find items that overlap with what I have gone over so far so I will not go into further explanations.

This was the earnings presentation of the KB Financial Group for Q1 of 2016. Thank you very much for your attention.

(Operator Instructions). Ku Yong, Daewoo Securities.

Hello. I have two questions. In the previous quarter, KB had a margin decline that was higher than others, but I think for this year you had great NIM improvement compared to your competitors. So can you explain the reason why? And can this trend continue?

My second question, you explained this earlier on and you mentioned about the quarterly NIM improvement and the assets that went up. And I'm curious about the interest income that went down. So can you explain in more detail?

Thank you very much, Mr. Ku Yong, for your questions. Regarding the NIM improvement factors, and the future outlook and net interest income decline, I think you asked those three questions. So let me first elaborate on the NIM.

As was mentioned, in Q1 Group NIM posted 1.84%. So it was a 1 bp improvement QoQ. But in the case of KB, we have a duration gap of minus that is being managed. And in the case of loan portfolio and in the interest rate maturity structure, the NIM drop impact is more delayed for KB compared to others.

So some of the policy rate cut impact that is taking place took place in Q1 and you can see that in Q1, we had the portfolio impact. So we had some improvements. So I think this impact impacted our NIM improvement. And we also had about KRW3 trillion of core deposit increase in Q1.

We believe that under the assumption that the policy rate cuts will not take place, then the NIM level is not expected to change greatly from the Q1 level.

Secondly, I would like to touch upon the net interest income drop that you mentioned. As you asked in your question, despite the NIM improvement and despite the stable loan growth, net interest income went down KRW59b QoQ. I think there are two reasons behind that. One reason is that there was one less working day or business day, so that KRW17b of interest income contraction occurred. Also in the case of the three-year or five-year treasury stocks, there was a decline.

So that is why bank-related principal guarantee price had higher deposit interest expenses in the case of market interest rate cuts. So gains on securities increased, so that is why the interest income, net interest income had that impact.

(Operator Instructions).

Lee Chulho, Korea Investment Securities.

My name is Lee Chulho from Korea Investment Securities. I have one question.

During your presentation, Mr. CFO, you said that credit costs had dropped significantly and the reason for that was that there has been a change in the LGD calculation method and so about KRW170b of write-back had occurred for provisions. And in this quarter -- so has been the case for the fourth quarter, there has been an additional KRW130b that has been set aside as provisioning preemptively. So with regards to these two issues, can you elaborate further with more details?

Mr. Lee Chulho, thank you very much for your questions. With regards to your question about our provisioning as I had noted, previously in this quarter, there is one-off factors. The LGD calculation method has been changed and there has been a write-back of KRW170b.

And in the case of KB Bank, starting from 2014, we have initiated an effort to change and improve our calculation methods of BIS ratio and LGD and the [SSS] has recommended this to us. And in January of this year, we have received the final approval for this change from the authorities and so this change has been reflected in our calculation method. So the provisions has been recalculated and so there has been a reduction of KRW170b.

When calculating the LGD, the estimated data that is used in the past used the period of five years, but this has been extended to a longer period to 11 years.

And another factor is that the minimum recovery observation period in the case of unsecured loans of one year and in the case of real estate secured loans, it was two years. However, this was changed to three years. It was extended. So this was a guideline that was provided by the authorities and so following this guideline we have changed our method. So as a result there has been a write-back of KRW170b of provisions.

In the case of KB during the fourth quarter of last year as well we had a similar issue. And we expect that greater uncertainties will unfold in the economic arena. There has been a lot of media reports to this effect in the case of shipbuilding and shipping sectors.

Going forward, including the restructuring schedule we will expect greater uncertainties. And so taking into account these kind of developments centering around shipbuilding and shipping sector, we have set aside an additional KRW130b of provisions.

And with regards to the calculation method, we have offset the collective calculation method through the individual calculation method. And without any major issue we will be able to maintain our asset quality at a very stable level. That is our expectations.

Thank you very much for the insightful answer.

(Operator Instructions). Samsung Securities, Mr. Kim Jae Woo.

I'm from Samsung Securities. My name is Kim Jae Woo. I have some questions about the acquisition of Hyundai Securities. Some people were concerned about the overly high premium that you may have paid for the acquisition of Hyundai Securities. So I'm curious about what your points are about that fact. And going forward, I'm curious about what type of synergy creation you have in mind with the acquisition?

In addition, I know that the shares are less than needed, so you won't need to buy treasury stock or other stocks. So I'm curious about your plans to acquire additional stock.

Thank you very much, Kim Jae Woo for your question. As you're probably well aware for Hyundai Securities acquisition price, I know there are some concerns in the market and some people are concerned about the acquisition price.

And related to the acquisition price of Hyundai Securities, we have acquired 22.56% of shares owned by the largest shareholder, so the price is limited to only that. Hyundai Securities has more than 7% of treasury stock that they hold and going forward, we will have a process to expand our share basis. And during that process, we believe that most of the premiums that we paid will be diluted. In the long term it will go I think less than one multiple of PBR. So in that assumption we are sure that concerns about the high acquisition price will gradually disappear and be diluted.

Also the biggest reason, one of the biggest reasons we acquired the shares of Hyundai Securities is because of synergy creation. Of course through PMI we will need to look at all aspects and we will need to reinforce the weaknesses. But to put it simply, the subsidiaries of KB Financial Group and the Hyundai Securities, we don't have a lot of relationships now.

So we believe that there will be a captive impact. In particular through KB Bank, you can see that for bank-linked securities accounts there are about one-third of bank-linked securities accounts that were made at KB Bank in the market. But only 0.3% or less of the securities-related accounts are made within KB Bank for Hyundai Securities. So we believe that we can gain more shares there.

Also, sales of Hyundai Securities products through KB Bank and KB asset management products sales through Hyundai Securities are both at a very low level of about 2% respectively. We believe that going forward, we can gain much synergy in this area.

In addition, Hyundai Securities has strong online brokerage and in particular we have in mind to create synergies through hybrid branches through securities and banks so that we will create further synergies. For example, KB Securities and the bank, we can have a hybrid branch. And the asset growth is I think more than 55% for the hybrid branches.

So taking those factors into consideration we believe that there will be great contributions made by this acquisition.

We can also think about the cost, for example, IT integration cost that will go down and the changes of the largest shareholder. We believe that our rating also will be positively impacted. So we believe that we will have much synergy in different aspects.

So that was just an overall picture of our expectations going forward. And through the processes, we believe that we will create more synergies so the concerns in the market will disappear and we will meet the demands of the market.

Regarding the acquisition of additional shares, we are reviewing many different ways from many perspectives and we are thinking of many different ways to acquire additional shares. However, the due diligence is ongoing currently, so we didn't have any detailed decision made yet. So as soon we know the facts we will communicate this to the market fully. Thank you.

(Operator Instructions). Kim Jinsang, [HSBC].

Thank you for the excellent earnings report. I have two questions. Of course with regards to credit costs, the provisioning --

Can you please repeat your question? We have difficulty connecting to you.

Is it okay now?

Mr. Kim? You don't have a very good connection right now. Can you call us back again?

Byung Gun Lee, Dongbu Securities.

Byung Gun Lee, Dongbu Securities, I have two short questions. First question, when you acquire the Hyundai Securities, what is the changes in the CET1 ratio that you expect? You will be acquiring a certain level of stake, but how much of risky asset increase do you foresee? So I'd like to ask your guidance about this.

And secondly, internally what do you think is the Group's CET1 ratio, appropriate CET1 ratio? So you are maintaining a stable CET1 ratio, but it's inevitable that it will fall and you will have to pay out dividends. So what is your final guidance about the CET1 ratio going forward?

Thank you very much for these questions. Please wait for a short while we prepare an answer for this question.

Mr. Lee, thank you very much for your question. Hyundai Securities sale, after acquiring 22.6% and the capital ratio of the Group, it will have a 25 bp impact for the capital ratio. The CET1 ratio is 13.41% YTD, at the end of last year and this year it's about 13.47%. Target level in the mid to long term is about 12%. That is the target level.

Thank you for the insightful answer.

Kim Jinsang, HMC Securities.

Hello. I think the call was cut off but I think now the line is better. I have a question about provisioning. If course I know that they were one-offs and I know that you had preemptive provisioning. But excluding that I'm curious about your recurring provisioning because it's lower than competitors.

I think for Korean banks, our provisioning was very high compared to the US. And I think that the level is going down and it's becoming maybe normalized. And I'm curious maybe not this year, but two or three years going forward, I'm curious about the credit cost ratio. How low can it go and what is your target, if you have a target for the mid to long term?

I also have a question about synergy because I am curious about internally for example, if you acquire Hyundai Securities than in the mid to long term, regarding your ROE or ROA it can be either one. But can you give us any expectations for improved ROE or ROA that you had in mind before you joined the bid?

Yes, I will answer. Regarding provisioning for many years, we have had a very stabilized provisioning level. And the credit cost for the mid to long term that we have as our target is about 45 to 50 bp. That is our target that we're trying to manage. And currently in Q1, it's quite low. It's 0.18%. And on a quarter basis it's abnormally low. So on the average credit cost, 45 to 50 bp is our target.

Regarding synergy, it might not be a good place for me to answer at this time. So maybe I can communicate individually.

There is no incoming questions. We will wait for a while for further questions.

I think that is all for our Q&A session. We have no further incoming questions, so with this we would wrap up the Q&A session.

With this, we will conclude the earnings presentation for Q1 2016. 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.