Jul 26, 2013
Executives
Kyu Sul Choi - Managing Director and Head of Investor Relations Department Jong-Kyoo Yoon - Deputy President and Chief Financial Officer
Analysts
Scott YH Seo - JP Morgan Chase & Co, Research Division Young-Soo Seo - Kiwoom Securities Co., Ltd., Research Division
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 2013. 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, Jong-Kyoo Yoon, and executives from KBFG subsidiaries.
The conference will consist of the earnings presentation by our CFO, Jong-Kyoo Yoon, on the earnings results for the first half of 2013, followed by a Q&A session, at which time you may call in for questions. Let me now present our CFO, Jong-Kyoo Yoon, for the earnings presentation for the first half of fiscal year 2013.
Jong-Kyoo Yoon
Good afternoon. My name is Jong-Kyoo Yoon, the newly appointed CFO of KB Financial Group.
Let me begin the earnings presentation of KBFG for the first half of fiscal year 2013. Let me begin with the financial highlights.
KBFG's profit for the first half 2013 recorded KRW 575 billion. Profit for the first half declined 50% year-on-year, mainly due to the narrowing interest income from the NIM contraction and sluggish loan growth, as well as the one-off losses, including impairment loss on securities.
Profits for Q2 marked KRW 163.5 billion, down around 60% quarter-on-quarter, affected by the factors such as equity method loss on BCC. The group's gross operating income for the first half came in at KRW 3,662,900,000,000.
As you can see on the graph, the quarterly gross operating income is hovering slightly below KRW 2 trillion lately. It is attributable to the margin compression and slow loan growth, leading to the lower interest income, as well as the noninterest one-off losses resulting in the slight weakening of the top line.
However, the Q2 numbers were supported by the resilient loan growth and efforts to enhance fee income coming in on par with the previous quarter. Including Trusts and AUM, the group's total asset marked around KRW 376 trillion as of the end of June.
Next page, please. The group's provision for credit losses for the first half 2013 posted KRW 677.5 billion, down 10% year-on-year.
Thanks to our proactive and continuous stance to address NPL and to enhance asset quality by way of conservative provisioning policy, our quarterly provisioning trend remains quite stable. The group ROA and ROE posted 0.4% and 4.64%, respectively.
On the bottom of the page, please find the capital adequacy trend. Although this is just an estimate for now, the Group BIS ratio as of the end of June rose and also, the -- as for the Bank BIS ratio, boosted by the rising capital credit and the reduction of RWA, it went up by 23 basis points quarter-on-quarter.
Also, the Group and the Bank's Tier 1 and Core Tier 1 ratios posted 10.93% and 11.21%, respectively, maintaining one of the highest capital adequacy in the financial sector. On Page 5, let me discuss the group financial performance for the first half in more detail.
First of all, the group net interest income for the first half 2013 stood at KRW 3,300,000,000,000, affected by the narrowing NIM and the overall slowdown of the loan growth. Leading to the lower average outstanding interest-bearing asset among others, the NII came down to 7.2% year-on-year.
The net fee and commission for the first half remained pretty much unchanged year-on-year, while the Q2 numbers climbed 6.9% quarter-on-quarter, boosted by the growing credit card fee income. The net other operating income for the first half scaled back significantly year-on-year, mainly due to the one-off losses, including impairment loss from the downward trend of the stock prices and CVA-related losses on forward contracts from the rising interest rate or exchange rate, that is, among others.
I will elaborate on the details in the latter part of the presentation. The group G&A expenses for the first half reached KRW 2,000,900,000,000, growing by 2.1% compared to the same period last year.
However, if you take out the labor cost increase accrual effect, the group-wide expense is well under control. Next is the breakdown of the group profitability on the next page.
Let me start with the net interest income. The bank's net interest income for the first half marked KRW 2,636,800,000,000, declining 10.7% year-on-year.
On top of the narrowing NIM from the market rate drop, the Q1 negative loan growth and the Q2 loan growth mainly taking place at the quarter end, resulted in the average balance of interest-bearing asset reduction by around KRW 5 trillion. The card net interest income for the first half posted KRW 510.7 billion, up KRW 36.2 billion year-on-year, mainly helped by the lower interest expense from lower funding rate.
Please refer to the group NIM graph on the bottom right. Please be advised that whereas the previously disclosed NIM numbers included merchant fees to ensure a backward comparison, starting from this quarter, however, the NIM numbers will exclude the merchant fees.
If you look at the graph including the merchant fee, the group NIM for the quarter actually inched down, posted 2.65%, inching down 8% quarter-on-quarter. On a cumulative basis, the NIM came in at 62.69%.
We have been estimating additional NIM contraction for Q2 from the policy rate drop in May and narrowing interest spread from fierce competition. Due to the lower recovery of the delinquent interest, however, the NIM contraction became somewhat more pronounced.
Going forward, a certain degree of competition for loans among banks seems unavoidable. If you also consider the various regulatory issues, further NIM compression to a limited degree may be a possibility.
However, we will do our best to proactively recover delinquency and to improve loan deposit portfolio to meet the NIM of 2.7% for the year. Let me now move on to the net fee and commission income.
The bank's net fee and commission income for the first half recorded KRW 564.7 billion, falling by 12% year-on-year. It was mainly due to the drop in both the bank assurance fees and the credit card agency fee.
First of all, the bank assurance fee edged down 41.8% year-on-year. During Q1 last year, the strong marketing efforts led to extraordinarily high sales of single premium products.
Also, the commission scheme change for bank assurance since April last year also played a role in the bank assurance fee reduction. Especially during Q2, the bank assurance fee fell 44.8% quarter-on-quarter.
The tax benefit revisions implemented in February 2013, especially regarding the immediate annuity products together with the low interest rate environment, deteriorated the crediting rate competitiveness of the insurance products, leading to the bank industry-wide contraction in the new business written. The credit card agency fee came down somewhat year-on-year.
However, this represents the agency fee paid to the banks by the card company, making the net impact on the group minimum. The first half card net fee and commission income jumped by 104.5% year-on-year, despite various regulatory pressure to lower fees, thanks to our efforts to minimize fee-related expenses, such as core marketing services.
As for Q2, the expanding merchant fee income boosted the net fee and commission income slightly quarter-on-quarter. I will now touch upon the net other operating income.
The bank's first half net other operating income inched down year-on-year due to one-off losses. First of all, the net gains on securities posted KRW 14.1 billion in losses during the first half.
During this period, the recognition of KRW 121 billion impairment loss on POSCO and HMM shares held by the bank took out the lion's share of the loss, along with the overall underperformance of the marketable securities affected by the rising bond yield and stock price decline and others. Under the others category, excluding the insurance fee on deposits and contribution to credit guarantee fund, the remaining net gains on derivatives and foreign currency translation and others trended down 73.5% year-on-year, due to the exchange rate factors.
During the first half of last year, the exchange rate drop year-to-date led to the reversal of around KRW 42 billion from the CVA fair value assessment on forward contracts. This year, however, the rising interest rate led to around KRW 24 billion worth of additional provisioning.
However, if you take out these one-off factors, the value of the marketable securities, underlying asset and the valuation of the derivative or hedge transactions pretty much offset each other, helped maintaining a stable level. As for the other operating income for the card business, the upward adjustment of the expected usage ratio of the reward point led to the provisioning of KRW 15.2 billion, resulting in the increased losses.
However, the recognition of the KRW 31 billion sales gain on loans sold to National Happiness Fund during Q2 helped improve the overall other operating income year-on-year. The other operating income for the other subsidiaries widened the loss year-on-year, mainly due to the insurance-related income contraction.
Please turn to the next page. The bank's G&A expenses for the first half was KRW 1,716,200,000,000, going up 2% year-on-year.
Considering the quarterly [indiscernible] selection of the wage increase estimates, the G&A is well under control, I believe. The card and other subsidiaries' G&A numbers on the bottom are quite healthy as well.
Despite the group-wide cost control efforts, the cost income ratio for the group edged up slightly. If you look at the graph on the top right, the group cost income ratio is showing a modest upward trend since 2012, due to the lower interest income and the one-off losses from the noninterest category.
KBFG will do its utmost to further minimize various administrative expenses while minimizing the labor cost hike to further enhance our profitability and efficiency. The bank's nonoperating income for the first half posted KRW 109.9 billion in losses, mainly reflecting the KRW 120 billion equity method loss on BCC during Q2.
This is the result of our conservative accounting treatment of the BCC financial due diligence conducted on BCC from the beginning of this year, aligning the provisioning accounting differences with BCC, in line with that of KBFG. Please turn to Page 10 for the bank profitability in details.
I will now touch upon the group asset liability. First, we're going to take a look at the group's balance sheet.
As of June end 2013, group's total asset based on the balance sheet is KRW 29.4 trillion, growing 2.7% year-to-date, driven by loan receivables. Group's total liability is KRW 269 trillion, with shareholder equity at KRW 2.5 trillion.
Group's total asset, including the trust and AUM, thanks to the growth of the bank's loan receivables and asset manager's AUM, increased 3.4% year-to-date. Next is KB Kookmin Bank's loans in won and KB Kookmin Card.
First, bank's loan in won as of end of June is KRW 185 trillion, increasing 0.6% year-to-date and 2.4% against end of March. Looking at each sector, with prolonged property market recession, the oppressing growth potential and the impact from the securitization of qualified loans, household lending declined 0.1% year-to-date.
For your information, if -- inclusive of the securitization, the growth rate is 2.8%. And on the back of government housing market normalization plan, which was introduced in the beginning of April, the demand was at the top end so that there was a growth of about 2.1%.
Corporate loans showed a growth of 1.4% year-to-date and 2.8% compared to March end. In light of the economic condition and the consent for household debt, growth rate for household loans has been moderated, with growth mostly coming from loans with good quality SMEs, such as from loans with letter of guarantee as a collateral.
We will continue to employ conservative loan policies with cyclical factors in line with our risk management stance. But in the meantime, we will identify high-quality SMEs and apply sophisticated credit valuation system and interest rate scheme to selectively explore growth opportunities in corporate lending sector.
The credit card receivables at end of June stands at KRW 13.3 trillion, growing 1.5% year-to-date and 3.1% against market trends, mostly driven by factoring and receivables. Next is on the bank's funding overview.
As of end of June, bank's deposit in won is KRW 190 trillion, showing a decline in a year-to-date basis, but it increased 0.8% compared to end of March. Due to the efforts to attract lower-cost deposit and settlement accounts, and on top of low interest rate and equity price decline, which led to increases in standby funds in the market, core deposit increased 6.1% year-to-date and 4.9% compared to March end.
However, time deposit has been declining in line with our funding stance that reflects overall sluggishness in loan growth and due to the impact of lower demand. The bank's debentures in won as of June end stands at KRW 12.8 trillion.
On the bottom-right corner, you will see that the loan-to-deposit ratio as of end of June is 98.5%. Due to the negative loan growth end of last quarter, the figure declined to 96.9%.
But with the regained growth in loans as of June end, we've recovered to the ordinary levels. From Page 15, I will talk about group's asset quality.
First is bank's asset quality overview. Bank's substandard and below ratio at the end of June is 1.92% compared to March end's 1.55%.
There was an increase of 37 basis points. The NPL ratio's large increase is in line with FSS's reclassification -- a conservative reclassification of guidelines, where some precautionary loans were moved and reclassified to substandard bucket.
As such, KRW 616 billion of impact took place. Taking this impact aside, NPL ratio is 1.62%.
In line with regular credit ratings review on corporates, there was KRW 78 billion impact on NPL increase. So compared to the previous quarter, there was a slight increase, but overall, the trend is stable.
NPL coverage ratio calculated inclusive of reserve for credit losses as of end of June is 136.9%. Bank's delinquency ratio as -- at end of June is 1.01%, falling by 8 basis points.
On the back of improvement and soundness of collective loans, household sector's delinquency ratio fell 10 basis points Q-o-Q. Delinquency for corporate loan is 1.01%, a slight decline Q-o-Q, maintaining a stable level.
Next is on asset quality for KB Card. As of June end, credit card NPL ratio is 1.80%, a rise by 8 basis points against March end.
The reason why NPL ratio increased is because, as of last quarter, the company's write-off criteria changed from over 3-month delinquent to 6-month delinquent, which had an impact of increasing the NPL ratio, and the residue impact is still lingering. It is by no means due to the deterioration in overall asset quality.
NPL coverage ratio inclusive of reserve for credit losses as of June end is down 312.9%. Credit card delinquency ratio increased by a large margin temporarily in Q1 because, once again, of the change in write-off criteria as previously mentioned.
But as of end of June, the ratio is currently stable at 2.15%. Next is on loan loss provisions for the bank and KB Kookmin Card.
The bank's LLP in first half was KRW 525.4 billion, improving 10.8% year-on-year, and KRW 262 billion in Q2, similar to the previous quarter. By sector, first half LLP for household loans was KRW 134 billion, falling 34.5% year-on-year, and Q2 LLP came in at KRW 43.8 billion, a 51.4% decline Q-o-Q.
Overall migration of asset quality reduced provisioning burden, and there was a slight increase in recovery of original loans. On the corporate side, first half provisions came in at KRW 391.4 billion, similar on a Y-o-Y basis.
However, our Q2 provisions were KRW 218.2 billion, inching up 26% Q-o-Q. This is due to the fact that there was additional provisioning of KRW 38.6 billion from reclassification and an addition of KRW 32.4 billion coming from the regular credit review of large corporates.
So if these factors are excluded, provision for the corporate sector is also quite stable. First half LLP for credit card was KRW 151.1 billion, showing a decline of KRW 13.8 billion year-on-year.
Q2 figure looks as though there was a large increase compared to the figure of the first quarter. But as said before, with the change in write-off policies, there was a one-off impact of reduction on provisions of around KRW 38 trillion in the first quarter, so Q2 figures should be construed as a recovery to ordinary level for the quarter.
The graph at the bottom shows the NPL coverage ratio for the bank and Kookmin Card as of June end, one is -- 136.9% and 312.9%, respectively. Last slide is on provisions by each sector.
On the top left graph, you will see that the group PCL over group total asset is a cumulative 0.47% for the first half, improvement of 9 basis points over 2012 full year credit cost of 0.56%. By sector, household loan loss provision recorded 0.27%.
Compared to previous year's credit cost, it fell by 12 basis points, with second quarter's credit cost improving significantly to 0.18%. First half corporate loan loss provision rate is at 0.79%.
By actively cleaning up bad debt and through conservative provisioning policies, the figure which was at 2.54% in 2010 and 1.04% in 2011 has been maintained at a steady level every quarter since 2012. Loan loss provision for credit card, except for the one-off factor that took place in the first quarter, has been displaying a steady trend as well.
Now there still is concern for economic recession and household debt, and asset quality issues around problem-prone sectors. As such, we will continue to stick to our conservative approach.
So rather than a significant improvement this year on the provisioning side, we expect the level to be similar to or slightly lower than that of last year. This has been First Half 2013 Earnings Presentation by KB Financial Group.
Thank you very much for your attention.
Kyu Sul Choi
Thank you. That was an earnings presentation by our CFO.
We will now begin the Q&A session. [Operator Instructions]
Kyu Sul Choi
From Hanwha Investment Securities, Mr. Shin.
Please go ahead, sir.
Unknown Analyst
My name is Shin. First of all, I believe that you emphasized about the importance of growing your retail credit growth.
So what is the change in your direction for the growth going forward? And also, how do you foresee the margin outlook towards the end of the year?
And also, at what level do you think that your margin will be stabilizing?
Jong-Kyoo Yoon
Yes, let me address your questions. When it comes to the retail loan area, our main sector will be our mortgage area.
And in the mortgage sector, we will continue to have our dominance. And also, in the general line and also when it comes to the unsecured loan sector, we would be targeting a high-quality, potential buyers who are mostly professionals with higher income so that we can further reinforce our marketing efforts.
And secondly, regarding our margin outlook towards the end of the year, as you are well aware, the Q2 NIM was 2.65%, which was an 8% -- 8 basis point lower quarter-on-quarter, so it was slightly below our annual guidance. However, it was mainly due to the end of June situation, where the month end happened to fall on the weekend.
Therefore, it led to less recovery of the delinquent interest. So this was a one-off factor.
So if we actually take it out in the Q3 trend, I believe that the Q3 NIM will be recovered back to the normalized level of Q2. So going forward, we will further reinforce the recovery of the delinquent loans, and we will further acquire low-cost funding deposits, as well as the settlement accounts in deposit.
I think that, that will all boost our margin going forward.
Unknown Executive
If I may elaborate just a little bit, until the end of the year, I believe that as for the loan growth, on a year-on-year basis, well we are anticipating and we have the estimate about 2% growth year-on-year. And for your information, there is a 30-second time lag between the phone call and the screen shown on the web page.
So first of all, thank you for your first question. We currently have no question in line.
So please go ahead with your questions.
Kyu Sul Choi
Yes, I think we have a question from JPMorgan, Seo, please go ahead.
Scott YH Seo - JP Morgan Chase & Co, Research Division
I have 2 questions. One is in terms of the NPL, there is a slight pick up.
You mentioned that it's a change of classification from a special mention to substandard. Can you comment on overall, is there any other concern on asset quality?
And secondly, in terms of the securities income, there were also some swings in the second quarter. Can you elaborate more on what contributed to those changes in the trading and also AFS income?
Jong-Kyoo Yoon
Yes, let me address your question. Regarding the rising NPL, I would like to elaborate slightly on this point.
They mainly had to do with the ship building companies. The provisioning ratio for those particular companies happen to be above 20%, but their asset classification sometimes fell under normal or precautionary.
But according to the FSS's guideline, the asset quality classification should be better aligned with the provisioning ratios. Therefore, regarding the payment guarantees related with RG, which is refund guarantee insurance covers, so we further upgraded the provisioning requirement and also, we wanted to realign it to the right classification.
That is why we've reclassified it as NPL. So that actually amounted to about KRW 616 billion.
Let me address your second question. With regards to the impairment loss on the securities income, now most of the impairment loss arose from POSCO or HMM.
And regarding available for sale, it amounted to about KRW 44.6 billion. And I think that the more detailed answers can be provided through the IR Department.
Kyu Sul Choi
I hope that answered your question. We will wait for others to request for questions.
It's Kiwoom Securities, Mr. Young-Soo Seo.
Young-Soo Seo - Kiwoom Securities Co., Ltd., Research Division
Yes, I'm Young-Soo Seo from Kiwoom Securities. I have one question I would like to ask.
As you know, government has taken initiatives to come up with cost reduction methods, and we even heard that from the news articles that there is a task force team that was installed. And also, I think one of the message is to do away with branches that's recording loss.
And also, second has to do with increasing the fee structure, especially on new origination and also on private mortgage product. Now these methods -- I mean, how realistic are these efforts?
And how could they -- how -- to what extent do they contribute to your profitability?
Jong-Kyoo Yoon
Yes, for reducing the number of branches that's generating loss, you first would have to be able to define what those branches are, who those branches are. In the course of the ordinary business, business as usual, I think that, that would be one of the requirements.
If there is change in the business or commercial district or if there is a large amount of loss that's being created making the branch record in the red or maybe with new branches and there could be a branch that takes a long time to reach a BEP point, breakeven point. We believe that the operational environment that becomes more difficult, thereby the branch also experiencing difficulties, we're trying to relocate them and put in more effort and rapidly respond to those situations, for branches that's facing difficult operational environment.
Number two, with regards to fee increase. Now this requires social consensus, and there also would have to be various analyses on the cost structure for the bank as well.
So for this methodology, it does beg for a very specific and detailed consideration. And at this point, we do -- we are not at a point where we could share with you any specifics.
Kyu Sul Choi
Next question from Prudential Securities, Yoshinari Watamura [ph]. Please go ahead, sir.
Unknown Analyst
Yes, I have one question. I have read an article, and there has been an article about the M&A strategy about your company.
There are some reports that you might be interested in the Woori Investment Securities-related acquisition or that you might be interested in any overseas acquisition. Now if that is actually true, could you actually touch upon your plans for funding for such M&A?
Jong-Kyoo Yoon
Thank you for your question. As for the participation in the process of Woori Financial Group privatization, I believe that everything will be decided under the overall group-wide strategy for the growth.
First of all, our strategy is to further diversify our portfolio. And also, our group has been always focused on making sure that our nonbanking subsidiaries are reinforced.
So that's the criteria in making the determination. And we have to make sure that we could further create synergy upon finishing the completion of the M&A.
And more than anything, we want to make sure that all our M&A decisions could contribute to the shareholder return. So at this particular juncture, we have not come to any particular decisions yet.
So unfortunately, I cannot give you any more color on this. Regarding the overseas expansion, likewise, I believe that our overseas strategy is under review at the moment.
And when it comes to the more specific ways of overseas expansion and the strategy, we are still in internal discussions. So once things become more finalized, we will make sure that we communicate it with the rest of the market.
Kyu Sul Choi
We will take question from Mr. Jin-Sung Kim [ph] from SK Securities.
Unknown Analyst
During the presentation, you talked about the delinquency rate for collective loans are declining, bringing down the provision for household debt and also improving your NPL figure. For this collective loan, I would think that the delinquency rate has turned its direction.
And for credit card, come this year, with the merchant fee decrease, we are thinking -- we had been thinking about a lot of pressure for the credit card business, but it's not been that bad yet. So then we should think that the impact is not too negative, the squeeze is not too big.
If you look at credit card loans and the interest rate is being monitored by the government and also, the tax benefits has been reduced. It's been reduced from the previous 15%.
So this could actually stifle the industry to a certain extent. At KB Financial Group, what are your plans to counter such movement?
Jong-Kyoo Yoon
If you asked 3 questions, the first one has to do with the collective loans. Now there are different types of collective loans.
What I was trying to talk about was the collective -- the installment loan. Due to many difficulties, for instance, the bad construction market, real estate market, the delinquency rate had increased significantly at recent.
But we've been very active in collection activities on the collective loans and for prime construction companies. And also, we are -- have been able to identify some positive opportunities.
So we do not expect any further delinquency formation. Second has to do with credit card.
With the change in the merchant fees, yes, that will drive down the profit to a certain extent. But if you look at our funding rate, we were able to maintain that rate at a quite low level.
And also, for the credit card product, we had employed many methods to gain competitiveness in terms of the cost structure. Third has to do with the credit card loans.
As you know, the interest rate, we expect, will go down-- continue to go down going forward. But through our product competitiveness and our sales competitiveness, we believe we can overcome the shortcomings.
Kyu Sul Choi
I hope that has answered your question. Currently, we have no questions waiting in line.
So we will wait just a little longer. Thank you.
It seems like there are no further questions. So with that, we will now conclude the Earnings Conference of KB Financial Group for the First Half of Fiscal Year 2013.
The presentation material and the video of this conference will be available for access any time on the IR web page of KBFG. Also, if you have more questions, please contact our IR Department directly.
We will do our best to address your questions. Thank you once again for your participation today.
Thank you very much.