KB Financial Group Inc (KB) 2016 Q2 法說會逐字稿

Good afternoon. This is [Pung Jung-wan] at the IR Department at KB Financial Group. We will now start the first-half 2016 earnings conference call. Thank you very much for joining us today.

Today's conference call, well, is being fed through the Internet as well as the telephone lines live in Korea as well as abroad. We will also be taking your questions over the telephone. First of all, our CFO, Jungsoo Huh, as well as other officers of the Group are present for today's earnings call.

First, CFO Huh will give a presentation of our first-half 2016 earnings before taking your questions. Now, I would like to give the floor to our CFO, Jungsoo Huh, who will be explaining our first-half results.

Good afternoon. This is CFO Jungsoo Huh of KB Financial Group. Before I go into the business results, I would like to talk about the overall business climate. During Q2, restructuring of the shipbuilding and shipping industries in Korea accelerated. Also, BOK lowered its benchmark rate, which further heightened concerns of the profitability of the banking sector. Externally, the Brexit decision in the UK also escalated uncertainties in the business environment during Q2.

Despite such challenges in the overall environment, KB Financial Group managed to realize stable top-line growth based on solid loan growth and improved NIM. We also nimbly responded to credit events with preemptive provisioning and continued our efforts to become more cost efficient, including additional ERP programs. This is overall a part of our efforts to improve the profitability of our overall business.

Also as of May 21st, Hyundai Securities became a new member of the KB Financial Group family, and with Hyundai Securities, we will be able to reinforce our non-bank portfolio. In the future, we will focus on maximizing synergies among subsidiaries such as banks and securities and insurance companies and continue to exert efforts to steadily improve KB Group's profitability amidst the low growth, low interest rate environment.

Now, please turn to page 2 for the major highlights. Our Group's NIM in Q2 was 1.85%, which is a 1 bp improvement Q on Q. This also continues on its Q on Q improvement trend, which started in the low point of Q4 last year. The improvement in NIM is explained by the impact of the two rate cuts last year wearing off as well as improvement in the portfolio such as increase of the low cost deposits.

However, the BOK rate cut in June has once again placed downward pressure on NIM and we are focusing on defending profitability through various NIM improvement efforts.

Bank loan growth continued to be solid, with 2% growth in Q2 following the 1.8% growth in Q1. The focus of the loan growth has been on high quality household unsecured loans and SOHO loans for better profitability. Given the continuing demand driven by low interest rates, we expect to have no issues in achieving the full-year loan growth targets for 2016.

With restructuring especially in the shipbuilding and shipping industries accelerating, the Group's first-half provisioning cost was KRW313.5 billion, maintaining fair levels. This is thanks to our past several years' efforts on asset soundness and the preemptive provisioning of some companies during fourth quarter last year as well as first quarter this year.

We will try to keep the Group's recurring credit cost within -- or the credit cost within a recurring level of within 40 bp.

In Q2, there were two major one-off factors, first was the purchase of Hyundai Securities treasury stock, which was done in June, which resulted in bargain purchase gain of KRW104.9 billion being recognized as non-operating profit; and the other was the 210 employees that applied for the early retirement program, which resulted in KRW57.4 billion being recognized as related cost. The ERP, however, is expected to contribute to improved HR structures and better efficiency in the future.

Now, on page 3 for the business result details. Bank Korean won loan was KRW215.1 trillion as of end of June, which is a 3.8% growth year to date. Q2 loan growth was 2%, continuing solid growth. And by sector, household loans grew by 2%, corporate loans grew by 2.1%, which is a very balanced growth between the two sectors.

In terms of Group's profitability, first-half Group net interest income was KRW3,050.9 billion, which is a slight decrease year on year. This is because despite the NIM improvements during 2016, cumulative NIM in the first-half of 2016 was still below levels during the first-half of 2015.

However, net interest income during Q2 was KRW1,554.6 billion, thanks to improved NIM and loan growth and NII grew by 2.5% Q on Q.

First-half Group net fee and commission income was 732.4 billion, which is a year on year 5.6% decrease. This is because trust fees decreased with decrease in sales of ELS products and credit card fee income decreased due to increased marketing cost. Q2 net fee and commission income was KRW364.2 billion, which is a slight decrease of 1.1% Q on Q.

First half other operating income recorded KRW53.8 billion in loss and increasing the loss in a year-on-year basis. Now, this is due to dissipation of one-off significant gains of last year with the impact carved out. First half other operating income is more sound compared against the recurring level.

For your information, last year first half there was one-off items of KRW138.2 billion of gains from sales of stake in Korea Housing and Urban Guarantee Corporation and KRW61.8 billion of gains from sales of relief loan conversion and POSCO impairment loss of KRW81.4 billion. Q2 other operating income recorded KRW20 billion in net loss, reducing the size of loss Q over Q.

With last year's second quarter ERP expense removed from the impact, first half G&A expense declined 13.2% year over year to KRW2.123 billion. Excluding ERP expenses of last and this year, there was 1.6% year-over-year decline as against on a recurring level basis. PCL, provision for credit loss, recorded KRW313.5 billion for the first half of the year, declining 31.6% year on year.

As mentioned before, with sound trends in household and SOHO segments and with preemptive provisioning for the problem ridden companies, we were able to record and maintain lower credit cost.

First half non-operating income recorded KRW177.2 billion, down 23.8% year on year. This may seem like a big decline, but is actually due to significant one-off gains last year same period.

In the first half of last year, there was KRW203 billion of corporate income tax refund and in the second quarter this year there was bargain purchase gain recognition of KRW104.9 billion regarding Hyundai Securities treasury shares.

Amid difficult overall business environment with stable top-line and reduction in G&A expenses and provisions, net income for the Group for the first half increased 20.1% year over year and Q2 net income increased 6.5% compared to the first quarter.

On page 4, I will walk you through key financial highlights. Group's first half ROE and ROA respectively recorded 7.77% and 0.68%, improving 100 basis points and 7 basis points year on year, mainly driven by bottom-line improvements through cost reductions. Q2 ROE and ROA recorded 7.97% and 0.7%, improving 40 basis points and 3 bp compared to the first quarter.

Q2 NIM, as said before, for the Group came in at 1.85%, improving 1 basis points Q on Q. This is driven by growth in core deposit and expanded portion of high quality unsecured loans achieved through our efforts to improve the portfolio and through robust control over spreads.

Bottom left, you see credit cost of the Group in the first half of the year coming in at 25 basis points, displaying improvement year over year. In the second half of the year, we will continue to abide by our conservative asset quality stance so as not to exceed 40 bp credit cost level.

Bottom right, you can see the Group and the Bank's June-end BIS ratio figure, which are 15.07% and 15.94% respectively. Group and the Bank's common equity tier 1 ratio, which the market is quite interested in, recorded 13.34% and 13.93% respectively, maintaining the highest level in the banking sector.

I will not walk through the following pages as they overlap with what has been explained so far. And now that brings me to the end of earnings presentation for KB Financial Group for the first half of year 2016. Thank you very much.

Now, we will be taking questions. (Operator Instructions) [Moon Young-cha], BNP Paribas.

First of all, thank you very much for your performance this quarter. I have a NIM related question. As you mentioned, NIM has been on a very good trend until Q2, but then benchmark rates -- BOK benchmark rates were lowered in June and many people are expecting additional rate cuts in the second half with Brexit and so forth. What is your benchmark rate outlook and do you think that you need to update your NIM outlook for the second half of this year?

Well, thank you very much for that question. I think actually the question has two parts to it; first is the view that we have regarding the benchmark rate outlook and whether we expect changes in the direction of our NIM. As you know, there was the referendum in the UK in June, which decided to exit the EU. This has caused a lot of uncertainty in the financial market and many are expecting lower or downgrading GDP expectations.

And given the overall climate and sentiment, which seems to also be reflected already in the market, if you look at Korean government bonds, the three-year and five-year bonds are actually inverted versus the benchmark rate -- and I think this also is sort of a forward indicator to possibilities of further benchmark rate cuts in the second half of this year.

Also, recently the Korean government has prepared an additional government budget and usually in past cases when the government prepares an additional budget for spending, it's also used together with interest rate policies to further maximize the economic boosting effect of such additional budgets -- and that also I think is a factor that adds to the probability of additional rate cuts in the second half of this year.

Now, that's the situation in Korea, but also the central banks of other major countries. Even though they have not specifically announced already a policy or currency policies, I think they are all thinking through the possibility of using these policy tools.

So given all of these factors, I think once the Q3 economic indicators become more visible around August and September, I think around that time of August and September there is a possibility of additional rate cuts.

Of course it's not -- it depends on the overall economic situation and climate, but there is a possibility of additional rate cuts. That is our outlook.

And with further rate cuts, this is a pressure on the NIM for banks, even though there is about a three-month time lag between lowering of policy rates versus NIM squeeze if there is an additional rate cut in the second half of this year, therefore, given this three months time lag, I don't think it will impact our 2016 NIM in a meaningful way. Of course the impact would visibly become -- will become visible next year if there is additional rate cut in the second half of this year.

Last year when the rate cuts were made, our NIM was squeezed by a large amount, but -- and we actually responded by focusing on gaining more spread on individual loans and also focusing our portfolio towards more of unsecured loans or SOHO loans. That was the way we recovered most of that NIM squeeze we had last year.

With more liquidity out in the market, we will be taking into, for example, consideration and try to increase our low cost on demand deposits on the funding side. And so I think we will be maintaining this basic direction in order to maintain reasonable NIM. And so the impact of any additional interest rate cut in the second half of our year we're not expecting that to be significant.

Thank you for that answer. We will wait a little more for the next question. Jae Woo Kim, Samsung Securities.

I think -- of the second quarter figures, I think your provisioning really stands out. In the first quarter, there was a significant write-back. So compared to Q2, there has been some increase in provisioning, but it's still below KRW200 billion.

So compared to our concern, I think your provisioning figure is quite sound. So under this backdrop, I see that there are some one-off impacts. There's this issue relating to S&P. So can you provide some more color on those aspects?

And also can you share with us for the second half of the year with regards to provisioning what is your outlook for the second half of this year?

Mr. Jae Woo Kim, thank you very much for that question. Regarding the provisions, as you know, in the past this was an aspect that KB had struggled with. However, as you can see from our second quarter provisioning figure, on a Q-on-Q basis there was an increase.

However, in the first quarter there was a write-back impact from LGD criteria changes. And that impact actually wore off, so I think that we are speaking based on that base effect. And also in the second quarter there were some provisioning with respect to the corporate restructuring that were implemented in the second quarter. And also with the S&P company initiating its rehabilitation process, there was provisioning of about KRW116 billion. And Hanjin Shipping and Hanjin Heavy also there was provisioning of around KRW36 billion and KRW12 billion respectively.

And also last year, there were -- and also there were some reversals of the provisions that has been built previous year. And we've been exerting our continuous efforts to improve on the asset quality and improve on the soundness. And also we were able to lower the outstanding loan balance. And those had also an impact. So on a net basis due to these factors there was about KRW50 billion increase in the provisioning driven by these special factors.

Now, in the second half of the year, we will continue to hold on to our very conservative soundness posture and strategy so that, as I've mentioned previously, on a per annum basis we are going to keep our credit cost below 40 basis points.

Currently, we don't have anyone in the question queue. We will wait for a few moments. (Operator Instructions) [Sui-han Kim], Shinhan Investment Securities.

Thank you very much for the good performance this quarter. I have two questions. First of all, in the second half since you acquired the treasury stock held by KB Insurance, you haven't had additional stake acquired and in the market we're all wondering and expecting and hoping that additional acquisitions of stake in KB Insurance would follow. Also -- so that's my first question. And also, whether you have additional M&A plans?

Also looking at KB Card, it seems that at least on a quarter-on-quarter basis its performance had worsened in Q2. And so is there a special reason why Credit -- unlike the overall credit card industry, KB Credit Card's performance is suffering?

Well, thank you very much for that question. You asked two questions. First, about our plans of adding on additional ownership stake in non-bank affiliates, what our plans are, what thoughts we have. Second question was regarding the KB Card's performance, which quarter on quarter has slipped.

Regarding our non-bank affiliates, that will be KB Insurance, KB Capital and now Hyundai Securities, our ownership stake in these non -- three affiliates from at least the Group's perspective is low and we do see the need of steadily increasing our stake in these three affiliates or subsidiaries.

KB Insurance, KB Capital and Hyundai Securities, all three of them and as well as KB Financial Group are all listed companies and that is why we also need to listen to the voices of not only KB Financial Group's shareholders, but also the shareholders of these three subsidiaries. We are also very closely listening to and fully understand the expectations that market has upon us.

Regarding KB Insurance, there were many upside factors such as deregulation in the insurance industry, and so the business environment for KB insurance is positive. On the other hand, there's also a variable of the IFRS accounting system changing and what would happen to the business in the process of this transition. And so our basic approach as to KB Insurance is to carefully analyze the internal and the external factors.

Hyundai Securities, we additionally purchased treasury stock in June of Hyundai Securities and so we're almost close to 30% -- we are slightly off of 30%. And we do need to meet the regulatory hurdle. But from the Group's perspective, in order to generate additional synergy, we do see the need to purchase additional stake in Hyundai Securities.

In terms of specifically how or when are matters that I hope you will understand are difficult for me to talk about in detail at this point. But I would like to take this opportunity to make very clear that we are very -- we fully understand what the market wants and we will very prudently find ways of delivering that and continue to communicate with the market.

Regarding possible additional M&A with non-bank companies, M&A, yes, is a very important strategy for us in implementing our overall Group's strategy, and so we are always constantly interested in further M&A opportunities if it's in line with our overall Group strategy. And so including buying additional stake in the three subsidiaries, we are also continuously viewing opportunities for additional M&A.

Regarding the KB Credit -- KB Card's performance, our market share on the credit card side continued to shrink last year and we thought that there were many areas in the credit card business that we need to bolster. And that's why this year starting in 2016 in order to increase volume and also to increase more active members, we actually went through some expenses.

And so even though merchant fees were lowered and we expected that to have impact on the earnings, actually the impact from the lower merchant fees were less than what we had expected. Actually, the major part of second quarter's credit card performance was due to marketing expenses and other expenses that we used for the sake of bolstering the business going forward, which we believe will become visible in the second quarter and I think your concerns would be eased in the second -- in the third quarter and after.

Thank you very much for the answer. We will wait for the next question. Jinsang Kim, HMC Investment Securities.

I have two questions. In the first half of the year, I see that you [lowered] G&A. Now, if you were to take out the ERP, it actually did decline by 1.6%. So it is quite encouraging. So such decline in expense and cost, do you think that this is sustainable and can you provide some more color as to what specific efforts you've put in to bring about this cost reduction?

My second question has to do with this current environment. The prolonged low interest rate environment is continuing, so from the Bank's perspective, as was mentioned by the CFO previously, in order to very aggressively protect against the margin, I would expect that the Bank needs to come out with more specific measures, for instance, sale of debt or bond in order to offset the interest rate declines.

So rather than just increasing low cost deposits or rather than just pricing the SOHO loans -- and I'm not discounting the importance of those approaches, but I am thinking that you would probably need to come up with a more aggressive measure to respond to this low rate environment. So if you have any such strategies, please share that with us?

If you look at the margin, the NIM, it's quite squeezed. So I think that since you have grown your loan portfolio, you would have to think about some additional spread -- adding more spread on top of the NIM margin. I'm wondering whether you have those other plans.

Thank you very much, Mr. Kim, for the question. Relating to your question about the G&A, now from KB's perspective G&A is a line item that we would continuously need to think very hard about. Of the G&A line items the most difficult item to control is the labor cost related expenses.

And with the labor cost aspect, we are constantly focusing on this. Last year there was a significant ERP program and also there was an ERP program this year as well. So we will continue on with this type of an approach going forward as well.

And as you have correctly mentioned, decline in G&A expenses, it's very important for us to make this a sustainable trend. So if you look at the first half, the decline came from two main drivers. The first had to do with around KRW100 billion of a material related cost which was spent less compared to our plan; for instance, it had to do with other maintenance or leases or services. So those were aspects that we really focused on and we believe that going forward we think that we can bring about some structural improvement or structural reductions on those aspects.

And also there are some deferred expenses as well on the IT side with the delay in the IT program and business. So there was a bit of a deferral, but that impact is not that significant. So on the G&A side, the trend for decline, we will continue to put in efforts to bring forth that trend.

And we believe the low interest rate is here to stay. So in terms of protecting our margin, we can think about two aspects. As I mentioned before, on loans and deposits, we would really need to focus our efforts on that aspect as well.

Starting second half of last year on the new loan originations and the spreads, we've increased the spreads on average about by 10 basis points. And the ones whose maturity is coming due and also the revolving loans, we've put in a lot of efforts to increase the spread and expand on the spread. And I think the impacts are now being felt.

So on the loan-to-deposit side -- in the first half of the year as well our invested fixed income instruments in order to reduce the volatility in the return, we are strategically making use of that fixed income portfolio as well as the marketable securities. So we are looking into various different measures as well.

As you've mentioned, the market volatility or the market rate environment is quite changing and we are going to come up with ways to minimize any impact that we may get from such volatility in the market.

We will wait for a few moments to see if there are any other questions. Hanik Na, Nomura Securities.

I have a question about the cost income ratio. Next year what will be the cost income ratio and long-term wise what is the cost income ratio that you target or is there such a target, cost income ratio?

Well, thank you very much for that question. It's a good question. Cost income ratio internally, long-term plan wise our cost income we're thinking needs to come down to below 50% -- that is our target. Of course given our realities, such as our current HR structure, it's not an easy goal to meet in the short-term.

But when we look at our operating income especially from the non-bank side, by bolstering that up, I think we will be able to hit a cost income ratio below 50% earlier than later.

You've asked of cost income ratio outlook for next year. Our cost income ratio target for next year is something that I don't feel comfortable disclosing here, but I think the detailed data will be communicated to you through our IR department.

Currently, our cost income ratio is in the mid-50s percent. We do see the need to bring that down further, and I hope you will anticipate that happening in the future.

Byung Gun Lee, Dongbu Securities.

I would like to post two questions. The first question is, I believe that compared to your good net income, I think that your common equity ratio on a Group level has slightly dwindled. And I think that is an impact -- I think there was an impact from the acquisition of Hyundai Securities. Basically, common equity tier 1 ratio has been impacted by that and basically that ratio -- what are some of the drivers that actually impact that CET1 ratio is my question?

And secondly, you talked about the loan growth outlook. Now, of course the government is going to make more stringent regulations on collective loans, but I believe that in the second half we will see some impact being felt. So with respect to the lending related regulations and relevant changes from the government, I would think that you will be able to achieve your target. But from a realistic perspective if you were to also consider the securitization aspect, how should we anticipate the second half to play out in this arena?

Yes, as you've mentioned, as we acquired Hyundai Securities, our common equity ratio, yes, it was impacted. When it comes to the specific data, we will furnish that information through our IR team.

Just to give you a simple answer, there was a 8 basis point impact and the CET1 ratio currently is in the mid-13%.

In terms of regulations regarding lending, in the first half of the year for the home equity loans there was -- and with respect to the household debt related issue in Korea, there were some government regulations and because of that we've seen less of a growth in these home equity loans.

In the second half of the year and with regards to our goal and target of loan growth -- mortgage loans is also of course related, but when it comes to the collective lending, we will be very selective so that we can grow on the high quality housing segments. And also SOHO is an area that we want to also grow as well.

So on a per annum basis, we think that we will grow around or below 5%. And in the first half of the year, we've grown by 2% to 3%. And I think that considering our track record in the first half, I think we can also anticipate good growth in the second half of the year as well.

Currently, we don't have anyone in the question queue. Why don't we wait a few moments to see if there are any last questions?

Since there is no one adding to the queue, we will close the Q&A session as well as the first half earnings conference call. 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.