KB Financial Group Inc. Q2 FY2025 Earnings Call

Greetings. I am Peter Kwon, Head of the KBFG IR division. We will now begin the 2025 first half business results presentation. Thank you very much for participating in today's earnings release. We have here with us executives from the group, including CFO, Sang-Rok Na; and other executives from the group. First, our Group CFO will cover 2025 first half major performance highlights. After that, we will have a Q&A session. Like in the previous quarter, please note that after our real-time Q&A session, we have set aside additional time for the management team to answer questions that were previously submitted by our shareholders. I will now invite our group CFO to walk us through the first half business results of 2025.

Good afternoon. I am Sang-Rok Na, CFO of KB Financial Group. Thank you all for joining the first half 2025 earnings release presentation. Today, I will walk through key results of the first half and update you on the shareholder value and return, then move on to the details of our earnings. First, Page 1. Q2 net profit reported KRW 1,738.4 billion with first half cumulative profit reporting KRW 3,435.7 billion and ROE of 13.03%. Increase in RWA for the first half on a cumulative basis was managed at around 2.4%, whilst CET1 ratio as of June end came in at 13.74%. All in all, we maintained the balance between resilient earnings power and stable capital management. And under KB's shareholders' return framework, we will be using what is above CET1 ratio of 13.5%, which is KRW 850 billion in total as funds for shareholder return in the second half. When accounting for KRW 300 billion of proactive buyback done in the second quarter, the second round of shareholder return upcoming in the second half will amount to around KRW 1.150 trillion. Out of the total annual cash dividend of KRW 1.34 trillion for 2025, today's BOD resolution decided on KRW 335 billion of equally portioned dividend for the second quarter and DPS of KRW 920. Also, we decided to first buy back and cancel KRW 660 billion of treasury shares within the scope of distributable profit. Out of KRW 850 billion, the KRW 190 billion, which is excess capital, would be used as funds for shareholder return at book closing of 2025 accounts following the BOD resolution. And this amount will be classified and attributed to shareholder return for 2025. It's inevitable that portions of the second round of shareholder return for 2025 will be first paid in Q2, while the rest will be returned by early next year, which is due to the progressive expansion of shareholder return at KBFG versus the past practices as we exceeded the profit available for dividend payout. I want to reiterate that KB's firm commitment to shareholder return and its promise stays unchanged. In particular, total shareholder return for 2025 is KRW 3.010 trillion, which is a significant increase year-over-year. And although TSR may slightly fluctuate depending on the size of annual net income, we expect record high TSR for the year. Also, we plan to have interim dividend payout from the subsidiaries in the second half to secure ample amount of distributable income for the upcoming year. Next is Page 2. We shared our shareholder return plan for both first half and second half of 2025 with the market for the benefit of transparency and are faithfully implementing the plan. In the second half, we plan to focus on 3 key directions in terms of capital discipline. First, promise to the market. We know the gravity of this commitment and will hence implement the announced shareholder return framework with consistency. Based on our execution capabilities, we will further solidify trust from the market. Second, we will manage risk-weighted assets with greater precision. RWA growth will be controlled at an appropriate level, but rather than just managing the rate of RWA growth, we will change the fundamentals to one that guarantees our bottom line. Third, under such capital discipline to ensure that the shareholder return expansion is not a one-off event, we will continue to balance between ROE and capital ratio as done so in the first half of the year. Now moving on to KBFG's business performance. Group's net profit for Q2 was KRW 1,738.4 billion. And on a first half basis, it was up 23.8% year-over-year, reporting KRW 3,435.7 billion. Such result was driven by higher non-interest income and the recovery from non-operating profit, which drove the group's net profit. Non-interest income was up 10.9% year-over-year. And due to the absence of ELS provisioning seen last year and gains from the disposition of assets under consolidated funds, non-operating income increased by KRW 1,104.7 billion year-over-year. Also, nonbank accounted for 39% of the group's first half net profit. The diversified business portfolio of the group is expected to play a critical role in securing earnings stability in times of interest rate decline and boom in the stock market trading. With that said, I will now move on to the breakdown of the earnings results. 2025 first half group net interest income posted KRW 6,368.7 billion. And despite the net interest margin contraction following the rate cut through stable loan growth, we achieved results similar to the same period last year. However, it decreased 4.8% not Q-o-Q because around KRW 159.1 billion of the expenses from the liquidation of consolidated funds in Q2 was temporarily reflected on interest expenses. And excluding this on a recurring level, we are maintaining the level of the previous quarter. Next, I will cover bank loans in won growth. As of end June 2025, bank loans in won posted KRW 372 trillion and grew 2.4% YTD and 1.4% Q-o-Q. Household loans posted KRW 181 trillion and mortgage loans and unsecured loans grew evenly and grew 0.9% Q-o-Q. Corporate loans posted KRW 191 trillion and centering on large corporates and prime SMEs grew 1.9% Q-o-Q. We plan to operate our loan policy from a comprehensive profitability perspective in the second half as well and stably secure our interest income base. Next is net interest margin that you can see on the bottom right side. Q2 bank NIM posted 1.73% despite efforts to cut funding costs, including increasing core deposits. And with the loan yield contraction following the market rate cut, it went down 3 bps Q-o-Q. Meanwhile, group NIM posted 1.96%, and the impact on the bank NIM decline was further compounded by the decline in credit card receivables yield and went down 5 bps Q-o-Q. In the second half as well, since we expect the interest rate decline trend to continue through core deposit growth and profitability-based loan portfolio management, we plan to minimize the contraction of NIM as much as possible. Next, I will cover non-interest income. First half group non-interest income posted KRW 2,723.3 billion and improved 10.9% Y-o-Y. Due to the decline in exchange rates and the rise in stock market index performance related to securities and derivatives significantly improved, leading to an increase of KRW 211.7 billion of other operating income compared to the same period last year. On the other hand, first half group net fee income posted KRW 1.966 trillion, a 2.9% increase Y-o-Y. And with the increase in bancassurance sales commissions and securities brokerage fees combined with higher fee income from the disposal of assets under management, we achieved results, which was a KRW 56.3 billion increase compared to the same period last year. In particular, Q2 group net fee income posted KRW 1.032 billion, a 10.5% increase Q-o-Q and surpassed for the first time on a quarterly basis, KRW 1 trillion. I believe these results were a fruit of our consistent efforts to expand fee income that does not accompany RWA growth and our growth in non-interest income by our subsidiaries. Going forward, based on a diversified group portfolio, we will gradually achieve qualitative improvement of our profit structure. Next, I will walk you through our G&A expenses. First half G&A expenses posted KRW 3,355.3 billion, a 4.1% growth Y-o-Y. The first half group CIR is being maintained at a stable level of 36.9%. Going forward, we will actively expand investments to secure future growth drivers, including exploring new businesses and enhancing productivity through AI, and also strive to rationalize costs, focusing primarily on rationalizing recurring expenses and continue our group's CIR downward stabilization trend. Next is Page 8, group's provision for credit losses. Q2 provision for credit losses posted KRW 655.1 billion and group credit cost posted 55 bp and maintained a similar level to the previous quarter. In the previous quarter, in the Card division, which the market was concerned about, as a result of implementing focused measures to improve asset quality, including the sale of nonperforming loans and reinforcement of short-term delinquency recovery teams, the scale of provisioning was significantly reduced compared to the previous quarter. However, while maintaining a conservative provisioning stance, bank and securities additionally provisioned around KRW 100 billion for real estate PF sites and guaranteed completion real estate trust projects, leading to Q2 credit loss provisioning level. And CCR is being maintained at a similar level to the previous quarter. And the NPL coverage ratio slightly improved Q-o-Q. Meanwhile, in the second half of the year, along with key rate cuts driven by the government's economic stimulus efforts such as supplementary budget and support for vulnerable borrowers through the establishment of a bad bank, we expect that the asset quality management conditions will improve favorably, and we believe that the credit cost has passed its cyclical peak and is entering into a downward phase. In the second half, we will do our best to achieve meaningful improvements in asset quality by actively promoting the rebalancing of nonperforming assets and reducing high-risk asset limits. Let's go to the next page. Q2 group NPL ratio posted 0.72% and improved 0.04 percentage points Q-o-Q. The group's NPL coverage ratio improved 5.4 percentage points Q-o-Q and recorded 138.5% and has sufficient loss absorption capacity to prepare for potential nonperforming assets. Lastly, I will cover the group's capital ratio. As I explained previously, the group's BIS ratio at the end of June 2025 on a preliminary basis posted 16.36% and the CET1 ratio recorded 13.74% and secured the industry's highest level of capital adequacy. As of end June '25, the group's risk-weighted assets posted KRW 354 trillion and grew 2.4% YTD. And considering our annual RWA growth target, it is being maintained at and managed at an appropriate and controlled pace of growth. The following pages contain details on the performance we have just presented, so please refer to it if needed. This concludes KB Financial Group's 2025 first half Business Performance Report. Thank you for your attention.

We will now begin the Q&A. We will take the first question from Kim Jaewoo from Samsung Securities.

I would like to ask 2 questions. Even with the earnings presentation, I still have a question as to the size of your second half shareholder return. In terms of the timing of the share buyback, you will be doing that in the early next year. So for the second half, is it correct for us to say that the size of the shareholder return for the second half is KRW 850 billion? So also for next year, what are your plans to make sure that you have ample amount of distributable profit for dividend? And second is a question related to your provisioning. I was expecting a lower figure in terms of the provision. So I'm a little bit confused. As you've mentioned, all the asset quality-related metrics have improved, but still, we've seen certain increases in the provisioning levels. So I would like to understand as to why that is. I understand the credit cost guidance is 45 basis points for the year. So in the first half, we are announcing CCR at 55 basis points. So that means that in the second half of the year, what would you guide us? Because you usually provision more in the end of the year, even if we consider that on an annual basis, I would like to understand as to the annual guidance. Is it staying the same as per your previous communication?

Thank you for your question. Regarding the shareholder return, as mentioned earlier, we have a total of KRW 850 billion designated for this purpose. Out of that, KRW 660 billion is considered excess capital above the distributable profit, which will be paid out. The Board of Directors has resolved that the remaining KRW 190 billion will also contribute to shareholder returns. As noted, this includes the KRW 190 billion for the 2025 return, which exceeds what can be distributed as profit. In the second half of the year, we are exploring various options to ensure we have enough distributable profit, including receiving interim dividends from our subsidiaries and considering possible impaired dividends. So there is no need for concern about resources. The KRW 850 billion remains the planned amount for the second half shareholder return. As for the credit cost ratio for the second half, it was similar in the second quarter to what we saw in the first quarter. We have accounted for natural increases in provisions and addressed the decline in property values by proactively provisioning about KRW 100 billion. We have taken additional provisioning measures to enhance our ability to absorb potential losses related to apartment sales and rental rates, alongside proactive write-offs and rebalancing of non-performing loans, which has strengthened our collection efforts. We are witnessing positive results from these initiatives, and we expect improvements in metrics related to NPL and asset quality. Additionally, we anticipate some reversals in the second half as we sell off NPLs, and we believe provisioning will stabilize moving forward. Nonetheless, we are aware of potential tariff pressures from the new administration and other external factors that could impact our metrics. However, with our asset quality strategy and careful lending practices for at-risk borrowers, we are confident we can maintain the credit cost ratio around the mid-40 basis points level, barring any unforeseen circumstances. I also want to reiterate our framework for shareholder returns at KBFG. Excess capital above a certain baseline will be fully returned to shareholders, and there will be some carryover into next year. While there might be concerns that the shareholder return amount for next year could decrease, our capital management and ratios indicate that the carryover will not adversely affect what shareholders can expect next year. Given our earnings resilience, we believe that the excess capital will positively support next year's shareholder returns.

We will take the next question from NH Securities, we have Jung Jun-Sup on the line.

I am from NH Securities, Jung Jun-Sup. I have 2 questions. First question is regarding your great performance and 0.8 PBR, I think you have achieved nearly that number. And although it may not be imminent for the contribution of dividends and share buyback, I think you can consider that. And if you can have some changes in your policy, can you tell us about the timing and what will change going forward? If you can share with us anything at this juncture? My second question is about your loan growth. In the last month, the government came up with measures to control household loans. And in the second half, it seems that the speed of household loan growth will be decelerated compared to the first half. And regarding the loan growth guidance that you have presented in the early part of the year, will this change? And if household loans suffer, are you going to come up with any countermeasures?

Thank you very much for the insightful questions. Regarding our shareholder return policy, regarding PBR enhancement and the mix change that may happen, according to our framework, I have been emphasizing that with lower PBR, the share buyback and cancellation amount will be increased. And when PBR goes up, the share buyback and cancellation contribution will go down and cash dividends will go up. I think we have mentioned this in our corporate value enhancement plan. And regarding your question, as you have just asked, our PBR is improving faster than we had expected and a lot of the discount factors have been resolved, and it seems that if we can reach a consensus, then regarding the cash dividend payout ratio, it can go up, and it is being improved very quickly. We are seriously considering a change in this mix at this juncture. And regarding our loan asset growth, our bank CFO will take that question.

Thank you for the question. I will address the topic of loan growth for 2025, particularly focusing on profitability and asset quality. We are aiming for high-quality asset growth while ensuring efficient capital usage in our bank's loan growth strategy. We anticipate a growth of 4% to 5% as outlined in our business plan. As you noted, financial authorities are implementing measures to manage household loans, and we plan to focus on profitable loans alongside certain mortgage products. In terms of collective loans, we intend to be more selective and will optimize our household loan portfolio. Considering the pace of economic growth and the government's policy reinforcements, we expect household loans to grow by about 3%. For corporate loans, we will prioritize high-quality loans, targeting an annual growth of 6% to 7%. As the business environment evolves, we will strive to secure high-quality corporate loans for large corporations. For SME loans, we plan to strengthen our customer base and accelerate transactions. Regarding SOHOs, we aim to achieve growth through diversifying our portfolio across different areas.

We will take the next question from Hanwha Investment Securities, Kim Do Ha.

You've mentioned distributable profit. I was able to review the disclosed information from the subsidiaries receiving the dividend before the end of the year. Is that feasible? Assuming there are no changes in the rules, would the dividend payout from the subsidiaries be possible starting in February? Given your total capital, you would need to account for certain deductions and the reserve, and looking at the P&C insurance, it appears there isn't much room available. That's why I'm posing this question. My second question is regarding PBR. If PBR is on the rise and you're considering increasing the cash dividend payout, do you have a specific valuation level in mind as a baseline? I ask this because other banking holding companies refer to their disclosure values, indicating a PBR range of 0.8 to 1x that they would consider for adjusting the ratio. Could you also provide us with a certain range concerning the PBR multiple?

So just give us one moment before we answer that question.

Yes, thank you very much for that good question. So I talked about the potential interim dividend payout from the subsidiaries and using that as funds for profit for dividend. If you look at our life insurance and P&C, the interim dividend that we get paid from that, that is not something that we are considering because there is a capital discipline and capital ratio-related regulation that's changing in the insurance industry. So we are thinking more of that impact coming from next year, not necessarily this year. So setting the insurance aside, we also have securities and brokerage subsidiaries. So we're thinking of getting that interim dividend around these types of subsidiaries. Now for the PBR range and the band, not other holding companies, but us as well, 0.8x to 1x the multiple within that range, we are open to potentially adjusting the mix between the two. This range itself is quite broad. But what's important is 0.9, 0.8, it's not the number itself that's important. It's about actually relieving all the discount factor and the start of the rerating cycle. If we think in our view that that timing has come, we will be able to come back to you and give you a more concrete answer. The band that other holding companies are talking about, I can also tell you that, yes, we are also moving within that range of PBR.

From HSBC, Jaewoong Won.

Congratulations on your outstanding performance, and thank you for the returns to shareholders. I have two questions. First, I would like to ask about the overseas business in Bukopin, Indonesia. I understand you are moving towards profitability and seeing stabilization. Could you provide more details about Bukopin's Q2 performance? Secondly, can you share your outlook on earnings for the second half of the year? Additionally, concerning JB Holdings, after the sale of capital, when will those profits be reflected in your P&L? I also understand that you have excess distributable profit that will need to be deferred to next year, and that some decisions will be made at the GSM. Regarding the KRW 190 billion for additional share buybacks and cancellations, will this take place after March? I'm not very familiar with this, so could you clarify the timing for me?

Thank you very much for your questions, and we will soon answer your question.

Thank you very much for your great questions. And for the reduced dividends, well, it needs the resolution from the GSM. And regarding interim dividends, this can be done before that. However, with the interim dividends and after that we close 2025, the books, then there will be the distributable profits that are calculated that can be done for the next fiscal year. So at that time, we can tell you that we can have additional shareholder return.

Thank you very much for your question. I am Kang Nam Che, in charge of global business at KB Kookmin Bank. And I have a question about KBI or Bukopin. In Q2, we turned up profit. And in the first half, we expect about KRW 20 billion of profit. And in the second half, we believe that this trend will continue. However, for G&A in the second half, we will have a bit more. So it might be a little bit lower than the first half, but we believe a KRW 20 billion level of net income or profit will continue. And regarding KBI subsidiary, JB Capital acquired capital, in the case of Indonesia, for the buyer, well, there is a fit and proper test that needs to be passed by the authorities, and it will take about 1 year for this test to be completed. Accordingly, regarding the proceeds of the sale, we believe that it will be booked probably in the first half of next year. Thank you.

Thank you. We do not have any additional questions that's in the queue, but we will wait 1 more minute. If there are no additional questions, let me now respond to some of the questions that were submitted by our shareholders. But before we go into that, let us just wait one moment. Yes, from Korea Investment Securities, Baek Doosan, please go ahead.

I am Baek Doosan from KIS. I know you've talked about this, but I just have one more follow-up question on shareholder return because KRW 190 billion, you will be buying back and canceling next year. And I think this is about 5 basis points in terms of capital. So next year, basically, you will use the sources that's above 13.5% in excess of that. But for next year, it's going to be 13.05% or 13.06%. So would that be the fund for distribution? Or is it still going to be 13.00%? So I just would like to get some color with regards to the excess capital and the CET1 ratio.

Yes. I think your question actually has the answer in it because it actually is the same thing. Basically, capital that's in excess of 13% of CET1 will be fully returned back to the shareholders. But the 5 basis points because we did not pay that out yet. So based upon the CET1 ratio at the year-end, it will still be reflected in the CET1 ratio as of the end of the year. So for that amount, that is going to be attributed to the 2025 shareholder return amount, as I've mentioned during my opening presentation.

Thank you for your questions. I don't think we have additional queues yet. So we will hold and wait for questions. I don't think that we have additional question. And I think that we can cover some questions that were asked by our shareholders. I think we can share the screen. And regarding the separation of taxation of dividend income, if this takes place, do we have any plans to increase our cash dividends? And second question, according to the level of PBR, do we – can we – or are we going to adjust our dividend shareholder buyback and cancellation ratio? The CFO will answer the questions.

I think I've already answered the second question. And regarding if the separate taxation of dividend income takes place, of course, we need to actively consider whether we're going to expand our cash dividends. And we do not have a concrete calculation basis for the dividend payout ratio or detailed provisions of the enforcement decree. So we cannot really set forth clear standards. However, I have mentioned that based on PBR, cash and share buyback and cancellation, we are going to do our best to have an efficient mix. So regarding the size of our profits, our cash dividend payout ratio and dividend yield, we're going to consider all of this. And regarding the separation of taxation of dividend income, we believe that it will be a great opportunity to expand our shareholder return. And because we are representative stock for the dividend payout, I think if we have the implementation of the separate taxation of dividend income, we're going to do our best to have this work in favor of our shareholders.

I think that now we can conclude today's earnings release. Thank you very much for your attention.