KakaoBank Corp

KRX:323410

Earnings Call Transcript 2023-Q2

[Operator]

[Foreign Language] Good morning, and good evening. Thank you all for joining this conference call, and now we will begin the conference of the fiscal year 2023 Second Quarter Earnings Results by KakaoBank. [Operator Instructions]

Now we shall commence the presentation on the fiscal year 2023 second quarter earnings results by KakaoBank.

[Dianna Kang, executive]

[Foreign Language] Hello, this is Dianna Kang from KakaoBank's IR team. We will now begin KakaoBank's earnings call for the second quarter 2023.

We are joined by members of management today, including our CEO, Daniel Yoon; Vice President, [ Jay Kim ]; Seok Kim, our Chief Operating Officer; [ Conrad Shin ], our Chief Technology Officer; [ Vesper Goo ], Chief Strategy Officer; [ Aaron Lee ], Chief Financial Officer; and [ Elli Lee ], Chief Risk 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 Seok Kim, our COO, to present on our second quarter business highlights and financial results.

[Kim Seok, executive]

[Foreign Language] Good morning. This is Seok Kim from KakaoBank. Thanks to all of our investors and analysts joining us today for our second quarter 2023 earnings conference call. Let me take you through the key highlight results starting on Page 3.

In 2023, KakaoBank has been moving forward under the goal of scaling up operating profits while strengthening the influence of our platform. In the second quarter, we posted operating profit of KRW 111.8 billion, driven by strong loan growth and stable asset quality. Our credit loan balance recorded KRW 33.9 trillion, up 16% Q-on-Q, driven by continued mortgage loan growth. Meanwhile, asset quality remained stable, with delinquency recording 0.52%, down 6 basis points versus Q1.

The influence and power of our platform is becoming ever greater, driven by our solid customer base and increasing traffic. Even now with more than 20 million strong customers, we continue to see an inflow of new customers with 1.32 million new users coming on to our platform in the first half of this year. Traffic is also gaining further momentum with MAU now reaching 17.35 million in the second quarter.

On to Page 4 for our customer base. As of the end of the second quarter, customers totaled 21.74 million with MAU of 17.35 million. Customers were evenly distributed across all 8 segments as we achieve growing presence not only among the 20-,30-somethings, but among older users in their 40s and 50s where we recorded increased penetration of 64% and 40%, respectively.

Our signature lineup of products, including group accounts, has been an efficient driver growing our customer base. Please refer to Page 5 for more details on our group account products.

Page 6. Based on the strength of our differentiated convenience and versatility of use, KakaoBank, we have been working to strengthen engagement with our customers further, and as a result, we are seeing customers depositing more of their money with us, keeping us close by and using KakaoBank services more. Over the last 3 years, our current deposit balance has grown at a CAGR of 14%, with a number of payroll account users growing at 32% CAGR. We are now fifth in the banking sector in terms of market share based on bank transfers, just based on our retail banking business alone, which all demonstrate the high activity level of KakaoBank users and, in turn, high level of retention as well. In fact, among all transacting customers in June, we have found that 69% have engaged in transactions on the KakaoBank platform for 12 months in a row, which is another strong indicator of our expansive user base.

On to Page 7 for operating revenue. We posted second quarter operating revenue of KRW 613.3 billion, up 9% Q-on-Q, with even growth across all business segments. Interest revenue increased significantly driven by loan growth, while noninterest revenue, which combines fee and platform revenue, grew 4% Q-on-Q, with debit card transactions a key growth driver.

On to Page 8 for deposits. Q2 deposit balance totaled KRW 43.6 trillion, up 8% from the first quarter. Low-cost deposits as a percentage of the total increased by [ 0.6 ] percentage points, recording 57.4%, which is about 18 percentage points higher than the banking sector average. Our funding cost increased by 18 basis points Q-on-Q to record 2.44% from an increase in deposit balance inflow in the prior quarter.

Next on to loans on Page 9. As of the second quarter, our loan balance totaled KRW 33.9 trillion, up 16% from the previous quarter. Again, our growing mortgage loan balance, which increased by more than double versus Q1, was the single largest driver for lending growth. Housing deposit loans also contributed to growth, with the balance turning around to a net increase for the first time in 6 months. Meanwhile, credit loans continued to record a net increase in Q2, as it did in Q1, with the share of mid-credit loans increasing to 27.7% against total credit loans, up 2 percentage points Q-on-Q. NIM, net interest margin in the second quarter was 2.26%, down 36 basis points Q-on-Q from deposit growth and higher funding costs.

Next moving on to the next page for details on our mortgage loan performance, Page 10. As of the end of Q2, KakaoBank's mortgage loan balance exceeded KRW 5.5 trillion, demonstrating strong growth thanks to convenient user experience and competitive rates, with new loans increasing by more than double every quarter, driven in particular by growth in new mortgage loans for refinancing purposes, which make up 60% of the new balance in Q2. Thanks to this strong performance, our market share in new loans within the banking sector was boosted to 7.1%.

At present, 56% of our mortgage loan users are aged 40 and above, who, on average, have a current deposit balance nearly 3x larger than the overall average for all aged users. We believe that our mortgage loan growth will in turn help strengthen the competitiveness of our deposit products.

From Page 11, let's move on to our fee and platform business side. I will be mostly highlighting new services. First, our refinancing platform on Page 11. With the start of the loan refinancing initiative in Korea, we launched our new credit loan refinancing service earlier this May. Although we set a daily limit on applications by high credit borrowers, as we were mindful of meeting our annual mid-credit targets, we still recorded a high market share of 10.5% within the broad financial industry in June, with market share shooting up to above 50% during periods when inflow limits were not in place, which reaffirm the influential power of our KakaoBank offering. We're planning to introduce a loan comparison service within the year, and expect to be firmly anchored as a refinancing platform of choice by more customers as we continue to scale our service domain.

Page 12. Please refer to the slide for details on our payment services.

Moving on to Page 13 for our investment context. At KakaoBank, we have been sequentially launching a series of investment-related services to build up our presence in the investment context, whereas we focus on completing our offerings mostly to support equity investments, for example, securities account openings or global and local stock trading services up to last year. In June, we started expanding into the nonequity stock trading space, with commercial paper sales as a start. Going forward, we want to expand our partnership and lineup of investment products further to provide a richer investment experience to all KakaoBank users.

Page 14, our advertising business. Our ad business recorded KRW 4.3 billion in sales in the first half thanks to expansion of ad categories, including telecommunications, electronics and commerce, and also inventory expansion as well. Although we are still at the very early stage of the advertising business, about 70% of total ad sales came from our own direct contract ads, such as loan ads, reaffirming the competitiveness of our platform, which we want to build on further in the second half of the year by further advancing our ad recommendation model for greater advertisement efficiency.

Next, on to mini on Page 15. Mini has become a must-have financial service app for local teens, and with the added launch of mini Life in May, has expanded into the daily life territory of our teen users even more. Now users are spending more time logged on to mini than ever before not only for their financial needs, but for everyday tasks such as checking their class schedules or their school lunch menu. In fact, 96% of mini Life subscribers are now visiting the app every single week, with log-in frequency averaging 10x per week, displaying a higher activity level versus non mini users. We will continue to add on other converged offerings to further establish our service as the go-to service for both finance and daily lifestyle needs.

Please refer to Page 16 for further details on mini.

And now moving on to SG&A and CIR. Page 17. Our SG&A in the second quarter recorded KRW 107.3 billion, up 16% Q-o-Q, reflecting full payment of premium into the 4 major public insurance schemes and also increased advertising and promotion spend for new products. CIR was 39%.

On to Page 18 for operating profit. Our second quarter operating profit recorded KRW 111.8 billion, up 50% year-on-year, driven by an increase in interest income from loan growth. ROE and ROA recorded 5.62% and 0.67%, respectively.

On to Page 19 for asset wellness. The delinquency rate we recorded in the second quarter actually was 0.52%, which was down 6 basis points from the previous quarter. We did see a big increase in loan assets, driven mostly by mortgage loans. But we initiated subrogation payment proceeding on guaranteed loans, which actually made up the biggest part of our overdue balance in the first quarter. And so as we seek repayment of the claims from the guarantor on behalf of the borrower, this contributed to a decline in the delinquency rate. Our substandard and below rate, also credit cost, saw a slight improvement versus the previous quarter, recording 0.42% and 0.75%, respectively. Our loan loss allowance and coverage ratio also was 229%.

From Pages 20 to 22, I think you can refer to the slide for our planned new service launches and our global business strategy, also key highlights in terms of ESG performance as well.

And with that, I will conclude my presentation on the key business highlights and financial results for the second quarter of 2023.

[Operator]

[Operator Instructions] The first question will be provided by Sinyoung Park from Goldman Sachs.

[Sinyoung Park, analyst]

[Foreign Language] This is Sinyoung Park from Goldman Sachs. I have 2 questions. First, on your loan growth, I think into the start of this year you did see very high rates of lending growth, especially around your mortgage loans. You've, in fact, even overachieved against your start of the year target at mid-10% or so. So perhaps your full year guidance in terms of loan growth may need an adjustment. So could you provide the kind of adjusted guidance in terms of how much loan growth, especially for your mortgage loans, you expect for 2023 on a full year revised basis?

Second question regarding margins. So as a percentage of all new loans, the percentage of mortgage loans actually was quite high. But even that said, I think the margins actually have contracted by more than what's expected by the market, generally. You did secure a lot of deposits funding early in the year. But still considering the speed of lending growth, do you think potentially there may be some burden weighing on your funding costs? So could you provide us with some plans or your outlook in terms of how you will be managing your funding costs and margins?

[Unknown Executive]

[Foreign Language] Yes. Thank you for what I think will be the 2 questions that everybody is most interested in. So your first question regarding our guidance for loan growth. As you have seen in the first half of this year, KakaoBank has really, by far, overachieved against our initial guidance or target. And at present, we believe that for full year 2023, we may be on good track to achieve mid-30% level of lending growth.

So as we explained at the last -- first quarter conference call, we actually did expect a high level of loan growth starting in the first quarter of this year. But relative to the increase we saw in deposits, the loan growth in Q1 was actually below our expectations. However, into the second quarter, the market start to move in line with our broad expectations. So we think that, obviously, we may have to look to adjust the loan-to-deposit ratio. And also this may be the timing where we start focusing more on how to manage both our deposit and lending rates.

So as we continue to grow our loan book, assuming that there are adjustments made to the rates, both on the deposit and lending side. Whereas we achieved full year NIM somewhere around 2.48% last year, we think that based on current projections, we may be set to achieve somewhere between 2.35% to 2.4% NIM this year. Of course, this may be subject to various uncertainties, including market, interest rates, also the directionality of the government policy. However, because a lot of the assumptions that have been in place by KakaoBank for the first half of the year have largely played out, we think that, that level of NIM or margins should be largely achievable in the second half of this year.

[Operator]

[Foreign Language] The following question will be presented by Park Hye-jin from Daishin Securities.

[Hye-jin Park, analyst]

[Foreign Language] Thank you for letting me ask 2 questions. So my question also has to do with margins. So it seems from what I'm hearing that you are ready to accept a little bit of a decline in NIM in order to really boost or scale up growth. So as we look not only out to the second half of this year but more into the mid- to longer term, do you have a certain target in mind in terms of NIM? What level of NIM will be manageable again? If you could share, we'd appreciate it.

Second question is more minor. So your loan growth today has been very solid. I understand for your housing deposit loan, you have increased the limits slightly, but it was not sizeable. So in the second half, do you have any plans to further increase the limit on your housing deposit loan?

[Unknown Executive]

[Foreign Language] So it's not that we have a specific mid- to long-term NIM target in mind that is reflected in the business plan. But we do actually refer to the lending-deposit rate spread, which is data made available by the banking federation on their website where you can access the information by the different banks, their lending rate versus deposit rate and in terms of the spread that I mentioned. So we do refer to the spread as key information in determining our deposit and lending rates at an optimal level.

But a key piece of information that is not visible or accessible is the amount of loan loss provisioning that is set aside by loan type. So we look at not only the rate spread between loans and deposits, but also how much provisioning has to be set aside in the process of originating a loan to protect against loan loss. So we refer to both indicators because we consider it to be a key priority to use that information to determine an optimal level of lending and deposit rate spread to carry a stable buffer.

So obviously we are a latecomer to the industry. And so as we launched new services and products, including our home mortgage loans, we believe that as a newcomer, in order to build up very quick presence and dominance in the space, we would intentionally have to come up with very competitive rates. And so I think this kind of strategic approach actually paid off because now very many users and also people in the market for loans think of the KakaoBank and also our refinancing loans first to mind when they consider getting a loan. And so if you look at the percentage of refinancing loans against our total mortgage loan balance, I think that also is an indicator showing that our strategic approach was in fact very effective and valid.

Regarding your second question regarding the housing deposit loans, actually, we launched a new housing deposit loan in July this year, which is actually guaranteed by SGI, which is Seoul Guarantee Insurance Corporation. So compared to the regular housing deposit loans that we had previously made available, this loan actually provides more attractive conditions for the borrower. So the limitations on the deposit amount limit, for example, has been eased from 220 million or so up to 500 million. So I think we should assess the reaction or the response from the market or the users on this product first.

[Operator]

[Foreign Language] The following question will be presented by Jihyun Cho from JPMorgan.

[Jihyun Cho, analyst]

[Foreign Language] Yes, so I have a question on asset soundness. So as you saw a very rapid increase in your loans, it seems that compared to the start of the year, your delinquency ratio NPL actually has stabilized considerably. Could you share those metrics and trends for other types of loans, your mid- to low-rate loans, for example, or other credit loans? I think the other competing banks actually have enforced more conservative provisioning policies in the second quarter, even changing their underlying assumptions to do that. So have you done that in the second quarter in terms of more conservative provisioning done in Q2 versus Q1?

Second question, you said that you're looking at mid-30% level loan growth as guidance for this year. Since you've already achieved 20% growth in the first half of the year, what does that mean in terms of the trajectory for further growth in the second quarter -- second half of the year on a quarter-to-quarter basis? Are you thinking single-digit growth? Or do you think that it was particularly high in the second quarter? Do you think it's likely to slow down? Or do you have more of a conservative outlook? Could you share more of your outlook for the second half?

[Unknown Executive]

[Foreign Language] Yes. So in terms of access soundness, we do have delinquency data available for the broad market covered as of the end of May, which we can refer to. So for the overall market, the delinquency rate for overall loan portfolio, including credit loans, is 0.75%. In the same time period for KakaoBank, for our credit loan and other loan portfolio, our delinquency rate is 4 basis points lower at 0.71%. So when you consider that the portion of mid- to low credit borrowers is almost 27%. I think that we can consider this as a key indicator showing very robust asset quality management, specifically of our credit loans.

But as we also commented at the last conference call, credit loans ultimately are impacted by the level of market interest rates and also directly impacted by the business cycle as well. That said, we think looking at the second half of the year, we think that there still remains a potential upside for growth of credit loans in the second half. Perhaps we should see a turnaround toward growth at the earlier and perhaps starting in the first half of next year or perhaps by more stable trends by June or July next year. That is our internal view at the moment.

And your second question regarding provisioning, we do understand that there are discussions centered around the regulatory authorities about introducing a more conservative stance toward provisioning overall. But separate and independent from those discussions, internally, at KakaoBank, we have already been enforcing more conservative provisioning already based on what we call future business outlook framework. And so we have already set aside a sufficient level of provisioning through efforts.

And in fact, in the first half of the year, we did additional provisioning of KRW 14 billion based on very conservative assessment of various risk assessment factors. In the second half of the year, it does depend on what kind of discussions take place on those risk factors, led by the regulatory authorities that will ultimately determine whether or how much additional provisioning would be required.

So regarding our full year guidance for loan growth 2023, as I said, we're talking about a minimum mid-30% growth this year. So relative to the first half of the year, we are slightly more conservative in terms of our outlook or prospects for loan growth in the second half. The reason being various uncertainties that remain in place in terms of the current business cycle; also the directionality of the market rates also is uncertain.

We think that going forward, that means that managing asset quality, particularly for our credit loans, will become will remain a very key priority into the second half of the year. So overall, we think that we may have to place more focus on the lower margin home mortgage type loans. Again, lower margins in a relative sense, of course. And we are mindful that there are ongoing discussions at the banking federation level within the -- among the commercial banks about changing the criteria for disclosure filing from new origination amount to existing balance.

And so depending on how those discussions play out, if it is affected, we think that, that can actually spark even more pricing competition over lending rates in the second half of the year, which is why, compared to the first half, we think that in the second half, we should focus not so much on building up the volume per se, but focus more on better managing our profitability and also our NIM rate. So again yes, again, compared to the first half, we are more conservative in terms of how much growth we expect in the second half of the year, expecting slightly less growth. But on balance, we think that we will, at minimum, be able to achieve -- not 30%, but let me correct myself, 35% minimum growth.

[Operator]

[Foreign Language] The following question will be presented by Jaewoong Won from HSBC.

[Jaewoong Won, analyst]

[Foreign Language] Thank you for delivering good performance despite the difficult circumstances and condition. My first question has to do with your other operating profit, which seems to have grown significantly very quickly compared to last year. So does that number include your advertisement revenue as well? Also other income from your marketable securities, for example, if you could provide more details, I'd appreciate it.

And second question regarding provisioning. I think you're saying that in relative sense, you have been very good about setting aside good provisioning already. So specific to the second quarter, how much preemptive provisioning have you done in Q2, and what are your expectations in terms of what the government will require in terms of future countercyclical type of provisioning requirements?

[Unknown Executive]

[Foreign Language] Yes, regarding your first question, so actually there are 3 components making up other revenue. First is regarding the marketable investment securities. We have gain or loss on trading or valuation. So that component will include gains or losses from MMF or beneficiary certificate type product. And then the second component is our disposal gains from disposition of NPL. And then third is our fee from ForEx transaction.

And advertising revenue, which you asked about, is actually accounted for not under other revenue, but it goes under platform revenue, which is indicated in our performance materials. And so to explain a little bit more, the biggest part making of other revenue actually is trading or valuation gain or loss from MMF. So in contrast with other commercial banks, actually, at KakaoBank, have a slightly lower loan to deposit ratio.

So what funding we use -- the funding that we have available after providing lending, we actually can invest in investment products or other marketable securities like MMF. It so happens that compared to the first quarter, we actually saw very good returns on our investments into products, including MMF in the second quarter. And in fact, because the treasury bond yields are, in fact, even lower versus the benchmark yield, we've actually seen very strong yield and returns from our short-term investments into these instruments.

And then in terms of the KRW 13 billion to KRW 14 billion in preemptive provisioning that we have already set aside in the first half of the year, let me break it down into Q1 and Q2. So it was slightly over KRW 9 billion in Q1 and KRW 4.3 trillion in Q2. And then in terms of the risk assessment factors that the regulatory authorities enforce, in the past, most of the discussions were focused around probability of default, or PD, rates. But now there are ongoing discussions about introducing additional assessment criteria like loss given default, LGD. So it does depend on how those discussions play out and they will have to see how they finalize to determine whether additional provisioning will be required or not. So it is hard to say definitively at this present time.

[Operator]

[Foreign Language] The following question will be presented by Do Ha Kim from Hanwha Investment & Securities.

[Do Ha Kim, analyst]

[Foreign Language] Thank you for the opportunity, but in fact, the investor or analyst just now actually asked the 2 questions that I was going to. So I'll pass. Thank you.

[Operator]

[Foreign Language] If there are no further questions, we will now conclude our conference call for KakaoBank in the second quarter of 2023. I'd like to end by thanking all of our analysts and investors for joining us today.