Earnings Call Transcript - KB Q2 2024

Peter Kwon, Head of IR

Greetings. I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2024 First Half Business Results Presentation. I would like to express my deepest gratitude to everyone for participating today. We have here with us our group CFO and SVP, Jae Kwan Kim, as well as other members from our group management. We will first share the 2024 first half major financial highlights by CFO and SVP, Jae Kwan Kim, and then engage in a Q&A session. I would like to invite our SVP to deliver 2024 first half earnings results.

Jae Kwan Kim, CFO

Good afternoon. I'm Jae Kwan Kim, CFO of KB Financial Group. Thank you for joining KBFG's 2024 first half earnings presentation. Before going into the second quarter earnings results, I will first go over the company's first half shareholder return plan, which was resolved by today's BOD meeting. Please turn to Page 4 of the presentation deck. Despite a difficult operational backdrop, KBFG has been pushing forward with an industry-leading shareholder return policy with a sustained effort on capital management to maintain the industry's top-notch capital strength. As a result, the CET1 ratio as of the end of June was up 17 basis points Q-over-Q, expected to reach 13.59%, which is the highest capital ratio in the domestic market. As you are aware, last quarter, we were the first in the industry to start paying out equal amounts of dividends every quarter on a total amount basis, enhancing visibility on annual payout and EPS while retaining flexibility in implementing share buyback and cancellation with a view towards improving shareholder returns. As part of such effort, today, the BoD decided on a quarterly cash payout of KRW791 per share and a buyback and cancellation amounting to KRW400 billion. The KRW791 EPS is a marginal increase following the impact from a KRW320 billion share buyback announced during the first quarter, while the additional share buyback and cancellation of KRW400 billion is yet again a testament to the commitment of the BoD and the management towards enhancing total shareholder return and shareholder value. All in all, we will, in total, buy back and cancel KRW720 billion, which distinguishes our shareholder return policy underpinned by the industry's top-notch capital strength and stable earnings capacity in spite of challenging operational headwinds with growing macro uncertainty. KBFG will endeavor to continue with a progressive dividend policy employing various means within the boundaries of sustaining robust capital adequacy so that we may meet the expectations of the market. Now, I will move on to KBFG's earnings for the first half of 2024. First, key business performance highlights and metrics of the group. KBFG's first half 2024 group net profit reported KRW2,781.5 billion. Because of sizable ELS compensation costs in Q1, this was a 7.5% decline year-over-year, but if you look at the second quarter, on the back of evenly spread growth coming from the bank and non-bank businesses and solid earnings expansion, particularly from non-bank subsidiaries, i.e., securities and insurance, net profit came in at KRW1,732.4 billion. Putting aside one-offs such as reversals from ELS compensation costs and loan loss provisions, the normalized net profit is at around KRW1.6 trillion. KBFG will continue its efforts around keeping stable earnings fundamentals supported by a conservative provisioning stance and diversified group portfolio so as to solidify its base for sustainable growth. G&A expense in the first half was KRW3,222.1 billion, up 2% year-over-year. The cost-to-income ratio, which represents the cost efficiency of the group, was supported by a solid earnings growth trend and corporate-wide cost efficiency efforts, keeping in line with the controlled level of 36.4%. Group's labor costs shifted to a downward trajectory last year, and with a decline in the number of headcount from an early retirement program and cost efficiency efforts continuing, we expect to see the group CIR trend to continue and stabilize downward. The first half cumulative credit cost for the group was 40 basis points, being kept at a steady level. Macro uncertainties are continuing this year, triggering concern on overall asset quality of the industry, but we have ample capacity to respond, backed by preemptive conservative provisioning and rigorous management against additional risks. As such, we believe the group's credit cost will be kept under steady control. Meanwhile, banking sector prices in the market have displayed strengths on the back of high expectations placed on the value-up program since the beginning of the year. As I mentioned at the beginning, on the shareholder return page, KBFG has been at the forefront of progressive shareholder return, underpinned by stronger fundamentals, capital ratio strength, and stable governance structure, writing its own version of value-up history. Also to maintain consistency of our value-up approach, we have faithfully implemented mid- to longer-term capital plans, which were announced last year, and was the first company in Korea to make preliminary value-up disclosures back in May. In the second half, in addition to scheduled value-up disclosures, we will continue to endeavor to drive corporate value and shareholder value enhancement. With that said, I will move on to detailed items. 2024 first half group net interest income posted KRW6,357.7 billion, and Q2 net interest income recorded KRW3,206.2 billion and went up 9% Y-o-Y and 1.7% Q-o-Q, respectively. This was possible on the back of loan average balance growth and continued interest income contribution expansion, including non-bank subsidiaries, such as insurance, despite the net interest margin contraction following the interest rate decline. The first half group net fee and commissions income posted KRW1,909.8 billion and increased 2.4% Y-o-Y. This is mostly attributable to the increase in stock transaction amounts following higher expectations regarding the value-up program, expanding brokerage income and increasing securities financial product sales fees, card fees and capital fees and commissions. However, Q2 group net fee income posted KRW919.7 billion. And with the IB fee decline following the real estate PF market contraction, it went down slightly Q-o-Q. However, on the back of strengthening group-wide sales activities and efforts to diversify business for six consecutive quarters, a KRW900 billion level of net fee income was recorded, assessing the fact that the group's fee income generation fundamentals are being robustly maintained. Next, I will cover other operating profits. Q2 other operating profit posted KRW323.1 billion, and with improvements in the financial market environment, including interest rates and stock index, on the back of expansion of securities investment performance, including bonds and beneficiary securities, they posted sound performance with a 19.5% Q-o-Q increase. On a first half cumulative basis, it posted KRW593.5 billion. And with the contraction and performance related to securities, FX and derivatives due to the interest rate and FX rate effect, the performance was lower than the same period compared to the previous year. On the other hand, in the case of the first half insurance income, it went up KRW185.7 billion Y-o-Y. This is attributable to the previous quarter's non-life insurance IBNR reserve reversal and long-term and general insurance loss ratio improvement. Next, I will cover G&A expenses. First half G&A posted KRW3,222.1 billion, and on the back of continuous cost rationalization efforts, it went up around 2% Y-o-Y and Q2 G&A decreased 2.1% Q-o-Q and is being well managed. Next is group provision for credit losses. Q2 provision for credit losses posted KRW552.6 billion, an increase Q-o-Q. Despite the provisioning reversal due to one-off in this quarter, this is mostly attributable to additional provisioning related to real estate trust and maintaining our conservative provisioning accumulation stance in case of future economic slowdowns. On the other hand, first half cumulative provision for credit losses posted KRW981 billion, and decreased by a great degree Y-o-Y. This was caused by the underlying effect stemming from the preemptive large-scale provisioning, reflecting the conservative FLC scenario in the previous year. Last, regarding the Q2 non-operating profit, on the back of the underlying effect following the previous Q1 large-scale ELS provisioning reversal, it grew by a large degree Q-o-Q. From the next page, I will go over key financial indicators. Next, the group's profitability indicators. 2024 first half group ROE posted 10.78%. Non-operating profit, which declined steeply due to the previous quarter's ELS compensation costs recovered, and based on a differentiated business portfolio, core profit growth continued and the recurring ROE, excluding one-offs, posted 12.26%, and solid profitability is being maintained. Next, I will cover bank loans in won growth. 2024 June-end, bank loans in won posted KRW352 trillion, an increase of 2.3% compared to the end of March and increased 2.9% YTD. Due to our asset quality and profitability-based loan policy and overheated competition in the corporate loan market, the bank's loans in won in the early part of the year showed slightly low growth, but from Q2, loan demand increased, centering on real demand, and loan growth is gradually recovering. In detail, household loans posted KRW172 trillion, and with the expansion in loan demand and loans from national funds due to home transaction increases, it went up 3.0% YTD, around KRW5 trillion increase. In the case of corporate loans, in Q2, with the expansion in large corporate loans and the addition of moderate SME loan growth, it increased 2.7% YTD. We will monitor the economic circumstances and household loan situation and focus on qualitative growth on asset quality and profitability in the second half as well and flexibly manage loan growth speed. Next is net interest margin. Q2 group and bank NIM each posted 2.08 percentage points and 1.84 percentage points, respectively, and each declined by 3 basis points Q-o-Q, respectively. This was mostly attributable to spread contraction and market interest rate decline and other factors leading to lower asset yields. However, on a Y-o-Y basis until now, group and bank each increased by 3 basis points, respectively. Let's go to the next page. I will cover the group's cost-income ratio, CIR. As you can see in the top left-hand graph, 2024 first half group CIR posted 36.4%, and with continuous core profit growth and group-wide cost management efforts, cost efficiency improvement trends are continuing and are showing downward stabilization. Next is the credit cost ratio. Q2 credit cost posted a 43 basis point level and slightly increased Q-o-Q, but is still maintaining stable asset quality, still within predictable scope. Last is group's capital adequacy. Despite the won and dollar FX increases in the quarter, on the back of the group's levels active risk-weighted asset management efforts and solid net profit increase, June-end BIS ratio and CET1 ratio are expected to post 16.63% and 13.59%, respectively, the highest level in the financial industry. As we had mentioned in the capital policy that was presented in the early part of the year in the business earnings report, we will manage the CET1 ratio at a 13.5% level and continue group-wide efforts to improve capital adequacy so that shareholder return visibility can be enhanced. The next pages are detailed material related to shareholder value-related indicators and management performance, so please refer to it if needed. With this, I will conclude KBFG's first half business results presentation. Thank you for listening.

Operator, Operator

Thank you very much. We will now begin the Q&A. We will take the first question from SK Securities, Mr. Seol, Yong-Jin. Please go ahead.

Yong-Jin Seol, Analyst

Thank you for taking my questions. I have some questions relating to your shareholder return policy and value-up program. Before I begin, I would like to first thank you for implementing consistently in alignment with your past announcement. And you've mentioned that with regards to the value-up disclosure, you will continue to implement those disclosures. I'm just wondering will there be any changes that we need to be mindful of in terms of that value-up disclosure going forward?

Jae Kwan Kim, CFO

Thank you for the question. Jae Kwan Kim, the CFO. Although we haven't yet made the value-up disclosure, as you know, starting this year, we have adopted the quarterly even dividend program and our share buyback and cancellation amounts to KRW720 billion, as we have announced. And although we have yet to make that relevant disclosure, under our value-up program, yes, we are implementing all of those measures one by one. With regards to the content that will be included in the value-up disclosure per se, we are at this point discussing the details. But in terms of the capital ratio and how we are going to use the capital and also our efforts to improve the ROE are some of the aspects that will be included in that disclosure.

Operator, Operator

Thank you. We do not have any more questions in the queue, so please bear with us one moment. We will take the next question from HSBC, Won, Jaewoong. You're on the line.

Jaewoong Won, Analyst

Can you hear me?

Jae Kwan Kim, CFO

Yes, we can hear you well.

Jaewoong Won, Analyst

Thank you for your good earnings despite the challenging environment and for shareholder return. I have two questions. My first question is related to Page 4 of the presentation deck. And it has 2023 and 2024 shareholder return comparison, and to my knowledge, on a physical basis, you were engaging in shareholder returns. And I think it seems that you have changed to a calendar schedule. So, does it mean that going forward, do we have to calculate shareholder return based on a calendar basis? So that's my first question. My second question is, if you are going on a calendar basis, then KRW720 billion of shareholder return was given for shareholder buyback and cancellation. But can we think that there could be additional shareholder return that is added in this manner? Thank you.

Jae Kwan Kim, CFO

I am Jae Kwan Kim, the CFO of KBFG. Until now, regarding the total shareholder return ratio, there were two standards. So, I think there was a little bit of confusion in the market. So that is going forward, we are going to have it integrated in a calendar fashion. And when we introduce the calendar method, then we have shareholder return firsthand, and then we have the net profit calculated afterwards. So that is why going forward, we plan to gradually increase it and to decide on the total shareholder return ratio in the beginning. And then, we can decide on the others as we go along, depending on the situation. And regarding what we planned for the rest of the year, we have not reviewed any possibilities at this point.

Operator, Operator

Thank you. We'll take the next question Hye-jin Park from Daishin Securities. Please go ahead.

Park Hye-jin, Analyst

Thank you. I have some questions about your provisioning. For your property project financing, I understand there are four specific categories. Regarding the property market, I believe you briefly mentioned the trust arrangement. I would like to know the size of provisioning related to PF at your subsidiary level. Also, do you think the impact from project financing will persist, meaning do you anticipate any additional provisioning we should be aware of moving forward?

Choi Cheal Soo, CRO

I will address the question. I am the Chief Risk Officer, Choi Cheal Soo. Regarding property project financing, the business feasibility assessment has become much stricter. For KB, we had already set aside provisions very conservatively. While there was an increase in non-performing loans amounting to tens of billions, the impact on provisioning was only around a billion. Thus, the overall impact has not been significant because we had made substantial provisions in advance. For the real estate trust, there was higher exposure this quarter, but other subsidiaries did not experience significant exposure related to project financing. With the real estate trust, we are seeing an increase in unfilled lots and rising construction costs, leading to various developer-related challenges. Most property trusts in the market are encountering difficulties, and the most significant impact will be from the completion guarantees provided. In the second quarter, we conducted inspections of all sites and set aside provisions very conservatively. In terms of the property trust, if there are outflows, there is a trust account. We are currently exposed to about KRW300 billion for those with completion guarantees, with about 70% of reserves available to back that up and around 30% allocated for the trust account moving forward. This indicates that we are well-prepared for loss absorption in those trust accounts, particularly for properties. As for project financing in the second quarter, there was a notable increase primarily due to the property trust arrangement.

Operator, Operator

Thank you. From Hanwha Securities, we have Do-Ha Kim. You're on the line.

Do-Ha Kim, Analyst

Thank you for the opportunity. I also have a question about asset quality. And regarding the trust and the completion, you mentioned about the provisioning. Can you tell us about the amount? Because I'm sure that in the other subsidiaries, you mentioned that it is not very sizable. So, recurring CCR, well, I would like to know more about it so that I would like these numbers to calculate backward. And regarding NPL, I think coverage ratio was affected. So, can you tell us about what was actually classified as NPL? And can you tell us about the appropriate level of coverage ratio that you think is optimal?

Jae Kwan Kim, CFO

So, when it comes to property trust, in Q2, we set aside about KRW80 billion. Now this is the provision that we set aside for Q2. And below substandard, there's been some increase. You are right, we've seen some increase for substandard and below. And in Q2, if you look at the asset quality categorization, we applied a more rigorous test. So, for borrowers with less capability of paying back, what we did was, in that case, the reserving ratio would have been higher. And for real estate PF, for loss-making sites, what we did was we also reflected for that. But when it comes to the big impact, it's the construction sites where there is a completion guarantee and all of those exposures have been categorized under NPL. That's why the number seems like it is quite high. Now, your question regarding what is the appropriate level of coverage, I look at coverage ratio from two different perspectives. The first one is during the COVID pandemic when there was very low interest rates, there has been a quite high amount of reserving, but these days, we're now in a high rate environment and the macro uncertainties have widened. So, during COVID, the 200% coverage ratio, I think that's very particular. So, if you look at pre-COVID, around 2019, I think 125% or 130% level will be a more appropriate level per se when it comes to coverage ratio. And when you calculate the coverage ratio, the assets under the NPL now have quite a bit of collateral strength. And so basically, the probability of incurring a loss is not very high. So, if we consider for that aspect, if you think about the appropriate level of coverage because you can't go too much, you can't go too low, but I think 130% and 140% can be considered to be an appropriate coverage ratio.

Operator, Operator

Thank you. And we do not have any more questions in the queue, so we will wait. We have from HSBC, Won Jaewoong, who is asking an additional question.

Jaewoong Won, Analyst

Thank you very much for giving me this opportunity once again to ask a question. I have a lot that I would like to know more about because in Bukopin, can you tell us more about what is going on abroad? Because I think regarding delinquency or income or CCR, can you tell us whether it is being stabilized? We would really appreciate more info.

Nam Che Kang, Overseas Business Head

Thank you for your question. I am Kang Nam Che, overseeing the overseas business. Regarding Bukopin, the name is KBI or KB Bank Indonesia, so I will refer to it as KBI. We are making continuous efforts towards sustainable management. Concerning the non-performing assets of Bukopin, we have significantly reduced them. As of 2022, Bukopin had IDR35 trillion that was non-viable, but by the first half of this year, we made many improvements and provisions, reducing that number to IDR11 trillion. Additionally, the net non-performing loans are currently stable, remaining below 5%. For your reference, it has not been announced yet, but there is information about PPOP.

Operator, Operator

Thank you. Jongmin Shim from CLSA.

Jongmin Shim, Analyst

Thank you. This is Jongmin Shim from CLSA. I have two questions. The first is about your NIM outlook. I have noticed that your NIM trend has been consistent and well-managed over the past six quarters. Moving forward, we anticipate some fluctuations in interest rates, so I would like to know the company’s perspective on NIM as we go ahead. If interest rates were to decline, do you have any defensive strategies in place? My second question is about shareholder returns. Previously, you mentioned that 0.8 times is considered fair value. If your share price approaches that level, wouldn't that lead to a reduction in share buybacks and an increase in dividends per share? What strategy do you plan to take regarding the balance between share buybacks and the trend in dividends per share?

Unidentified Company Representative, Representative

Thank you. I am Jong-Min Lee, the bank's CFO. The bank's net interest margin is currently 1.84%, which is 3 basis points lower due to stagnation in core deposit growth. Despite the delay in cutting the policy rate, market rates have decreased, and we have also experienced spread contraction. We anticipate that market rates will decline in the second half of the year, and there is a chance that the Bank of Korea may also lower rates, leading to increased competition, although that timing has been pushed back. By increasing core deposits, we believe we can mitigate the decline in net interest margin. For 2024, we expect the bank's net interest margin to remain steady compared to last year. Our goal is to enhance both core and retail deposits to counteract net interest margin decline, effectively manage our maturity structure, and reduce funding costs. We will remain aware of the operational environment and interest rate trends while focusing on achieving the right margins.

Jae Kwan Kim, CFO

This is CFO of the KBFG. Regarding the cash payout and the share buyback and cancellation, how we will balance between the two means, now, we are in the process of preparing for the value-up disclosure, so including the answer to your question that you posed today, we will include that into our upcoming Q4 disclosure. At the current PBR level, we're going to focus more on share buyback and cancellation.

Operator, Operator

We will take the next question from Goldman Sachs, Park Sin-Young.

Sin-Young Park, Analyst

Thank you very much for the opportunity. I am Park Sin-Young from Goldman Sachs. Regarding shareholder return, I have another question. Regarding the treasury shares that you have, are you thinking about canceling them? And I know that they're not newly acquired, so I don't think it will go into your annual calculation, but does the group share the same opinions?

Jae Kwan Kim, CFO

Regarding the treasury shares that we own, we have about 14 million shares. And we're going to utilize them to our advantage at the appropriate time, but we don't have any plans to actually put them out in the market. So, we are going to focus more on additional share buyback.

Operator, Operator

Thank you. From NH Securities, Jun-Sup Jung.

Jun-Sup Jung, Analyst

Hello. I am Jun-Sup Jung from NH Securities. Thank you for taking my question. I see that your Q2 performance is good, and especially, your CET1 ratio is also quite positive. When you announced your shareholder return policy, you mentioned 13% as the baseline for CET1. I think you have really outperformed that basis. Do you have plans to further increase that benchmark? Or can we look forward to increasing the payout ratio going forward?

Jae Kwan Kim, CFO

Yes, during last quarter's earnings presentation, we highlighted our commitment to maintaining our CET1 ratio at the mid-13% level. Currently, our cash payout stands at approximately KRW1.2 trillion, distributed evenly across the quarters, with a payout ratio of 37.7%. Regarding total shareholder return, we previously mentioned our proactive approach to expansion. To support this, we will continue to enhance our share buyback and cancellation initiatives.

Operator, Operator

I think this is probably the last question. Cho Jihyun from JPMorgan.

Jihyun Cho, Analyst

Thank you for the opportunity. Despite the challenging environment, I appreciate your commitment to dividends and total shareholder return policies. Regarding the net interest margin, you mentioned it is likely to remain similar to last year. However, for credit costs, it seems you may have adjusted some of your initial guidance, as the growth in corporate loans appears to be faster than anticipated. Additionally, you seem to have room in the CET1 ratio. As competition intensifies in the second half of the year, do you plan to actively raise this ratio? There has also been a significant reversal in provisioning for credit costs. Over the past two years, you accumulated considerable provisioning, so can we expect more reversals this year? Is this a suitable environment for that? Could you provide your expected credit cost for this year along with guidance related to changes in the environment? Lastly, concerning asset quality and property trusts, you mentioned having accumulated substantial provisioning for the property fund. Do you think this puts you in a better position considering the current property real estate market, or do you believe the industry has fundamentals strong enough to withstand a significant crisis? What is your perspective on the current property fund situation in the market?

Jae Kwan Kim, CFO

I am Jae Kwan Kim, the CFO of KBFG. I will first address your question, and then other executives may add to my response. Concerning the second half of the year and asset growth, our CET1 ratio increased to 13.59% this quarter, but we face many uncertainties, so we do not believe this is adequate. In the latter half of this year, we will strive to account for nominal growth and the economic growth rate. To enhance shareholder value, we have plans for further improvements. Although you mentioned there is room for CET1 growth, our strategies always consider the nominal economic growth rate. As for the CCR you inquired about, it was 87 basis points, while Q2 recorded 43 basis points. There was some accumulation for property trust, so when excluding reversals, it stands near a 40 basis point level. The recurring CCR is about 40 basis points. If we require additional provisioning from a conservative perspective, please understand that this reflects a cautious outlook. Regarding your last question about the property PF market, this is more of a personal opinion. For KB, the provisioning for property has not been as significant as in other sectors. First, it has been conservative, and second, we possess good-quality property, with over 95% in senior loans. This places us in a favorable position. I do not see much optimism in the property PF market presently. For the real estate and sales markets, we have to observe future developments. We should also consider the government's plans for a soft landing in the PF market. Regarding normal sites, restructuring must be executed properly for the situation to improve. Thank you very much.

Operator, Operator

We have a follow-up question from Do-Ha Kim from Hanwha Securities.

Do-Ha Kim, Analyst

Yes, thank you for taking my question. This may be a quite specific question. I was doing some financial modeling. Because you're paying out equal amounts quarter-to-quarter, so on the dividend side, there is not going to be any earnings surprise, but on a treasury share, if you've changed the basis on a calendar year, that will mean that, since this quarter, it was an earnings surprise. But if we do some modeling, I think, for Q3 and Q4, actually the amount may actually fall. So, depending on the earnings, I'm just wondering, in Q4, this is a calendar year basis, because I think your implication was that you were closing any opportunity to make any additional share buybacks. Is my understanding correct?

Jae Kwan Kim, CFO

This is the CFO. The KRW400 billion share buyback and cancellation, basically this was in-line with our progressive shareholder return policy. It was in full consideration of that. For Q4, we have not yet made any decision as to the additional buyback and cancellation. And as you've mentioned, if there's any shortfall, then next year, those aspects will be fully considered for when we come to that dividend cycle next year.

Operator, Operator

We do not have any more questions in the queue, but just give us one minute.

Peter Kwon, Head of IR

I think, in a relative short amount of time, we have had many questions. And we have had a very dense and fruitful Q&A session, so we will wait for just a little bit more, and if there are no other questions coming in, we will conclude our earnings release. It seems that there are no other questions coming in, so we will complete the Q&A session. With this, we will complete our earnings release. Thank you very much for your participation.