KB Financial Group Inc (KB) 2018 Q4 法說會逐字稿

Greetings, everyone. I am Peter Kwon, in charge of IR at KB Financial Group. We will now begin the 2018 business results presentation for the whole year. Thank you all for being here with us today.

Here at today's earnings conference, we have our CFO and Deputy President, Kim Ki-Hwan, as well as other group executives. We will first hear the 2018 full year business results presentation from Deputy President and CFO, Kim Kwi-Hwan, and then have a Q&A session.

I'd like to now invite our Deputy President to elaborate on our 2018 whole year earnings.

Good afternoon. I am Kim Ki-Hwan, CFO of KB Financial Group. Thank you very much for joining our 2018 earnings release call. Before we present on the financials, let me briefly talk about the operation of our stock and key highlights of 2018.

In 2018 in the domestic market, concerns deepened over household debt and real estate market, and there was heightened caution against the start of a slowdown cycle. And with prolonged U.S.-China trade dispute and U.S. rate hikes, global market volatility increased, posing a formidable environment for the financial sector as a whole.

Under such backdrop, KBFG, through solid loan growth, expanded its interest income and by strengthening organic collaborations across affiliates, increased fee and commission income as we continued to enhance our earnings capabilities. Moreover, in order to overcome the growth constraints in the domestic market and sustainable growth engine, our subsidiaries speeded up their global businesses. KB Bank acquired shares in Indonesia's Bank Bukopin, and entered the Indonesian market, mainly taking its -- our digital banking and retail finance model.

KB Card acquired Tomato Specialized Bank, a lending institution in Cambodia, starting auto installment financing business in the local market as it laid the groundwork for tapping into the overseas market. But we expect operational environment to become more difficult with slowing export growth and corporate investment sentiments.

Some are projecting U.S. and Chinese economy will enter an economic slowdown cycle as sense of crisis around domestic and global economy rises. Facing such uncertainties both internal and external, we have strengthened monitoring of asset quality indicators and risk factors to concentrate on preemptive risk management at the group level. For high-risk borrowers who are susceptible to economic cycles, we are using an integrated system across the group geared for the individual borrower for rigorous quality management.

Also this year, our focus will be on soundness and profitability more so than growth as we plan to bring quality growth around sound and high-quality assets and broaden stable sources of earning.

In 2019, KB Financial Group will continue to upgrade fundamental competitiveness of our key subsidiaries to leap towards a top-tier player in the industry and focus on competency building and new core growth businesses so that we can solidify our position as an unwavering leading financial group.

Please also note that today, the BOD has resolved on 2018 payout ratio of 24.8%, an improvement from the previous 23.2%. We are committed to improving the payout ratio gradually by securing earnings stability and will do our best to enhance total shareholder return through inorganic growth via M&As and share buybacks.

Now I move on to 2018 earnings results. KBFG's 2018 full year net profit was KRW 3,068.9 billion. It is approximately KRW 240 billion year-over-year because despite solid growth from net interest income and net fees and commissions income, G&A expenses increased from higher ERP costs and bank and key subsidiaries, and greater capital market volatility and difficulties from the P&C insurance market led to sizable increase in other operating loss.

However, if 2018 one-off factors such as ERP and bank's gain on sale of Myeongdong HQ building and 2017 one-off factors are excluded on a recurring basis, net profit was up around 2.2% year-over-year.

Q4 net profit was KRW 200.1 billion, significant decline Q-on-Q due to large sums of one-off costs, such as ERP, bank employee bonuses as well as sizable increases in securities-related laws and equity index declines and greater FX volatilities and fall in insurance income from deteriorating auto loss ratio.

Looking at each segment in greater detail. 2018 net interest income was KRW 8,905.1 billion, up 8% year-over-year while Q4 figure came in at KRW 2,313.6 billion, up 2.8% Q-on-Q. This is driven by solid quarterly growth of bank's loan in won, up 9.6% year-to-date and broader contribution to interest income from major subsidiaries like KB Insurance and Card business.

Next is group's net fee and commission income. 2018 net fee and commission income was KRW 2,242.9 billion, up 9.4% year-over-year. This is mainly driven by booming submarket in the first half of last year with increased trading volume leading to a growth in fee and trust income for the brokerage business. And with stronger credit card marketing, which led to growth in credit sales volume, there was a growth in credit card fee income.

But with greater financial market volatility as we enter the second half, there was a decline in overall financial product sales and significant fall in stock trading volume with Q4 net fee and commission income edging down marginally to KRW 495.2 billion.

2018 other operating loss was KRW 288.4 billion in net loss, slowing year-over-year. On the back of bullish equity market, both home and abroad and contributions from KB Insurance's underwriting profit, the trend over the years was quite steady. But with greater volatility in the financial market as seen from the equity index and $1 exchange rate in Q4, there were greater losses from equity and ETFs as well as derivatives, such as ELS and DLS products.

For the Insurance business due to abnormal climate and rise in repair costs, loss ratio for the auto line worsened and the expense ratio increased on fiercer industry competition, which led to slight decrease in insurance income.

So for the securities S&T business, we are developing different ways to enhance profitability by managing P&L volatilities through bolstering management capabilities and revamping derivatives issuance and management processes. For insurance income, we expect to recover profitability up to a certain level in light of recent increase in auto insurance premium and greater cost efficiencies.

Next is on G&A expense. 2018 G&A expense was KRW 5,966.6 billion on higher ERP cost from major subsidiaries, including the bank. The figure went up 6% year-over-year. But if consolidation effect from KB Insurance is to be excluded, the increase is around 3.6% year-over-year basis. Also, Q4 G&A expense was KRW 1,892.3 billion, a significant rise Q-on-Q. Once again, when we take out the ERP of KRW 286 billion and bank's bonus pay of KRW 185 billion, all adding up to a total of KRW 471 billion of one-offs, Q-on-Q increases are around 6.8%, which is relatively good in light of Q4 seasonality.

For your information, 2018 group G&A expense, excluding the one-off of KB Insurance consolidation effect and ERP cost on a recurring basis, the increase is only 0.9% year-over-year, which attests to our efforts to our cost efficiency group-wide as we implemented headcount reductions and cost savings over the years. We expect labor cost savings to gradually start to show on the back of the ERP implementations, and we will continue to improve cost efficiencies in parallel with productivity growth.

Next is on PCL. 2018 full year PCL was KRW 673.6 billion. Driven by asset growth and other factors, it was up KRW 125.4 billion year-over-year. But on credit cost basis, it was at 21 basis points, similar to last year as it is being managed at a stable level. Now this is despite KRW 30 trillion growth in asset during 2018, which is only an increase of around KRW 31 billion from 2017 IFRS basis PCL of KRW 643 billion. And this is an outcome of our continuous commitment to a quality improvement of the loan portfolio and preemptive risk management.

Q4 provisioning was KRW 245.8 billion, up KRW 99.3 billion Q-on-Q. Last quarter, we saw sizable write-back from Kumho Tire, among others. But in Q4, PD value was adjusted, reflecting potential economic slowdown and other forward-looking outlook, and we took a more conservative assessment and preemptive approach to provisioning.

Lastly, 2018 nonoperating profit was KRW 46.9 billion. Despite one-off gains from bank sale with Myeongdong office building in 2018 on higher CSR donations, the figure was down KRW 76.3 billion year-over-year in Q4. Aside from donations, there was a tax audit of the bank and around KRW 31 billion of penalty booked, which led to KRW 49.2 billion of loss.

Next is on key financial indicators. 2018 group ROA posted 0.66% and ROE posted 8.84%, respectively, a slight decrease for both Y-o-Y. However, apart from one-off factors, the recurring level of ROA and ROE each reported 0.74% and 9.82%, respectively, and is maintaining sound profitability.

Next is the group cost-income ratio. 2018 group CIR posted 54.9% with sizable one-off costs, including ERP cost and the bank's bonus payout. But excluding these items, the group CIR recorded 50.5% on a recurring level. The group CIR has been consistently maintaining a 40% level for each quarter. But in Q4, with the increase in other operating losses and large-scale one-off costs, group CIR rose to 50% temporarily. But as aforementioned, with the labor cost saving effect from ERP being recognized steadily, we expect the group's recurring CIR level to improve in the mid to long term to a mid-40% level.

Next, I would like to elaborate on the credit cost ratio. As seen on the graph on the right, the 2018 group and the bank's credit cost ratio compared to total loans posted 0.21% and 0.04%, respectively, still maintaining a low level. This year, the overall economic conditions are expected to deteriorate, and some of the markets are concerned about provisioning expansion. However, we believe that our credit cost, with our continued efforts to improve loan portfolio quality, strengthen preemptive management of potential risk factors and maintain a conservative provisioning basis as well as other group-wide efforts to preemptively manage risks, will be stably managed in 2019 within a 25 bp level.

Let's go to the next page. Let me elaborate on the bank's loans in won. On the graph on the left, the 2018 and bank loans in won recorded KRW 257 trillion, a 9.6% YTD and 2.1% Q-o-Q increase, respectively. Household loans centering on low risk prime asset loans, including Jeonsae loans and monthly lease loans and especially a range of secured loans to 8.9% YTD and 2.7% Q-o-Q, respectively. Corporate loans, thanks to continued efforts to expand high-quality SME loans, grew 10.5% YTD and 1.4% Q-o-Q, respectively.

This year, taking into consideration the economic downturn cycle and real estate market situation, we aim to have a more conservative loan policy and focus on quality growth centering on prime borrowers.

Next, looking at the NIM, the yearly group NIM in 2018 posted 1.99% and bank's NIM reported 1.71%, respectively, and maintained the same level of the previous year. In Q4, the group's NIM reported 1.97% and bank's NIM posted 1.70%, respectively, and both declined by 2 bp Q-o-Q, respectively. This year, the bank's NIM showed a slight stall because, although the loan portfolio improvement efforts centering on profitability have been showing visible results. On the funding side, the ratio of time deposits compared to low-cost deposits increased, leading to a higher cost burden.

Taking into consideration the LDR regulations and the market situation, this type of funding burden is expected to continue for the time being, but we will exert the best of our sales capabilities and focus on low-cost deposits, including settlement-type accounts and have at least a slight NIM improvement through loan reprice -- loan pricing advancements and rebalancing of low profitable loan.

Next, I would like to elaborate on the group capital adequacy ratio. Looking at the graph on the right, the 2018 BIS ratio recorded 14.60% and CET1 ratio posted 13.97%, respectively. Due to the year-end dividend and corporate loan-driven growth influence, the group BIS ratio slightly dropped Q-o-Q, but is still maintaining the highest level of capital adequacy in the financial industry.

On this page, I would like to walk you through the 2019 KB Financial Group's management strategy and financial strategic direction. First of all, KB Financial Group has set forth the direction of 2019 management strategy direction as setting the status as the leading financial group that leads financial innovation, RISE 2019. RISE 2019 is reinforcement, innovation, smart working and expansion and its abbreviation. And following CODE 2017 in 2017 and RACE 2018 in 2018, it expresses all the employees' determination to renew their commitment to accomplish the group's mission and vision and to take a huge leap forward.

The direction of the management strategy is: reinforcement, to reinforce the core competitiveness of each subsidiary to solidify its market status; innovation, to innovate and advance the business infra to improve convenience for our customers; smart working, to innovate the way of working through a new corporate culture, the new KB culture will be established; and lastly, expansion so that through expansion of domestic M&As and global business continuously expand our core business territories.

KB Financial Group will ultimately not be complacent about our current status and leap forward once again as the genuine leading financial group with market status, innovation, corporate culture and growth momentum that can lead financial innovation.

Next, covering the 2019 fiscal strategic direction, our priority will be risk management on a group level, and we will pursue soft and centered growth, including diversifying profit structure based on the new core growth business areas. Accordingly, we are focusing more on profitability rather than growth, asset quality rather than profitability. And with a major premise, preemptive risk management preparing for market uncertainty, we will pursue profit structure diversification in future growth areas, including WM, CIB and capital markets. Please refer to the same page for details regarding our management strategy, and I will now cover the bank's asset quality from Page 6.

Recently, there are many concerns regarding possibility of asset quality deterioration due to the internal and external economic situation, including interest rate hike and economic slowdown. Accordingly, I will briefly cover KB Bank's asset quality status on this page.

First is the household. As seen on the graph on the top left-hand side, the comprehensive delinquency ratio and the comprehensive NPL ratio, which are the representative asset quality indicators, posted 0.48% and 0.44% as of end 2018, respectively, and it's showing a continued improvement trend and it's being maintained at a historic low level. As seen in the new NPL formation graph, the amount of new yearly NPL expansion is being maintained stably overall at around KRW 400 billion level. Under the recent real estate price decline and interest rate hike environment, there have been concerns related to household loan asset quality deterioration.

But as seen on the bottom graph, the average LTV of the bank's mortgage loans posted a 50.9% level as of September and 2018, showing that there is sufficient buffer related to the asset price decline risk. Also the recently implemented DSR is at a 34.4% level, attesting to our conservative assessment of borrower loan recovery capability.

In addition, the unsecured loans increased from KRW 19.8 trillion in end 2016 to KRW 25.5 trillion as of September end 2018 by KRW 6 trillion. Out of this, specially arranged unsecured loans totaled approximately KRW 5 trillion of this amount. And in reality, led the unsecured loan growth, and the growth of general unsecured loan growth was very limited. In addition, the weight of prime loans among the nonsecured loans grew quickly from 60.2% in late 2014 to 82.6% in late September 2018, attesting that not only growth, but also asset quality was strictly managed.

Next, looking at the corporate loans. As of end 2018, the comprehensive delinquency ratio and real NPL formation posted 0.50% and 1.06%, respectively, and improved greatly compared to 2014, as seen on the graph. Thanks to the nonviable asset consolidation and portfolio improvement efforts, the amount of yearly new NPL net growth, which was at an average of KRW 1,500 billion level in the past greatly decreased to around KRW 220 billion level in 2018.

On the other hand, with the downturn in the domestic economic cycle and real estate market, there have been many concerns over loans extended to self-employed business owners and real estate lease businesses. As you can see on our group SOHO loans on the graph on the bottom, the ratio of prime loans is around 82% and secured loans is around 88%, and is being stably managed in terms of asset quality.

In particular, in the case of loans extended to real estate lease businesses, the ratio of prime loans and secured loans both amount to 92%, respectively. And accordingly, the credit quality is being managed very stably.

Please refer to the following pages for the details regarding the business results that I have aforementioned.

With this, I will conclude the 2018 KB Financial Group business results presentation. Thank you for listening.

We will now entertain your questions. (Operator Instructions) There is about 20-second lag between the Internet and the phone, so please bear with us for one moment.

It's from Samsung Securities, Mr. Kim Jaewoo.

I would like to ask for your elaboration on your business results as well as your business plan going forward. If you look at this quarter on the noninterest income side, we see the performance was laggard, especially there was poor performance on securities and insurance, even in light of the market backdrop.

And also for credit card up to this year, we may be able to see some level of performance. But in 2019, due to the cut in the merchant fee, I believe that it will be quite difficult for you to defend your earnings. So what are the key reasons behind such poor performance of your major subsidiaries? And what are your plans going forward to defend any further erosion?

My second question is on G&A. Now I think up to Q3, your expense trend was good and there were some changes. But Q4 was [seen] in other years as well. There was there a significant payout, bonus payout. Now going forward, what can we expect as we go forward? What are your management plans with regards to such bonus payment? And lastly, 2019, what is your business plan for 2019? Especially with the focus on shareholder return policy, could you walk us through all of these areas?

Give us a moment so that we may prepare for an answer. Thank you, Mr. Jaewoo Kim, for your question. Your first question has to do with the earnings for -- from our subsidiary, KB Insurance and KB Securities that you mentioned that there were poor performance, and you asked for a reason. And for KB Card going forward, you expect. And we do also see that there will be some difficulty in defending that earnings. So internally, we are highly vigilant as we meet and enter into 2019.

Let me begin with KB Securities. On a consolidated basis in 2018, our net profit was around KRW 178 billion and ROE was about 4.03%. So on a year-over-year basis, on the PR basis, it was quite laggard. And if you look at each of the segment, on the WM side, we overachieved our business plan. But for IB and wholesale, we underperformed our objective. However, we are close to the target that we have set for ourselves. But on the S&T business in the second half, there was a stock price plummet and also there was FX volatility, which we failed to respond appropriately. So there was a significant ELS hedging-related loss.

And so on the equity side and ETF management, we've seen increases in loss. As a result in other operating profit on a year-over-year basis, there was about KRW 110 billion increases in the amount of loss. So what we need to focus on for the time being quite urgently is the S&T business, S&T segment. We need to further strengthen our management capabilities, so we are currently undergoing process to hire great experts and also do a training. We want to further strengthen our hedging capabilities.

And on the derivatives side on the issuance as well as management with derivative process, we are revamping and revisiting those process. So we are undertaking a multidimensional approach to improve this earnings. On the DCM side, we are top tier, but we want to further widen the gap that we have with Tier 2.

And on real estate PF, due to the slowdown in the domestic real estate market, we think that this trend will continue. So overseas alternative investment opportunity is something that we are really trying to seek. For WB and CIB, together with collaboration with the bank, we are seeing good results, but -- and hence, we think that there will be a better result in the near future.

For KB Insurance, in 2018, due to abnormal climate and increases in repair costs, the loss ratio for the auto line really increased significantly. And also market competition was very fierce, expense ratio, therefore, aggravated. So overall, the performance was poor. And on a peer comparison basis, our loss ratio growth rate was a little more steeper. Thankfully, our KB Insurance actually increased our premium auto line, 3.5%.

And for medical indemnity rates, we expect about 6% to 7% price hike to be possible. And GA commission revamping is something that the authority is going to implement. So we believe that the overall expense ratio burden is going to lessen compared to the previous year. So we believe that we will be able to see NP, net profit, increase at a market consensus level.

Going forward, what is our insurance's plan? Now we want to make sure that we secure product competitiveness. Through that, we need to be able to increase our prime revenue source and increase our efficiency in terms of the fixed cost expense. Another aspect is that when it comes to rates and underwriting and claims management, we will do our best to save on the loss ratio or improve the loss ratio. And also, overall, improve on the P&L structure.

On the asset management side, we want to increase on alternative investment and increase outsourcing so that we can further enhance our management capability. When it comes to new business and value in force, we want to be mindful of the future cash flow for new business and value in force and really focus on value-centric management.

On the digital process side, we are revisiting the overall process. When it comes to counseling, claiming as well as different steps, we will be digitalizing the overall workflow with a mind to redesign the process. So get rid of the inefficient processes, so we believe that we will be -- we are committed to recovering our profitability up to 2017 level.

For KB Card, there is the fee revamping as well as the regulation on the total volume, which is going to be a constraint on our profit -- or decline in our profit. So it's very important for us to -- as to how we could expand in the new business areas, so that would be our approach. On fees, basically, we -- there's been excessive VAS, value-added services, to indiscriminate number of subscribers. And that excessive VAS service system has to be improved, and we need to be able to reduce the marketing cost.

The marketing cost reduction may bring about market share decline, so we need to be effective. Meaning, based on big data, we want to be sophisticated and provide a customized service so that we can really control the marketing cost, but at the same time, maintain or increase market share. So -- and not just the fees and commission income, but in responding to the volume regulation, basically for the mid-rates lending market, which is not subject to volume regulation, and also we want to strengthen our revenue sources from a secondhand car installment financing and lease financing services so that we can broaden our revenue source.

So these are all our group-wide efforts, so that we could minimize and contain any impacts so that we can make sure that our net profit could be well defended to the previous levels.

Second question had to do with cost, and let me respond to that question. We had this bonus payout, and we have the ERP that was paid out. It was quite sizable on a one-off basis. And our CIR deteriorated, so I would like to explain about that. Regarding the special bonus that was paid out, it is actually related to the agreement project we have with the labor union, including the labor -- our salary peak in the ERP system and the pay band system. So you don't have to worry that it's going to be on a recurring basis, it was purely on a one-off basis. And we are actually preparing for PS for this year as well.

Also for the ERP of this year, we had more people that are actually a type of ERP. So that is why we had more of the ERP expenses or ERP costs, and we believe that we will have about 300 to 400 people included in the ERP. Also, even if you do not include yourself in the ERP, we have the baby boomer generation, and they will be included in the wage peak.

So our labor cost will go down, so you have to think about the CIR going to about a mid-40% level on a long-term basis. So you don't have to worry that this will be on a recurring level.

And I think you also asked about the 2019 business plans, so let me elaborate on the loans. In light of the macro environment of the regulatory environment, I think there will be some limitation in growth. We'll be -- so therefore, rather than on growth capabilities, we want to focus on the soundness aspect. So we're basically looking to about 4% to 5% of loan growth; for household, 2% to 3%; corporate loans, 5% to 6% is our outlook. So our credit policy is going to be quite stringent as well as conservative.

The bank's NIM this year internally, we think that our previous benchmark rate is going to freeze at the current level. That's our outlook. Now, therefore, the asset repricing impact will be quite limited, which follow the market rate hike. So that impact is going to be limited. And the new LDR regulation, it's going to be applied starting next year. We believe that the funding cost burden is going to exist. So from a conservative perspective, we think that NIM for this year is going to maintain at the similar level as the previous year. Having said that, as I have mentioned during my presentation, we are expanding our low-cost deposit and also really further enhance our lending pricing so that we can -- so that we will exert our best efforts to improve the margin even if it's 1 to 2 basis points.

On noninterest income side, I briefly mentioned about securities and insurance. After we acquired the nonbanking subsidiaries, when it comes to improvement of noninterest income improvement, there was high level of expectations by the market. Unfortunately, the earnings were underperformed, and I express my regret. This year, what our plan is -- already the stock market decline has been sustaining for some time, so we now believe that there will be new inflow of investment money. So for trust and fund sales of fees and commission, there is potential that, that fee commission income can go up.

And also the WM on the CIB side, the collaboration between securities and bank is showing good results. So we think that, that will support our earnings. So we are looking at about 5% growth in terms of fees and commission income growth on per annum basis.

When it comes to securities and derivatives product and FX products in the capital market, how are we going to manage the P&L of such? And for insurance, P&C insurance, we do need to recover profitability. And we need to improve on the profitability so that on the noninterest income side, we are looking forward to more meaningful improvement.

On G&A, we will continuously implement our HR structure revamping and do cost savings, and we'll try to control it below 2%. However, group-wide, we're in the process of digitalizing our process. We are introducing next-generation system, and we will soon complete the building of the integrated IT center, and this is going to amount to about KRW 100 billion per year for overall depreciation. So in light of these factors, we think that G&A in 2019 will increase around 5% level.

So depreciation on CapEx is going to last for about 3 to 5 years, so it's going to stop on 2019 to 2022. So after the depreciation period elapses, I think that there will be some meaningful decline in depreciation cost. Lastly on provisioning this year with economic slowdown and with rate hikes, provisioning on a year-over-year basis have -- we expect, this year, is going to go up. However, on a credit cost basis, it is going to be controlled at around 25 basis point level. And the PCL provisioning on a year-over-year basis, we think there will be KRW 100 billion increase. Thank you.

We will wait for the next question. I'll take the next question from Hyundai Auto Securities, Mr. Kim Jin-Sang.

I have 2 questions. First question is about the Q4 provisioning, you said it's quite -- it increased and it's about 30 bps your credit cost. And your CFO mentioned that this year, it's going to be about 25 bps. But previously for KB, we always saw that you provisioned conservatively. So in Q4, you did not have much volatility, but it seems that for this year, you'll have some volatility.

In Q4, you mentioned about the preemptive provisioning, but was there any other reason, for example, government asking for extra provisioning? And if the economy doesn't improve and stays at the current levels and -- do you believe that your provisioning will be similar to the level of Q4 for each quarter?

My second question is about the dividends, and you mentioned the dividends in the presentation. And for dividend payout ratio, well, it seems that it was better than expected, but you have the Treasury buyback and so I thought that it would be similar to last year for the dividend payout ratio, but to have more trust with the shareholders, and you mentioned that the dividend payout ratio will go up, that's what you have always relayed to us.

Do you believe that this trend -- the dividend payout ratio, do you think this trend will continue? Can we expect that? My last question is about the recent balance sheet COFIX and its influence. I would like to know about its impact on KB.

Thank you very much for the good questions. I will -- we will take some time to prepare for the answers and get right back to you. Thank you.

Thank you very much, Kim Jin-Sang for your questions. Regarding the provisioning, you mentioned that in Q4 it has increased. And to explain for each quarter, it's deferred a bit by bit, but we had the provisioning write-back items. And for this quarter, we did not have special write-back items. And for this quarter, for the forward-looking scenario, we had an adjustment for that, so that is why we had extra provisioning and we had more conservative individual assessments.

Our forward-looking scenario is about GDP 2.8% growth assumption and $1 currency -- $1,280 per barrel. So it's quite conservative the assumption, so we had that in mind when we did the provisioning. As long as the economy doesn't deteriorate and actually if we're out of the forward-looking scenario, we believe that our provision will be sufficient. We believe that 25, this will be our rightful assumption. Also, the economic downturn if it goes out of the forward-looking scenario and worsens, we still believe that it will be managed within 30 bps.

We did our prices scenario assumptions, and we did our reviews and predictions, so that is based on our reviews. Also, you mentioned the government asking for the Stage 2 changes for individual assessment expansion. So changes in the provisioning standards and you asked if the government asked us for that. But still the talks are ongoing. KB in IFRS 9 will for companies we believe will be nonviable. We had already expanded the categories for those companies and have been provisioning conservatively against those companies, so we believe that we will not be impacted by this change.

I would like to also answer your question about the dividend payout ratio. Our basic dividend payout ratio direction is to have a improvement in dividend payout ratio even if it's slight, and we are doing our best to honor the commitment.

Let me mention some effects, and it is true that our net profit decreased compared to last year. That is why we are going -- we have worked very hard to maintain the bps level through the treasury stock buyback and dividend payout improvement, and we did our best to have the treasury buybacks in many cases. And you can see that our nominal dividend payout ratio is 24.8%. But because all the treasury stocks that we have are excluded from the dividend, the real dividend payout ratio is 26.2%. And when we include the treasury buyback that we have already completed, then it is 31.8%, our dividend payout ratio.

So we are going to do our best to have a better total shareholder return ratio, and we believe that our dividend payout ratio will be improved step-by-step. But still in order to manage our capital adequacy ratio and to reserve some for M&A, we cannot do it drastically. So we will show you that it will improve, but step-by-step and gradually. Regarding the DPS, it was maintained, and we had a very stable profit. So even for DPS basis, we are going to do our best so that it can be maintained stably.

And FSC recently have announced its new COFIX calculation saying that it would be implemented starting month of July.

Overall, compared to the previous basis, the interest rate is going to go down for about 27 basis points with this new COFIX calculation. So out of the customers who took out the loans, they may refinance. And if so, there could be a certain amount of financial impact on the loss side.

However, for KB, out of the COFIX-linked loans, basically we have a new origination COFIX and balance basis COFIX. But 88% of our COFIX-linked is linked to our new origination COFIX. And the interest rate for that COFIX compared to the balance-based COFIX, basically the interest rate is about 15 basis points lower. So all in all, basically it's going to bring down with the impact of about 12 basis points.

And also from the customer's perspective, they have to pay early repayment fee. And if they refinance their loans that there's going to be new loan limit, that's going to be reapplied. So we believe that the actual size of rollover or refinancing or the impact of the interest income is not going to be a level that's going to beg for our concern. We believe that the impact is going to be quite low in terms of our -- the financial impact. Thank you.

Thank you for the answer. We will wait for the next question. We will take the next question from Macquarie Securities, Mr. Hwang Chan Young.

I'm Hwang Chan Young from Macquarie Securities. You are quite detailed and specific with respect to the questions asked, so I may be redundant. My first follow-up question is on NIM. You've briefly mentioned the LDR regulation may increase the funding cost to a certain extent. For KB, in the face of LDR regulation, what is the size of the additional funding that you require? And what is your funding plan for making up for that need?

My second question is -- this is a question that comes up all the time. But with regards to your M&A initiative, Shinhan has acquired Orange Life, and the earnings figure is going to start to show from this year's financials. So what are your future stance when it comes to M&A attempts? Do you have any specific M&A plans that you are envisioning, that you're implementing? Do you have any specific target that you are interested in?

Thank you very much for the question. Please wait for a moment for us to give you the answer.

Thank you very much, Mr. Hwang Chan Young, for your question. In order for us to prepare for the new LDR regulation in 2020, it is true that it will be a burden for us in funding, but we don't have a lot of the definitive clauses that have been confirmed for different classification. So it is going to be difficult for us to give you detailed numbers for funding plans, but let us just give you the big picture.

Looking at our current loan portfolio and then our annual growth plan, then we will have the amount that is needed. And for funding, we wish to actually refrain from getting the funding from special -- the time deposit products, but we -- loans or we want to -- however, we want to actually manage the -- manage and monitor it closely and to look at the monthly and quarterly loan growth situation, market interest rate level and others. And we want to come up with different strategies for different quarters to prepare for this.

And also when we are in the funding, well, there are the marketable CDs and other funding in the market that we're going to best try to utilize. And we are also trying to expand it for individual -- using the deposits of individuals and the corporate customer. As was mentioned, we're going to do our best so that we can put utmost priority on low-cost deposits we got such as the salary accounts and the credit card settlement accounts.

Responding to your question about our M&A strategy. In 2015, we've acquired LIG Insurance; and in 2016, Hyundai Securities; and in 2017, KB Insurance has become our fully-owned subsidiary. So we have been quite successful in our M&A feat. Now after this point in time -- up to that point in time, we do not have any large-sized M&A plans, so we do not need to be rushing into it because we do have the capital. And also in light of the regulation and the potential industry landscape reshuffling as we go forward, we think that would be a good opportunity that may emerge.

As you know, when it comes to the M&A initiative, it's difficult for us to be specific in terms of the target asset. But as we've been communicating over the years, within our group, we are currently interested in life insurance companies because that's a weak point within our group.

On the securities business, wealth business, we're interested in brokerage companies that have capabilities in wealth management and product manufacturing and also card companies that have strengths on the customer segment and in data. So these are some of the areas that could help us further strengthen and bolster our portfolio.

If we were to implement an M&A, then basically we hope that this company will have the strong fundamentals to have and generate more than 10% of ROE. And acquisition price, of course, is an important factor. But growth potential of that company as well as potential synergy generated within the group of companies that we have, those are also other factors that we would keenly look into.

Thank you. We've spent about 15 minutes, we would wait and see if there are any additional questions. It seems that there are no other questions on the queue. We will conclude the Q&A session. With this, we will close our earnings presentation. 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.