KakaoBank Corp

KRX:323410

Earnings Call Analysis

KakaoBank Reports Strong Growth and Strategic Advances in Q3 2024

In Q3 2024, KakaoBank achieved significant growth, reporting a 36% year-on-year increase in operating profit to KRW 173.7 billion. Yearly customer engagement rose with WAUs at 13.52 million, up 1.18 million. Operating revenue reached KRW 746.3 billion, driven by a robust interest and fee revenue growth. The bank's loan balance increased to KRW 42.9 trillion, while their funding costs improved to 2.26%. KakaoBank anticipates maintaining a stable credit cost of 0.65% next year and endorses a growth strategy in SOHO loans, aiming to achieve a balanced loan mix by reaching a 50-50 split between credit and guaranteed loans by year-end.

Strong Growth in Customer Engagement

KakaoBank is experiencing impressive growth driven by enhanced customer engagement. In the third quarter of 2024, the weekly active users (WAU) reached 13.52 million, representing a substantial increase of 1.18 million compared to the previous year. With a customer base now totaling 24.43 million and a monthly active user count of 18.74 million, the bank attributes this surge to the successful launch of the Benefit Tab in August, which is expected to continue boosting user traffic and service expansion.

Solid Financial Performance

KakaoBank reported a record operating profit of KRW 173.7 billion for the third quarter, marking a remarkable 36% year-over-year increase. Total operating revenue reached KRW 746.3 billion, up 2% quarter-on-quarter, thanks to growth in both interest and fee revenues. The increase in fee revenue, which rose to KRW 79.1 billion (up 8% year-over-year), was predominantly due to increased debit card usage and improved portfolio management in response to interest rate changes.

Loan Portfolio Dynamics

As of the end of the third quarter, KakaoBank's loan balance was KRW 42.9 trillion, a 1% quarterly increase. This growth was primarily driven by SOHO (small office/home office) and unsecured personal loans. Notably, SOHO loans have doubled year-on-year, with guaranteed loans climbing from 20% to 45% of the overall SOHO portfolio. Despite a slight downturn in the net interest margin (NIM) to 2.15%, KakaoBank remains cautiously optimistic about the stability of its loan portfolio.

Deposit Growth and Funding Strategies

The bank's deposit balance rose by 2% quarter-on-quarter, reaching KRW 54.3 trillion. A noteworthy 57.9% of these deposits are low-cost demand funds, positioning KakaoBank favorably against its competitors. Furthermore, the funding cost decreased by 5 basis points to 2.26%, enhancing profitability.

Managing Credit Costs and Asset Quality

KakaoBank's credit cost year-to-date currently sits at 0.56%, a significant improvement from 0.75% for the entire previous year. The delinquency rate remains steady at 0.48%, showcasing effective risk management practices. The firm continues to be vigilant about potential increases in delinquency rates tied to mid-credit and SOHO loans. Executive management asserts that, despite external regulations, overall asset soundness remains stable.

Outlook for Continued Growth

Looking forward, KakaoBank has set a full-year net increase target of KRW 1 trillion for SOHO loans in 2024 and anticipates maintaining consistent growth rates in the forthcoming year. The bank aims to shift the current split of SOHO credit versus guaranteed loans from 55%-45% to a balanced 50%-50% by year-end. Enhanced partnerships and product offerings, such as secured SOHO loans and joint loan services, are also in the pipeline to drive further growth.

Expanding Beyond Domestic Markets

In terms of international expansion, KakaoBank is strategically venturing into the Indonesian and Thai markets through its investment in Superbank and a pending application for a virtual banking license, respectively. These moves are backed by strong early performance metrics from Superbank, which has demonstrated rapid growth in deposits and customer engagement since launch.

Earnings Call Transcript 2024-Q3

[Operator]

[Interpreted] Good morning, and good evening. Thank you all for joining the 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 Third Quarter Earnings of the Fiscal Year 2024.

[Dianna Kang, executive]

[Interpreted] Hello. This is Dianna Kang from KakaoBank's IR team. We will now begin KakaoBank's earnings call for the third quarter 2024.

We are joined today by members of management, including our CEO, Daniel Yoon; Vice President, [ Jay Kim ]; Sean Kim, our Chief Operating Officer; [ Conrad Shin ], Chief Technology Officer; Paolo Lee, Chief Business Officer; [ Vesper Ko ], Chief Strategy Officer; and [ Eli 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 the call over to Sean Kim, our COO, to present on our third quarter business highlights and financial results.

[Seok Kim, executive]

[Interpreted] Yes. Good morning. This is Sean Kim from KakaoBank Bank. Thanks to all of the investors and analysts joining us today for our third quarter 2024 earnings conference. Let me take you through our third quarter 2024 key highlights on Page 3.

At KakaoBank, driven by stronger customer engagement, we are seeing continued growth in traffic as well as in our fee and platform business. Third quarter WAU was 13.52 million, which is a significant increase of 1.18 million year-on-year. Meanwhile, fee and platform revenue was KRW 79.1 billion, up 8% Y-o-Y. Meanwhile, we continue to shape solid fundamentals driven by continued top line growth and stable risk management. As a result, we reported operating profit of KRW 173.7 billion, up 36% Y-o-Y, another record high following on the second quarter.

Let me now take you through our third quarter results, starting from Page 4. Page 4 is our customer base. As of the end of the third quarter, our customer base totaled 24.43 million. MAU was 18.74 million; WAU, 13.52 million, both up significantly quarter-on-quarter, largely as a result of stronger customer engagement following the launch of our Benefit Tab in August. We expect this to drive even more traffic growth as we expand services moving forward, helping grow our traffic-driven business further.

Next on to Page 5 for our operating revenue. Operating revenue in the third quarter totaled KRW 746.3 billion, up 2% Q-on-Q, thanks to interest and fee and platform revenue growth. Fee revenue saw a significant increase Q-on-Q due to the increase in debit card usage, also reflecting the base effect from one-off settlements in the second quarter.

Platform revenue also grew Q-on-Q from growth in our credit loan comparison service. Meanwhile, financial investment revenue also increased Q-on-Q as we made adjustments to our portfolio, mainly increasing allocations to bonds and RPs and call loans while reducing MMF in response to the changing interest rate environment.

On to Page 6 for deposits. As of the third quarter, our deposit balance totaled KRW 54.3 trillion, up 2% Q-on-Q, driven by an increase in low-cost funding with the share of low-cost demand deposits increasing to 57.9%, widening the gap against our banking peers. Our funding cost also went down 5 basis points Q-on-Q to 2.26%.

Page 7 provides more detailed performance for group accounts. So please refer to the slide.

On to loans on Page 8. In Q3, our loan balance totaled KRW 42.9 trillion, up 1% Q-on-Q, driven by growth in SOHO and unsecured personal loans. Although the share of mid-credit loans went down by 0.2 percentage points quarter-on-quarter to 32.3%, this was due to the overall increase in our unsecured loan average balance. And in fact, our mid-credit loan average balance continues to see growth. Third quarter NIM was 2.15%, down 2 basis points from the second quarter from a decline in loan yields amid falling market rates.

Page 9. At KakaoBank, by expanding SOHO loans and our loan platform business, we have established the underlying foundation for continued growth, which allows us to respond flexibly to regulatory conditions. We have seen rapid growth in our SOHO loan balance, driven by growth in guaranteed loans, all the while achieving greater stability in our loan portfolio. As of the end of Q3, our SOHO loan balance grew by more than double versus last year levels, while the share of guaranteed loans, in particular, increased from 20% to 45%.

Leveraging our overwhelming unsecured loan traffic, we have recorded a monthly average traffic of 1 million now. We've also been diversifying our business model beyond unsecured loans into the loan comparison or loan ad business as well. We will continue to build out our loan platform business by expanding the coverage of our loan comparison services and by launching new products and offerings like joint loan services, which are based on our traffic competitiveness.

On to Page 10 for more on our loan platform. Our loan comparison service, which was launched for credit loans in December 2023, has continued to grow quickly, thanks to ongoing efforts to enhance the competitiveness of our services such as by creating partnerships. As of the third quarter, the loan comparison execution value and number of executed loans increased by 39% and 43% Q-on-Q, respectively. As a result, fee revenue increased 30% Q-on-Q to KRW 8.5 billion, becoming the main revenue model for our platform business.

Yes, please refer to Page 11 for further detailed results from our investments, and we'll move on to advertisement on Page 12. We have been expanding our advertisement business by introducing new ad space and diversifying our products. When we launched our Benefits Tab in August, we also introduced our Adfit banner product alongside other new offerings like Native banners or Carousel banners in order to strengthen our lineup. We will continue to increase our ad inventory whilst engaging in targeted advertising in order to provide well-developed products that better reflect advertiser needs as we seek to strengthen the competitiveness of our ad business and our revenue stream.

Please refer to Pages 13 to 14 for details on our SG&A and operating profit, and we will move on to Page 15 on asset quality.

Asset quality, on Page 15. Third quarter delinquency held steady at 0.48%, flat Q-on-Q from stable risk management. Credit cost meanwhile increased by 4 basis points Q-on-Q due to an increase in new loan issuance and write-offs mostly for unsecured credit loans, which led to increased provisioning. Credit cost on a YTD basis, however, was 0.56%, which is a major improvement from the full year credit cost of 0.75% recorded in 2023.

This concludes our financial results and business performance highlights for the third quarter of 2024.

[Dianna Kang, executive]

[Interpreted] We will now move on to Q&A.

[Operator]

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

[Sinyoung Park, analyst]

[Interpreted] This is Sinyoung Park from Goldman. I would like to ask 2 questions. First is on your platform revenue. In line with our expectations, it seems that the amount -- the intermediation volume of loans on the platform has increased. But in terms of the fee income, it does not seem significant enough to really make a big impact on your overall platform revenue. So what is your outlook in terms of platform revenue going forward? Do you have a level up strategy to increase the platform revenue side?

Second question is on asset soundness. It seems that the delinquency rate on your new issued loans is now appearing more stable. Looking ahead to possible rate cuts, or changes to your loan mix, what is your outlook in terms of the credit cost? And also since COVID, you have been maintaining quite high NPL coverage at above 200%. So what is your outlook there as well?

[Unknown Executive]

[Interpreted] Yes. Let me address your first question. So in terms of our loan comparison service, we were actually late to launch our product compared to our competitors. However, if you look at the performance achieved over the last recent 1 year, we've really seen quite strong performance above our expectations.

In terms of the absolute level of the fee income, compared to the initial period when the market was just starting up, as competition becomes more intense going forward, I think there's a high likelihood that fee income will likely see continued downward pressure.

So this is true to the true role of financial institutions as a financial service intermediary. And I think the decrease in fee is just a natural phenomenon. We are thinking hard, however, in terms of how to boost the absolute amount of fee income.

One of the strategies that we have been thinking of is to increase the scope of partners. We are currently working with just a limited number of financial partners. But by the end of this year and also throughout the first half of next year as well, we want to increase the number of financial institutions, mainly the lenders that we work with so that more of them can use our services to issue their loans and sell their loan products.

And another strategy is to further improve the usability and the user experience on our app. So users would no longer have to go to the individual financial company sites to download the application as we provide for greater in-app convenience.

And in terms of our loan comparison service, obviously, we only cover credit or unsecured loans at the moment. But gradually, we will add on additional services, increasing coverage to home mortgage loans as an example, which is why we expect a significant boost to our revenue.

And then moving on to your question on credit costs. So credit cost as of the third quarter is flat relative to the second quarter, and we expect a significant improvement on a full year basis, somewhere around 0.65%, 0.66% compared to last year.

So over the 2 years between 2022 and '23, we did monitor very closely the loan repayment development as we increase our mid-credit loans significantly. But we're quite positive at the moment as the outstanding loans have been managed quite stably.

So if you look at the current portfolio mix as it stands today, the part of the portfolio that may potentially have a big impact on our credit cost would be our SOHO loans. For the SOHO credit loans, since the time of launch, we've not had enough time passed by yet and as the loans have not reached maturity yet. So we are approaching it with caution and setting our credit cost forecast on a conservative basis.

For the guaranteed loans that also make up a part of the SOHO loans, a portion of them actually are seeing higher delinquency rate as they were issued based on mid- to low credit low special regulations. And so it may weigh us in terms of delinquency or credit cost going forward, which is something we are closely monitoring.

So because we carry a higher exposure to mid-credit loans and individual SOHO credit loans relative to the other commercial banks, I think it is a rational decision for us to carry a higher NPL coverage ratio versus the commercial banks where the biggest part of their exposure is household retail loans.

[Operator]

[Interpreted] The following question will be presented by Jun-Sup Jung from NH Investment & Securities.

[Jun-Sup Jung, analyst]

This is Jun-Sup Jung from NH Investment & Securities. Regarding your SOHO loans, I think earlier during your call in the second quarter, you mentioned your full year net increase target of KRW 1 trillion for 2024. At the current pace, I think you are on a good track to achieve that goal this year. But do you anticipate a similar pace of growth for SOHO loans next year as well?

And you just mentioned how asset soundness is quite key. The proportion of guaranteed backed loans currently is 45%. What is your target percentage going forward? And there is talk of the fourth Internet bank also moving into or focusing on SOHO loans, other Internet banks and commercial banks because conditions are more difficult for household loans are also focusing more on SOHO loan side. So what is KakaoBank's differentiation strategy in terms of your SOHO loan product?

[Unknown Executive]

[Interpreted] Yes, let me take your first question. So just based on what we're seeing in terms of the pace of growth for the SOHO credit and SOHO guaranteed loans, we expect to be able to achieve a similar rate of growth next year as well.

So one of the reasons why we have a positive view is that for the guaranteed backed loans, in particular, compared to before, we're seeing very smooth coordination and collaboration with the regional credit guarantee foundations, and we're seeing improved business relations as well. So they're actually -- they have been confirming of growing customer preference for KakaoBank's existing guaranteed backed loan products. And so they are very open and quite proactive about involving KakaoBank and our products further.

And also, as we mentioned in our previous call, we are planning to introduce a new lineup of SOHO loan products, credit loans above KRW 100 million, for example, or secured SOHO loan products as well, which is why we think that we will be able to see consistent growth in terms of our SOHO loan balance next year as well.

And separate from the secured loans, if you look just at the mix or split between the SOHO credit versus SOHO guaranteed loans, we mentioned during the second quarter call that we intend to change the 60-40 split to 50-50 by the end of this year. As we currently stand, as of the third quarter, the split is 55% to 45%. So again, we're on a good track, a good trajectory to achieve that target. And there are 2 big sources of competitiveness in our SOHO product.

First, because our funding cost is in relative terms, lower than the other lenders, we are able to offer lower lending rates to our customers. And second, we've been receiving a very good response from users for our support and assistance in payment of guaranteed insurance premiums. Also overall, the SOHO customers have been giving us high marks in terms of the ease of the loan process on our app.

And apart from the competitiveness of the loan product itself and also the convenience and ease of use that we offer, I think more important is the strategic direction of KakaoBank just in terms of how we look at our SOHO borrowers. So we do not look at them strictly as our loan users, but we look at them from a broader scope, as we anticipate or we hope to build a broader community or platform for the SOHO business owners so that we can serve their various financial needs overall and provide other necessary added services as well.

And if you look at our SOHO user base, just in terms of the rate of growth and recent development trends, I would say that we have been able to acquire the SOHO user base more quickly than any other financial firm or the big tech lenders as well. So just in terms of the deposit business, traffic and engagement, we have been able to boost our market share among SOHO users above and beyond our expectations very quickly.

[Operator]

[Interpreted] The next question will be presented by Seung-Gun Kang from KB Securities.

[Seung-Gun Kang, analyst]

[Interpreted] This is Seung-Gun Kang from KB Securities. The first question is on your loan asset growth outlook. So it seems for SOHO loans, you have been achieving meaningful performance. But since various household loan regulations by the government is still ongoing, there are concerns about loan growth next year. So what is the company's view or strategy in terms of loan growth for 2025?

Second, due to various regulations, compared to your capital, I don't think you're able to deploy -- compared to -- excuse me, compared to your capital, you're not able to deploy as much as you may want because of regulations. I do appreciate the update in the materials. on certain deployments, including your investment in Superbank in Indonesia and the application for virtual banking license in Thailand. So for the Indonesian investment, how long do you anticipate it may take for that to start delivering more meaningful results? And what is your outlook in terms of the Indonesian banking market overall? I understand it is dominated mostly by state-owned banks. There are lots of banks, very stiff competition. So it's a very difficult market in terms of asset growth and also margins as well. If you could provide more details on your strategy.

[Unknown Executive]

[Interpreted] Yes. Let me address your first question. So in terms of loan growth, I think the analysts and the market will be very well aware of how the discussions have played out since similar time back in 2023 last year about the banking sector household loan issue.

So from last year, of course, up to December, the individual financial companies, including ourselves, set about establishing our business plan, which was shared with the market through earnings conference call in the month of February. But then subject -- following negotiations with the authorities that took place in February and March, well, these findings actually were reflected to revise the business plan. So we already went through this kind of cycle last year.

So I think the situation now versus last year is largely similar, not that different at all. So it may be premature for us to, at this point, talk about the outlook for loan growth next year.

But for certain loans like SOHO or corporate business loans, which are not subject to as much government regulations or discussions compared to household loans are concerned, I think our guidance -- our previous guidance on growth actually is still valid.

And then on to your second question in terms of our overseas advancement. So yes, there are significant differences in terms of the financial environment in Indonesia versus here in Korea. But after our grand launch, Superbank actually has shown a very rapid pace of growth for both deposits, loans and its customer base when compared to any other digital bank.

So I think there were 2 most effective parts of our early strategy. First is the fact that we leveraged the Grab ecosystem to move into that market was a key part of our success. And in terms of the products and services offered by Superbank, actually, they are the outcome of very close discussions with KakaoBank. We actually were involved in producing those [ very ] products based on our domestic experience. And they are, in fact, products that we wanted to test out to see what the response would be when offered on the global market. And so the response from the customers actually has been very solid, which has been the basis for the good performance to date.

So we want to expand on this type of growth strategy as we expand into Thailand as well. So if we are given the opportunity to do business in Thailand by obtaining the virtual banking license that we have applied for, we actually want to take our strategy to the next level, moving beyond what we are doing now in Indonesia. Just in terms of the front end, the app development work, well, we actually are thinking of doing that development ourselves based on a strong sense of accountability.

So in terms of our overseas business expansion plan, it will follow this type of order, again, our involvement in product service planning, followed by development of UI/UX within the necessary extent, of course. And building on this experience, we will look to potentially other markets for further expansion.

And then there was a last bit, a question on our capital. So you may have seen our disclosure, but we're planning an analyst meeting on the 26. So there, we will explain further details of our ROC or capital efficiency plan on that occasion.

[Operator]

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

[Jaewoong Won, analyst]

[Interpreted] Thank you for delivering strong performance despite the difficult environment. I have 2 questions. First, in terms of your CIR trend, it seems -- it's quite impressive to see a significant improvement with the CIR going down. Are you targeting perhaps the low 30% range even? Or do you anticipate maintaining around current levels in terms of CIR?

Second question, it does seem that you are -- you have tight control over all in terms of your delinquency. But with the sharp rise in delinquency for the corporate or SOHO loans, we have less of a sense of how well delinquency is being managed. We do not have long time period data yet as they were only introduced last year. So do you internally have some view? So if delinquency rises to a certain internal threshold, for example, is there that kind of threshold where then you will start moderating the pace of growth and tighten your vigilance?

[Unknown Executive]

Yes. Let me take your first question. So as we have repeatedly mentioned on numerous occasions, in terms of the overall trajectory of our CIR trends, we are anticipating continued downside improvement.

So of course, there can be different externalities or variables that can impact that. As we mentioned in the second quarter, KakaoBank is committed to investing in new technologies like AI, additional technological investments will be made further, provide greater stability or safety of all transactions, and we are making early investments to create new businesses or new type of service offerings. So compared to other commercial banks, we have more cost factors.

So overall, yes, we do anticipate the CIR to go down much lower versus the current level. But in terms of year-to-year trends, it may not be -- it may not translate into a decrease, a straightforward decrease straightaway each year. But in terms of our 3-, 5-year mid- to longer-term expectations, we are expecting very low CIR levels that, in fact, may be unprecedented, not just in Korea but globally.

And moving on to your second question. So like I said before, it's hard to project what will happen in the future based on the current situation because it's simply not been long enough since we launched our SOHO credit loan products. But what is clear is that the delinquency rate for our SOHO unsecured loans actually is trending lower than the broader market average, which as of the third quarter, we believe is roughly around 1.1%.

And in terms of the SOHO guaranteed loans, the delinquency overall is similar to the market level. There is a portion of our SOHO guaranteed loan portfolio, which does have very high delinquency levels. But given the very high 95% guaranteed rates, even if we may see temporarily an uptick in delinquency ratios or provisioning, ultimately, it will be paid back through subrogated payments, and we will be able to manage the delinquency and also reverse -- see reversal of the provisioning. So overall, we believe the asset soundness is stable, and we believe that we will be able to maintain these stable levels going forward as well.

[Dianna Kang, executive]

[Interpreted] Yes. With that, we will conclude the Third Quarter 2024 Earnings Call for KakaoBank. I thank all the members of media, analysts and investors. Thank you very much for joining us.

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