KakaoBank Corp

KRX:323410

Earnings Call Transcript 2023-Q4

[Operator]

[Interpreted] Good morning and good evening. Thank you all for joining this conference call. And now we'll begin the conference of the Fiscal Year 2023 Fourth Quarter Earnings Results by Kakao Bank. [Operator Instructions]

Now, we shall commence the presentation on the fiscal year 2023 first quarter earnings results by Kakao Bank.

[Dianna Kang, executive]

[Interpreted] Good morning. This is Dianna Kang from Kakao Bank IR team. We will now begin Kakao Bank's earnings call for the fourth quarter 2023.

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

[Seok Kim, executive]

[Interpreted] Good morning. This is Sean Kim from Kakao Bank. Thanks to all of our analysts and investors who are joining us today for our fourth quarter 2023 earnings conference. Let me take you through the key highlight results on Page 3.

In 2023, we were able to lay in place a strong foundation for our platform business by strengthening our customer base while expanding our operating profits, thanks to resilient loan growth and strategic cost management. As of the end of 2023, we now have a total customer base of 22.84 million, an increase of 2.42 million Y-o-Y with an MAU of 17.58 million, up by 1.53 million Y-o-Y.

Our loan balance totaled KRW 38.7 trillion, up 39% Y-o-Y, driven by an increase in refinancing mortgage loans. Thanks to robust loan growth and disciplined cost management, our CIR improved by 5 percentage points versus last year, moving down to the 30% range. Operating profit increased 35% Y-o-Y to KRW 478.5 billion.

On to our customer base on Page 4. Although our customer base already exceeds 20 million, we continue to see new inflows on a consistent basis. As of the end of fourth quarter 2023, customers totaled 22.84 million, with even distribution across all age groups from teens to those aged 60 and above. As our customer base expands further, we are seeing engagement levels also rise with MAU and WAU recording 17.58 million and 12.66 million, respectively, as of the end of Q4.

On to our operating revenue, Page 5. In the fourth quarter, we recorded operating revenue of KRW 663.7 billion, up 1% Q-on-Q and 37% Y-o-Y, driven by interest income growth. Fee revenue was down Q-on-Q due to one-off costs in the fourth quarter from return of credit card commission fees for small merchants, while other revenue declined slightly Q-on-Q as our improved loan-to-deposit ratio led to a reduction in total invested assets, also due to the low base effect from disposals loan receivables in the third quarter.

On to deposits, Page 6. In Q4, our deposit balance grew 3% Q-on-Q to KRW 47.1 trillion. Although our share of low-cost deposits declined slightly Q-on-Q to 55.3%, it is still 16.6 percentage points higher than the overall banking sector average, demonstrating our competitive funding profile. Our funding cost in Q4 recorded 2.38%, up 2 basis points Q-on-Q from the increase in our installment and savings account balance.

I will introduce our latest new product, our 1-month savings product on Page 7. Moving on to Page 7. Our new 1-month savings product, which was launched in October 2023 is the installment savings product where the user makes a daily deposit every day for 31 days, which is to make the mundane task of saving money into a fund challenge that can give users a sense of accomplishment. This new product was a big hit among all age groups from 20-somethings to people age 50 and above, exceeding 1 million customers in just 25 days from launch. As of the end of December 2023, on a cumulative basis, we have recorded a total of 1.36 million customers.

The inflow of new customers signing up for 1-month savings has also had a positive impact on expanding our total user base. We saw a 66% increase in new customers, 1-month after launch compared to prior to launch with 1/3 of all new customers choosing 1-month savings as their very first product from our app. We plan on working with many different partners in the future to develop more of this kind of signature product by incorporating more benefits and bond to our offering.

Moving on to Page 8 for loans. As of the fourth quarter, our loan balance totaled KRW 38.7 trillion, up 4% from the previous quarter, driven by growth across all loan segments, including home mortgage loans and housing deposit loans. The share of mid-credit loans recorded 30.4%, outperforming the policy goal, while net interest margin recorded 2.36%, up 5 basis points Q-on-Q from our improved loan-to-deposit ratio.

I will move on to performance of our refinancing service on the next page, Page 9. The refinancing platform initiative, which began for credit loans in May of 2023 was expanded in scope to also now include mortgage loans as of January 2024. This has prompted more borrowers to switch over to different lenders. Thanks to efficient deposit funding structure, Kakao Bank is able to offer competitive refinancing terms and have been recording a high market share for both credit and mortgage loans.

In the case of refinancing for credit loans, despite inflow controls on high credit followers, mindful of our full year mid-credit target for 2023, we recorded 14.7% high market share among 53 financial institutions in terms of refinanced value. Our market share for mortgage refinancing stood at 24.3% among 32 financial institutions based on the loan application value. As various loan transfer schemes have been rolled out, we have always been committed to responding proactively to government policy, offering customer-friendly lending rates to borrowers with expectation that more of them will be able to lessen their interest repayment burden by switching to lower, more favorable rates.

So I will now move on to our fee and platform business highlights, moving on to Page 10. This is our loan platform on Page 10. We launched our credit loan comparison service in December of last year, whereas our existing referral loans were a limited offer in the sense that they were available only for applicants that were previously denied by Kakao Bank. In contrast, our credit loan comparison service, which lets users browse and compare 61 products offered by 33 partners is available to all customers needing a loan and further reinforces Kakao Bank's role as a lending platform, providing a more convenient product discovery experience for users. Just with our own credit loans alone, we have generated almost 12 million in traffic based on views as we now offer even greater customer and product coverage, we expect to quickly establish ourselves as a main player within the loan comparison platform market.

Please refer to Pages 11 and 12 for further detailed on performance regarding our payment service and also our investment context.

Moving on to our advertising business, Page 13. Although 2023 was the first ramp-up year for our advertising business, we continue to onboard large-scale advertisers like SK Telecom and Samsung Fire & Marine, already establishing ourselves as a competitive advertising platform. Advertising has grown into a major revenue stream for our platform business with ad revenue recording KRW 9.2 billion, up by nearly fourfold versus 2022, accounting for 13% of full year platform revenue. Going forward, in 2024, we will be testing out different ad types and utilization of available inventory to further enhance our competitiveness in advertising and scale as revenue further.

Please refer to Slide 14 for details on mini. And on to Page 15 for our SG&A and CIR. Page 15. In Q4, our SG&A increased Q-on-Q to KRW 128.7 billion from an increase in advertising and marketing spend and labor cost. Cumulative CIR was 37.3%, which is a consistent and distinct improvement from 43% recorded last year.

Our operating profit on Page 16. Fourth quarter operating profit increased 20% Y-o-Y to KRW 102.8 billion, driven by interest income expansion. Full year ROE and ROA improved to 5.97% and 0.72%, respectively, thanks to increased earnings growth.

Our asset soundness on Page 17. Fourth quarter delinquency was flat Q-on-Q at 0.49%, thanks to loan growth and stable risk management. Although we also had additional one-off provisions of KRW 10.4 billion in Q4 due to preemptive provisioning on our part, the amount decreased Q-on-Q as we had already set aside a sufficient buffer in the third quarter. Also as higher short-term delinquencies from the Chuseok holidays were resolved by the end of the third quarter, credit cost dropped to 0.69%, down 14 basis points Q-on-Q. Our loan loss allowance coverage ratio maintained a high 237%.

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

[Dianna Kang, executive]

[Interpreted] With that, we'll now move on to Q&A. Due to the limited time, we ask that you limit yourselves to 2 questions each.

[Operator]

[Interpreted] [Operator Instructions]

The first question will be provided by Sinyoung Park from Goldman Sachs.

[Sinyoung Park, analyst]

[Interpreted] Yes, this is Sinyoung Park from Goldman Sachs. I will ask 2 questions. First, regarding your growth target for 2024. Since you have very strong performance in mortgage loans last year, you are coming off of a high base. But there are some concerns in the market that due to the cap placed on the refinancing platform, the -- your growth in 2024 may be significantly slowed down. So now that you do not have to increase the portion of mid-credit loans any further, I suppose that means less pressure for Kakao Bank. But could you provide, to the extent possible, more guidance in terms of what kind of loan growth you are planning?

Second question on the deposit side. Up to now, you have enjoyed a higher portion of low-cost deposits with a lower funding cost profile versus the other banks. It does seem that more recently, those gap does appear to have narrowed some. I believe, in part, it might have been inevitable to fund high-growth. But how much of a gap do you think you can manage going forward in terms of the low funding cost also and also the low-cost deposit share?

[Seok Kim, executive]

[Interpreted] So thank you for what I believe are 2 questions. Let me take your first one on loan growth.

So, obviously, within the loan market, the #1 most important macro factor would be the interest rate. As you know, there was a considerable debate about the prospective level of interest rates starting in the fall of 2023 and there was a lot of exploration about the interest level. So it is hard for me at this time to specify a certain target. However, based on our analysis of the business environment at the time of putting together a business plan and also based on the response we have been seeing from the loan market to date, we do believe that the loan growth can be sustained somewhere within around 20% year-on-year.

Of course, we are very well aware of the policy stance by the government, and there have been several new announcements in January as well. So, obviously, things are always subject to change as there can be some impact from those types of factors. We have a very deep understanding of the government stance to keep the aggregate amount of household loans under control and also new policies like stress DSR, which apply to the entire loan market, obviously, can have a certain impact. So things are quite fluid.

So from the very early phase of our home mortgage loan business, we have been tracking the total household loan amounts, in particular, the home mortgage loans as well. And we've also been analyzing the purpose of those loans to see what portion is for refinancing needs. And based on our analysis from last year to date, we have found that many of our customers or many users are using Kakao Bank to enjoy lower lending rates. And we believe that this represents Kakao Bank's contribution in part to the qualitative improvement of household loans.

And then let me cover your second question regarding our funding growth. So as I explained in our presentation slides, despite already having a customer base of over 20 million, we still are seeing consistent new inflows. So if we continue to develop new types of services and also signature deposit products like our 1-month savings, we think that we should be able to manage deposit growth similar to current levels. And we have found that the engagement level of our existing deposit customers is also continue to improve.

So for our group account product, which is the signature products in terms of our low-cost deposit portfolio. Actually, as of last year, finally, we surpassed the 10 million mark in terms of the number of customers and also the deposit balance amount saw 30% year-on-year growth. So I believe it was some time -- this time of the year last year when we had our Analyst Day, there, we said that we intend to maintain somewhere around the 15% gap in terms of low-cost funding ratio versus other financial companies. And I think it's quite fortunate that we were able to keep our promise commitment after all. So although the percentage or the number itself may go down slightly as the absolute scale goes up, internally, our view is that, we will be able to maintain this kind of meaningful gap going forward as well.

[Operator]

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

[Hye-jin Park, analyst]

[Interpreted] Yes, this is Hye-jin Park from Daishin Securities. I will also have 2 questions. First one is on your margins. While your loan-to-deposit ratio has not increased that much, whereas your funding costs have risen. It does seem that NIM has improved slightly. So could you provide further details about your improved NIM? And then did you adjust the rates applied on your low-cost deposits?

And the second question has to do with your group accounts or other low-cost deposit products. I do understand that it is part of your key competitiveness, but similar products are also being launched by your competitors like Toss Bank or K Bank as well. So do you anticipate that you will be able to maintain your current competitive edge, also the current status as is?

[Seok Kim, executive]

[Interpreted] Let me answer first on NIM. So the #1 contributing factor to continued improvement of NIM into the fourth quarter actually is the improvement to the loan-to-deposit ratio. So despite a drop in market rates, we were able to improve our margin.

So the publicly disclosed financial numbers actually are based on period end. So, on those terms, the improvement to the loan-to-deposit ratio may not appear that big. However, based on the daily balance, which is the indicator that we track internally, the actual improvement to the loan-to-deposit ratio was higher at 3%, which was again the biggest contributor to our 5 basis point improvement in NIM.

And then regarding your question, whether we adjusted the rates applied on the group account products. Well, most of the group accounts are in the form of current deposits. And so, there's no separate interest rate adjustment mechanism for the separate products. And this links up to the second question actually. But the group account users, based on our experience, are not using the product necessarily for interest income needs, but they have much bigger non-interest service-oriented needs.

So our group account is a community service-based offering, and we have to very closely align to our exact customer needs to provide very robust social services like this. I think it is because we have been able to do that, then we continue to be loved and appreciated by so many customers in spite of the many similar competitor products.

Yes. So based on our internal analysis, we have actually observed that the more of an increase we have in the actual customers, the more groups and communities are formed. There has been amplification of a network effect. And so, going forward, as we continue to improve on the product features, the focus will not be based on an interest rate-oriented approach as we will be strengthening non-interest-related benefit to improve our offering going forward. So competitive products, we do not believe will have any material -- any impact on our share of low-cost deposits or funding costs.

[Operator]

[Interpreted] The next question will be presented by Sinyoung Park from Goldman Sachs.

[Dianna Kang, executive]

[Interpreted] So could you unmute yourself, please?

[Operator]

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

[Jihyun Cho, analyst]

[Interpreted] Yes. Thank you for the opportunity to ask 2 questions. First, regarding provisioning, as it was the end of the year, and you had already done more provisioning in prior quarters, it seems provisioning in the fourth quarter was relatively lower. So could you provide further details? I think you did mention about KRW 10 billion in preemptive provisioning done in the fourth quarter, but I believe there have been some changes to your credit assumptions. So could you elaborate more on those details and your guidance for 2024 credit cost as well?

And the second question is, with very rapid growth of your business, it does seem that you are also quite proactive on the dividend front as well. So do you now have a more firmer dividend policy in place? If so, could you share?

[Seok Kim, executive]

[Interpreted] Let me answer the provisioning question first. So the provisioning that we did on -- in the fourth quarter was due to our annual adjustment of actual default levels compared to expected default. So banks actually have to do this kind of comparison analysis between expected and actual default every year, and that cycle actually falls on the fourth quarter for us at Kakao Bank.

Yes. And actually, we had already done significant provisioning last year, particularly in the second and third quarter. And we had already had ongoing discussions about adjustments to the long-term market default multiple and also the recommended LGD adjustment by the government and policymakers. And so, again, significant provisioning had already been set aside as of the third quarter, which meant that we only had to do KRW 10.4 billion in additional non-recurring or one-off provisioning in the fourth quarter. And most of that KRW 10.4 billion again is from the annual adjustments between our expected and actual default.

I think when we look out to 2024 in terms of our outlook, I think -- this is connected to what we have consistently shared with you throughout our earnings call in 2023, where we explained that in 2024, there may be several things that may be different versus 2023. For us, there may be a difference in certain ratios, including delinquency, substandard or below. And the second metric that could be different, could be provisioning for CCR ratios as well.

Regarding delinquency and other asset soundness indicators, when -- in our 2023 outlook, we said that, potentially there could be a turning point sometime in the first half of 2024, and we could expect a turnaround. In 2023, for stable management of mid-credit loans, we actually did a high issuance or origination, particularly in the third and fourth quarter.

And that said, it does seem that based on that origination amount in the third and fourth quarter, achieving a turnaround within the first half may be difficult, which is why the turnaround may be delayed sometime after the third quarter. However, it is quite clear that the CCR, credit cost ratio, will be improved in 2024 versus last year. Of course, there may be some variance depending on the overall interest rate environment and economic growth prospects, but we do not believe that the variance would be big. So, again, compared to 2023, we believe that our CCR, or credit cost, will see a downward improvement.

And then next, regarding your question on dividend policy. Yes. So we actually provided a disclosure filing this morning following resolution by the BOD, where we will -- we have committed to a dividend payout of 23% of 2023 net income, and the dividend will be KRW 150 per share coming to a total of KRW 71.4 billion. So dividend per share was KRW 80 last year. So this year's KRW 150 represents a major 87% increase. And our total shareholder return, which was KRW 51.1 billion last year is also significantly improved at KRW 71.4 billion.

But we are still very much aware that compared to other commercial banks, our prior share dividends are still on the lower side. So our basic approach is to continue to consistently increase our dividend per share every year. However, since as a company, Kakao Bank is still experiencing very sharp growth. Although, of course, shareholder return is one way that we can enhance shareholder value, we have to take into balanced accounts, different factors as well, circumstances of the overall market, our growth profile and stock price levels. So this is pretty much what I can share with you at this moment.

[Operator]

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

[Jaewoong Won, analyst]

[Interpreted] So thank you very much for delivering a very good performance despite the overall difficult environment. I think growth-wise, asset soundness-wise and shareholder return-wise, all being sound good. But there is a little bit of concern. You have started your loan refinancing service. And I understand that within the same platform, existing customers can switch over to another lender, but they cannot switch to another loan from the same lender or same bank. So if we assume that maybe 1 year from now or sometime in the second half of this year, interest rates should fall. And some lender within the platform offers a lower rate than because an existing Kakao Bank customer cannot switch over to another Kakao Bank product, is there a potential that you may lose that customer to another bank or another lender?

[Seok Kim, executive]

[Interpreted] So this is my understanding of the question. So if a borrower used the refinancing system to switch from their existing loan to a Kakao Bank loan, can they then also use the mechanism again to switch over to another vendor?

So even if that kind of situation, which can be a difficult situation occurs, I think this is consistent with the policy objective of the government. However, we believe that compared to other financial institutions, we have very strong advantages and strengths, namely a very high capital ratio, low funding costs and low loan-to-deposit ratio.

So as you can see, our BIS ratio is nearly double that of the commercial bank average. Again, we have very low funding costs. And so, I think we are the best positioned within the industry to adjust the best to these types of institutional changes. If you look at the publicly disclosed statistics from the banking federation, although our lending rates actually are relatively lower, we actually have much higher loan deposit spread versus other commercial banks, thanks to our very competitive funding profile and our investment returns as well. And apart from our refinancing platform, we find that there's actually much more sizable demand for refinancing for our own Kakao Bank products.

And, of course, when customers are looking to choose from different refinancing providers, the early payment penalty fee is something that actually is a big factor. It weighs on their decision. And the authorities are in consultations with the banking industry to make certain adjustments to adopt a standardized approach to early penalties. So we do not think that we stand to be disadvantaged in any way from that kind of system.

And, of course, unmatched competitive advantage of Kakao Bank is the very strongly anchored image and perception among the customers that when it comes to their refinancing needs, Kakao Bank is the go-to bank of choice. So it's not only for credit loans, but in fact, now for home mortgage loans as well, we are seeing a very big rise in traffic for potential borrowers running inquiries or submitting applications. So for the time being, we expect or have every expectation to continue to deliver very strong performance from our refinancing business.

[Operator]

[Interpreted] The last question will be presented by Sinyoung Park from Goldman Sachs.

[Sinyoung Park, analyst]

[Interpreted] Yes. I have one additional question regarding your interest rate sensitivity. So there are some expectations that the benchmark policy rates may be lower sometime in the second half of this year. So compared to your past guidance on interest rate sensitivity, what is your current position now? And are there any changes? So, again, if you could elaborate more on interest rate sensitivity, particularly regarding your margin?

[Seok Kim, executive]

[Interpreted] So let me answer based on my understanding of your question. So in the past, say, 1 to 2 years ago, when we did not have any long-term fixed rate loan products in our product portfolio. We did have a higher portion of interest rate risk compared to our capital just because of this portfolio mix. And so, at that time, we explained how we needed to increase the portion of long-term fixed rate products like mortgage loans in improving our product portfolio. So thanks to our effort over the last 2 years, we have done exactly that. And right now in terms of interest rate risk, we have virtually no duration mismatch or minimal at best. And our interest rate risk amount relative to shareholder equity is also very low compared to commercial banks.

So, say, as an example, if there's a 25 basis point decrease in the benchmark interest rate, on a full year basis, we are anticipating about a 1 basis point hit or impact on our NIM. So other commercial banks, based on their current product portfolios, we believe will have a bigger impact on their NIM in that kind of situation. But again, because of our current portfolio structure, we carry and are exposed to very minimal, almost none -- almost no interest rate risk. So very little NIM impact.

So it is based on those expectations and assumptions that we believe that we should be able to maintain similar full year NIM in 2024 compared to 2023, even if there is a potential decrease in interest rates.

[Dianna Kang, executive]

[Interpreted] With that, we will now conclude the fourth quarter 2023 earnings call for Kakao Bank. I'd like to thank all of our analysts, investors and journalists for joining us today. Thank you.

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