Apr 22, 2016
Executives
Peter Kwon - Head, IR Huh Jungsoo - CFO
Analysts
Ku Yong - Daewoo Securities Lee Chulho - Korea Investment Securities Kim Jae Woo - Samsung Securities Kim Jinsang - HMC Securities Byung Gun Lee - Dongbu Securities
Peter Kwon
Greetings, my name is Peter Kwon, the Head of IR at KB Financial Group. We will now begin the KBFG 2016 Q1 Earnings Release Presentation.
Thank you very much for joining in today. The access to the conference is being provided via the Internet and the conference call and being webcasted 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, Huh Jungsoo and executives from the Group.
The conference will consists of earnings presentation by our CFO, Huh Jungsoo on the 2016 Q1 earnings results followed by a Q&A session at which time you may call in for questions. Let me now present our CFO, Huh Jungsoo for 2016 Q1 earnings presentation.
Huh Jungsoo
Greetings, I am Huh Jungsoo, the new CFO of KB Financial Group. Before going over the business performance, I would briefly like to look at the overall business overview in Q1.
First of all, following KBFG's integration of KB Insurance as a subsidiary in the previous year, we signed the SPA or share purchase agreement for the acquisition of Hyundai Securities. KBFG now has a complete balanced portfolio as a comprehensive financial group.
We will do our best to expand synergy through cooperation between subsidiaries in insurance and securities and [Audio Gap] our diversified profit base so that we can push up our Group's profitability with stability. In business performance, the quarterly NIM which was on a long downward track showed a rebound.
Asset quality stably continued and credit costs went down. Overall sound earnings flow continued.
Now I will walk you through Q1 business presentation results, focusing on the main highlights. Please go to Page 2.
As you may know through the media, KBFG on April 12, 2016 signed a SPA to acquire 22.56% stake of Hyundai Securities. After finalizing the final acquisition price through thorough due diligence and after the supervisory authority's approval is given, we expect to have the deal closing in late May and have Hyundai Securities integrated as our subsidiary.
Hyundai Securities is number five in the industry currently based on shareholders equity and when it merges with KB Investment Securities, number three large scale securities firm will be created. We expect a higher level of synergy through cooperation between subsidiaries including cross-selling in hybrid branches.
Now, the highlights of Q1, first, sound loan growth continued. Regardless of the seasonality which leads to a deceleration of loan growth at the beginning of the year, a solid growth trend was maintained in Q1.
Corporate loans also grew due to steady demand of the SOHO loans. In Q1, overall won denominated loans grew 1.7%.
In addition, Group's Q1 NIM recorded 1.84% and improved 3 basis points Q-o-Q. This was a result of the portfolio improvement efforts after the policy rate cut in 2015 including the loan re-pricing and low cost deposit growth for NIM improvement.
On the other hand, there was a positive trend in maintaining provisioning costs. Provisioning costs in Q1 posted KRW119 billion and showed a significant improvement.
There were two one-offs behind the provisioning. With the change in the LGD calculation method, which is used to calculate provisioning there was KRW170 billion of write-back.
On the other hand there was approximately KRW130 billion of additional provisioning to be prepared for any deterioration of large corporations in shipbuilding and marine transport sector. From Page 3, I will touch upon the Group's loan growth and profitability.
Bank loans in won posted KRW210.8 trillion as of March end and grew 1.7% YTD. Taking into consideration that this year's growth goal is around 5%, it seems that an appropriate level of growth was accomplished.
Looking at the breakdown, household loans usually show low results with seasonality, but there was continues demand leading to 1.3% growth YTD. Corporate loan growth is pursuing SOHO centered loan growth to improve profitability.
Also, with the continued loan demand it grew 2.2% YTD, next, the Group's profitability overview. Net interest income in Q1 posted KRW1,506.3 billion and declined 2% Y-o-Y and 3.8% Q-o-Q.
Interest income declined despite the NIM improvement in the previous quarter, this was caused by one less working day or business day compared to the previous quarter and also because of the interest expense increase related to the principal guarantee trust following the market interest rate cut, for your reference, the increase in interest expenses for the principal guarantee trust was offset by the securities disposition gains increase, so its impact to the overall operating income was very limited. In Q1, the net fee income came to KRW368.2 billion, falling 3.6% year-over-year this was mainly due to the decline in credit card fee income impacted by the cut in merchant fees.
On the other hand on a Q-o-Q basis, trust, Bancassurance, fund sales commission grew slightly, so there was an improvement of 1.9%. In Q1 other operating income posted losses of KRW33.8 billion resulting in an improvement Q-o-Q and year-over-year, aside from the gains on disposal of securities related to capital preserve trust, the profitability is at recurring levels without any significant one-off items.
In Q1, the G&A posted KRW1,053.8 billion declining 2.2% and 2.4% respectively on a Y-o-Y and a Q-o-Q basis. Especially in Q1 taking into account that we have recognized KRW62 billion in internal employee benefit fund, we can say that the G&A is being controlled at a healthy level.
In Q1 provision for credit losses reached KRW119 billion falling significantly Y-o-Y and Q-o-Q. As has been noted, in Q1 the LGD loss given before, the calculation method has been changed so that KRW170 billion of provisions has been written back.
And in shipbuilding and shipping sector, taking into account the deteriorating business environment, a number of large companies have had their credit rating downgraded. And in relation to our exposure to a few such companies, we have set aside provisioning of KRW130 billion.
Even when such one-off items are considered, the credit cost is maintained at a low level and the NPL ratios as well as the delinquency rate are all quite stable allowing us to continue the present trend of stabilizing asset quality. In Q1 the non-operating income posted KRW51.9 billion, down 74.8% Y-o-Y, 38.2% Q-o-Q.
But this is due to the removal of large one-off gains such as the corporate tax refund from Q1 of last year of KRW180.3 billion and recognition of KRW165.3 billion in negative goodwill of KB Insurance Co. As such, backed by cost reduction mostly in G&A and provisions for credit losses in Q1, the Group's net income attributable to controlling interests posted KRW545 billion.
Due to the large one-off gains last year, on a Y-o-Y basis, it's down 9.9% and on a Q-o-Q basis it is up 57%. Next on the Page 4, we will go over the main financial highlights.
The ROE and ROA of the Group in Q1 of 2016 posted 7.57% and 0.67% respectively and on a Q-o-Q basis there has been improvement of 270 and 24 basis points respectively. As I explained previously, this was mainly due to the improved cost control efforts in G&A and provisions for credit losses.
The Group's NIM in Q1 posted 1.84%, up 3 basis point Q-o-Q. If we look at each individual factor contributing to an improved NIM, first last year after the benchmark rate cut, re-pricing of our debt was undertaken contributing plus 1 basis point and owing to the growth in low cost deposits, the improvement in the portfolio also contributed plus 2 basis points.
If one takes a look at the loan/loss reserve ratio at the bottom left of the slide, the ratio stands at 0.18% in Q1 showing a significant improvement. Going forward, owing to the economic slowdown, restructuring undertaken for insolvent companies in some sectors may lead to an increase in credit costs.
However, as we have done so last quarter, in Q1 as well we have been preemptively engaged in setting aside additional provisioning based on a conservative point of view; therefore we do not expect any major impact from such an occurrence. On your bottom right, the Group's and the bank's estimated BIS ratio at the end of the month of March comes to 15.28% and 15.81% respectively.
In particular, the CET1 ratio of both the Group and the bank which is an object of much interest from the market posted 13.53% and 13.80% maintaining the highest level in the financial sector. Starting from the next page you will find items that overlap with what I have gone over so far so I will not go into further explanations.
This was the earnings presentation of the KB Financial Group for Q1 of 2016. Thank you very much for your attention.
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