KB Financial Group Inc (KB) 2017 Q3 法說會逐字稿

Good afternoon. I am Peter Kwon, Head of IR Department at KB Financial Group. We would like to now begin Q3 2017 Earnings Presentation. Thank you very much for joining us this afternoon.

For today's earnings release, we have our CFO, Jae Keun Lee, and the group's executive team with us. We will begin with Q3 2017 Earnings Results, which will be presented by our CFO, followed by a Q&A session. With that, let me invite our CFO for Q3 2017 Earnings Presentation.

Good afternoon. I am CFO, Jae Keun Lee, of KB Financial Group. Thank you for joining KBFG Q3 2017 earnings presentation. Before I present on the earnings results, allow me to walk through several key issues. Firstly, we have completed the process of making KB Insurance and KB Capital 100% wholly owned subsidiaries through small-scale share swap during the third quarter. As a result, we have laid the foundation for further enhancement of group-level profitability and we expect stability of group's profit to further improve. In the meantime, following the August housing market stabilization plan, the government announced on October 24 comprehensive plan on household debt. The new regulation expand support for the financially vulnerable class and introduced stringent financial regulations for owners of multiple houses so as to induce soft landing of the household debt issue and incurred stable growth of the domestic economy in the mid to long run.

And turning to KBFG, underpinned by the stable governance structure, we have nominated the incumbent CEO as the next CEO candidate. In November, during the extraordinary shareholders meeting, if the reelection is confirmed, we expect our key business strategies and their implementations will accelerate, supported by business stability.

Now let me move on to Q3 2017 earnings results. Q3 2017 KBFG's cumulative net profit was KRW 2,757.7 billion. This is KRW 1,067.9 billion increase year-over-year driven by salient improvement in bank profitability, together with sizable non-bank profit increases on the back of the Hyundai Securities acquisition and turning KB Insurance and KB Capital as wholly-owned subsidiaries. Q3 net profit declined slightly Q-on-Q on the impact of KB Insurance's schemes from bargain purchase reflected in the second quarter. But excluding the one-off factor, recurring level of profit actually increased, supported by improvements in the fundamentals.

Moving on to each line item, Q3 cumulative net interest income was KRW 5,687 billion, improving 22.3% year-over-year, with a quarterly figure coming in at KRW 2,021.5 billion, up 4.2% Q-on-Q. This was driven by robust increase in the bank's loans and bonds, with sustained NIM improvement trends from the group and the bank.

3Q cumulative net fees and commissions income was KRW 1,522.2 billion, up 37.4% year-over-year, driven by sizable increase in commissions received following the acquisition of Hyundai Securities and the launch of the integrated KB Securities, as well as higher sales of bank's trust products, including ELS'.

Q3 cumulative other operating profit displayed significant year-over-year rise with the inclusion of underwriting profit from KB Insurance. On a quarterly basis, there was also around KRW 90 billion increase attributable to the absence of loses related to interest rates and FX rate rises. Q3 cumulative G&A expense was KRW 3,796.6 billion, a rise year-over-year, which is due to the inclusion of non-bank subsidiaries, if this factor is crossed out G&A expense actually dropped marginally. 3Q quarterly G&A was KRW 1,307 billion, a slight decline Q-on-Q, and as such G&A expense is managed at around the recurring level.

Q3 cumulative PCL was KRW 479.9 billion, and is continuously improving. On a quarterly basis, there was an increase of KRW 62 billion provisioning following Kumho Tire's voluntary restructuring agreement. Carving out this one-off factor, Q3 PCL provisioning was KRW 110 billion level with credit cost at 15 basis points, still being kept at a low level.

Q3 nonoperating profit showed Q-on-Q decline with the dissipation of gains from bargain purchase impact in relation to KB Insurance in the previous quarter.

Next on Page 3 is on financial statement. 2017 Q3 cumulative group ROE posted 0.92%, ROE 11.44%, a great improvement Q-o-Q. Q3 ROA and ROE seems to have slightly decreased Q-o-Q, but taking into consideration, Q1 BCC-related disposition gains, Q2 gains from bargain purchase and other one-off factors, the quarterly improvement trend is continuing. Q3 NIM posted 2.02% for the group and 1.17% for the bank, a 2 bp additional improvement Q-o-Q. The margin improved mainly because of the lower funding cost on the back of low-cost core deposit growth efforts and spread improvement, thanks to the highly profitable assets focused growth and efforts for pricing sophistication.

Looking at the cost income ratio on the top right, Q3 CIR posted 49.4%, and improved Q-o-Q. We will try to manage it at around 50% going forward through top line improvement and group-wide cost controls.

Next is the group's credit cost ratio. Q3 credit cost ratio compared to total loans posted 0.24% for the group and 0.13% for the bank. As aforementioned, it rose slightly Q-o-Q due to one-off provisioning related to Kumho Tire, but it's still being managed stably.

September end group BIS ratio, CET1 ratio posted 15.37% and 14.74%, respectively. Bank BIS ratio and CET1 ratio recorded 16.16% and 15.01% respectively, still maintaining the highest level of capital adequacy in the financial industry. From Page 4, I will cover the key financial highlights during the past 3 years and the strategic direction the group aims to pursue for the next 3 years.

First on the top-left side. 2013 group net income was only KRW 1,272 billion, and net income on a recurring basis was only at KRW 350 billion level. However, in 2017, Q3 cumulative net income posted KRW 2,757.7 billion, growing the quarterly net income significantly to a KRW 850 billion level. As you can see on the right-hand graph, this was due to the bank ROE improving greatly from 4.02% in 2013 to 10.18% in 2017 due to improvement in interest income and cost cutting measures, and also, supported by the nonbanking sector profit growing through nonbanking subsidiaries (inaudible) side you can see that the group's asset quality during the past 5 years has been improving in many aspects. First, group's credit cost posted 67 bp in 2013 and 54 bp in 2014, with asset quality deterioration in sectors such as real estate, PS that are sensitive to economic cycles. However, with asset cleaning of NPLs and deleveraging of risk assets, it quickly improved to 20 bp level in 2017 Q3.

The credit quality of our consumers also improved greatly. The percentage of high credit quality customers, which was around 50% in 2013, rose to a 70% level in 2017 Q3. Also, you can see on the bottom graph that the bank's new NPL formation exceeding KRW 3 trillion, on a yearly basis decreased to less than KRW 100 billion from 2016. Apart from this fundamental improvement, we have been utilizing our capital in many ways to improve corporate and shareholder value. Starting from Woori Financial in 2014, LIG Insurance in 2015 and Hyundai Securities in 2016, corporate value was greatly improved through acquiring nonbanking subsidiaries at reasonable prices. A KRW 800 billion level of share buyback was also executed to boost stock prices and enhance shareholder value.

In addition, as a part of our group's policies to bolster shareholder return, dividend payout ratio recorded 15% in 2013 was expanded to a 23% level as of 2016. I will cover the group strategic direction for the next 3 years as seen on the bottom right side.

First, with the vision of Asia's regional leading banking group as our goal, the bank will secure stable competitiveness and pursue management stability of newly integrated subsidiaries, including securities and insurance, and pursue strengthening the group's global strategy. Second is to thoroughly prepare for the digital wave. We will strengthen the digital competitiveness to become the customer's first choice in the fast-changing financial environment and have a customer customized service using customer big data to this end, our greatest strength of strong customer base and strong capital position will be actively utilized.

Lastly, we will not be complacent with our recent performance and pursue a balance of profitability, growth and asset quality and pursue sustainable growth from a midterm perspective that can look forward to the next 5 to 10 years and not focus on short-term results.

Please refer to the following pages for details regarding this quarter's performance. With this, I will conclude KBFG 2017 Q3 business results presentation. Thank you very much for listening.

Thank you very much to our CFO. We will now entertain your questions. Those of you connected via the Internet please refer to the contact number written on the last of page of your presentation screen. (Operator Instructions) .

Now for your information, there is around 30-second time lag between the Internet and the phone. So once again, please do bear with us.

Yes, we will take the question from Hyundai Investment Securities, Kim Suyang.

Yes, good afternoon. Now within this quarter, I think there was some items other than the Kumho Tire KRW 65 billion provisioning. Were there any other one-off and particular items that we need to note? If we were to take that aside in terms of your capability of generating -- basically is this, do you think, the running level, the recurring level that we could also look forward to? There were some gains from securities as well as some other one-off items that helped with your earnings performance. But there's no guarantee that you will enjoy the same impact. And I think next year, there could be some other items that will require some impairments treatment. So at the management level, do you have any specific strategies that you are planning to employ going forward?

Yes, thank you very much Mr. Kim Suyang from Hyundai Securities. You asked 2 questions. First, has to do with asset quality, and number 2, whether we could actually continue that, and also, do we have any strategic approach that could really make us standout. In terms of the one-off, there is KRW 62 billion of provisioning relating to Kumho Tire. And as under the voluntary restructuring agreement, we have a very conservative provisioning policy in place. So despite the fact that there is a volunteer agreement in place, we have used NPL, and out of the KRW 75 billion, we've actually provisioned 85% at around KRW 62 billion. And also, there were gains from sales of the Hyundai Cement securities in the amount of about KRW 41 billion. And also, for KB Securities, with the application of the peak hour system, there was a KRW 27 billion of an impact by adopting the wage peak system. And starting next year, in terms of provisioning, we do have some -- have bad experiences in the past, that is why we have a very conservative stance when it comes to provisioning policy. So if you look at the quality trend, we have, on a CCR basis, 25 basis points. We think we'll be able to maintain that level. With interest rate hikes and even if the environment turns bad against us, we think that we'll be able to maintain it at 30 to 40 basis points based on the CCR figure. So how are we going to differentiate ourselves? Over the past 3 years, as a leading bank, leading group, we were laying the basis to really, really prog as a (inaudible) equipped ourselves with more capabilities on the nonbanking area. And our group portfolio, our banking asset portfolio is now quite steady and stable. Going forward, in the coming 3 years, based on our leading position in the domestic market, we are going to now turn our interest on the global stage. So we will be strengthening our capabilities on those aspects. So Cambodia, Myanmar, and we've actually set up a Hong Kong subsidiary. And so together with the KB Securities, we are fostering it as a CIB hub in Asia. And also in Vietnam, the securities after we acquired a company in the case of KB Capital and KB Card, in Laos market, they have entered into that market doing installment financing and providing microloans, household loans. And other than that, there are multiple efforts that are undergoing in different groups underneath the different committees. Basically different subsidiaries are working together and collaborating together to make sure that we can implement the strategy in the most stable manner as possible. And another thing is with regard to households, that we do have high percentage of mortgages, and government has announced recent plans, and I understand that the market has some concern on KB because our portion of household mortgage loans is quite high. But despite that concern, if you -- we've actually introduced a loan to the policemen. It's actually up until October 15, we have been originating what we have originated and seen net addition of KRW 2 trillion. And so these are high-quality household credit loans. And also together, as against SMEs and SOHO loans, we've also seen some growth as well. Especially on the SME side. I think this is in line with the government's policy to bring about inclusive growth and really foster companies that could be leaders of our future industries. So we will be expanding these segments by strengthening our underwriting capabilities. And together with securities and banks, we want to further strengthen the collaboration between the 2 entities. If you look at the entities, if you look at the referral customers and referral assets, we've seen significant increase. And on top of that, for the securities employees, we're really providing, we're really strengthening the training program, the education program. And with the buildup of the experience, I think that our skill set is going to further enhance as we go forward. And therefore, we can expect greater synergies in the future.

Thank you very much. If I might add, apart from the one-off factor, we have had about KRW 900 billion one-off earnings, but on a recurring level, it's about KRW 85 billion -- KRW 850 billion, actually. So I don't think there's a big difference.

From Dongbu Securities, Lee Deong Gwon, please.

Yes, I'm Lee Deong Gwon of Dongbu Securities. And I have 2 questions. My first question is as follows. You talked about regulation, and recently, there has been the comprehensive plan for household loans and for LDRs or BIS ratio. Well, there is the risk-weighted ratio for RW for household loans that have been mentioned. However, when we look back on our past experience, is the regulatory authorities review this possibility, then I believe, that there has been probably a dialogue between the bank and the regulatory authority. And related to that, can you tell us what you think? And if you think this will truly be executed, these measures and be realized? My second question is, as was mentioned in the beginning, regarding the dividend payout ratio, is it indeed going up? This year, you have a very high up on your profits and earnings. So I guess it will affect your payout. Although we will have to wait and see. So related to your dividend payout ratio, you have mentioned guidance before. But can you give us some guidance for this year and next year for the dividend payout ratio trends going forward?

Please hold for just a moment. Thank you, Lee Deong Gwon from Dongbu Securities for your question. You asked 2 questions. And first, let me answer your question about dividend payout ratio. Last year, our dividend payout ratio was 23.2%, about KRW 1,251 per share, about the late 2% range for the dividend yield. And for this year, our net income has gone up greatly. And for -- when we need our investors, we always tell them that we're going to boost our dividend payout ratio. And we're not going to cut down on the dividend payout ratio because of the net income increase. And even if we have an increase in net income for the short term, about 25% to 30% in the long term. So we're going to have that as your guidance. Regarding the impact from the regulatory authorities. Well, we have the policies coming in from the government on August 2 and October 24, and there has been an increase in the spread. And related to household loans, RW boost related to household loans that have come up as topic. And the comprehensive real estate measure that was publicized on October 24, as you know, it's for vulnerable borrowers and to give customized support and for the people that hold multiple housing, we're trying to actually push down on that, so that household that doesn't act as a burden on our government economy and to have a soft landing. And first is for the mortgage loan support that already have existing loans. So to have a change in the DTI calculation method, and as you know, that we have the DTI in all metropolitan areas after the August 2 real estate policy that was actually publicized, and the DTI is already limited to a maximum of 30% for the so-called bubble areas. And in the existing DTI, the new mortgage loans were only included and the other loan principles were not included for repayment. But now for the new DTI, it means that it's for the multiple household, house owners, so it will have a limited impact on those who do not have a home and are looking for a new home. And for the bank itself, there will be a contraction in the loans going to multiple house owners, but in the long term, it means that we can have actually a control over the vulnerability that may occur for marginal borrowers. So that can be a positive factor for us. Also, we believe that with the August 2 announcement, it has already had a positive impact on the market.

Regarding the mortgage loan growth, it is true that it has seen some growth contraction and the market is, I know, worried that it will have a greater impact on KB because we have a larger proportion of mortgaged loans. However, for the growth of these mortgage loans until Q3, if you take into consideration our difference against the others until Q3, when you see our loans in won and our SOHO loans and our securitized loans. And our SOHO loans, you can see that we can make up for that, 4% to 5%. Also, the government is looking for additional spreads or the -- so delinquent spreads, so it's about 6% to 9% for each delinquent period. And it is actually quite high compared to the U.S. or Germany or other developed countries. And it is true that we did not have a very clear-cut procedure related to these spreads that are delinquent. So the government is expected to have a clearer guideline on this type of spread delinquency by December. And for our bank, we do have a different spread according to the duration of those delinquency periods, and it will be different according to the calculation of delinquent interest or the loan repayment method, so we will need to look into it further. But even if we have a 1% decrease, then its impact on the interest income will be very low, about KRW 3 billion or so, it will be very minimal. We will need to wait and see how the policy plays out before we can make clearer forecast. Also, the boosting of RW related to mortgage loans, we have a 15% limitation now for the lower limitation, and for Australia and Switzerland, they have it up to 25% a floor. And as for our group, as you know, we have the highest capital adequacy quality. So for others, it will have a bigger impact. But for us, we will have a very limited impact from this boosting up of the RW. So excluding Australia and Switzerland, most developing countries have 10% to 15% of RW floor. So taking that into consideration, well, even if it is pushed up to 25%, then we think that it will not actually be probably the future picture going forward.

We will take the question from Samsung Securities, Mr. Kim Woo.

I would like to ask 3 questions. First, if you look at the bank's interest income, on a Q-on-Q basis, even if we consider for growth and margin, I think the increase is quite significant. Were there any drivers behind such significant growth? And number 2, if you look at SK Holdings, you have some securities, I understand that you did not sell the securities this quarter. What are your plans going forward for your SK holdings? And do you plan to actually do it next year, not as an AFS, but more of a short-term tradable securities? So do you have plans to actually handle it that way? Could you provide some color? And it seems like the securities, KB Securities didn't really post significant profit. Could you explain us the reason why? What do you think is the level that the market should expect as we go forward? Can you share with us some guideline -- guidance, please?

Thank you for the questions. Please bear with us as we prepare ourselves to answer that question. Mr. Kim Woo from Samsung Securities, thank you very much for your questions. You raised 3 questions. First, on interest income, and also, whether we plan to sell, show the shares that we hold and on KB Securities. In terms of interest income, actually the biggest driver was the improvement from NIM. We continue to see NIM improvement. In the case of low-cost deposits, we have seen significant growth. So on the funding cost, we were able to save on cost. And we see from this slide, when it comes to the household loan on credit, there was growth in terms of the loan origination and basically that had an impact on NIM. With KB Insurance inclusion, the interest income actually comes -- has an impact of KRW 150 billion on a quarterly basis. So compared to the past that is a differentiating factor. Going forward, we believe, we currently have KRW 100 trillion of low-cost deposit, and we're going to really focus on low-cost deposits as we go forward as well. SK share, and we also, in POSCO shares as well. Our plan at this point, we do not have any specific direction as to how we will deal with these shares, whether the equity prices will go up in the future or do we think whether this is the right timing to dispose of our holdings. It's something that we're continuously monitoring to make the appropriate judgment. With IFRS 9 coming online, and as we -- whether we're going to apply SBPO or SBOCI, whether we -- which accounting method we should apply is something that we will be able to communicate to you later on. In terms of KB Securities income, it is slow but we've seen some contribution from the synergy effect. But on the IB commission, investment banking, on a Q-on-Q basis, the performance was weaker. We've seen a bit of a decline in IB commission income. Now synergy income, we think is going to get momentum and it will go up as we go forward. Once again, the employees of KB Securities, so the previous Hyundai Securities employees, they were getting income from the brokerage services not from wealth management sales. So the employees will be equipped with capabilities and with the appropriate skill set. Right now, their capital -- equity capital is about KRW 4 trillion, and it's about 8% on ROE, so we think that the appropriate level of profit will be about KRW 300 billion and will be in the range to achieve that.

The Next question from Daishin Securities, Choi Chung Uk.

I am Choi Chung Uk from Daishin Securities. I have a question about M&A, and your treasury stock. And taking those factors into consideration, you are able to have a KRW 2 trillion or a higher M&A possibility. And you talked about overseas possibilities in the beginning. So with this capital what is the company that you're most interested in Korea or any sectors in Korea or any possibilities you're looking forward to overseas? So that is my first question. My second question is about the government stand and SME loans to focus more on those loans. And next year, I'm sure that there will be a growth in SME loans. And during the past 2 years, SOHO growth took place. But I think for other SME loans, it went down for KB. However, to suddenly boost the SME loans after following the government's guidance taking into consideration the different asset quality issues, will that be possible to do it in a sudden manner? So can you give us any guidance you have for SME loan growth for next year?

Thank you very much for your question. Please wait until we prepare the answer. Thank you Mr. Choi Chung from Daishin Securities. You asked 2 questions. First was about M&A, and second question was about how we're going to grow our SME growth, SME loan growth. To answer your second question for SME growth, SME loan growth. We had nonbanking sector growth, and I believe that our group's fundamentals really became strong. We have our group's smart capital management that has improved. And for M&As, well, we do not have any deals on the table right now or any possibilities that we're actively looking into but regardless of any sector, if we believe it will help our ROE targets then we have a stance to actively pursue those M&A possibilities.

As you know, for life insurance, we are a little bit weak. And if there are good possibilities for life insurance companies then we are fully able to look into those possibilities very actively. Also, KB Securities acquired Vietnam's maritime securities recently, and we will look into very good M&A possibilities also in the overseas markets to strengthen our global position. We will work hard so that our group's capabilities can be upgraded a notch through these M&A possibilities.

And regarding SME loan growth, looking into our numbers, in Q3 YTD, we had about KRW 4 trillion of growth already. And for our insurance, that has been consolidated with Q2. We had about KRW 1 trillion impact from SMEs. And taking that out, then we had about KRW 2.5 trillion of growth. And it's not that we're going to only focus on SME loan growth, but we're going to have a very balanced growth. In the past for SMEs, we thought of them as gray zones to increase our interest income. And we had -- that gave a long repercussions from that and shocks from it, so we will take those factors into consideration and look into our credit underwriting capabilities so that we will never have any gray zones in our SMEs and have very meticulous underwriting. Thank you.

Thank you very much. And please bear with us for a moment as we wait for other questions. At this point, we do not have any additional questions coming online. But please bear with us for one more minute. I see that we have no additional questions. This will bring us to the end of the Q&A session. We would like to close Q3 2017 Earnings Presentation of KBFG. Thank you.