Feb 6, 2015
Executives
Kyu Sul Choi - Head, IR Jong-Hee Yang - CFO
Analysts
Byung-Gun Lee - Dongbu Securities Kyu Song Shim - Samsung Asset Management Junho Lee - UBS Securities
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 Fiscal Year 2014 despite your busy schedule. 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 session, you may call in to ask questions. Joining us in today's earnings conference, we have with us KBFG's CFO, Jong-Hee Yang, and executives from KBFG's subsidiaries.
The conference will consist of the earnings presentation by our CFO, Jong-Hee Yang, on the earnings results for fiscal year 2014, followed by a Q&A session, at which time you may call in for questions. Let me now present our CFO, Jong-Hee Yang for the earnings presentation.
Jong-Hee Yang
Good afternoon. My name is Jong-Hee Yang, the newly appointed CFO of KB Financial Group.
Before going into the earnings results, I would like to provide a brief overview of our business for 2014. KB financial group suffered lackluster results, affected by the data compromise of the credit card business in Q1 resulting in segment loan growth and contracting card payment volume.
However, starting from Q2 our renewed marketing endeavors led to loan growth and interim fee income. As for NIM, factors such as the bank maturing of the high yield debt led to a relatively sound NIM level up to Q3.
During Q4 however, the two policy rate drops implemented in August and October narrowed the NIM. Although the G&A increased during Q4 due to seasonal factors and the bank impairment loss on Taihan Electric Wire and POSCO shares led to sluggish quarterly earnings, the cost side showed a well-controlled stable trend attesting to the group wide cost cutting efforts and stabilization of asset quality.
In 2015 we will step up our efforts to realize even more stable results. For year intimation and dividend for fiscal year 2014 is 781 per share.
The payout ratio has been fixed at 21.5% of profit before loan loss provisioning. We will continue to further enhance our shareholder value.
With that let me begin the earnings presentation of KB Financial Group for fiscal year 2014. First, the financial highlights on Page 3.
KBFG's profit for 2014 posted KRW1.401 trillion, expanding KRW129 billion year-on-year. The Q4 profit recorded KRW203 billion edging down by KRW243 billion quarter-on-quarter.
The drivers for the annual profit increase year-on-year include the reduced credit cost from improved asset quality as well as the base effect of the BCC equity method loss recognized back in 2013. Affected by the impairment loss on Posco and Taihan Electric Wire shares and the seasonal increase in advertising and marketing with the year-end sales efforts, the Q4 profit came down quarter-on-quarter.
I will elaborate on the following pages. As of the end of 2014 the group's total asset marked KRW405 trillion, rising KRW25 trillion year-on-year.
The group's NIM for the year posted 2.48%. The contracting loan deposit spread coupled with the policy rate drop in August and October brought down the NIM by 14 basis points year-on-year.
The NIM for Q4 also came down 6 basis points quarter-on-quarter reflecting the policy rate drop to 2.46%. The banks loans in won and deposits in won for 2014 grew 4.6% and 4.4% respectively.
The year-end loan to deposit ratio posted a stable 97.4%. Next page 3.
For 2014 group loan loss provisioning came in at 0.54% improving 13 basis points year-on-year. The Q4 LLP posted 0.47% enhancing 8 basis points quarter-on-quarter.
The loan loss provisioning for the bank and credit card improved both year-on-year and quarter-on-quarter. Years of our efforts to proactively clean up the bad assets and to improve asset quality are materializing.
The bank and credit card NPL ratios as of the end of December skewed at 1.26% and 1.42% respectively. The delinquency ratios for the bank and credit card were 0.51% and 1.62%.
I will go into details later. The BIS ratios for the group and the bank marked 15.54% and 15.95% respectively, sustaining a stable level.
The group's CIR posted 55.7%, while G&A came in at KRW4.010 trillion, up KRW26 billion, year-on-year. Page 6 please.
The group profit attributable to controlling interest amounted to KRW1,400.7 billion going up 10.2% year-on-year. If you look at the breakdown the net interest income fell year-on-year due to the contracting NIM.
Net fee and commission income also decreased year-on-year with lower commission income from bancassurance and fund sales. However the G&A was on par with the previous year and credit cost came down leading to a sound cost control.
As for non-operating loss, the reduction in BCC equity method loss lowered the loss significantly year-on-year. I will touch upon the details on the following pages.
The Q4 profit attributable to controlling interest was KRW203 billion, declining quarter-on-quarter. As mentioned earlier the impairment loss on some security holdings and seasonal hike in G&A led to such results.
If you look at the subsidiaries contribution to profit, the bank contributed KRW1,029 billion making up about 70% of the total group profit. Credit card came in at KRW333 billion, which was 23% with KB Asset Management at KRW5 billion or at 3%.
KB Securities posted KRW26 billion and KB Capital Market KRW30 billion, each taking up 2% effectively. From next stage I'll go into more details about the Group's profitability.
Let me start off with the group's net interest income. As mentioned before, the Group net interest income reduced 1.6% year-on-year to KRW6,415.8 billion due to the NIM contraction.
In the meantime the Q4's net interest income pinched up quarter-on-quarter sustaining an upward quarterly trend. Despite the two quality rate drops in August and October and the narrowing quarter of the NIM the resilient loan growth helped maintain the quarterly trend.
On the bottom graph for the Group's interest income trend, you will find that the bank and credit card interest income reduction from sluggish sales in the beginning of the year and the market rate drop. However other subsidiaries interest income went up by KRW161 billion.
The inclusion of KB Capital as a subsidiary last March helped boost the interest income by KRW135.5 billion. If you look at the graph on right, the Group NIM for Q4 was 2.46%, down 6 basis points quarter-on-quarter.
The bank NIM for Q4 on the bottom right posted 1.79%, decreasing 6 basis points quarter-on-quarter. The two policy rate drops in August and October last year are expected to continue squeezing the margin in 2015 as well.
Nevertheless, KBFG will do its best to expand high margin loans and deposits while refining interest rate management so that the realized spread can be enhanced with well-defended margins. Please turn to Page 8.
Let me move on to the net fee and commission income. The annual net fee and commission income for 2014 reached KRW1,382.7 trillion reducing 6.5% year-on-year.
In more detail, the credit card fee scales back 6.7% year-on-year due to subdued card operation from card data compromised while the bancassurance sales was muted affected by the shrinking tax exemption benefit on tax revision. The rebounding cost fee in the second half pushed up the redemption volume for funds, bringing down the fund sales fee and commission income as well.
In the meantime, the Q4 net fee and commission income posted KRW365.9 billion, rising 4.2% quarter-on-quarter. It was mainly due to the higher bancassurance agent activity fee by 17.8% from the expanded sales at year-end, coupled with the increased results from investment banking under the other net fee and commission income line item, rising KRW16 billion quarter-on-quarter.
The group net fee and commission income is showing a quarterly improvement trend following the recovered sales capacity on the back of the sluggish results affected by the data compromise at the beginning of the year. In 2015, we will do our best to continue the recovery trend to enhance competitive edge on our products and services.
Next is the other operating income? Other operating income for fiscal year 2014 amounted to KRW601.7 billion in net loss widening the loss by KRW53.7 billion year-on-year.
More specifically the net gains on securities and derivatives had increased loss due to one off factors such as the CVA adjustment to reflect the FX volatility. In the meantime, the sales gain on loans turned to black, backed by the reduced loss amount and some realized gain in the NPL sales process from KRW65.4 billion loss in 2013 to KRW19.9 billion in gain.
Other operating income for Q4 posted KRW310 billion in loss expanding the loss by KRW213.7 billion quarter-on-quarter. It was mainly due to the impairment loss on equity holdings and sales loss on loans.
As for impairment losses, POSCO shares had a KRW32.4 billion impact and Taihan Electric Wire KRW68.3 billion. Also the year end asset quality management measures led to a KRW24.6 billion sales loss on NPL.
I will now discuss the G&A PCO and non-operating income. Annual G&A recorded quarterly at KRW4,009.7 trillion, up only 0.7% year over year thanks to companywide cost saving efforts.
Q4 G&A increased 6.6% quarter -over-quarter but considering seasonality factor such as higher marketing costs with the year-end sales activity expansion, costs are well under control. If you look at the upper right graph, 2014 Group's cost income ratio recorded 55.7% slightly inching up on muted top line year-on-year.
Going forward we will improve on the rigidity of the structure and enhance profitability, thereby improving the CIR. Annual provision for credit losses came in at KRW1,228 trillion, down 14.9% year-on-year and 10.1% Q over Q keeping to a stable level.
The graphs on the bottom line show PCL against the group total asset at 0.41% with the trend stabilizing downward since 2010. In 2015 we will enhance assessment capabilities per the industry and strengthen pre and post management of lending in order to improve on asset quality indicators.
2014 non-operating income recorded KRW57.7 billion of net loss, loss which has been narrowed compared to 2013 when there was a sizable equity method loss related to BCC. Next page please.
Next is on the Group's financial position. As of December 2014 total assets stands at KRW308.3 trillion, up 5.5% compared to the previous year.
It is mostly driven by inclusion of KB Capital as a subsidiary last March and an increase in the bank loan receivables, whose total assets as the end of December recorded KRW405.4 trillion, up 6.7% year to date. Please refer to the right hand graph on the assets sizes and AUMs for each of the subsidiaries.
Next is on the group's asset and funding status. First bank loan in won as of end of December was KRW196.2 trillion, up 4.6% year to date.
By sector underpinned by mortgages, household loans sustained its growth growing around 7.8% per annum. For cooperate driven by growth in SOHO loans there was a per annum growth of 0.7%.
In 2015 we will enhance our competitiveness and household lending and SOHO loans and at the same time beef up competitive edge in cooperate lending in order to achieve balanced growth driving around 6% per annum lending growth. As of end of December bank deposit in won stands at KRW203 trillion rising 4.4% year to date.
By segment our effects to attract settlement accounts is bearing fruit with demand deposit increasing 10.8% per annum basis. Next is on card assets and funding status.
Due to the data breach incident beginning of the year, credit receivable balance recorded KRW14.5 trillion down 0.7% year to date, a decline in the usage volumes. But thanks to normalization of operations since the mid-2014 followed by growth and payment volume and card loans, against end of September there was a 3.6% rise.
Outstanding cash advanced declined 13.3% year to date driven by making a more stringent qualification for repayment and installment, implemented to strengthen risk management which led to a decline in the cash advance volume. In terms of card funding, on a year to date basis it is more or less the same but decline in AVS balance is attributable to lower inflow of handset installment receivable.
Next is on the Group's asset quality. First is on the asset quality of KB bank.
NPL ratio and NPL coverage ratio on sizable sale and write-off of NPL to meet the year-end NPL guidelines improved by a large margin. Through KRW1,169.8 trillion of NPL write-off and sales in Q4, NPL ratio as of end of December improved by 45 basis points compared to end of September, recording 1.26%.
NPL coverage ratio also greatly improve recording 138%. Graph on the bottom will show December ended delinquency ratio at 0.51% declining 37 basis points, compared to end of September and then on year-on-year basis fell 26 basis points as well.
Next is on the asset quality of KB Kookmin Card. December end recorded NPL ratio was 1.42%, an improvement of 12 basis points compared to the end of September.
NPL coverage ratio recorded 356% as of end of December, improving 20 percentage points compared to the end of the last year. December end delinquency came in at 1.62%, improving 24 basis points compared to end of September.
New delinquency formation has come down with migration to 30 day delinquent and 90 day delinquent is also trending down with overall credit card soundness expressing a stable trend. Next is on loan loss provision and credit cost.
Bank 2014 annual LLP loan loss provision is KRW874.3 billion, falling 17.7% year-over-year, Q4 LLP is KRW190.3 billion also declining 7.7% quarter-over- quarter. By sector, household recorded a similar level of LLP as the previous quarter.
And for the corporate, thanks to higher recovery of bad loans from certain construction companies, corporate LLP declined 20.1% quarter-over- quarter. Annual credit card loan loss provision is KRW279.2 billion declining 19.6% year-on-year with Q4 LLP recording KRW66.2 billion, down 12.2% on a quarter-over- quarter basis.
Bottom left graph shows credit cost improving against 2013 by 13 basis points, recording 0.53%. On a quarter-over- quarter basis there was a 5 basis point improvement to 0.46%, sustaining a trend of improvement.
On the last page, Page 19 we have the main business indicators for the subsidiaries. So please refer to them at your leisure.
This has been the business results of KB Financial Group for 2014. Thank you very much for your attention.
Operator
That was an earnings presentation by our CFO. We will now begin the Q&A session.
[Operator Instructions] We will take the question from Dongbu Securities, Mr. Byung-Gun Lee.
Please go ahead sir.
Byung-Gun Lee
I have the following two questions. First of all, it's a very simple question really.
It has to do with your dividend policy. Your common equity ratio compared to your peers is relatively high, and compared to another bank, which announced its earnings yesterday which has lower common equity ratio, you have actually announced a similar dividend ratio.
So I was wondering, do you have plans to raise the dividend ratio or payout ratio going forward? Number two, when it comes to conforming loans and NIM I have a question.
Relatively speaking, because you have a large market share in the home equity loans, I guess your share of conforming loans for securitization is higher. But it seems that you have sold about 40% of the conforming loans last quarter, and of course I understand that you had to meet the FSS guideline of the fixed rate loans.
But still compared to your peers in the industry, your share of the fixed rate loans has been higher and of course your home equity loan has been sold quite a bit as well. So I was wondering, going forward into the rest of 2015 would you be actively utilizing the conforming loans for securitization as well?
And relatively, your margin has been squeezing quite a bit. So what is the reason for the NIM drop up to Q4 last year and what -- how do you foresee the future outlook?
Jong-Hee Yang
Let me first answer your questions in dividend area. Let me answer in the following three ways.
First of all, earnings has to precede to give out higher dividend and of course we have to think about payout ratio and we have to think about the 15.5% BIS ratio that we have to meet by next year. You mentioned that our peer and our dividend ratio was about the same.
Perhaps it is because of the Basel III requirement that we actually meet until 2019. Our position is that we will do our best to maximize dividend payout for our shareholders.
So rather than simply looking at the payout ratio itself, I think that we should more be focus on the earnings enhancement, so that ultimately we could payout more dividend per share. And when it comes to confirming loans for securitization and also your question about NIM, let me answer those questions.
On KB Kookmin Bank typically had always had a higher portion of the confirming loans, and also the FSS guideline of fixed rate loans has been raised last year from 17% to 20%. So because of that we have to meet that guideline and we sold more fixed rate loans.
And this year we were given another guideline of 25% for 2015. It would definitely be a burden for us but this year yes we have some expectations about another policy rate drop in the first quarter.
So we have created a taskforce team to review outlook. So last year we grew the loan assets basically on the fixed rate products.
So it was a little lopsided. So this year we will move away from that and we will seek more balance growth.
And also when it comes to the growth of the fixed rate loans, we will not be only focused on the Q4 period, but we will even it out throughout the year. So we are looking at various measures to deal with this issue.
So as we enter into 2015 we believe that the overall NIM is expected to be around 2.49%. So this year if we can we will do our best to maintain the NIM at the previous level.
Operator
We will take the next question from Samsung Asset Management, Kyu Song Shim. Please go ahead.
Kyu Song Shim
My question is regarding business plans for 2015, as much as you can share, would appreciate that. And you've mentioned the NIM.
What would be the some of the measures where you could further defend a further squeeze on your NIM?
Jong-Hee Yang
The overall direction in terms of business plan for 2015 is that in terms of the asset growth, last year it was mostly growth that was driven -- was driven by lopsided growth. But this year we would go towards more balanced growth.
So in terms of the household unsecured loan and starting last year we have set up a TF team to come up with different measures. And also if you look at SOHO loans, now we are also going to focus on small amount unsecured loans.
So with the inauguration of the new CEO, we are developing many different counter measures. Especially also for the SME sector.
We see that there are certain stabilization that is taking place. So internally according to our profit analysis, we are almost meeting the BEP level.
So when it comes to the underwriting models, we are in the process of making this model more sophisticated. So in terms of the household unsecured loans and SOHO and SME focus, rather than the home equity or the home equity loans, we're going to shift the focus.
And also because of the data reach problem last year, in terms of our sales operation, it was muted. So in terms of the demand deposit, we were able to gain as much as we had hoped or expected.
Especially we had been – there was – it was subdued in terms of our attracting credit card users and we weren’t able to provide adequate -- ample amount of asset management services. So for this year we're going to be very active in soliciting credit card users and also attract settlement accounts so that we can increase the demand deposit volume.
And in this process we want to regain the trust from our customer base so that we can also further expand on our asset management fees and commissions. And also on the non-banking side, there were some strategies like the M&A.
But the organic growth had been lackluster but from this year we are also going to refocus on the importance of strengthening organic growth and we are also reviewing possibility of expanding on the fees and commission. And in terms of the margin.
So I'd say this year if there is going to be another rate cut, just like what's the case in August and October of last year, and if there is an additional cut in the first quarter of this year, this will have certain impact. We have measures in place to respond to such movements and we currently have a taskforce team in place.
So the asset growth and also in regards to margin -- in the aspect of the funding, what would be the most optimal timing to, as we go about funding or aspects that are being discussed underneath that tax force team. And once that gets finalized we will communicate with you again.
Operator
Next question from UBS Securities, Junho Lee. Please go ahead.
Junho Lee
I have two simple questions. First of all, it's just as number question.
Looking at your cash book between Q1-Q3, your net profit number has been changed I think that your corporate tax amount has been changed. So does it have to do with the reversal of the corporate tax because of the recent winning of lawsuit and how will it impact your accounting going forward?
Secondly, what is the progress on your LIG acquisition?
Jong-Hee Yang
Let me first address your question regarding LIG acquisition. There are two things to consider.
First, in the United States, we've to meet the requirement to be a financial holding company. So we have to seek that approval process.
Secondly we've to further finalize the price negotiation with LIG. And because this is a two party negotiation I cannot elaborate too much.
Now, when it comes to FSC approval, we have sent an executive to FARB in the United States and the Korean government is quite supportive. So that's going to be a matter time.
We will be obtaining the approval, I'm sure. Typically it takes about three months to obtain the approval in the United States.
It will just take some time. When it comes to some fact related number question we've got in the credit card related litigation, in terms of the cash flow basis, KRW466.6 billion will be reversed or refunded.
Accounting wise at FSS, we have given the following guidelines. Now main tax will be recognized as DTA and will be reflected as surplus amount immediately but remaining $199 billion will be reflected in the P&L in the rest of the year.
Kyu Sul Choi
We don't have any more questions that are coming in. Thank you very much for all your questions.
So, ladies and gentlemen with that we will now conclude the earnings conference of KB Financial Group for fiscal year 2014. The presentation and VOD of this conference will be available for access at any time on the IR Web page of KBFG.
Also if you have more questions please do contact our IR department. We will do our best to address your questions.
Once again, thank you very much for participating today. Thank you.