Earnings Call Transcript - KB Q3 2020

Peter Kwon, Head of IR

Greetings. I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2020 Q3 Business Results Presentation. I would like to express my deepest gratitude to everyone for participating in our call. We have here with us our group CFO and Deputy President, Kim Ki-Hwan, as well as other members from our group management. We will first hear the 2020 Q3 financial highlights from our CFO and Deputy President, Kim Ki-Hwan, and then engage in a Q&A session. I would like to invite our Deputy President to walk us through the 2020 Q3 major financial highlights.

Kim Ki-Hwan, CFO

Good afternoon. I am Kim Ki-Hwan, CFO of KB Financial Group. Thank you for joining KBFG's presentation on Q3 2020 business results. Before presenting on the earnings, let me first brief you on the operational backdrop. As of end of August, KBFG completed the consolidation of Prudential Life, Korea's top-tier insurer in terms of capital adequacy, sales capabilities and financial stability as its 13th subsidiary. With that, we have finally completed the acquisition of a life insurer, which was a long-harbored aim, gaining a meaningful market position in the life insurance industry. With a perfected business portfolio, second to none in the financial industry, we are now able to further enhance the group's potential for sustainable growth and profitability. Driven by robust earnings fundamentals following the expansion in our nonbank portfolio and preemptive and precise risk management, once again, we were able to record a quite stable earnings in the third quarter. However, with the prolonged COVID-19 pandemic, the overall business environment for the financial industry is turning unfavorable. With social distancing and restrictions on economic activities, the macro outlook for the Korean economy continues to be negative. While financial support programs for hard-hit SMEs and SOHOs have been extended by 6 more months, which deepened concerns over asset quality deteriorations and have once again put to test the risk management capabilities of the Korean banks. Firstly, I would like to affirm that under the crisis brought on by COVID-19, KB has kept its asset quality stable, underpinned by its rigorous risk management framework. With the extension of the financial support, i.e., moratorium on repayment, it is true that for some marginal companies there could be a carryover effect of deteriorations which would eventually lead to erosion of asset quality. However, by taking basic financial information of the borrowers and cash flow projections, which factors in the COVID crisis, we are reviewing debt servicing capacity and possible liquidity issues holistically as we segment risk exposures accordingly. And through such sophisticated follow-up management, we are rigorously preparing against potential risks. Also, credit quality for the company has been improving over the years. And based on conservative forecast economic scenarios, we have made preemptive provisioning, maintaining a fundamentally robust risk management framework. As such, we expect the possibility of asset quality deterioration, to the extent that it will erode our fundamentals, is quite limited. In the meantime, COVID-19 has triggered the spread of the so-called untapped behavior, quickly shifting the center of gravity to digital channels when it comes to customer touch points. KB Financial Group, even before the COVID pandemic, had its focus on customer pain points, making improvements on convenience aspects on our platforms like Star Banking, M-able and Liiv Mate. And as a result, amid competitions with the big techs and other financial service platforms, our core apps are outperforming in terms of usage. We will continue to strengthen our competitiveness in the untapped channel. And by connecting with our existing powerful offline channel, we will lead the efforts in starting a new chapter in channel competitiveness and develop into a future-proof platform with a key focus on customers and the core of financial business. With that, I will move on to the third-quarter earnings results. For your information, Q3 group performance is based on 100% consolidation of Prudential Life. So please note that in light of the acquisition date, we reflected the earnings results for a single month of September. KBFG's Q3 net profit was KRW 1.1666 trillion. On sustained growth of net interest income and net fee and commission income and a base effect of additional provisioning in Q2 as well as the negative goodwill benefit from Prudential Life, net profit was up 18.8% quarter-on-quarter. Excluding the negative goodwill benefit of KRW 145 billion and other one-off items, recurring basis net profit was in the upper KRW 900 billion at a steady level, underpinned by core profit growth and asset quality management. In terms of cumulative net profit up to Q3 2020, it came in at KRW 2.8779 trillion despite NIM being in a narrowing cycle from the rate cuts, and this figure reported a 3.6% growth year-on-year. On a running basis, excluding the one-offs, such as last year's ERP expense and this year's preemptive and additional provisioning and negative goodwill benefit, the increase was 5.1%. Moving on to more details by line item. Q3 cumulative net interest income was KRW 7.1434 trillion, driven by loan growth from the bank and the KB Card and consolidation effects from PRASAC acquired last April. We saw a sustained growth of 4% year-on-year. Q3 cumulative net fee and commission income was KRW 2.1705 trillion. Notwithstanding difficulties, i.e., economic recession and curtailed financial product sales, driven by growth in customer assets and efforts around IB business activation, there was a sharp rise in brokerage commissions, pushing up the income by KRW 454 billion on year. Also, Q3 net fee and commission income reported KRW 789.2 billion, supported by improvement in commission performances from the brokerage financial business and trust income, which was subdued in the first half due to the regulatory impact on sales ceiling, saw improvements on better sales and higher ELS early repayment, posting a growth of 11% on quarter. Next, Q3 other operating income posted a loss of KRW 17.7 billion, which is a steep decline quarter-on-quarter. This is mainly due to the base effect of Q2, where financial market recovery has significantly pushed up gains from marketable securities and derivatives. And with August forming the trough, market rates started to rise, somewhat compressing valuation gains from bonds. Next is on the group's G&A expense. Q3 G&A expense was KRW 1.606 trillion, a marginal increase quarter-on-quarter on the consolidation effect from Prudential Life. On a cumulative basis up to Q3, it reported KRW 4.6462 trillion, which is up 4.3% year-on-year. Although it looks to be a sizable increase, taking PRASAC and Prudential Life impact aside, it is a 2.3% increase year-on-year basis. Q3 PCL, provision for credit loss, was KRW 214.6 billion, with additional provisioning impact in the second quarter removed, there was around 27.5% decline quarter-on-quarter, with quarterly credit costs reporting 0.22%. As such, costs are being well managed. Cumulative group PCL as of the third quarter increased significantly year-on-year on massive additional provisioning in Q2. However, credit cost continues to be at a lower range at 0.25%. Next is on key financial metrics. 2020 Q3 cumulative group ROE and ROA respectively posted 9.76% and 0.70% and are maintaining sound fundamentals and profitability despite concerns over economic downturn. The recurring ROE, taking into account major one-offs, posted 10.01% on the back of the group’s core profit growth and conservative asset quality management. I would now like to cover the bank's growth in won. As of late September 2020, bank's loans in won posted KRW 292 trillion, an 8.6% growth YTD. In Q3, the focus was on quality growth centered on profitability and asset quality and grew 1.7% compared to late June. In the case of household loans, with the solid growth of Jeonse loans and prime unsecured loans, it grew 2.4% compared to late June. In the case of corporate loans, large corp loans decreased 1.9%. But on the other hand, SME loans grew stably by 1.3%, centered on SOHOs. And as a result of conservative loan policy, it grew 0.8% compared to late June. Next is the NIM. Q3 group and bank NIM each recorded 1.73% and 1.49%, respectively. And although there was a contraction in asset yields following the interest rate cut through efforts to increase low-cost deposits and through overall reduction in funding costs, we were able to guard the NIM, so that it only went down 1 basis point quarter-on-quarter. Going forward, KB, based on outstanding sales capability, will focus on expanding low-cost deposits and through a more precise and sophisticated loan pricing system, we will improve profitability and do our best to safeguard the NIM as much as possible. Let's go to the next page. Next, I would like to cover the group's cost-income ratio. 2020 Q3 cumulative group CIR posted 50.3%. And on a recurring level, excluding expenses, including digitalization-related costs, posted 48.3% on a recurring level. With sound top line growth and efforts to manage costs, the group's CIR consistently shows a downward trend. With the realization of our group-wide cost-cutting efforts, we forecast that it will improve to a mid-40% level in the mid- to long-term. Next, I will cover the credit cost ratio. 2020 Q3 credit cost posted 0.22% and 0.25% on a cumulative basis and is still being maintained at a stable level. In addition, excluding one-offs, including Q2 additional preemptive provisioning and sizable write-backs, the cumulative credit cost posted a 0.20% level and is maintaining a low level despite the COVID crisis and concerns over an economic downturn, proving our asset quality management capability. With various financial support programs being prolonged, there are some spreading concerns over asset quality. However, we have been preemptively preparing for these possibilities. And since we have been strengthening management of NPL exposure, we believe that we can stably manage asset quality going forward in the future as well. Next, I would like to cover our group's capital ratio. As of end September 2020, the group's BIS ratio posted 14.69% and the CET1 ratio posted 13.08% and is still maintaining the highest level of capital adequacy in the Korean financial industry. Even after the acquisition of Prudential Life insurance, BIS ratio on the back of stronger capital through net earnings increase and hybrid bond issuance as well as the RWA reduction effect following the early adoption of Basel III, BIS ratio rose 45 bp quarter-on-quarter. For your reference, KB has applied the Basel III credit risk calculation revision plan that the Financial Services Commission decided to adopt early in March. And accordingly, we assume that the group BIS ratio has been pushed up by around 130 bp. Let's now go to the next page. From Page 5, I would like to explain about the management strategic direction related to Prudential Life insurance, which became integrated as a group subsidiary from late August and the synergies we expect. Through acquiring Prudential Life insurance, we were able to acquire a life insurance company that we had yearned for a long time. In the recent low interest environment, it is an undeniable reality that there is a bigger burden to guard life insurance company's profitability. Capital management burden is also increasing with the upcoming accounting standard and capital regulation changes. However, as aforementioned, we believe that it can be an opportunity for solid life insurers. And in this vein, we believe that Prudential Life can be a good partner that can develop along with our group. As you are fully aware, Prudential Life insurance has the industry's highest level of financial soundness and tied agent channels. The RBC ratio as of late June this year posted 456.4% and is much higher than the industry's average and is being recognized as the safest and most solid insurer from the perspective of RBC. We believe that even after the adoption of IFRS 17 or K-ICS, the highest level of RBC solvency in the industry can be maintained. In the case of major financial indicators of life insurers, the persistency ratio and loss ratio in the 13th month as of end June, each posted 87.9% and 51.8%, respectively, and is maintaining a market financial soundness compared to the industry average. In addition, the organization of tied agents, AKA Life planners, is recognized fully in the market as having outstanding capabilities. Prudential Life insurance is called the Insurance Consulting Officer training school and has a great strength in its systematic and professional training system and has around 2,000 tied agents that have received the training of the highest quality. The 13th month agent retention ratio is 52.8%, which is an overwhelmingly high level compared to the industry average. The ratio of certified insurance consultants is 32.5% and has been maintaining #1 in the industry for 13 consecutive years, proving that the sales agents are outstanding in many ways. Next, to explain about Prudential Life management strategy in order for the smooth settlement of Prudential Life insurance into the group and to stabilize business, we will operate Prudential Life insurance independently without merging with KB Life Insurance for the time being, while the group will continuously support Prudential Life so that it can exert its unique competency as much as possible. In the mid- to long-term, with Prudential Life's outstanding Life Planner channel, we have plans to establish a premium sales model, converging the diverse financial services of KB Finance and offering differentiated customer service through digital innovation. In addition, with the acquisition of Prudential Life, the group's business portfolio has been further strengthened and the position of the insurance company within the group has been heightened. The nonbanking sector contribution to the group's net profit rose from around 31% late last year to around 40% based on the current portfolio. And based on the sum of net profit of Prudential Life and KB Life Insurance, our group's life insurance has become #5 in the industry. Apart from these results, we are setting up strategies from the group perspective to create synergy and value in all areas, including product, channel, organization. And just to mention a few, we will utilize the outstanding Prudential Life insurance agent organization as our group's WM outbound marketing channel to promote more cross-selling opportunities between subsidiaries. We will expand diverse financial and asset management services, including real estate, tax and legal services to Prudential Life's 650,000 customers, with a high ratio of affluent customers and create new value in the WM business. In addition, through Prudential Life, since we have better economy of scale and bargaining power from the group, better deal sourcing will be possible, and we expect that the group's asset management competitiveness will get stronger. We are aware of some concerns in the market about cannibalization with KB Life Insurance. But since we have a strong bancassurance channel at KB Life Insurance and an outstanding Life Planner or insurance agent organization at Prudential, we are pursuing a strategy to maximize synergy at the sales channel. Through the acquisition of Prudential Life, KBFG has solid competitiveness in all areas of core business, including securities, non-life insurance, capital and now life insurance, and we will leap forward once again as a leading financial group. Please refer to the following pages regarding the details of the earnings that I have mentioned so far. With this, I will conclude the 2020 Q3 earnings report by KBFG. Thank you for listening.

Operator, Operator

From Hyundai Motor Securities, Mr. Kim Jin-Sang.

Kim Jin-Sang, Analyst

First of all, thank you very much for a good earnings this quarter. I would like to ask two questions. First is on the loan growth and NIM. I see that the trend is favorable, in line with your guidance. Loan growth is higher than your projection, and you're defending the margin quite well. What is your year-end projection for loan growth and for NIM in the second half and next year? What is your outlook? And I also have a question on M&A. Since you've talked about Prudential and also you have acquired products, and also from Cambodia, I feel that your acquisition efforts, and organic efforts have really helped with your growth. Do you also have any additional M&A plans?

Peter Kwon, Head of IR

Yes. Thank you. We would like to please prepare. Give us a moment, so that we could respond to your questions. Just one moment, please.

Kim Ki-Hwan, CFO

Thank you for your question, Kim Jin-Sang. I'll address the loan growth and NIM outlook, while Lee Chang-Kwon, who leads our strategy, will handle the M&A inquiries. Regarding loan and NIM growth, we saw significant increases in unsecured and large corporate loans in the first half of the year, alongside extensions of policy loans and financial aid programs, resulting in growth that exceeded our initial expectations. In the third quarter, our focus shifted to profitability and soundness, leading us to moderate the corporate loan growth rate. By the end of the year, considering loan sales and write-offs, we anticipate a fairly moderate loan growth in Q4, with only a slight increase from the end of September. For household loans, stricter requirements for new originations are expected to moderate growth as we enter Q4. In terms of corporate loans, we will maintain lending policies that prioritize profitability and soundness, and we foresee a flat growth rate compared to the end of September due to seasonal repayment patterns. As for our NIM outlook, the third quarter's rate cut resulted in a further decline in asset yield. However, thanks to our strategy of expanding low-cost deposits, we managed to limit the NIM decline to just 1 basis point quarter-on-quarter. We expect NIM to experience a downward pressure of about 1 to 2 basis points in Q4, but we will focus on increasing low-cost deposits and being precise in our loan policies to mitigate NIM compression. We aim to keep our NIM at a minimum of 1.5% annually. Looking ahead to next year's NIM outlook, we are in the process of drafting our business plan, making it challenging to provide specific details. Nonetheless, we consider the impact of the current rate cuts, which may sustain downward pressure on NIM. However, we also see a gradual uptrend in market rates, and we will work on adjusting our portfolio and limiting NIM erosion. Now I'll hand it over to Lee Chang-Kwon.

Lee Chang Kwon, Strategy Officer

I would like to discuss our M&A strategy and international markets. KB has been focused on achieving consistent growth and maintaining a balanced portfolio while expanding our business. Our efforts have been significant. As the CFO noted, nonbanking profit contributions rose from 20% in 2014 to 40% in the third quarter of this year. We now have a strong portfolio across various sectors including banking, securities, life insurance, non-life insurance, and credit cards, making us the most balanced and stable in the industry. For future M&As, we will prioritize perfecting our merger with Prudential and PRASAC to ensure a safe settlement. We are also working on creating new values with PAA and PAI, focusing on a smooth integration process. However, if beneficial opportunities arise that can enhance profitability and overall value, we will cautiously evaluate them. Regarding international expansions, we will consider country risks, cultural factors, and how they relate to our company to ensure we make well-informed decisions.

Operator, Operator

Next question from Hana Financial Securities, Mr. Choi Jung Wook.

Choi Jung Wook, Analyst

Hello. I'm from Hana Financial Securities. My name is Choi Jung Wook. It's a little bit early, but I would like to ask some questions about dividends. The market is very much interested in your dividend plan going forward. And recently, the authorities, because of COVID, they have asked to refrain from giving out dividends. And I think in the news, we have heard about that. And KB has had very good earnings until Q3. And compared to last year, it seems that your earnings and performance could be better. And if that happens, then there could be some dividend impact. So could you actually give us your take on what is going to be the direction of dividends going forward? And not only this year, but in the mid- to long-term, can you tell us about your dividend plan and shareholder plan because you have mentioned that it's going to go beyond 30%? But if you can tell us in more detail about your mid- to long-term dividend plans, it would be very helpful.

Peter Kwon, Head of IR

Please bear with us, and we will soon answer your questions. Thank you.

Kim Ki-Hwan, CFO

Thank you for your question. This year, due to COVID-19, we have experienced an economic downturn. There are higher requirements concerning capital adequacy management, and I understand the growing concerns over dividend payouts. The global economic crisis is becoming a reality, and financial authorities in the U.S., Europe, and Australia recommend that banks reduce dividend payments and share buybacks. Similarly, Korea's financial authorities are urging banks to adopt conservative capital management. We have been preparing thoroughly and strictly, while also maintaining strong capital capabilities. We are working hard to balance these aspects. At this moment, I cannot provide specific details about this year's dividend payout ratio. Given the ongoing economic downturn following COVID-19 and the uncertainties it brings, we need to be fully prepared. Aggressive expansion of our dividend payout may be challenging in the current climate. Our final decision on this year's dividend payout ratio will be influenced by the management environment and strategy. Korean banks have a dividend payout ratio in the mid-20% range, with a total shareholder return ratio of about 30%, which is considerably lower than banks in the U.S., Europe, and Australia. However, Korean banks demonstrate strong earnings stability, capital adequacy, and solid asset quality. Therefore, we believe these factors can positively influence our dividend payout ratio. We are committed to doing our best to maintain our dividend payout ratio at least at last year's level. Regarding future dividend payout ratios, we aim to consistently maintain a rate of 30% and will continue on that trajectory. However, we cannot provide a definitive decision about treasury share buybacks or cancellations at this time. Current conditions suggest it might be challenging, but next year, considering the economic environment and other factors, we could reassess our decisions.

Operator, Operator

Next question is from Kim Jaewoo from Samsung Securities.

Kim Jaewoo, Analyst

I would like to ask two questions. First question is on COVID-19 related financial aid, which was supposed to end in September, it got extended. So there's concern that there could be further deterioration after the program actually ends for marginal companies and that could actually impact your equity price. I would like to understand what your assessment is on the quality and the credit worthiness of the relevant loans in question? And also, what's your outlook for provisioning for next year? Second question, last month, the Korean government announced the Korean new deal plan. I understand that Korean banks are also taking part in that initiative. I understand that KB is committed to investing KRW 10 trillion up to 2025. Can you be a little more specific as to what types of projects or businesses you would be investing in?

Peter Kwon, Head of IR

Give us one moment, and we will soon respond to your questions.

Kim Ki-Hwan, CFO

Thank you for your question. You inquired about the financial aid package and its potential impact on our asset quality and provisioning. We will also address the Korean new deal recently announced by the government. The financial support program has been extended to March of next year due to the prolonged effects of COVID-19, allowing SMEs, SOHOs, and small merchants affected by the pandemic to receive assistance. This raises concerns about the long-term effects on asset quality. However, we at KB have taken proactive and precise measures to manage asset quality. We have classified our borrowers and adopted a cautious approach in our management. Most of the financial support includes guarantee elements, and the actual volume of loans is not as concerning as it may seem. From a soundness perspective, we believe we can maintain control over asset quality. To provide more specifics, the new loans we have issued consist largely of guaranteed portions and prime loans, with most collateralized by payment guarantees and properties, making them stable. Regarding the interest deferment program, as of September, the principal under this program is about KRW 400 billion. The peak occurred in April, but since then, the number of deferment applications has declined, and outstanding balances have stabilized. We do not expect significant credit quality deterioration from this trend. However, once the support program concludes, there are concerns about potential asset quality issues leading to nonperforming loans. We are closely monitoring these borrowers and implementing a strong risk management strategy, especially for those we consider vulnerable. We are prepared to address any deterioration in asset quality effectively. Looking at other asset quality indicators, everything is under control. We are committed to managing our assets meticulously to safeguard quality. For provisioning, we anticipate credit costs this year will be around 25 to 30 basis points, with potential increases next year if COVID-19 resurges. Nevertheless, we believe next year's credit costs can be maintained around 30 basis points based on our current portfolio. In a worst-case scenario, we could still keep credit costs at approximately 40 basis points. Regarding your question about the new deal and our involvement, we have observed significant growth in untapped cultural sectors and increased interest in ESG initiatives post-COVID-19. We believe the economic landscape will transform significantly. Historically, the Korean economy was strong in shipbuilding and heavy industries, but the new deal emphasizes digital, green, and safety sectors, moving away from traditional industries. We concur with the rationale behind this shift and have identified digital and ESG as our strategic focus. Last year, we committed to reducing carbon emissions by 25% from 2017 levels by 2030 and increasing sales of ESG-related products and loans to KRW 50 trillion as part of our KB Greenway 2030 initiative. Recently, we announced that we would cease participation in projects related to fossil fuels and power generation, both domestically and internationally. The Korean government's new deal aligns well with our strategic direction, providing an opportunity for business development while fulfilling our responsibilities as a leading financial group. Out of the 10 major projects under the Korean new deal, we have identified five key areas for investment: Green Smart School, Safety SOC Digitalization, Green Remodeling, Green Energy, and Green Future Mobility. By 2025, we plan to invest around KRW 10 trillion in these sectors. To date, we have already invested approximately KRW 1.2 trillion and are on track to meet our goals. The participatory new deal fund's government guarantees on sub-debt will help reduce risks and the calculated BIS capital ratio will have a lower risk weight, along with tax benefits. We intend to fully leverage these benefits to create diverse business opportunities. Thank you.

Peter Kwon, Head of IR

I believe we have had a lengthy Q&A session, and it has been nearly 50 minutes. I know there may be other questions on the line, but please direct them to our IR department afterwards, and we will take one last question.

Operator, Operator

We will take the last question from Cape Investment Securities, Kim Do Ha.

Kim Do Ha, Analyst

I'm from Cape Securities. I'm Kim Do Ha. It might be an overlapping question, but I have two questions. The first question is about mid dividend payout. And I know that some things are having short-term dividend payouts and some others have other types. And I know that you have very strong capital. So do you have any plans for short-term or mid-term dividend payout? If you do, please share with us your interim payout plan. And for provisioning, do you believe that you will need Q4 provisioning to prepare for COVID-19 possibility? In Q2, you had some preemptive provisioning. And I am curious whether you have other plans for preemptive provisioning against COVID going forward in Q4?

Peter Kwon, Head of IR

We will soon answer your question. Please hold. Thank you.

Kim Ki-Hwan, CFO

Thank you for your questions, Kim Do Ha. Regarding the interim dividend, we've previously addressed some points, and as per regulations, any changes would require amendments to our Articles of Incorporation. However, our current AOI allows for interim dividend payouts without necessitating any modifications. We are aware of the growing demand for dividends in the market, and while several banks are offering short-term or interim payouts, we have yet to finalize our details on this. Nonetheless, we consider the option of interim dividends to enhance shareholder value and will provide updates as more information becomes available. You also inquired about provisioning for potential COVID-19 impacts in Q4. We have been evaluating economic forecasts and need to make provisions this year. The forecast suggests a low rate, but next year could see fluctuations around plus or minus 3% due to this year’s base effect. We are currently calculating the required provisioning amount, which we anticipate will not be significant, and we will not overemphasize the vulnerable industries affected by COVID. We are committed to maintaining our preparedness plan as we move forward into Q4.

Peter Kwon, Head of IR

Thank you very much. That ends the Q&A. And that ends today's earnings release. Thank you.