Earnings Call Transcript - KB Q3 2022

Peter Kweon, Head of IR

Greetings. I am Peter Kwon, the Head of IR at KB Financial Group. We will now begin our 2022 Q3 Earnings Release. I would like to express my deepest gratitude to all of you for participating. We have here with us today at our business results presentation, Scott YH Seo, Senior Managing Director and CFO of the Group, as well as other group executives. CFO, Scott YH Seo will first present the 2022 Q3 major business highlights, and then we will have a Q&A session. We will invite our CFO to walk us through the 2020 Q3 earnings results.

Scott YH Seo, CFO

Good afternoon. I'm Scott YH Seo, CFO of KB Financial Group. Thank you for joining the company's Q3 2022 earnings presentation. Before going into earnings results, I will briefly run through key business highlights of the group. First, KBFG's Q3 cumulative net profit was KRW 4,279 billion, up 6.8% year-over-year. Despite greater financial market volatility and a difficult operational backdrop, we once again displayed the group's robust fundamentals and earnings capacity. Also, cumulative ROE reported 12.11% and annualized EPS, earnings per share, was KRW 13,530. EPS was up 5.9% year-over-year, sustaining an uptrend. Q3 net profit was KRW 1,271.3 billion, seeming to have dipped marginally versus Q2, but excluding one-off gain from the sale of real estate from KB Insurance last quarter, KBFG headline profit was up 7.7% Q-on-Q. Next, Q3 cumulative credit cost for the group against total loan was 24 basis points. Despite slower global demand, trade deficit, and heightened uncertainties in the real economy, as well as deep rate hikes leading to higher credit risk, we have been keeping credit costs at a steady level at around 20 basis points, which KBFG has maintained since 2016. While the group's NPL coverage ratio as of the end of September was around 220%, which is the highest level of loss absorption capacity in the industry. Lastly, KBFG's Board of Directors has decided on a KRW 500 quarterly dividend paid per share. Let me now walk through the details of the business performance. Q3 2022 cumulative net interest income for the group was approximately KRW 8,339 billion, and net interest income for Q3 reported KRW 1,897 billion, driven by solid loan asset growth and higher NIM on a rate hike cycle. It was up 19% year-over-year and 3.7% Q-on-Q. The group's Q3 cumulative net fee commission income reported around KRW 2,600 billion on the back of the stock market slump driving a significant fall in trading volume. Brokerage fee income from the securities entity was down by around 42% year-over-year, and we also saw sluggish sales of trust and funds for the bank. However, we are also seeing meaningful results from our continued multi-faceted efforts around bolstering the group's investment banking business competitiveness, bringing the group's investment banking fee commission income up 56% year-over-year. We expect our dominance in the investment banking market will further expand and contribute to strengthening the group's fundamentals. Also, Q3 net fee commission income was KRW 813.8 billion, with the slump in the overall stock market causing securities business fee commission income to contract, declining 7% Q-on-Q. Next is other operating profit. Other operating profit in Q3 was somewhat sluggish due to variabilities and seasonal profit from insurance entities. There were heavy rainfall, typhoons, and other seasonal factors leading to an increase in loss ratio of the insurance business and lower investment gains, including dividend income. But this quarter, there was marginal Q-on-Q improvement in Q3 performances from securities, derivatives, and assets, especially in September. Despite unprecedented levels of capital market volatility this quarter, through a diversified investment portfolio and elastic positioning strategy, we were able to nimbly and efficiently respond to the market. Next is on G&A expense. Q3 cumulative G&A was approximately KRW 5,180 billion. Despite higher digitalization investment, thanks to sustained operational revamping efforts and group-wide cost controls, cost increase was well kept at 2.4% year-over-year. In particular, in the face of concerns about a recession next year, disciplined cost control will be the priority for the business. Hence, we will revisit all of the cost items starting from a zero basis and not lose focus on group-wide cost controls. Lastly, the group's provision for credit losses. Q3 cumulative provision for credit losses posted around KRW 775 billion and increased KRW 179 billion year-over-year. This was due to around KRW 121 billion of additional provisioning in Q2, reflecting a conservative future economic outlook scenario. And excluding this, this is generally at a level that needs the increase of the group's loan assets. On the other hand, Q3 provision for credit losses posted around KRW 314 billion and, due to the additional provisioning base effect in Q2, decreased slightly Q-on-Q. I will cover the key financial highlights from the next page. First, please look at the bank loans in won growth graph in the middle. Bank loans in won as of the end of September posted KRW 329 trillion and grew 1.9% compared to end June and increased 3.1% year-to-date. Corporate loans posted KRW 163 trillion, and SME loans and large corporate loans saw balanced growth, respectively, and with the 9.6% and around KRW 14 trillion growth year-to-date, corporate loan is leading the bank loan growth. In particular, in Q3 alone, there was a 4% growth compared to June end, and it was attributable to a sizable growth in loan demand due to the contraction of corporate loan bond issuance, leading to around KRW 3.4 trillion of large corporate loans. In the case of household loans, with a steep increase in loan interest rates and effects from loan regulations, loan demand decreased and repayment continued leading to a 2.6% decrease year-to-date, and is generally sluggish. But in Q3, total loans recovered, an increase of around KRW 900 billion, and with Citibank unsecured loan conversion demand coming in, reverse growth pressure quickly went down. Next is net interest margin, NIM, 2022, Q3 group NIM and bank NIM each posted 1.98% and 1.76%, respectively, and Q3 bank NIM increased 3 basis points Q-on-Q. With the decrease of low-cost deposits and a great surge of time deposits, funding cost burden increased and compared to the first half of this year, the rate of increase is limited. But with the asset repricing reflecting the interest rate hike, it is still maintaining an expansionary sense. For your reference, Q3 group NIM reflected the card business funding cost rise and grew 2 basis points Q-on-Q. Let's go to the next page. First, the group's cost effectiveness, the cost-to-income ratio 2022, Q3 cumulative group CIR posted 46.9%, and the recurring CIR, excluding one-off factors, such as digitalization costs posted a 45.7% level. The group's cost efficiency is showing a very visible improvement trend due to solid top line growth, group level manpower structure improvement, and as a result of cost management in the mid- to long-term, the group CIR aims to reach the early to mid-40% level. Next is the credit cost. As mentioned earlier, the Q3 cumulative group credit cost is still low at 24 basis points compared to total loans. In particular, even in a situation where risks have increased due to the COVID-19 pandemic and rising interest rates, the group's recurring credit cost has been stably maintained at the early 20 basis points level from 2020 to present. It can be said that this proves our conservative asset quality management policy and preemptive risk management capabilities. Finally, I will cover the group's capital ratio. As of the end of September, the group BIS ratio is 15.42% and the CET1 ratio is 12.60%, with risk-weighted assets increased due to corporate loan center growth and overseas asset expansion and accumulated other comprehensive income decreased due to interest rate hikes and stock price decline. The BIS ratio decreased compared to the end of June, but still a solid capital buffer is being secured against macro uncertainties. From the next page, we have detailed results regarding the business performance I've described so far. This concludes KB Financial Group's business performance report for the third quarter of 2022. Thank you for your attention.