Earnings Call Transcript - KB Q4 2024

Bong Joong Kwon, Managing Director

We will now begin the 2024 full year business presentation. Thank you very much for participating in today's earnings release. At today's earnings release, we have with us executives from the group, including Managing Director and CFO, Sang-Rok Na. First, our Group CFO will cover the 2024 major earnings results. After that, we will engage in a Q&A session. Please note that from this presentation, after our real-time Q&A session, we have set aside additional time for the management team to answer questions that were previously submitted by our shareholders to our website. I will now invite our group CFO to walk us through the 2024 full year business results.

Na Sang Rok, CFO

Good afternoon. I am Na Sang-Rok, CFO of KB Financial Group. Thank you all for joining KBFG's earnings presentation for FY 2024. Before going into earnings results, I will first run through business highlights. As concerns over household debt and the real estate market persisted in 2024, recent financial market volatilities expanded on the back of major countries' monetary policy stance, U.S. presidential election and surge in the FX rate. For banking, in particular, the rate cut cycle eroded profitability and there were rising concerns on asset quality due to a slump in the real economy and ELS-related compensation booked at the start of the year exerted a downward pressure on the bottom line. Despite all this, net profit for the year reported more than KRW 5 trillion, sustaining a solid profit uptrend for the group. These results are meaningful in that despite a structural difficulty of profitability declines, concerns on soundness and heightened economic uncertainties, our fundamentals have proven solid on the back of business portfolio diversification efforts that we have placed over the years. Also, 2024 can be regarded as the inaugural year of Value-Up, as we placed emphasis on sustainability and predictability, based on which we announced the Sustainable Value-Up Plan last October, embodying KB's philosophy, which was met with a positive market reaction. We were the first to implement share buyback and cancellation in the sector and introduced equal quarterly dividend distribution based on total payout, which shows KBFG is leading the market in shareholder return and has continued to develop such policies, thereby laying a fertile ground. Underpinned by this foundation, I would like to emphasize yet again that we will implement KB's Value-Up Plan firmly with no interruptions. From the next page onwards, I will walk through KBFG's performance highlights for 2024. Firstly, KBFG's FY '24 net profit was KRW 5,078.2 billion, driven by balanced top line expansion across all domains, reporting a 10.5% year-over-year increase. If you look at pre-provisioning operating profit for '24, it came in at KRW 10,089.6 billion, up 5.9% year-over-year. Compared to FY '21, nearly three years back, this is around 38.5% expansion, attesting to solid earnings capacity of the group. Also, ROE for 2024 recorded 9.72%, improving 0.59 percentage points year-over-year, while EPS was KRW 12,881, up 12.2% whilst still maintaining a mid-13% level, which is the industry's top tier. I will elaborate on CET1 on the following pages. Let me also talk about the resolution on shareholder return made by the Board of Directors today. KBFG's BOD today decided on a total of KRW 300 billion cash payout, with DPS of KRW 804. DPS, including the paid dividend in 2024, amount to KRW 3,174, which is an increase of around 3.7% year-over-year. Do note that total yearly dividend payout of KRW 1.2 trillion and KRW 820 billion of share buyback and cancellation during the year will amount to TSR of 39.8% for FY '24. The BOD today also resolved on KRW 520 billion of share buyback and cancellation as well. In accordance with our Value-Up framework that aligns TSR to CET1 ratio based on year-end CET1 ratio of 13.51%. Capital in excess of 13%, which equals approximately KRW 1.76 trillion, was used as resources for cash payout for '25 and first half share buyback and cancellation. For your information, we are looking at a slight year-on-year increase in total cash payout in 2025 by around KRW 40 billion, but nothing has yet been confirmed. Once the BOD decision is reached, we will make appropriate disclosure in due time. Next, moving on to the breakdown and details of the earnings results. In Q4, in accordance with supervisors' interpretation and accounting rules, insurance subsidiaries, including KB Insurance and KB Life, applied changed accounting rules in relation to experience variance and expiring contract, and Q4 '22 and Q4 '23 earnings have been restated retrospectively for your reference. The main lever behind group's top-line performance in '24 was a bigger and sustained profit contribution from the nonbank portfolio, defining solid earnings enhancement of the group. Firstly, in 2024, Group NIM was KRW 12,826.7 billion, up 5.3% year-over-year. Despite NIM moving downwards on the back of rate cut expectations, loan demand rose, expanding the bank's average loan balance, while interest income contribution from non-bank subsidiaries from credit cards and insurance continued to rise. Group's net fee and commission income in FY '24 reported KRW 3,849.6 billion, up 4.8% year-over-year or around KRW 176.1 billion. Now this is despite suspension of ELS sales and depressed real estate PF market, which pushed down the bank and real estate trust fee income. Rather, on the back of the increase in credit card merchant fees and cost efficiency gains, credit card fee income posted a whopping KRW 99.7 billion increase year-on-year. Also, with higher securities business net fee income from investment banking and steady lease fee income at KB Capital, enhanced fee income across non-bank subsidiaries were key levers. Worth noting is fourth quarter net fee and commission income at KRW 997.2 billion despite a decline in merchant fees following a shortened acquiring cycle and decline in stock trading volume and other market headwinds. Securities made a bigger contribution through acquisition financing, IPO, real estate PF and other IB's fees, driving 5.8% growth Q-over-Q. Next, 2024 other operating income posted KRW 351.9 billion. With the fading of the base effect from the previous year's bank social contribution program costs, it increased 8.5% year-over-year. However, Q4 other operating income due to the significant decrease in performance related to securities derivative products, FX caused by the rise of FX rates and the narrowing bond yield decline, as well as seasonal factors, including cold waves and heavy snow, led to a reduction of insurance-related income and recorded muted performance. Next, I will cover SG&A. 2024 SG&A posted KRW 6,938.6 billion. Despite the increase in related costs, including ERP expansion and increasing depreciation and admin cost of subsidiaries, thanks to ERP implemented over the past several years, this led to the reflection of the accumulated labor cost reduction effect and is being stably managed. In addition, 2024 Group CIR posted 40.7%, and on the back of solid top line growth based on core profit and efforts to improve HR structure and manage costs, it declined 0.4 percentage points year-over-year, and is showing a market improvement trend in our Group's cost efficiency. Going forward, KBFG plans to strengthen cost efficiency improvement efforts. In particular, in the case of capital budget, we plan to refrain from a big bang method large amount injection, and through diversified investments in-line with market trends, we will minimize this effect. Also, in the case of recurring costs, we will minimize fixed cost expenditures in order to improve the rigid cost structure. Lastly, is group provisioning for credit losses. 2024 group provisioning for credit losses posted KRW 2,044.3 billion and decreased greatly year-over-year by KRW 1,102.1 billion. This was attributable to the effect from preemptive additional provisioning late last year, preparing for potential real estate PF and other risks, as well as the effect from a reversal of about KRW 263 billion yearly provisioning stemming from the bank's valuation re-rating. In addition, 2024 group credit cost posted 43 bps and improved 24 bps year-over-year, and some reversals took place at selectively normalized PF sites and is being stably managed within the expected range. On the other hand, Q4 provisioning for credit losses posted KRW 565.1 billion and increased 13.5% Q-o-Q, caused by the conservative provisioning stance of all subsidiaries preparing for potential economic condition worsening despite the bank's sizable provisioning reversals. Going into detail, according to the asset quality rating adjustment of the bank, around KRW 68 billion was provisioned against overseas CRE exposure. In the case of securities, around KRW 58 billion was provisioned against real estate PF, and overseas acquisition financing and leasing subsidiaries, including card and capital, have provisioned an appropriate amount, reflecting the recent asset quality ratio trend under a conservative management approach. From Page 9, I will cover major financial indicators. First, group's profitability indicators. As aforementioned, KB Financial Group's 2024 ROE posted 9.72% and improved 0.59 percentage points year-over-year. ROE on a recurring basis, excluding one-offs, stands at 10.76% level. In particular, this was a result of the business diversification efforts made during the past years and was possible since we secured an optimal business portfolio, including 40% non-banking contribution. Going forward, KBFG responding to the low growth interest rate decline regime will strengthen efforts for each business, and on the other hand, continue RoRWA focused qualitative growth efforts. Let's go to the next page. Next, I will cover banks' loans in won growth. At 2024 end, bank loans in won posted KRW 364 trillion and increased 6.4% YTD and 0.5% compared to late September. In the case of household loans, following key interest rate cuts and real estate market transaction volume increase, we saw an increase in home mortgage loans and credit loans centering on actual homebuyers and rose significantly by 6.2% YTD. Corporate loans as a result of solid growth rates centering on high-quality SME and SOHO loans led to a 6.6% increase YTD. We plan to conservatively manage our loan policy, focusing on asset quality and profitability, considering factors including the economic cycle, real estate market and household debt trends, among other factors this year as well. On the other hand, we will minimize quarterly fluctuations, considering RoRWA, and plan to manage so that loan growth will be predictable. Next is net interest margin. Group and Bank's 2024 yearly NIM posted 2.03% and 1.78%, respectively, and went down slightly year-over-year. Despite the fact that the effect from two rounds of key rate cuts that were made in Q4 was reflected early on in the market interest rate, bank NIM stopped at dropping 5 bps Y-o-Y and once again proved profitability management capability centered around internal soundness. On the other hand, Q4 bank NIM posted 1.72% and increased by 1 bps Q-o-Q, resulting from partial improvement of new and balanced loan deposit spread enabled through household loan growth, speed control and following funding amount control as well. We expect the downward NIM trend to continue for the time being this year as well. But in line with our asset growth speed, we will flexibly control the volume and speed of funding and strengthen ALM management to strictly manage our NIM. Lastly, let's go to Page 12. I would like to cover group's capital adequacy-related indicators. First, as you can see on the graph on the left, 2024 and group BIS ratio posted 16.41% and CET1 ratio posted 13.51%, respectively. I will explain in more detail regarding CET1 ratio on the right-hand graph. Group CET1 ratio declined 33 bps Q-o-Q caused by the Q4 net income amount decrease, which limited its contribution to CET1 ratio to a 20 bp level and a 2.9% RoRWA increase due to factors, including the FX rate surge in the quarter. In addition, KRW 300 billion of quarterly dividends and shareholder returns, including share buyback, which took place during the quarter led to around 19 bp level downward effect. As you can see on the graph on the bottom right of the page, Q4 RWA posted KRW 346.9 trillion, a 2.9% increase Q-o-Q. There was around KRW 7.5 trillion of credit risk increase due to FX rate surge, including quarterly won-dollar FX rates rising more than KRW 151, and this contributed to a decrease of about 30 bps to the group CET1 ratio. However, despite these downward factors, thanks to rebalancing efforts, including reduction in unused credit limit, we are still maintaining the industry's highest level of differentiated capital capability. In order to steadfastly implement our group's Value-Up framework, we will strictly manage the RWA total amount limit and through continuous ALM monitoring, we will manage the volatility of asset growth. To the extent that it does not impair revenue-generating ability, we will strengthen efforts to improve capital efficiency through efficient asset rebalancing considering RoRWA. Please refer to the details of our business results from the next pages. And with this, I will conclude KBFG's 2024 business results presentation. Thank you for listening.

Bong Joong Kwon, Managing Director

Thank you for the presentation. We will now begin the Q&A. For those of you joining through the Internet, please refer to the contact information on the very last page of the presentation screen. For those of you using the phone, please refer to the Operator Instructions. From Hanwha Investment Securities, Kim Do Ha. Please go ahead.

Do-Ha Kim, Analyst

Thank you very much for taking my question. I would like to first get an insight on the guidance for your growth and margin. The second question, I believe that these questions are upcoming. If you look at the CET1 ratio, in light of the FX sensitivity that we understand, even if the Korean won was weak, the CET1 ratio was lower than what we had expected. I think the outcome of the share buyback was less. I think the RWA increase was not mainly attributable to the bank. What were the key levers? Can we understand the FX sensitivity on a dollar basis? In terms of our shareholder return policy, the CET ratio of the year-end and midyear is going to be quite important. Did you endeavor to control the year-end CET ratio?

Bong Joong Kwon, Managing Director

Thank you for that question. Just give us one moment before we answer your question.

Na Sang Rok, CFO

Hello, I am CFO Na Sang-Rok. Thank you very much for the question. Regarding the guidance on growth and margin, first, if you look at growth on a nominal GDP basis, that will be our key benchmark against which we will manage our growth. Basically, on a quarterly basis, we want to minimize the variability from one quarter to the next to achieve steady growth. Now the market is looking about 1 or 2 or 3 basis point decline. If you look at the secular trend, the decline in margin seems inevitable because of the rate cut cycle that we’re in. However, we want to make sure that the volatility on the asset side is minimized so that we can save on the funding cost and not just interest, but we want to be able to narrow any fluctuations or big fluctuations that we've seen in the NIM. For CET1 ratio, if you look at Q4, the FX impact was quite sizable; as you mentioned last year, KRW 10, the sensitivity is about 2 basis points for every KRW 10. In Q4, there's been a decline in profit and also with cash dividend payout in Q4. On top of that, we had a share buyback and cancellation of more than KRW 100 billion. So the plus impact has been off-setted because of these levers. Now FX increase had impacted an increase in RWA, which lowered the CET1 ratio. We are not arbitrarily going to bring down the asset growth for Q3 and Q4 to keep to a certain number because that is going to impact our earnings capability negatively. We want to minimize the volatility and fluctuation as much as possible from one quarter to the next. If you take a look at our Value-Up Plan at the midyear and year-end, yes, those are very important timing. Shareholder return is not just going to end with one single point. Basically, there is going to be sustainable shareholder return that is ongoing. Rather than arbitrarily cutting the level of asset, we want to ensure steady growth of asset and striking a right balance between shareholder return and that asset growth.

Bong Joong Kwon, Managing Director

Thank you very much for the answer. We don't have any questions in the queue as of now, so we will wait. We will take the next question from HSBC Securities. We have Won Jaewoong on the line.

Jaewoong Won, Analyst

Can you hear me?

Bong Joong Kwon, Managing Director

Yes, we can hear you well.

Jaewoong Won, Analyst

Thank you very much for the good performance despite the difficult environment. I have two questions. The first question is about the shareholder return Value-Up because when you announced those plans, you mentioned that in the first half, if it exceeds 13% for that excess capital, you would use all of that for shareholder return. After that, in the second half, there would be the amount exceeding 13.5%. That excess capital would be utilized for shareholder return. There is some confusion on our part, and I would like a clearer understanding because I think with the profits that have increased, CET1 increase, it could be 0.2% or 0.3% per quarter. In Q2, when you have the earnings presentation in July, if it goes beyond 13.5%, will that be used for shareholder return? Or after Q3 in September, if you look at the trend, and if you had lower results in Q2, but if it goes beyond 13.5% at that time, would you be more flexible and let us know about the results?

Bong Joong Kwon, Managing Director

We will soon answer your question. Thank you.

Na Sang Rok, CFO

I’d like to answer your questions, and thank you very much for your insightful questions. In the second half of this year for shareholder return, we will be quite flexible. We are not going to have a hard pinpoint in June, but we will see the situation, and there will be CET1 at the end of the year, and we will need to consider that as well, as well as its repercussions. We will be as flexible as possible. For loan growth and CCR, I will ask our CRO of the Financial Holdings Group to answer that question. So I would like to invite Mr. Jong Min Lee.

Jong Min Lee, CRO

I am Jong Min Lee, the CFO of the bank. I would like to answer your question about growth. In 2025, considering profitability and asset quality, we will pursue appropriate growth centering on high-quality assets and risk management. We are expecting about 5% growth of the bank loan growth rate. For household loans, through improving the non-face-to-face loan process and dedicated product expansion, we will have a growth portfolio based on non-face-to-face channel growth. We will also have growth based on high-quality credit loans and mortgage loans that have profitability. So we expect about 4% household loan growth rate considering the market situation. For corporate loans, we will consider asset quality, so we will pursue about 6% loan growth for corporate loans, controlling the growth speed strategically for large corporations and having flexible growth considering market opportunities. For SME loans, we will have appropriate growth based on high-quality assets. For SOHO, we will have growth and have portfolio diversification for different categories and regions. Thank you very much for your question related to CCR. For this year, like the previous year, the financial environment is slated to be quite subdued and economic outlook is not very good as well. We will maintain our conservative provisioning stance as we had maintained. However, the CCR that we are expecting will be in line with the previous year about the mid-40 bps level.

Bong Joong Kwon, Managing Director

Thank you. Next, Mr. Jeong Tae Joon from Mirae Asset. Please go ahead.

Tae Joon Jeong, Analyst

I am Jeong Tae Joon from Mirae Asset. Can you hear me okay?

Bong Joong Kwon, Managing Director

Yes.

Tae Joon Jeong, Analyst

Thank you for taking my question. I have two questions. First, regarding the shareholder buyback you've announced, is it similar to the figures from the first half? During the Q1 earnings presentation, you mentioned that if the capital ratio exceeds what you've shared, would there be additional share buybacks? In your Value-Up Plan, you discussed Phase 1 and Phase 2, but you have now indicated a more flexible approach regarding share buybacks. I would like to understand that better. Secondly, when we assess your total shareholder return compared to last year, it seems that it might decrease year-over-year. Is this a scenario we should consider? Thank you.

Bong Joong Kwon, Managing Director

Just give us one moment.

Na Sang Rok, CFO

I'm the CFO. Responding to your question, based on the Value-Up program, we have, yes, Phase 1, Phase 2, first and second leg. My previous answer is that with regards to the timing of the second return, basically, it is on that aspect that we will be more flexible. In terms of TSR, compared to 2024, we expect TSR will rise in light of the year-end profit guidance and the CET1 ratio that we are projecting for the second half. If we redo the calculation, we will definitely not scale back from where we were last year. So we expect there to be an increase. Just to add on that, when we made the disclosure, it is two times. So the second is second half. This could be Q3, and it means the second half of the year. Thank you.

Bong Joong Kwon, Managing Director

SK Securities, Yong Jin Seol. You are on the line. Please ask your question.

Yong-Jin Seol, Analyst

Thank you very much for the opportunity. I have a question related to insurance. Yes, with regards to the Insurance Reform Council regarding CSM and P&L in case, what impact does the recent rule change or rule revision have on these different indicators?

Bong Joong Kwon, Managing Director

Give us one moment to respond to that question.

Na Sang Rok, CFO

Yes. Thank you very much for the question. I will respond to your question. Out of all of the rule changes and regulatory changes, especially changes on the experience variance related assumption, in Q4, we applied the best estimate figure. KB Insurance, basically, the CSM impact was around KRW 400 billion downwards. Mostly, it had to do with assumption changes relating to lab-supported products. This means that compared to previous Q4, there has been quite a bit of a decline.

Bong Joong Kwon, Managing Director

Thank you very much for your answer. We don't have any questions in the queue as of now, so we will wait. We have the next question. From Goldman Sachs, we have Park Sinyoung. Please ask your question.

Sinyoung Park, Analyst

Thank you for the opportunity. I'm Park Sinyoung from Goldman Sachs. You mentioned the CCR and the mid-40 bps level outlook in your previous answer. Regarding additional provisioning burden that existed, it seems a little high. So on a recurring level, do you think this will actually climb? If that is true, then can you give us your assumption in that background or the outlook? Thank you very much.

Na Sang Rok, CFO

Well, I will explain about that in my answer. Regarding the mid-40 bps level, you mentioned that it may be a little bit of a burdensome level for us, but we are seeing the economy recover and seems to be delaying, and for real estate PF or for overseas CRE, it seems that there is a possibility that it could deteriorate. That is why we have been preemptively provisioning, and we want to have additional pre-provisioning on a conservative basis. Of course, we will have some reversals for our previously accumulated provisioning, but we believe that we need to be ready and prepared for this year. That is the background behind that.

Bong Joong Kwon, Managing Director

Thank you. And can you understand it as a very conservative level of guidance of provisioning? The next question, please.

Unidentified Analyst, Analyst

Thank you very much for the question. My question also has to do with credit cost. In Q4, you are more conservative in provisioning. In 2025, you've also mentioned that you would be conservative going forward. But if you look at the increase in provision in Q4, it wasn't by and large a large margin. You say that there are also factors that will drive reversals. So can you provide a little more detail relating to this? The write-back of provisioning in Q4 had an impact on the overall size of the provision. We would expect that the 40 basis points will start to go down. Basically, what are some of the one-off factors, and this mid-40 basis point guidance that you have just shared? Is it conservative or is this just an appropriate level of projection as of today?

Na Sang Rok, CFO

Yes, let me respond to that. Regarding any one-off factors for the bank relating to real estate and valuation, there were some write-backs booked. Your question is, is this a neutral projection? Or is it conservative? My answer to that is that we have taken a conservative stance. That 40 basis points is a conservative view that we have.

Bong Joong Kwon, Managing Director

From NH Securities, we have a question from Jung Jun-Sup.

Jun-Sup Jung, Analyst

I'm Jung Jun-Sup from NH Securities. Thank you for the opportunity. Regarding loan growth guidance that you remarked on, you mentioned about 5% growth that you are thinking of. I think it's a little bit higher than I had expected. Regarding RWA growth, do you think it will be a similar level? I would like to know more about your rationale.

Na Sang Rok, CFO

Regarding the 5%, well, it could be seen as a little bit high. But for household loans, it is similar to a nominal growth rate of 4% that we are expecting. For corporate loans, we are expecting about 6% in-line with the previous year. I don't think it could be seen as too high, but I think it will be appropriate thinking of the previous year and RWA growth rate about 4.5%. So it will be a little bit lower than the asset growth rate. Thank you.

Bong Joong Kwon, Managing Director

We do not yet have any other people who have asked to submit a question. If there are no additional questions, as I have guided at the very beginning, let us walk through the questions that we received from our shareholders before the start of today's conference call, but we will still wait a little more to see if there's anybody else who has questions. If there are no further questions, then why don't we move on to the questions that we received from shareholders? So there are three questions that we will be talking about today. The first one is about some of the changes relating to the record date, the dividend record date of 2025. The second question is the cash dividend plan going forward. The last question is the timing and the size of share buyback and cancellation in 2025. There may be some overlap with what we have already mentioned, but I would still like to turn it over to our CFO to respond to these questions.

Na Sang Rok, CFO

Regarding the quarterly dividend record date this year with the adoption of the capital markets revision, in the past, the record date was set as of the end of March, June, and September. We can change that to the date after the decision on dividend is made. When we make quarterly earnings presentations, it is at that point in time that we will be able to announce a date on which we will be distributing the dividend. Regarding the cash payout, this year as well, we will continue to implement equal quarterly distribution. Last year, we had done about KRW 1.2 trillion of cash dividend payout. According to this year's information, we have a total shareholder return amount. If you subtract the share buyback and cancellation, the rest will be in the form of a cash dividend payout. So on a year-over-year basis, we believe there is going to be about KRW 40 billion increase, but nothing yet has been confirmed. Once we have the resolution by the BOD, we will be able to come back to you with more detail through disclosure. Another question was asked about when we will have the share buyback and cancellation for 2025. We will have some changes according to CET1 results, and regarding the timing, as we had mentioned, we have first half and second half of the year. There will be two rounds, and it will be basically two rounds. In the second half, we will be more flexible, keeping an eye on the trend. Thank you very much.

Bong Joong Kwon, Managing Director

We will conclude today's earnings release, and thank you very much for participating today.