Earnings Call Transcript - KB Q4 2023

Peter Kwon, Head of IR

Greetings. I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2023 Full Year Business Results Presentation. I would like to express my deep gratitude to everyone for participating today. We have here with us our Group CFO and SEVP Jae Kwan Kim, as well as other members from our group management. We will first hear the 2023 major financial highlights from CFO and SEVP, Jae Kwan Kim and then engage in a joint Q&A session. I would like to invite our CFO and SEVP to deliver our 2023 earnings results.

Kim Jae Kwan, CFO

Good afternoon. I am Jae Kwan Kim, the CFO of KB Financial Group. Thank you for taking part in our 2023 earnings presentation. Before going into the details of the business results, let me briefly walk you through the key financial highlights for the year of 2023 of KB Financial Group. KB Financial Group's net profit attributable to controlling interest for 2023 posted KRW 4,631.9 billion. It is up 11.5% year-over-year, driven by noninterest income-led solid earnings improvements and stable cost control despite macro headwinds, thus demonstrating healthy fundamentals and the ability for profit growth. Balanced and strong earnings fundamentals were achieved across all of the top-line segments of the group, which resulted in a record high gross operating profit for 2023, posting KRW 16 trillion, up 17.8% year-over-year. As a result of efforts to enhance cost efficiency within the group, G&A expenses increased only 0.1% year-over-year and the group's CIR in 2023 was at record low levels, coming in at approximately 41%. However, provisions for credit losses posted KRW 3,146.4 billion last year, up significantly year-over-year due to continuing high-interest rates, both at home and abroad. Credit risk, especially in the real estate market, has expanded substantially. After Taeyoung E&C filed for a debt restructuring program in December, concerns are running high regarding deteriorating asset quality in the real estate PF market. To be preemptively prepared during the first half of last year through changes in our expected loss modeling, we have set aside KRW 490 billion in provisions. In addition, in the fourth quarter, reflecting a conservative outlook for the future, we have set aside an additional KRW 51 billion approximately and preemptively set aside approximately KRW 754 billion in one-off additional provisions for priority watch list sectors, including real estate PF and overseas commercial real estate to prepare for any future risk. We expect this to underpin our sustained and strong growth going forward. In terms of returning our profit to society, we have recognized KRW 333 billion out of the total of KRW 372 billion for our social contribution program in Q4, although last year's net income did not quite meet market expectations because of this. Excluding such factors, the group's ordinary net income is approximately more than KRW 5.5 trillion, which is the highest level of fundamentals found in the industry. Meanwhile, the credit cost ratio of the group in 2023 posted 67 bps. But excluding one-off factors on a recurring basis, it stands at approximately 40 bps, thus being maintained at a stable level. Also, as of the end of 2023, the group's NPL coverage ratio posted 174.5%. In this quarter, the asset quality of priority watch list sectors such as the real estate PF and overseas commercial real estate has been more conservatively rated, resulting in a slight fall in the NPL coverage ratio quarter-over-quarter. Despite this, however, the group still demonstrates the industry's highest level of loss-absorbing capacity. Meanwhile, KB Financial Group's Board of Directors today has decided that the per-share dividend for 2023 will be KRW 3,060, up 4% from KRW 2,951 of the previous year and also resolved on the share buyback and cancellation of KRW 320 billion. The share buyback and cancellation is in addition to the KRW 300 billion in share buyback and cancellation that we undertook in July of last year, once again, showing the firm commitment of the Board and senior management toward enhancing shareholder return and value. Finally, let me briefly touch upon the progress made in 2023 regarding the group's mid- to long-term capital management plan that was announced in February of last year. First, the total assets based on the 2023 year-end consolidated financial statement posted KRW 716 trillion, up 3.9% year-to-date and led by healthy loan growth of the bank. Assets have expanded appropriately within the nominal GDP level. Secondly, as was mentioned already, following the previous year, in 2023 as well, dividends have been gradually increasing, while share buyback and stock cancellation has been proactively undertaken. So, despite a number of uncertainties, we are endlessly striving to achieve shareholder returns in keeping with the expectations of the market. Going forward, the company will uphold its firm commitment to faithfully carry out the group's long-term capital management plan, and will do our utmost to implement a proactive shareholder return policy. Let me now explain our business results in greater detail. In 2023, the group's net interest profit posted KRW 12,141.7 billion, up 5.4% over last year. This is the result of improving net interest margins of 12 bps, reflecting the effects of loan asset repricing on the back of rising interest rates last year while Korean won loans of the bank increased 4% year-to-date, securing a stable profit base. Next, in 2023, the group's net fee income and commission posted KRW 3,673.5 billion, up 4.5% year-over-year, increasing by approximately KRW 159 billion. Such growth of the net fee income owes itself mainly to the solid growth of the business fees coming from the retail customer base of the credit card, securities, and capital business despite the challenging market environment with wealth management and real estate PF contracting. Next, let me move on to the other operating profit. In 2023, the other operating profit posted KRW 413.9 billion, showing significant improvements over the previous year's large losses, up by KRW 1,663.5 billion. Against the backdrop of improving market conditions, including interest rates and stock indexes, efforts have been made to engage in timely responses to the market in addition to diversifying the funding asset portfolio, leading to meaningful enhancements in the performance of marketable securities and derivatives. In the case of insurance-related income, despite an increase in costs owing to actuarial assumption changes of the financial authorities last year related to IFRS 17 in the second half of the year, growth of 8.5% was posted over the previous year, maintaining a solid earnings momentum. However, the other operating profit in Q4 declined significantly quarter-over-quarter, posting losses of KRW 595.7 billion. This is due to seasonal factors driving an increase in loss ratio, which led to a fall in insurance income, in addition to which KRW 333 billion of social contribution program expense was reflected as other operating expense. Next is on G&A expenses. In 2023, the G&A expense posted KRW 6,647.4 billion. As has been previously referred to, this is a mere 0.1% increase over the previous year and is the result of personnel restructuring, strict cost control, and other measures taken across the group to enhance cost efficiencies. Finally, the group's credit loss provisions. In Q4 the credit loss provisions posted KRW 1,378.2 billion, a significant increase quarter-over-quarter. This is due mostly to the large-scale preemptive provisioning against the priority watch list sectors at the group level, reflecting a conservative SLC. And excluding such factors, the credit loss provisions at the recurring level is approximately KRW 573 billion. On the next page, I will explain the key financial indices. First, the group's profitability. KBFG's 2023 ROE posted 9.18%, and the recurring level of ROE, excluding one-off items, stands at 11.53%, highlighting continuous and solid earnings fundamentals. Next, I will cover bank's loans in won growth. Bank's loans in won as of end 2023 posted KRW 342 trillion, a 4% year-to-date and 1.5% increase quarter-over-quarter. Corporate loans posted KRW 175 trillion, a 7.7% increase year-to-date, around KRW 12.5 trillion increase and led last year's bank loan growth. This was a result of an increase in loan demand derived from deterioration in corporate bond market conditions leading to a KRW 8.9 trillion year-to-date increase of large corporate loans, with SME loans continuing to grow centering on high-quality SME and SOHO loans. On the other hand, household loans after posting minus growth in Q1 have been continuing a gradual stable recovery trend based on real demand and posted KRW 167 trillion, a 0.3% growth year-to-date. In this year as well, we will take into consideration multifaceted factors such as the economic circumstances and household debt situation and focus on qualitative growth, centering on asset quality and profitability, and maintain loan growth within an appropriate level. Next is NIM. Group and bank 2023 NIM posted 2.08% and 1.83%, respectively, a 12 bp and 10 bp increase year-over-year. This improvement in NIM was a result of our utmost focused efforts in NIM management, including reducing funding costs by securing the industry's highest level of low-cost core deposits through our superior sales capability and channel competitiveness and by significantly improving profitability of our financial investments compared to the previous year through profitability-centered portfolio management. However, in the case of Q4, group and bank NIM with the gradual diminishing of the loan asset repricing effect reflecting the interest rate hike in the second half of the year, both went down 1 bp quarter-over-quarter, respectively. Let's go to the next page. Regarding the group's CIR and CCR, I will skip this part since I covered this earlier, and I will elaborate on the group's capital ratio, which is found in the upper right-hand side. 2023 end estimated group BIS ratio posted 16.71% and CET1 ratio posted 13.58%, respectively. Despite the increased RWA due to growth centering on corporate loans as well as year-end dividend effect, group's BIS ratio increased 55 bps year-over-year still maintaining the highest level of robust capital buffer in the financial industry still fully prepared for macro uncertainties. I will explain in more detail regarding the CET1 ratio from the next page. This page is for us to more clearly explain the indicators that shareholders and investors are interested in, including share-related indicators and CET1 ratio. First, if you look at the graph on the left, you can see that the group's CET1 ratio as of 2023 year-end posted 13.58%, a 34 bp improvement year-to-date. Looking at the factors behind major movements, additional factors, including group's solid net profit growth and OCI movements each contributed by around 144 bps and 24 bps, respectively, to push up the CET1 ratio. RWA, which increased by KRW 19.1 trillion year-to-date, and the dividend share buyback and cancellation, which was recognized in 2023, each contributed to an 80 bps and 54 bp drop in CET1 ratio, respectively. Next, 2023 EPS posted approximately KRW 11,580 and on the back of sound income growth and share buyback and cancellation effect went up approximately 12.1% year-over-year. In addition, the BPS posted approximately KRW 148,240. And like the EPS, thanks to our consistent efforts to enhance shareholder value, including active share buyback and cancellation, it improved by around 9.3% year-over-year. From this page, I would like to cover KBFG's ESG management for shared growth fulfilling social responsibilities among our group's core management strategies. In order for us to create a sustainable future and society, which is the ultimate goal that we want to achieve through ESG management, we have been working hard for social contribution, utilizing our core competency in finance and also engaging in social contribution activities in a balanced and accelerated manner. 2023's representative performance results include newly providing around KRW 7.4 trillion of social finance utilizing our core competency in finance, including financial products for the underprivileged, low-interest refinancing loans, and hope savings program for youth. In the nonfinancial side, we contributed around KRW 300 billion for social contribution and local community investment, including supporting the underprivileged and small businesses and activities to improve social infrastructure. In addition, we provided around 13,500 cases of free consulting to small businesses. And through the KB Good-job fair, we connected around 6,190 jobs to job seekers and actively engaged in diverse social contribution activities and programs. We will not be complacent with these results, but also focus our efforts on other social contribution activities as well. First, related to the bank-wide public social contribution program, which was announced late last year, we plan to support KRW 372.1 billion, the largest among all participating banks and we plan to expedite the completion of interest cash-back implementation within Q1 of this year and plan to consecutively support small business owners and the underprivileged through our voluntary program. Apart from this, we plan to increase different support programs so that the self-employed can overcome their economic difficulties, expand programs to reduce interest rates for the underprivileged and sole proprietors, and expand guaranteed loans through guarantee institutional special contributions. And in particular, in order to resolve the low fertility program, we contributed a total of KRW 75 billion to expand elementary school after school care, which includes school childcare programs until 2022. From 2023, we have been additionally supporting a total of KRW 50 billion related to increasing after school and other childcare-related institutions. KBFG pledges that we will engage in a higher level of ESG management, which benefits its role as a leading financial group that will grow with the people through consistently implementing diverse social contribution finance programs that can provide realistic benefits that can be felt firsthand. Please refer to the next pages which cover details regarding the business results I have covered so far. With this, I will conclude the 2023 KBFG business results presentation. Thank you for listening.

Peter Kwon, Head of IR

Thank you very much for the presentation. We'll now proceed to a Q&A session. Those of you viewing the presentation through the Internet, please contact us through the contact number that is on the last page of the PPT deck. So we'll now wait for the questions.

Operator, Operator

The first question is from Park Hye-jin from Daishin Securities.

Hye-jin Park, Analyst

My name is Park Hye-jin from Daishin Securities. With regards to credit cost, I have some questions. Rather than expectations in Q4, the credit cost was quite high. With regards to real estate PF, I understand that there have been preemptive provisions. Can you break down the provisions between the banking subsidiaries and the nonbank subsidiaries, and the total exposure in the bridge loan and delinquency? What is the size of the delinquency at the year-end? Also, loan loss provisions this year as well. Despite the preemptive provisioning, with regards to the real estate PF, do you have any plans for additional provisioning this year?

Kim Jae Kwan, CFO

In the fourth quarter, we set aside large provisions. For bank subsidiaries, the PF is about 95% of senior debt. If you look at the loan provisioning between bank and nonbank subsidiaries, the bank accounts for 60%, making it a significant portion. The nonbanking subsidiaries have also set aside a large additional provision for those segments as well. Our total exposure is around KRW 13.5 trillion, with half accounted for by the bank and the rest by securities and insurance companies. Regarding the delinquency ratio, for the real estate PF, the NPL ratio is about 1%, less than 1%, at 0.8%. Despite this low level, we have set aside very conservative provisioning, and the asset quality rating has been conservatively assessed as well. This is why we have set large provisions. As for whether we will need to have additional provisioning this year, if we assume the worst-case scenario regarding collateral prices, our current assessment suggests that sufficient provisioning has already been set aside, so we don't foresee any additional provisioning for this year.

Operator, Operator

We will take the next question from HSBC. We have Won Jaewoong on the line.

Jaewoong Won, Analyst

Thank you very much for very superior earnings despite the difficult circumstances and for your shareholder return results. I would like to ask you about the standard that you have in mind regarding the KRW 320 billion of share cancellation. You mentioned the PCA and the payout ratio. I think it is over 38%, or so. Is that the total TSR? Or can you provide a little more insight on whether we should expect any changes? Can you give us guidance on the total shareholder return ratio?

Kim Jae Kwan, CFO

Thank you very much. As you’ve mentioned, there will be some changes according to which calendar you are using on a calendar basis for the share buyback and cancellation for this year. Looking back to the previous year, it's 38.6%, as you noted. For share buyback and cancellation this year, we see it at approximately KRW 572 billion. Thus, it should be around 37.5%.

Operator, Operator

We will receive the next question. Jeong Tae Joon from Yuanta Securities.

Tae Joon Jeong, Analyst

My name is Jeong Tae Joon. This recent issue regarding the ELS, what is your view on this? What future responses are you formulating to cope with the situation?

Kim Jae Kwan, CFO

While we are preparing the answer, please wait for a few seconds. So this year, the bank is very much focused on the ELS responses and also on rebuilding trust with our customers. The FSS audit is still underway, and there hasn't been anything decided in terms of compensation for the damages.

Operator, Operator

We will take the next question from Samsung Securities, Kim Jaewoo.

Jae Woo Kim, Analyst

Thank you very much for your good earnings results and shareholder return results. Regarding the CET1 ratio, I think it is improving and, compared to your peers, I believe it is very superior. To what extent do you foresee total shareholder return? For Hana, if it exceeds 13%, they say that they will provide 50% of returns to shareholders that go beyond that. Do you have any special guidance on that, and can you discuss quarterly dividends for this year as well?

Kim Jae Kwan, CFO

Regarding shareholder return, I would like to emphasize three factors. First, we have the highest level of earnings generation power in the financial industry. There was preemptive provisioning for social contributions last year, but excluding that, the 2023 recurring net profit stands at around KRW 3.5 trillion, and total operating profit posted about KRW 16 trillion, reflecting a 17.8% growth and a record high. Our superior earnings power will be a significant source for shareholder return. Secondly, according to the mid- to long-term capital management plan we announced in February, we will faithfully implement our shareholder return policies. Through detailed and sophisticated capital management plans, we will secure the highest level of capital adequacy in the industry. For capital in excess that goes beyond a 13% CET1 ratio, we plan to utilize this actively for shareholder return, barring any special circumstances related to financial market volatility and our company's management goals. Based on such principles, the recent decision on shareholder return was made considering the uncertainties linked to ELS. Unless there are exceptional events, we will fully adhere to our existing long-term capital management plan. KB Financial Group has historically played a leading role concerning shareholder returns, and we intend to implement an even stronger shareholder return policy going forward. Regarding the quarterly dividends you asked about, we plan to do so this year as well, and we will discuss details with the Board of Directors regarding our quarterly dividends this year.

Operator, Operator

Next question is from Kim Do Ha from Hanwha Securities.

Do Ha Kim, Analyst

It’s quite overlapping with the previous question. Earlier this year, how are you intending to calculate the shareholder buyback? Is it linked to the previous year's performance or this year's performance? Based on your answer, we can anticipate what the guidance will be for this year's dividend. Thank you very much for your answer in advance.

Kim Jae Kwan, CFO

Well, I think this question is quite similar to the first question. So let me reiterate that the answer is quite the same as previously stated.

Operator, Operator

We will take the next question from SK Securities, Seol Yong Jin.

Yong Jin Seol, Analyst

It might be a very narrow question, but could you elaborate a bit on the K-ICS ratio? It appears to have gone up for insurance. What are the underlying reasons?

Kim Jae Kwan, CFO

The K-ICS ratio changes quarterly and has been affected by interest rates. The changes this quarter are primarily due to these interest rates.

Operator, Operator

Next question is from Mr. Cho Jihyun from JPMorgan.

Jihyun Cho, Analyst

I have two questions. In 2024, regarding NIM and credit cost growth, if you have any guidance, can you share that as well as your assumptions? Secondly, investors are concerned about the U.S. real estate exposure. Can you provide a breakdown by subsidiaries? What kind of level of risk do you foresee? With regards to K-ICS, do you have provisions for overseas real estate included in that amount?

Kim Jae Kwan, CFO

Regarding U.S. commercial real estate, we have about KRW 5 trillion of exposure, largely held by the bank with significant conservative investments. The bulk of our holdings is in senior debt. In the U.S. and Europe, we have commercial real estate, office buildings, multifamily, and quasi-residential real estate, with a 0.2% default rate NPL ratio. Regarding provisioning, in Q4, I mentioned conservative provisions set against real estate. The overseas commercial real estate also has conservative provisioning, with impaired losses taken at the end of 2023. The overall portfolio mainly consists of senior debt, and consequently, we've prepared ample provisioning based on these factors. Therefore, for KB Financial Group, we don't foresee significant impacts going forward. As for NIM, we have a high share of low-cost deposits, which enables us to maintain a high NIM level in 2023 and likely in 2024. We have maturing high-interest rate time deposits that will play a role as well. Additionally, KB's portion of fixed interest rate deposits is quite substantial, and starting last year, our asset duration has been expanded. Thus, even if the interest rate declines in the second half, we will manage the funding portfolio flexibly. Our 2024 loan growth will focus mostly on corporate loans, maintaining at the nominal GDP growth level.

Operator, Operator

It seems that there are no other questions in the queue now, so we shall hold.

Bong Kwon, Head of IR

It seems that we have received about 7 questions in a short amount of time and covered different areas. If you did not get a chance to ask questions, please contact our IR team, and we would be more than happy to answer them. It seems that there are no questions in the queue now. Since we do not seem to be having any more questions for now in the queue, we shall wait a little longer and if there are no other questions coming in, we will conclude our earnings presentation. Well, we will conclude our Q&A session, and we will conclude our business presentation for full year 2023. Thank you very much.