KakaoBank Corp

KRX:323410

Earnings Call Transcript 2023-Q3

[Operator]

[Foreign Language] Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference out of fiscal year 2023 third quarter earnings results by KakaoBank. [Operator Instructions]

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

[Dianna Kang, executive]

[Interpreted] Hello. This is Dianna Kang from KakaoBank's IR team. We will now begin KakaoBank's earnings conference call for the third quarter 2023.

Today, we are joined by members of management, including our CEO, Daniel Yoon; Vice President, [ Jay Kim ]; Seok Kim, our Chief Operating Officer; Jae-Hong Shin our Chief Technology Officer; [ Vesper Goh ], Chief Strategy Officer; and Mr. [ Cheol Lee ], Chief Financial Officer; as well as [ Idun 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 third quarter business highlights and financial results.

[Kim Seok, executive]

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

At KakaoBank, we have seen robust portfolio expansion, underpinned by balanced growth on both the loan and deposit side and stable risk management. As of Q3, our loan and deposit balance stands at KRW 37.1 trillion and KRW 45.7 trillion, growing by 9% and 5%, respectively, Q-on-Q. Most of the loan growth was driven by mortgage loans for refinancing purposes with a cumulative balance now standing at KRW 4.3 trillion.

Meanwhile, delinquency improved 2 quarters in a row, recording 0.49%, down by 3 basis points as of the end of Q3. Thanks to rigorous risk management and control, we at KakaoBank have been providing a consistent supply of mid-credit loan into the market with a cumulative balance recording KRW 9.6 trillion and mid-credit loans accounting for 28.7% of total credit loans, which is very close to the stated policy target.

Together with growth in our business portfolio, our profit base has also become even stronger. Fee and platform revenue grew by 11% Q-on-Q, recording KRW 73.1 billion. Our CIR improved to the 35% level, thanks to appropriate hiring and cost control. NIM also improved for the first time in 3 quarters, recording 2.31%, up by 5 basis points Q-on-Q.

Next on to our customer base on Page 4. As of the end of Q3, customers totaled 22.28 million, with our MAU increasing slightly from 17.35 million in the second quarter to 17.44 million. Customers were evenly distributed across all 8 segments, with continued inflow of users in their 40s and 50s with the respective age group penetration increasing to 66% and 42% each.

We have been expanding our customer base consistently, thanks to the strength of our signature lineup of products, including group accounts. Please refer to Page 5 for more details on our group account products.

Moving on to Page 6 for operating revenue. In Q3, we recorded operating revenue of KRW 656.6 billion, up 7% Q-on-Q. Interest revenue grew in line with lending growth, while fee and platform revenue also increased quarter-on-quarter, thanks to strong debit card performance. Meanwhile, other revenues decreased slightly Q-on-Q as MMF and other investment assets declined as our loan-to-deposit ratio improved.

On to deposits, Page 7. In Q3, our deposit balance grew 5% Q-on-Q to KRW 45.7 trillion. The portion of low-cost deposits declined slightly Q-on-Q to 56.9%, but our gap versus the banking industry average widened further to 18.6 percentage points. Our funding cost recorded 2.36%, down 8 basis points Q-on-Q following adjustment to our deposit rates.

Moving on to Page 8 for our loans. As of the third quarter, our loan balance totaled KRW 37.1 trillion, up 9% from the previous quarter, driven by even growth in all loan segments, including credit and secured. The share of mid-credit loans increased to 28.7%, up 1 percentage point Q-on-Q. Net interest margin in Q3 recorded 2.31%, up 5 basis points Q-on-Q from a drop in funding cost and improved loan-to-deposit ratio. I will move on to further details on our secured loan performance on the next slide.

Page 9. As of the end of Q3, KakaoBank's mortgage loans, which were launched in February last year, have posted a cumulative balance of KRW 8 trillion, representing 1.4% market share within the banking sector when based on balance. More than half of the balance was for refinancing purposes with customers drawn to KakaoBank due to our compelling user convenience and competitive lending rates, which are helping alleviate the financial burden of our users. Last July, we launched our housing deposit loans guaranteed by SGI, which help extend the scope of our target customers. Later in September, we started out refinancing services for housing deposit loans for borrowers who need to refinance existing housing deposit loans when moving to a new house or renewing their housing contracts at a higher deposit amount as we seek to offer more competitive options for users to choose from.

Let me move on to our fee and platform business highlights, starting on Page 10. Our loan platform on Page 10. With the start of the loan refinancing platform initiative in Korea, we launched our new credit loan refinancing service earlier in May, despite setting a limit on applications by high credit borrowers in consideration of our full year mid-credit loan target, we still recorded third quarter market share of 19.5% within the financial industry, which is nearly double that of the second quarter. This demonstrates the strength of KakaoBank's platform and its underlying capabilities as well as the competitiveness of our products. Once the scope of loan products eligible for refinancing or the refinancing platform extended to cover home mortgage as well as housing deposit loans, we expect our market influence to become even stronger throughout the remainder of the year.

Page 11, on to our payment services. Even as a single product, our KakaoBank debit card has recorded consistent growth in transaction value, exceeding 12% market share as of the end of Q3. We launched our credit card issuance platform named credit card with best benefits in September, expanding our business coverage beyond credit card partnerships to encompass the general credit card market. We intend to further expand our presence in the online credit card issuance space by diversifying our lineup of products and providing differentiated services versus the other platforms.

Please refer to Slide 12 for more details on our investment highlights. On to Page 13 on our advertising system. In the third quarter, our ad revenue recorded KRW 2.4 billion, up 20% Q-on-Q, setting a new quarterly high. We have been testing out different ad types with the goal of diversifying our revenue stream and enhancing business competitiveness. As part of these efforts, we launched an affiliated promotional event in August that users could participate in, which achieved very strong performance. We'll be following up with more diverse initiatives, trying out different ad formats and different ways of using our inventory to further enhance the competitiveness of our platform.

Page 14, please. Yes. Please refer to the slide for details on mini.

Next on to SG&A and cost income ratio. Page 15. 15. In Q3, SG&A recorded KRW 106.8 billion, down slightly Q-on-Q as one-off costs, including contributions into the 4 major public insurance schemes in the second quarter dissipated. Cumulative CIR was 35.5%, which is a consistent improvement from 43% recorded last year.

Page 16, operating profit. Third quarter operating profit increased by 14% Q-on-Q, recording KRW 127.5 billion, driven by increase in interest income. ROE and ROA was 6.34% and 0.78%, respectively.

Asset soundness on Page 17. In Q3, our delinquency and NPL ratio continued to decline following on the improvement of Q2, thanks to solid loan asset growth and stable risk management. Our credit cost was 0.83%, up 8 basis points Q-on-Q from preemptive additional provisioning done in consideration of the current economic environment. As a result, our loan loss allowance coverage ratio went up Q-on-Q, recording 243%.

Please refer to Page 18 for more details on our global business strategy.

This concludes our financial results and business performance highlights for the third quarter of 2023.

[Operator]

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

[Sinyoung Park, analyst]

[Interpreted] This is Sinyoung from Goldman Sachs. I will ask 2 questions. First has to do with the sustainability of your high lending growth. So following on the high growth you saw in the second quarter, you also achieved a high asset growth in Q3, and it does appear that at least 35% full year loan growth may be possible. But given how the government stands, it's placing greater weight on management of loans versus household loan growth. There are a lot of questions about the sustainability of this kind of high rate of growth. So as you look out beyond this year into the mid- to longer term, what are your loan growth plan?

Second, there is a talk potentially of a possible change in the largest majority shareholder of KakaoBank, and there are some concerns among investors about how that may potentially impact your business. So in terms of KakaoBank products or services, could you specify which are actually receiving support or otherwise linked to the Kakao Group or any of its affiliates in any kind of a proprietary exclusive way?

[Unknown Executive]

[Interpreted] Yes. Thank you for your questions. Let me take the first one about the sustainability of loan growth. So we believe that our funding capabilities is directly linked to our asset growth. And compared to other commercial banks, we are very capable in terms of our funding capacity. And so we will continue to be able to fund at low cost, thereby being able to provide competitive pricing on our loan products to users.

So in terms of our internal capabilities, on top of our low funding cost and low funding capacity, we benefit from a relatively higher PIS ratio versus the other competitor bank. And so we have a more extensive capital pool, which, of course, provides us with the funding capacity or capital capacity to fund our lending growth, and we have much more headroom versus the other competitors or the competitor banks.

And on the external side, when you look at the overall loan market, a bigger driver of loan growth is actually the existing lending space. So new growth comes more so not from purely new participants into the market, but from a rollover of existing loans that reach maturity. So who actually captures can tap this part of the market is actually very critical in terms of market dynamics.

And so we believe that by building on our internal capabilities, we are capable of actually winning over a great part of the existing lending market that is previously occupied or held by the competitors. And based on that kind of strong capacity, we believe that we can sustain high levels of loan asset growth above the market average in the mid to long term. And this type of approach actually served or proved to be quite effective this year.

So given how the scope of loan products that will be eligible for the refinancing platform is being expanded, we think that with limited upside in terms of how far household loans can grow further, still we think that this gives us a very effective tool to continue to drive lending growth for KakaoBank.

Then moving on to your second question. So as you know, since launch of our business, we have actually continued to achieve sustainable growth as an independent app separate and distinct from KakaoTalk. Which is why at present we do not have any worries or concerns about potential impact to our business.

And not just KakaoTalk, but in fact, we are always open-minded in engaging with many different market players in different parts of the market through diverse partnerships and alliances, and we are confident that we will be able to continue to run consisted business without that bank.

[Operator]

[Interpreted] The next question will be presented by Hye-jin Park from Daishin Securities.

[Hye-jin Park, analyst]

[Interpreted] To ask 2 questions. First, regarding your NIM, I think the improvement is quite impressive. I think it's [indiscernible] some part to your preemptive funding efforts to increase your deposit side first, it seems that going forward, it will be just a matter of growing your loans. So what is your NIM outlook for the remainder of the year for the fourth quarter and also first half of next year? Second, I have a question on one of your products on Page 9. You mentioned that you have launched a refinancing platform for your housing deposit loans. So could you explain what kind of offering it is, especially in comparison with similar offers by other banks?

[Unknown Executive]

[Interpreted] Okay. Let me address your first question on NIM. Actually, I think everybody will appreciate just hard it is to forecast what exactly will happen to macroeconomic factors like interest rates or FX rates.

So in terms of looking at the external environment, I think as we stand now, there is much higher likelihood as of the second half of this year versus the first half, that higher interest rate levels may remain at higher levels for longer. And also in relative terms, I think there is now a greater uncertainty about the overall directionality of market liquidity. But when we look internally, as you mentioned, we actually were good about preemptively building up our deposit on the funding side. So it is now substantial and significant enough to back sufficient loan growth.

And we have actually been increasing our customer base consistently and launch of our recent new products, the 1-month installment saving product among other signature products actually has been very well received by the market. And so against that backdrop, by stably managing down our funding cost and our loan-to-deposit ratio further, we still think that there can be room for a slight improvement -- further improvement in our NIM.

And then your second question regarding our housing deposit loan refinancing. So originally, the housing deposit loan product that we offered were new originations. So they were when we actually provided the new loan issue ourselves.

So for practical purpose, it was -- it would be difficult for a borrower who already had a housing deposit loan from another financial institution to refinance that loan on KakaoBank by switching over to our housing deposit loans.

And even if the user had received the original housing deposit loan from us, KakaoBank, if, for example, upon renewal of the housing rental contract, there was an increase in the deposit amount, that could also have been restrictive and this user may not have been able to refinance the loan on KakaoBank.

So the purpose behind the launch of refinancing services actually was to alleviate this type of inconvenience on the consumer side by improving some of the product features. But more so than we expected, actually, the profit improvement actually have resulted in a significant increase in the size or in the numbers.

So although technically, it's not altogether new product on its own as it is an improvement on an existing offer, still our internal calculations suggest that this type of improvement can actually add on KRW 60 billion in monthly performance to our bottom line.

[Operator]

[Interpreted] The next question will be presented by Do Ha Kim from Hanwha Investment & Securities.

[Do Ha Kim, analyst]

[Interpreted] Yes. I would like to ask some questions to clarify some of the numbers. So you said that as a countercyclical preemptive measure, you set aside additional provisioning in advance. So how much did you do in the third quarter exactly? And I also have some questions about the numbers. I understand that the improvement to your loan deposit ratio led to improved margin. When you look on the spreads -- at the spread, the loan side, actually, there may have been a mix change. But overall, there was a movement of 28 basis points down. On the deposit side, I think it was also down by 10 basis points or so. So my question is if you look at other commercial banks, they also saw a decline in spreads because their funding ratio increased by a greater margin versus the lending rates. So what is the reason for the breakdown in the case of KakaoBank, the reason for the decline in the cost of the funding or the deposit side, could you explain?

[Unknown Executive]

[Interpreted] So I believe there were 2 questions, one about our additional provisioning. And then second, regarding our funding cost structure. So first, regarding the additional provisioning, the amount for the third quarter actually was KRW 15 billion. So that is a one-off of additional provisioning for the third quarter, again of KRW 15 billion. So because we do not have a very long business history, we did not have internal data on long-term probability of defaults, which is why we supplemented by using available market data. Upon discussions with the FSS, it was viewed that the time frame for analysis should be extended up to 10 years. And on that basis, we felt that additional provisioning at the set amount was adequate.

And then regarding the funding cost. So of course, funding cost is a function of different metrics like our loan-to-deposit ratio. The factors on both the loan and deposit side matter. For the third quarter, there were actually 2 factors that were reflected. So first, the first metric is the long-term rate on our --so the long term -- the rate on our long-term savings installment saving products.

So as of the end of the second quarter, based on the old loan-to-deposit ratio scheme, our LDR actually was 78%. And at that time, our deposits actually where we had KRW 9 trillion more in deposits versus lending. And so during the third quarter, when there was intense competition over deposits among the commercial banks, we were actually relatively freer from the competition with our rates on savings accounts, installment savings, about 0.2% lower in comparison, that's about 15 to 20 basis points lower.

And as you suggested, yes, there was some adjustment to the interest rates for our checking account type products, including Safe Box. And so that is determined actually in consideration of different factors, including duration mismatch and the type of deposit rates offered by our competitor banks.

So it's the combined effect of both factors that allowed us to do lower-cost funding on the deposit side.

[Operator]

[Interpreted] The next question will be presented by Junsup Jeong from NH Investment & Securities.

[Junsup Jeong, analyst]

[Interpreted] Yes. This is Junsup Jeong from NH Investment Securities. I will also ask 2 questions. And these may actually be connected to previous questions, by the way. First, regarding the government-led refinancing platform, it is understood that toward the end of this year or early next year, the scope of loan products that can use the refinancing platform will be extended to also cover housing deposit loans, also home mortgage loans. So to what degree is the schedule farmed out, if you know?

Second question is regarding provisioning. I'd like to hear more about your outlook for the fourth quarter and also next year in terms of how much provisioning you think is likely to be needed. As you increase your loan book, I would imagine that the absolute amount of reserves may increase while your credit cost goes down. But what is the internal view?

[Unknown Executive]

[Interpreted] So first, let me answer how we are preparing for the refinancing platform. So actually, ever since the initial discussions began, we at KakaoBank have been preparing quite tightly ahead of the launch. And just as far as we at KakaoBank are concerned, we believe that we should be ready to finish executing on the full preparation phase within this year.

However, as this does represent a major change to an important piece of regulation, I think the financial regulatory authorities will be considering the readiness of the other banks as well as they deliberate on the exact timing of launch. And I think when everything is decided then, they will provide a singular communication. And so as to when exactly user-facing services will be launched, it is hard for us to say.

And then moving on to our outlook for provisioning. So as I explained in the previous answer to the question about NIM, again, it is very difficult to forecast what exactly will happen to the macro environment, including interest rates, given the embedded uncertainties.

So considering the overall environment, we believe that more important than the operating profit or net income for any given period is to prepare for a sufficient enough buffer against possible loss.

So -- because relative to the other commercial banks, the percentage of credit loans as a share of our total portfolio is still larger, we intend to continue to maintain a conservative stance in the fourth quarter as well to make sure that we set aside sufficient provisioning.

However, as we explained at the last conference call, based on our internal monitoring, we have observed a slowdown in the increase in delinquency rate for our credit loans. So that being the case, our cautious view is that starting in the first half of next year, loan loss allowance coverage or the increase in that provisioning may slow down again starting first half of next year.

[Operator]

[Interpreted] The next question will be presented by Jihyun Cho from JPMorgan Securities.

[Jihyun Cho, analyst]

[Interpreted] Yes. This is Jihyun from JPMorgan Securities. I would also like to ask some related questions. So obviously, the regulatory environment overall, especially regarding management of debt is not very easy at the moment. But it seems that because you have different strengths, including price competitiveness and strong capital position, you are in a very strong -- you are on strong track to continue market share gain. But after the stance by the authorities have been tightened, what kind of trends have you seen in terms of your loan growth in the month, say, from July, August, September? The pace of growth always has been above industry growth, but what kind of trends have you seen since July? And for full year, I think you will obviously be able to achieve the 35% target, but could you provide further guidance on the exact level of loan growth you foresee for the fourth quarter this year and also next year?

Second question regarding the Kakao Group related issues. So I understand, and we've been hearing that review [indiscernible] actually is being delayed for certain new business initiatives. For example, your plans to move into the credit card market, My Data and other new business areas may be experiencing a bit of a postponement. So if things are put off more than expected, then how do you intend to respond? And how will you reinforce your fee and platform side of the business?

[Unknown Executive]

So those are 2 very difficult questions. Let me take the first one. So regarding our loan growth for the fourth quarter, I think at the last conference call, we did specify that into the second half of this year, we are looking at, at minimum, 35% or above loan growth for the second half.

But to achieve that goal, I think the most important thing is to engage with the authorities in very close discussions and consultations. So whether it pertains to an aggregate cap on household loans or whatever it may be, we have to consult with the authorities very closely so that we can draw a growth curve that can be received and that is seen as acceptable within the market.

And even in that context and even in that type of direction, we still believe that we can continue to achieve loan growth into the fourth quarter. And we are still in the process of working on our business plan for 2024. So as we did earlier this year, as soon as that is finalized, we will prepare for some kind of information sharing session early next year to share our plans.

And then regarding new business areas, including credit card or My Data. We have set some directions for these new businesses. So our basic position regarding these types of businesses and related licenses, we do think that they will ultimately -- or they are businesses that we ultimately have to move into. It's just a matter of time. So to the extent that we can work on preparation, we will continue to progress. So even for the check card product, we still think there is room to further improve on its usability and also various system upgrades will continue to be required. Ultimately, we are exploring from a multi-angle perspective on how we can boost the experience to be comparable with the credit card. And for My Data, even if we -- even if we were not -- even if we did not outright obtain a direct license for My Data, we do still believe that we need to approach data analytics, also continue to build up our data capabilities for our user-facing services. So data analytics and that kind of modeling will continue to be a focus.

And there are, of course, different sources of data that can be obtained as a direct license holder of My Data and also even in the event that we do not hold a direct license. There is the public sphere, My Data scheme. Also, we're just now starting to hear about pure play my data and through non-identified or pseudonymized information combination, we can also come up with different types of data sources from different sectors and potentially identify serviceable areas.

So we actually will continue in parallel to seek out new business licenses where possible where there are no legal constraints. So we will continue to obtain licensing to provide different types of financial services that are needed and required for consumers and users.

[Operator]

[Interpreted] Yes. With that, we will now conclude the third quarter conference call for KakaoBank. I'd like to thank all analysts, investors and members of the media for joining us. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]