KB Financial Group Inc (KB) 2017 Q2 法說會逐字稿

Good afternoon. My name is [Kwon Bong-Ju] in charge of the IR department at KB Financial Group. We will now start the earnings conference call for our first half results. Thank you very much for joining us today. First, we will start off with a presentation by our CFO, Jae Keun Lee. Also, we have the executives in charge of major subsidiaries present as well to take your questions. Following the presentation by our CFO, we will take your questions.

Now our CFO, Jae Keun Lee, will give us our first half results.

Good afternoon. This is Jae Keun Lee, CFO of KB Financial Group. Before we go over the first half results, I would like to give you a brief business update. In Q2, the financial sector saw favorable business conditions overall with continued Fed rate hikes as announced from end of last year and the KOSPI hitting historical highs supported by better earnings and expectations of an economic recovery. Meanwhile, in Korea, the new President took office last May and now we are starting to see better visibility of a new administration's comprehensive policies regarding household debt, which is a potential destabilizing risk for the Korean economy. Regulations for the real estate market, which is overheating and showing signs of speculative movements as well as policies to protect the financially vulnerable. We believe such efforts will provide a strong foundation from virtuous cycle and balanced growth for the Korean economy. As the leading financial group in Korea, KB Financial Group will remain dedicated to its social responsibility and continue its contributions for sound growth. At the same time, we will achieve continuous profitability improvement and efficient capital utilization to deliver greater shareholder value. As part of such effort, KB Financial Group started the process of converting KB Insurance and KB Capital into a wholly owned subsidiary since last April. And thanks to the overwhelming support of the 2 subsidiaries and KB Financial Group, we have successfully completed purchase of the remaining shares and we were able to complete a more balanced business portfolio and a stable structure for future profitability. KB Insurance has been consolidated into the business results of KB Financial Group from Q2.

Now let's look at our first half business results. KB Financial Group's 2017 first half net income was KRW 1,860.2 billion, which is the highest half-year performance in the group's history. This is a 65.3% increase year-on-year and this is mainly due to the consolidation of Hyundai Securities and more recently, KB Insurance which has greatly helped boost nonbank income as well as increased bank interest income, driven by improved net interest margin. Net income was KRW 990.1 billion, which is a 13.8% increase compared to Q1 which recorded KRW 870.1 billion.

In terms of type of income. Net interest income in first half was KRW 3,665.5 trillion, which is a 20.1% increase year-on-year. Net interest income was KRW 1,939.1 trillion in Q2, which is 12.3% increase q-on-q. Korea's -- the Korea won loans continued sound growth coupled with continuous improvement in NIM. This also reflects interest income earned by assets owned by KB Insurance. For your reference, Korean won loan growth, which was a bit sluggish in Q1 was 1.9% q-on-q driven by gradual improvements in mortgage-related demand up from Q2 as well as whole loans and high-quality SME loans. Fee and commissions was KRW 1,030.8 trillion in the first half, which is a 40.7% increase year-on-year.

ELS sales by Korean Bank increased supported by rising global equity markets also the launch of the integrated KB Securities. Since that, synergies among group affiliates have increased helping increase security business related fee income such as [IDCs] and trust fees. However, in [Q] despite the continued increase in securities business related fees, sales of bank trust products somewhat became subdued compared to the rapid increase at the start of the year. Also, the consolidation of KB Insurance has added new fee expenses to be recognized, which resulted in fee and commission income decreasing slightly q-on-q.

The group's other operating profit in first half and Q2 was KRW 104.0 billion in the first half, KRW 42.1 billion for the Q2, respectively. In particular, in Q2, consolidation of KB Insurance helped increase insurance-related profits by a significant size. But on the other hand, increase in interest rates and exchange rates increased securities and [derivative] related losses.

Also in G&A, the first half was KRW 2,489.6 trillion, which is a 17.3% increase year-on-year mainly due to increased fixed costs related with integration of non-bank subsidiaries. G&A during Q2 increased by 13.3% compared to the previous quarter but while the effects of KB Insurance are excluded, G&A actually decreased slightly q-on-q reflecting our cost saving efforts such as ERP programs.

PCL for the first half was KRW 307.7 billion, flat year-over-year but considering the sizable reversal from the coming standard changes in Q1 last year, this is a significant improvement. Q2 PCL was KRW 52.8 billion with overall stability in asset quality and some write backs including recovery of NPLs. The figure was quite low.

Q2 nonoperating income, driven by gains from bargain purchase in additional KB Insurance share acquisitions was up 66.6% q-on-q.

Next on Page 3, I will talk about key financials. 2017 first half ROA and ROE group cumulative were 0.96% and 11.76%, respectively, improving significantly year-over-year. This is due to NIM improvements and volume credit growth leading to sizable improvements in bank profitability and higher nonbanking gains on the back of acquisition of Hyundai Securities and its higher shareholding in KB Insurance.

NIM, which is a key profitability measure, was 2% for the group and 1.72% for the bank in the second quarter, improving 5 basis points and 6 basis points q-on-q. With the focus on low-cost deposits and growth mainly around high yielding assets and more sophisticated pricing, we saw spread improvements with constructive quarterly trends continuing. KB Financial Group will continue to endeavor to secure appropriate level of margin through profit-driven growth.

On the top right, you will see the cost income ratio coming in at 53.1% in Q2, slight rise q-on-q. However, this is due to higher G&A, driven by consolidation effect from KB Insurance and losses from securities and derivatives on interest rates and exchange rate rises. Apart from such factors, group recurring basis CIR is maintained at a quite stable level.

On the bottom left is loan loss provision. Q2 LLP against a base of total loans was 8 basis points for the group and negative 9 basis points for the bank posting an improvement q-on-q. And even excluding the one-off reversals, it still continues to show a steady trend.

Group BIS ratio and CET1 ratios were 15.47% and 14.77%, respectively as of end of June. Despite group's net profit increased with the increases in risk-weighted assets and KB Insurance shareholding increased the ratio dipped marginally q-on-q. For the bank due to the rise in RWA, driven by loan growth, its capital ratios dipped slightly but it's still keeping to the indices highest capital adequacy level.

Page 4 compares key metrics across bank and non-bank affiliates and [KPNL] line items between Q2 of 2016 and Q2 of 2017. It shows our efforts so far to diversify revenue sources and improve stability in profit are bringing visible results. First is on net interest income. Q2 2016 NII was around KRW 1,555 billion (sic) [KRW 1,545 billion] and the group's net interest income in Q2 2017 was around KRW 1,939 billion, rising 26%. This is thanks to sound loan growth and our continuous efforts to enhance NIM, align the banks to regain its core capacity in generating interest income and also from the consolidation effects from securities and P&C insurance affiliates, the steady interest income growth from existing affiliates of KB Card and Capital. For your information, bank's NIM over the recent 4 quarters displayed sustained improvement and in a cumulative basis increased a total of 14 basis points.

Q2 group’s gross operating profit increased significantly year-over-year outperforming quarterly size of KRW 2 trillion. Gross operating profit rise was driven mainly by improvements in interest income and bigger contributions from non-bank affiliates. Nonbanks portion out of the total operating income showed meaningful increase from 23% in Q2 of 2016 to 42% in Q2 of 2017.

Last item is on the group's net profit. We took out the gain from bargain purchase impact for comparison purposes. The graph shows Q2 2017 net profit of KRW 869 billion, a sizable rise year-over-year from last year's KRW 476 billion. Nonbank's contribution in the mix increased meaningfully from 25% to 37%.

With the profitability improvement, cost cutting and asset quality control assets of the bank, we brought organic growth opportunities, realizing recurring net profit level of KRW 500 billion. On the non-bank side, the Hyundai Securities acquisition increased shareholding of the Insurance and Capital, through such strategic approaches, we attained inorganic growth.

KB Financial Group will continue to look through our business portfolio to diversify profit sources and bring organic and inorganic growth opportunities so as to enhance profitability and stability in earnings. Please refer to the following pages as they set out the details to what I have just explained. That brings me to the end of first half 2017 earnings presentation for KB Financial Group. Thank you very much.

Thank you very much for that presentation. Now we will take your questions. Those who are logged in through the Internet, you can refer to the contact number at the end of the presentation. (Operator Instructions)

Also there is a bit of a 30-second delay between the conference call and the webcast so we will wait a little bit for that webcast to catch up.

The first question is from Byung Gun Lee of Dongbu Securities.

Thank you very much for the wonderful performance, first half. I have 2 questions. The first question is if you look at the improved performance, I think the credit cost decreasing had a huge contribution. There were some write-offs. But even if we take that into account, your provisioning per quarter was only around KRW 100 billion. And so going forward, of course, we have variables such as regulations about loans, do -- I think that we don't have any concerns about your credit quality worsening. So for full year, can you give us some guidance of a full year credit cost outlook that you have? My second question is this may be too early to start asking. But since your performance is doing so much better than expected, I would like to ask you about your dividends. Because even if you keep -- maintain the same payout ratio, your actual dividend amount may be (inaudible) increased. So could you give us an update or confirmation of your dividend policy at this point?

We will answer that question shortly. Yes, thank you very much Mr. Lee from Dongbu Securities for those questions. Our credit cost being so low it did help our performance if we compare 2016 and '17. Our pattern of net income itself has changed. Our gross operating profit last year did come down but we were able to overcome a lot of that by reducing our credit costs and G&A. On the other hand, this year, first quarter, and second quarter 2017, our top line, as you would notice have far outpaced or outpaced in terms of growth. Also, we have been able to maintain our costs at the same time. And that, I think, has put us to the next level of sustainable growth. Our provisioning is about KRW 300 billion right now. I think what -- if we take out the write backs, we have to look at our credit soundness and how the assets (inaudible) is migrating. And if you look at '15, '16 and '17 on a quarter-by-quarter basis, our migration down in terms of asset quality has decreased in terms of pace or as any loans have also compared to the past have improved quite a lot in terms of quality. So even if we look at the new loans that we've been issuing we've been focusing, as you know, on high-quality loans. And we have been cutting down our potential delinquent loans that we issued in the past. And so our migration down in terms of asset soundness has decreased. And we're thinking as the CCR is about 23 bps, we think that's a bit on 30 bps. And even if we give some room for increased ratios with higher interest rates, I think we will be able to keep that within 40 bps. About our dividend policy, we paid out KRW 1,250 last year, which is a payout ratio of 23.2%. We have net income of KRW 1.8 trillion in first half. And our payout ratio, our dividend policy, we try to go high or gradually increase with time, which we will continue to go in terms of a long-term and our ultimate goal is to reach 30% payout ratio. Even if we maintain 23% or plus our payout ratio given the huge increase in our net profits year-on-year, as you mentioned, that will have an increase in the absolute amount of dividends that we pay out. Also, there were shareholder -- or treasury stocks that were swapped as a part of the acquisition of additional shares and I think that would also help increase the overall effect of our dividends.

Next question from Macquarie Securities, Chan Young Hwang.

Investors have been talking about the change in the potential regulatory framework with the new government coming in. If you look at KB Financial Group, what are your views in terms of the future developments in the regulatory environment and what would be your countermeasures, how would you respond to changing regulations? And also, if you could also talk about maybe potential plans for further restructuring, that would be also very helpful.

Please give us a minute to respond to that question.

Mr. Hwang from Macquarie, thank you very much for submitting that question. Your question relates to the regulatory backdrop. I believe that the new government basically has a focus in providing financial support to the more vulnerable class of the society. If you look at the bank grade based on KCB there are 10 different grades. So the prime customers are grade 1 to 3. But if you talk about financing for the low quality consumers, it will be to provide to the more vulnerable. But I believe that the regulatory direction of the government is really not going to impact our bank per se. But if you look at the banks and the KB Capital, there are credit card loans and also the unsecured loans that are provided to the lower quality segment. And there could be some issues there. There are multiple loan holders and there is delinquency issues that may arise. But we are very closely monitoring those indicators based on which we are coming up with our countermeasures for the future. Government is also interested in managing the household debt. The property transaction has been taking off and the household debt problem has been an issue. In light of the rising yield environment we believe that household debt could be an issue. So we agree to that focus. From the bank's perspective, asset quality with improvement in asset quality that is, basically we have been quite selective in originating our loans. So that -- what about loan improvements? And we think that will continue. So in terms of the profitability in bottom line aspect, I think actually it's a positive direction. In terms of the slowing of the growth rate, the bank has said about 3% to 4% household debt growth, loan growth, that is. So you can see that our target itself is set at a very low-level. So any potential regulation and its ensuing impact on the bank would be quite minimal.

Currently we have no people waiting for questions. We will wait for a few minutes to see if there are any additional questions.

We would like to highlight that we don't have a lot of one-offs and I think it's quite straightforward maybe that's why we don't have many questions this quarter.

Mr. Hwang from Macquarie. Do you have a follow-up question, sir?

Well, since there are no further questions, I actually wanted to ask another question. I personally think that a bank is exposed to the environment. Timing is also very important in the banking business. But I think the current management team that is in place during its tenure has done a tremendously good job in improving the business of the bank. So I would like to see you stay for a longer period of time. That's my personal wish. But I guess, whether the CEO will take another term or not, all the people in the market are all wondering whether that would happen. Can you give us a bit of an update of the succession or the next appointment schedule and what kind of plans you have?

Yes, we will take a few minutes to prepare that answer. Yes. Thank you very much for that question. And as you all know, the new management took office in November 2014. And when we look at the data, our market cap was about KRW 15 trillion and we were running at about KRW 37,000 per share. Currently our market cap is up to KRW 24 trillion. So since the current management took office, we have increased our market cap by KRW 8.6 trillion. We are #1 in the financial sector in terms of market cap, our [PDR] also is up to about [0.76]. We used to be at about 0.56 in 2014. So overall, our performance has improved. Also even if we exclude some one-offs on a running basis, our profits are at KRW 867 billion. And if we divide that into organic and M&A, I think it's about a half and half share. So we have banks the bank business, the basic fundamentals of the banking business and the organic business is quite strong. We've been able to successfully add new businesses through successful M&A. About the transition period of the CEO, we have not yet fixed the schedule yet. So we need some more time to give you a definite answer of the schedule but we have very good performance. And I think personally that, even though the schedule has not been determined, the board would make a wise decision. Okay, I hope that answered your question.

We do not have any other request for questions. But please bear with us for 1 minute.

This comes from Samsung Securities, Jae Woo Kim.

I would like to ask 2 questions. The first question compared to the 6-month, I think [CapEx] have actually dipped. So in the second half, would you not be facing some pressure on your margin? Can you provide us what your projection is for the second half? And we see the debenture rates actually go up so not just the mortgages or home equities or SME loans, I think there will be some opportunity in terms of the rollover aspects, that there could be some impact. And KB Insurance earnings or performance is really coming up very quickly or increasing quickly, so what's your projection there? And not just on SOHO but on the nonbank side. You talked a lot about the potential synergies between bank and nonbank business. What positive impact can we expect as we go forward from such synergistic impact?

Please bear with us one moment. We will respond to the question shortly. Mr. Jae Woo Kim from Samsung, thank you for your question. In terms of the [CapEx] rate and you know, it lags behind the market rate and in the first half of the year (inaudible) treasury yield it did go up but CapEx actually dipped. But despite that, in terms of the spread on the newly originated portion, so that went up and NIM went up and on the funding cost we have about KRW 100 trillion of low-cost deposits and we were able to save on the funding costs from those core deposits so we were able to increase our NIM. In the second half, we think CapEx rate is going to go up as it lags behind the market rate. So for SME loan or corporate loans and household mortgage, we believe that NIM level, with the increase in yield, NIM increase, we think we could somehow be able to make sure that we get attractive NIM. On the KB Insurance side basically in Q2, KRW 161 billion is the profit, but there is some adjustments. Basically not 100% of all of that is reflected in the consolidated figure for the group. Currently a little less is being reflected, let's say, from KB Insurance. To just give you the ballpark figure, there is going to be about KRW 400 billion impact, or from KRW 350 billion or KRW 400 billion of net income impact on the mother company level. We believe that we have over 40% share, (inaudible) additional share of [50 billion]. So it's at KRW 400 billion then per annum perspective, we think that there will be an impact of additional KRW 240 million of net profit coming from KB Insurance. You asked about some synergistic or positive synergistic effect. As you would know, we've newly included KB Securities so in Q1, we are enjoying quite a bit of synergy. And in Q2, there is more synergies in terms of referring our customers, there is a referral asset. There is referral customers, and there's a lot of referral that's happening between the bank and the Securities. And going forward, we think more positive impact from such activities because from KB Securities and WM, or asset management, our capabilities were a little weak and their skilled level of employees were not really high. But after the inclusion of the affiliates, we've put in a lot of efforts to train these people so that they could enhance their skills. So as they improve and bolster their skill set, I think that there's going to be more positive synergies that we can expect. At the group level, synergy is one of our key topics that we go after, so with KB Insurance and Securities and other affiliates we're really looking at various aspects so that we can discover that opportunity.

We'll take the next question Jaewoong Won from NH & Securities

My name is Won Jaewoong from NH & Securities. I have 2 questions. The first question is about your NIM, which I felt improved quite impressively. In the second half, do you think there's further expansion room for the NIM? And what I would like to know is that I think with more nonbank subsidiaries being consolidated, your NIM volatility has increased. So if others improved by 1 bp, KB Financial Group, I think we'll probably see wider range of volatility in your NIM. Is that a proper expectation? If other banks increased by 1 bp, given your nonbank income, do you think you'll be able to go up more than 1 bp? And my second question is your security side has been recording a loss. What are the main causes of that loss for the Securities business?

Mr. Won, thank you very much. About NIM outlook for the second half. As you saw from first quarter of last year, we have increased our NIM by about 16 bps. Since first quarter to third quarter 2016, we were actually able to increase our NIM by 2 bps, even though market rates were going down. I think we were the only case to increase the NIM in the market. And even since the third quarter of last year, we have continued to widen our NIM. And so we have been able to do that by focusing more on profit-oriented business management. And I think it has gone up quite a lot. It's becoming more and more difficult for that marginal gain. But we will, of course, continue to strive for a better NIM. And I don't think the inclusion or consolidation of other nonbank businesses have had any negative impact on our NIM. They actually, there's about KRW 300 trillion assets of bank and credit card. And so actually the interest income on the [IS] side, as you look at our quarter, there's about KRW 1.4 trillion on interest income side. There's an increase (inaudible), which is not impacting our NIM. So that's totally a different topic. But the Securities recording a loss. They have 2 subsidiaries. There's the Hyundai Savings Bank and Hyundai Asset Management. And during the sales process, Hyundai Asset Management, there was a goodwill about -- or Hyundai Savings Bank, there was a goodwill about KRW 120 billion and when we consolidated Hyundai Securities in, we had recognized that as a loss. And the Hyundai Securities itself, the goodwill got written off, amortized and that was also a one-off impact on the operating profit. So these are one-off impacts.

We do not have any more requests for questions but please give us one moment. I think that was ample for a Q&A session. This brings us to the end of the earnings [presentation].