Earnings Call Transcript - KB Q3 2025

Bong Kwon, Head of IR Division

Greetings, everyone. I am Peter Kwon, Head of KB Financial Group IR Division. We will now begin the 2025 Q3 business results presentation. Thank you very much for participating in today's earnings release. We have here with us executives from the group, including our Group CFO, Sang-Rok Na. We will have our CFO cover 2025 Q3 major business results, and then we will have a Q&A session. I will now invite our group CFO to walk us through 2025 Q3 business results.

Sang-Rok Na, CFO

Good afternoon. I am Sang-Rok Na, CFO of KB Financial Group. Thank you for joining the third quarter 2025 earnings presentation by KBFG. Before discussing our third quarter performance, I want to address our approach to profitability in light of the changing business environment. We are experiencing a continued trend of slow growth and facing various factors such as interest rate and foreign exchange volatility, government measures to stabilize the housing market, and policies aimed at revitalizing the capital market. Despite these challenges and supported by strong fundamentals, KBFG has successfully mitigated the impact of external uncertainties, ensuring a stable earnings capacity. We have seen strong growth in our core deposit base, which has helped us maintain the group’s net interest margin resilience, countering external volatilities. Furthermore, through our nonbank subsidiaries portfolio, we are creating a balanced earnings structure that adapts to new market conditions. We are also managing appropriate growth in risk-weighted assets, which helps absorb the impacts of various factors and strengthens our overall profitability. With the government aiming for the KOSPI to reach 5,000, the Korean economy is at a turning point, shifting focus from real estate to the capital market. In light of this change, KBFG plans to seize this opportunity to enhance our profit-making capabilities and support the future growth of our group. Through our bank and KB Securities WM channel, we will expand our brokerage, credit, and investment product sales to diversify our earnings and foster financial asset growth for the Korean population. Leveraging our expertise and influence in capital markets, we aim to lead the market characterized by productive finance and venture capital, capturing emerging business opportunities. Our experience in investing in venture and innovative companies will strengthen our market leadership as we invest in growth sectors. With our well-prepared leadership, KBFG will adapt to changes and enhance the quality of our earnings structure. Now, regarding the Q3 cash dividend, our Board of Directors has approved a dividend of KRW 931 per share, totaling KRW 335.7 billion. This is an increase of KRW 135 per share year-on-year, driven by the overall increase in total dividends and the impact of share buybacks. Moving on to our financial performance, the group's net profit for the quarter was KRW 1.686 trillion, with a cumulative increase of 16.6% year-on-year, reaching KRW 5,121.7 billion by the end of Q3. The group's cumulative return on equity for Q3 was 12.78%, showing significant improvement from last year. This growth was supported by solid core earnings, and with the absence of the ELS reserving impact and gains from sales in our consolidated funds in Q2, we saw a significant recovery in non-operating accounts. Additionally, rigorous cost control measures have further strengthened our solid fundamentals. Our nonbank business accounted for 37% of cumulative Q3 net profit, demonstrating our diversified earnings portfolio. I will now provide a detailed breakdown of our earnings results. For the third quarter, the cumulative net interest income of the group was KRW 9,704.9 billion, remaining flat year-on-year. In Q3 2025, the group’s net interest income reached KRW 3,336.2 billion; when excluding the impact of expenses related to the liquidation of funds, net interest income remained flat quarter-on-quarter. Regarding bank loans in Won, as of the end of September 2025, they totaled KRW 375 trillion, reflecting a growth of 3.3% compared to last year and 0.9% quarter-on-quarter. Household loans amounted to KRW 182 trillion, showing a 0.7% growth quarter-on-quarter, while corporate loans to larger corporations and strong SMEs increased by 1.0% quarter-on-quarter. Given the government's focus on managing household debt and stabilizing the housing market, we anticipate limited growth in household loans for the time being. However, we plan to strategically rebalance our household loan portfolio for profitability and emphasize loan growth focusing on strong SMEs to secure our interest income foundation. Speaking of net interest margin, Q3 bank NIM stood at 1.74% due to effective funding cost management, and the group NIM was 1.96%, consistent with the previous quarter's levels. Despite a decline in loan yields this quarter, the bank's NIM remained stable, supported by around KRW 7.9 trillion growth in core deposits, which alleviated funding pressures. Now, turning to noninterest income, the cumulative group noninterest income for Q3 was KRW 3,739 billion, reflecting a 1.1% decrease year-on-year. The cumulative other operating income was KRW 786.6 billion, down 15.4% year-on-year, largely due to the previous year's reversal of KRW 123 billion in KB Insurance reserves. Conversely, cumulative net fee income increased to KRW 2,952.4 billion, a growth of 3.5% year-on-year, driven by increased stock market trading volumes, significant growth in brokerage commission income, robust bancassurance sales, and the expansion of trust-related earnings. Notably, KB Securities and KB Asset Management recorded net fee income growth of 16.5% and 23.3%, respectively, contributing to the group’s fee income expansion. We believe this growth in fee income from the capital markets has significant potential for further expansion. Since approximately 70% of group fee income derives from nonbanking subsidiaries focused on the capital market, we aim to enhance our nonbanking competitiveness to further grow our fee income base. Next, I will discuss general G&A expenses, which reached KRW 5,007.7 billion for Q3. Thanks to ongoing cost efficiency efforts, this represents a 2.8% increase year-on-year. The group's cost-to-income ratio for Q3 was 37.2%, effectively managed within our target range. We are focused on reducing recurring expenses while maintaining necessary investments in critical areas, including IT, disaster prevention, and information security. Moreover, we are strategically increasing investments in growth sectors like AI, and will improve our cost structure efficiency through selective cost implementations. Regarding provisions for credit losses, in Q3, we recorded KRW 364.5 billion, a 44.4% decrease quarter-on-quarter. The credit cost for Q3 declined by 25 basis points from the previous quarter, reaching 30 basis points, and on a cumulative basis, it was 46 basis points, reflecting a trend toward stabilization. The significant decrease in provisioning this quarter was primarily due to our conservative provisioning approach and slightly reduced pressures on provisioning accumulation through portfolio improvements and advancements in our bank retail credit assessment model. Additionally, we had a partial reversal of provisioning due to non-performing loan recoveries in Q3. Overall, we believe our efforts to strengthen risk management are yielding positive results, and based on this trend, we expect the group's credit cost to stabilize in the mid-40 basis points range for this year. Lastly, regarding our capital ratio, as of the end of September 2025, the estimated group BIS ratio was 16.28%, and the CET1 ratio was 13.83%, placing us among the highest in terms of capital adequacy in the industry. The risk-weighted assets as of September 2025 amounted to KRW 358 trillion, a 3.5% increase from the previous year. The depreciation of the Korean Won against the U.S. dollar contributed to RWA growth, but through effective monitoring and portfolio adjustments, we absorbed the effects of exchange rates and maintained RWA growth at an appropriate level. Please refer to the detailed materials on the performance results I have just presented. Thank you for your attention as I conclude KBFG's Q3 business results presentation.

Bong Kwon, Head of IR Division

Thank you for the presentation. We will now begin the Q&A.

Operator, Operator

We will take the first question from Do Ha Kim at Hanwha Securities.

Do Ha Kim, Analyst

I have one question on margin, and you talked about the reversal. So first, on margin, it seems like the decline has now stopped. And there's been an offset in Q4 or for next year. Do you have, maybe not a specific number in terms of the guidance? Do you see that the decline in margin has now stopped? And are you looking forward to a turnaround? And you talked about the reversal from the recovery of the NPL. What is the amount?

Bong Kwon, Head of IR Division

Give us one moment as we prepare for the answer to the question that you've submitted.

Jong-Min Lee, CFO

Yes. Good afternoon. I am Jong-Min Lee, the CFO of KB Bank. First, let's discuss the NIM outlook. In the third quarter, the NIM was 1.78%, which represents a 1 basis point increase. The decline in rates has somewhat slowed down, and we saw an increase in our core deposits, with an average balance rise of KRW 4.3 trillion. Through our efforts to reduce funding costs, we were able to maintain our margins despite stagnant loan growth. Given the government's strict control over household debt, we expect loan growth to remain limited for the time being. Our focus will continue to be on expanding core deposits and reducing funding costs, which are essential to supporting the NIM. We aim to enhance our institutional sales and grow our low-cost deposits to further reduce funding costs. Annually, in the second half or in the fourth quarter, we anticipate that the NIM will be influenced by changes in the market policy rate. There are various opinions on the future trajectory of market rates, but overall, we expect a gradual decline in the second half at low single digits. To mitigate the impact on margins, we will strengthen our deposit base. Regarding the reversal of the provision, the amount is approximately KRW 70 billion. We have recovered some bad debt from our overseas acquisition and reflected recoveries related to domestic knowledge complex centers and loans that were extended.

Operator, Operator

We will now take the next question from ANZ.

Unknown Analyst, Analyst

I have two questions. First, with U.S. policy rates decreasing more rapidly than those set by BOK, what are the plans for the financial group or KB Bank to issue additional Tier 1 securities in U.S. dollars? Second, what is your guidance for NPL coverage in the near future? Should we anticipate a further decline, or will you maintain it at current levels?

Unknown Executive, Executive

Can you repeat the first question on the Tier 1 capital? Did you say issuance of USD-denominated Tier 1?

Unknown Analyst, Analyst

Yes. Is the group or the bank planning to issue U.S. dollar-denominated additional Tier 1 securities considering that the cost of foreign currency debt is decreasing more rapidly than the Korean won policy rate?

Bong Kwon, Head of IR Division

Yes, give us one moment.

Sang-Rok Na, CFO

Regarding the first question, the current foreign exchange rate is quite high. In comparison to the decrease in the U.S. Federal Reserve rate, Korea is facing household loan issues and real estate packages. Therefore, we anticipate that the decline in interest rates will not occur as quickly as in the U.S. Given this situation, we are not yet considering issuing U.S. dollar-denominated bonds or hybrid bonds. As for the coverage ratio, it currently stands at about 130%. Over the last two years, we have effectively addressed our bad assets, leading to some reversals that contributed to the decline from 200% to 130%. We have maintained this trajectory throughout the past two years. As we finalize the cleanup of non-performing loans (NPLs) and observe improvements in our portfolio, we expect the inflow of new NPLs to be limited. However, our reserving discipline will remain intact, and we anticipate that the coverage ratio may slightly increase from its current level.

Operator, Operator

We do not have any questions in the queue as of now, so we will wait. We will take the next question from BNK Investment Securities, Kim In, Director Kim In.

Unknown Analyst, Analyst

Congratulations, and thank you for the good performance.

Bong Kwon, Head of IR Division

Can you speak up a little bit?

Unknown Analyst, Analyst

I think for KB for Q3, your earnings are good, but this could be a little bit sensitive. But as you probably know, we are hearing some talk about fines, administrative fines. So if you can comment on this, can you tell us about your thoughts, what is currently on your mind regarding these fines?

Operator, Operator

We will soon answer the question, please.

Sang-Rok Na, CFO

I am the CFO of the group. So to briefly elaborate, currently, regarding the size of the fine or the timing, it is very hard for us to comment because of its impact or the amount or the calculating standard, it is not finalized. So it is difficult for us to answer it in detail. And for the basic fine or the deductions, I believe that the authorities have shown us some clear guidance. And looking at the current situation, we are actively giving them our responses. So I think that we're in the process of coming up with a reasonable resolution. I'm sure that we will have some impact, but we are doing our best to minimize the impact, and we're working very hard. So we will work hard so that it will not actually have an impact on the shareholder return policy that we have committed ourselves to. And our bank CFO, I think, will also give a few comments, but maybe we can just conclude the answer at this time. Thank you.

Bong Kwon, Head of IR Division

We will actually wait just a little more.

Operator, Operator

We do not have any questions in the queue as of now. And we will take the next question from HSBC Securities. We have Won Jaewoong.

Jaewoong Won, Analyst

Despite the challenging environment, thank you very much for your great earnings. I have one question and for core deposit growth, I think that is quite notable. And regarding your core deposits, I think all other banks have this increase. So I think NIM has gone up. But I think that the competition is getting fiercer. Do you think this trend will continue for the time being? Or do you think that because there was the great elevation because of some maybe one-offs, so I'm curious about what was the main reason for this? And another question is, on Page 14 of the presentation, I think when we have a booming stock market for savings products, or I think a lot of the money moves to demand deposits. So do you think this is a trend? Or do you think it's because core deposits are coming in from the outside, so this is actually growing? So if you can explain about this phenomenon, it will be greatly appreciated.

Bong Kwon, Head of IR Division

We will soon answer the question, please.

Jung-Soo Huh, Executive

Yes, I will address your question. For the bank, the increase in core deposits can primarily be attributed to the decline in interest rates, which has a significant effect. When market rates decrease, we tend to see a rise in core deposits. This has led to elevated levels of deposits. Recently, we've noticed an uptick in customers using our services for salary deposits. Overall, the increase in our customer base has also contributed to the growth in core deposits. Additionally, we've made some adjustments that allow us to attract more deposits from institutions and companies. Thanks to these changes, we're seeing more corporate and institutional deposits coming in, and we are actively working to enhance this. In the stock market, unsecured loans are slightly increasing and transitioning into demand deposits, creating movement of funds. While it's hard to quantify the specific impact just yet, the growth in individual customers has been significant. For corporations, the changes we've implemented have simplified account management, encouraging them to deposit with us.

Operator, Operator

Next, Cho, Jihyun from JPMorgan.

Jihyun Cho, Analyst

I have two questions. Firstly, what are your plans concerning productive finance? Additionally, what impact are you projecting for RWA and CET 1? Regarding loan growth up to Q3, compared to your peers, it appears your loan growth is weaker, whereas KB typically excels in household lending. Looking ahead, there are concerns about your ability to meet the loan growth targets you've set. Could you provide some insights on your loan growth projections for Q4 and next year, particularly in relation to your efforts in inclusive finance? There was a significant write-back in Q3, and since that amount is substantial, it seems you mentioned a reduction in the overall size of the reserves for the second half. What can we anticipate in Q4? Are you considering a write-back of the reserves? Your NPL has slightly decreased; do you believe it has peaked? Are we now seeing a consistent trend in the decline of NPLs? I would like to hear your thoughts on this.

Bong Kwon, Head of IR Division

Give us one moment.

Sang-Rok Na, CFO

Thank you for the insightful questions regarding productive finance and its impact on risk-weighted assets. I would like to respond briefly. Although there hasn't been any official announcement yet, we have prepared thoroughly. Once the announcement occurs, we will communicate the specific details of this support. Taking the government's official guidance into account, we will determine the size of our financing package. While the amount is significant, what matters more is transforming our asset structure in a way that enhances our risk-weighted assets. This parallel process is crucial. Our current asset structure leans heavily towards properties and financial assets; we aim to redirect this towards small and medium enterprises and the manufacturing sector to increase our risk-weighted assets, which is our fundamental approach. We recognize that we need to reduce exposure in certain areas as we consider all these factors in our planning for risk-weighted assets. We anticipate being able to comfortably meet the expected growth rate of around 5% next year. This optimism stems from the government's efforts to revitalize the capital market, including adjustments to risk weights, which are now lower for securities. We believe we are well aligned with the government's policy direction. Therefore, next year, we expect productive finance to have an impact. Managing risk-weighted assets has become more complex compared to last year. However, we have gained valuable experience in monitoring them, and we are confident in our ability to continue this trend as we approach next year. Now, regarding loan growth, I will hand it over to the CFO of the bank to address that question.

Jung-Soo Huh, Executive

So in terms of the loan growth, just to add, now our bank on a quarterly basis, we try to ensure stable growth, so Q1, 2 and 3, we are growing at about the same rate. So under that approach for the loan growth, especially for households, it will be 3%, 6% to 7% for corporate loans. That's the growth rate that we are working under, so which will bring us about 5% of an annual growth. And we believe that we will be able to achieve that same level next year as well.

Sang-Rok Na, CFO

I would like to add that while we are seeing loan growth, we also anticipate growth in securities due to our shift towards the capital market. Our projected loan growth is around 4.5%, while we expect securities investment growth to be approximately 9%. Next year, we'll focus not only on loan growth but also on securities to drive overall growth. Regarding asset quality, after facing challenges in the first half of the year, we adopted a proactive strategy to improve our portfolio starting last year. This has resulted in noticeable improvements since the second quarter, which we believe have continued into the third quarter. We're cautiously optimistic about seeing recovery in our delinquency rates and non-performing loan ratios, aided by government stimulus and support for vulnerable populations. While we started the year with higher credit costs, we have been conservative in our reserves and are now reversing some of those reserves. We expect this positive trend to persist through the end of the fourth quarter, enabling us to meet our original targets for capital conservation ratio. However, the extent of improvement in asset quality will depend on the recovery of the domestic market and real estate sector. We will closely monitor vulnerable borrowers to maintain effective control in that area.

Operator, Operator

We do not have any questions in the queue as of now, so we will hold.

Bong Kwon, Head of IR Division

I think we had a very good Q&A session. And we have actually from Samsung Securities, Kim Jaewoo, who will ask the next question.

Jae Woo Kim, Analyst

I have two questions. The first question is about asset quality and credit card delinquency rates, which seem to be declining. If asset quality has improved and you've indicated a cautious approach towards vulnerable borrowers, do you believe that there has been significant improvement, or is it too early to tell, merely reflecting Q3 performance? Regarding your Q4 and next year's provisions, what levels do you anticipate? Given the elevated credit costs earlier this year, how do you foresee changes if the economy weakens? My second question is about the capital adequacy ratio, which appears to have improved significantly, exceeding 13% in RWA as you noted. Based on straightforward calculations, we might see a better outcome than expected this year, with over 50% anticipated. What timeframe do you think we should aim for? Will this be challenging, or could it lead to differentiated total shareholder return next year, as you mentioned? What should we expect moving forward?

Bong Kwon, Head of IR Division

We will soon answer your question. Thank you.

Jung-Soo Huh, Executive

Regarding credit card delinquency, I would like to answer that question. As you had mentioned, for a credit card, from late last year, we have been very aggressive and active in entry management and having good write-offs and sell-offs. So due to this, we have had portfolio improvement. And I think we're seeing the effects of our efforts materialize. So I think regarding the positive results, it is not just a one-off effect. I think this will actually continue until next year, the positive results. Of course, for the receivable, the voluntary adjustment and others, we will do so. But I believe that we will be able to manage it at the current level. You also asked a question about asset quality and the level of CCR for next year. And as was mentioned previously, I think until now, we will maintain the stance for management that we have had until now, and I think early 40% range could be the goal that we are going to pursue.

Sang-Rok Na, CFO

Regarding Q4, capital adequacy rate and expectations for next year's shareholder return, well, regarding the amount of TSR or shareholder return, well, I also have very rosy expectations, and I'm keeping an eye on the situation. And regarding the capital adequacy ratio, well, I think that we have had a very high FX rate and it's being maintained. So we need to have ample buffer for that. So we have been managing our RWA. In Q4, there are seasonal factors. So it normally falls. And I think this pattern will also be repeated in Q4 of this year as well. So we need to take that into consideration. And regarding TSR, whether it will go up or down, well, you probably know we can't really comment on what we think will happen. But regarding the excess capital that goes beyond our committed number, well, we do have a protocol and this protocol will be maintained next year as well. But what we can comment on for sure is that regarding the timing or the size of TSR, regarding what we showed this year, we will be very flexible like we had been this year. And this means that in Q2 of this year, there was the expected shareholder return that we had actually implemented earlier than scheduled. So we will maybe pursue a similar stance next year, but we have the first half and second half of the year policy that we will actually commit to and we promise the highest level of TSR in the industry. So we will do our best to meet our commitments so that we can satisfy the expectation that you're looking for. Thank you.

Operator, Operator

So we have Cho Jihyun from JPMorgan also wanting to ask a question.

Jihyun Cho, Analyst

Yes, I have one more question about the shareholder return policy. In the General Meeting of Shareholders, you will make a resolution regarding dividend payments through capital reduction. Concerning the separate taxation on dividends, for high dividend payouts, the criteria are a 40% cash dividend rate or a 25% cash dividend, while also looking at the average over the past three years. There are various criteria, and there is some debate over whether it should only be based on a 40% cash basis. If the decision is to go with 25% plus 5%, then only companies paying cash dividends of 30% or 40% will be subject to that separation of taxation. Can we increase the cash dividend rate to that maximum to provide the greatest possible benefit to shareholders? There may be several scenarios. How do you plan to balance the dividend with share buybacks and cancellations?

Bong Kwon, Head of IR Division

Give us one moment.

Sang-Rok Na, CFO

Thank you for the question. In the first half of the year, we talked about expanding our retail investor base and establishing ourselves as a recognizable name in the capital markets, which remains our commitment. We are currently reviewing various aspects, but I can't share too much at this point since the policies and regulations are not finalized. We plan to engage in discussions with the market as well. As for the separate taxation of dividend income, it's challenging to provide a clear answer right now due to the uncertainty of the rules. However, when we announced our plan related to the price-to-book ratio moving from 0.8 to 1, we intend to increase our share buyback and cancellations until we achieve a certain ratio. Regarding cash payout ratios, if the requirement is established at 30% or even 40%, it will be difficult for us to significantly raise the cash dividend payout ratio. We will reconsider the balance between cash dividends and share buybacks based on our established discipline. If the taxation requirement allows, we will actively explore ways to benefit our retail investors as much as we can.

Bong Kwon, Head of IR Division

Thank you very much for the answer. We don't have any questions in the queue as of now. And I believe that we have had a good amount of discussion for about 45 minutes since we had the beginning of our earnings release. If you have any questions, please feel free to contact our IR department. And we will wait just a little bit more if you have any other questions. Well, I think questions are over, and we will conclude our business results presentation and Q&A session. Thank you very much.