KB Financial Group Inc (KB) 2018 Q1 法說會逐字稿

Greetings. I am Peter Kwon, the head of KB Financial Group IR Department. We will now begin the 2018 Q1 Business Results Presentation. I express my deepest appreciation to all participants.

We have here with us today KBFG's CFO and Senior Managing Director, Ki-Hwan Kim, as well as other group executives. Today, 2018 Q1 results will be covered by CFO, Ki-Hwan Kim, followed by a Q&A session.

I would now like to invite our CFO to cover Q1 business results.

Good afternoon. I am Ki-Hwan Kim, CFO of KB Financial Group. Thank you for joining KB Financial Group's First Quarter 2018 Earnings Presentation.

This year, under the vision of global financial group leading in Asia, all our employees and the management are focused on recovering the bank's profitability and expanding synergies across subsidiaries.

During the first quarter, we've seen solid growth around high-quality corporate loans. And driven by improving cost efficiencies and risk management, we were able to achieve sound performance.

For the Korean economy, on the back of global economic recovery and better Korea-China relations, GDP growth is expected to be around 3%. And with the holding of the summit talks between the 2 Koreas, geopolitical risk is expected to alleviate, creating an overall favorable backdrop.

Under such backdrop, underpinned by stable group margin, we plan to grow loans to high-quality SMEs. And by offering proactive support to promising venture start-ups and SMEs with technological capabilities, we would position ourselves as a leading financial group living up to its role as a financial partner in the inclusive society.

Also, we are mindful of policy rate hikes from the United States, reversing the interest rate differential between Korea and the U.S., which can heighten concerns over capital outflow, earnings deterioration of export companies due to stronger won, higher credit risk and borrowers on the margin going bad. And so we are thoroughly preparing to respond to such concerns preemptively.

I also like to note that we have been bold in removing inefficiencies from the organization and speeded up adoption of innovative systems, thereby improving overall operational efficiencies.

Based on the balanced business portfolio, we will exert our best efforts this year to further enhance profitability towards becoming a financial institution equipped with global competitiveness.

Please note that starting Q1 of 2018 results, we applied corporate accounting standard 1109, IFRS 9, in representing our statements.

Let me now move on to Q1 2018 earnings results. KBFG's Q1 2018 net profit was KRW 968.2 billion, up KRW 98.1 billion, which is 11.3% rise year-over-year, driven by the bank's net interest income and nonbanking subsidiaries' commissions' income growth and consolidation impact of KB Insurance. There was a one-off gain from the sale of Myeongdong KB Bank building amounting to KRW 115.3 billion, after-tax basis KRW 83.4 billion. With the Q4 impact of the bank's PS and ERP expense removed, there was a significant Q-on-Q growth of 60 -- excuse me, 74.9%.

Looking at each performance line item in more detail. Q1 net interest income was KRW 2,143,800,000,000, up 15.9% year-over-year.

With solid growth of loan assets underpinned by high-quality SME loans as well as rising market interest rates and our efforts to expand on low-cost deposits, NIM improved.

However, in Q1, despite solid growth of 1.8% in loans in won, due to the difference in recognizing interest income between IFRS 9 and the existing accounting standards and higher borrowing costs for KB Securities, there was a slight Q-on-Q decline.

To note one point regarding accounting treatment of net interest income, of the financial assets at FVPL, we have previously classified interest income from certain assets like bonds under other operating income. And for better comparison with other companies, we modified our internal accounting policy and decided to classify them under interest income from this quarter. Please note that we applied such treatments retroactively on the relevant figures. For your information, the amount reclassified under interest income from other operating income ranges from around KRW 120 billion to KRW 140 billion per quarter.

Next is on the group's net fees and commissions' income. Q1 fees and commissions' income was KRW 628.9 billion, up 20.8% year-over-year and 19.1% Q-on-Q, recording for the first time KRW 600 billion in a single quarter. This was driven by growth in equities trading volume on the back of bullish stock markets, leading to a great expansion of brokerage commissions' income as well as higher trust fees for the bank on the back of bullish ELS and ETF sales.

Q1 other operating income declined Q-on-Q with the dissipation of FX-related one-off gains from the previous quarter and rise in loss ratio, which lowered the insurance profit. But there was a significant improvement year-over-year with the consolidation effect of KB Insurance.

Q1 G&A posted KRW 1,391,700,000,000 and rose 19.2% Y-o-Y with KB Insurance consolidation. On a recurring basis, G&A rose KRW 18.3 billion, a 1.6% growth and is being maintained stably.

In addition, compared to the previous quarter, SG&A improved greatly by 24% Q-o-Q as a result of the removal of the bank's one-off costs recognized in Q4.

Next, provision for credit losses. Q1 provisioning for credit losses posted KRW 164.5 billion, an increase from the previous quarter when approximately KRW 60 billion of large-scale write-backs took place. It is still being maintained at a low level of 23 bps of credit costs.

Lastly, Q1 nonoperating profit posted KRW 116.3 billion, with the one-off gains reflected from the sale of the bank's Myeongdong building.

I will now elaborate on the major financial indicators from Page 3. 2018 Q1 group ROA posted 0.87% and ROE 11.45%, respectively. In particular, in the case of the group ROE, excluding Q4 of the previous year when one-off costs rose greatly, from 2017, it is being maintained at a level higher than 10% continuously for each quarter on a recurring basis.

Next is the NIM. Q1 NIM posted 2% for the group and 1.71% for the bank, respectively. Group NIM improved 2 bps Q-o-Q with the card NIM increase effect from card loan and installment finance interest rate hike. The bank NIM recorded a similar level to the previous quarter due to factors including funding cost burden related to Mugunghwa loan for police officers and others.

Next is the group's cost-income ratio on the upper right-hand side. Q1 group CIR posted 50%, a great improvement compared to the previous quarter, which had sizable one-off costs. Group's recurring CIR, excluding KB card ERP-related one-off costs, recorded 49.6% and is estimated that it will reach to a high 40% level, which is this year's group management goal.

Looking at the group's credit cost ratio graph on the bottom left side. Q1 credit cost ratio compared to the total loans posted 0.23% for the group and 0.08% for the bank, respectively, and greatly improved from 39 bps in Q1 of the previous year when sizable provisioning took place against the SME.

As of 2018 March-end, group BIS ratio and CET1 ratio posted 15.08% and 14.52%, respectively, and the bank's BIS ratio and CET1 ratio posted 15.8% and 14.89%, respectively, and is still maintaining the best level of capital adequacy in the financial sector.

From Page 4, I will elaborate on the aforementioned financial statement impact related to the implementation of IFRS 9. IFRS 9 is an accounting standard, which reclassifies financial products according to the business model and contracted cash flow into FVPL, FVOCI, AC and others and applies the expected credit loss regarding the expected loss period when recognizing the loan loss provision.

Let me now elaborate on the financial impact from the implementation of IFRS 9. As aforementioned, for loans and some financial products, the loan loss provisions recognized applying the expected credit loss for the expected loss period or lifetime and with the factors including increase in loan loss provisions, group total assets declined 0.13%, approximately a KRW 570 billion decrease compared to the previous accounting standard.

Regarding the reclassification of financial assets, FVPL financial assets increased KRW 12,994,000,000,000, but FVOCI financial assets declined KRW 12,136,000,000,000. Theoretically, the increase of FVPL financial assets can be through the expansion of earnings volatility because of fair value assessment.

However, among the securities that we hold, POSCO and SK securities have been classified as FVOCI, thus we expect minimal earnings volatility. Group's net assets due to the aforementioned provisioning increased and tax effect decreased 1.24%, approximately by KRW 420 billion compared to the previous accounting standards. The table on the upper right-hand side is the opening balance comparing IFRS 9 with the previous accounting standard.

I will not cover the other pages as they are explained in detail on the paper related to the performance that I have covered already. With this, I will conclude KBFG's 2018 Q1 business results presentation. Thank you for listening.

We would like to now entertain questions. Those of you connected via the Internet, please refer to the contact number in the very last page of your presentation screen. (Operator Instructions)

We will take the questions. Mr. Jin-Sang Kim from Hyundai Motors Investment Securities.

I have 3 questions. First, the bank's NIM was below the expectations. You talked about the loans that you originated to the police force. So could you elaborate a little more as to the reason why the NIM is lower than expected? What is your future NIM projection? And the second question has to do with NIM. And also, recently when it comes to delinquency interest rate and the cap on the credit card interest rates, there has been new regulations that have been introduced. And also, I understand that there is a new mechanism that is being introduced in terms of the loan rate calculation. Now when the interest rate is going to go up, basically it wouldn't really help with the margin or there is also some concern that this will not really help with the profitability of the company. What is the management's view on this? And lastly, if you look at this quarter, the loan growth seems to be quite steep despite difficult backdrop. So in terms of the loan growth and your strategies for originating loans, could you provide some explanation?

Thank you very much for your questions. Please bear with us one moment.

Thank you very much for the question. You first asked about the NIM. On credit card loan and installment loan, basically for KB Financial Group, we went up by 2 basis points. But for bank, basically it was lower than expected. So let me explain as to what that is. Basically, there was a 2 basis point plus impact between loans and deposits. But basically, there has been some changes with respect to the housing credit guarantee, so that was a negative 2.2 basis points. So it's about 0.8% increase. As I have mentioned previously, the loans to the police was about KRW 600 billion. So there was some funding-related burden. And if you look at the spread, loan-to-deposit spread, there is a different weight that we apply. And there was need for us to actually increase funding. And in light of the increasing interest rate, we basically expanded to finance early on. Because there was early-on financing, I think, going forward, we will see more improvement. So in terms of the NIM direction going forward, now with interest rate goes up by 25 basis points, we project about 3 basis -- 3 to 4 basis point improvement on NIM. And last November, there was 2 basis points increase in policy rate. And basically, we're also expecting a similar level of increase. Now in order for us to get 4 basis points of NIM, which is our objective, we believe that this can be achieved. And for this year, rather than the household loans, we are going to focus on corporate loans, which is better margin for us. And if you look at the household loans rather than the housing mortgage products, we're more focused on the Magic Car, unsecured loans as well as other types of loans. So we believe that the NIM improvement target, we will be able to achieve. So in terms of the regulation on the loan rates, basically there is a cut in the delinquency rate and then the lowering of the cap on the credit card interest rate. Now internally, we did some assessment. And on a group-wide perspective, we believe that there is about KRW 20 billion to KRW 30 billion downward pressure on our numbers. So -- but so from the financial perspective, the impact is not going to be that significant. Another aspect is that with improvement in asset soundness and asset quality, basically the income from delinquency interest rate has been going down. So with interest rate going down -- for the delinquency interest rate going down, the actual financial impact on our numbers is going to be less and less as we go forward. However, when it comes to the credit card, right now, the cap is at 24%. But there is discussion that they want to reduce and lower the cap to 20% for credit card interest rate. So there is a possibility that we will have a downward pressure on our numbers and earnings. So in terms of credit card business, there are multiple measures that we are identifying in order to defend that erosion. In terms of the pricing on the lending rate, in terms of the mechanism and potential pressure on pricing, currently, the FSS, they have their focus on reasonability and transparency of the lending rate mechanism. So if there is any aspect that is unreasonable, they want to make improvement and they want to further enhance transparency. So there are multiple policies and plans that the regulatory -- regulator is preparing, and basically we believe that this is the desirable direction. At KB Bank, in terms of the data analysis and cost analysis, there are various cost and risk premiums that we will calculate. And we will also consider our growth strategy and the competitive landscape so that we can make sure that there is a systematic lending rate mechanism -- setting mechanism, that is. Well, there are a lot of discussions that are ongoing in order to secure reasonability as well as transparency, but also by -- we believe and we expect there will be a reasonable standard and approach will come out of the supervisory authorities. Basically, market is concerned that there will be a sudden cut in the spread or -- but we don't think that, that will happen nor it will have negative impact on our numbers. And also -- so the bank will respond to such movement. And for us, NIM management is important. But net interest income is also quite important, basically our growth strategy on the size. So we will do strategic pricing to further solidify our customer base and really increase our high-quality loans. And also, we could think about also incomes from the securities, from the capital market and also further solidify our commissions' mechanism so that we can gain a more robust commissions' income. So that's the way for us to control this. You've also asked about the loan growth. In Q1, 1.8% was the growth rate. Household was 0.8%. And also there was growth for the corporate. Basically, our target is 5% and corporate 7%. So in total, it's about 5%. Basically, you may think that the loan growth level will be quite steep for this year. There is some regulation on the loans, and I think it will start to materialize in the numbers as we go into the second half of the year. So a per-year basis, basically, we are keeping to our original target. On household, on mortgage, we didn't perform very well, but there was (inaudible) loan and Mugunghwa loan, the loan to the policemen, that actually increased. Going forward, we believe that we will continue to implement loan policies around (inaudible) loans, Magic Car and also high-quality unsecured loans, areas that we will focus. So corporate loans, total is 2.3%, SMEs, 4.5% and large corporations, 3.1%. So for each of the line items, we were able to grow evenly. Basically, for providing innovative support and technical financing, we made strategic expansion there and from the end of last year. In order to select high-quality SMEs, we have really strengthened on marketing. This year, there is regulation on the self-employed businesses or people in the real estate leasing business. So there is a quite a bit of regulation there. So we -- rather than SOHO, we're going to focus more on SMEs so that we can bring about around 7% of growth from this segment. I hope that answers your question.

I'm the CFO of the bank. Let me just add some more on the NIM question. In Q1, there were some special points to note. Basically, the loan to the police increased by KRW 251 billion, and basically that had an impact of 0.2 bps. And basically, there is a -- with beneficiary certificates, there are certain noninterest-bearing securities, and basically the amount was KRW 258 billion. The funding cost for us for interest-bearing is 1.3%. So if it is KRW 700 billion, then that means that it can have impact of 0.5 basis points. The credit guarantee aspect, 1.5 bps actually went down. So it's 2.2 basis points negative in the negative realm. So it went up by 0.8 basis points. So if you do the addition, you will see that it go -- it went up by 3 basis points.

We're waiting for the next question. Next question from Samsung Securities, Kim Jae Woo, researcher.

I'm Kim Jae Woo from Samsung Securities. I would like to ask you about 2 questions about the interest offer. And for the group, your performance is very good. But for the subsidiaries, for KB Securities, to my knowledge, in Q1, there was an increase in the trading and we thought that was very profitable. For other companies, the results were very good. But for KB, it was said that results were not as high as expected. Was there any special reason for that? And secondly, between the bank and the KB Securities, I think the synergy was mentioned. So can you give us any results regarding any synergy that took place? Third is regarding M&A with ING Life and there were some reports about the decision to acquire. And some also reported that it was not a final decision for the M&A for KB. I know that you were very interested in life insurance from a long time ago. So can you tell us about any changes in your position and your future plans going forward? Lastly, in the presentation, you mentioned that for the reclassification of the interest profit or interest income, can you elaborate more?

Please wait until we have the answers ready for you.

KB Securities Q1 net income was KRW 78.8 billion and it was actually KRW 154.4 billion in the previous quarter, so it went down. It is true that there were high expectations because of the boom in the market in Q1. But to explain about the factors, for the securities trust fees, it was about a KRW 30 billion increase for WM. We had very positive results. However, for IB, for the previous quarter, there was the Hyundai Merchant Marine acquisition of securities and there was about KRW 20 billion of fee income. However, with the evaluation and disposition, we had about KRW 115 billion of losses. So on a recurring basis, it's KRW 93 billion. So for the previous quarter, if we actually exclude the one-off factors, it's at a similar level. And you mentioned that we had some lower results than expected, but it was because of the bond investment or bond performance that was not as good as expected for IB. So if we had normalized recurring results, we are sure that our performance would improve. The synergy between the bank and securities was mentioned. And for WM and CIM, bank and securities corporation is very positive in numbers of customers or in assets or in numbers of the (inaudible), they're very notable. And we have a lot of profits related to the synergy. And if this becomes materialized, then for KB Securities on a recurring level, well, for a quarterly basis, it was about KRW 50 billion per quarter. But we expect that it will improve to KRW 90 billion per quarter this year. It will improve gradually. And for the acquisition related to ING Life, well, it's an M&A, very sensitive question. So for ING, well, we cannot really mention anything related to that company at this time. So we will just give you a textbook answer. As we mentioned in our disclosure, within our group, we want to actually strengthen our competitiveness of insurance. So we are looking at many different options, including M&A for ING Life. Well, it is one of our potential targets, we can recognize that. But until now, we do not have any facts we can deliver to you. We have many potential targets, including ING. And related to the changes of the insurance regulations, we will need to make some assessments, and we need to think about the synergy creation on a strategic level, and then we will make a final decision. Related to M&As in the future, until now, for the nonbanking sector, through successful M&As, we have recovered our leading financial group status. And we believe that we still need to make extra efforts for global expansion or for the strategic direction of the group. We will need to see if it meets it, and we will need to also have a target that will complete our balanced portfolio. So we will actually continuously make assessments and reviews. Related to the interest income, until now, for the financial assets at FVPL, well, it was actually classified in another fashion. And from this quarter, it's net interest profit that we recognize it as. And for all other companies, I know that they all recognize it in this as net profit so -- for interest. So we also have been making reviews about reclassification and with the implementation of IFRS 9, we have completed our reclassification as mentioned before, for it is true that we have reclassified, and it is KRW 120 billion to KRW 140 billion. And on the whole is about KRW 240 billion that we have reclassified for financial asset at FVPL. Thank you very much.

From Franklin Templeton, Mr. [Chung Wee].

I am [Chung Wee] from Franklin Templeton. And this is not really a question but, I guess, a comment. Basically, with recalculation of the lending rate, I understand that in 2013 at FSS and FSC, basically they developed a model guideline for lending rate. And in that process (inaudible) was made. And when you are going to do the calculation, the market interest rate, royalty and also duration and the necessary margin. So all of these factors were used to actually come up with that model guideline. And in 2013, the regulation became much more stringent. And basically, that lending rate is something compared to the past. The bank lost its, I guess, influence over setting the lending rate. Now under this environment, under this regime, basically -- I mean, I wonder where is -- whether there is any buffer or room to actually change this mechanism once again. If you think about regulation and the regulatory authority, basically there are certain things that they have fixed that is unable to change, so I don't understand how a company can further shed its costs. So it's not really, I guess, a question but a concern that I have.

Let us respond to that. Please bear with us one moment.

Let me briefly speak to that comment. Thank you very much for the questions. When it comes to the lending rate, there is the cost, operational cost, liquidity, premium, these different factors are considered. And each of the bank has different, I guess, criteria for managing those. And there were some unofficial management of these factors. So I think the authority is just making a review and, once again, checking to standardize the process. So from the customer's perspective, the reasonable and transparent guideline is something that could be further improved in this process. And also, to the consumers, these factors or this mechanism will be disclosed so that people could have higher level of confidence. When a rate is set, there are multiple factors. And if those factors are reasonable, then I believe that the regulator as well, as I mentioned before, is not going to move to try to cut the spread interest rate. So I do not think that this is a way towards wanting to substantially cut the rate.

Just to add on that, I'm the CFO of the bank. In January and in February, basically the regulator actually went to the lending rate mechanism and they checked it. And also for us, end of January, there was a checkup. Basically, all of the banks, in order for them to actually do everything the same way, then there could be a price collusion. So even if the framework itself is more or less the same, the actual mechanism is very different from one bank to another. Basically, they're making a check on this process not because that everyone wants to lower the interest rate but they want to make sure to find out whether this rate itself is being calculated in a fair manner. Is the process reasonable? Are there any negative aspects in the process? That's what the government is checking. So with FSS, basically what we are talking about is that if there is a better process and that does not violate the fair trade act and practices, then basically we can learn from other banks if they are doing something better so that we can actually set up a more rational and reasonable price setting process. So basically, this doesn't -- this is not something that implies that there's going to be a decline in the price. Thank you.

Next question from (inaudible).

It seems that there has been an interruption to the line. So we will wait for the next question.

Thank you very much. We have no other questions on the queue, so we will wait. I believe that maybe we have had a sufficient amount of Q&A, so we will wait until we have any final questions.

We will conclude our Q&A session. And with this, we will conclude the 2018 KBFG's earnings release for 2018 Q1.