KB Financial Group Inc

KRX:105560

Earnings Call Transcript 2023-Q3

[Bong Kwon, executive]

Greetings. I am Peter Kweon, the Head of IR at KBFG. We will now begin the 2023 Q3 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 SEVP Scott YH Seo as well as other members from our group management. We will first hear the 2023 Q3 major financial highlights from CFO and SEVP Scott YH Seo and then have a Q&A session. I would like to invite our SEVP to deliver our 2023 Q3 earnings results.

[Seo ho Young, executive]

Good afternoon. I am Scott YH Seo, CFO of KB Financial Group. Thank you for joining KBFG's Third Quarter 2023 Earnings Presentation. Allow me to first walk through key performance metrics as of cumulative Q3 2023 before going into the details on business performance. KBFG's third quarter '23 cumulative net profit was KRW 4,370.4 billion, up 8.2% year-over-year. Despite difficult internal and external operational backdrop supported by balanced banking and nonbanking subsidiary growth and widening of noninterest revenue and G&A control group's earnings capacity is currently well sustained.

Just to note, IFRS 17 has been retroactively applied to our 2022 earnings. Also, cumulative ROE this year was 11.7%, sustaining improvement following last year. annualized EPS, earnings per share reported approximately KRW 14,691, up 8.3% year-over-year with the impact of treasury share buyback and cancellation coming through. In Q3, net profit reported KRW 1,373.7 billion, Sound interest income growth and continuing cost savings efforts drove earnings in line with market consensus and even based on retroactive treatment of IFRS 17, there was increase in earnings year-over-year. However, due to greater financial market volatilities and sizable reduction in other operating income as well as one-off losses arising from insurance subsidiaries' use of the actuarial assumption guideline of supervisors, net profit was down 8.4% Q-on-Q.

Next, credit cost on a cumulative basis for the group in Q3 was 52 basis points, reporting a wide year-over-year expansion. This is because on top of general provisioning during the first quarter, there was no overlay provisioning during Q2 following changes in the expected loss model, which amounted to KRW 490 billion of large-scale provisioning in the first half of the year, which was a continuation of conservative and preemptive provisioning stance against economic uncertainties at the group level. We believe such provisioning policy will eventually have a positive impact on mitigating possible economic shock in the future and sustaining a stable net profit generation at the group level.

Also, in light of internal/external business backdrop, level of current provisioning and possibility of needing additional provisioning in the fourth quarter, full year '23 group credit cost is expected to not exceed 50 basis points. Group's NPL ratio as of end of September '23 was 0.48%, up 4 basis points versus end of June. This is in the context of rising delinquency rate on top of which there was rise in NPLs from affiliate lending providers, real estate trust and savings bank. Nonetheless, NPL coverage ratio for the group and the bank as of end of September were 180% and 228%, respectively, attesting to ample loss absorption capacity when and if there is to be credit risk deterioration.

Lastly, today BOD of KBFG decided to payout quarterly dividend of KRW 510 per share. In terms of the update on share buyback and cancellation which was announced last July, we have been buying our shares since August under the trust arrangement and will immediately cancel the shares once the purchase is complete. Next, I will walk through the details of the Q3 '23 business results. Group's net interest income for Q3 '23 was KRW 3,087.9 billion, driven by loan growth and interest income widened, posting a Q-on-Q rise of 3.8%. Net fee and commission income for Q3 came in at KRW 901.4 billion, down 5.3% Q-on-Q. Even though increase in stock trading volume drove up broker fees, softer investment banking income and decline in trust fees had a dampening effect.

Nevertheless, thanks to efforts put in to diversify group's business portfolio, net fees and commission income this year had been around KRW 900 billion level on a quarterly basis which goes to show enhanced capacity of the group in generating its fee income. Next is other operating profit, which includes income from prop trading and insurance operations. In Q3, there was other operating loss of KRW 23.1 billion on the back of higher market rate and rising $1 exchange rate, which led to somewhat of a muted performance of securities, derivatives and FX currency operations. For the insurance business, with the application of supervisory guideline on actuarial assumption, including changes in loss ratio for medical indemnity product for the P&C insurance, there was a one-off loss of around KRW 71 billion.

However, excluding such one-off loss this quarter, net profit of KB Insurance in Q3 is above KRW 200 billion, which is quite steady, even considering second half seasonality seen in the nonlife insurance industry, while the company's market dominance is widening, pivoting on long-term protection insurance. Next, I would like to cover G&A expenses. Q3 G&A expenses posted KRW 1,564.7 billion and through continuous cost rationalization efforts, it went down slightly Q-o-Q. On the other hand, Q3 cumulative group CIR posted 37.4% and nominal CIR and recurring CIR, excluding nonrecurring items, all greatly improved Y-o-Y. Group CIR is showing a market downward trend, thanks to solid top line growth and results from continuous cost efficiency efforts. Our goal is to achieve a mid- to long-term annual CIR target of early 40% range, and we forecast that 2023 full year CIR will be managed within our target range.

Lastly, group provision for credit losses. Q3 provision for credit losses posted KRW 448.6 billion and decreased greatly Q-o-Q due to the additional provisioning underlying effect in Q2. Since we have been continuing a conservative provisioning policy until now and have been securing a buffer preparing for external internal uncertainties, we find that there is a limited possibility for the group's credit cost to rapidly increase going forward. There have been recent concerns regarding financial company's asset quality. And in order to prepare for these possibilities preemptively, we will do our best to manage asset quality by strengthening management of potential nonviable exposure and by maintaining our conservative risk management stance. From the next page, I'll cover our major financial highlights.

First, looking at the bank loans in won growth graph, bank loans in won as of end September 2023 posted KRW 336 trillion, and increased 1.8% compared to late June and 2.4% YTD. Corporate loans posted KRW 172 trillion, and increased around KRW 5 trillion compared to late June and is leading loan growth. This was due to the deterioration in the corporate bond insurance market and with the increase of overall loan demand, large corporate loans increased 8.9% compared to end June and SME loans increased 1.6% compared to end June. Household loans posted KRW 164 trillion and with increased demand following the real estate recovery trend centering on mortgage loans and Jeonse loans, it has increased by 0.6% compared to late June and reduced negative growth.

Amidst of spreading internal and external uncertainties in order to focus on qualitative growth based on high-quality assets, we have been continuing rebalancing for potentially nonviable loans and maintaining a conservative loan policy. Next is net interest margin NIM. 2023 Q3 group and bank NIM posted 2.09% and 1.84%, each, respectively, and went down 1 bp Q-o-Q. This was mostly due to the increase of funding burden centering on time deposits and marketable deposits according to the loan growth recovery amid the decreasing trend of the loan asset repricing effect, which had been leading the NIM improvement trend. On the other hand, regarding 2023, Q4 NIM, despite the continuous downward pressure, including continuing funding burden and contraction in the net interest spread we expected to maintain a level not greatly different from the Q3 level.

Next, let's go to the next page. I would like to elaborate on the group's capital ratio on the upper right-hand side. Estimated group BIS ratio as of late September posted 16.76% and CET1 ratio posted 13.70%, respectively. With corporate loan focused growth, risk-weighted assets relatively greatly increased, won -- weakening of KRW 32 per $1 in the quarter led to a negative effect on RWA management, which all caused a slight decline in BIS and CET1 ratio compared to late June. However, we are still maintaining a higher CET1 ratio level among the bank financial holdings companies. From the next page, we have details regarding the performance I have been covering, so please refer to if needed. With this, I will conclude KBFG's 2023 Q3 business performance report. Thank you for listening.

[Bong Kwon, executive]

Thank you very much for the presentation. We would now like to begin the Q&A. For those of you joining us via the Internet, please refer to the contact info on the very last page of the presentation screen. [Operator Instructions] We have not yet received any questions, just bear with us one moment. We will take the first question from Yuanta Securities, Jeong Tae Joon.

[Tae Joon Jeong, analyst]

Mr. Jeong Tae Joon from Yuanta Securities.

[Bong Kwon, executive]

We cannot hear you. Just one moment, please. Please go ahead. I think we are having some technical problems. We cannot hear you. Just please one moment. Mr. Jeong, can you hear us? I think we have a very bad connection at this point. So just please give us one moment. Yes, please go ahead. We are, at this point, experiencing technical difficulties. I understand that the sound -- the outgoing as well as incoming sounds have some issues. So please, one moment.

[Tae Joon Jeong, analyst]

[Technical Difficulty].

[Seo ho Young, executive]

Yes, this question related to a dividend payout policy. This is the CFO. You asked about a possibility of a change in our dividend payout policy going forward. I understand that to be your question. As you know, in 2023, as well as for our dividend policy going forward. Based on our year -- beginning of the year business plan, we've made the relevant disclosures, and we've been continuously communicating with our shareholders, the investors and the market. As you know, our stance is to adopt a progressive approach. Our stance is the same as before, we will adopt a progressive dividend payout. And our CET1 ratio, as you can see from our Q1 number, it was above 13.7%, so which is quite positive. So there is no reason for us at this point in time for us to shift gears and change our dividend approach. We've been continuously emphasizing this, our price to book is around 0.4x. So for us, what's important is for us to bring about improvement in the valuation of the company. So we will continuously to focus on canceling our treasury shares. Thank you.

[Bong Kwon, executive]

We will move on to the next question from Hanwha Securities, Kim Do Ha.

[Do Ha Kim, analyst]

[Technical Difficulty ] and I know that there were no reasons to change. But regarding the stress cyclical buffer, regarding the level -- regarding the [ bell ] so can there be some changes here for the best estimate ratio liability for [ bell ].

[Joo Oh Byung, executive]

I am Oh Byung Joo. Thank you very much for your question. I'm the Managing Director of KBFG. I will respond to this question on the changes in the actuarial or the guidelines leading to the actuarial assumption by the supervisors. During the Q2 earnings presentation, we talked about the medical indemnities and the guidelines, supervisory guidelines, and we mentioned that there is some risk that there will be some changes. So we said that maybe a modified retroactive approach, there's also a possibility of that. But KB Insurance, we have been applying a more conservative guideline compared to the regulatory guideline. So if you were -- but for the benefit of making apples-to-apples comparison, we have decided to approach a progressive method.

And basically, that has been what has been applied to our Q3 numbers. As the CFO of the financial holding company has mentioned on a one-off basis, the CSM buffer and also, there has been some decline in VIF. So there was one-off loss about KRW 71 billion. This is one-off. But as Kim mentioned, BIS is the very specific, I guess, impact from that. I would like to share with you what impact it has on the best estimate liability later on off-line. But I can tell you that within the business plan that was established by KB Insurance, we were able to close accounts in alignment with the guidance of the supervisory authorities, and we will be able to achieve the previous targets that we have set for ourselves.

Moving on to the stress test and the buffer capital. At this point in time, in terms of the methodology and the introduction timing, it has not yet been confirmed, but together with the DCP entities, the -- currently the authorities are in talks. Now if we look at these DCP entities, including the countercyclical buffers, the CET1 -- based on CET1, it will be 9%. And if you were to overlay stress capital on top of that, then it's going to then change. We still have about 400 basis points of buffer so even if considering for a countercyclical buffer, we believe that in terms of the CET1 ratio, we will be within what is appropriate. Going forward, in terms of the timing of adoption of methodologies for stressed buffer application, we will come back to you and provide you with more detailed information.

[Bong Kwon, executive]

Thank you very much for the answer. We have no questions in the queue, so we will wait. We apologize that we had some technical issues leading to some communication issues. So we apologize for those difficulties. We will wait a little longer for any other questions to join us in the queue. We will take the next question from JPMorgan. We have Cho Jihyun on the line.

[Jihyun Cho, analyst]

Thank you very much for the opportunity. Can you hear me?

[Bong Kwon, executive]

Yes.

[Jihyun Cho, analyst]

So in the beginning, I think we had some technical issues. So maybe I didn't hear well, but this is a question about overseas real estate investments and assets. So I think people are wondering about what kind of exposure you have globally? And regarding the different colors for different areas, geographies and for different industries and for the lagging indicators. Can you tell us about what is the current situation? And do you have any areas for concern also for other evaluation or other areas that can be reflected. Can you give us some more information? And regarding the government I believe that the government is trying to change the dividend policy so that we can -- people can know about beforehand and then invest. Can you tell us about what is the situation in the regulations for dividends? And going forward, if we could have the confirmed dividend for future investors.

[Seo ho Young, executive]

Thank you for your questions. I would like to answer the question regarding KRW 5.9 trillion of overseas real estate investment we have 5 point -- CRE and it's in Europe and in some -- in [ NA ] and other areas. We have office and multifamily for households, which is about 60%. And for the different subsidiaries, we have 2/3 that is owned by the bank. But regarding the characteristics of the bank, it is the subordinated -- it is for the senior debt, so it's very secure. And regarding the senior debt, it's more than 70%. So we have substantial loss absorption capability. So we believe that we will have a lot of room for losses.

However, we do share with you that you may have some concerns, but we have the different TFDs for different subsidiaries, and we are looking into the situation in detail. So we have the different TFD for subsidiaries for different properties and sites. And we are looking at the exit plan for each area. And regarding the vacancy rate and for the stress test, we are looking at the current situation. But overall, it seems that we do not have any outstanding issues. And we have some issue assets that are a minimum 1% or less. And we are looking into what we will need to do. So for risk and for the evaluation or review, we are looking into it in detail. And for KB regarding CRE, for the losses for overseas, commercial real estate, we believe we have very small possibility of losses.

I would like to continue with your question related to the government improvement plan for dividends, the Korean government, as you're well aware, is trying to improve the dividend policy system so that the policy could be changed, so the dividend could be confirmed beforehand. And for KB as well for 2023 year-end settlement dividends from 2024, it is we are trying to reflect the changed policies. So we already changed our AOI as of March of 2023. However, for the quarterly dividends, we need to change the Capital Market Act. The law needs to be changed. So if there is a change in the capital market act at the end of this year, we believe that there will be another AOI revision as of end March next year. And we will need to change the speed of revisioning of the law. But if all goes on smoothly, we believe that from Q1 quarterly dividend of next year, we will be able to reflect the improved government policy for dividends. Thank you.

[Bong Kwon, executive]

Next question, please, from HSBC, Won Jaewoong. It's currently, in the English channel it is not receiving any feed. So please bear with us, we're having technical issues. The English channel is not receiving any feed at this point. Once again, apologies the English feed is not being received by the interpreters, so we are unable to interpret at this point.

[Seo ho Young, executive]

Yes, I'm the CFO. I will respond to both of the questions. And then in terms of the maintenance margin I provide you with my answer. I will then hand over to the bank CFO. First question regarding the dividend policy, as I previously mentioned. And I think because the connection was that you were unable to hear my previous answer. The financial holding company will continue to adopt a progressive dividend payout policy. And as I mentioned before, we will continuously increase the absolute amount of the dividend paid out. Now there will be cash dividend payout as well as share buyback. We've repeated this on numerous occasions that in terms of the EPS, the cash amount that is being paid out, we have no intention whatsoever to reduce that size. We will actually overlay on top of the cash dividend payout and conduct share buyback and cancellation.

As I mentioned before, price to book is 0.4x for our company. So from the shareholders' perspective, share cancellation is a way for the shareholders to benefit, especially compared to increasing the cash dividend because of the capital gains tax, we believe that share cancellation is a better policy or a more positive policy and further improving the corporate value. Second question was on NIM. The maintenance margin. As mentioned during the presentation. Just looking at Q4 NIM, the maintenance margin we are in the context of many difficulties. And in Q3, from a big picture perspective and also if you look at the NIM in Q3 and Q4, I can tell you that the NIM will be more or less flat, not very different. I will now turn it over to our bank CFO for further elaboration.

[Unknown Executive]

As mentioned during the opening presentation. In Q3, NIM dipped 1 basis point compared to the previous quarter. Going forward, in light of the high interest rate, as well as asset growth, we expect that funding costs will continuously go up. Currently, the loan-to-deposit ratio, the spread NIS is going down. So in light of these drivers, we expect NIM to further dip. However, because we think that high interest rate environment will continue for the time being, we think that dip is not going to be that significant. Meaning in Q4, I believe that decline to be around 1 basis point. And then if you look at bank's NIM in 1.83% in Q3, then in Q4, the NIM on a cumulative basis will stay at that same level at 1.83%. And then if you look at 2024 on a Y-o-Y basis, every quarter, we've seen -- we expect there to be a 1 basis point dip on a quarterly basis. So there will be a low single digit NIM, once we reach 2024.

[Bong Kwon, executive]

Thank you very much for your question. It seems that there are no questions in the queue, we will hold. In the beginning of the conference call we had some technical difficulties so we apologize for the difficulties. And if you have any further questions, please contact our IR team, and we will do our best to answer your questions. We will hold. And if we have no other questions coming in the queue, we will conclude today's business results presentation. We will take 1 more question from Goldman Sachs, Park Sinyoung.

[Sinyoung Park, analyst]

Yes, I'm Park Sinyoung from Goldman Sachs. I have 2 questions and my first question is about shareholder return policy and regarding treasury share buyback regarding your structure. So maybe you're going to make it routine so that you're going to have a share buyback per quarter or such possibilities -- with the time line going forward, do you have any possibilities of that? And secondly, regarding provisioning in the previous quarter, I think you talked to us about an annual guidance, and we are during the end of the year. And regarding LTCG (sic) [ LGD ], there is a talk about some details related to it. And can you tell us about whether it can affect -- actually have an effect on your guidance that you aforementioned?

[Seo ho Young, executive]

Regarding the dividend policy, I will answer that question. And regarding the additional provisioning for Q4, maybe I can talk about it from a bigger perspective. And then our risk -- CRO from the holdings company will answer your question. Regarding the dividend policy, as you are well aware -- well, it seems to be a repeated answer. But regarding our current dividend policy, our business plan at the end of this year, we had made this public. And we are actually implementing this as is written. We have been communicating with our investors to our shareholders that our benchmark are the shareholder return policies by many large U.S. banks. And we think that is still the best policy. So we will try to evolve to mimic those policies.

What we have been doing so far is in the early part of this year regarding the treasury share buyback and cancellation we had made this public. And we also made it public in the previous quarter as well. And we have been having quarterly dividend payout and cash for each quarter. So we will not go back on our commitments, and that is not what we have in mind going forward. So what we have in mind is a more evolved and shareholder-friendly dividend policy that we have in mind currently, we have been trying to have a more shareholder-friendly dividend policy. And as we have previously mentioned in Q4 as well regarding the additional provisioning, we have been having this in our plans as well. So maybe our group CRO can answer that as well.

[Unknown Executive]

I think you asked the question regarding Q4. The -- based on the future economic forecast, the LGD, collateral LGD you asked about for the forward-looking economic forecast regarding the methodology for LGD, I believe the details have not been set. So we can't really give you any number of figures. However, it seems that in Q4, regarding our provisioning guidance that we had set forth previously, we did not take it out from the bank. And regarding some numbers, I think that it has already been reflected to a certain extent. So related to the collateral LGD, we believe that even if that happens, we will not have a great difference from the guidance that we had given in the past.

[Bong Kwon, executive]

Thank you. We do not have any further questions in the queue, but just give us one moment. Yes, I think we were able to entertain an ample number of questions. So with no further questions, we would like to close today's earnings presentation. Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]