KB Financial Group (NYSE:KB)
Q2 2014 Earnings Conference Call
July 25, 2014, 3:00 AM ET
Kyu Sul Choi – Head of Investor Relations and Managing Director
Woong-Won Yoon – Chief Financial Officer and Deputy President
Byung-Gun Lee – Dongbu Securities
Seok Kyu Hwang – Kyobo Securities
Chan Young Hwang – Macquarie Securities
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 Half of 2014. 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 CFO, Woong-Won Yoon; and executives from KBFG's subsidiaries. The conference will consist of the earnings presentation by our CFO, Woong-Won Yoon, on the earnings results for the first half 2014, followed by a Q&A session, at which time you may call in for questions.
Let me now present our CFO, Woong-Won Yoon, for the earnings presentation.
Good afternoon. My name is Woong-Won Yoon, the CFO of KB Financial Group. Before going into the earnings results, I would like to provide a brief overview of our business for the first half of 2014. Although the Q1 muted loan growth and NIM contraction limited the top-line growth, during Q2, appropriate level of loan growth and NIM improvement led to an expanded interest income and resulting top-line enhancement. On the cost front, the provision for credit losses and G&A only grew by a small margin remaining well under control.
During the second half, we expect the continued loan growth trend and gradual NIM improvement to lead to the top-line recovery trend. The cost is also expected to continue showing IA stable picture as well.
Let me begin the earnings presentation of KBFG for the first half of 2014. First the financial highlights. KBFG’s profit for the first half posted KRW 765.2 billion, up 33.1% year-on-year. The absence of one-off factors from the same period last year including the equity swap impairment loss and BCC equity method loss attributed to such increase.
Profit for Q2 marked KRW 391.7 billion, boosted by the appropriate level of loan growth and NIM enhancements and the insuring top-line recovery. As a result, profit went up 4.9% quarter-on-quarter. As of the end of June, including trust and AUM the Group’s total assets marked around KRW 393 trillion as of the end of June, up 3.5% year-to-date.
The bank’s loans in won rose 1.5% year-to-date, thanks to the loan growth achieved in Q2. The Group NIM for Q2 stood at 2.48% going up 2 basis points. The first half cumulative NIM for 2014 was 2.47%. Next page please.
The provision for credit losses for the first half came in at KRW 613.2 billion despite the small increase during Q2. On a year-on-year basis it declined 9.5%. This can be seen as the result of our steadfast efforts to improve asset quality. The provision for credit losses for Q2 marked KRW 332.4 inching up 18.4% quarter-on-quarter.
It should not be viewed as deterioration of asset quality however, the Q1 PCL was extremely low and no major asset quality deterioration occurred during Q2. The Group total asset to PCL ratio for the first half recorded 0.41% improving six basis points year-on-year but it rose seven basis points quarter-on-quarter to 0.45%.
If you look at the NPL ratio and delinquency trends on the top right, both the bank and card businesses NPL ratios marked 1.75% while the delinquency ratio posted 0.99% and 2.09% respectively. The Group and bank BIS ratios as of the end of June recorded 15.35% and 15.64% respectively sustaining one of the industry’s highest capital adequacy.
Page 6 please. Let me start off with the Group net interest income. The Group net interest income for the first half of 2014 amounted to KRW 3,150.8 billion reducing 4.5% year-over-year affected by the NIM compression. If you look at the quarterly trend however, the Q2 net interest income was supported by the loan growth and lower funding cost picking up 4.2% quarter-on-quarter turning the trend into an upward trajectory.
Net fee and commission for the first half posted KRW 665.5 billion, down 12.3% year-on-year. The main reason was, the overall sluggish results from the core fee and commissions including bancassurance and investment trust products.
During Q2 however, the bank’s commission income from investment banking and credit card commission income picked up adding to the 12.3% quarter-on-quarter growth.
Net other operating loss for the first half was KRW 194 billion narrowing the amount of loss both year-on-year and quarter-on-quarter showing an improvement trend. On a year-on-year basis, the lack of the one-off losses such as the impairment loss from POSCO shares and others led to significant improvement. Compared to the previous quarter, the CVA reversal from the FX changes led to a slight enhancement.
G&A for the first half reached KRW 2 trillion, despite the edging up of G&A during Q2, the half year number remained flat year-on-year.
From next page, I will go into more details about the Group’s profitability. First, the Group net interest income, the net interest income for the first half declined 4.5% year-on-year mainly due to the NIM contraction.
In the mean time, the Q2 net interest income amounted to KRW 1,608.1 billion, the loan growth, together with the lower funding cost from the maturing of the high yield debts lifted the NIM by 4.2% for the quarter.
On the top right graph, the Group NIM trend is shown. Inclusive of the merchant fees, the Q2 Group NIM marked 2.48%, up two basis points compared to Q1’s 2.46%. The bank NIM came in at 1.82%, up four basis points from the previous quarter.
As mentioned earlier, the Group NIM increase was mainly thanks to the lowered interest expense during Q2 from the maturing of the high yield debt amounting to over KRW 3 trillion.
The reason why the Group NIM expansion was less than that of the bank NIM was because of the credit card operation suspension including card loans during Q1 and Q2, which led to lower interest income and translated into additional pressure on the NIM.
Against the backdrop of serious market competition in the prime loan category, we do anticipate some loan deposit spread pressure. Nonetheless, we would do our utmost to gradually enhance NIM through profit-centric portfolios management in the core deposit and retail unsecured loan areas.
Also in the card business, the NIM is showing a rebounding trend through efficient marketing, post the operation suspension. We will continue our efforts to sustain a stable NIM trend going forward.
Let me move on to net fee and commission income. The Group’s net fee and commission income for the first half of 2014 marked KRW 665.5 billion, down 12.3% year-on-year. The agency commissions such as bancassurance dropped quite a bit, while the credit guarantee insurance for factoring receivables started being – Q4 last year due to accounting changes. The net fee and commission income for Q2 posted KRW 352.1 billion rising 12.3% quarter-on-quarter.
The reduced one-off expenses related to card reissuance from the card data compromise during Q1 along with the improved bancassurance commission and commission income from investment banking enabled such enhancements.
I will elaborate further on the bank and card net fee and commission income on the following page. If you first refer to the top-left graph on Kookmin bank’s net fee and commission income trend, the overall quarterly trend was downward.
Starting from Q2 however, the trend edged up slightly boosted by the increasing bancassurance and investment banking commission income by line item, the bancassurance new business sold for the first half 2014 came down by 51.1% year-on-year as with the entire banking sector as a whole.
During Q2, our efforts to strengthen the bancassurance sales led to a 34.3% increase quarter-on-quarter. As for the new fund sales, the first half results amounted to KRW 1,63.3 billion reducing 55.3% year-on-year while the Q2 results went up 6.3% quarter-on-quarter boosted by our focus on fund sales capabilities.
On the bottom-right table you will find the first half card payment volume of KRW 37,700 billion which rose to 2.5% year-on-year and 1.6% quarter-on-quarter due to the card data breach incident in Q1 costs such as the card re-issuance expense and exemption of SMS fees compressed the credit card fee income by 39.7% year-on-year.
In Q2, such one-off expenses declined leading to 147.9 per quarter after the operation we are pursuing efficient into new products catering to customer investment portfolio in order to regain – operations. As we move – we would do our best to further – abilities with profitability operating income.
The operating income for the first half improved both year-on-year and quarter-on-quarter on the back of reduced impairment loss on POSCO shares among others as well as the CVA reversal from the falling exchange rate. In more detail, the net gains on securities for the first half recorded 171.1 climbing year-on-year.
As was mentioned, the main reason was the decreased impairment loss on POSCO shares and others and during Q2, the impairment loss on Taihan Electric Wire of around KRW 24 billion was recognized hedging down the net gains and securities.
Net gains on derivative and foreign currency translation for the first half amounted to KRW 151.2 billion rising both year-on-year and quarter-on-quarter. During the first half of last year, the rising FX rate resulted in CVA provisioning. However, Q2 experienced exchange rate fall compared to March end leading to around KRW 21 billion worth of CVA reversal.
Let me now move on to G&A PCL and non-operating income. The Group G&A for the first half 2014 recorded KRW 2 trillion, in line with the previous quarter. The quarter-on-quarter growth only remained at 1.8% adjusting to our overall cost control efforts.
As can be seen on the top right graph, the Group cost income ratio despite our cost control efforts has shown a continuous deterioration until last quarter due to the profitability drop. Since Q2 however, the profitability started recovering on the back of enhanced interest income inching up the cost income ratio plus quarter-on-quarter to 54.1%.
The first half provision for credit losses marked KRW 613.2 billion decreasing 9.5% year-on-year and increasing 18.4% quarter-on-quarter with no one-off factors we are maintaining a stable level of around KRW 300 billion.
Next is on the Group’s financial position. As of 2014 June end, the Group total asset on the BS stands at KRW 299.1 trillion driven by loan growth and with the inclusion of KB Capital as a subsidiary last March. The figure increased 2.5% year-to-date. Group’s shareholder equity is KRW 26.4 trillion, increase of 3.1% year-to-date.
As of June end, Group total assets inclusive of Trust and AUM is KRW 393.2 trillion increasing 3.5% year-to-date. Please refer to the right-hand graph for asset size and AUM for each of our subsidiaries.
Next is on Group’s assets and liabilities. First bank’s loan in won as of end of June is KRW 190.4 trillion, growing 1.5% year-to-date and Q-o-Q. By each sector, for household loans, driven by mortgage loans increased 1.8% year-to-date and corporate loans grew 1.2% year-to-date showing a balanced growth trend across the board.
In Q1 on the back of re-precautions from customer data breach incident, we were unable to bring normal level of performance, but from Q2, we are seeing normalization with a stable growth trend continuing. And we expect such growth trajectory to continue in the second half of the year.
Credit card receivables at the end of June is KRW 13.9 trillion, despite the increase in factoring receivables on the back of suspension of business, overall credit card receivable growth including credit purchases was muted recording a decline of 4.8% year-to-date.
Next page. As of end of June, bank deposit in won, is KRW 197.1 trillion increasing 1.4% year-to-date and 0.8% against March end. Especially, savings deposit driven by growth in time deposits increased 2.0% year-to-date and 1.8% against the end of March.
Bank’s debentures in won as of June end is KRW 11.3 trillion, slightly declining on a Q-o-Q basis with high cost debt reaching debt maturity. As can be seen from the bottom left’s graph, the LTED, the Loan to deposit ratio is 98.5% as of June end sustaining a stable trend.
Next is on the Group’s asset quality. This slide shows KB Bank’s asset quality. The bank’s NPL ratio as of June end is 1.75% improving against March end figure by seven basis points.
New NPL formation continues to decline with overall asset quality showing a sound trend. NPL coverage ratio as of June end inclusive of reserve for credit loss came in at 111.2% increasing one basis points against March end.
June end, Bank delinquency ratio came in at 0.99% falling five basis points compared to end of March. Delinquency trend by each sector on the bottom right shows as of June end, household delinquency ratio of 0.78% which is a similar level on a Q-o-Q basis, but corporate delinquency ratio came in at 1.23% falling nine basis points Q-o-Q to a more stabilized level.
As of end of June, NPL ratio is 1.75% improving one basis point against March end sustaining a positive trend. NPL coverage ratio inclusive of reserve for credit loss as of end of June is 318.2%.
June end delinquency ratio for credit cards improved three basis points against end of March recording 2.09%. Quarterly new delinquency formation continues to be stable with a sustained decline.
Next is on loan loss provisions and credit cost. 2014 first half LLP for the Bank is KRW 477.9 billion, despite a slight increase in the second quarter, it was a 9% decline on an year-over-year basis. By each sector, first half provisions for household loan is KRW 118.1 billion, a decline of 11.9% year-on-year.
In Q2, with KRW 40.9 billion increase Q-o-Q at KRW 79.5 billion, the figure seems to have risen quite significantly, but it is not due to worsening of asset quality, but significantly low level of provisioning in the first quarter on the back of muted loan growth and reduction in write-offs. As such, Q2 figure represents a more normalized quarterly level.
Considering that the size of the household loan is around KRW 105 trillion, LLP for household loan is still within a stable range. For the corporate loans, first half for provision came in at KRW 359.8 billion falling 8.1% year-on-year. Q2 figure is lower by 16.7% Q-o-Q showing a sustained improvement.
First half credit card LLP on the back of decline in receivables declined 8.9% year-on-year to KRW 137.6 billion. In Q2, there was an increase of KRW 5.4 billion Q-o-Q recording KRW 71.5 billion.
On the bottom left graph, the bottom left graph shows first half 2014 Bank and credit card LLP over total asset on a cumulative basis came in at 0.57% with Q2 credit cost increasing two basis points Q-o-Q to 0.58%.
This has been first half 2014 KB Financial Group’s earnings presentation. Thank you very much for your attention.
Kyu Sul Choi
There was an earnings presentation by our CFO. We will now begin the Q&A session.
(Operator Instructions) Yes, first question from Mr. Byung-Gun Lee from Dongbu Securities. Please go ahead sir.
Byung-Gun Lee – Dongbu Securities
Good afternoon. My name is Byung-Gun Lee. First of all thank you for your positive results. I have two questions. Number one, perhaps it was because of over expectation by the market and by our security firms, but I think that NIM growth for the quarter or the first half has not increased as much as possible.
Despite the maturing of the high yield debt, I think that the full impact will begin to show in the third quarter. So, how will that improve your NIM for Q3 and I believe that the positive rate will go down further, so can you actually give us some view of the bank or the financial holding company regarding the outlook for the NIM going forward?
Secondly, recently regarding capital efficiency improvement and diversification has been on the top of your agenda and I think that you have decided to enter into the LIG acquisition. So in time, I am sure you will go through the stages including the approval of a receipt.
After obtaining such approval, you have to obtain additional 10% of the shares, so that it can be included in your financial holding company structure. So can you share with us through what methodology you will be gaining additional shares of LIG.
I am sure you have no definite answer yet, but, I am sure you could choose to buy the shares of treasury shares of LIG, but in that case if LIG has to pay corporate tax on that and as you are well aware, LIG has very relatively low IBC ratio compared to peers. So according to the Article of Incorporation, up to 20%, I believe that you have the option of rights issued through third-party allotment. So, at the moment, what major options can you actually leverage going forward?
Thank you very much for your questions. You raised two questions. So let me first address your question on NIM. You mentioned that the NIM improvement was not as high as your expectation. But you should remember that during the first half, we were pretty much forced to expand the fixed rate loans.
So we had to offer very low interest rate on some of the fixed rate loans to comply with the guidelines. And as the results we did acquire more percentage of these higher share of fixed rate loans during the first half. So we don’t have too much effect expected for the second half.
Regarding the maturing of the high yield debt, I think that such positive impact will continue to show into the second half. And also regarding the credit card business, the operation is normalizing quite rapidly.
Therefore in terms of the interest income in the second half, we really expect higher results. So overall, our NIM during the second half will continue to show gradual improvement. And we will do our best to make that happen.
And your second questions had to do with the acquisition of LIG. And you were asking about the methodology through which we may acquire additional shares of LIG. I am sure you are quite knowledgeable about this issue.
As you know, LIG is a listed company and they have to go through a lot of their internal reviews therefore, I think that it is premature for us to mention anything very specific right now. So we will share with you very actively once things become more finalized.
I apologize for not being able to give you very definite answers on the second question.
Byung-Gun Lee – Dongbu Securities
Thank you very much for the answer.
Unidentified Company Representative
Please do understand that this is a quite sensitive issue. But we understand that various different options and measures are being considered and most confident that we will find the most adequate approach. We will wait a little more for questions.
We have a question online from Kyobo Securities, Seok Kyu Hwang. Please go ahead.
Seok Kyu Hwang – Kyobo Securities
Yes, I am Seok Kyu Hwang from Kyobo Securities. I have two questions. In the second quarter, we see growth in the home equity by about 5%. So I think that you are able to recover from the first quarter, but there isn’t some easing of regulation of LTV and DTI. So what do you expect additional upside in terms of the growth for the loans is going to be going forward?
And also, if you look at the SMEs, we haven’t seen much growth in SMEs loans. Can we expect more growth in the second half of the year by different borrower segments? If you could elaborate that will be helpful and that the growth is quite stagnant.
But in terms of market share as well, can you provide some more color after the future direction of the credit card business, especially in terms of the expenses, especially for marketing expenses, how much of an increase are you seeing for your credit card business, because you would need to recover your previous spending in terms of credit card business. But according to the data that I have, it’s difficult for me to identify that additional increase in marketing cost. So, could you provide some more color please?
Unidentified Company Representative
Yes, I will respond to this respective question. I think that you are quite interested in our growth strategy for different business lines in the first half of the year. As you know, we have grown mostly on mortgage loans and also for LTV and DTI deregulation we do believe that there will be some additional potential for loan growth going forward.
Now in terms of the size of that impact, we are internally coming up with some estimates. Now also out in the market, the so-called sound of borrowers or the – if there are any demand from borrowers who are capable to make the repayments we will be quite aggressive in originating the loan.
However if you are a borrower with multiple borrowings and also with low level of capacity to repay then we will be very cautious. Now if you look at the home equity loans as well as unsecured household loans, we in the second half of the year will be expanded to more than the first half and also for the SOHO loans and also for corporate loans, we do expect a higher growth rate in the second half compared to the first half.
Now, the SME loans, yes in the first half of the year, we haven’t seen much growth, but we think that in the second half of the year, we are expecting a bigger margin of growth. Now having said that, one of the things that we are most concerned about or looking at is that we will look at companies with high productivity rate and also with companies with potential future cash flow generating capabilities.
Those aspects we will always keep in mind as priority. For growth in credit card business, in the first half of the year due to the suspension of business operation, yes, admittedly, there were many difficulties.
As you know, but with the redemption of the business, from the mid-May, we are really normalizing this business very quickly and on an Y-o-Y basis, market share did dip, yes, that is true, but we think that by the end of this year, we think that we will experience a very quick recovery and in the first half of next year, we will recover to the normalized level.
In terms of the question relating to the marketing expense, in the first half of the year, once again, there were restrictions on our operational activity so the acquisition fees for the credit card holders and also credit card mileage points related expenses for instance, there were some expenses incurred.
But with the normalization of the business, it’s becoming more normalized and however, within our yearly plan, it’s going to be paid out within the scope of our yearly plan and the expense is not going to overshoot against what we have planned. So in terms of the growth, we will grow focusing on retail banking and then we will continue to keep a close watch on the soundness and in terms of expensing cost, we will very stringently control the cost within the range.
Yes, we will entertain the next question. Mr. Hwang from Macquarie Securities. Please go ahead sir.
Chan Young Hwang – Macquarie Securities
Good afternoon, my name is Hwang. First time in a long time, I am glad to see some timeline growth. So I have a very brief question. I believe that the government stands on dividend policy, it seems to be changing. So how is the government stance change going to affect the capital management of KB Financial Group going forward? If you could briefly comment on that, that would be great.
Unidentified Company Representative
Actually, we do also welcome the government’s stance and ultimately we are pursuing the maximization of the shareholder benefit, of which dividend would be a very critical portion. So, we would be very proactive in order to meet the expectations of the shareholders.
I believe that the stance change of the government towards the more dividend-friendly manner would possibly give us the right signal to improve the payout ratio going forward. So, in other words, in terms of dividend, we will do our best to expand our payout ratio going forward.
We have no questions on the line, but please bear with us for a couple of minutes. Thank you. Since we don’t have any further questions, with that we will now conclude the earnings conference of KB Financial Group for the first half 2014. The presentation and VOD of this conference will be available for access anytime on the IR webpage of KBFG.
Also, if you have more questions, please contact our IR Department. We will do our best to address your questions. Thank you once again for your participation today. Thank you very much.
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