Oct 24, 2014
Executives
Kyu Sul Choi – Head of Investor Relations and Managing Director Woong-Won Yoon – Acting Chairman and Chief Financial Officer
Analysts
Koo Kyung-hwe – Hyundai Securities Junho Lee – UBS
Kyu Sul Choi
My name is Kyu Sul Choi the Head of IR at KB Financial Group. Thank you for taking part in today’s earnings conference call of KB Financial Group for Q3 2014.
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 Acting Chairman, Woong-Won Yoon; and executives from KB Kookmin Bank and credit card. The conference will consist of the earnings presentation by our CFO/Acting Chairman, Woong-Won Yoon, on the earnings results for Q3 2014, followed by a Q&A session, at which time you may call in for questions.
Let me now present our Acting Chair, Woong-Won Yoon, for the earnings presentation.
Woong-Won Yoon
[Interpreted] Good afternoon. My name is Woong-Won Yoon, the CFO of KB Financial Group.
Before going into the earnings results, I would like to provide a brief overview of our business for the Q3 2014. After posting rather lackluster Group results for Q1 of this year, operations normalized from Q2 sustaining an improvement trend in Q3.
Across loan growth and NIM enhancement and improved G&A, the overall operational results showed an enhancement trend. We anticipate stable earnings going into the next quarter as well and we will do our best to minimize earnings volatility to further heighten the earnings visibility.
Let me begin the earnings presentation on KBFG for Q3 2014. First, the financial highlights.
KBFG’s cumulative profit for Q3 2014 posted KRW 1,221.4 billion while the Q3 profit marks KRW 456.2 billion, up 16.5% year-on-year. The drivers for the Q3 profit increase are as follows.
First of all as can be seen on the graph on the right, NIM continued expanding boosted by the lower funding cost resulting in higher interest income. Secondly, following the previous quarter, G&A and PCL were well controlled this quarter as well.
Lastly, there was a one-off KRW 23.7 billion corporate tax refund related to the R&D. As of the end of September, the Group’s total assets including KRW 399 trillion rising 5.2% year-to-date.
The Bank’s loan in won continued an optimum level of growth during Q3 rising 1.2% compared to the end of June and up 2.7% year-to-date. Next page please.
The cumulative provision for credit losses up to Q3 came in at KRW 937 billion while the PCL for Q3 posted KRW 323.8 billion improving 2.6% year-on-year sustaining at stable level. The Group’s total asset to PCL rations improved from the previous quarter’s 0.45% to 0.43% enhancing by 2 basis points.
If you look at the graph on the right, the NPL ratios for the Bank and card business recorded 1.71% and 1.54% respectively. The delinquency ratio came down to 0.88% and 0.86% respectively, maintaining sound asset quality indicators.
Please find the BIS ratio on the bottom. Bank BIS ratios were 15.63% and 15.96% respectively sustaining one of the industry’s highest capital adequacy, especially the common equity which excludes Tier-1 and capital mark, 13.26% for the Group and 13.36% for the Bank, which are the highest in the industry.
I will discuss the Group profitability overview on Page 6 with comparison with historical figures. If you compare the Q3, there are three relatively big changes compared to the previous year.
The gross operating income came down by 2.8% year-on-year. The reduced interest income from narrowing NIM and the weak fee income attributed to such decrease, such trend bottomed out in Q1 and the NIM started trending up from Q2 auguring well for interest income expansion and operational recovery which will ultimately be to higher fee.
Provision for credit losses decreased 17.2% year-on-year. Also on a quarter-on-quarter basis, the PCL is stabilizing at a lower level.
This is a testament to our steady efforts over the year to improve the asset quality. Lastly, the non-operating loss of KRW 122.3 billion last year’s same period turned to profit this year making the cumulative non-operating income up to Q3 KRW 8.8 billion.
This was due to the lack of the one-off factors such as the BCC equity method loss of KRW 120.3 billion from Q2 last year. On a quarter-on-quarter comparison, aside from the across the board improvement, there is also a one-off gain by KRW 23.7 billion from the tax refund for R&D expenses.
Please refer to that fact. From the next page, I will go into more details.
First, the Group net interest income is cumulative net interest income up to Q3 declined 2.1% year-on-year due to the contracting NIM. In the meantime, the Q3 net interest income hedged up 1.2% quarter-on-quarter continuing an upward trend.
Despite the lower interest income from the policy rate decrease and the ensuing contraction in loan spread, the favorable funding cost lower the interest expense at a larger pace. If you look at the right graph, the Group’s NIM inclusive of the merchant fees for Q3 posted 2.52% rising four basis points quarter-on-quarter.
The Bank NIM was 1.85%, up three basis points quarter-on-quarter. As mentioned before, the main driver for NIM enhancement was the lower funding cost.
The maturing of the high yield Bank issued bonds is continuing to have positive effects while efforts to secure low cost deposits are reaping results with 2.2% demand deposit increase quarter-on-quarter. Following August, the policy rate was lowered once again in October which will likely further compress the loan deposit spread going forward.
However, through persistent expansion of core deposits, the management of loan portfolio and the recovered sales capacity of the credit card business, we will continue to make efforts to enhance NIM. Let me move on to the net fee and commission income.
The Group net fee and commission income for Q3 marked KRW 116.8 billion down 10.1% year-on-year. As shown on the table at the bottom, of the other net fee and commission income, there was the high base effect of the Q4 last year’s accounting change on credit card factoring receivables commission, while bancassurance commission dropped significantly.
The net fee and commission income for Q3 came in at KRW 351.3 billion, down 0.2% quarter-on-quarter. Although trust-related fee income expanded, the commission income from investment banking decreased, while the credit fees inched down from rising marketing expense and customer acquisition costs.
Next page please. If you first refer to the top left graph on the Bank’s net fee and commission income trend, the overall downward trend started edging up since Q2.
By line item, both securities representing and bancassurance commission, inched down quarter-on-quarter, while Trust posted KRW 59.7 billion in the third quarter posted by the Bank’s ELS sales increase. It rose 33% quarter-on-quarter showing a steady upward trend.
The fund fee and commission income table on the bottom left showed a sizable increase in Q3 as with the previous quarter. With the bullish index however, the redemption volume increased reducing the outstanding sales balance narrowing the fee income slightly.
As shown on the bottom right, the transaction volume for both credit card and debit card rose 4.4% and 7.5% effectively to supported by our efforts to normalize our card operation. The fee and commission income decreased 40.3% quarter-on-quarter due to the higher marketing and customer acquisition costs mentioned earlier.
KB Kookmin Card was to its utmost to pursue efficient marketing based on profitability during Q4 in order to recover our sales capacity and market position. The cumulative other operating income for Q3 improved from the dissipation of last year’s impairment loss on POSCO shares going up KRW 58.7 billion year-on-year.
The other operating income for Q3 had a CVA provisioning due to the higher exchange rate quarter-on-quarter. However, the gain on partial sale of Kumho Tires shares and the small increase in gain on sales of loans resulted in the other operating income on par with the previous quarters.
By line item under Q3 other operating income, the net gains and securities and net gains on derivatives and foreign currency translation, partially offset each other from the volatility of the touch price interest rate and exchange rate. If you combine the two items, the amount for Q3 stood at KRW 150.4 billion decreasing KRW 30.2 billion from the previous quarter’s KRW 180.6 billion.
As mentioned earlier, there was a CVA reversal last quarter due to the exchange rate drop by KRW 21 billion while this quarter saw a CVA provisioning of KRW 21.4 billion from the rising exchange rate. Next page please.
Q3 cumulative G&A came in at KRW 2,972.9 billion similar on a year-on-year basis. Thanks to cost control efforts and Q3 G&A decreased 3.6% quarter-over-quarter.
This year, with improvements in profitability on a quarterly basis and better cost controls, cost income ratio in Q3 recorded 51.7%. Going forward, in the fourth quarter, we expect G&A to end up somewhat with seasonal factors such as increases in wages and A&P spending.
Q3 cumulative PCL came in at KRW 937 billion, declining 17.2% year-on-year and 2.6% quarter-on-quarter being quite stable. Q3 cumulative non-operating profit came in at KRW 8.8 billion, a large reduction in losses year-on-year.
It is mostly driven by dissipation of BCC equity method loss expenses which were incurred in the second quarter of last year. Next is on the Group’s financial position.
As of September end, Group’s total asset on the balance sheet stands at KRW 301.7 trillion mostly driven by a growth in loan asset and inclusion of KB Capital as a subsidiary last March increasing 3.4% year-to-date. Group’s shareholder equity is KRW 27.1 trillion, increasing 5.9% year-to-date.
As of September end, Group’s total asset inclusive of Trust and AUM stands at KRW 399.4 trillion, rising 5.2% year-to-date. Please refer to the right hand graph for each subsidiary’s asset size and AUM figures.
Next page. First Bank’s loan in won as of end of September is KRW 192.6 trillion, increasing 1.2% against end of June.
For household loans, in Q3, as was the case in Q2, mortgage loans showed a growth of 1.8% compared to end of June. And for corporate loans underpinned by SOHO loans, we saw a growth of 0.4% compared to end of June.
Going forward in Q4, we will continue to drive stable lending growth in consideration of profitability. Credit card receivables as of September end stands at KRW 14 trillion, inching down 4.1% year-to-date basis.
But with growth in credit purchases and card loan volume, thanks to our efforts normalize operations increased to 0.7% on a Q-o-Q basis. As end of September, Bank’s deposit in won came in at KRW 196.9 trillion, increasing 1.3% year-to-date.
Although there was a decline of 0.1% compared to end of June, whereby savings deposits decreased 1.3% with continued focus on attracting settlement accounts, demand deposits increased 2.2% contributing to improvement in funding rate. As of September end, Bank’s debenture in won stands at KRW 12.1 trillion.
Bank’s LTD, Loan-To-Deposit ratio as shown on the bottom left graph is 98% as of end of September sustaining a stable trend. Next page.
Now this slide shows KB Bank’s asset quality. Bank’s NPL ratio as of September end is 1.71% improving four basis points against end of June.
NPL coverage ratio inclusive of reserve for credit losses is 114.8% rising 3.6 percentage points compared to end of June. Bottom right graph shows Bank’s delinquency ratio at 0.88% as of end of September falling 11 basis points compared to end of June.
In terms of each sector, household delinquency rate is 0.63% falling 15 basis points Q-o-Q and corporate delinquency rate is 1.18% also inching down five basis points Q-o-Q continuing on a stable trend. Next is on the asset quality of KB Card.
As of September end, NPL ratio is 1.54% improving 21 basis points against end of June, sustaining a positive trend. NPL coverage ratio inclusive of reserve for credit losses as of end of September stands at 345.9%, showing an improvement of 27.7 percentage points compared to end of June.
September end credit card delinquency rate improved 23 basis points against end of June coming in at 1.86%. New delinquency formation is declining and migration rate to 30 day and 90 day delinquency is also declining with overall credit card asset quality continuing to show stability.
Next page. The Bank’s Q3 cumulative LLP is KRW 684, decreasing 22% year-over-year and Q3 LLP came in at KRW 206.1 billion declining 15.2% Q-o-Q.
By sector, there was, on a Q-o-Q basis, 14.1% increase for the household sector due to write-offs on some collective loans during the third quarter which was then provisioned. For the corporate, with overall quality improvement, and increases in write-back from the sale of loan assets, there was a reduction by 29.4% Q-o-Q.
Q3 KB Card’s cumulative LLP is KRW 214.9, declining 10.6% year-on-year and Q3 provision came in at KRW77.3 billion, slightly edging on a Q-o-Q basis. The bottom left graph shows Bank and credit card LLP over total asset on a cumulative basis coming in at 0.55% and Q3 credit cost improved six basis points on a Q-o-Q basis coming in at 0.52% showing a clear stability in asset quality compared to the past.
This has been Q3 2014 KB Financial Group earnings presentation. Thank you very much for your attention.
Operator
There was an earnings presentation by our acting chair. We will now begin the Q&A session.
(Operator Instructions) First question from Hyundai Securities, Koo Kyung-hwe. Please go ahead.
Koo Kyung-hwe – Hyundai Securities
[Interpreted] Good afternoon. My name is Koo Kyung-hwe from Hyundai Securities.
Looking at the earnings results Acquisition process of LIG insurance, what’s the update? Number two, what is your dividend policy for this year?
Any changes to be anticipated?
Woong-Won Yoon
[Interpreted] Yes, let me address that question. Regarding the acquisition of LIG Insurance, we are proceeding at a very normal procedure from FSC, we have to obtain the approval to include LIG as our subsidiary and in order to get to that point, we have to submit diverse documents and we are in the process of submitting such paper work and we are addressing any additional follow-up requests on the paper work.
So there is always a likelihood that it could be delayed slightly. But we would do our utmost to expedite the process, so that we could acquire the approval as soon as possible, so that we could reap good results.
Now the second question has to do with your dividend, as you are well aware, KB’s common stock BIS ratio is relatively high compared to other peers and also the government is promoting pro-dividend policies at the moment. So we are fully aware of such market dynamics and also we realize that the shareholders are constantly seeking higher dividends.
So, we will be working very hard to come up with some positive end-results ultimately. Thank you.
Next question please.
Operator
From Tashan [ph] Securities Haney Kim [ph].
Unidentified Analyst
[Interpreted] Yes, hello, I am Haney Kim [ph] from Tashan [ph]. Securities.
I am looking at – I cover capital companies. So, I have two questions related to KB Capital.
In Q2, you got KRW 12.8 billion, but there is only KRW 7 billion. Is it because of certain credit cost or provision?
What are some of the expenses? And after Q1, we’ve heard that there will be normalized level of profit going forward after the first quarter shock, but I think the higher level of provision, there is a concern, so, I am concerned whether in the fourth quarter there will also be more increases in the loan loss provisions.
And also from a holding company’s perspective, what is the company’s policy to provide momentum to your capital company? I understand that you provide certain linkage operation support and we saw a lot of press coverage on this asset in the first half of the year, but I would like to understand little more about your unsecured loan related corporation.
Woong-Won Yoon
[Interpreted] Yes, I will respond to the question, you’ve asked me about the figures from KB Capital in the first quarter, the net profit was low and was like last year because as we acquired the entity as you would know in the initial phase, there is relevant M&A and acquisition-related expenses that’s going to being cut. In Q3, the performance was relatively once again like last year and that is because, on our book there is a corporate finance related asset meaning the loans and we were in the process of cleaning up those loans and we have built up the provision to respond to that.
And this year, this is an aspect that we are really going to focus on to enhance on the asset quality and we believe based on those assets we would see more stable profit coming in, in Q4 and we can expect better profits and income for next year. And your second question has to do with what is the holding company’s plan to support KB Capital.
In terms of sales operation based on corporation or linkages, as you know, we are in the process of stabilizing these link-based business operations and the overall framework had undergone certain changes and our training and education that was provided on the sales people and there are some time that would be required to really facilitate such cross-selling or such cooperation. But in terms of the figures and the performance, we are seeing stable upward trend, so we have greater hope for the coming year.
Other than that, at the holding company level, in terms of re-capitalization or solidifying our capital base, we do have certain measures and once those become more specific, we will communicate with the market.
Unidentified Analyst
[Interpreted] I have one more follow-on question. After the deregulation on LTV in the non-bank industry, I would think that would there more volume that is being originated from the banking industry rather than the non-banks?
Woong-Won Yoon
[Interpreted] Admittedly, there is a certain impact here. However, the extent or the size is not that significant.
Fundamentally, with the higher LTV ratio, the limit on the loan size is increasing. So, with regards to the policy on real estate, there is new demand on the new loans.
So those are two-fold impacts on the LTV deregulation.
Operator
Next question from UBS, Mr. Junho Lee please go ahead.
Junho Lee – UBS
[Interpreted] Good afternoon. Thank you very much for good results.
I have a question regarding your credit card business. What is your internal market share figure on the overall credit card volumes?
I believe that it has gone up by 0.1% to 0.2% compared to the previous quarter. If that is the case, what you lost during the first half in terms of market share has not fully recovered yet.
So, up to which market share point do you think that you could possibly regain your position?
Woong-Won Yoon
[Interpreted] Yes, let me respond that question from the credit card business. You talked about the market share of the credit card business in your question.
In the month of April, our market share was at the lowest point, at 13.9%, but after that we pursued very proactive sales momentum. So it’s steadily increasing.
As of the end of September, although this is tentative figure, we believe that is about early or mid-14% range. So assuming that the current pace continues, we believe that we will continue to expand our share in Q4 as well in terms of customer numbers.
So, at the end of the day, we believe that we could recover our market share. Thank you.
Operator
Thank you very much. We don’t have anyone waiting to pose a question.
Thank you. With that, we would now conclude earnings conference of KB Financial Group for Q3 2014.
The presentation and VOD of this conference will be available for access at any time for you on the IR webpage of KBFG. Also, if you have any more questions, please contact our IR Department.
We will do our best to address your questions. Once again, thank you very much for participating today.
Thank you.