KB Financial Group Inc. (NYSE:KB)
Q3 2016 Earnings Conference Call
October 20, 2016, 03:00 AM ET
Peter Kwon - Head, IR
Huh Jungsoo - CFO
Jinsang Kim - HMC Securities
Kim Eng - Ugin Securities
Byung Gun Lee - Dongbu Securities
Hanik Na - Nomura Securities
Kelhyum Kim - CS Securities
Good afternoon. My name is Peter Kwon, Head of IR at KB Financial Group. We will now begin the KBFG 2016 Q3 earnings release presentation. Thank you very much for joining in today.
Joining us for today's earnings conference call are KBFG's CFO, Huh, Jungsoo, and executives from the Group. The conference will consist of earnings presentation by our CFO, Mr. Huh, followed by a Q&A session at which time you may call in for questions. Let me now invite our CFO, Huh Jungsoo, for 2016 Q3 earnings presentation.
Good afternoon. I am Huh Jungsoo, CFO of KB Financial Group. Before going into the earnings presentation, let me briefly talk about the overall business environment. In Q3 due to uncertainties around US rate hike and corporate restructuring, including the shipping industries concerns were about.
Even under such a bank, KB Financial Group was able to continue top-line growth through robust loan growth and through defending its NIM and due to the ERP implemented last year and this year, G&A was kept at a stable level. And despite conservative provisioning credit cost was maintained at a low level continuing on with an overall improvement in profitability.
Also on October 19 through comprehensive share swap, Hyundai Securities have now successfully fully become - became a subsidiary, so they are solidifying groups non-bank portfolio.
With such development we will focus on maximizing synergies across group subsidiaries such as securities and insurance business, so as to sustain rise in group's profitability and its deepening low growth in low interest rate environment.
With that, allow me to elaborate on key highlights of our earnings for the quarter in page two. First is on net interest income. Q3 group and the banks NIM were 1.85% and 1.58% respectively keeping to last quarter’s levels, despite policy rate cuts in June.
Loan growth continued to be robust, driving NII net interest income slightly upwards on a Q-on-Q basis. But for additional policy rate cuts we expect NIM to bottom out around the end of the year, but if rate cut happens, we expect rebounds to take place one or two quarters latter.
Moving to continued improvement in headcount structure and cost management assets, G&A is showing a gradually decline. We plan to utilize various means to enhance cost efficiencies going forward.
Despite provisioning relating to KCI and D'live, Group's Q3 provisioning continues to be at a favorable level. This is driven by aggressive asset quality improvement efforts over the past many years and our conservative stance expressed through preemptive [ph] provisioning undertaken in Q4 of last year and Q1 of this year. We will continue to endeavor to make sure that the groups credit cost on a recurring basis is kept below 40 basis points.
Let me now talk about one-off items for the third quarter. Regarding the banks’ exposure of two KCI and D'live there was provisioning of a total of KRW97.8 billion in Q3. We fully provisioned KRW49.8 billion debt to equity swap portion and made additional provisioning of KRW48 billion on the outstanding loan balance.
For KCI and D'live provisioning rate is approximately around 19%. On the other hand, for Dongkuk Steel and Hyundai Merchant and Marine driven by reversals relating to debt repayments and debt to equity swap there was respectively KRW28 billion and KRW31.3 billion or reversals.
Next is on earnings highlights on page three. Banks loans in won as of end of September was KRW218.5 trillion, up 5.4% year-to-date. By sector, there was balanced growth for both household and corporate of 5.4% and as of Q3 there was a Q-on-Q growth of 1.6% continuing to display a solid growth trend.
Next is on the summary of group's profitability. Q3 group cumulative net interest income notwithstanding Q-on-Q NIM decline driven by robust loan growth slightly rose to KRW4,651.7 billion [ph].
Q3 NII also driven by loan growth and NIM protections recorded KRW1,600.8 billion, up 3.6% on a Q-on-Q basis. Q3 cumulative net fees and commission income came in at KRW1,108 billion, down 5.6% on a year-over-year basis. This seems to arise from the base effect from last year significant rise in income from trust fees and commissions on the back of higher ELS sales.
On the other hand, net fee and commission income for Q3 came at KRW375.6 billion, an increase of 3.1% Q on Q, thanks to increase in interest fee income. Q3 cumulative other operating income recorded net loss of KRW119.6 billion. However, the size of the loss had shrunk considerably year-on-year basis, thanks mainly to exploration of last year's large impairment loss from POSCO and others.
In Q3 loss and other operating income increased slightly Q-on-Q due to reduced gains from sale of loans. Cumulative Q3 G&A was KRW318 billion [ph] down 9.5% year-on-year as last year's huge ERP expenses no longer exists.
Even when taking out ERP related expenses from last and this year, cumulative G&A expenses still declined 1.2% year-on-year showing stable management. In particular in Q3 G&A expenses continued on a sound trend recording KRW995 billion, down 6.9% Q-on-Q. And this is an addition of improvement even when excluding Q2 ERP expenses.
Cumulative provisioning for credit losses for Q3 recorded KRW5.7 billion, dropping 18.7% year-on-year. This is the result of past few years' efforts to actively improve asset quality amidst the trend of sound household and SOHO asset quality.
Provisioning for credit loss in Q3 remained sound recording KRW194.2 billion similar to the previous quarter, despite having to make loan loss reserve for KCI and D'live.
Q3 cumulative non-operating income was KRW217.6 billion, down 16.2% year-on-year, this is because there was a large one-off income such as the corporate tax refund in the period last year. Q3 non-operating income decreased KRW884.9 billion to KRW40.2 billion as gains from bargain purchase of Hyundai securities in Q2 have disappeared.
Despite the difficult overall business environment in Q2, the group’s cumulative debt income reported KRW689.8 billion, up 25.1% year-on-year on the back of sustained top-line growth and decline in G&A and provisioning cost. Q3 net income came in at KRW564.4 billion, a slight drop from previous quarter when one-off gain from Hyundai Securities was recognized.
On page four, I will cover financial highlights for Q3. Groups Q3 cumulative ROE and ROA improved year-on-year by 126 basis point and 10 basis points to stand 7.73% and 0.68% respectively, thanks to improved our profitability on the back of before mentioned cost reduction. Q3 ROE and ROA are 7.65% and 0.66%, declining 32 basis points and 4 basis point Q-on-Q respectively.
Q3 NIM for the group and the bank are similar to the previous quarter at 1.85% and 1.58% respectively. Group Q3 cumulative credit cost was 27 basis point, improving 10 basis point year-on-year. Although sustained low interest rate has help to improve various asset quality indicators, KBFG will continue to keep its asset quality policy conservative in Q4.
As can be seen on the right bottom graph, groups and the banks estimated BIS ratio at the end of September recorded 15.25% and 16.37% respectively. Market especially has keen interest on common equity Tier 1 ratio for the group and the bank and the figures are 13.52% and 14.35% respectively, maintaining the highest level in the banking sector. Since the following pages contain overlapping information, I will not walk you through them today.
This concludes the presentation on KBFGs Q3 2016 business performance. Thank you for your attention.
Thank you. We will now begin Q&A session. Those who are using internet, please contact us at the address shown at the last page of the presentation. [Operator Instructions]
A - Peter Kwon
We will take the question from HMC Securities, Mr. Jinsang Kim.
Good afternoon. First of all, thank you very much for the good performance. And I have three simple questions. The first has to do with your D'live provisioning. It seems that you've been quite conservative in provisioning for D'live. Could you provide some explanation and background as to why you did so?
And also I understand that there were two reversals - two factors of reversals including HMM, but other than those factors that you've mentioned are there any other one-off items that you did not mention during the presentation?
And second question, in the June there was a rate cut and in consideration of that the Q3 NIM was well protected and defended. And you've mentioned that you think that by the fourth quarter it will hit bottom and the trend will start to reverse. So can you share with us what you project to be next year's outlook?
And also what are the main reasons that you were able to really defend your NIM? What were the main key aspects? And also since as we're nearing the end of the year I think people are interested in your dividend. And I do know that we're a little too early. But can you provide some color as to your dividend policy for the year?
Yes, please bear with us. Please bear with us for a moment. We will respond to the question momentarily. Yes, let me respond to that question. Mr. Jinsang Kim, thank you very much for the good questions. I understand that you raised three questions. First question had to do with D'live and provisioning for D'live and the background to such decision. And you asked about some of the one-off items, you asked about NIM and you asked about dividend as well.
First of all, as I've previously mentioned, in Q3 if you look at the one-off factors for the quarter, they had to do with the provisioning side. First has to do with D'live and KCI. We have actually applied more rigorous categorization and ratings for this loan and we provisioned in the total of KRW97.8 billion.
The reason why we decided to be a little conservative on this provisioning is because as you know with respect to the IPTV industry we are seeing deregulation take place and large companies are being very aggressive in this space. As a result the future outlook for the cable TV industry seems not to be all that positive.
And under this backdrop therefore we believe that the cash flow from D'live and its capability to repay on the principals are quite uncertain and there are some concerns relating to those issues.
And at the same time, as you understand, the overall backdrop has aggravated in terms of the sale of D'live and we've made some internal assessment and we've decided to really categorize it from a more rigid perspective.
And also with debt-to-equity swap for Hyundai Merchant and Marine there was a reversal of KRW31.3 billon and Dongkuk Steel had made repayments on its loans and there was reversal of KRW28 billion. So those are the three one-off factors and they are the only one-off factors.
You then asked about NIM. As you have correctly pointed out, in the month of June there was a policy rate cut. And as you know, after about a quarter following the rate cut there will be some downward pressure on the margin. So in Q4, we do expect that there will be some impact that will start to come through.
And as I mentioned during my presentation, in terms of the policy rate cut we do not at this point know whether would be further rate cuts or not. If you assume that it's just going to stay at the current level, then we believe that after the first quarter of next year on the margin side we could very cautiously expect for some recovery on the margin side.
In Q3, in terms of defending our margin, we really did exert our utmost efforts, and basically on the portfolio side, on the demand deposit products it really had a positive impact. And our growth strategy that we implement is not focused on volume-based competition, but to providing unsecured loans, household loans which is prime and also facilitating SOHO loans with good collaterals attached. So on the portfolio side we had really focused on a - and that had a positive impact on our overall portfolio.
Now, your last question about the dividend. Last year, after the inauguration of our chairman, basically the overall direction in terms of our dividend payout ratio, as well as our dividend policy, our principle is to continuously improve on the payout ratio. There is common understanding on the importance of this and that as a matter of principle still is quite valid.
And in terms of the specifics, it is a bit too early for us to provide you with more details. But as you would know, from an investor's perspective I would think that the dividend rate as against a share price would be a very important indicator for you.
And in 2016, if you look at some of the estimates for these dividends as against the share price, KB's share price has increased from the beginning of the year by about 20% and our earnings improvement actually surpassed that more than - to around 25%. So I think those factors should be accounted for.
And with regards to Hyundai Securities, there would be new issuances and there would be KRW800 billion worth of or there was KRW800 billion worth of share buyback. So I think those factors should be considered.
So in terms of the dividend, we will do our best to comply with the expectations of the market. Thank you very much. I hope that answers your question.
So there is question waiting in line, let us wait, a little longer. Let’s take a question from Mr. Kim Eng of Ugin Securities. Kim Eng of Ugin Securities
Well, about the acquisition of the remaining shares of Hyundai Securities, that we think it's quite positive in terms of the share price of KB, as well as the business performance. And when it comes to KB insurance, because of the RBC issue and when it comes to KB capital has about 52% of the share and the capital market is quite doing really well, but there's an issue of capital increase.
So about the shares and about that equity swap and the subsidiaries, what are your thoughts about increasing the shares? I know it's a bit early but can you tell us about your plans to increase the shares in your subsidiaries and others?
As we are waiting for a response, if you could just bear with us for a minute. Mr. Kim, thank you very much for your question. As you know KB Financial Group's business portfolio has been pointed out as a weakness and especially when it comes to non-bank business and the KB insurance and KB capital.
About the increase of our shares in these two subsidiaries there's a lot of interest. Of course from our - we want to increase the value of our group and also improve the business efficiency, and therefore we do see the need to increase our shares in those two subsidiaries and this is something that we need to focus on, something that we will have to focus on.
However, these two companies are listed companies as you know. And so I want to be very careful in my communication related to our shares or there are plans to increase the shares in these two companies.
So let me just say that I want to be really careful on that. What the market wants and what market expect, we will make full preparations in advance so that we will be able to satisfy the expectation of our shareholders. I hope that answers your question.
We will take the next question from Dongbu Securities, Byung Gun Lee, please go ahead.
Byung Gun Lee
Yes. Good afternoon. I am from Dongbu Securities. My name is Byung Gun Lee. My question is actually a follow up to what was already raised as a question. If you look at Hyundai Securities, now it has become our full subsidiary, next year in terms of any merger integration schedules, can you provide some color?
And eventually, basically this merged securities arm in terms of the net profit basis, can you provide some guideline and guidance as to what the size would be? And also in terms of your G&A it really declined more than we expected and therefore I think your endeavor they are really reaping and bearing fruit.
Once you actually do complete the merger and once Hyundai Securities integrated and according to the press releases, I would think that your wage system would become much more performance-based. I know that you're putting an effort to introduce a performance-based wage system.
So after Hyundai Securities is included on a consolidated basis what should we expect for the G&A line item and how do you plan to control your G&A expenses? So that would be my question.
Thank you for the question. Please bear with us. We will respond to the question momentarily. Thank you very much Mr. Lee for the good question that you've raised. In terms of the schedules going forward, in May after the acquisition of Hyundai Securities we really accelerated the overall process.
So to a certain extent we did kind of rush at this and the reason is because in the M&A process what I believe is most critical is a very rapid progress, so that we could within our group come up with a good business structure including the expense and cost aspects and really wrapping up that merger process in as soon as possible we felt was quite important.
We believe that by the end of the year including the merger of the both companies, in relating to all the other aspects we wish to end those efforts so that by next year we will be an integrated entity as KB Securities. And in terms of the guidance’s relating to net profit, as well as operational performance we will get back to you on that with the specifics later.
You asked about us G&A as well, G&A expenses. Hyundai Securities on the expense side there are some opportunities for improvement on the G&A side, that's - we understand that there could be room for improvement and also in terms of the wage structure, we believe that there are areas where we could make further enhancements.
And once we work on those opportunities we believe that the CIR ratio that we are currently targeting we will be able to control it under that guideline. Please bear with me and please understand that I won't be able to disclose specific numbers at this point, but if you need more details we will try to provide that via our IR team.
I hope that answered your question.
We will take the next question, the question from Mr. Hanik Na from Nomura Securities.
My name is Hanik Na from Nomura Securities. Your Q3 performance is quite good. And when I talk to the investors, they say that they have to wait and see what happens until the Q4 to see what the whole year performance is like because in Q4 there seems to be some decline in terms of performance.
And last year in terms of I think credit cost, I think it was about KRW1,600 billion, but in Q4 that was over KRW400 billion in Q4 that was. But this time around I tell my investors that things were changed, it's not going to be like the way it was before but the investors are still concerned about Q4. And so we usually don't talk about Q4, we'll say let's see, look at what the performance would be like in Q1.
So there is like logic of response to the performance of Q4 of the Korean banks. Of course we do want to see change in Q4, so I wonder what you think about this. And in Q4 in terms of bad debt, expenses and what should we think.
Thank you very much for the question. We'll get back to you as soon as we have prepared a response for you. Mr. Na, thank you very much for the question. As you have said, the Korean Banks most of them anyway in Q4 usually show increased provisioning and that was the trend.
And at KBFG we have realized that have brought about a decline in the trust of the banks here in Korea. In case of KBFG last year, in Q4 there was additional provisioning. And it's not because it was Q4 then we did the provisioning.
Well, we have reviewed asset quality since last year and for 2016 in anticipation of what will happen in 2016, so we did addition of provision in Q4. And for this year we do not expect anything to happen for us to make additional provisioning.
And so in Q4 I'm sure the market is aware of this because there will be some reversal from a company such as assemble, civil engineer or construction. Thank you.
So we do not have any questions in the queue. But we will wait a minute. I believe that we are fully entertaining questions with regards to the questions that you may have. Please bear with us for one moment to see if there are any additional questions. We have one more question that’s coming through from CS Securities, Kelhyum Kim. Go ahead please.
I would like to ask you a question about your capital policy. It seems like it's been quite some time that if you look at CET Tier 1 ratio and capital adequacy it's very stabilized. It seems like you have quite large capital. Even despite the M&A we see continuous increase on capital.
If we assume the loan growth is not going to be all that significant I think CET1 ratio in light of the 25% payout ratio of last year I think CET1 is continuously going to go up. So is there any other reason that the outsiders don't know.
I mean are there any concerns that internally the company is worried about that's why you want to maintain capital at this level? Or going forward are there any ways for us to actually utilize these additional capital or excess capital?
Thank you very much for the question. Please bear with us for a moment. Mr. Kim for your question. Relating to your questions on the capital side, I Know that KB Investors are very much interested in this topic and you are also concerned on some certain aspect.
Having said that, as of end of Q3 and if you look at BIS ratio in CET1, its respectively 15.25% and 13.52% You may say that this is relatively high but in our view at our company we believe that for some time to come if you look at the financial industry or the banking sector in terms of the business, we expect that there could be some uncertainties, that will continue exist.
And also in terms of the additional M&A opportunities and really providing more growth strategies, we believe that we do need capital in order to basically allow that to happen and I know that also - things about concerns about excessive capital and when it comes to capital regime and capital regulations going forward, we expect regulatory capital aspect to further become more rigorous. Therefore we believe that the capital levels that we - we have at this point is not overly excessive.
In terms of the capital management policy, if you wish to know more details, we will communicate with you through our IR team later. Thank you. Thank you for the answer Mr. Huh. We do not have further questions waiting in line. So let us wait a little longer.
I think there are no further questions. We would like to know conclude the 2016 Q3 earnings presentation of KBFG. Thank you very much.
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