KB Financial Group (KB) Q4 2015 Results - Earnings Call Transcript

| About: KB Financial (KB)

KB Financial Group, Inc. (ADR) (NYSE:KB)

Q4 2015 Earnings Conference Call

February 04, 2015 02:00 AM ET


Jong Cheon Lee - CFO


Kyunghwe Koo - Hyundai Securities

Ho Kwe Hung - Global Securities

Chan Young Hwang - Macquarie Securities

Byung Gun Lee - Dongbu Securities

Unidentified Company Representative

Good afternoon. My name is [Hwan Bong Jun] (ph), the Head of IR at KB Financial Group. Thank you for joining earnings conference of KB Financial Group for 2015. The access to the conference is being provided via the Internet and through conference call and being webcasted 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, Jong Cheon Lee and Executives from the Group.

The conference will consist of earnings presentation by our CFO, Jong Cheon Lee on the earnings results, followed by a Q&A session at which time you may call in for questions. Let me now present our CFO, Jong Cheon Lee for earnings presentation.

Jong Cheon Lee

Good afternoon. This is Jong Cheon Lee, the new CFO of KB Financial Group. Before going over the business performance, I would like to briefly look at the business environment overall in 2015.

Following the inauguration of the new management team in November 2014, KB Financial Group has experienced many changes during the past year. It has expanded the scope of financial service for its customers and completed a more balanced business portfolio by successfully integrating KB Insurance. KB also continued to create new business opportunities by being selected as a service provider for the [Natazarang] military cart as well as signing up more than 10 million smart banking users.

Also the Group's affiliates including banking, insurance, credit cards, securities, asset management, and capital have expanded their market dominance in their respective segments. In terms of operation, despite the continued decline in NIM due to the securitization of mortgage loans as a part of the loan conversion program, and the benchmark market rate cuts in March and June, KB was able to continuously grow its net interest income quarterly by expanding its loan assets through stronger marketing.

Expenses were also controlled at stable levels in 2015 through Group-wide cost-saving efforts and improved asset quality. Even though cost related with the early retirement package carried out in Q2 and Q4 were incurred, we expect to recover the cost in the next three to four years. Also considering economic uncertainty, KB has taken on additional provisioning during Q4 from a conservative perspective in order to pre-emptively prepare against future contingencies. Based on such efforts, KB will continue to strive to deliver more stable results in 2016.

For your reference, the dividend payment for fiscal year 2015 has been decided at KRW980 per share, which results in a payout ratio of 22.3%, based on net income before credit loss provisioning. Also, finding that our share price has fallen excessively compared to our fair value and in order to enhance shareholder value, today's BOD meeting resolved on our share buyback of about KRW300 billion. We will continue to exert our best efforts to further enhance shareholder value.

Now, I would like to briefly explain our business performance, while highlighting the major issues during Q4. Please refer to page 2 of the presentation. Provisioning for credit loss during Q4 was KRW412.8 billion, which was a significant increase Quarter-on-Q. The main reason for this increase is the additional provisioning of about KRW180 billion we took during Q4 in order to pre-emptively prepare against certain companies expected to face greater difficulties under future economic uncertainties.

Even when such additional provisioning is excluded, provisioning for credit loss in Q4 would be in the low KRW200 billion range, which is a fairly reasonable level, considering the provisioning made during Q4 due to the credit risk revaluation of SMEs and large corporates.

Next is other one off items in special circumstances, a negative goodwill of a KRW165.3 billion was recognized during Q4. As you already know, KB Financial Group additionally purchased 13.8% of KB Insurance treasury stock as of November 19, 2015, and a negative goodwill was recognized because the acquisition price was below the fair value of the business acquired.

Regarding gains from sales of securities, a gain of KRW39.2 billion was recognized during Q4 from the sale of 230,000 shares of SK Corp. Also a sales gain of KRW31 billion was recognized in Q4 from the sales of shares of Kumho Industrial, which graduated from its work-out program. Lastly, regarding ERP, while the Q2 early or voluntary retirement program was for both regular and employees, subject to the salary peak program, the ERP in Q4 was only for employees about to enter the salary peak; 171 people in total applied and a total of KRW43.7 billion was recognized as ERP-related cost in Q4.

The Bank's loans in won as of December end was KRW207.3 trillion, up 5.7% year to date and 2% Q-over-Q. By sector, driven by higher housing transactions until the end of the year, demand continued to grow, leading to 3.3% Q-o-Q increase in household loans. Thanks to the efforts to enhance the portfolio through focus on SOHO loans which was attempted to improve profitability, corporate loans recorded an increase of 8.6% year-to-date and 0.3% Q-over-Q. In 2016, we will continue to bring stable loan growth fully mindful of both profitability and soundness.

Next is on the P&L. Group's 2015 net interest income recorded KRW6,203.2 billion, down 3.3% year-on-year. This is mainly due to Group's annual NIM decline of 22 basis points. However, Q4 net interest income despite NIM declines on sound loan growth went up slightly Q-over-Q continuing on with a quarterly upward trend. 2015 net fees and commissions income came in at KRW1,535 billion, up 11% year-on-year, but for Q4, on decline of interest income, it declined 9% Q-over-Q to KRW361.5 billion. 2015 other operating income recorded KRW356.3 billion in loss lowering the size of the loss quite significantly year-over-year. This is mostly driven by gains from sales of securities including stake in Korea Housing and Urban Guarantee Corporation.

Q4 other operating income also saw a reduction in loss Q-over-Q with dissipation of one off factors such as impairment loss on POSCO securities in Q3 and the recognition of gains from sales of shares in SK Corp and Kumho Industries. 2015 G&A was KRW4,523.6 billion, up 12.8% year-over-year with Q4 G&A at KRW1,079.3 billion, up 8% Q-o-Q. In light of and excluding the ERP in second quarter amounting KRW345.4 billion in Q4 ERP expense of KRW43.7 billion, the expenses were managed relatively well. 2015 PCL recorded KRW1,037.2 billion improving 15.5% year-over-year, and Q4 provisioning as explained earlier recorded KRW412.8 billion on additional provisioning leading to a significant Q-over-Q increase. For your reference, page 13 shows Group asset quality, and you can check to see that KB Bank and KB credit cards NPLs and delinquency ratio are keeping to a steady level.

Q4 2015 non-operating income increased significantly year-over-year on KRW203 billion of corporate income tax refund in the first half and KRW165.3 billion of recognition on negative goodwill in Q4. As such, with overall improvement across business performance, 2015 Group's profit attributable to controlling shares was KRW1,698.3 billion, up 21.2% year-on-year. However, Q4 net income after additional provisioning and ERP expenses recorded KRW347.1 billion, down 16.3% Q-over-Q. I will now move on to page 4 and walk you through key indicators. Group's 2015 ROE and ROA recorded 6.06% and 0.54%, showing improvements year-on-year. As explained, it was driven by net fees and commissions’ income growth and better asset quality leading to lowering of provisioning.

Group's Q4 NIM came in at 1.81%, down 7 basis points Q-over-Q. This is driven by continued impact from June policy rate cut and in the process of expanding fix rated loan portion in Q4, that were conversioned from legacy high rated variable rate loans to fix rated loans. But with greater inflow of low cost deposits from end of last year and with the June rate cut already priced in, starting Q1 of this year, we expect NIM declines to slow quite significantly.

Through strategically managing our margin like with more sophisticated pricing approaches, we will endeavor to improve NIM as soon as possible. Left bottom shows Group's credit costs moving from 0.54% in 2014 to 0.44% in 2015 which is a 10 basis point improvement. BIS ratio for the Group in the bank is 15.48% and 16.01% respectively. The market I understand has great interest on Group and the Bank's common equity tier 1 ratio which is 13.47% and 13.74%, highest in the financial industry. I will not elaborate on following slides as it overlaps with what has been already explained. That now brings me to the end of 2015 earnings report of KB Financial Group. Thank you very much for your attention.

Question-and-Answer Session

A - Unidentified Company Representative

That was the earnings presentation by our CFO. We will now move on to the Q&A session. For those of you taking part through the Internet, please use the number on the last page of your presentation [Operator Instructions]. For your information, there is a 30-second time lag between the phone call and the screen shown on the webpage, so please bear with us while we wait for questions. Yes, we have a question. Mr. [Jae-Hyun Ryu] from Daewoo Securities. Please go ahead sir.

Unidentified Analyst

I actually have two main questions. The first question is regarding your NIM. Your Q4 NIM fell about 7 bp Q-on-Q which seems to be a larger decline compared to other companies. So, I would like to know what was the cause of it, and also what is your outlook on your NIM in 2016 and are you also -- what are you expecting to happen for the benchmark rate this year? Second is regarding your mortgages. KB is a major player in the mortgage market or home equity loan market, but with a new strengthened underwriting guideline. I'm wondering how much of impact it would have on your loan business. Could you give us some estimates of what you think will happen?

Jong-Cheon Lee

Thank you very much Mr. [Ryu] for those questions. Our Q4 NIM, I think you've asked about the reasons why it fell; also next year's NIM outlook, as well as our view about next year's interest rate movements and also about our loan growth related especially specifically with the home equity loans. Our Q4 Group NIM was 1.81%, which was a 7 bp Q-on-Q decrease. These are reasons. One is the fact that the benchmark rate was lower last year twice and that has had a downward pressure on our NIM.

Also at the end of the year, in the process of achieving our fixed rate loan targets, some of the customers that were on a variable rate loan have converted or moved over to the blended rate loan and this has actually also squeezed the NIM a bit more. Also our Korean won loan in Q4 increased by about 2%, but a lot of that increase was in the mortgage as well as SOHO loans, which have relatively lower margins. Also on our funding side, most of our funding, a large part of it was from time deposits, which also had an impact of squeezing our margins.

However, we were able to increase our volume and therefore our interest income still grew. About our outlook on NIM and benchmark rates next year or this year in 2016, given the economic situation we are seeing, I don't expect large changes to happen in the interest rates this year. Also, our NIM outlook for this year 2016, actually we've been focusing since end of last year on increasing our low-cost deposits, and so that has been increasing.

And I think the impact of the benchmark rate decrease specially peaked in Q4 last year. Also internally we have been focusing on preserving our margins, so our new spread has improved by about 10 bp. Also we've gone through additional margin-gaining activities at the end of last month. So, I think that maybe the drop in NIM will continue as a trend in the first half, and perhaps from the second half, our quarterly NIM will start to widen.

Regarding our loan and mortgage growth, mortgage loan growth expectations, we are expecting or we're internally targeting about a 5% growth in our loan assets overall, even though the housing market is losing steam, so 5% may not be an easily achievable target. But given the fact that the nominal economic growth rate, which is the real term GDP growth rate, plus prices, will be around that range, we think that 5% loan growth is something that we can achieve.

Unidentified Company Representative

We do not have any questions on the queue, so please bear with us for a moment. And we will take the next question from Hyundai Securities, Mr. Kyunghwe Koo.

Kyunghwe Koo

I am Kyun Hai Koo from Hyundai Securities. My question is related to your provisioning. I see that your Q4 provisioning has increased quite significantly, impacted by some seasonality factors and some other elements. You mentioned that there was a pre-emptive provisioning amounting to KRW180 billion. I would like to understand that, whether this was impacted by the small medium industries and the large corporation credit evaluation that was conducted last year. And so could you provide some more color? Could you explain by different sectors, like shipbuilding and other industries, would like to understand what this pre-emptive provisioning amounts to for each of the sectors. And in 2015, on a year-over-year basis, there was a decline by about 15%, but I believe that in 2016 because of slowing economic growth rate, market is expecting a higher level of provisioning. I know that the forecasting is the job of the analysts, but I would like to understand what KB's understanding is or its forecast is in terms of the asset quality aspect as well as provisioning, how do you think that these two factors would play out in 2016?

Jong Cheon Lee

Thank you, Mr. Koo for the questions. You asked about provisions as well as the asset quality. I will respond to them in that order. First of all, that KRW180 billion provisioning that I have mentioned during the presentation was a preemptive provisioning. If you look at Q4 PCL on a recurring basis, the figure would be low 200 billion, in the range of 200 billion. So as you have mentioned in the Q4 there was a periodic credit evaluation on large corporations in Q4 which amounted to KRW2.6 billion, and for SMEs, KRW22.5 billion, as well as for Hanjin Heavy there was KRW25.9 billion of provisioning based on the voluntary agreement for restructurings.

And also there was KRW47.1 billion of write back relating to Kumho Industries normalization. So in light of all of these factors, I would have to say that our asset quality is being steadily and well maintained. Having said that, in 2016, we are going to see more heightened uncertainties in global economy and some of the corporate names will face some aggravated credit risk. That is the reason why we have satisfied KRW180 billion in preemptive provisioning. By sector we have satisfied KRW60 billion for shipping and KRW80 billion for steel and for other machinery and equipments we have provisioned in the amount of around KRW40 billion.

Q4 provisioning did increase quite significantly, so I do understand that some people may be concerned about our future asset quality. But as I have mentioned numerous times, this whole approach was a conservative approach that we wanted to be preemptively ready for potential risk. So in 2016, the credit cost is going to be somewhere around 40 basis points to 50 basis points. We believe that we can manage the credit cost within that range. Thank you.

Kyu-Sui Choi

I hope that has answered your question. We will wait few minutes for any additional questions. We'll take the next question from Mr. Hung So Kyoo of Global Securities. Please go ahead sir.

Ho Kwe Hung

This is Ho Kwe Hung of Global Securities. I have three questions. First of all, you've announced your 2015 payout ratio which is around 22% to 23%. Do you think this with payout ratio that you would sustain in 2016 and 2017 or could we look forward to higher payout ratios? Second is I'm wondering what you are planning to do with your equity. There is another securities company out in the market very recently for purchase. I would like to hear your thoughts about that. Also do you have plans of what you would do with treasury stock or what you would do with your equity? Overall, could you give us your plans of what you would do with your capital this year? Third is that there was a large scale ERP in Q2, also a smaller scale ERP in Q4. On a recurring basis, how much of other retiring package are you planning to implement going forward?

Jong Cheon Lee

Thank you very much Mr. Hung for those questions. You've asked about our dividend policy. You've also asked about what we plan to do with our capital, also you've asked about what we plan to do with our ERP program. I will answer them one by one. Our 2015 fiscal year payout ratio has been decided to be 22.3, which is an increase from 21.5 last year. This is a dividend of 980 per share and this is market price payout ratio or dividend ratio of 2.9%. We have been trying to increase our payout ratio in order to maximize our shareholder value, but given the economic uncertainties as well as international movement to enforce stronger, stricter capital regulations, we have decided to keep our payout ratio for fiscal year 2015 at 22.3. It's a bit too early to commit to a certain payout ratio, but overall our policy is to gradually increase our payout ratio.

Second question is about our what we would plan to do with our capital as well as the treasury stock that we will be buying back. Given the fact that the financial market is increasing in terms of volatility, we're also seeing foreigners leaving the domestic securities market and that's why we have decided to buyback our shares because we thought that our share prices have fallen excessively.

We have not decided yet what to do with the treasury stock, but we will continuously study various ways of enhancing shareholder value. For example, what you've mentioned, buying back our subsidiary shares is an option but details such as how much to buy when has not yet been decided. But we want to, for example have some direction, for example increase our ownership in our subsidiaries that have higher, relatively higher ROE would be a direction that we would seriously consider.

Regarding our ERP package, this is not only an issue that hits KB, but it's an entire social issue with the Korean society itself aging. Our personnel structure also is aging. And we do need to address the age structure in order to enhance the efficiency of our labor structure. The ERP that we're under in Q4, we're actually focused on employees that were about to enter into the salary peak program. We spent KRW43.7 billion was recognized in Q4 as this recent ERP program cost. We will have to continue to talk with our labor union in order to find ways of further enhancing our cost efficiency.

Unidentified Company Representative

We will wait for possibly more questions. Just for your information once again, for those of you joining through the Web site, please use the number on the last page of the presentation [Operator Instructions]. From Macquarie Securities, Mr. Chan Young Hwang, please go ahead.

Chan Young Hwang

I am Hwang Chan Young from Macquarie Securities. I wanted to ask a question about your capital, but it was already raised. But if we think about dividend and your capital management, I believe that we do need some visibility. You bought back, if you're buying the new treasury shares not to cancel the shares. Then I'm wondering how buyback of treasury shares, I mean, I think the only way for you would be to sell it and do M&A. So is buying back of treasury shares, is it really going to help? You have a lot of retained capital, so I believe that you need to utilize and mobilize that capital. So, is it possible for you to give more clearer outlook, more visible outlook, in terms of leverage and what would be your leverage target. I think that it would really help the market a lot greatly in understanding if you could share with us these guidances?

Jong Cheon Lee

Thank you, Mr. Hwang, for those questions. At this point, as I have mentioned before on the treasury shares that we buy back in terms of how we're going to make use of them. At this point, we are considering many different options and reviewing many different options, but we have not yet come to a final conclusion; having said that, we will use this for further enhancing our shareholder value that is a clear principle that we will stick to. When it comes to excess capital and how shall we use this, we are thinking very hard. We did attempt at acquisition of Daewoo Securities, which failed. But basically what is very clear for us is that in terms of the direction, strategic direction for our Group, we are committed to further strengthening the non-bank business. We believe that this capital should be allocated towards that purpose. But in terms of the specifics as to which area, which sector, it's too early to say. But both, we are thinking of organic as well as inorganic method.

From an organic approach, we could inject capital to further boost our non-banking business, or we could think about an M&A opportunity. As was mentioned very briefly, in the case of Hyundai Securities for instance, no decision has been made internally. But we will look at whether there is a strategic fit with our business. So, we are open to both organic and inorganic avenues.

Unidentified Company Representative

We will wait a few minutes for the next question. Yes. We'll take the next question. It's Mr. Byung Gun Lee of Dongbu Securities. Please go ahead sir.

Byung Gun Lee

Actually, I don't think I need to ask my question because the previous person already did.

Unidentified Company Representative

We will then wait a few more minutes for the next question. We will take the next question. It's Mr. [Hanik Na] of Nomura Securities. Please go ahead, sir.

Unidentified Analyst

Actually my question was answered right now, because I was wondering about what you're planning to do with your treasury share, whether you have plans of cancelling it. But I think you've already answered that question. So thank you very much.

Unidentified Company Representative

Well, I think our answers are so well, given that we're actually cancelling some questions. We'll wait a few more minutes to see if there is any further questions. We'll take the next question which is from [KIH], Chotter Lee.

Unidentified Analyst

Yes, I am Chotter Lee. Related to dividend, the other companies in the banking industry have shared with us some disappointing outcome. But I believe that you've decided to do the dividend payout and I think that's very shareholder friendly, so I thank you for that. I would like to ask you two questions. One, regarding additional provisioning and you gave us a good explanation, but when you were responding to one of the questions you said that there was 180 billion of additional provisioning and you talked about the recurring 200 billion on a quarterly basis. So I'm wondering whether that 200 billion is reflective of the additional provisioning or not. And if you look at non-interest income there are securities and derivatives related gains, and on a Q-on-Q basis there was 130 billion increase. Last year in Q4 there was a one off factor from security sales and I think this is this only accounts for half of that 70 billion. So can you provide some more elaboration on this point?

Jong Cheon Lee

Yes, Mr. Lee, thank you for waiting and thank you for the questions. Relating to additional provisioning, I separated out two different names. If you were to see recurring basis of provisioning which is about 200 billion, there is 2.6 billion from large corporate credit evaluation and SME there was 22 billion and 25.9 billion for Hanjin Heavy, and also for Kumho Industrials there are some write backs. So that's what makes up the 200 billion.

And there's on top of that additional 180 billion of additional provisioning. And please do understand I cannot disclose specific company names, but for shipping, it's 60 billion, steel 80 billion, and other machineries and equipments 40 billion have been set aside. And on noninterest income, please bear with us because our IR team will communicate that back to you after the call. Thank you.

Unidentified Company Representative

Currently, we have no questions in queue. Please bear with us while we wait. Well, I think we have taken all your questions. So we have no questions in queue and I would like to say that we will close the Q&A session here.

Of course, if you have any further questions please forward them to the IR department and we'll be more than happy to answer that. We once again then complete the conference call earnings conference call for 2015. Thank you very much.

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