KakaoBank Corp
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KakaoBank Corp
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[Interpreted] Good morning and good evening. Thank you all for joining this conference call for the earnings results of KakaoBank. This conference will start with a presentation followed by a Q&A session.[Operator Instructions]Now we will begin the presentation on KakaoBank's first quarter earnings results of the fiscal year 2024.
[Interpreted] Hello. This is Dianna Kang from KakaoBank's IR team. We will now begin KakaoBank's earnings call for the first quarter 2024. We are joined by members of management, including our CEO, Daniel Yoon; Vice President, [ Jay Kim ]; Chief Operating Officer, Seok Kim; [ Conrad Shin ], our Chief Technology Officer; [ Vesper Ko ], Chief Strategy Officer; [ Eli Lee ], Chief Risk Officer; [ Paolo Lee ], Chief Business Officer; and [ Ted Kwan ], our Chief Financial Officer.The financial results contained in today's call are preliminary, unaudited results based on K-IFRS and may be subject to change upon review by an independent auditor.I will now hand over to Sean Kim, our COO, to present on our first quarter business highlights and financial results.
[Interpreted] Good morning. This is Seok Kim from KakaoBank. Thanks to all of our investors and analysts joining us today for our first quarter 2024 earnings conference. On Page 3, let me first take you through our key business directions for 2024.We seek to achieve 3 objectives in 2024. The first is profit expansion from enhanced customer engagement. A stronger customer base will allow us to expand our competitive funding portfolio centered around low-cost demand deposits, which will in turn support stable asset management and loan growth, driving stronger earnings for KakaoBank.The second objective is to expand our fee and platform revenue, leveraging our overwhelming traffic base. Last year, we focused on building up the foundation for our fee and platform business going forward as we started off our advertising business and our credit loan comparison service. In 2024, we will build on the foundation laid over the past year to kick-start our monetization ramp up. Through a steady growth across our fee business and diversification of platform revenue, we aim to achieve significant growth in our fee and platform earnings this year.Lastly, our third objective is to continue to practice stable risk management throughout 2024 for balanced growth between financial soundness and profitability.Let me now move on to our first quarter results from Page 4. On to our customer base. As of Q1, customers totaled 23.56 million, up by 720,000 versus the end of last year, of which 84% are group account and KakaoBank certification users, demonstrating meaningful penetration of our services into the everyday context of our users. As our customer base expands further, engagement is also continuing to get stronger with MAU and WAU recording 18.03 million and 13.22 million respectively as of the end of Q1.On to Page 5 for our operating revenue. In the first quarter, we recorded operating revenue of KRW 717.9 billion, up 8% Q-on-Q with even growth across all segments, including interest revenue. Platform revenue picked up, recording KRW 21.1 billion, driven by 30% plus top line growth from both our securities and loan comparison services. Meanwhile, other revenue increased significantly Q-on-Q to KRW 64.3 billion from an increase in total invested assets and also disposal gains from loan receivables.On to Page 6 for deposits. In the first quarter, our deposit balance saw record high quarterly growth of KRW 4 trillion, driven by a boost in our demand deposits, including group accounts, increasing 12% Q-on-Q to KRW 53 trillion. Our share of low-cost deposits increased by 1.5 percentage points Q-on-Q to 56.8%, widening our gap versus the banking sector average further. Our funding cost in Q1 recorded 2.42%, up by 4 basis points Q-on-Q driven by an increase in our time deposit balance. Please refer to Page 7 for a detailed performance results from our group account products.Moving on to loans on Page 8. As of the first quarter, our loan balance totaled KRW 41.3 trillion, up 7% Q-on-Q driven by growth in home mortgage loans and housing deposit loans. The share of mid-credit loans was up 1.2 percentage points Q-on-Q, recording 31.6% while NIM recorded 2.18%, down 18 basis points Q-on-Q as the increase in our deposit balance resulted in a lower loan-to-deposit ratio and higher funding costs.Next on to the following page for results from our refinancing service. Page 9. Leveraging our efficient deposit funding structure, we offer competitive refinancing terms, recording high market share for both mortgage and housing deposit loans, which were included in the scope of the refinancing platform earlier in January with refinancing loans driving total lending growth.We recorded market share of 31% in mortgage loan refinancing among 32 financial institutions, 46% market share in housing deposit loan refinancing among 21 financial providers based on the execution amount of loans with the share of refinancing increasing to 62% of new mortgage loans and 45% of new housing deposit loans in the first quarter.Onto our treasury management on Page 10. Our assets under management from deposit funding are invested across loans, bonds and beneficiary certificates, with total managed assets expanding to KRW 14 trillion in the first quarter from an increase in our deposit balance and decline in our loan-to-deposit ratio. We recorded KRW 51.1 billion in revenue from MMF and fixed income type fund investments as we increased our allocation to the asset class.Meanwhile, given the growth in our AUM, we are planning to reinforce our asset management function further. For investments in Korean won, we want to expand our fixed income and fund portfolio while also expanding into foreign currency funds following the launch of FX services. Diversifying our investment portfolio is expected to boost the effectiveness of our asset management, continuing to drive overall earnings growth going forward.Let me move on to our fee and platform business performance on Page 11. First our loan platform on Page 11. Our credit loan comparison service was launched December last year, but has already been showing positive performance, both in terms of revenue and traffic. In the first quarter, the number of loans executed through co-branded partners via our credit loan comparison service totaled 48,000 with a total loan execution amount of KRW 574.3 billion. This is more than double the performance we achieved in the first quarter of last year based on our existing loan referral business. And when assuming that this pace may continue, we expect full year earnings to increase by more than twofold on a year-on-year basis. Meanwhile, since launching our credit loan comparison service, our coverage as a broad lending platform has only increased and credit loan traffic in Q1 recorded 3.27 million, up 22% Y-o-Y.Next onto Page 12, our payment services. We are looking to expand into more types of payment means as we expand our payment services business. As a start, we are introducing an account-linked payment service, which will allow us to offer newfound payment experience to our partners and users alike, thanks to the efficient underlying cost structure.In January, we added on an account linked payment option on the Kakao gifting and shopping service, which has increasingly been gaining traction among more users. In the midterm, we are aiming for a strong integration with credit card services to strengthen the completeness of our credit card offerings. Meanwhile, we continue to demonstrate our overwhelming platform power through our co-branded services. Our mobile coupon marketplace, for example, which opened December last year, has already surpassed 1 million in cumulative users as of mid-April, accounting for 87% sales transaction market share among major co-branded partnering channels. We will continue to leverage our platform power to expand our lineup of services that can provide for a more compelling user experience.The slides from Page 13 to 15 outline more details about our overall investment context, also our advertising business and mini products. So please do refer to the slides. And we will now move on to Page 16 for SG&A and CIR. Page 16. In Q1, our SG&A was down Q-on-Q to KRW 113.7 billion as the impact from one-offs in the fourth quarter last year, including bonus payouts, were resolved. Q1 CIR recorded 35.2%, which is an improvement from 37.3% recorded last year.Onto Page 17 for our operating profit. First quarter operating profit increased by 44% Q-on-Q to KRW 148.4 billion, driven by an increase in fee and platform income. Thanks to increased profit, ROE and ROA improved to 7.29% and 0.78% respectively.Onto Page 18 for asset soundness. Q1 delinquency decreased by 2 basis points quarter-on-quarter to 0.47%, thanks to stable loan growth and risk management. Q1 loan loss provisioning total KRW 59.7 billion, down KRW 6.1 billion Q-on-Q, thanks to preemptive provisioning already done in 2023. As a result, credit cost was 0.60%, down by 9 basis points Q-on-Q.This now concludes our financial results and business performance for the first quarter of 2024.
[Interpreted] And with that, we'll now move on to the Q&A session.
[Interpreted] [Operator Instructions] The first question will be presented by Sinyoung Park from Goldman Sachs.
[Interpreted] Yes. This is Sinyoung Park from Goldman Sachs Securities. I would like to first ask about the very sharp growth you have seen in the first quarter this year in terms of your deposit base following on similar rapid growth in the first quarter last year. Earlier you did mention that you intend to expand your asset or invested asset portfolio. So overall, what is the level of adequate loan-to-deposit ratio that the company is thinking of? And also, what is the probable size of the asset portfolio as envisioned by the company? What is the portion out of total interest-bearing assets? Also, what are the expected returns on the portfolio as well?And the second question has to do with your expectations regarding credit costs. I think earlier, you mentioned that the level will likely be similar to prior-year levels. Last year, however, you did some preemptive provisioning and the reported number actually was somewhere in the mid-70 basis point level, if I recall correctly. So the reason why you mentioned that you will maintain prior levels, is it mindful of additional provisioning that you believe may be required? Or are you thinking that on a recurring level, your credit cost profile may deteriorate? Is that reflecting your expectations for similar credit costs as last year?
[Interpreted] Okay. Let me answer your first question. So, there's distinct seasonality in the first quarter of any given year. This applies not only to KakaoBank, but in fact all commercial banks in Korea whereupon there is an increase in the deposit balance in the first quarter.And compared to the first quarter last year, actually this quarter we saw a record high incremental growth in terms of low-cost demand deposits coming in in the first quarter this year. So in terms of our total funding cost, there is some impact from the high rate time deposits or installment saving type deposits that we drew last year, reaching maturity. So on a blended basis, the funding cost is slightly higher. But if we assume consistent inflow of low-cost demand deposits, as we've seen in the first quarter, we can expect to manage our funding costs for the full year on a more manageable, stable basis.So in terms -- assuming that current deposit inflows are maintained, we will be able to manage the level at a very stable rate, assuming 70% to 73% loan-to-deposit ratio based on the older calculation scheme, even after reflecting duration or interest rate risk.So the point is that we will be able to manage loan-to-deposit ratio lower than current level. And I think the point of your question is what kind of NIM do we expect for the total portfolio. So regarding our NIM expectation, this will be covered when we provide our overall company-wide guidance. However, in terms of our asset management, the scale is actually determined to fit the purpose of adequate risk or interest rate risk management.So for our new money yield, the target is actually a 3-year KTB yield plus an added alpha. But of course, because we have previous investments in longer duration assets, the end return, of course, will be a blend of new money yield and existing yield.And then onto the second question. Regarding -- your second question regarding credit cost. As we have commented earlier, on a full year annual basis, we believe that it will be similar, if not slightly improved versus last year levels. So this projection is actually based on conservative assumptions that presume additional deterioration in terms of delinquency profile or asset quality even compared to our mid-rate loan portfolio newly originated last year.
[Interpreted] The next question will be presented by Hye-jin Park from Daishin Securities.
[Interpreted] I have 2 questions. First, on margins. It seems that in the first quarter, despite significant increase in your deposits, NIM actually contracted by a significant margin. So could you explain more the reasons why? It seems that perhaps as mortgage loans and housing deposit loans were included in the scope of refinancing, there might have been a little bit of a pricing competition going on. So could you explain the reasons behind the reduced NIM?Second question also has to do with your refinancing platform. So as the scope of eligible borrowers and collateral is expanded in April, or was expanded in April, going forward do you plan on being actively tapping into that part of the market in the second half of the year as you did in the first quarter? And then would it be fair to expect that your margins in that case would be lower?
[Interpreted] Okay. Let me take your first question. So we believe there are 3 drivers behind the reduced NIM. The first and biggest factor behind the reduced NIM is the decrease in our loan-to-deposit ratio. So as we have set a new strategic direction to channel our low-cost demand deposits toward asset management, we are now condoning a lower level in terms of loan-to-deposit ratio. So that is the first key factor.And then the second reason is the slightly reduced interest rate that is applied to our lending products. So reflecting overall loan portfolio mix change, and also again, the slight decrease in the growing market rate that serves as the benchmark for our lending rate. Actually that was the second factor behind the reduced NIM.And then the third factor is actually additional cost burden from time or installment deposits that were originated last year upon reaching maturity. So in terms of our full year expectation regarding NIM, we think that there is room for additional upside in terms of NIM and our baseline expectation is 2.2% in terms of full year NIM. So our guidance of 2.2% NIM, we believe, is achievable, even assuming that our loan-to-deposit ratio declines further from current levels on the assumption that our return on our investments, our invested assets, does align with our targets. So we feel that there is a high likelihood that we will be able to achieve this target. And another target is to maintain 50 basis points or greater gap in terms of our KakaoBank NIM versus the market average NIM.And let me now take your second question. So, as you mentioned, there are certain initiatives that the government is intending to pursue this year. For example, expanding the scope of eligible housing to qualify for mortgage loans, or extending the loan period for housing deposit loans [ what ] we actually have been preparing for these types of initiatives.But all the preparatory work notwithstanding, we seek to revise down our annual full year guidance for loan growth from the 20% range that we communicated to you at our previous earnings call to a low 10% range. So this reflects the regulatory authority's strong commitment to contain household loan growth within nominal GDP growth levels.So we want to be receptive to the government direction and align to that direction as well. And so lending growth will likely ease in the second half of the year. And on a full year basis, again., our guidance is lending growth at around low -- around the low 10% level.The same set of assumptions actually apply to the inflow of refinancing loans from other financial institutions that come to us through the refinancing platform.
[Interpreted] Next question, please.
[Interpreted] The next question will be presented by Do Ha Kim from Hanwha Investment & Securities.
[Interpreted] Yes. I also have a similar question regarding the loan-to-deposit ratio. So it seems that your overall concept is to direct part of your low-cost deposit funding more toward asset management. But given how current funding cost actually is on the rise, there are some questions whether that kind of excess funding should necessarily be directed to more asset management or not.So earlier in your NIM expectations, you mentioned that the expected return from your asset investments will be incorporated in NIM. So obviously, the interest gain from your AUM management, of course, will be calculated as part of NIM. But it seems that perhaps you have other sources that you are expecting to deliver additional upside. So, for example, disposal gains from your loan receivables or whatnot.So, can I confirm what other external sources you may be expecting? And in your fact sheet, could you actually break out your other operating income into marketable security gains and other gains, just to clarify the sources? And in terms of your current loan portfolio, could you also provide greater detail in terms of the overall mix between housing-related loans versus credit? And then also the percentage share of variable or floating rate loans against the total portfolio, like those figures as well?
[Interpreted] Okay. Let me answer your first question on NIM. So the discussion that we're having today, how we want to increase our low-cost demand funding to deliver high rate of return on our investment assets, of course, this is intended in part to improve our earnings growth, but also based on our conclusion that ultimately, in order to become a broad financial platform that is much appreciated by many users, we actually have to have even growth across not only the platform, but also in terms of transactions and also user engagement. And as I mentioned, the funding costs that we saw on our deposits for the first quarter actually do reflect seasonality and also the nature of the portfolio.But as we move towards the second quarter, we expect it to stabilize and go downward. And funding cost, of course, will also stabilize versus the first quarter. And then your suggestion or request for further breakdown of the fact sheet item, we will follow up with.For your information, by the way, disposal gains from loan receivables totaled KRW 11.3 billion in the first quarter. And so this is included in the KRW 64.3 billion in our other operating revenue.And then let me move on to your second question. So our loan portfolio can be largely broken down into 3 types of products, credit loans, housing deposit loans and mortgage loans. So for credit loans, in terms of what benchmark index we use in terms of the credit loan lending rate, well, we currently use a 5 to 5 split between 3 months and 12 months financial debentures.And so we use an index that has average duration of 6 months. This is applicable to our variable loan products. And for our housing deposit loans, they are all 6 months variable rate products. For mortgage loans, about 83% of the loans are 5-year fixed rate products.
[Interpreted] Next question, please.
[Interpreted] The next question will be presented by Jihyun Cho from JPMorgan from JPMorgan.
[Interpreted] Yes. Thank you for the opportunity to ask some questions. It seems that in terms of your mid-rate credit loans, the percentage is currently about 31.6% whereas the guidance from the authorities and perhaps your company target, I believe, was somewhere around 30%. So specifically for this year, what is your target in terms of mid-rate credit loans?And also overall NPL and delinquency appear to be stable, but could you provide a further breakdown of those 2 asset quality indicators by different loan segments, also for the mid-rate loans?Second, regarding your credit loan comparison service, which you launched on your loan platform, how is it differentiated versus similar services offered by others?Third question, you said you want to expand your fee income. So are there any updates on my data or your credit card service offerings?
[Interpreted] Let me take your first question. So in terms of our target for this year, in terms of mid-rate credit loans, as a percentage share of our total credit loan portfolio, the target is 30%. Our balance target is 4.8% as of the end of this year.And regarding the delinquency rates, I do understand that there are no other commercial banks that provide a detailed breakdown of delinquency by different household loan segments. So just to comment on current dynamics. For mortgage loans, housing deposit loans and also business owner loans, our delinquency has been more stable compared to the broader market.For credit loans, actually the -- the figures actually are disclosed under the category of other credit loans. But because we do handle mid-rate credit loans, in relative terms, the delinquency is slightly higher versus the other commercial banks.But we do have the disclosed delinquency numbers out current as of February. And so in terms of those numbers relative to the market, I can tell you that the degree of deterioration of the credit loans in terms of delinquency, it is to a much lesser extent versus the broader market also in comparison to the situation at the end of last year.And then there really are no updates available at this time for MyData or credit card initiative as the review process is still underway regarding the largest shareholder eligibility issues. But we are in talks with credit card service providers about a strong integration of services with the credit card companies for co-branded services.And similarly, we are in talks with MyData providers as well to discuss potential areas for partnerships.
[Interpreted] Because of the time, we will accept one last question.
[Interpreted] The last question will be presented by Jaewoong Won from HSBC.
[Interpreted] Yes. I have 2 questions as well. First, regarding your global business. It seems that it could potentially be a source of growth momentum in the mid to long term. So what is the situation right now in Thailand and Indonesia? Could you just briefly take us through what you are preparing and also the potential timing?Also, regarding credit costs, your overall guidance is that it may be similar to last year level. But given the delinquency level that you have just mentioned and also credit cost, it seems likely that, if anything, it may become more stable this year versus last year. So is your guidance -- isn't it overly conservative?
[Interpreted] Okay, let me take your first question. First, in terms of Indonesia, we are collaborating with a local bank, super bank, and we're preparing for a grand opening for local customers quite soon. And so again, we want to actually take our [ accumulated ] service capacity and know-how to provide to the local market. And so we are in talks again with our local partner in terms of how to exactly reflect our distinct service philosophy and features into local services.And in terms of the latest on Thailand, so WeBank from China actually has recently joined as a business partner to our existing consortium with Siam, SCBX bank. And the 3 companies will work together to submit an application for a virtual bank license to the Thai Central Bank as actually, they have started receiving license applications as of March. So our target is to finish the documentation work by August this year.Regarding your second question. Regarding your projection on credit cost, as we have commented earlier, we do think that it is geared slightly on the conservative side. And there are 2 reasons why we believe this degree of conservativeness is required. Last year we actually originated a record high amount in mid-rate credit loans. And that is why we believe potentially there can be a high concentration of delinquency that can materialize on last year's batch of mid-rate loans. And then the second reason is due to what's called the credit leniency program that can also have some impact.So as various easing measures which were adopted due to COVID are normalized, we have seen a spike in delinquency, for example, from individual business owner loans. And we believe that likewise, the effect from these credit leniency programs could kick in potentially at any time. So this requires a measure of conservative assumptions as well.
[Interpreted] With that, we will conclude the earnings call for the first quarter 2024 for KakaoBank. We'd like to thank all of our analysts, investors and members of the media for attending.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]