Hyun Gap Shin – Chief Financial Officer, Executive Vice President - Finance, Director
Well good Afternoon, my name is Hyun Gap Shin, CFO of Kookmin Bank. Now I would like to present to you our third quarter 2007 earnings. First, the financial highlights. Until the third quarter our net income 2.1938 trillion Won. This does appear to be a slight quarter-on-quarter decrease by about 2.8%. However if you exclude the run off factors between both the third and second quarter, actually the third quarter net income would have been 2.120 trillion Won which are similar to the same period of the previous year. Our pre-provisional... income was 3.770 trillion Won, which is a 10% year-on-year increase. Our provisioning expense decreased 34%, year-on-year and was 313.5 billion Won. Our MPR ratio was 0.56 decreased and was 0.77%. Our ROA annualized was 1.44%, ROE annualized 19.63% and even though it is tentative, our BIS ratio is estimated to be 13.42,... tier 1, 10.42%.
Our third quarter PNL highlights. First of all our gross profits which would include both the interest and non-interest income has been continuing a stable trend of 1.9 trillion Won, when excluding the special factors that occurred during the first quarter. Our G&A is maintained around 900 billion Won and there was a slight decrease during the second quarter but there was some sales of MPR during the second quarter and we have been maintaining the level at about 100 billion Won under the third quarter. Therefore if we exclude the one off factors our net income quarterly would be around 700 billion Won this quarter. Our net income appears to be a bit slow because there weren’t more holidays during the third quarter, and this decreased our delinquency interest income and the fee income was also slightly smaller because there were fewer number of operating days on a quarterly basis. On our interest income there was an increase of our interest bearing assets and there was the day effect and this did increase slightly our interest income and onto the third quarter accumulatively our interest income was 5.132.2 trillion Won which is similar to the previous year.
Non-interest income, there was the special effect of the LG cards sales during the first quarter, which is pre tax based 595.5 billion Won and therefore year-on-year there was a 68% increase of our non-interest income and quarter-on-quarter there was a decrease of 59.5 billion Won. This is because there was an additional 60... 4.4 billion of LG card related gains during the second quarter and we, if we exclude this special factor in the second quarter, quarter-on-quarter it has been maintained at a similar level. The details of our non-interest income will be explained in detail later on.
During the third quarter there was a one off factor such as payment of special bonuses and our G&A therefore recorded 897.7 billion Won and in the second quarter we have to contribute to the employee welfare fund, which did not... did not occur and therefore there was, compared to the previous quarter a decrease of 28.9 billion Won.
Our pre provisioning profits were similar to the previous quarter and if we exclude the reversal of provisioning due to the sales of MPL that occurred in the previous quarter the... provisioning expense was similar quarter-on-quarter as well. Also the non-operating income during the third quarter appeared to have increased significantly and this is nearly because during the third quarter, we had the proceeds from the ING Life sales and because during the second quarter, actually we had to pay additional income taxes.
The interest income during the third quarter which will be explained in more detail later on, compared to the same period of the previous year there was a 13.2% increase in loans in Won including credit cards. However the interest income only grew by 1.6% and this was the major cause of the contraction of our margins. As you can see on the bottom part, our net interest margin continued to contract in the third quarter. Mixed cost, our assets have been growing but mainly around the lower margin loans and also our funding expenses have increased. And because the holidays were concentrated towards the end of the quarter we had fewer number of operating days during the third quarter and this did have an impact on our collection of delinquencies as well as well as the interest income generated by our credit card sales.
The fee income during the third quarter decreased quarter-on-quarter by 4.7%. However in the Bancassurance or ITC fees the core products, there the income was either slightly better than the previous quarter or similar quarter-on-quarter. The Bancassurance fee income suddenly decreased quarter-on-quarter but accumulatively year-to-date Bancassurance fees have grown by 25% which is quite significant.
Also ITC fees did increase quarter-on-quarter by 11... 11% meaning increase of defunct fees and also year-on-year there was an increase of ITC fee income by 83%. In terms of securities, income and loss, there was the LG card sales gain during the first and second quarter, which was during the first quarter pre tax 595.5 billion Won, second quarter pre tax 60.4 billion Won and this did increase the one off factors compared year-on-year. However quarter-on-quarter due to these special factors on the second quarter we do see a decrease quarter-on-quarter in securities income or loss.
And during the G&A as I mentioned quarter-on-quarter the G&A did decrease by 80.9 billion Won but year-on-year it did increase by 10.9. There was special bonuses, our recognized and this caused a quarter-on-quarter increase of our labor cost by 8.1%. However in the administrative expenses there was contribution to our welfare fund during the second quarter and this did have a quarter-on-quarter decrease of our administrative expenses by 20%.
In our depreciation there was an increase of 11% quarter-on-quarter mainly because of increases of depreciation on ATM and other equipment. The cost income ratio if we exclude the LG card income, slightly increased and recorded 45.6% of cost income ratio excluding the LG card effect.
Our non-operating in the third quarter increased significantly. This is because during the second quarter we had paid 482 billion Won in income taxes and also during the third quarter we had proceeds of the ING Life sales of 161.1 billion Won. Our asset group during the third quarter, we have continued to grow our pre paid loans especially around the SMEs and actually our house hold and credit card segments have continued to grow.
If we look at the different... different segments. First of all house hold, their asset growth was small because of, during the first half, because of the stagnant real estate market. But actually the house hold loans have turned around to slight increase during the third quarter. Corporate loans are continuing to grow throughout the third quarter and credit card assets were expecting that to grow as it did during the second, third quarters.
Our balance sheet, total assets at the end of the third quarter including private placed funds was, there was an increase of our loans in Wons by 14 trillion and Won securities by 2.1 trillion Won and year-to-date our total assets increased by 17.8 trillion Won and recorded 213 trillion Won. In terms of the funding or liabilities, we had Won deposits increase by 2.6 trillion Won, debentures by 1.4 trillion Won and foreign currency liabilities 2.7 trillion Won and at the, compared to the end of the year, year-to-date our liabilities increased by 17.3 trillion Won and recorded 197.4 trillion Won.
Our house hold loans, I mentioned continued to grow around the home equity loans during the third quarter and compared to the... previous quarter our house hold loans increased by 1 trillion Won and year-to-date it grew by 1.2 trillion Won. Our corporate loans also continued to grow by 8% quarter-on-quarter and 27% year-to-date including SOHOS. On the credit card side our loans increased by 1%, quarter-on-quarter and so the growth phase of our credit card assets are continuing since the second quarter. We expect our credit card assets to continue to grow throughout the fourth quarter. Also the corporate segment is summarized on the last line and year-to-date it has grown by 25%.
About Won deposits, it did grow by 1.9% year-to-date around market rated deposits. While demand deposits did actually turn around to a slight increase as the outflow to CME accounts started to slow down. Our savings accounts have slightly decreased quarter-on-quarter because of fierce market competition. Our financial debentures in Won did increase by 2.1 trillion Won quarter-on-quarter and 7.4 trillion Won year-to-date due to increase of our loan assets. Our loan assets are growing, however our time deposits, our demand deposits are having been stagnant or slightly decreased and we had to make up the gap by debentures or market marked financial instruments and we believe that this trend will probably continue for the time being.
Hyun Gap Shin – Chief Financial Officer, Executive Vice President - Finance, Director
As you can see from the graphs the delinquency ration in total has been significantly improved since late 2004 to stand at 0.69% as of end of September, this year. So it could delinquency ratio has slightly gone up quarter-on-quarter but while sales of receivables and peer contribute to significant decrease of delinquency ratio considering that there was no receivables MPL sales in the third quarter. The house of asset quality is being maintained.
For your reference JB has been calculating delinquency ratio based on the new delinquency classification standard enforced from January 1st 2007. So since 2007 new standards being applied at the bank. Thanks to continuous improvement of our asset quality, asset quality, MPL ratio decreased quarter-on-quarter to stand at 0.77%. MPL coverage ratio in particular was 177.4%, which is the highest for the Bank. I will not explain the delinquency trend in detail as it was covered in previous slide.
Loan loss provisioning for third quarter was 112.4 billion Won. Loan loss provisioning looks to have increased quarter-on-quarter. However this is mainly due to reversal of reserve for, from MPL sales. If we assume that there was no such reversal factor then it is similar level quarter-on-quarter. Every dated loan loss reserve for house hold and credit card up to the third quarter 2007, decreased year-on-year while reserve for corporate rose. This is owing to one factors, such as reversal of provision related to LG card, which is about 33 billion Won, recovery of special bonds and increasing reverse amount related to loan receivables. Especially this year corporate side has increased there by having impact. As I mentioned before, MPL coverage ratio is continuing its upward trend.
As you can see from this graph ratio of precautionary and below lending is continuing its downward trend while MPL coverage ratio is rising steadily. Net increase of new MPL rose slightly over previous quarter but it is still maintaining stable level. In 2006 net increase of MPL, which was around 300 billion Won per quarter rose slightly during the fourth quarter owing to one-off factor of SPC lending but excluding such factors net increase for the fourth quarter was 261.6 billion Won to show slight decline. In 2007 net increase of MPL stand at less than 200 billion Won range. By sector also you can see that stable trend is continuing.
Thanks to continued improvement in asset quality and upward trend in recovery of special bonds, credit costs for loan loss provision aggregated up to the third quarter was 0.2%. By sector, house hold was up to third quarter aggregated 0.09%... showing great improvement compared to last year’s average of 0.46%. Credit cost for corporate lending was also 0.43% deposed decrease of last year’s average of 0.47%. Credit card in particular, credit costs declined significantly to 5.4% over the last year’s annual average of 3.12% thanks to increase of reversal of special bonds. Let me now turn to key issues for the Bank for the third quarter.
Currently we are propelling for the AUSIO [ph] 2 regime, so on that front as you are well... well aware for the market risk we obtained FSS’ approval for internal model approach at the end of 2005 and has been using it ever since. Though subject to new BISO 2 [ph] regime will be credit and operational risks. Our current plan is to use FRB for credit risk from 2007 to a double trance RRB approach from 2009. So, this is currently subject to approval by FSS and we are taking proper steps to obtain that. For provational risk also, Standardized Approach or TSA will be used in 2008. In Advanced Measurement Approach or AMA will be used from 2009. KB’s is internally already using ARB from 2006, which will be officially adopted from 2009 and TSA from 2007, which is scheduled for implementation in 2008. AMA will be adopted internally from 2008 before official adoption of 2009.
This concludes my presentation. Thank you.
Question and Answer
Thank you very much CFO Shun Hyun Gap, now we will take your questions. [Operator Instructions]
We will take questions. Yes the question comes from Mr. Hun Tun Yong [ph] from Morgan and Stanley.
Hun Tung Yong – Morgan Stanley
Yes good afternoon. I have about two questions, the first question is about the NIM which I think has contracted more than I thought, all about the various, how much of the impact was there due to the changes of the contribution rates to the guaranteed funds, and it seems that somebody said that the bottom is expected to be about 3.33 or 3.35 has that estimation changed? And it seems that the costs are going up to the 46% ranges and could you give us some of the guidance related with your costs?
Unidentified Company Representative
Well thank you very much for that question. First about the guarantee deposits, the guarantee fees, whether that impacted the decrease of, I think that did decrease our NIM by about 3 BP. In the past, the reason why our NIMs have contracted more than what we had thought, is because recently there were changes in the market, especially the funding side of the market has been a volatile as you know. The demand deposits have moved quite a lot to the CMA accounts and funds, investment products have become quite popular and we think that some of our time deposits supply has contracted quite significantly due to this population of investment products, and so while our assets are growing quite rapidly, our deposit growth has been relatively slower and so that difference had to be funded through market marked deposits, and debenture issues. And this has made us pay a relatively higher funding cost.
On the other hand there was very fierce competition on the loan market, and it was difficult for us to completely hand over the increase on our funding side to our loan pricing. Also our credit card assets, which offer a higher margin did, were impacted by the stagnation of the household or housing market that was one factor. While we could not increase these higher margin assets higher, on our SOHO loans, which are collateralized or securitized are relatively lower margin as you know. So the volume on these sides, have increased and so that is why overall the mean appears to have decreased more. We think that this trend itself will continue for the time being but we also have plans being implemented for example, we are continuing to price in our funding cost increases to our loan pricing. We have already stared that and we will continue to reflect more of our funding cost to our loan pricing. So maybe the NIM will decrease a bit further but the pace of the decrease we believe will slow down but the cost income ratio.
Up till now KB has been involved in various initiatives, for example we had a project to atomize our processes and to integrate our imaging system. We also have launched our next generation system project, and we are, we have opened about 16 new branches up so this year and all of that has infected to a higher cost income ratio. But on the ‘I’ rate we will be maintaining, we are cautious of maintaining our cost income ratio. However on a product base, we may need to make investments to enhance our sales capability and if these investments are necessary on a case by case basis we are still willing to commit and invest if that is necessary for better sales power.
Thank you, you used about, a word called BAU and that's Business As Usual let me add that's the acronym of that.
Next question Philip Rogers from Goldman Sachs, please ask your question.
Philip Rogers – Goldman Sachs
Yes I have two questions for you, the first question pertains to capital management, can you give us some guidance on your potent considerations on capital management from here particularly pertaining to a potential coming bid for KB if you have the opportunity and how you are thinking about capital in that context?
Unidentified Company Representative
Well early this year we said that given no special things happening in the future that we were thinking of dividend of 30%. And as for KEB, well thank you for your interests and we are keeping cap on the situation. However, as of now our judgment is that 30% dividend would still give us enough room to prepare for any things related to KEB.
Next question from Citi Securities Ms. Chun [ph] Yung [ph].
Yes good afternoon my name is Chun Yung from Citi. I have three questions; the first is the net interests margin has decreased quarter on quarter. You did give us some details of the contributing factors. How much of the margin was impacted because of the number of operating days? For example originally what was your recovery target? Could you go over the actual in the difference?
The second is the volume growth it seems especially, the corporate volume is growing strongly. Looking out to the future in your volume and margin where will you place your priorities on? Third question is related with capital management I would like to lead on to that question. I’m thinking that you’re still interested in non-bank MNAs securities it seems is, seems to be the most eminent area. But on the non-banking side, where which industries would be your MNA priorities? And what is the purpose about MNA’s possibilities and the securities sector?
Unidentified Company Representative
Well the first two questions I think I’ll answer the first two, third question I’d like to give that to our CEO. About the decrease in our NIM at the end of the quarter, and the end of the third quarter there was a concentration of holidays and we think that, that contributed to about 2 to 3 BP decrease which will then also have the opposite effect of during the fourth quarter. About the volume and margins, the trade off of the volumes and margins and where we place our priorities; we think that when we look on to 2008. Of course we have not finalized our business plans for that yet. But on a rough basis for 2008, we are thinking of a system growth level for next year, which will be about 7% to 8% within that range of volume growth is what we are considering for next year. So we don't have any intentions of growing or out growing the market organically at least. And so next year our margins will be bigger focus or an emphasis for us probably.
Chung Won Kang – President, Chief Executive Officer, Director
And about the non-bank sector where we are considering investments as we had made our disclosure on the securities there is [inaudible] securities and we are thinking of not only MNA but also a possibility of establishing our own business, which could reach a decision within this year and in addition to the securities sector we could think of looking at opportunities as well.
Thank you we’ll move on to next question from Templeton Mr. Chung
Yes good afternoon, my name is Chung I’m from Templeton. I have three questions first which relates to, the banks; with securities companies [inaudible] are watching the move towards the MA accounts to block any customer attrition. So do you also have plans to, I think, you have plans also to run CME based salary deposit account what’s happening on that front? And secondly according to media report, I think consumer banking will be some area that you are looking into or especially... consumer lending. So if you are prepared to going to that area, how do you see the market... going forward? And are you going to have that as a subsidiary once you become a holding company what will be... the structure? And thirdly the banking structure is changing very rapidly, so this question is to CEO what do you think of the, banking industry will be like for 2008? Any implications or guidance you could give to analysts or, and your investors.
Unidentified Company Representative
First about the, the CNA and the deposit account products, I would like to ask Mr. Lee [ph] from the marketing department to answer.
Yes the CME fund, yes it’s moving away from the bank so we are, at KB also keeping close watch on the market trend. However we are trying to avoid any interest based competition but we are trying to create funding products so that we can have more competition based on better quality of products. For example for any preference for the demand deposits or other ways to guarantee certain level of yield or income to customers, is what we are looking at. So for the CME products, again we are keeping close watch about what’s happening in the market.
Chung Won Kang – President, Chief Executive Officer, Director
In addition to that I also read in the newspaper today that the CME account at Taipei, it was reported that we are not interested in that area for the time being. As for the consumer lending we have started to review but I think its going to take some time. And to enter this sector I do not think we have to wait to, until we have holding company established.
Lastly about the question about the implication I could give about banking industry for the next year, well to analysts I want to actually ask you that question to prepare for the next year, but you have given me the question first. So, I think sales of the banks in Korea is going to get tougher and more challenging next year. So creativity and pro-activeness in sales will become more important and also the banks size up to now has become quite big over the time. So in that regard I think analysts maybe better than focusing too much on financial analysis you should also consider how the risk are managed at banks and the internal control how much investment the banks have made while also growing in size.
Yes we’ll take the next question from Shinzong [ph] Securities Mr. Lee please.
Yes hello, yes please go ahead.
I have two or three questions. The first question is about the NIM which is a favorite topic it seems today. Would about your liquidity ratios for KB, what is your liquidity ratio being managed at and some... some related question to the liquidity is because CFO Shin mentioned, it seems that cost and this issue is that how much you can pass over your funding cost to your lending or loans. Lid with liquidity, one way of managing the NIM maybe by changing the composition of your assets is there no room to do that or how much? And so the... liquidity ratio I think was a bit of a challenge for KB at the end of September of course its not so serious issue, but there was some talk of that in the market so I think it’s good for you to comment.
And about the non- interest income third quarter, even if we consider the LG card proceeds or the income I think the non interest income was not as strong as what I had expected. And the fee income from the ITC products, considering that the share of these off fund fees have increased are these compared to the previous ITC fees its not that high either. And so on the non-interest income, why is it as strong as I expected or is this according to your plans on schedule?
And the third question is about the cost income ratio. You mentioned that in the BAU prospective it could be maintained at current levels, but there could some projects individual product case by case project demand. But when we look at G&A and other aspects the cost income ratio I think would have to go up. There’s no way that it cannot go up especially if you want to increase your non interest income you would need to make investments and you probably may not be able to increase your non interests income without increasing your cost income... cost income ratio. And so 2008, 2009 what would be your good defense level for your cost income ratio this next year or the following year?
Unidentified Company Representative
About the liquidity ratio, I think we were, our liquidity ratio is increasing by the least just as other banks. We are closely watching the liquidity ratio increase and next year our growth target is probably going to be system growth but at an higher, and I think that is also not totally unrelated with our liquidity ratio. At the end of the third quarter our liquidity ratio you said was a challenge but which is I don't think true. And currently we have totally no problem in keeping our liquidity ratio ceilings. However in the market still there is a very strong tendency for the volume driven business however we would like to take a different stance and if necessary we are willing to sell assets or issue MBS if necessary so that we can reduce out funding costs and also diversify our source of funding at the same time. And by doing that we would improve our, or at least we would gain room to improve our NIM.
About non interest income the reason we are not growing there is as you pointed out our non interest income is mainly contributed by bank insurance and ITC. They are growing quite strongly however this year the housing market, the property market was quite stagnant and therefore there was a decrease of housing fee income and there was also a decrease of guarantee fees. There was an increase though about our contributions to the guarantee trust and there was a bit more of a marketing expense necessary on a credit card side because of fiercer marketing competition. And during the third quarter since the sub prime crisis, rates had rapidly increased during the third quarter and there were some evaluation losses on our treading bonds. All of these factors have contributed and the non interest income appears to have not grown that much. But regarding the housing fund and the trust side we have I think hit the bottom already. And about the trust guarantee fee we probably will not go any higher probably be maintained at current levels and so when it comes to non interest income we do see that it will be increasing in the future.
Thank you. We don't seem to have any more questions I think because the presentation was very good and maybe there seems to be no, also no questions forth coming. So this concludes the third quarter earnings conference for KB for the year 2007 the presentation material and the video presentation of our earnings conference will be available from our web site from this date on and if you have any more questions please contact KB’s IR department. We’ll be more than ready to help you, thank you for your participation.
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