Kyu Sul Choi
Good afternoon. My name is Kyu Sul Choi, the head of IR at KB Financial Group. Thank you for taking part in today's earnings conference of KB Financial Group for fiscal year 2012.
The access to this conference is being provided via Internet and conference call, being webcast real time for Korea and abroad. During the Q&A, you may call in to ask questions.
Joining us in today's earnings conference, we have with us KBFG's President, Young-Rok Lim, and executives from KBFG's subsidiaries. The conference will consist of the earnings presentation by our CFO, Jong Kyoo Yoon, on the earnings results for fiscal year 2012 followed by a Q&A session, at which time you may call in for questions.
Let me now present our CFO, Jong Kyoo Yoon, for the earnings presentation.
Jong Kyoo Yoon
Good afternoon. My name is Jong Kyoo Yoon, the CFO of KB Financial Group. Let me begin the earnings presentation of KBFG for year 2012. First, the financial highlights.
KBFG's profit for fiscal year 2012 recorded KRW 1,774.5 billion, while the Q4 profit alone marked KRW 213.8 billion. Profit for year 2012 declined year-on-year, mainly due to the narrowing noninterest income, including fee and commission income and lower income from investment securities.
In 2011, the proceeds from NHF lawsuit-related reversal and sales gain on Hyundai E&C boosted the one-off gain, whereas this year, many one-off losses occurred instead.
Notably, in Q4, profit, as shown on the graph, was compressed compared to the previous quarters. It was mainly due to the Hyundai Merchant Marine and POSCO related impairment losses and other extraordinary losses. I will elaborate on the one-off factors in the latter part of my presentation.
The indicator representing the group's profit generation capacity, the growth operating income, has sustained a KRW 2 trillion level in per quarter in the past, but the Q4 results fell short of the KRW 2 trillion level. However, when excluding the one-off losses, the overall trend remains pretty much unchanged.
Including Trusts and AUM, the group's total assets marked around KRW 364 trillion as of the end of December, up KRW 2 trillion year-to-date.
Next page, please. The provision for credit losses for 2012 came in at KRW 1,513.3 billion, remaining on par with the previous year. As shown on the graph, the NPL ratio guidelines from FSS of 1.35% has to be complied with, leading to a sizable NPL sales and write off. Nevertheless, the provisioning amount only remained at KRW 383.7 billion, maintaining a stable quarterly trend.
Year 2012's ROA and ROE marked 0.62% and 7.46%, respectively. If you look at the capital adequacy trend on the bottom, the end of December BIS ratio of the bank rose 44 basis points versus the end of September to 14.42%. The Tier I and Core Tier I ratios recorded 10.89% and 10.82%, respectively, boasting the highest capital adequacy in the financial sector.
On Page 5, I will discuss the group's financial performance in more detail. Please turn to Page 5. The 2012 group net interest income stood at KRW 7,115.9 billion, affected by the narrowing NIM and stagnant loan growth, though growth was only 0.2% year-on-year. The Q4 net interest income marked KRW 1,751.3 billion, down 1.6% quarter-on-quarter.
The annual net fee and commission declined 11.3% year-on-year, but if you exclude last year's proceeds from NHF lawsuit, the decrease was 3.9%.
The Q4 commission income mainly came from the investment banking and bancassurance-related commissions. And if you exclude the one-off factors, it was by about 3%.
So again, though Q4 commission income mainly came from investment banking and bancassurance-related commissions, although the results were slightly less than the previous quarter, the ordinary trend was maintained if you exclude those one-off factors. As you are well aware, the biggest difference from the previous years mainly came from the net other operating income. As you are well aware, this net other operating income tends to have high volatility associated with securities, derivatives and FX gain or loss, and I will actually elaborate on the details later on.
The group's G&A expenses for the year came in at KRW 3,885.3 billion, and down KRW 46.5 billion year-on-year. The Q4 G&A expense was KRW 878.8 billion, decreasing KRW 162 billion quarter-on-quarter. During Q4, there were some one-offs. But considering the seasonally high G&A at year end, the Q4 results can be seen as a positive result of the company-wide efforts to cut cost.
Lastly, nonoperating balance for Q4 posted KRW 112.8 billion in losses, mainly due to extraordinary losses such as impairment of goodwill of KB Savings Bank, et cetera.
Next is the breakdown of the group profitability on the next page.
Let me start with the net interest income. The bank's net interest income for year 2012 reached KRW 5,895.3 billion. The net interest income for the card came in at KRW 974.4 billion. Compared to the previous year, the banks income narrowed 4.1%, while the card income expanded 27.4%. As mentioned in the previous earnings conferences, it is because the card business earnings prior to the spinoff in March 2011 is included in the prior year number. The graph on the top right shows the group net interest income breakdown by business. The net interest income combining bank, card and other subsidiaries is trending down quarterly in 2012. It is mainly due to the declining NIM of the bank and the resulting net interest income reduction. The card and other subsidiaries are showing healthy trends.
On the bottom-right graph, the group NIM, comprising bank and credit card businesses, is shown. The market rate drop along with the narrowing loan to deposit spread continued compressing the margin, making the cumulative NIM for 2012 2.88%, down by 19 basis points compared to last year's 3.07%, and the NIM for Q4 was 2.79%, decreasing 3 basis points quarter-on-quarter.
Amidst the challenging market faced by the banking sector in growing their loan portfolios, the interest rate drop and the expanding low-margin loan such as fixed-rate loans are adding margin pressure.
However, KB will focus on improving the funding side by broadening the low-cost deposit and by enhancing the deposit portfolios. And on the fund's operating front, we will refine the pricing policies while further rationalizing the rate system to minimize the margin's squeeze.
Let me move on to the net fee and commission income. The bank's net fee and commission income for the year recorded KRW 1,274 billion, falling significantly by 13.6% year-on-year, seemingly. During 2011, however, there was the one-off gain of the proceeds from the NHF litigation as well as the pre-spinoff income from the credit card business prior to March that was captured under the bank's performance. So if you actually consider that, that's a 4% increase.
The Q4 net fee and commission income also declined 13.6% quarter-on-quarter. More specifically, the fund sales income suffered from the stock market uncertainties and the volatile market and experienced lower fresh inflow of funds. So although the fund redemption came down by 18% year-on-year, the quarterly redemption trend remained flat. As for bancassurance, thanks to the proactive marketing activities and increased new business, the commission income spiked by 20.4% year-on-year. However, during Q4, the contracted sales of the single-premium products and the commission rate cut reversed the trend downwards. The FX and others for Q4 fell due to the high base effect on the previous quarter, when there was the one-off gain from investment banking business. Other than that, there was no anomaly.
Please turn to the next page. I believe that the biggest differentiating portion compared to the previous quarter and the previous year, I believe that the net other operating income showed the biggest difference. First of all, if you look at the details, the net gains on securities for 2012 recorded KRW 56 billion, showing a big gap with KRW 507.5 billion of 2011. In the previous year, there were the sales gain on Hyundai E&C shares of KRW 413.9 billion and other one-off gains, whereas this year, however, the impairment loss on Hyundai Merchant Marine and POSCO shares of KRW 206.1 billion and other one-off losses took place. When taking away such one-offs, the net gains on securities actually kept rather stable.
Also, if you look at the other category, the losses climbed during Q4 versus Q3. It can be attributable to the shipbuilder's credit risk being reflected through fair value adjustment on the forward exchange contracts, ultimately recognizing $112.1 billion in losses. Unlike Q3, during Q4, there was the sale of loans amounting to more than KRW 500 billion, resulting in the sales loss of KRW 124 billion on loans as well.
Let me remind you of 2 factors. First of all, on the loan extended to the above-mentioned shipbuilding companies as well as the forward exchange contracts, we have already provisioned up to 90% level. Therefore, in case the second-tier shipbuilding companies face difficulties, we feel that we are already fully prepared. So even if there are issues that emerge again in the future, you could rest assure that we are prepared. And also, when it comes to the loss on the loan receivables, we actually reflect the previous quarter's results in the following quarter, so we actually have to consider both the provisioning amount and also the reversal amounts together.
The net other operating income for credit card business for Q4 inched down quarter-on-quarter. It is because there was the dividend income from the assets sold to the credit recovery support program, such as Hee-mang Moa, which is a bad bank program.
Please turn to the next page. The bank's G&A expenses for 2012 as a whole was KRW 3,305.7 billion. The G&A for Q4 marked KRW 731.1 billion, down 3.2% year-on-year and 18% quarter-on-quarter. The factors affecting the reduction in the annual G&A compared to the previous year include reduction of miscellaneous labor cost-related expenses and company-wide cost-cutting measures. During Q4, there was the reversal of the education tax in the amount of KRW 82.7 billion as well as the reversal of the retirement benefit allowance. But even after considering those reversals, the G&A showed only a limited increase, by KRW 8.5 billion. The fourth quarter's G&A fell market base supported by the earlier mentioned one-offs as well as the early recognition of the retirement benefit allowance adjustment.
On the top-right graph, we have the group cost income ratio. And since 2011, the gross profit, mainly driven by the rising NIM, steadily kept the CIR at the mid-40% level. In 2012, however, despite efforts to control the G&A, the contracting NIM and sluggish loan growth led to weaker top line results, gradually pushing up the cost/income ratio.
Accordingly, we anticipate the cost/income ratio to remain in the high-40% range for some time until our top line results improve significantly.
As for the nonoperating balance for Q4 for the bank, due to Kazakhstan banking regulators' expected move to strengthen the asset quality of restructuring loans, we preemptively recognized the impairment loss of KRW 33.8 billion for BCC. Also, there was the KRW 57.5 billion nonoperating balance for other subsidiaries. On KB Savings Bank, we recognized goodwill impairment loss of KRW 35.2 billion, while there was the additional 8.8 billion provisioning for KB asset management for the ongoing litigation. These items led to nonrecurring losses.
Next page, please. In Page 10, the KB Kookmin Bank profitability overview has been provided for comparison purposes of the past data, so please refer to this data.
Next, I'd like to speak for the groups assets and liabilities. This is Page 11. First to the group's financial status. In brief, as of the end of December 2012, according to the balance sheet, total assets of the group should add approximately KRW 282 trillion, only a 1.6% increase year-on-year. The main reason was the slow growth in loans and receivables. For your information, from this year, if you were to include the loans that we underwrote but were securitized, such as qualified loans and securitization to KHFC, the annual growth rate of total assets is 3%. We've include the qualified loans with the increase in the off-balance loans for the analyst purposes. In the future, the off-balance qualified loans, such as Bogeumjari loans, and also from the second half of the year, the MBS is going to be handled by the bank. And the MBS regulations have recently been revised, so for these aspects, the off-balance loans data will be continuously provided to the analysts.
Next is the Kookmin Bank loans in won and the KB Kookmin Card. First, the bank's loan in won as of the end of December stood at KRW 184 trillion, which is almost the same level as the end of the previous year. Weakened growth momentum for household loans due to the depressed property market and the sale of qualified loans for securitization to KG's agreement with [ph] decreasing household loans. With concerns of a sluggish economy and the household debt, the growth rate of SOHO loans was controlled, which resulted in a somewhat limited growth in corporate loans as well since the first half of the year. Especially during the fourth quarter, loans in won declined by 2% quarter-on-quarter. This is due to the fact that in addition to the factors just mentioned earlier, there was the sales and write-off of more than KRW 1 trillion of NPLs as seasonally, many corporations repay their loans at the end of the year to manage their debt ratios.
By sector, household loans decreased year-on-year by 1.8%. But as mentioned earlier, if we are to include the qualified loans for securitization and the loan securitized, it grew by 2%.
Our company, in order to increase the share of fixed-interest-rate loans to 30%, we will be handling an appropriate level of qualified loans for securitization.
slight decrease. That's why despite the increase in factoring assets, it only grew by 4.8%.
Next page, please. Next is Bank Funding. As of the end of December, the bank total deposits in won amount to approximately KRW 192 trillion, which is a year-on-year increase of 1.2%. Thanks to efforts to attract low-cost deposits and settlement account, core deposits increased by 4%. But time deposits declined modestly year-on-year due to funding control, in line with the overall slowdown in loan growth. So it was a slight decline.
Debentures in won stands at KRW 13 trillion at the end of the December. If you look at the graph on the upper right, Deposits in Won, the share of retail -- as you can see from the graph on the low right, loan-to-deposit ratio is 98.7%.
Next, I'd like to speak about the asset quality of the group on Page 15. First is asset quality of KB Kookmin Bank. The ratio of the standard and below loans of the bank, which was 1.75% as of the end of September, improved to 1.34% as of the end of December. And in order to meet the FSS guideline of NPL ratio of 1.35%, KRW 1.2 trillion of NPLs was sold off. But the new NPL formation, which excludes the effect of the NPL sales and write-off, is to amount to approximately -- reduce the amount to KRW 600 billion to KRW 700 billion has now decreased significantly to approximately KRW 300 billion, indicating a rather healthy migration of asset quality. As of the end of December, NPL coverage ratio is 160.9%. As of the end of December, the bank's delinquency ratio was 0.97%. Due to the NPL sales and write-off, it increases substantially by 25 basis points quarter-on-quarter. Household and corporate delinquency ratios fell by 21 basis points to 31 basis points, respectively.
Next is the asset quality of KB Kookmin Card. As of the end of December, card NPL ratio stood at 1.12%, a slight fall quarter-on-quarter. But precautionary loans increased significantly quarter-on-quarter by about KRW 500 billion. This is because in accordance with FSS guidelines with respect to card revolving receivables, approximately KRW 500 billion of receivables that had used their credit limit by more than 80% were classified into precautionary loans, and so we also had to provision against them.
Including the reserve for credit losses, the NPL coverage ratio is 458.2%. And also, the delinquency ratio of KB Kookmin Card due to a decrease in the amount of write-off and compared to the previous year slightly rose from 1.24% as of end of September to 1.29% at the end of December. However, if we were to exclude the write-off effect, the actual delinquency rate in the fourth quarter improved slightly quarter-on-quarter. The KB Financial Group, in light of the recent macroeconomic climate, such as economic downturn and rising household debt, has preemptively addressed any possibility of a deterioration in card asset quality. We have made strenuous efforts to manage asset quality through proactive credit limit management and improvement in processes to manage delinquencies.
Next is group provisions and NPL coverage ratio by sector. KB Kookmin Bank's loan loss provisions for the year stood at KRW 1,156.3 billion and was recorded at KRW 271.9 billion in the fourth quarter. Thanks mainly to improvement in quality of the corporate loans, this was a 11.4% decline year-on-year and a 8% decline quarter-on-quarter. By sector, the loan loss provisions for household was KRW 92.3 billion, a modest decline quarter-on-quarter. The overall quality of household collective loans, which have put pressure on the quality of household loans all along, and household asset quality in general has improved gradually from the fourth quarter.
The fourth quarter corporate loan loss provision stood at KRW 179.6 billion. And compared to the third quarter, it was a decrease of KRW 15 billion. The recent corporate loan loss provision has decreased in the midst of an overall improvement in asset quality, thanks to the preemptive and conservative loan loss provisioning thus far. The additional provisioning burden following the NPL cleanup was not very significant despite the NPL sales and write-offs of almost KRW 1 trillion during the fourth quarter. The KB Kookmin Card loan loss provision also amounted to KRW 85.7 billion during the fourth quarter, marking a reduction of KRW 2.5 billion quarter-on-quarter.
Lastly, I'd to speak about our group provisions by sector. If you look at the graph on the upper left, the group provisions for credit losses against group total assets was 0.53% on a cumulative basis for 2012. This was a modest improvement compared to the 0.56% in 2011. And the ratio was also quite stable each quarter.
The credit cost in household during the fourth quarter was recorded at 0.36%, a slight decrease quarter-on-quarter. But on a manual cumulative basis, it stood at 0.39%, a rise of 0.29% year-on-year. Delay in economic recovery and prolonged depression of the property market have led to an increase in provisions, mainly due to unsecured loans and household collective loans.
The fourth quarter and annual credit cost for corporate sectors stood at 0.71% and 0.75%, respectively. As a result of the active NPL cleanup and conservative provisioning policy, it has shown a steady decline. The annual credit cost improved significantly compared to the 1.04% recorded in 2011. The KB Kookmin Card annual credit cost was recorded at 2.76%, a rather significant increase year-on-year. But starting from the fourth quarter, it has shown a slowdown in growth. Over the year, efforts have been made in terms of risk management that is a tightening criteria for cash advance and card loans and proactive limit management. Thus, we expect the credit cost will be contained at current levels instead of any additional increases.
This has been the 2012 business results for KB Financial Group. Thank you for your attention.
Kyu Sul Choi
That was an earnings presentation by our CFO. We would now begin the Q&A session. [Operator Instructions] We will now take question from Franklin Templeton. Mr. Chong [ph]?
My name is Wu Yoo Chong [ph] from Franklin Templeton. I have the following 2 questions. Looking at your payout ratio compared to the previous year, it seems like it is edging up slightly. It was 11.7% in 2011, and in 2012, it was about 13.1%. So it's good that payout ratio is going up, this is good thing. But your capital adequacy is quite good. And recently, the Basel III and LCR regulations have been delayed quite a bit. So my guess is that your dividend policies going forward could be changing for the better. So could you explain why your payout ratio still remains relatively low? Second question is the following. With the incoming administration taking power, I believe that there are some financial-sector-related regulation changes that can be expected. So can I ask about KBFG's stance on the expected regulation change that is proposed by the incoming government?
Jong Kyoo Yoon
Yes, let me first address your question about the payout ratio. First of all, I must apologize to all the shareholders for the relatively low dividend ratio, because I believe that all the shareholders have been asking for higher earnings for the financial group. And it is, of course, our goal and aim to give back to the shareholders. And it is only right for us to give back as much as possible. As mentioned by Mr. Chong [ph], last year's payout ratio, now we had to actually calculate 15% of the payout ratio after calculating all the credit-loss-related provisioning and reserves. And this year, of course, and we only raised the payout ratio by 1% only. So in the mid- to long-term perspective, we still have to view that our payout ratio should reach all the way to 30% ultimately. However, economic uncertainties still remain, and household-debt-related concerns are mounting. So including the government's view also, the financial sector still feels that we need to still maintain a relatively high level of retained earnings. Of course, within the BOD, we are having extensive discussions about the payout ratio. Of course, you might be slightly disappointed right now, but then again, please be understanding, because our goal mid- to long-term is to raise the payout ratio much further. But we had to make this decision because of the -- all of these uncertainties. So I apologize for not being able to give you better needs. Now regarding the M&A issue, could Mr. Park answer?
Yes, I'm in charge of the Strategy. My name is Dong-Chang Park, I am a CSO. During the past 1 year or so, we worked very hard to acquire the ING Korea business. But because of various factors, we were not able to carry through all the way. But when it comes to our basic strategy, mid- to long-term strategy, to further diversify our nonbanking subsidiaries through M&A possibly, it's still quite open. Especially under the new incoming administration, I believe that everybody is aware that the domestic financial sector is reaching the saturation point. So going forward, I could also reassure you that we will be looking into the global expansion as well.
Kyu Sul Choi
Yes. We'll take our next question from JP Morgan Asset Management, Dale Hardeviza [ph].
I have a couple of questions. The first one is, can you talk about your foreign currency funding situation in terms of foreign currency loan to deposit ratio, the size of your foreign currency assets, funding and also what -- how much of that funding is short-term? And secondly, if you can talk about your expectation of loan growth for this year.
Jong Kyoo Yoon
Yes, let me first give you the answers. After 2009, because of the uncertain global economic situation, not only other countries but also Korea, tried to prevent any further financial crisis. So in order to avoid the same situation that we experienced back in 1997, we actually funded sufficiently in terms of the fund -- foreign currency quite early on. First of all, we are -- we have been trying to diversify funding sources when it comes to foreign currency. Because European banks were very unstable, we diversified into Asia. And also, we actually converted our short-term funding to the long-term funding quite a bit. Not only funding in foreign currency, we also try to make efforts to expand the foreign currency assets, in other words, the deposits. Yes, let me also elaborate on this. Regarding LDR, in the beginning of last year, it reached about 180%. But during the past 1 year, when it comes to foreign currency funding, we have put in a lot of efforts to get more foreign currency deposits. So it actually went up all the way to 101%. So in other words, we have, in a way, kept our promise that our foreign currency LDR would need at least 100%. Yes, once again, as was mentioned by our CSO, Mr. Park, when it comes to the FC -- currencies, we will continue to work on increasing the deposits in foreign currency. And we are experimenting with leveraging our overseas branches as well. So again, foreign currency LDR, I believe that ultimately, we have to maintain around 100% level so that we could ensure a stable foreign currency funding. And when it comes to the breakdown between short-term, long-term; short-term is about 1/3 and long-term is about 2/3. And within this year, if at all possible, we plan to expand the long-term foreign currency funding even further. And I think that our efforts to that end has already begun. So we will closely monitor the situation. We will look at the funding structure and the rates, and we will continue to improve our foreign currency funding situation. And I believe your second question had to do with our outlook on the loan growth going forward. As you are well aware, this year, until now, I believe that there are mounting concerns about the household loans and debt situation, and that concern has not been alleviated. Even on the macro side, the global economy is still quite sluggish. So we have to be rather cautious. So this year, we will be very much focused on the high-quality business management. In other words, on both household loans and corporate loans, I believe that we will be growing our loan portfolio in low one-digit number, by about 4% level. But as I told you before, we still have to watch very closely how the interest rate trend will evolve going forward. And also, we have to think about the qualified loan securitization to KHFC, so we have to think about the loan raise competitiveness as well. So we have to balance things. So about half of the loans would be our own loan underwriting, whereas another 50% would be probably for the qualified loans securitized to KHFC. So if we could sufficiently balance those 2 groups of loans, I think that we would be able to meet that 4% target. I hope that answers your question. Up until now, there are no further questions. So we'll wait for a little bit for any further questions that may occur.
While we wait, if I were to just add 1 more thing. I mentioned about the dividend payout. But 16%, although that's an unsatisfactory level to our shareholders, the 16% payout ratio, but our intention is to go all the way up to 30%. Although it may take a little bit of time, we will work persistently towards the 30% and to increase the payout ratio for our shareholders. Ladies and gentlemen, as you are well aware, this weekend is the Lunar New Year's holidays. And I believe that people will start going back to their hometowns starting from tomorrow. As far as I understand, all 4 major financial holding companies and 2 additional banks, including KBFG, are holding earnings conference right now at this same time. Therefore, I believe that the market participants are having to attend to and listen to various earnings conference calls right now. So as was expected, I don't think that we have too many questions for today's conference, but we will wait just a little longer before possibly closing the Q&A session earlier than usual. We will wait just a little longer.
Yes, I understand that from 4:30 on, Shinhan Financial Group will be getting their presentation. So I believe that we could actually close today's earnings conference. So thank you very much. With that, we will officially conclude the earnings conference of KB Financial Group for fiscal year 2012. The presentation and VOD of this conference will be available for access any time on the IR web page of KBFG. So it is prepared for your convenience. Also, if you have more questions, please contact our IR Department directly, then we will do our best to address your questions. Thank you once again for your participation today. Thank you very much, and happy new year. Thank you.
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