KB Financial Group Inc (NYSE:KB) Q4 2016 Results Earnings Conference Call February 9, 2017 2:00 AM ET
Unidentified Company Representative
Good afternoon, I am [Kwan Bon Joon] (ph), IR manager at KB Financial Group. Thank you for joining us today. We would like to now begin 2016 Full Year Earnings Presentation. For today's earnings release, we have our CFO, Yi Dae-gun and the Group's Executive Team. We will begin with 2016 earnings results which will be presented by our CFO, followed by a Q&A session.
Now, let me invite our CFO for 2016 earnings presentation.
Unidentified Company Representative
Good afternoon, I am CFO, [Ye Dae Gon] (ph) of KB Financial Group. Before going into 2016 earnings, let me briefly talk about the overall business backdrop. In 2016, we saw global economic uncertainties heightened with low growth trend in the domestic market becoming more pronounced, accompanied by rigorous corporate restructuring. We expect the domestic economy to face difficulties this year due to unfavorable export conditions on slower Chinese growth and difficult trading relations with the U.S., and prolonged burden of household debt and contractions in the housing market. Under such challenging environment, KB Financial Group fully consolidated Hyundai Securities as its subsidiary last October and merged it with KB Investment and Securities to launch KB Securities, thereby laying the basis to fuel growth and diversify its business in the low rate, low growth environment.
On top of various strategic efforts to secure source of profitability, we will continue to endeavor towards cost efficiencies, and improvement of asset quality so as to manage cost effectively. Just to note, today, the company's BoD decided on cash dividend of KRW1,250 per share for 2016 with the payout ratio of 23.2%. In line with improvement and stability in earnings performance, we plan to gradually increase the payout ratio and we will do our best to satisfy shareholders' expectations and reward their support. With that, I will move onto 2016 earnings results. Please refer to page two. KB Financial Group's 2016 net profit was KRW2,143.7 billion, up by 26.2% year-over-year. Such improvement excluding the one-off factors are largely due to sound loan growth and increase in net interest income driven by defending the margin. And declining in provisioning on asset quality improvement. Q4 group net profit was KRW453.9 billion, down 19.6% Q-on-Q impacted by one-off factors.
Looking at the breakdown, annual net interest income recorded KRW6,402.5 billion putting a stop to several years of downward trend, growing 3.2% year-over-year. Also, since hitting bottom in Q1 of 2016, there has been a sustained increase due to the fact that whilst there was a robust loan growth, we were able to actively improve asset liability portfolio and conduct sophisticated pricing enabling a rigorous control of NIM. Just to note, Q4 group's performance includes Hyundai Securities' Q4 figures. I will elaborate on relevant items from Hyundai Securities that impact our earnings significantly. Next, net fees and commissions income came in at KRW1,584.9 billion for the full year and KRW476.9 billion for Q4, up 3.3% year-over-year and 27% Q-on-Q. Q4 net fees and commissions income increased quite significantly compared to Q3 due to the inclusion of Hyundai Securities' fees and commissions income.
Other operating loss was KRW542.5 billion for the full year and KRW422.9 billion for Q4, widening the size of loss both year-over-year and Q-on-Q. In Q4, net loss was larger than the typical year due to losses from investment securities and fluctuations from interest rate and exchange rate and one off losses created in the process of merging KB Securities. To provide a bit more color, firstly, due to a sudden rise in the market rate and the FX rate, loss from investment securities increased with significant impact from Hyundai Securities' losses which was consolidated starting this quarter. And in the process of integrating evaluating models for OTC derivatives of KB Investment and Securities into Hyundai Securities, there was a KRW95.2 billion of loss recognition.
Also, there was the impairment loss from HMM shares owned by the bank in the amount of KRW15.3 billion and KRW14.4 billion loss from principal preservation trust and derivative related CVA loss of KRW13.5 billion. Excluding such factors, we believe the size of loss from the other operating income items are within the ordinary range. For G&A, driven by extensive voluntary retirement expenses, and inclusion of Hyundai Securities, there was a significant year-over-year and Q-on-Q increase to KRW5,228.7 billion for the full year, and KRW2,110.7 billion for Q4. If you exclude the ERP expense and Hyundai Securities' impact, G&A was only up 1.3% year-over-year, displaying that our cost cutting efforts to previous ERPs and corporate-wide cost savings efforts were of value.
For your reference, the ERP which took place in Q4 led to the personnel reduction of 3,017 employees in the Group and KRW844.7 billion of expenses. It is expected that these ERP costs will result in cost phasings within three years and all of the expenses will be recovered. Group's provision for credit losses recorded KRW539.2 billion annually and KRW31.5 billion in Q4. Asset quality was maintained at a sound level and provisioning write-back continuously took place, recording a very low level, lower than the normalized credit cost. As long as the economic situation doesn't deteriorate rapidly, this year's asset quality is also expected to be maintained at a sound level. However, since there were sizeable write-backs in 2016, the provision for credit losses in 2017 is expected to increase on an absolute amount basis compared to the previous year and is expected to be within a 40 basis point level compared to total loans from a credit cost basis.
Net non-operating profit was impacted by the gains from the bargain purchase related to the share purchase of Hyundai Securities and KB Insurance and posted KRW951.7 billion and KRW734.1 billion in Q4. The total sum of gains from bargain purchase recognized in Q4 was KRW697.9 billion, a sum of KRW622.8 billion from the shares swapped with Hyundai Securities and KRW75.1 billion from third-party allocation to a capital increase with consideration from KB Insurance. Let me cover the major financial indicators from page three. Group's 2016 ROE and ROA recorded 7.26% and 0.63% respectively showing continuously profitability improvement. NIM, a major profitability indicator posted 1.86% annually for the Group, a 3 basis point drop Y-o-Y but recorded 1.89% in Q4, showing a 4 basis point improvement Q-on-Q.
In particular, despite the policy rate cut in June, Group and Bank NIM are both slightly but continuously edging upwards after bottoming out in Q1 showing that the overall NIM improvement efforts are fruitful. Looking at the cost income ratio on the right, the Group CIR rose 70.2% for the whole year in 2016 and 116.9% in Q4 respectively. A significant increase with a sizable ERP cost in Hyundai Securities' consolidation effect. Excluding the ERP and Hyundai Securities' consolidation effect, the Group CIR posted an annual 56.1%, similar to the previous year and recorded 62% in Q4, a slight increase from the annual average due to factors including seasonality of general G&A. Going forward, it is expected that the Group CIR can be improved to the low 50% level after the top-line profit base is stabilized and the cost cutting effect from ERP is visualized.
Next, let's look at the asset quality indicators. The group's credit cost ratio compared to the total loan greatly fell to 22 basis points for the whole year and 6 basis points in Q4, this is significantly lower than the recurring level due to the decrease in the asset quality deterioration spread due to portfolio improvement and some sizable write-backs. For your reference, we believe normalized credit cost ratio is approximately between 40 basis points to 45 basis points compared to the total loan. Even the bank's BIS ratio at December end posted 15.25% and 16.32% respectively maintaining the highest level of capital adequacy in the financial industry. The CET1 ratio that the market is focusing on is 14.23% and 14.83% respectively, but has improved with the reserve for credit losses being recognized as CET1 capital.
Let me cover the Hyundai Securities' consolidation and the launch of KB Securities' impact from page four. As was mentioned at the beginning, since Hyundai Securities' performance was reflected 100% in the group's consolidated financial statements from Q4, I will briefly cover the consolidation effect. As you can see from the graph, Hyundai Securities' consolidation effect was KRW61 billion in net interest income, KRW84 billion in net fee and commissions income and KRW171 billion in G&A expenses. Despite Hyundai Securities' contribution to the top line profit, there was approximately KRW62 billion of loss reflected to the Group with some securities related losses and ERP cost burden. On the other hand, Hyundai Securities' effect on Group's capital adequacy and asset quality is very limited in Q4.
KB Securities which concluded consolidation at the end of last year will strengthen the retail stock brokerage business and advantages in DCM which was its main focus but also actively utilize the synergy between the group's subsidiaries so that we will be an all-around player in the securities industry in all categories including wealth management, sales and training, investment banking and wholesale, so that we will become an IB offering optimal investment solutions for customer's financial needs. I will not elaborate on the following slides as it overlaps with what has already been explained. That now brings me to the end of 2016 earnings report of KB Financial Group.
Thank you very much for your attention.
End of Q&A
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