Earnings Call Transcript - KB Q3 2024

Operator, Operator

Greetings. We will now begin the 2024 Q3 business results presentation, and thank you very much for participating in today's earnings release. We have here with us, Group CFO and SEVP, Jae Kwan Kim, as well as executives from our Group. Regarding today's agenda, first there will be a video of our Group CEO and Chairman, Jong Hee Yang, explaining our company's value-up plan, which was disclosed today; and then our Group CFO will cover 2024 Q3 major earnings results. After that, we will have a Q&A session. We will now watch a video covering KB Financial Group Sustainable Value-up Plan.

Jong Hee Yang, Chairman and CEO

Greetings, I am Jong Hee Yang, Chairman and CEO of KB Financial Group. I will briefly cover KBFG's sustainable value-up plan to our shareholders and investors in and out of Korea who support and love KB. KB has the significant responsibility of both utilizing the capital that our shareholders have invested to maximize profitability to continuously achieve high profits and at the same time, maintain asset quality as a financial company, which plays a pivotal role in supporting the nation's economy. During the past 10 years, KB, by strengthening fundamentals through painstaking efforts, diversified our portfolio. In addition, we firmly established our position as a leading financial group representing Korea in terms of earnings, shareholder return, and ESG. As a result, our capital profitability and asset quality have grown to the point where it stands shoulder to shoulder with leading global companies. And our value per share has also considerably improved. In addition, through continued shareholder return efforts, the total shareholder return ratio for 2023 grew to 37.7%. However, shareholder return is still being pointed out as the biggest reason KB's corporate value is being undervalued. And we have the task of increasing the level of our shareholder return for our company's value to be properly assessed. While preparing for this value-up disclosure, what we believe was the most important shareholder return philosophy was, first, sustainability; and second, predictability. What we most painstakingly thought about was how to catch three rabbits: to continuously improve the company's profitability, enhance shareholder value, and maintain our corporate asset quality. Going forward, KB will link shareholder returns to the CET1 ratio and return surplus capital excluding some management buffer to our shareholders. For example, if the 2024 year-end CET1 ratio posts 13.5%, then 50 basis points of capital, which exceeded 13%, will be a source for next year's dividends and first-half share buyback and cancellation. On the other hand, with the profits accumulated throughout the year, we will maintain a CET1 ratio of mid-13% and utilize the amount which exceeds 13.5% in the second half for additional share buyback and cancellation. The higher KB's CET1 ratio is, the more shareholder returns our shareholders can expect for the next year. In addition, you can predict the amount of shareholder return with the CET1 ratio as well. Like global leading companies such as JPMorgan, the CET1 ratio and shareholder returns will provide more for shareholders. The higher the CET1 ratio, the greater the total shareholder return ratio. To this end, KB Financial Group will enhance our fundamentals, keeping in step with the new value paradigm that pursues qualitative growth beyond quantitative growth. We are organizing our business management system so that we can continue our RWA-focused growth efforts and strengthen our fundamental earnings generation capabilities. From right away, we will begin with our business plans for 2025, aligning our asset growth goals with our value-up paradigm and redesigning key performance indicators. That is to say that all of our group members will move according to the program. Based on these changes, KB's shareholder returns will lead the industry going forward, and our total shareholder return ratio will also maintain the industry's highest position. KB, even before implementing our value-up program, was genuinely committed to shareholder value enhancements, including being the first in the industry to implement share buyback and cancellation and adopting quarterly even dividends based on a total annual amount. We included in this disclosure the results of our deep thoughts about how to satisfy our shareholders and interested parties. Due to time constraints, I cannot explain all details but we promise you that we will continuously improve our corporate governance structure, internal control, ESG, and communication with shareholders. In KB's sustainable journey to catch the three rabbits of profitability, asset quality, and shareholder returns, all members of KB, including myself, will strive forward with one heart and one mind. Thank you for listening.

Jae Kwan Kim, CFO

Good afternoon. I am Kim Jae Kwan, CFO of KB Financial Group. Thank you very much for joining our third quarter 2024 earnings presentation. Before going to Q3 earnings, I will first run through the resolution made by the BOD today regarding the third quarter shareholder return. Based on the industry's top capital strength and earnings capacity, KBFG is committed to a shareholder return policy with a view towards driving shareholder and corporate value enhancement. To pay out equal amounts of dividends every quarter, we've executed share buyback and cancellation, driving quarterly DPS uptrend. As you can see from the value-up plan disclosed today, we will continue to enhance shareholder value underpinned by RoRWA-centric business management and through a CET1-linked shareholder return policy. The CET1 ratio, which is common equity Tier 1, is used for determining shareholder return and is expected to increase by 25 basis points Q-over-Q to 13.85% as of the end of September. In Q3, possibly due to FX rate movement and seasonal effects weighing down on profit, the CET1 ratio may slightly dip, but we plan to keep it robust at above 13.5% during the year. And today, the BOD approved a quarterly cash dividend of KRW 795 per share and an additional share buyback and cancellation of KRW 100 billion. Therefore, DPS is KRW 795, marginally up Q-over-Q following the impact from KRW 400 billion of share buyback announced during the first half of the year. With KRW 100 billion of additional buyback and cancellation, our plan is to retire a total of KRW 820 billion this year, representing the industry's biggest buyback and cancellation yet again, a testament to the strong will of the BOD and management placing foremost priority upon shareholder and corporate value enhancement. Two keywords that characterize KB Financial Group's value-up plan are sustainability and predictability of shareholder return. Guided by such sustainability and predictability, we will endeavor to sustain shareholder return at the industry's top-notch level in alignment with the new value-up program. Now moving on to KBFG's earnings results for Q3 2024. I will begin with the group's performance highlights and key business metrics on a cumulative basis ending Q3 '24. The group's Q3 2024 cumulative net profit was KRW 4.3953 trillion, up 0.4% year-over-year. This is thanks to good performance across nonbank subsidiaries, including securities, insurance, and credit card businesses despite continuing headwinds from rate cuts and a sluggish economy. On the other hand, net profit in Q3 reported KRW 1.614 trillion, down on a Q-over-Q basis. This decline is mainly due to the base effect of sizable provisioning last quarter for ELS compensation; save for this impact, on a normalized basis, net profit was flat Q-over-Q. The group's cumulative credit cost in Q3 recorded an improvement of 11 basis points year-over-year, coming in at 0.41%. Despite ensuing macro uncertainties, we have ample amount of buffer following preemptive provisioning, and we expect to maintain robust control over credit cost going forward as well. As of the end of September 2024, the group's CET1 ratio reported 13.85%, maintaining the industry's top level of capital buffer on the back of solid profit generation and strategic capital management. This, in turn, has been the basis of KRW 100 billion of additional share buyback and cancellation enabling KBFG to continue with a differentiated shareholder return policy supported by capital strength. With that said, I will now move on to a detailed breakdown of the company's third quarter results. The group's net interest income in Q3 was KRW 3.165 trillion, down 1.3% Q-over-Q due to interest rate cuts that reduced yields from loan assets. Q3 net fees and commission income stood at KRW 942.7 billion, driven by increases in the bank's bancassurance and securities investment banking fees, reflecting a 2.5% Q-over-Q increase. Other operating profit for Q3 reported KRW 398.7 billion, up 23.4% Q-over-Q, driven by falls in market rates and FX rates, which resulted in significant expansion in returns from securities and derivatives. Q3 G&A expenses came in at KRW 1.6508 trillion, which is an increase of 3.6% Q-over-Q; however, the Group CIR in Q3 on a cumulative basis reported 36.5%, maintaining below the 40% level, thanks to a solid top-line growth and sustained efforts on cost efficiency gains. Third quarter PCL stood at KRW 498.1 billion, down 9.9% Q-over-Q, mainly due to a reduced burden for provisioning at nonbank subsidiaries, including KB card, savings bank, and real estate trust. Lastly, non-operating profit in Q3 recorded a decline of KRW 140 billion Q-over-Q, attributing to the base effect of last quarter's significant provisioning for ELS compensation costs. On the next page, I will explain key financial indicators. First, profitability indicators: the Q3 '24 cumulative group ROE was 11.26%, surpassing the target ROE of 10%. In the face of the upcoming rate cut cycle, we will also continue to work on diversifying our revenue sources and improving cost efficiency. Looking now at the growth of loans in won, the bank's total loans in won as of September end '24 were KRW 362 trillion, reflecting a 2.9% increase versus June and a 5.9% increase year-to-date. Household loans reached KRW 176 trillion, with rising demand following recent increases in transaction volume driving a 2.7% increase or KRW 4.6 trillion compared to the end of June. Corporate loans accounted for KRW 186 trillion, as loans to large corporates continued following the second-quarter trend, while SME loans also trended upward, reflecting a 3.2% rise compared to the end of June. In terms of NIM, the group's and bank's NIM in Q3 was 1.95% and 1.71%, respectively, down 13 basis points Q-over-Q. This shift is attributed to market rates pricing in expectations of base rate cuts and the lagging repricing of deposit-related rates compared to loans, resulting in spread contraction and lower yields on loan assets. However, downward pressures on NIM, including a steep rise in mortgage lending and pricing in base rate cuts, were mostly captured during Q3. We expect that as deposit repricing aligns with lending rates, there will be an offsetting of NIM erosion. Loan growth has slowed since September due to stringent government controls on household lending, and we expect to maintain Q4 bank NIM at a steady level on the back of margin recovery. Rather than focusing solely on growing the loan book, we plan to concentrate on quality-driven growth with adequate margins to ensure a sustainable basis for interest income generation. Let's move to the next page for a review of the group's cost-income ratio, or CIR. Cumulative group CIR for Q3 2024 posted 36.5% due to solid earnings growth and group-wide cost control efforts, maintaining a stable level. Regarding credit cost ratio, the Q3 cumulative group credit cost posted a 41 bp level; with stabilization in the real estate PF market, some reversals occurred, thereby ensuring that the group's CCR remains stable. Lastly, on capital adequacy, despite the risk-weighted asset growth effect linked to loan growth in the quarter, we secured the highest capital adequacy level in the industry due to proactive capital management and sound net interest growth. In September, we expect the base BIS ratio and CET1 ratio to post 16.75% and 13.85% respectively. As I covered in the shareholder return slide, we will continue to improve capital efficiency to enhance shareholder return visibility by managing the CET ratio to remain above 13.5% throughout the year. KB Financial Group is striving to strengthen communication with and provide investment information access to not only institutional investors but also individual investors. As a beginning, we will introduce a value-up bulletin board on our website to provide investment-related information, including details of our value-up program. From the next earnings release, we plan to allocate time to receive questions in advance from individual investors and address them during the session. Please refer to the next pages for details related to the business presentation that I have covered so far. With this, I will conclude KB Financial Group's 2024 Q3 business results presentation. Thank you for listening.

Operator, Operator

Thank you very much. We will now begin the Q&A session. Our first question will come from Samsung Securities, Jae-Woo Kim. Please go ahead.

Jae Woo Kim, Analyst

Thank you very much for the good earnings this quarter as well as the announcement of the value-up plan. I have two questions for comparative purposes. The first question is, I would like to know what your RWA target is if you were to compare to other developed markets like the U.S. and Japan? When we think about the appropriate level of shareholder return, it would be around 50%. So under the ROE target and for you to achieve that 50% shareholder return rate, I would think that the RWA growth should be kept under 5%. So I would like to know about your target RWA growth rate and how you will manage and control the RWA growth within that level. Also, what do you think is the maximum limit that you think you can actually go to because I do not believe that 50% is the top ceiling depending on different circumstances. If there is more improvement in the ROE and more changes in the RWA, I think that you may be able to pay out more than 50%. So what will be your ultimate target concerning shareholder return?

Jae Kwan Kim, CFO

Yes, this is CFO Kim Jae Kwan. I will address your first question about the RWA target and the total shareholder return (TSR) target. I'll start with the TSR question and then move to RWA. As mentioned during the announcement of our value-up plan, any CET1 ratio above 13% will be used for buybacks and cancellations. We do not have an explicit separate TSR target. However, to enhance TSR further, it is crucial for us to manage the RWA growth rate effectively. To achieve this, we are realigning our entire process within the group. I also want to highlight the importance of the overall size of shareholder return rather than just the TSR ratio. Next year, we anticipate a significant increase in the total amount returned to shareholders. Following this year, we expect our net profit to trend upwards, leading to meaningful expansion in both ratio and absolute amounts. Additionally, we have achieved the highest level of TSR in the industry. We are dedicated to maintaining our status as the company with the best TSR. Regarding your question on RWA, we foresee our asset growth aligning with the nominal GDP growth rate, which is our target. Our average RWA growth over the past decade has been about 6.1%, and we plan to reduce that to around 5%. This growth rate is part of our business plan, aligned with our value-up plan and objectives, as well as the KPIs for our team, which are also in line with these objectives. So, we are well-aligned. Thank you very much for the answer.

Operator, Operator

We will take the next question from Hanwha Investment Securities, Kim Do Ha. You are on the line.

Do-Ha Kim, Analyst

Thank you for the opportunity. Regarding your value-up disclosure, I have questions, and thank you for the announcements. Looking at it at first glance, it seems that it's not a return ratio target; it's more of a CET1 capital amount that will decide. So I think RWA prediction will be quite important for RWA forecast. Regarding RoRWA, do you have any targets? In the disclosure, I think you had targets for ROE, but I don't think for RoRWA. If you can let us know if you have a target for that, it will be greatly appreciated. Additionally, looking at the value-up disclosure PDF, it states our principles for share buyback, cancellation, and cash dividends, and it indicates that you can continue share buyback and cancellation if there are good results. For the dividend profit, it will be decided based on market conditions. So I agree with the philosophy, but I'm curious about where the balance is gearing toward. Regarding that, for cash dividend amounts compared to the ROE amount, you mentioned about KRW 300 billion; thus, the DPS will go up even with share buybacks and cancellations. Can you tell us more about the balance of how you will carry this out?

Jae Kwan Kim, CFO

Thank you very much for the question. I am CFO, Jae Kwan Kim. Regarding the RoRWA target, you asked questions. Of course, from next year, we'll have targets set, although I cannot disclose that at this time. When we set up our business plan for our subsidiaries, businesses, and departments, we will have detailed RoRWA targets and will continue to monitor them moving forward. In particular, regarding RoRWA, there is a linkage to management executive compensation, which we are planning to expand next year to include sales because we think that it's vital. We will do our best to ensure our KPIs are redesigned so that the value-up program communicates well with our employees. Concerning cash dividends and share buyback and cancellation, our principle is that until the PBR reaches 1.0, we are going to expand the amounts of our share buyback and cancellation. However, regarding dividend amounts, we won't restrict it to KRW 1.2 trillion; we'll consider the dividend yield ratio and the market conditions to expand it accordingly. Nevertheless, until the PBR reaches 1x, our dividends will incrementally increase, while for share buybacks and cancellations, as it continuously rises, we believe the pace of DPS uplift will accelerate.

Do-Ha Kim, Analyst

Thank you.

Operator, Operator

From SK Securities, Seol Yong Jin. Please go ahead.

Yong-Jin Seol, Analyst

Thank you for taking my question. I would like to also ask you about value-up, Page 8. Anything in excess of 13% of CET1, you will use those resources for dividend payouts and also share buybacks. You mentioned that any figure above 13.5%, you will actually execute the second-half share buyback. When you say second half, the 13.5%, what are the timing or the baseline of the 13.5%, so that we could get more clarification on when that share buyback might happen in the second half?

Jae Kwan Kim, CFO

This is the CFO, and in our disclosure, when we mention the second half, just to clarify, it's based on the CET1 ratio as of the second quarter. If there are any special circumstances, we could base it off the third quarter number, but our target is to base the CET1 ratio on the second quarter of the year.

Operator, Operator

We will take the next question from Korea Investment Securities, Baek Doosan. You are on the line.

Doosan Baek, Analyst

Thank you very much for the opportunity. I'm Baek Doosan from KIS. Thank you for the value-up disclosure. To ensure this value-up is sustainable, I believe that designing a compensation plan and execution will be very important. I think this was briefly mentioned beforehand regarding setting the KPIs concerning RoRWA for the management and for the employees. Regarding the value-up program, what incentives are you offering them? Can you tell us about any changes or directions you can provide more clarity on?

Jae Kwan Kim, CFO

I am Jae Kwan Kim, the CFO of the group. As aforementioned, we have a lot of this reflected in executive and management compensation. However, the significance will be emphasized for next year. Accordingly, a larger proportion of this will be integrated into compensation plans for our executives. This will not be limited to executives and offices; we believe that the sales teams need to play a significant role. We will do our best to ensure that KPIs reflect this going forward so that sales will understand this paradigm and align with it.

Operator, Operator

Moving on to the next question from Citi Securities of Miseon Lee. Please go ahead.

Miseon Lee, Analyst

I am Miseon from Citi. Thank you for the great earnings. Thank you for taking my question. I have three questions. The first one, regarding the value-up program that you have announced, what is your competitive edge? What is the strength? And what do you think are some of the weaknesses or shortcomings that need improvement? To improve ROE, you said you will expand on shareholder return. Do you have any strategies and plans that could help you further improve your top-line and bottom-line growth? Lastly, for this year and next year, what is your NIM outlook? What are your assumptions in terms of the rate cut, the extent of the rate cut, and the timing included?

Unidentified Company Representative, Company Representative

Well, thank you. Please give us a moment to prepare for the answer. Regarding the value-up program and how we differ from others, it is characterized by sustainability and predictability. Our shareholder return is linked to the CET1 ratio, meaning that if our CET1 ratio is higher, our shareholder return will also expand. Throughout the year, we keep moving to maintain a CET1 ratio of 13.5% in terms of asset quality; thus, we can maintain steady asset quality. This type of value-up approach and policy can only be utilized for companies like us with elevated or high levels of CET1 ratios. Also, as we mentioned before, as we maintain our CET1 ratio at a high level, pushing up TSR, total shareholder return, is crucial. However, for there to be meaningful absolute levels of return back to shareholders, we believe net profit growth is another critical lever. Thus, last year, this year, and going forward, we expect the net profit growth trajectory to continue with the rate cut cycle. Regarding interest income, there may be a dip in the total interest income; however, depending on the decline in the interest rate, we expect positive impacts on returns we get from the capital market as there will be an increase in non-interest income. For this year, there was ELS compensation cost related reserving, which worked as a base effect. Thus, we can expect more pronounced improvement in net profit following this base effect. We have also been proactive in provisioning, contributing to further growth in net profit moving ahead. In terms of your query about NIM, I will turn it over to the CFO of KB Bank. I am the CFO of the Bank. In Q3, our net interest margin was 1.71%, down about 13 basis points from the previous quarter. In the first half of the year, market interest rate cuts impacted margins, but we were able to mitigate this due to our longer duration assets. In the second quarter, matured accumulation savings transformed into core deposits, which helped reduce funding costs and protect against NIM decline. However, as we entered Q3, the normalization of reverse base effects and heightened expectations for rate cuts significantly affected our lending rates. The market's adjustment to rate changes accelerated the overall repricing impacts, which reduced asset yields and spreads. Compared to other commercial banks, we hold a relatively higher proportion of long-duration assets. The reversal of the yield curve in Q3 and the anticipation of interest rate cuts for longer-dated assets influenced our Q3 NIM, leading us to expect a normalization of the yield curve. Consequently, we predict significant implications for our lending rates. In terms of household loans, we are working diligently to ensure adequate deposit pricing. Taking all these factors into account, we expect our Q4 NIM to stabilize as margins recover. Next year, we forecast that quarterly NIM will remain quite consistent with what we experienced this year. Furthermore, we will prioritize profitability and capital efficiency to foster growth and enhance our portfolio with low-cost deposits.

Miseon Lee, Analyst

Thank you very much for your answer.

Operator, Operator

Value-up disclosure has attracted great market interest, so we will take the next question from NH Securities, Jung Jun-Sup.

Jun-Sup Jung, Analyst

Thank you for the opportunity. I'm Jung Jun-Sup from NH Securities. Regarding the disclosure, thank you very much, and the explanation was very helpful. I also have a question related to the value-up program. Regarding your shareholder return, the amount relates closely to RWA. It seems that RWA will be influenced by market factors, including interest rates and FX rates. Could you provide any projections or forecasts regarding external changes impacting CET1 or others? Thank you.

Unidentified Company Representative, Group CRO

I am responsible for Group CRO, and RWA pertains to risk. Let me address that question. In terms of sensitivity, we do not hold a significant open position in stocks, so I believe there is minimal impact there. However, regarding foreign exchange, we must take that into account, as a KRW 10 change in the FX can affect RWA, though not to a large extent. Specifically, a KRW 10 fluctuation in FX results in a 1 basis point effect, which means it can increase or decrease, but this is the limit of its influence.

Jae Kwan Kim, CFO

I am the CFO of the group, Jae Kwan Kim, and let me just add more about our asset growth and RWA growth. We will try to maintain a smaller gap and lessen that gap as our goal, ensuring more efficient capital use. We aim for capital-light growth to minimize the gap, and we are currently working toward that. As you may have noticed this year, we saw a sizable ELS provisioning reversal affecting RWA increases; however, we managed the CET1 at a very high level due to our improved management practices.

Jun-Sup Jung, Analyst

Thank you.

Operator, Operator

From JPMorgan, Jihyun Cho. Please go ahead.

Jihyun Cho, Analyst

Yes, thank you for taking my question. Since most of the questions are directed towards the value-up program, my question will refer to asset quality. This quarter, you briefly mentioned a reversal from the PF provisioning. I'd like to understand your projection concerning credit costs. When analyzing the project financing market, restructuring is ongoing. Are there additional provisions that we need to be cautious about? Please provide us with an update on the current market situation and its implications, especially concerning real estate trust products. Are there any pressing issues or concerns we should be aware of?

Unidentified Company Representative, Company Representative

Yes, I will respond to this question regarding provisions. We've been very conservative and proactive in setting provisions. Last year, we anticipated challenges in real estate project financing, and thus, we adopted a conservative approach. This year, we are now witnessing some reversals in provisioning, and we expect to continue seeing reversals next year as well. However, this does not imply that any concerns regarding asset quality have vanished entirely. We will maintain our conservative and proactive provisioning approach. Even though we uphold this strategy, we are capping our CCR at approximately 40 basis points. We believe we can sustain this CCR ratio next year. Regarding real estate PF, as the CFO mentioned, we've been conservative and proactive in provisioning, and we're now seeing problematic sites going up for auction and moving through the resolution process, which suggests a decline in NPL. Consequently, some provisions could be written back. Concerning real estate trusts, new formations or provisioning requirements are emerging; however, we have sufficient provisioning set aside from Q1 and Q2. Hence, up until early 2022, many sites encountered difficulties, but we do not expect any significant escalations now.

Operator, Operator

A lot has been discussed regarding interest in the market. If you have any further questions and did not get a chance to ask, please reach out to our IR team, and we will be happy to assist you. We will wait a little longer to see if there are any additional questions. It seems that no further questions are coming in, so we will conclude our Q&A session and our earnings presentation. Thank you very much.