Earnings Call Transcript - KB Q4 2020

Peter Kwon, Head of IR

Greetings, I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2020 Q4 Business Results Presentation. I would like to express my deepest gratitude to you for participating in our call. We have here with us our group CFO and SEVP, Ki-Hwan Joo, as well as other members from our group management. We will first hear the 2020 major financial highlights from our CFO and SEVP, Ki-Hwan Joo, and then engage in a Q&A session. I would like to invite our CFO and SEVP to elaborate on our 2020 business results highlights.

Ki-Hwan Joo, CFO

Good afternoon. I am Ki-Hwan Joo, CFO of KB Financial Group. Thank you for joining KBFG’s earnings presentation for Q4 2020. Before moving on to our earnings results, let’s briefly look back on last year’s operational environment and KBFG’s key business results. Due to the COVID-19 pandemic, the global real economy fell into steep contraction and 2020 was an unprecedented year with high volatilities for the financial market as well. For the banking industry, since the 75 basis point cut in the rate by the Bank of Korea, policy rates continued to be at their historical low, and with greater possibility of asset quality deteriorations due to the prolonged COVID-19 impact, there were concerns over a fall in profitability which led to declines in share prices. Notwithstanding such internal and external challenges surrounding the company, KBFG was able to achieve meaningful results in 2020. Last August, Prudential Life, the industry’s top-tier life insurer, became our subsidiary. We completed our business portfolio, which ranges from bank, securities, non-life insurance, credit card, and finally, life insurance, enabling us to gain solid competitiveness. We also completed the acquisition of Cambodia’s biggest micro-financing institution, Prasac, and Bukopin Bank, which will serve as a foothold into the Indonesian market. As such, we made significant progress in our global business and further enhanced the group towards sustainability. In terms of financial performance, despite NIM contraction following the rate cut and ongoing macro uncertainties, we saw a balanced earnings improvement across bank and non-banking business, driven by solid loan growth that led to a sustained increase in interest income, as well as sizable increases in net fees and commission income from non-bank subsidiaries. Also, our inorganic growth through M&As brought tangible results leading to around KRW 3.4 trillion of net profit as we continued to sustain solid fundamentals. Today, the Board of Directors meeting has decided on a payout ratio of 20% and a dividend per share of KRW 1,771 for this year. As we are mindful of the possible economic depression due to the prolonged COVID-19 impact and macro uncertainties at home and abroad, we believe that conservative capital management and supportive measures for the real economy are required. Hence, the payout has been slimmed somewhat compared to last year. However, underpinned by solid earnings resilience and the industry’s top capital adequacy, we will continue to follow a progressive dividend policy as we have done in the past. We commit yet again that we will be at the forefront of implementing various shareholder return policies that live up to global standards. As you are aware, the Korean economy is entering a new normal, characterized by ultra-low rates and low growth. Additionally, the financial market paradigm is changing quickly. To respond to the changing financial environment preemptively, KB Financial Group will upgrade the group’s business portfolio. Based on KB’s distinct all-around financial service capabilities, superior customer base, and channel competitiveness, we aim to become the number one financial platform company. To this end, we have named this year’s strategic direction as RENEW 2021. RENEW stands for Reinforced Core, Expansion of Global and New Business, Number One Platform, ESG Leadership, and World-Class Talent and Culture. In 2021, we will strengthen the competitiveness of core businesses in each of our business lines. Beyond our traditional financial business, we will bolster non-financial businesses such as auto, real estate, and health care to secure growth engines for the future. At the same time, we will become the number one financial platform company that offers differentiated and comprehensive financial solutions via customized financial products and services underpinned by data. With that, I will now move on to the financial highlights for 2020. KBFG’s full-year net profit for 2020 was KRW 3,455.2 billion. Despite a challenging business environment at home and abroad, we achieved 4.3% growth year-on-year driven by robust core earnings growth and tangible results from inorganic growth through M&As while maintaining solid earnings fundamentals. However, Q4 net profit was down significantly quarter-on-quarter to KRW 577.3 billion on the back of ERP expenses and additional provisions related to COVID-19, as well as the base effect from booking negative goodwill benefits from Prudential Life in the previous quarter. Excluding these one-off factors, on a recurring basis, Q4 net profit was flat quarter-on-quarter. Group’s 2020 net interest income was KRW 9,722.3 billion, up 5.7% year-on-year, continuing a stable growth trend despite falling rates. This growth is due to the bank’s solid loan growth, which helped secure a stable earnings base and resulted from inorganic growth through M&As. Additionally, 2020 net fee and commission income was KRW 2,958.9 billion, up 25.6% year-on-year, providing substantial support to the group’s core earnings growth. Such growth in net fees and commission is driven by a sizable increase of KRW 347 billion from the securities business, mostly comprised of brokerage income and higher credit card fee income resulting from robust marketing and cost-saving efforts, leading to better performances from non-bank subsidiaries. Meanwhile, Q4 net fee and commission income was KRW 788.4 billion. Although securities business fee income declined slightly due to lower average trading volume, year-end increases in credit card transaction volumes and fees were up, keeping total fee and commission income flat quarter-on-quarter. The size of quarterly net fee commission income used to be around KRW 500 billion but started to expand to around KRW 800 billion since the beginning of the year and has sustained an upward trend ever since. Next, regarding other operating profit, in 2020, there was KRW 188.6 billion of other operating loss for the group, mainly stemming from increased operating expenses, including credit and deposit insurance and depreciation on operating leases. However, we noticed meaningful improvements from core businesses, such as securities, derivatives, and FX, driven by a favorable financial market backdrop, including share prices and rates, and by an increase in invested assets as well as portfolio diversification efforts. Having said that, for Q4, the seasonal impact of year-end cold weather and an increase in medical expense claims constrained insurance performance, leading other operating income to come in at a level lower than that of the previous quarter. Now, on the group’s G&A expense, the total for 2020 was KRW 6,833.2 billion. This year, with ERP size growing for the group, there was approximately KRW 344 billion in ERP expenses, and with the consolidation of Prasac, Prudential Life, and Bukopin Bank of Indonesia into the financial statement, an additional KRW 243 billion of expenses was recognized, pushing up G&A expenses by 9% year-on-year. While the rise may seem significant this year, if we exclude one-off special factors such as the ERP expenses and M&A impacts, the increase on a recurring basis was around 2.6% year-on-year. Q4 G&A expenses reported KRW 2,187 billion, a sizable increase quarter-on-quarter, again due to ERP and seasonal impacts as well as expenses from Bukopin Bank, which was consolidated as a subsidiary as of September. Moving on to the provision for credit loss, our PCL for 2020 reported KRW 1,043.4 billion, up KRW 373.1 billion year-on-year. To preemptively counter uncertainties arising from COVID-19, we made KRW 206 billion in provisioning during the second quarter and an additional KRW 171 billion this quarter. Consequently, since we set aside an additional KRW 377 billion of provisioning this year, excluding this impact, the trend is flat year-on-year. For the fourth quarter, PCL was KRW 289.1 billion. Despite additional provisioning as explained, due to the sale of bank loans and related write-backs concerning specialty bonds, the increase was only KRW 74.1 billion quarter-on-quarter. Next, let's consider key financial indicators. You can see the group ROA and ROE on the top left-hand side. Before I go further, I want to mention that there is increased issuance of hybrid bonds in the overall industry recognized as supplementary capital, along with the global trend of profitability indicators. Taking these factors into account, I want to inform you that from this quarter, our ROE has been based on ROCE, which is return on common equity, centering on profitability indicators while excluding effects of supplementary capital. For 2020, KBFG’s ROE posted 8.79%, a slight drop year-on-year. However, the recurring ROE excluding one-offs, including preemptive provisioning and ERP costs related to COVID-19, stands at a 10.17% level. Even in a difficult operating environment characterized by downturns in the real economy and falling interest rates, our profitability is being stably maintained due to the group’s steady core profit increase and inorganic growth. Next, I would like to comment on the bank’s loans in won growth. As of the end of 2020, bank loans in won posted KRW 295 trillion, showing balanced qualitative growth with households and corporations, increasing by 9.9% year-to-date and 1.2% compared to the end of September. Looking at the breakdown, in the case of household loans, we saw sound growth in Jeonse loans and prime unsecured loans with a 9.5% increase year-to-date and 2.6% compared to late September. Corporate loans grew evenly across SOHO, SME, and large corporate loans at 10.3% year-to-date. Compared to late September, an increase in debt redemption at year-end led to a 0.5% decrease. In 2020, loans growth exceeded initial plans due to increased fund demand and government financial aid support owing to COVID-19. However, starting this year, we plan to consider factors such as economic circumstances and household debt situations while focusing on profitability and asset quality through centered qualitative growth and managed loan growth at appropriate levels. Now, regarding NIM, the group and Bank NIM for 2020 Q4 stood at 1.75% and 1.51%, respectively, even amidst continued contraction of asset yields following the interest rate decline. Through our strict margin management efforts, we improved by 2 bp quarter-on-quarter. Particularly for the bank’s NIM from the funding side, with an approximately KRW 9 trillion growth of core deposits this quarter and a sizable decrease in time deposits, the overall funding cost burden was effectively alleviated. Focusing on selective loan growth centered on profitability allowed us to safeguard our NIM reasonably well. However, on a yearly basis, the group and bank NIM contracted significantly year-on-year due to interest rate cuts. We expect that the effects of interest rate declines will persist, and we will make every effort to manage our NIM by focusing on increasing core deposits based on our superior sales capabilities and channel competitiveness while maintaining a profitability-based loan portfolio with advanced loan pricing. Let’s go to the next page. I will now elaborate on the group’s cost-income ratio, which posted 54.7% in 2020. Despite the group’s ERP expansion and M&A-related one-off cost increases, we maintained the previous year’s level as a result of improved overall revenue generation. Specifically, the CIR excluding one-offs stood at 49.4% and has steadily stabilized downwards for the past five years thanks to our group-wide cost-cutting efforts. Next, I would like to remark on the credit cost ratio. The group’s credit cost for 2020 stood at 0.26%. Due to preemptive provisioning related to COVID-19, there was a slightly increased year-on-year. However, excluding this, credit costs are being managed stably at just 0.20%. As COVID-19 continues, there are growing concerns regarding asset quality. To preemptively prepare for these uncertainties and enhance our response capabilities, we made additional conservative provisioning to build a buffer while focusing on risk management through sophisticated systems across different industries and borrowers, strengthening monitoring for vulnerable borrowers. We believe this will allow us to manage our asset quality stably. Next, let’s look at the group’s BIS ratio. As of the end of December 2020, the group’s BIS ratio posted 15.27%, and CET1 ratio stood at 13.29%. Despite the increase in risk-weighted assets following year-end dividends and loan growth, through strategic capital management including solid net profit increases and hybrid bond issuances, we are still maintaining the highest level of capital adequacy in the Korean financial industry. Now, let’s go to the next page. From this page, I want to cover ESG management leadership, one of KBFG’s core management strategies for 2021. Globally, ESG management has evolved into both an essential value for companies and a critical strategy to ensure sustainability. Particularly due to COVID-19, heightened awareness of environmental issues such as climate change and natural disasters has made the importance of ESG management more pronounced. KBFG, which has been proactive in responding to these changes as the first Korean financial institution, established an ESG committee within the Board of Directors in March of last year. This committee set a strategic goal in May to create sustainable value and enhance customer trust by promoting responsible environmental and social management while disseminating healthy corporate governance and establishing the KB Green Way 2030, a mid- to long-term ESG strategy road map. KB Green Way 2030 holds the commitment to respond proactively to environmental crisis and secure green leadership, which will foster an environmentally friendly financial ecosystem. Our core goal is to reduce our group’s carbon emissions by 25% by 2030 compared to 2017 levels, while expanding the sales and investment sizes of our ESG financial products and loans to around KRW 20 trillion by 2030. Keeping in line with this, in August, we publicly declared our commitment to the Equator Principles, a global guideline for environmentally friendly finance, and we are working diligently towards completing our membership this year. In September, we announced our exit from coal financing, marking the first time a Korean financial group took such a redoubtable stance, demonstrating that KB’s ESG management philosophy surpasses others while showcasing our rapid execution capabilities. Moving forward, KB Financial Group, following the recommendations of TCFD, intends to manage various climate-related risk factors and disclose relevant information transparently. We are also establishing an advanced climate change response system and are dedicated to implementing TCFD’s recommendations earnestly. We have been recognized for our differentiated ESG management efforts; recently, as the first Korean financial company, we achieved the highest grade of A+ from Korea Corporate Governance Service, or KCGS, in all categories, including environment, society, and corporate structure. Lastly, we actively participate in the government’s Korean New Deal projects and have bolstered support core areas in ESG – including innovative growth companies, green smart schools, and green energy to create social values. We promise to exert ESG management leadership and fulfill our responsibilities as a leading financial institution. Please refer to the following pages for details regarding the business results that I have just covered. With this, I will conclude KBFG’s 2020 business results presentation. Thank you all for listening.