KB Financial Group Inc. Q3 FY2023 Earnings Call

Greetings. I am Peter Kweon, the Head of IR at KBFG. We will now begin the 2023 Q3 Business Results Presentation. I would like to express my deepest gratitude to everyone for participating today. We have here with us our Group CFO and SEVP Scott YH Seo, as well as other members from our Group management. We will first hear the 2023 Q3 major financial highlights from CFO and SEVP Scott YH Seo and then have a Q&A session. I would like to invite our SEVP to deliver our 2023 Q3 earnings results.

Good afternoon. I am Scott YH Seo, CFO of KB Financial Group. Thank you for joining KBFG's third quarter 2023 earnings presentation. Allow me to first walk through key performance metrics as of cumulative Q3 2023 before going into the details of business performance. KBFG's third quarter ‘23 cumulative net profit was KRW4,370.4 billion, up 8.2% year-over-year. Despite difficult internal and external operational backdrop supported by balanced banking and non-banking subsidiary growth and widening of non-interest revenue and G&A control group's earnings capacity is currently well sustained. Just to note, IFRS 17 has been retroactively applied to our 2022 earnings. Also, cumulative ROE this year was 11.7%, sustaining improvement following last year. Annualized EPS, earnings per share reported approximately KRW14,691, up 8.3% year-over-year with the impact of treasury share buyback and cancellation coming through. In Q3, net profit reported KRW1,373.7 billion, sound interest income growth and continuing cost savings efforts drove earnings in line with market consensus and even based on retroactive treatment of IFRS 17, there was increase in earnings year-over-year. However, due to greater financial market volatilities and sizable reduction in other operating income, as well as one-off losses arising from insurance subsidiaries’ use of the actuarial assumption guideline of the supervisors, net profit was down 8.4% Q-on-Q. Next, credit cost on a cumulative basis for the Group in Q3 was 52 basis points, reporting a wide year-over-year expansion. This is because on top of general provisioning during the first quarter, there was no overlay provisioning during Q2 following changes in the expected loss model, which amounted to KRW490 billion of large-scale provisioning in the first half of the year, which was a continuation of conservative and preemptive provisioning stance against economic uncertainties at the Group level. We believe such provisioning policy will eventually have a positive impact on mitigating possible economic shock in the future and sustaining a stable net profit generation at the Group level. Also, in light of internal/external business backdrop, level of current provisioning and possibility of needing additional provisioning in the fourth quarter, full-year '23 group credit cost is expected to not exceed 50 basis points. Group's NPL ratio as of end of September '23 was 0.48%, up 4 basis points versus end of June. This is in the context of rising delinquency rate on top of which there was rise in NPLs from affiliate lending providers, real estate trust and savings bank. Nonetheless, NPL coverage ratio for the group and the bank as of end of September were 180% and 228%, respectively, attesting to ample loss absorption capacity when and if there is to be credit risk deterioration. Lastly, today BOD of KBFG decided to payout quarterly dividend of KRW510 per share. In terms of the update on share buyback and cancellation which was announced last July, we have been buying our shares since August under the trust arrangement and will immediately cancel the shares once the purchase is complete. Next, I will walk through the details of the Q3 '23 business results. Group's net interest income for Q3 '23 was KRW3,087.9 billion, driven by loan growth and interest income widened, posting a Q-on-Q rise of 3.8%. Net fee and commission income for Q3 came in at KRW901.4 billion, down 5.3% Q-on-Q. Even though increase in stock trading volume drove up broker fees, softer investment banking income and decline in trust fees had a dampening effect. Nevertheless, thanks to efforts put in to diversify Group's business portfolio, net fees and commission income this year had been around KRW900 billion level on a quarterly basis which goes to show enhanced capacity of the Group in generating its fee income. Next is other operating profit, which includes income from prop trading and insurance operations. In Q3, there was other operating loss of KRW23.1 billion on the back of higher market rate and rising $1 exchange rate, which led to somewhat of a muted performance of securities, derivatives and FX currency operations. For the insurance business, with the application of supervisory guideline on actuarial assumption, including changes in loss ratio for medical indemnity product for the P&C insurance, there was a one-off loss of around KRW71 billion. However, excluding such one-off loss this quarter, net profit of KB Insurance in Q3 is above KRW200 billion, which is quite steady, even considering second-half seasonality seen in the nonlife insurance industry, while the company's market dominance is widening, pivoting on long-term protection insurance. Next, I would like to cover G&A expenses. Q3 G&A expenses posted KRW1,564.7 billion and through continuous cost rationalization efforts, it went down slightly Q-o-Q. On the other hand, Q3 cumulative group CIR posted 37.4% and nominal CIR and recurring CIR, excluding non-recurring items, all greatly improved Y-o-Y. Group CIR is showing a market downward trend, thanks to solid top line growth and results from continuous cost efficiency efforts. Our goal is to achieve a mid to long-term annual CIR target of early 40% range, and we forecast that 2023 full-year CIR will be managed within our target range. Lastly, group provision for credit losses. Q3 provision for credit losses posted KRW448.6 billion and decreased greatly Q-o-Q, due to the additional provisioning underlying effect in Q2. Since we have been continuing a conservative provisioning policy until now and have been securing a buffer preparing for external internal uncertainties, we find that there is a limited possibility for the Group's credit cost to rapidly increase going forward. There have been recent concerns regarding financial company's asset quality. And in order to prepare for these possibilities preemptively, we will do our best to manage asset quality by strengthening management of potential non-viable exposure and by maintaining our conservative risk management stance. From the next page, I'll cover our major financial highlights. First, looking at the bank loans in won growth graph, bank loans in won as of end September 2023 posted KRW336 trillion, and increased 1.8%, compared to late June and 2.4% YTD. Corporate loans posted KRW172 trillion, and increased around KRW5 trillion, compared to late June and is leading loan growth. This was due to the deterioration in the corporate bond insurance market and with the increase of overall loan demand, large corporate loans increased 8.9%, compared to end June and SME loans increased 1.6%, compared to end June. Household loans posted KRW164 trillion and with increased demand following the real estate recovery trend centering on mortgage loans and Jeonse loans, it has increased by 0.6% compared to late June and reduced negative growth. Amidst of spreading internal and external uncertainties in order to focus on qualitative growth based on high-quality assets, we have been continuing rebalancing for potentially non-viable loans and maintaining a conservative loan policy. Next is net interest margin NIM. 2023 Q3 Group and Bank NIM posted 2.09% and 1.84%, each, respectively, and went down 1 bp Q-o-Q. This was mostly due to the increase of funding burden centering on time deposits and marketable deposits according to the loan growth recovery amid the decreasing trend of the loan asset repricing effect, which had been leading the NIM improvement trend. On the other hand, regarding 2023, Q4 NIM, despite the continuous downward pressure, including continuing funding burden and contraction in the net interest spread we expected to maintain a level not greatly different from the Q3 level. Next, let's go to the next page. I would like to elaborate on the Group's capital ratio on the upper right-hand side. Estimated group BIS ratio as of late September posted 16.76% and CET1 ratio posted 13.70%, respectively. With corporate loan focused growth, risk-weighted assets relatively greatly increased, weakening of KRW32 per $1 in the quarter led to a negative effect on RWA management, which all caused a slight decline in BIS and CET1 ratio compared to late June. However, we are still maintaining a higher CET1 ratio level among the bank financial holdings companies. From the next page, we have details regarding the performance I have been covering, so please refer to if needed. With this, I will conclude KBFG's 2023 Q3 business performance report. Thank you for listening.

Thank you very much for the presentation. We would now like to start the Q&A session. For those joining us online, please refer to the contact information on the last page of the presentation. We haven’t received any questions yet, so please bear with us for a moment. Our first question will come from Yuanta Securities, Jeong Tae Joon. Mr. Jeong Tae Joon, you can go ahead with your question. However, we cannot hear you at the moment. Please hold on for a moment. It seems we are encountering some technical issues. Mr. Jeong, can you hear us? It appears that the connection is very poor right now, so please hang tight. Yes, please proceed. We are currently experiencing technical difficulties. I understand that there are problems with both outgoing and incoming sounds. Thank you for your patience.

We are currently experiencing some technical difficulties. There are issues with both the outgoing and incoming sounds. Please bear with us for a moment.

Thank you for your question regarding our dividend payout policy. This is the CFO speaking. You asked about the potential for a change in our dividend strategy moving forward. I appreciate your inquiry. As you know, we have made the necessary disclosures based on our business plan at the beginning of this year, and we have been in ongoing communication with our shareholders, investors, and the market. Our approach remains progressive, and we intend to maintain a progressive dividend payout. Our CET1 ratio, as indicated by our Q1 results, is above 13.7%, which is encouraging. Therefore, there is no reason for us to alter our dividend strategy at this time. We have repeatedly highlighted this point, and our price-to-book ratio is around 0.4x. Our priority is to improve the company’s valuation, and we will continue to focus on repurchasing our treasury shares. Thank you.

We will move on to the next question from Hanwha Securities, Kim Do-ha. Please go ahead.

I understand there were no reasons to make changes. However, concerning the stress cyclical buffer and the level of the best estimate ratio liability, can there be some adjustments made?

I am Oh Byung Joo, the Managing Director of KBFG. Thank you for your question. I will address the changes in the actuarial guidelines set by the supervisors. During our Q2 earnings presentation, we discussed medical indemnities and mentioned that there is a risk of changes in these guidelines, potentially leading to a modified retroactive approach. However, KB Insurance has been applying a more conservative guideline than the regulatory one. To ensure a fair comparison, we have decided to adopt a progressive method, which has been reflected in our Q3 numbers. As noted by the CFO of the financial holding company, we experienced a one-off loss of about KRW71 billion due to the CSM buffer and a decline in VIF. This is a one-off situation. I plan to share the impact on the best estimate liability offline. I can assure you that within the business plan established by KB Insurance, we aligned our accounts with the supervisory authorities' guidance and are on track to meet our previous targets. Regarding the stress test and buffer capital, the methodology and timing of its introduction have not yet been confirmed, but discussions are ongoing with the DCP entities. For the DCP entities, including countercyclical buffers, we aim for a CET1 of 9%. With an additional stress capital overlay, this may change, but we still have about a 400 basis point buffer. We believe our CET1 ratio will remain appropriate even when considering the countercyclical buffer. We will provide more detailed information about the timing of methodologies for the stressed buffer application in the future.

Thank you very much for the answer. We have no questions in the queue, so we will wait. We apologize that we had some technical issues leading to some communication issues. So we apologize for those difficulties. We will wait a little longer for any other questions to join us in the queue. We will take the next question from JPMorgan. We have Cho Jihyun on the line.

Thank you very much for the opportunity. Can you hear me?

Yes.

In the beginning, I think we faced some technical issues, so I may not have heard correctly. My question is about international real estate investments and assets. People are likely curious about your global exposure. Can you discuss the varying conditions across different regions, industries, and lagging indicators? What is the current state, and are there any areas of concern for evaluation or other regions that should be noted? Additionally, regarding government policies, I believe there are efforts to adjust the dividend policy to provide advance notice for investors. Can you update us on the regulations surrounding dividends? Going forward, will we be able to confirm the dividend for future investors?

Thank you for your questions. I would like to address the overseas real estate investment of KRW 5.9 trillion, primarily in Europe, North America, and other regions, focusing on office and multifamily residential properties, making up approximately 60% of our investments. Two-thirds of these assets are owned by the Bank. The characteristics of the Bank include a secure senior debt position, with over 70% of our capital in that category, providing us with significant loss absorption capability. We understand there may be some concerns, but we are actively managing different TFDs for our subsidiaries and assessing the situation in detail, including exit plans for various properties. As for vacancy rates and stress testing, our current evaluation indicates no significant issues, with any problematic assets representing 1% or less. We are thoroughly reviewing our risk and evaluation processes. Regarding KB's overseas commercial real estate losses, we anticipate minimal risk. I would also like to touch on the Korean government's efforts to improve the dividend policy, aiming to make changes that would allow dividends to be confirmed in advance. For KB's 2023 year-end dividend settlements effective from 2024, we are planning to incorporate these changes. We revised our AOI in March 2023, but for quarterly dividends, amendments to the Capital Market Act are required. If the Act is revised by the end of this year, we expect to make another AOI revision in March next year, allowing us to align with the enhanced government dividend policy beginning in Q1 of next year. Thank you.

Next question, please, from HSBC, Won Jaewoong. Please go ahead. It's currently, in the English channel it is not receiving any feed. So please bear with us, we're having technical issues. The English channel is not receiving any feed at this point. Once again, apologies the English feed is not being received by the interpreters, so we are unable to interpret at this point.

Yes, I'm the CFO. I will respond to both of the questions. And then in terms of the maintenance margin I provide you with my answer. I will then hand over to the bank CFO. First question regarding the dividend policy, as I previously mentioned. And I think because the connection was that you were unable to hear my previous answer. The financial holding company will continue to adopt a progressive dividend payout policy. And as I mentioned before, we will continuously increase the absolute amount of the dividend paid out. Now there will be cash dividend payout as well as share buyback. We've repeated this on numerous occasions that in terms of the EPS, the cash amount that is being paid out, we have no intention whatsoever to reduce that size. We will actually overlay on top of the cash dividend payout and conduct share buyback and cancellation. As I mentioned before, price to book is 0.4 times for our company. So from the shareholders' perspective, share cancellation is a way for the shareholders to benefit, especially compared to increasing the cash dividend because of the capital gains tax, we believe that share cancellation is a better policy or a more positive policy and further improving the corporate value. Second question was on NIM. The maintenance margin. As mentioned during the presentation. Just looking at Q4 NIM, the maintenance margin we are in the context of many difficulties. And in Q3, from a big picture perspective and also if you look at the NIM in Q3 and Q4, I can tell you that the NIM will be more or less flat, not very different. I will now turn it over to our bank CFO for further elaboration.

As mentioned during the opening presentation, in Q3, the net interest margin decreased by 1 basis point compared to the previous quarter. Looking ahead, given the high interest rates and asset growth, we anticipate that funding costs will continue to rise. Currently, the loan-to-deposit ratio is declining, which is affecting the spread. Therefore, we expect the net interest margin to decrease further. However, since we believe the high interest rate environment will persist for now, we do not expect this decline to be substantial. I anticipate a decrease of about 1 basis point in Q4. With the bank's net interest margin standing at 1.83% in Q3, we expect it to remain at that level in Q4. For 2024, on a year-over-year basis, we expect a 1 basis point decrease each quarter, leading to a low single-digit net interest margin by the time we reach 2024.

Thank you very much for your question. It seems that there are no questions in the queue, we will hold. In the beginning of the conference call, we had some technical difficulties so we apologize for the difficulties. And if you have any further questions, please contact our IR team, and we will do our best to answer your questions. We will hold. And if we have no other questions coming in the queue, we will conclude today's business results presentation. We will take one more question from Goldman Sachs, Park Sinyoung.

Yes, I'm Park Sinyoung from Goldman Sachs. I have two questions. My first question is about your shareholder return policy, specifically regarding your treasury share buyback structure. Are you considering making share buybacks a routine event, such as quarterly buybacks? Looking ahead, is that a possibility? Secondly, in relation to provisioning from the previous quarter, you mentioned annual guidance, and since we are nearing the end of the year, can you provide any updates regarding Loss Given Default that might impact your previously mentioned guidance?

Regarding the dividend policy, I can address that. As for the additional provisioning for Q4, I will discuss it from a broader perspective before our Chief Risk Officer provides further details. Concerning the dividend policy, we have made our plans public. We are currently executing as outlined and have been in communication with our shareholders about our benchmark being the shareholder return policies of several major U.S. banks, which we believe is still the best approach. We aim to adapt and align our policies accordingly. Earlier this year, we announced our treasury share buyback and cancellation plans, which we reiterated in the previous quarter, and we continue to maintain quarterly dividend payouts. We are committed to fulfilling our obligations, and that remains our intention moving forward. Our goal is to evolve into a more shareholder-friendly dividend policy. Additionally, as mentioned in Q4, we have included further provisioning in our plans, which our group CRO can elaborate on.

I think your question was about Q4. Based on the future economic forecast, the collateral Loss Given Default you inquired about for the forward-looking economic forecast concerning the methodology for Loss Given Default doesn't have finalized details yet. Therefore, we can't provide specific figures at this time. However, it seems that in Q4, we did not adjust our provisioning guidance that we had previously established. Some numbers have already been reflected to a certain extent. Regarding the collateral Loss Given Default, we believe that even with potential changes, there should not be a significant deviation from the guidance we provided earlier.

Thank you. We do not have any further questions in the queue, but just give us one moment. Yes, I think we were able to entertain an ample number of questions. So with no further questions, we would like to close today's earnings presentation. Thank you very much.