KB Financial Group Inc

KRX:105560

Earnings Call Analysis

KB Financial Group Reports Lower Net Income Amid Strong Dividends

In Q1 2024, KB Financial Group faced a 30.5% year-on-year drop in net income to KRW 1,049.1 billion, primarily due to significant provisions for customer compensation linked to ELS issues. Despite this, the group’s gross operating income edged up by 0.9%, helped by improved performances in non-banking subsidiaries. Loan growth was steady at 0.6% year-to-date, while provisions for credit losses plummeted 35.9%. The bank declared a quarterly dividend of KRW 784 per share, with an annual target of KRW 1.2 trillion. Looking forward, management aims to maintain a CET1 ratio of at least 13.5% and expects NIM to stabilize at around 2.11%.

Navigating Through Waters: Q1 2024 Overview

In the first quarter of 2024, KB Financial Group reported a net income of KRW 1,049.1 billion, reflecting a significant drop of 30.5% year-over-year. This downturn primarily stemmed from a substantial increase in non-operating losses, including KRW 862 billion set aside for customer compensation related to Hong Kong's H index-linked structured products (ELS). Notably, despite this challenge, the group's gross operating income managed to rise by 0.9% from the previous year, indicating resilience amid external pressures.

Key Highlights of Q1 Performance

The quartet of critical financial metrics displayed a promising narrative for KB Financial Group aside from the net income dip. The group posted a net interest income of KRW 3,151.5 billion, an increase of 11.6% year-over-year, largely bolstered by a higher average loan balance and an improvement in the net interest margin (NIM) which expanded by 3 basis points sequentially to 2.11%. This contrasts with the slight 1% decrease from the previous quarter due to fewer business days. Additionally, fee and commission income rose to KRW 990.1 billion, marking an increase of 8.3% year-over-year and 9.2% quarter-over-quarter.

Cost Management and Provisioning Strategy

The Group succeeded in operational cost management, reporting general and administrative expenses of KRW 1,628.2 billion, reflecting a controlled 4% increase year-over-year. Furthermore, credit loss provisions significantly dropped to KRW 428.4 billion, down 35.9% year-over-year and a staggering 68.9% quarter-over-quarter, underlining the efficacy of their conservative provisioning policy. The credit cost ratio remained stable at 38 basis points, indicating robust risk management amidst evolving economic conditions.

Shareholder Returns: A Focus on Stability

In line with enhancing shareholder returns, the Board of Directors approved a quarterly cash dividend of KRW 784 per share for Q1, reaffirming a commitment to return cash to shareholders. Moving forward, the Group has set a target for total annual cash dividends at KRW 1.2 trillion for the year, which represents a modest increase from last year's KRW 1.17 trillion. This projected change reflects a growth rate of approximately 2%.

Balancing Growth with Quality

The group's focus extends to loan growth, with total domestic loans reaching KRW 344 trillion, an increase of 0.6% year-to-date. Household loans saw a modest increase of 0.4%, while corporate loans bolstered the balance with a 0.7% growth. Despite tracking performance amid economic uncertainty, the Group aims to ensure quality over quantity in their lending strategy, particularly in high-quality corporate loans with a target growth of 6%. This approach underscores a commitment to maintaining asset quality while supporting profitability.

Looking Ahead: Projections and Challenges

Although the financial landscape exhibits potential challenges, KB Financial Group remains optimistic with strategic targets set for the current year. Discussions indicate a plan to maintain or improve capital ratios, aiming for a CET1 ratio of at least 13.5% by year-end. While net interest margins may fluctuate due to potential interest rate changes by the central bank, the management’s cautious outlook is reassuring. The proactive measures and insights shared during this earnings call suggest a sound trajectory despite the hurdles faced.

Earnings Call Transcript 2024-Q1

[Bong Kwon, executive]

Greetings. I am Peter Kweon, the Head of IR at KB Financial Group. We will now begin the 2024 Q1 Business Results Presentation. I would like to express my deepest gratitude to everyone for participating today. We have here with us our Group CFO and SVP, Jae Kwan Kim and other members from our group management.We will first hear the 2024 Q1 major financial highlights from our CFO and SVP, Jae Kwan Kim, and then engage in a Q&A session. I would like to invite our SVP to deliver 2024 Q1 earnings results.

[Jae Kwan Kim, executive]

Good afternoon. My name is Jae Kwan Kim, CFO of KB Financial Group. I would like to extend my sincere appreciation to all of you for joining us in our Q1 2024 earnings presentation.Before presenting our first quarter results, I would like to share with you, once again, KB Financial Group shareholder return policy and capital management policy, including the change in the dividend policy starting from this quarter. As you are well aware, KB Financial Group has been implementing an industry-leading shareholder return policy for over a decade based on solid profitability and strong capital base. We were the first company in the industry to buy back and retire its own shares, introduced a quarterly dividend policy and to announce a mid- to long-term capital policy. And in this way, we have continuously enhanced and developed our shareholder return policy and building on these efforts, while maintaining the existing mid- to long-term capital policy to enhance the visibility and predictability of cash dividend.Today, our Board of Directors passed a resolution on a new shareholder return policy, which is evenly paid quarterly dividends based on total dividend policy. To explain our new shareholder return policy in more detail, first, we plan to introduce starting from this year, an evenly paid quarterly dividend to enhance the predictability of our cash dividends.Second, we plan to calculate cash dividends per share based on total dividends. This year, our Board of Directors plans to approve a cash dividend per share for each quarter based on total dividends at a level of around KRW 300 billion per quarter and around KRW 1.2 trillion per year. At the same time, we will continue to actively buy back and retire shares so that the effect of share buybacks and share cancellation can translate into a higher dividend per share. As shown in the graph at the bottom right of the chart, if the company pays out KRW 300 billion in cash dividends every quarter, while also buying back and retiring shares, this will automatically lead to increased EPS.Third, we expect to maintain or increase our annual cash dividend at a level of at least KRW 1.2 trillion. At this point, we are at the low end of our valuation in absolute terms. So we intend to maintain the total cash dividend at the current level and intend to gradually increase the shareholder return rate through share buybacks and share cancellation. However, in the future, if our valuation approaches fair value per share or our earnings improve meaningfully, then we may increase the aggregate amount of our annual cash dividend.As you can see from KB's shareholder return history, leveraging our strong capital base, we have consistently strived to pursue an industry-leading shareholder return policy. In order to respond in an agile manner to future economic uncertainties such as the heightened risks to global security in recent months and the sharp exchange rate fluctuations, while continuing to implement KB's industry-leading shareholder return policy, above all else, we believe it is crucial for KB to have its own differentiated capital competitiveness. Therefore, despite the ELS impact, increased profitability across the group and tight management of risk-weighted assets will enable us to maintain a CET1 ratio of at least 13.5% at year-end to enhance the visibility of future shareholder returns.Finally, we will strengthen the market communication on our shareholder return policy, focusing on the per share metrics, including EPS, DPS, we will actively and consistently disclose the status of our shareholder return and related indicators from the perspective of per share value through our quarterly earnings presentations.To this end, we have prepared a slide on the following page that provides an overview of our shareholder return and related metrics. Please refer to it at your leisure.Our Board of Directors and management firmly believe that shareholder and enterprise value enhancement efforts must continue unwaveringly over the medium- to long-term based on market [ thrust ]. Through the consistent pursuit of the shareholder return policy announced today, we will do our best to achieve substantial and sustainable shareholder and corporate value enhancement.Next, I would like to share with you KB Financial Group's Q1 2024 business results. I'll start by highlighting the group's key business results and key financial indicators before going into greater detail.For your information, please note that KB Life Insurance's quarterly results for 2023 has been restated retrospectively as KB Life has applied in Q4 of 2023, the FSS insurance liability valuation model guidelines.KB Financial Group's net income based on net income attributable to controlling interest for the first quarter of 2024 was KRW 1,049.1 billion, down 30.5% Y-o-Y. The weaker first quarter results were due to a significant widening of nonoperating losses as the approximately KRW 862 billion was recognized as provisions for customer compensation costs related to Hong Kong H index-linked ELS issues. However, the group's gross operating income increased by 0.9% compared to the previous year when gains on valuation has significantly increased due to market rate cuts in Q1 of 2023 and profitability of the group's major non-banking subsidiaries, including securities, nonlife insurance and card improved, enabling continuing solid earnings fundamentals.Provision for credit losses amounted to KRW 428.4 billion, down 35.9% Y-o-Y and down 68.9% Q-o-Q, owing to the base effect of last year's large additional provisioning that had been set aside preemptively. The group's credit cost ratio remained stable and within expected ranges at 38 bps in Q1. And the bank's credit cost ratio also remained low at 11 bps as well. In addition, the group's CIR for Q1 of 2024 was at 36.9%, down from the previous quarter, continuing the downward stabilizing trend. As had been previously announced, the Board of Directors today approved the evenly paid quarterly dividend based on total dividend policy and resultant cash dividend of KRW 784 per share for the first quarter.Now I would like to share with you a more detailed breakdown of our performance by business segment. 2024 Q1 group net interest income posted KRW 3,151.5 billion and went up 11.6% Y-o-Y. With strong earnings growth of the bank on the back of loan average balance increase and NIM improvement, this was also a result of non-bank interest income contribution increase. However, compared to the previous quarter, there was a slight decrease of 1.0% due to factors such as decrease of business days.Q1 group net fee and commissions income posted KRW 990.1 billion, and increased 8.3% Y-o-Y and 9.2% Q-o-Q, respectively. The increase in net fee and commissions income was mainly attributable to increase in securities fee income on the back of improvement of brokerage fee income and IB business despite the challenging business environment, including suspension of ELS sales as well as card fee income growth, thanks to increase in card members and card fees. This was due to non-banking subsidiary fee income growth.Next, I will cover other operating profit. Q1 other operating profit posted KRW 270.4 billion. And due to the effect from changes in the market interest rate and the increase in $1 FX rate leading to weak securities, derivative product and FX performance, it decreased KRW 366.2 billion Y-o-Y. On the other hand, it increased by KRW 762.8 billion Q-o-Q. With the reflection of the base effect from bank's social contribution program expenses in Q4, insurance operating profit increased with the write-back of KB Insurance IBNR reserves and improvement in loss ratio.Next, I will walk you through G&A expenses. Q1 G&A expenses posted KRW 1,628.2 billion, and increased KRW 61.9 billion Y-o-Y, a 4.0% increase and is being well controlled.Last but not least, group provision for credit losses. Q1 provision for credit losses posted KRW 428.4 billion. And due to the base effect from preemptive additional provisioning set aside in 2023, it went down KRW 239.8 billion Y-o-Y and KRW 949.8 billion Q-o-Q. In order to prepare for internal and external uncertainties continuing from last year, we have been implementing a conservative provisioning policy to this year as well. However, since we have already secured sufficient loss absorption capabilities through accumulating large-scale provisioning last year, we expect there to be limited possibility for the group's credit cost to rapidly increase this year.Next, I will cover major financial highlights. Let's cover the group's profitability. 2024 Q1 group ROE posted 8.15%. The recurring level of ROE, excluding one-off items, including ELS customer compensation expenses posted 12.18% and under a diversified business portfolio, stable profitability is being maintained.Next, I will cover bank loans in won growth. 2024 March-end bank loans in won posted KRW 344 trillion and grew 0.6% YTD. Household loans posted KRW 167 trillion and centering on home mortgage loans, it grew 0.4% YTD, around KRW 0.7 trillion increase in corporate loans posted KRW 177 trillion and SOHO loans and large corporate loans grew evenly and grew 0.7% YTD, a KRW 1.4 trillion increase. We are taking into consideration the economic circumstances and household debt situation and are focusing on qualitative growth, focusing on profitability and asset quality. This year, we will take into consideration a balance between improving capital efficiency and securing an appropriate level of profit basis and plan to flexibly manage the speed of loan growth.Next is net interest margin. 2024 Q1 group and bank NIM posted 2.11% and 1.87%, respectively, and grew 3 bps and 4 bps Q-o-Q, respectively. Bank NIM in terms of funding with the increase in low-cost deposits in Q1 and with the drop in the expense ratio, with the high interest rate time and savings deposits reaching maturity grew 4 bps Q-o-Q. In the case of the group NIM, even with the increase of card funding costs on the back of efforts to improve card financial asset profitability and bank NIM increase, grew 3 bps Q-o-Q.Let's go to the next page. Next is group CIR. 2024 Q1 group CIR stands at 36.9% level. And thanks to core profit growth and group-wide cost control efforts, it is showing a steady stabilization of downward trend. I will skip group CCR since I previously covered this and now go over the group capital ratio. 2024 Q1 estimated group BIS ratio is expected to post 16.54% and CET1 ratio is expected to post 13.40%. With the recognition of ELS customer compensation costs, it went down slightly Q-o-Q. Although the CET1 ratio slightly declined in this quarter, we plan to exert efforts to improve group-wide capital efficiency to recover the year-end CET1 ratio to at least 13.5% or higher. Please refer to the next page for details related to the earnings that I have just covered.With this, I will conclude KBFG's 2024 Q1 business results presentation. Thank you for listening.

[Operator]

[Operator Instructions] We'll take the first question, NH Securities, Jung Jun-Sup.

[Jun-Sup Jung, analyst]

I am Jung Jun-Sup. Well, despite the challenging environment, congratulations for your good results. And I have 2 questions. My first question is related to -- well, I know that your asset quality is very good, but you can see the delinquency rate or the NPL ratio, it seems that it has gotten up Q-o-Q. And regarding credit risk, or including the PF until the end of the year, can you tell us about your forecast? And regarding the PF by the financial regulators, can you tell us about the situation and how you're going to respond? And regarding the interest rate or the FX rate, there has been changes in the environment and for your loan growth or for NIM forecast or guidance, can you give us your feedback?

[Unknown Executive]

Regarding your question regarding credit risk, I believe that the asset quality indicators are actually improving. Regarding credit risk, well, I think it is actually an indicator that follows the economic circumstances, so it's a lagging indicator. And I think we should actually see it in different categories for the bank before COVID level. I believe that we are probably in the situation in the middle before and after COVID. And I think for the other subsidiaries, maybe it is a little bit worse than before COVID. So regarding asset quality, well, I think it may increase compared to pre-COVID days. And I believe that group-wide, well, we need to look at the different subsidiaries and the weak sectors. So we will need to focus on that and reinforce that by the end of the year.And regarding the real estate PF financing that you have mentioned, regarding the real estate slowdown and the interest rate fluctuations, it seems that real estate or the PF, well, it seems that we are not going to see improvement in the short term. And I believe the regulators also, for this PF, well, I know that they're planning to restructure to actually see what is good from the bad. And regarding the real estate PF market, we're going to strengthen reviews, and we're going to have conservative provisioning. And for the problematic sites, we're going to actually see what can be normalized and what needs to be provisioned against. And for KBFG, regarding the government's PF restructuring direction, well, our direction actually was -- matched the government's -- or the regulator's direction for last year, there was conservative reviews of these PF sites, and we have very conservative provisioning preemptively.And regarding some of the sites that we could sell off, we did and through the [ MPF ] fund, we were -- we cleaned it out to a large extent. So -- and we had auctions as well. And I have mentioned this previously that regarding conservative provisioning for real estate PF and regarding how we've managed this situation, I believe that going forward, the impact will not be worse than now. Of course, I'm not saying that we will not be completely impact-free, but regarding the non-metropolitan area, some of the PF sites, there could be some worsening, but I think that on the whole, it will be well managed. And we are going to, of course, respond on a group level. And for the subsidiaries, there will be different groups that will be made to respond to the governments or the regulators' large direction for restructuring. And we're going to give support to what can be normalized. So we're going to actually strengthen normalization of what needs to be normalized and see the good from the bad.And I would like to remark on the bank NIM and provisioning. And regarding the bank NIM, we had core deposit growth, and we had the decrease in the deposits, and we had 4 bps increase Q-o-Q. And I think this is similar to what I mentioned, and we had the fading away of the loan asset repricing. And there is a possibility of interest rate changes, and that is why we believe that the NIM will actually show a downward trend this year. However, the interest rate cut, we believe that -- by the central bank, we believe that there is a possibility that it will be delayed. So I believe that regarding the slight increase that we've mentioned, we believe that actually, it could decline a bit. So I think for the household loans, it will be at a level similar to nominal growth rate. And for corporate loans, we are going to focus on high-quality loans. So there will be about 6% or so growth rate. Thank you very much.

[Operator]

We will receive the next question from Daishin Securities, Park Hye-jin.

[Hye-jin Park, analyst]

I'm Park Hye-Jin. First of all, thank you very much for announcing this capital policy. I have 2 simple questions. First, with regard to your share buyback -- with regards to the buyback shares or canceled shares, do you have any plans to regularize this? Or do you have any guidance for a minimum level annually? Secondly, with regards to the sales compensation, is it fully provisioned? Or is it partially provisioned this time?

[Jae Kwan Kim, executive]

I'm the CFO, Kim Jae Kwan. With regards to the plans for share buyback and cancellation, due to the announcement of the dividend policy today, since the visibility of gross annual dividend has become more transparent, we will flexibly implement share buyback and cancellation and meet the diverse needs of the market and expand shareholder return flexibility. The amount of share buyback will take into consideration, comprehensively, factors including annual income, total shareholder return ratio and CET1 ratio changes and others and based on communication with the market, this will be determined from the perspective of enhancing total shareholder returns.And regarding the timing, we will consider not only the year-end when the income is finalized, but also consider our share price and the market situation, thus have appropriate parallel implementation during the year as well.Regards to the sale compensation in the first quarter, we have KRW 860 billion set aside in the first quarter. So that was set in the figures based on the end of March figures. So if we look at the rise of the H Index, we don't think there will be any additional losses. So it's going to be a one-off factor basically.

[Operator]

We will take the next question from Korea Investment & Securities, Baek Doosan.

[Doosan Baek, analyst]

I am Baek Doosan from Korea Investment & Securities. I also have 2 questions. My first question is regarding your previous quarter and in this quarter as well regarding the real estate trust performance. It is, I believe, a little bit lackluster. So do you have any underlying factors, including PF, that led to these results? My second question is about the government's value-up program. And in regards to this, in May, there will be guidelines to enhance the shareholder value or customer value. And how are you going to respond after the government sets out more detailed guidelines for corporate value-up program?

[Unknown Executive]

Thank you very much for your question. Regarding real estate trust, as you're well aware, there are some sites with a responsible construction. So there were some issues. And at the end of last year, we had provisions sufficiently. And due to this, at the end of last year, there were some deficits, but in Q1, from that perspective, we had additionally provisioned very conservatively. So we had a full wide-on reviews of all these sites that need to be responsibly constructed. So if there are other factors, we will also conservatively accumulate provisioning.In addition, regarding the value-up program that you've mentioned and how we're going to respond, regarding the value-up program response, we mentioned the evenly paid quarterly dividend on a total annual amount basis. So it's at a KRW 1.2 trillion level. So we have the evenly paid quarterly dividend as well as share buyback and cancellation that we're going to use together. So we're going to increase DPS and TSR.And regarding the level of net income and CET1 ratio, it could fluctuate, and we're going to communicate with the market through events like today's earnings release. Thank you.

[Operator]

Next question from HSBC Securities, Won Jaewoong.

[Jaewoong Won, analyst]

Can you hear me?

[Operator]

Yes, we can hear you well.

[Jaewoong Won, analyst]

In a very difficult environment, thank you very much for the excellent results. I have 2 questions. First question is CET1 ratio movement. You showed this movement. Regarding this, how much was the portion for operation risk? That's my first question. What was the impact of the FX exchange rate? And second question is, CIR ratio and CCR ratio is quite impressive. The CIR ratio, what is your planned target or planned level or for CCR as well, do you have any planned level or expected level for this year?

[Unknown Executive]

In the CET1 ratio, I think you asked about the ELS portion, it's about 47 bps. And related to operational risk is about 28 bps. However, at the year-end last year, from 13.59%, we have come to 13.40% as an estimate. And so there has been down of 19 bps. However, our net income has gone up. And also, we have made efforts to reduce the RWA. And so we have made up about 28 bps.And your second question was about the CCR level, right? So last year and this year as well in the Q1, from a conservative point of view, we are setting us high provisions. However, last year, we had additional large-scale provisioning. Through that provisioning, we have secured sufficient loss absorption capability. And so we think there will be less burden of additional provision going forward. On a quarterly basis, 40 bps also -- I think on a quarterly basis, I think that level can be maintained.

[Operator]

We will take the next question from Hanwha Investment & Securities, Kim Do Ha.

[Do Ha Kim, analyst]

Well, I have a question related to the answer you just gave regarding the CET1 drop, 47 bps influence for CET1. So can you tell us about the losses? And can you tell us about what was actually cut and what the impact on RWA increase?

[Unknown Executive]

It's about [ KRW 6.8 trillion ], the impact on RWA increase.

[Operator]

We'll receive the next question from JPMorgan Securities, Cho Jihyun.

[Jihyun Cho, analyst]

I have few questions. First question is on -- you talked about PF market outlook. So the overall PF exposure from that, what percentage has been provisioned? Can you give me a figure? And second question is for overseas real estate in this quarter, has there been any provisions that have been set aside for this exposure? What is our exposure, what is the market outlook for the exposure that we have? Can you give more color to your outlook? And finally, the CCR target, I think you said on a quarterly basis, it will be managed at 40 bps level. Is this guidance for Q3? Or is this guidance for the whole year -- on annual guidance, so to speak?

[Unknown Executive]

So the PF sites have unique characteristics, 95% is senior debt. And there's a lot of sites in the metropolitan area, and there's a lot of sites located in the public sector as well. These are high-quality project sites. And what you mentioned is about 5%. The provisioning rate against exposure is about 5%. With regard to CCR, we talked about 40 bps. This relates to both quarterly and an annual basis, yes.

[Operator]

Please contact our IR team if you have any additional questions. We will hold just a little more to see if there are other questions. We will take the next question from CLSA Securities, Shim Jongmin.

[Shim Jongmin, analyst]

I am Shim Jongmin from CLSA. Regarding your shareholder return policy, I have a question, and you mentioned that for the valuation, it is still actually undervalued. So when the valuation becomes normalized, you mentioned that you're going to actually increase this. So can you tell us about the valuation that is your target by the management? If you can share your valuation target with us, it will be greatly appreciated. And from the mid- to long-term, can you tell us about the total TSR ratio that you are targeting? If you can actually announce it to us, it will be greatly appreciated.

[Jae Kwan Kim, executive]

I am Jae Kwan Kim, the CFO of the Financial Holdings Group. Regarding the evenly paid quarterly dividend on a total annual amount basis, we have our thinking of KRW 1.2 trillion level currently. And regarding the valuation regarding how we're going to enhance this and what is our target ROA -- about ROE, about 10% is what we're thinking of and [ PBR ] around 0.8% is what we are currently thinking. And regarding our mid- to long-term total shareholder return policy, we have been continuing that we're going to enhance our DPS levels incrementally. And we're also going to have parallel share buyback and cancellation so that we can increase this gradually and continuously. I would like to emphasize that once again. Well, the reason why we are increasing the cash amount on an annual amount basis, it could be that there is no absolute standard, but it will depend on the situation. So if there is ample room for us to -- or the circumstances for us to increase, we will do so accordingly.

[Operator]

We'll receive the next question from Citi Securities, Lee Miseon.

[Miseon Lee, analyst]

Thank you very much for the update on the shareholder return policy. I have 1 question. Last year's cash dividend was KRW 1.17 trillion. And this year, you're talking about KRW 1.2 trillion. So I think the growth rate is about 2%. Well, can you elaborate on the logic behind this KRW 1.2 trillion? And also in relation to the EPS growth rate as well?

[Unknown Executive]

Last year, cash dividend was about 25%. Starting point for this new dividend policy was similar to last year at 25%, similar to 24% of last year. So let me elaborate, KRW 1.2 trillion for about past 2 years. Last year, it was about KRW 1.17 trillion. And the year before that was KRW 1.15 trillion. So I think there were regular intervals behind the amount and the payout ratio was 25% last year. And this year, in consideration of the market consensus, we have upgraded or leveled up the amount a little bit.

[Operator]

It seems that there are no other questions in the queue. We will hold. And if there are no other questions coming in, we will conclude today's earnings business results presentation. It seems that there are no other Qs, so we will conclude today's Q1 business results presentation. Thank you very much for your participation.[Statements in English on this transcript were spoken by an interpreter present on the live call.]