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 the first quarter of 2013. The access to this conference is being provided via Internet and conference call, being webcast live 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 subsidiaries. The conference will consist of the earnings presentation by our CFO, Jong-Kyoo Yoon, on the earnings results for Q1 2013, followed by a Q&A session, at which time you may call in for questions. Please utilize the Q&A session time. Let me now present our CFO, Jong-Kyoo Yoon, for the earnings presentation.
Good afternoon. My name is Jong-Kyoo Yoon, the CFO of KB Financial Group. Let me begin the earnings presentation of KBFG for Q1 2013. Before we go into the main presentation, let me remind you that there has been an accounting standards change on the scope of consolidated companies from 2013. In order to ensure comparability of the financial statements, we have restated the 2012 results, pursuant to the revised accounting criteria. So please take note that the 2012 numbers may have differed slightly.
Let me now give you the financial highlights. KBFG's profit for Q1 2013 recorded KRW 411.5 billion. Profit for Q1 declined to 32% year-on-year, mainly due to the narrowing interest income from the NIM contraction, as well as the one-off noninterest income losses, including impairment loss on securities. I will elaborate further on the NIM trend and the details about the one-off losses in the latter part of my presentation. The indicator representing the group's profit generation capacity, the gross operating income, came in at KRW 1,844.4 billion, slightly hovering below the KRW 2 trillion levels sustained during the recent 3 quarters. The tepid loan growth, the margin compression put pressure on the interest income, while the one-off losses, in the noninterest category, weakened the top line. KBFG was trying to expand our fee income in addition to stably managing our investment return on the marketable securities, thereby maintaining the historical trend of KRW 2 trillion level. Including trusts and AUM, the group's total assets marked around KRW 368 trillion as of the end of March.
Next, please. The provision for credit losses for Q1 2013 posted KRW 326.1 billion, down 16.2% year-on-year and 31.8% quarter-on-quarter. To date, we have proactively implemented, asset cleanup efforts, while applying conservative provisioning policies. As a result, despite the persistent credit issues in certain sectors, our provisioning trend remains quite stable. As you can see in the middle graph, ROA and ROE for Q1 marked 0.58% and 6.65%, respectively. If you look at the capital adequacy trend at the bottom, the end of March BIS ratio of the group rose 35 basis points versus the end of last year to 14.25%. The Tier 1 and core Tier 1 ratios for both group and the bank recorded over 11%, posting the highest capital adequacy in the financial sector. The rising BIS ratios for both the group and the bank are mainly attributable to the reduction of the RWA.
We may now discuss the group's financial performance for Q1 in more detail. Page 5, please. The Q1 and 2013 group net interest income stood at KRW 1,650.6 billion. Affected by the narrowing NIM and a stagnant loan growth, the group's net interest came down 7.9% year-on-year and 5.7% quarter-on-quarter. The Q1 net fee and commission of the group decreased by 6% year-on-year, mainly affected by the lower bancassurance fees. On a quarter-on-quarter basis, the reduced credit card fees, among others, led to a 5.9% drop. As for the net other operating income, the one-off, which is the impaired loss on securities, as well as the provisioning for the FX derivatives with shipbuilders, expanded the loss on a year-to-year basis. The group G&A expenses for Q1 reached a KRW 985.5 billion, only growing by KRW 13.6 billion compared to the same period last year. The perceived hike in the G&A for Q1 was due to the education tax reversal of KRW 82.7 billion during Q4. 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 Q1 marked KRW 1,313.5 billion. The muted loan growth resulted in a decrease of 11.8% year-on-year and 7.2% quarter-on-quarter. In the meantime, the card net interest income for Q1 posted KRW 260.2 billion, up 8.1% year-on-year and 1.8% quarter-on-quarter. It was mainly attributable to the reduced interest expense from the lower funding rate. As can be seen on the graph on the bottom right, the group's Q1 NIM narrowed 6 basis points compared to that of Q4 number of 2.79%, recording 2.73%. The leveling down of the group NIM was a result of the combination of the market rate drop and compressing loan-to-deposit spreads for the bank, as well as the Card business' shrinking merchant fees. For your information, when excluding the merchant fee reduction portion, the group NIM only inched down 2 basis points quarter-on-quarter, just as the previous quarter. As the effect of the liability repricing is beginning to take hold this year, the downward trend of bank NIM is gradually stabilizing. However, the intensifying competition among banks for loan growth, together with the likelihood of policy rate cuts going forward, are expected to press down the NIM for a time being. KB will do its utmost to minimize margin reduction through increased low-cost deposits and enhanced funding portfolio.
Next page, please. Let me move on to the net fee and commission income. The bank's net fee and commission income for Q1 recorded KRW 277.9 billion, falling significantly by 16.3% year-on-year. It was mainly due to the drop in both the bancassurance fees and the credit card agency fees. First of all, the bancassurance fee inched down 32.8% year-on-year. During Q1 last year, the strong marketing efforts led to extraordinarily high sales of single premium products, but the sales trend normalized recently. So you should look at this quarter's result as the ordinary trend. At the same time, the commission scheme change for bancassurance last April also played a role in the results.
As for the credit card agency fee, while the year-on-year and quarter-on-quarter trends may appear to have edged down, it was the agency fee payable by the credit card business to the bank that came down, which means there's no real impact on the group profitability. The Card's net fee and commission income for Q1 posted KRW 42.5 billion, rising KRW 21.4 billion year-on-year, thanks to the visible outcome of the cost-reduction efforts. On a quarter-on-quarter basis, however, it decreased KRW 21.2 billion. The new merchant fee structure implementation last December had an impact, while the card usage amount also scaled back slightly from the less affinity services offered.
It seems unavoidable that the merchant fee reduction will further erode the card's net fee and commission income going forward. KBFG plans to pursue differentiated marketing strategy per customer segment, systematic cost management and identification of the next-generation growth engines, such as the mobile, in order to better manage the Card business' profitability.
I will now touch upon the net other operating income. First, the bank's net other operating income for Q1 slided year-on-year due to one-off losses. If you look at the details, the net gains on securities for Q1 marked KRW 33.1 billion, down by KRW 72.5 billion year-on-year. Impairment losses recognized on the bank's holdings of POSCO and HMM by KRW 76 billion led to such results. Since the share swap with those counterparts as means of disposing the Treasury shares, the bearish stock market and the deteriorating sector outlook resulted in the impairment loss recognition for the recent 3 quarters. Although no final decision has been made on the ways to deal with these securities, we will do our best to minimize the losses.
If you look at the other category, the number came down KRW 61.4 billion year-on-year, while the exchange rate dropped in Q1 last year led to the reversal of KRW 30 billion, with a fair value adjustment on the forward exchange contract with some shipbuilders, including Sungdong, we had to deal with the exchange rate hype, vis-à-vis the end of last year, by provisioning extra KRW 19.3 billion. For your information, we are applying a conservative provisioning stand on not only the direct loans, but also the forward exchange contracts extended to some of the second tier, small and medium shipbuilders. We are also maintaining around 90% level of provisioning coverage ratio for the forward exchange exposures. The net other operating balance of credit card business for Q1 saw a widening loss year-on-year of [indiscernible] the provisioning of KRW 15.2 billion, related to higher point usage expected.
Next page, please. The bank's G&A expense for Q1 was KRW 841.7 billion, only growing by KRW 6.4 billion year-on-year. Considering the fact that the annual wage increase estimate accrued each quarter, the G&A is well under control. Compared to Q4 last year, the G&A may seem slightly higher. As was mentioned earlier, it was due to the education tax reversal of KRW 82.7 billion in Q4. The card and other subsidiaries' G&A numbers on the bottom are quite healthy. Despite the group-wide cost control efforts, the cost-income ratio for the group edged up slightly. If you look at the graph at the top right, the group's CIR is showing a modest upward trend since 2012 due to the lower interest income and the one-off losses from the noninterest category. Considering these circumstances, the CIR is expected to remain at around 50% level for some time.
The non-operating balance for Q1 after excluding the one-offs, such as the bank's BCC impairment loss and other subsidiaries' goodwill impairment on KB Savings Bank during Q1 to Q4, the non-operating balance of both the bank and other subsidiaries improved significantly.
Next page, please. Please turn to Page 10 for the bank's profitability details. I will not elaborate on it separately. I will now touch upon the group's asset and liability.
First, the group's financial standing. As of March end 2013, group total asset recorded KRW 287 trillion, a 0.3% increase compared to end of the previous year, with the impact of interest rate slide and expansion of investment and marketable securities caused by the sluggish loans in won, FVTPL or fair value through profit or loss and financial investments increased, whereas loans decreased 1.4%. Total liabilities stood at KRW 252 trillion, a 0.2% increase compared to the end of the previous year. With the sluggish loan growth, deposits dropped KRW 2.8 trillion, and debt went up KRW 1.2 trillion. Margin group shareholders' equity stood at KRW 25 trillion and group total assets, including trust and AUM, thanks to the AUM growth of our asset management subsidiary, went up 1.4% compared to the end of the previous year.
Next, bank and credit card loans. The bank's loan in won as of March end recorded KRW 181 trillion, a 1.8% decrease compared to the end of the previous year. By sector, household loans, with the weakening growth momentum following the prolonged property market depression and the impact of the qualified or conforming loan securitization, caused household loans to drop to 2.2% compared to the end of the previous year, which was a 0.3% drop if we include the securitized assets. For your information, a total of KRW 1.9 trillion of loans were securitized, including KRW 1 trillion of qualified loans in Q1. The government announced the real estate market normalization policy aims to boost the real estate market on April 1. KBFG will keep a close eye on the property market and the household loan demand trend to aggressively respond to any movements. The amount of extended conforming loans will take into consideration the proportion of fixed interest rate loans and be maintained within an appropriate limit. Corporate loans went down 1.3% compared to the end of the previous year. It was because of the whole loan growth fee, with control taking into account the sluggish economy and the household loan concerns. It was also due to avoidance of excessive interest rate competition to manage profitability. From that risk management purposes, we will maintain a conservative loan policy for the economic cycle-sensitive sectors. We will also be looking selectively to find corporate loan growth opportunities to uncovering global SMEs and also by applying a sophisticated credit analysis and interest rate system. Credit card receivables as of March recorded KRW 12.9 trillion, a 1.5% decline compared to the end of December last year. And credit sales decreased with affinity credit card services reduction, where factoring receivables went up.
Next page. Next is the bank's funding overview. As of March end, deposits in won stood at KRW 188 trillion, a 1.6% drop compared to the end of the previous year. The core deposit slightly rose, following efforts to win low-cost deposits and settlement account. Time deposits influenced by the funding management, following the overall stagnant loan growth, went down 3.1% compared to the previous year end. Debentures in won stood at KRW 12.5 trillion as of end of March. If you look at the graph on the lower right, the loan-to-deposit ratio recorded 96.9%, as of end March.
Next page, on Page 15, I will talk about bank's asset quality. The bank's asset quality, as you can see, the March NPL ratio for the bank stood at 1.36% in end of December and recorded 1.55% in end March, a 19 bp increase. KB sold off and bought off KRW 1,238 billion of NPL in the previous Q4. So although it may not seem like NPL ratio has gone up quite a bit, this was caused by the aforementioned base effect and is actually being controlled well at a level similar to the previous quarters. The NPL coverage ratio, including the reserve for credit losses, is 145.5%. As of end March, the bank's delinquency ratio was 1.09%, a 12 bp increase year-to-date.
For the different sectors, the household delinquency ratio went up 10 bp Q-o-Q because there was KRW 70 billion of new delinquencies in mostly interim collective loans. And excluding this, household loan asset quality is still sound. The corporate delinquency ratio went up 14 bp compared to the end of previous years due to the large-scale selloff and write-off at previous year's end, but actually the nominal delinquency rate and the new delinquency classifications improved Q-o-Q.
Next is the asset quality of KB Kookmin card. As of March end, credit card NPL rate recorded 1.72% and a 60 bp increase compared to late December. The card NPL increasing greatly centering on estimated loss was because of the change in the write-off policy. In the past loans, more than 3 months delinquent were written off according to the bank policy. But from this quarter, it has been changed to writing off delinquencies of more than 3 months, keeping in step with the general practice in the credit card industry. Accordingly, in the past, there was KRW 100 billion to KRW 150 billion of NPLs written off for each quarter, but approximately KRW 40 billion of NPLs were written off in this quarter. Accordingly, you can see that there was a 70 to 80 bp positive effect on the NPL, with the reduction in approximately KRW 100 billion of write-off compared to the last quarter. And if this effect is excluded, the NPL ratio is still being maintained at a appropriate level. The NPL coverage ratio, including the reserve for credit losses, recorded 321.4%. Credit card delinquency recorded 1.29% in end December to 2.14% in end March, a slightly sizable increase, but it was caused by the aforementioned change in the writing off policy of moving from 3 months delinquency to 6 months delinquency.
Next is provisioning for bank and credit card company. Bank's Q1 LLP recorded KRW 263.4 billion in Q1, a 17.2% year-on-year drop and 28.1% drop Q-o-Q, respectively. Provisions for household sector in Q1 recorded KRW 20.2 billion, and it is being maintained at a sound level each quarter. Corporate provisioning in Q1 stood at KRW 173.2 billion, a drop both year-on-year and Q-o-Q. However, while we take into consideration the provisioning write-back discount factor for some companies, it seems to be on a similar level to the previous years. KBFG is aware that overall sluggish economy and concern of over household debt are continuing. We are also aware that there are some asset quality issues in major industries, such as shipbuilding and construction. Thus, we are still maintaining our conservative provisioning position. Accordingly, our forecast for this year's provisioning is similar to the previous years.
Credit card provisioning in Q1 recorded KRW 68.2 billion and went down KRW 12.4 billion year-on-year and KRW 17.5 billion Q-o-Q. The reason for the loan loss provision decline in Q1 was because of the KRW 38 billion of one-time provisioning reduction effect, with the change in the write-off policy. Accordingly, in the future, it will be maintained at an ordinary level from the next quarter, and we will preemptively have a measure against household deterioration by strengthening the provisioning policy for some credit card assets. So we have a KRW 50 billion more of provisioning. So when we have this -- you can see that there will be some one-off impact, but this impact will disappear from the next quarter. It will remain at an ordinary level from the next quarter.
Let's go to the next page. Lastly, I'd like to touch upon the group provisions by sector. As shown on the top left-hand corner, the group's PCL against the total consolidated assets recorded 0.46% and dropped 10 bp compared to the 2012 credit cost of 0.56% on a cumulative basis. First, household Q1 credit costs recorded 0.36%, a level similar to the previous year's cumulative credit cost of 0.39%. The corporate sector Q1 credit cost recorded 0.71%, a 13 bp drop compared to the 2012 cumulative 0.84% credit costs. Owing to an aggressive cleanup of NPLs and a conservative provisioning policy, credit costs recorded 2.544% in 2010, 1.05% in 2011. And from 2012, it has been stabling, being maintained at a 70 bp to 80 bp level on a recurring basis for each quarter. Credit card Q1 credit cost recorded 2.10%, a drop of 66 bp compared to 2012 cumulative credit cost of 2.76%. This was as aforementioned many times, a one-off provisioning reduction following the change in the write-off policy. Excluding this effect, it is at a similar level to the past. This has been the 2013 Q1 business result presentation for KB Financial Group. Thank you for your attention.
Yes. That was the earnings presentation by our CFO. We will now begin with the Q&A session. [Operator Instructions] Mr. Hwang from Kyobo Securities.
Seok Kyu Hwang - Kyobo Research Center
My name is Huwang from Kyobo Seecurities. Regarding interest income for the bank, it seems like you are showing a downward trend. I believe that it is probably because of the lower volume of the loan growth. So on a quarter-on-quarter basis, I was wondering whether there were any other one-off factors that led to such a reduction? And starting from Q2, I believe that you have got to continue to grow your assets so that your interest income could also grow. So how do you anticipate the Q2 and Q3 outlook for loan growth? And also recently, there seems to be a trend within the banking sector to grow the SME loans. So per-borrower level, how do you foresee the outlook for the SME growth?
Yes, let me answer your question. As you have mentioned, the interest income reduction in Q1, basically was not because of the NIM because it was pretty much in line with our expectations. But it was mainly because of the lackluster loan growth. We did anticipate a little higher loan growth. However, our asset size has come down by about KRW 3 trillion, so that was the biggest factor. And you have very correctly pointed out a couple of things. If you look at the macroeconomic landscape, I believe that the sentiment in the market is to provide extra support for the SMEs. And that's direction of the current new government. So starting from April, I believe that, without hurting the asset quality of the bank, we are already beginning to pursue marketing, targeting certain SME loans. So already, I think that the trend has reversed from the downward trend to the upward trend for SME loans. As for the household loans, we are in the process of deleveraging. So I do not anticipate rapid growth on the household loans, especially regarding the collective loans. For a while, I believe that the -- we are -- conservative stance on the collective loans will remain. As I told you before, the household loans, we believe, will be growing at a very, very modest pace. However, on the corporate side, we have the large corporate, as well as SMEs. Now I believe that large corporates and SOHOs will continue to grow. But as for the SMEs loans, there will be 2 types available: One, there would be loans extended to support the SME sector, but at the same time, we have to help restructure the SME loans that are actually going delinquent. So I think that overall netted growth will be about on par. So on an annualized basis, we anticipate about 2% growth of our loan assets, that's our internal target. So starting from Q2, as I told you before, we will initially target the corporate loan so that we could actually begin to grow the loan assets further.
We have no questions coming in at this time, so we will wait at this time. We'll be taking a question from Macquarie Securities, Mr. Hwang Chan Young.
Chan Young Hwang - Macquarie Research
I'm Hwan Chan Young from Macquarie Securities. As was mentioned, you said that the NIM is probably going to go down in the future, and can you tell us about why you believe that? And I hope that you could provide a background information for the first quarter for each month, quarter. And could you tell us about your forecast for each quarter?
Regarding the NIM, to elaborate in the first quarter, as was mentioned, it's 2.73%. We believe that at this time, we have the interest impact that has been already influenced and we have seen some repricing as well. So in the second quarter, we will have to wait and see how the BOK interest rate turns out and the trend may change. For example, in Q1, if the BOK interest rate is maintained at the same level, then in Q2, the repricing probably will be concluded. And currently, what is difficult is that in the market for the corporate loans, as I aforementioned, there is heated competition, so I think that we have some difficulties related to the interest rate, which may have a downward pressure on the NIM. However, as I mentioned, if we have the BOK interest rate excluded, then probably in the Q2 numbers, we will see some delay in the NIM being declining in the second quarter. However, if there is a decline in the BOK interest rate in Q2, then we believe that in the third quarter or fourth quarter that they may drop even more. We will need to look at how we'll do in terms of efforts and repricing the market. To summarize, regarding the NIM, we will need to see, and if the BOK interest rate doesn't change, then we believe that the NIM downward trend will be stalled. However, if the BOK interest rate falls, then probably for 1 or 2 quarters going forward, it will go down. For your information, the first quarter monthly margin trend, 2.73% for January; 2.69% for February; and 2.76% for April. And when we take into consideration the recovery of delinquent interest, then it is very stable. And when we look at the previous quarterly trends or monthly trends, we can see that the downward decline is being stalled, so it will soon be stabilized. That is our forecast. Next question.
Thank you very much. I believe that aside from a couple of one-off factors, our Q1 earnings results were quite straightforward, perhaps that's the reason for the small number of questions. So we seem to have no further questions. So with that, we will now conclude the earnings conference of KB Financial Group for the first quarter 2013. The presentation and DoD of this conference will be available for access any time on the IR web page of KBFG. Also, if you have more questions, please contact our IR Department. We would do our best to address your questions. Thank you, once again, for your participation today. Thank you very much.
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