KB Financial Group Inc

KRX:105560

Earnings Call Transcript 2022-Q2

[Peter Kweon, Head, IR]

Greetings. I am Peter Kweon, the Head of IR at KBFG. We will now begin the 2022 first half 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 Senior Managing Director, Scott Seo; as well as other members from our group management. We will first hear the 2022 first half major financial highlights from CFO and Senior Managing Director, Scott Seo, and then have a Q&A session.

I would like to invite our Senior Managing Director to deliver 2022 first half earnings results.

[Scott Seo, Group CFO and Senior Managing Director]

Good afternoon. I am Scott YH Seo, CFO of KB Financial Group. Thank you for joining the company’s first half 2022 earnings presentation.

Before moving on to our earnings results, allow me to briefly run through key business highlights of the group. Q2 ‘22 group net profit was KRW 1.3 trillion, up 11.4% year-over-year as of the first half, reporting KRW 2.8 trillion. Group ROCE was 12.5%, being kept at a steady level as of the first half, while annualized EPS, earnings per share, was around KRW 14,000, up 11% year-over-year on a robust uptrend.

Also, today, KBFG’s BOD approved KRW 500 per share as the quarterly dividend. And following last February, we decided to do share cancellation of KRW 150 billion of treasury shares and, as such, do KRW 300 billion of total share cancellation this year. In the midst of the spread of macro uncertainties and difficult business backdrop underpinned by our outstanding capital adequacy and stable earnings capacity, we have been consistent and differentiated in implementing our shareholder return policy.

Globally, there is growing concern over saturation while Korean economy is mired with 3 highs, high interest rate, high inflation and high exchange rate, which may undermine profitability of the banking business and widen credit risk. We therefore are focused on the fundamentals and preemptive risk management.

For example, this quarter, based on conservative projections for GDP growth, policy rates and the FX rate as well as other indicators and scenario analysis for crisis, we made around KRW 121 billion of additional provisions. By way of such conservative provisioning stance, we’ve been enhancing loss-absorbing capacity, bringing group’s NPL coverage ratio to 222.4%, which is the industry’s top-notch level as well as top-notch in terms of the global standards.

Also, last May, we ran a group-level stress test based on internal and external economic conditions and probable future risk factors. And even under a severe recession scenario of negative 6.3% GDP growth of the IMF, the group’s capital adequacy will be above the regulatory requirement, yet again attesting to KB’s sound financial prudence.

Meanwhile, as a leading financial group fulfilling its social responsibility, KBFG is extending various different financial support for the vulnerable and the less privileged who are suffering from economic slowdown and rate hikes. Also, ahead of the end of COVID-19 financial forbearance program in May, to alleviate burden for small businesses and the self-employed, depending on the borrowers’ repayment capacity, we allowed up to 10-year extension for amortization and introduced COVID-19 special long-term repayment amortization program offering grace period for repayment of the loans to allow for a soft lending.

And out of all of the commercial banks, KB Bank was chosen as an affiliated bank for Citibank Korea for rollover of unsecured retail loans. This has proven KB’s distinctive expertise in household loans and customers’ trust, and we expect there to be some growth in household loan growth going forward amidst somewhat of a sluggish first half growth.

Next, I will move on to the details of the company’s earnings. KBFG’s Q2 2022 net profit was KRW 1,303.5 billion, up 11.4% year-over-year to KRW 2,756.6 billion on the first half basis. On greater macro uncertainties and financial market volatilities and despite such difficult operational backdrop, we have shown the group’s solid earnings capacity. However, Q2 net profit was down 10.3% Q-on-Q as conservative FLC, forward-looking criteria, was used to preemptively book provisioning. And due to the lack of one-off gains such as the bank’s corporate tax reversals in Q1, excluding the impact of such nonrecurring items, net profit is down 2.4% Q-on-Q.

In more detail, first half 2022 group net interest income was KRW 5,441.8 billion. And Q2 net interest income was KRW 2,793.8 billion, up 18.7% year-over-year and 5.5% Q-on-Q. This is driven by rising rates leading to repricing of loans which ended up widening the NIM as well as due to the loan growth.

Q2 group net fee and commission income was KRW 874.9 billion, down 4.4% Q-on-Q. And on a first half basis, it reported KRW 1,789.9 billion, down slightly year-over-year. This year, against sluggish financial markets at both home and abroad, brokerage fee income was constrained. And on slower sales of financial products, sale of trust and funds also slowed, dampening the group’s fee and commission income. However, thanks to our business diversification and efforts to strengthen competitiveness, earnings fundamental behind generating fee and commission income has improved a notch, driving the IB business performance by twofold year-over-year, landing the group on a solid market position. And the Securities business has gained a leading position on the league table for its DCM as well as ECM, M&A and acquisition financing business.

Next is other operating profit. Other operating profit this year underperformed on the back of valuation loss from bonds following market rate hikes, while rise in FX rates and foreign equity index drove losses from ELS and CVA valuation, dampening performance from securities and derivatives and FX, leading to sluggish performance both year-over-year and Q-on-Q. But for insurance underwriting profit, we saw overall improvement in loss ratio from the non-life business, while life insurance profitability was sustained, continuing on a positive performance trend.

In the second half, we expect additional fee interest rate hike. And since there is the added possibility that financial market volatility can increase including for FX, we wish to maintain a defensive management stance for the time being and improve earnings stability through portfolio diversification and a flexible position strategy. 2022 first half group G&A posted KRW 3,445.9 billion. Despite the increasing group level investment in digitalization, as a result of cost-control efforts including labor costs, it only increased 1.6% Y-o-Y and is being well controlled. In addition, for Q2, G&A expenses, due to seasonal factors, including increase in advertising and promotion costs and taxes and dues, increased 3.7% Q-o-Q.

Q2 group provision for credit losses posted KRW 333.1 billion and increased by KRW 203 billion, a slightly high range Q-o-Q. As was aforementioned, reflecting the conservative FLC scenario in this quarter will be around KRW 121 billion of additional provisioning. And with the removal of the Q1 sizeable provisioning write-back in this quarter, the recurring level of provisioning, excluding these nonrecurring items, posted around KRW 210 billion level. First half provision for credit losses posted KRW 463.2 billion, an increase slightly Y-o-Y due to preemptive provisioning and asset growth but is maintaining a stable level on a recurring level.

I will be covering the major financial indicators from the next page. First, 2022 first half group ROCE posted 12.49%. And as a result of solid core earnings growth and cost control efforts, a level of higher than 10% is being well maintained. 2022 June end bank loan in won posted KRW 323 trillion. And compared to end of March, it grew 0.4% and 1.2% YTD. And on the whole, loan growth is at a low level.

In the case of corporate loans, it posted KRW 157 trillion as of end of June. It increased 2.1% compared to end of March and increased 5.5% YTD and is continuing solid growth rate for each quarter. In particular, general SME loans increased around KRW 4 trillion YTD and drove SME loans growth.

For large corporate loans, with the loan demand growth following worsening conditions for corporate bond issuing and as a result of efforts to strengthen the IB business, it decreased 7.5% YTD. On the other hand, June end household loans posted KRW 166 trillion and decreased 2.5% YTD and is posting a minus growth rate. This was due to weaker overall loan demand due to strengthened household loan regulations and burden due to loan interest rate hikes and, in particular, since there was an increase of pressure to repay unsecured loans.

In the second half of this year, it is forecast that there will be a partial recovery of household loan growth. But since this is a period where conservative risk management is required due to internal and external conditions, we wish to focus on asset quality and profitability management and concentrate on qualitative growth centering on high-quality assets.

Next is net interest margin, NIM. 2022 Q2 bank NIM posted 1.73% and rose 7 bp Q-on-Q and from this year on a cumulative basis expanded to 12 bp. This was mainly attributable to the rapid loan asset repricing, reflecting steep key rate hikes from August of the previous year and the valued asset profitability improvement. On the other hand, Q2 group NIM posted 1.96% and rose 5 bp Q-o-Q. With the card financial asset yield decline, including card loan and cash advance, and effects from card NIM contraction following funding cost increase, the increase was more limited compared to the bank’s NIM.

Let’s go to the next page. I would like to touch upon the group’s cost-income ratio, CIR. As you can see on the top left-hand graph, 2022 first half group CIR posted 46.5%, and the group’s cost efficiency is being continuously improved. In addition, even excluding the nonrecurring items including digitalization costs, CIR is showing a market lower stabilization trend. With the visualization of strengthening efforts for workforce efficiency, we believe that the cost efficiency will be additionally improved. And we aim to maintain the group’s recurring CIR so that it can improve to mid-40%.

Next, I would like to cover the credit cost. 2022 first half credit cost posted 0.23%. And even in the situation where credit risk is increasing due to rapid interest rate hikes and economic downturn, it is still being maintained at a stable level. And Q2 CCR, when excluding preemptive additional provisioning, is at a low level at a 0.20% level.

Next is the group’s capital adequacy. As of end of June 2022, group BIS ratio posted 15.64%, and CET1 ratio posted 12.93%. With expansion of corporate and overseas asset expansion, risk-weighted asset increase and with the interest rate hike and some price declines and with the decrease in accumulated other comprehensive income, it decreased YTD. But on the back of robust profit generation and strategic capital management, it is securing the highest level of solid capital buffer in the financial industry.

From the next page are the detailed materials related to the performance that I just aforementioned, so please refer to it if needed. With this, I will conclude 2022 first half KB Financial Group business results presentation. Thank you for listening.

[Peter Kweon, Head, IR]

We will now begin the Q&A. [Operator Instructions] We will take questions from Samsung Securities, Mr. Kim Jaewoo.

[Jaewoo Kim]

I would like to ask 2 questions. First question relates to your shareholder return decision. You’ve decided to maintain the DPS, and you’ve also decided to cancel your treasury shares. And I think that helps with the alleviation of concerns in the market. But my question is, would you be able to sustain this stance? There is some positive hope as well as some negative, I guess, assessment. We see that the U.S. banks have started to end the treasury share-related cancellations, so we’re concerned with this type of stance could actually continue and be sustained into the future. So if you have any guidance, that will be helpful.

Second has to do with your asset quality. As mentioned, the economic situation is quite challenging and difficult, and I’m wondering whether the provisions that you have in place is sufficient. As you mentioned, your NPL coverage ratio is relatively high. However, the NPLs could also -- may rise quite steeply. So in the bank’s assessment with respect to your potential concerns and risks, where do you see the biggest risk? Is it in project financing or other types of products or segments? And also, are there any countermeasures or measures in place for you to stringently manage your asset quality? If you have any insights, please do share that with us.

[Scott Seo, Group CFO and Senior Managing Director]

Yes, I am Scott Seo, the CFO of KBFG. I will respond to your question on shareholder return and then the appropriateness of the provisions that we have in place. And with regards to the details relating to the provision, we have our CRO, who is with us, so he will provide you with more details.

Let me respond to the shareholder return-related question. In June and in July, we had an NDR, during which we met with our major shareholders and investors. We had an overseas NDR, and we were able to listen to the feedback of our investors and shareholders. And we -- I delivered that to our BOD and the top management.

We believe that what the foreign investors want and what the major shareholders of domestic market want is not a steep rise in the dividend amount per se but a continuous trend and also an appropriate mix and balance between the cash dividend payout as well as the overall shareholder return.

And second thing we were able to confirm was the Japanese banks, their dividend payout amount was not very big. And over the past couple of years, Japanese companies have done cash payout as well as treasury share cancellation. And they have turned quite shareholder friendly through such approach.

We, of course, are fully considering all of these approaches. And after Q2, the U.S. banks have started to stop paying out dividend. If you look at some of the major banks of the U.S. and their performance, it’s not all of the banks, but I understand the case differs for different banks. After Fed had a stress test for each of the banks, I understand that they handed down a guidance for each of the commercial banks, so we can’t really bring the situation of the U.S. and apply that just directly to Korea.

With regards to dividend payout, we’ve been emphasizing this over numerous occasions. There is cash dividend payout as well as buying of treasury shares. The payout ratio, our objective, including those 2 approaches, we’re going to do our best to reach that 30% as quickly as possible. That’s the one -- first thing I wanted to emphasize.

And second, if you look at our net profit this year, if our net profit this year is at least KRW 1 more, we’re going to do our best to make sure our DPS also rises.

And the third point I would like to emphasize is that our payout ratio, once we reach the 30%, rather than increasing the cash payout, we will focus more on share buyback and cancellation. That would be the direction for us going forward. If you look at our price to book, it’s only 3.3 multiple. Under this condition, the share buyback from mid- to long-term perspective and canceling of those treasury shares, we believe, will be the better way for us to go.

In terms of the appropriateness of the size of the provision, regarding the appropriateness assessment, we’ve looked at many aspects. If you were to compare us with banks in the U.S., excluding the credit cards, if you look at the provision, out of the total loan book, and this is not against the NPL but against the total loan book, if you were to compare our provision level versus the U.S. banks, there is no difference.

And number two, even looking at credit card carve-out, some of the credit card products in the U.S., there are certain portions that account for bigger exposure. And us, vice versa. So because of that situation, there’s a difference between the credit card provisions for U.S. versus Korea. So in KB Financial Group, we have global standards, and we have the most higher-notch criteria, based on which we’ve done our best to provision as much as possible for our credit card.

So I would like to now turnover to the CRO to provide a little more elaboration.

[Pil-Kyu Im, CRO]

Yes, I am Im Pil-Kyu. I’m the CRO of KBFG. Regarding the asset quality and PF. You’ve also mentioned PF, so let me respond to that question. With the interest rate hike in Korea, there is some concern as to whether there will be a systemic risk for Korea. I do not think that will be the case. If you look at the global financial crisis, the subprime crisis, during that time, the LTV regulation was put in place preemptively by the regulators, and we were able to overcome the crisis. So we do think the interest rate will be an uptrend for some time. But starting last year, there was a very strong DSR regulation. Phase 1, Phase 2 and Phase 3, there has been a continuous implementation of that. And from July, there was Phase 3 DSR regulation, which is a very rigorous asset quality-related discipline. And we think that, that will help the asset quality. Basically, as you know, for people, DSR is 40% if it’s above KRW 100 billion. And also there’s are regulations and rules for second-tier financial market and third tier as well. So overall, we believe that this regulation will work as a safety fence for the system.

Now having said that, because of the rate hikes, if you look at savings banks, we believe that they are going to be quite severely impacted or highly impacted because if you look at the delinquency rate, delinquency rate is showing an uptrend. And the reason for that is because last year and 2 years back up to first half of this year, looking at the savings banks, there’s been a steep price in household loans, last year more than 50%. The reason is because there were a lot of platform-linked loans like Pinda or Kakao Pay or Toss. For all these platform-based customers, they took certain level of fee, and these fintech companies have referred the loan products of the savings bank. And so that accounts for more than 40% of the total new loans originated through the savings bank. This was a new marketing method, a methodology that was utilized by these companies.

What’s interesting is that these platform-linked loans -- now for credit card, it was a totally different picture. Credit card advance or credit card loans was not really linked up to the fintech platforms, but against their captive market, they did more card loan marketing. The reason I mentioned this is because at the savings bank, the subprime unsecured loans and household loans potential risk factors in the savings bank industry, it may have a big impact. But what I’m trying to say is that it will not actually spill over to the credit card industry because the customer base as well as the marketing structure is very different between the 2.

And if you look at the relevant data, you will see that for the credit card industry, the platform-linked loans is very minimal at best. So with interest rate hikes, depending on the customer segmentation, yes, there may be some impact. But for the time being, we believe that the risk is going to be more or less contained within the savings bank industry. So that’s the overall picture.

And regarding the banking sector, as you know, we are very tightly managing the situation. Entry management is done quite rigorously. And we believe that going forward, we will continue to do so. And also, if there are potential risk events or if there’s any borrowers whose credit worthiness is going to be significantly undermined, we actually have a model in place where we could preemptively assess for that and be ready for that. So if they extend the repayment period, for instance, they need to, we can think about further enhancing their collaterals or restructuring their loans, et cetera. So we have all of that mechanism well in place.

And another thing is, despite all of that, there’s also expert management regarding delinquency management. The importance of delinquency management is going up. So at the overall group level, delinquency management, we are using AI and machine learning for bank, credit card, capital and savings bank. We’ve adopted that AL and ML-based for the bank. We will open that system in September, so we can actually do a good entry management, and we can also do a good exit management and also everything in between. So we have all of the needed system in place so that we could fend against or prevent against any asset quality degradation of the company. So I’m not overly concerned about that.

So another thing is PF related, which has recently been featured in the audit articles. Bridge loan, PF, we have about KRW 14 trillion in exposure. And all of that, basically, what we’ve done was for each of the work sites, we’ve conducted all the reviews and inspections. And if we think that a special site is prone to issues, KRW 43 billion is a potential -- KRW 40.3 billion is a potential risk. But it’s all senior. We all have -- we already have a senior debt position, so we’re not highly exposed to bridge loans or PF loans. Any potential real estate-related issues, we believe that the issue is not that significant.

And also going forward, for all of our project financing sites, for all of the -- not just the KRW 40.3 billion but also highly risky work site, we have categorized them so that we could appropriately manage them. And also when it comes to real estate management, depending on different regions, there are unsold lots, there is potential risk as well as construction company-related risk, contractor-related risk, so we have a risk management regime in place. Also, we have 20 different variables and parameters that help us decide which needs to be monitored and which site needs to be observed. Appropriately, we have the underwriting process in place and risk assessment process in place. So with regards to all the project financing-related exposures, we are well protected. And for -- and on the security side, PF security side, I can tell you that we are not experiencing any problem as of today.

[Peter Kweon, Head, IR]

We will take the next question, Yafei Tian from Citi Securities.

[Yafei Tian, Citi Securities]

I have a couple. Yes, the first one is there is a relatively lower trading-related income for this quarter. Would it be possible to give a breakdown of some of the losses that is weighing that line down? A little bit more granular detail there will be super helpful.

Second one is on the net interest margin outlook. Clearly, the BOK has turned more hawkish since end of first quarter in terms of raising the rates. So would that change the net interest margin outlook for the bank? At the same time, we are also seeing the regulator loan banks perhaps to provide relief to more vulnerable borrowers to prevent their debt servicing burden. So how should we balance the thinking of rising rates and probably banks would need to pass on some of the benefits to customers?

And maybe just along with that, finally, are there any discussion of a potential proposing of a bank-related tax in this current environment?

[Peter Kweon, Head, IR]

We will soon answer your question, Yafei, so please bear just for a few more minutes. Thank you.

[Unidentified Company Representative]

I’m Kim Jae-keun [ph], the CFO of the bank. And for the bank NIM, I would like to answer the question first. Regarding the bank NIM, in Q2, it was 1.73%. So compared to the previous quarter, it rose 7 bp, and it expanded by 12 bp on a cumulative basis this year. And on a yearly basis, compared to the early NIM, you can see in the first half, 11 bps was improved. And prudently, we are expecting that in the second half of the year, we will have additional improvement in the NIM as well. We believe that 5 to 6 bps may be improved. However, as was mentioned by you, we know that there will need to be some policies to help the vulnerable borrowers. And because there’s less demand for household loans, there will be more competition between the banks. So there will be an effect from the spread decline. So the NIM improvement range might be limited, but we do believe that the improvement trend will continue. In addition, portfolio management based on profitability and in order to improve the profitability on our managed assets, we are working consistently, and we plan to steadfastly move in this direction.

[Unidentified Company Representative]

I would like to answer your question related to trading. To answer your question, as you know, there was some FX fluctuations and an increase in the fixed income yield, so you can see trading volatility was very high. However, we believe that in trading, the direction will be as follows. In the second half, we believe that there will be improvement in the profit. For more details, please contact our IR team, and we will be more than happy to give you with more detailed information about trading forecast.

[Peter Kweon, Head, IR]

Yes, I don’t think you’re connected, so we’ll go to the next question.

[Unidentified Analyst]

My first question is quite simple. The biggest concern that people have is that BOK by the end of this year will -- could hike the rates to 2.7% to 3%. When that time comes for the household loans, this will also apply to corporate loans as well, interest rate on household loans is going to go up quite significantly. So by the end of the year, what do you think is going to be the lending rate for the household loans as of the end of this year because according to our estimate, we believe that household interest burden is expected to go up by 50% compared to the previous year. If that’s the case, the borrowers are going to really see -- are going to really feel the pressure. So from the bank’s perspective, what are some of the ways for you to alleviate the interest burden and maintain your customer base and make sure that there is no excessive stress? So I would like to understand what your measures are.

Second question is a quite difficult question. And if it’s difficult for you to respond, I guess you could decide not to. But if you look at BOK’s financial stability report on the mutual finance side, the corporate lending, there are cases where a household basically took out a loan under a corporate name and made investment into property. And it seems like a lot of people made use of the short-term floating rate loans. And it seems there is quite a bit of a burden that is felt by these borrowers. So when interest rates further hike, this may work as a stress.

And if you look at these people, these types of borrowers, more than 50% of these borrowers are banking customers, so there seems to be rising risk from this. And also, you would have a lot of Chinese customers or -- excuse me, or the redundant customers who are taking out their loan as under the name of the household as well as under the name of a corporate. So for these types of borrowers, what are your plans to fend off a potential risk?

[Pil-Kyu Im, CRO]

Yes, I am Im Pil-Kyu, the CRO of the holding company. On the household side, end of this year, BOK is saying about 300 basis points and what impact will that have on our lending rates and what type of an impact would that bring. Now if you look at our household loan, if look at the repricing cycle, it’s usually 6 months. So 60% will come every 6 months and 20% of the loans every year. So basically, after 1 year, 80% of our loans will have gone through the repricing.

We believe that up to this year, the impacts are about 60% by the year-end will be subject to that impact. When an interest rate rises and if looking at its correlation to the delinquency rate, we do a retroactive assessment. For the bank’s unsecured loans, after about 11-month period, we see a meaningful tick in the delinquency rate. That has been our experience. So when we run our data, that basically is the result that we were able to see.

So when the interest rate rises and that’s having an impact on the bank, it actually has about 11-month lag, time lag. We start to see the impact on the bank about 11 months later. So what we did was, preemptively, we booked provisions. And for the corporate loans, we had the ample provision. And also for this year as well for the household loans, as our CFO has mentioned, we’ve also set aside this ample amount of provisions for these household loans.

In terms of interest rate hikes, yes, there could be some vulnerable or at-risk borrowers. And just as we do for corporate customers, we also have long-term amortization reprogram or program. So for any customers and borrowers who may be at risk, we could convert them into a long-term repayment program. And if we make use of that program, we can make sure we mitigate the repayment burden of the borrowers. And also, it helps for us as a bank to maintain our quality of assets. So these were our past experiences, and we are, at this point, really operating all of these different mechanisms at more granular level.

And then you asked about the second question. If you look at second-tier financial market, our credit card, capital and savings bank, the unsecured loans, the about -- more than 95% are all amortization. And also, they’re all fixed rated. So with regards to increases in interest rates, these nonbank affiliates are not going to be impacted by the interest rate hike. But as you’ve mentioned, Mr. [Seo], for the mutual financing, there could be some borrowers who’ve received the loans under an individual and under a corporate. So these borrowers with multiple loans, we very closely manage these people because there we get multiple array of risk profile, based on which we manage these borrowers who hold multiple loans. And I think you can contact me also in person or one-on-one, but in the banking sector, we are -- of all of the banks in Korea, we’ve been very, very rigorous in managing and controlling these borrowers who hold multiple loans. So any potential risk that, that could have on our bank, I could tell you, it’s pretty much limited and constrained.

[Peter Kweon, Head, IR]

Thank you very much for the detailed answer. It seems that there are no other questions in the queue, so we will wait for a few minutes until we can see if there are other questions remaining. And if you have any further questions, please contact us, and we will be more than happy to answer your question.

I believe that because we had no very sizable or important nonrecurring items in this quarter, there might not be other questions coming in. So, I believe that we have covered the major highlights. And we will be waiting for just a few more seconds, but it seems that we have no other questions coming in. And with this, we will conclude.