Earnings Call Transcript - KB Q3 2021

Peter Kweon, Head of IR

Greetings. I am Peter Kweon, Head of IR at KB Financial Group. We will now begin the 2021 Q3 Business Results Presentation and thank you for your participation today. We have here with us our group CFO and SEVP, Lee Hwan Ju, and other executives from the group. We will first have CFO and SEVP, Lee Hwan Ju, walk us through the 2021 Q3 major highlights and then have a Q&A session after the presentation. I would like to invite our SEVP to deliver the 2021 Q3 presentation.

Hwan Ju Lee, CFO

Good afternoon. I am Lee Hwan Ju, CFO of KB Financial Group. Thank you for joining KBFG's third quarter 2021 earnings release presentation. Before presenting on the company earnings, I will brief you on the overall operational backdrop first. Last August, in light of the recovery trend of the domestic economy and inflationary pressure and deepening financial imbalance, BOK hiked the policy rate by 25 basis points for the first time in 15 months. Following the rate hike, expectations on NIM improvement drove a rise in banking sector share prices, though temporarily. However, with the spread of the delta variant and concerns around the peak of economic momentum and early tapering in the U.S., uncertainties, both internal and external, are accumulating. Moreover, as big tech enters the financial business, there is a possibility that authorities may separate the manufacturing and sales business of products, which may undermine incumbent competitiveness. Overall, the operational backdrop doesn’t seem positive in the financial sector. It is also possible that there may be another policy rate hike before the end of the year. Additionally, as the financial support program for SMEs and small merchants harmed by the COVID-19 pandemic has been extended by six more months, there is growing concern over deterioration in asset quality. Thus, more fine-tuned risk management is required on the part of financial institutions. Under this backdrop, let me assure you that KB's asset quality management is very solid, underpinned by our rigorous risk management framework. Nevertheless, even if asset quality management is quite solid, as the financial business has retrospective characteristics, one cannot completely preclude the chance of crisis support program. Therefore, we set up a comprehensive plan for loan assets and strengthened creditworthiness monitoring on borrowers who are susceptible to negative impact and have preemptively established sector policies for highly impacted and deteriorating sectors from the COVID pandemic in order to fully prepare for potential risks. Last year, at the group level, we made around KRW380 billion in additional provisioning, securing a sufficient buffer to counter uncertainties in the future. Thus, even with the end of the financial support, we believe there will be limited chance of a sudden drop in asset quality or a surge in credit cost. Next, under the trend of digital transformation and financial transactions, which is accelerating due to the COVID-19 pandemic, KB will enhance our core competitiveness in financial services, expand customer touchpoints, and further improve our own platform to transform into the number one financial platform most loved by our customers. To elaborate, KB Bank last July expanded and implemented PG, which is short for Partnership Group, 2.0, an innovative model for the offline channel, shifting away from the legacy one-size-fits-all branch system to one that is business-centric, tailored for retail, corporate, and wealth management, fully reflecting branch environments and our customer profile in order to improve the competitiveness of the offline channel. By leveraging the MyData service, which will be fully launched this year based on in-depth data analysis from customer data, we will provide comprehensive, super-personalized asset management services, thus completing our unique channel competitiveness through an omnichannel approach across both online and offline services. We also made board enhancements to the group's platform, KB Star Banking, from a user convenience perspective and will showcase the new platform to leap forward as the number one financial platform. I will provide more details on KB Star Banking in the following slides. Additionally, last June, KB adopted PCAF, which stands for Partnership for Carbon Accounting Financials, and SBTi, Science-Based Target initiative, disclosing carbon emissions from our asset portfolio transparently and declaring KB Net Zero S.T.A.R., S-T-A-R, with a target for net zero by 2050. On the 14th of the month, we became the first Asia regional financial company and domestic company to receive SBTi approval on carbon reduction targets. This is significant in that KBFG's carbon-neutral strategy of KB Net Zero S.T.A.R. has proven to have global standard objectivity through rigorous, science-based carbon reduction target setting. Now, let me walk you through our Q3 2021 business results. KBFG's third quarter 2021 net profit reported KRW1,297.9 billion, showing solid growth in net interest income and net fees and commissions income, attributed to the reversal of provisioning of Hanjin Heavy after the end of the workout procedure and to KB Insurance's Q2 ERP and other one-off related base effects. Net profit was up 7.8% Q-over-Q. Excluding one-off factors, including the reversal of provisions, net profit on a recurring basis was around KRW1,250 billion. The solid profit uptrend continued, thanks to core profit growth and company-wide cost control efforts. In Q2, cumulative basis net profit was KRW3,772.2 billion. Despite a difficult internal and external operational environment, we solidified the core business model of each line of business, expanding sources of revenue and diversifying our business portfolio through M&As, all of which drove up profits by 31.1% year-over-year. Let us now look at each of the segments in more detail. Third-quarter cumulative net interest income was KRW8,255.4 billion, an increase of 15.6% year-over-year. KB Bank's loans in won increased by 5.5% compared to the previous year, sustaining sound growth. NIM improvements and interest income expansion, along with consolidation effects from M&As, including Prudential Life, as well as contributions from nonbank subsidiaries to interest income also sustained their improving trend. Q3 cumulative net fee and commission income was KRW2,743.9 billion, which reflects a 26.4% year-over-year increase or KRW573.4 billion, driven mainly by fees from the securities business around investment banking that reported around KRW116.4 billion, which is a sizable increase. The growth in credit card payment volume also resulted in an increase in merchant fee income, further driving improvements in nonbank subsidiaries' performance, alongside an increase in early redemption of ELS and growth in new sales. Bank trust income also posted an improvement. Third quarter net fees and commission income reached KRW911.3 billion despite a decline in stock trading volume that led to lower securities business fee income. Thanks to the bank’s investment banking business and improvement in profit in the investment banking sector and securities, along with higher trust income from the group, it showed an increase of 5.3% year-over-year. Third quarter, other operating accounts reported KRW114.1 billion of loss, slowing Q-on-Q, attributed to rising interest rates and FX rates in Q3, which led to lower translation gains from securities, derivatives, and FX. We also experienced a higher loss ratio from property and casualty insurance due to seasonality and greater stock market volatility that resulted in increased guarantee reserving for Prudential Life. Next, the group's G&A expense for Q3 reported KRW1,664.9 billion with seasonal factors and Q2 ERP of KB Insurance impacting this number, resulting in a marginal dip Q-on-Q. On a cumulative basis, G&A was recorded at KRW5,057.5 billion, which indicates a slight increase year-over-year due to the consolidation impact from the M&A and ERP expense from the insurance business. Apart from these factors, G&A remains stable. Next is provision for credit losses; Q3 cumulative provision for credit losses posted KRW596.5 billion, reflecting a KRW157.8 billion drop year-over-year. This was achieved through qualitative growth centering on safe and prime assets, along with continued credit quality management efforts and the fading away of additional provisioning related to COVID-19 from Q2 of the previous year. On a credit cost basis, it posted 0.22% while maintaining sound asset quality. In Q3, provision for credit losses amounted to KRW199.4 billion, and despite an increase in loan assets, primarily driven by qualitative growth focusing on prime assets and a reversal of around KRW23 billion of provisions related to Hanjin Heavy, it was managed at a low level. Looking at the graph on the bottom right, the nonbanking contribution in the group's net profit recorded 44.5% as of Q3 2021 on a cumulative level. This was a result of non-organic growth within financial investments and insurance industry areas through M&As, contributing to profit stability and generation through strengthened core business models for each area. KB aims to overcome the limitations in the domestic market and secure sustainable growth by expanding sales capabilities in Southeast Asia, including acquiring 100% product shares in Cambodia, along with the upcoming acquisition by our securities division of Valbury Securities in Indonesia. The bank has also secured an investment banking and capital markets sales hub in Singapore and is enhancing its competitiveness in advanced markets, thus improving its global market status. Going forward, based on the results and competitiveness that have been achieved domestically, we will continue to expand our dominance and profit basis in the global market and enhance our corporate value. From the next page, I will go over the major financial indicators. 2021 Q3 cumulative group ROA and ROE, backed by the group's core income growth and conservative asset quality management, posted 0.81% and 11.85%, respectively. Considering the recurring ROE, it recorded 12.06%, maintaining sound fundamentals and profitability. Next, I would like to cover the bank's loans in won growth. As of September 2021, bank loans in won posted KRW312 trillion, reflecting a 5.5% year-to-date and a 3.4% quarterly increase, respectively. In detail, household loans, particularly Jeonse loans and Prime Unsecured loans, continued their solid growth, increasing 3.4% compared to the end of June. For corporate loans, driven by increased demand following the economic activity recovery trend, SME loans grew stably at 2.8%, while large corporate loans grew substantially at 7.3%, marking a 3.4% increase compared to the end of June. Next is net interest margin. For Q3 2021, the bank's NIM posted 1.58%, reflecting a 2 basis point increase quarter-over-quarter. This improvement results not only from the repricing of the funding interest rates, impacted by last year's cut but also from selective and sophisticated loan pricing policies, along with asset profitability improvement efforts. On the other hand, the group NIM has contracted due to increased funding burdens from card asset growth, but on the back of the improvement in bank NIM, it rose one basis point quarter-over-quarter. Going forward, based on strong channel competitiveness, KB will focus on expanding low-cost deposits, including settlement accounts and corporate core deposits. Through flexible interest rate management based on profitability and asset quality, we aim to secure appropriate margins and do our utmost to improve our NIM as much as possible. Let's go to the next page. I would like to cover our group's CIR cost to income ratio. For Q3 2021, cumulative group CIR posted 46.6%, reflecting a downward stability trend as a result of solid core income increase and continuous cost management efforts. Excluding one-off factors, including ERP costs, the recurring CIR posted approximately 45%. Additionally, taking into account the effect from other factors, we are seeing that the cost efficiency improvement trend is becoming more realized. Next, I would like to cover the credit cost ratio, CCR. For Q3 2021, group and bank credit costs each posted 0.20% and 0.05%, respectively. On a cumulative basis for Q3, it is still being stably managed at 0.22% and 0.08%, respectively. Excluding the reversal for provision of loan losses associated with Hanjin Heavy Industries, the group credit cost maintained a low level of 0.23% in Q3. Even amidst the ongoing COVID-19 crisis, our sound asset quality management capability is being evidenced. With the prolongation of COVID-19-related financial support programs and the potential for further BOK interest rate hikes, concerns over asset quality are increasing. However, we are proactively preparing for these possibilities and reinforcing our management for potential nonviable exposures, allowing us to expect stable management of asset quality in the future. Next, I would like to cover the group's capital ratio. As of September 2021, the group BIS ratio posted 16.11%, and the CET1 ratio recorded 13.91%, reflecting 4 basis points and 18 basis points increases quarter-over-quarter, respectively, and is maintaining the highest level of capital buffer in the financial industry. Despite higher risk-weighted assets from loan growth, this was possible through significant capital improvement from solid net income generation and increases in securities valuations. Let's now go to the next page. I would like to explain KB Financial Group's representative digital platform, KB Star Banking, which we will be launching at the end of this month. Following the acceleration of online financial transactions due to the COVID-19 pandemic and competition with platform companies such as Kakao Bank and Tosbank, digitalization has become a crucial competitive factor in the financial industry. KB Financial Group, which has been proactive in responding to these changes by focusing on customer needs and challenges, has been enhancing the group's major platforms. Going forward, we aim to solidify our top-tier status within the digital financial market by driving digital transformation from an all-around perspective, encompassing platform, content, and marketing. As part of these efforts, starting with KB Star Banking, we aim to strengthen KB's unique platform competitiveness and become the most beloved comprehensive financial platform to our customers through a bold reconfiguration of the group's core services from the customer's perspective. As you're well aware, the key factors for a platform to succeed are securing the 3Ts: traffic, time sharing, and transaction. The essence is to develop and deliver compelling content that drives customer visits to the platform, encouraging them to stay and engage frequently. The new KB Star Banking aims for an expandable comprehensive financial platform, integrating the core services of each subsidiary into one application. It enhances customer value through improved customer engagement by offering database personalization service and through fast, secure service based on a mobile-optimized infrastructure. We expect that this will be a robust platform that secures the aforementioned 3Ts. To further elaborate, we plan to apply methods like KB's proprietary Mobile Certification and an in-app browser, aiming to establish a flexible platform which encompasses not only KB Financial Group subsidiaries but also diverse external channels. By moving beyond simple services focused on inquiries and through internalizing the core services of subsidiaries, including securities, stock transactions, insurance coverage analysis, insurance claims, KB Card, and KB Pay, we aim to establish a KB ecosystem that utilizes related services seamlessly and efficiently without additional applications or attrition. We will also connect to external channels like Government24 and Hometax, providing a flexible platform that integrates seamlessly into our customer's life while expanding alliances with public and private institutions in the future to improve overall user convenience within the platform. Secondly, through measures such as home screen duration and MyPage service, more sophisticated personalization service will be implemented. By leveraging AI, machine learning, and other advanced data analysis techniques, we will develop tailored content for customers and provide personalized asset management services. Lastly, the new KB Star Banking is significant because it has an expandable basis that remains unaffected by speed or stability, even with continuous channel and service expansion in the future. Employing SPA, or Single Page Application, technology will ensure a smooth transition in screens and greatly enhance transaction speed. Even in scenarios where errors occur, essential transaction stability will be significantly improved through a mobile banking optimized system. Additionally, an integration with non-financial platforms, such as Liiv Real Estate and Healthcare, will further enhance KB's unique platform competitiveness, ensuring that finance and daily life are inherently connected, positioning us as our customers' most beloved lifetime financial partner. From the next page, please find the detailed materials related to the performance that I just mentioned. Feel free to refer to it if necessary. With this, I will conclude my business results presentation for the 2021 Q3 of KB Financial Group.

Peter Kweon, Head of IR

Our first question is from Hanwha Securities, Do Ha Kim. Please go ahead with your questions.

Do Ha Kim, Analyst

Thank you. I have two questions. First, we are pleased to see a slight increase in margin due to the rise in loans. Do you think this effect will fully materialize in the fourth quarter? In the third quarter, the NIS figure indicated that, rather than seeing a rebound in interest income, a larger part of the margin improvement came from better funding costs. I would like to know if the increase in profitability is expected to result in a higher margin in the fourth quarter. My second question is about your various mergers and acquisitions over the years. It looks like your portfolio in credit cards, insurance, and capital P&C has become quite diversified. With an earnings capacity of KRW4 trillion annually, how do you plan to effectively use this significant capital for M&A investments, international expansion, or share buybacks? What are your strategies concerning the allocation of this capital?

Hwan Ju Lee, CFO

Thank you, Ms. Do Ha Kim, for your questions. I will respond to the question on NIM. Regarding M&A, Chang Kwon Lee, our Senior Executive VP, will respond to the question on M&A. On the quarter NIM profile, on a Q-on-Q basis, we saw a one basis point increase. In terms of investment, we've had a very selective policy on loans. So on household loans, we were able to improve the spread. Investment yield on securities also increased, contributing to the improvement in NIM. We focused on expanding deposits with low funding costs. We had around KRW3.8 trillion increase in core deposits. In August, there was an interest rate hike, causing short-term rates to surge. The MDA improved significantly, yet there was a limitation on the improvement of NIM. The nominal improvement is two basis points; however, when looking more accurately, we observe a fractional improvement of about 1.3 basis points. On a cumulative basis, the bank's NIM is 1.82% and 1.57%. Compared to last year's NIM, there have been six basis points improvement for both the group and the bank. Last year, there was a 75 basis point cut, presenting considerable challenges to defending our net interest margin; nevertheless, we continually grew our core deposits and maintained profit-centric lending and asset management policies. Regarding the NIM outlook: Starting in the fourth quarter, the asset repricing impact will gradually manifest following the interest rate hike in August along with regulatory adjustments on household loans, combined with an alleviated competitive landscape, we anticipate an improvement in the loan-to-deposit spread and NIM will continue its gradual upward trend. Full-fledged NIM expansion, however, is expected to materialize from the first quarter of next year. If we assume there will be two more rate hikes from November through the first half of next year, we expect meaningful improvement in NIM in line with this year's trend. Our company is firmly focused on profit-centered lending policies and complies with government regulations on the aggregate loan limit while maintaining a conservative growth approach, especially increasing prime unsecured loans. As mentioned previously, we will introduce the settlement account alongside company's core deposits, which are low-cost deposits, ensuring that we manage our profit effectively and achieve an appropriate profit from these endeavors.

Chang Kwon Lee, CSO

I am CSO, Lee Chan Kwon from KB Financial Group. Thank you very much for the great question. Regarding the capital plan and any plans for future M&As, as you may know, KB recently acquired Prudential Life and Bukopin Bank from Indonesia, as well as invested in Cambodia's PRASAC Bank, which were significant deals for us. For the time being, rather than pursuing new M&As, we will focus on stabilizing these acquired entities and maximizing synergies across our subsidiaries. Value creation is our primary focus, but we are not entirely closing ourselves off from M&A possibilities. Should we identify advantageous assets and opportunities that could enhance KB's corporate value, we will consider capital efficiency as well as various potentials in decision-making. In contemplating an M&A project, we will carefully assess the target group, evaluating the potential for a 10% level of ROIC, the sector's attractiveness, and the strategic fit with our company. Furthermore, we will analyze potential synergies post-acquisition. Global markets, in regions where high growth potential exists, will also be explored for opportunities to enhance our influence. However, we must consider financial environment aspects such as sovereign risks, regulatory constraints, and market credibility as we evaluate these worldwide opportunities. Meanwhile, to respond to upcoming trends in the finance industry, we will also explore potential investments in promising fintech enterprises and innovative technology companies.

Hwan Ju Lee, CFO

One more thing I would like to add regarding shareholder returns, as dividend-related policy seems to be of interest to many analysts. I would like to provide insights into these matters. As I indicated during previous earnings calls, we still have a progressive dividend policy, which remains in place. Concerning this year's payout, while I cannot provide a definitive statement, we will consider the COVID pandemic's implications and the regulatory direction from authorities when making decisions. We stated in Q2, that barring significant macroeconomic changes, a return to pre-COVID payout levels—26% payout ratio—you could expect is reasonable at this time. As you are aware, we are currently holding 6% treasury shares, which could lead to an actual payout ratio exceeding 26%. Given the substantial increase in our profit compared to the previous year, we anticipate some meaningful increase in DPS. Regarding quarterly payouts, some firms like Shinhan Holdings enacted a Q2 payout without announcing details for Q3 yet, but we expect there to be a dividend in Q3 as well. This year, for the first time since the company's establishment, we executed an interim dividend. However, as for instituting quarterly dividends more regularly, we are yet to finalize decisions. We will ensure our decisions align with shareholder interest in light of global trends in shareholder returns and feedback from our investors regarding this topic. On matters related to share buybacks and potential cancellations of shares, KBFG consistently factors in year-end dividends, macroeconomic conditions, and our communications with regulators. Over the years, we have utilized a mix and match strategy between dividend payouts and share buybacks, successfully delivering total shareholder returns above the market performance. We will maintain this approach, thoughtfully seeking ways to enhance shareholder return while ensuring transparency with the market on this issue. Regarding share cancellations amidst economic uncertainties prolonged by the COVID pandemic, it is difficult to clarify our short-term position currently. However, we believe that following this year, we will be in a position to provide a firmer response upon evaluating our strategic stance on share cancellations.

Peter Kweon, Head of IR

Thank you very much for the detailed answer. We will take the next question from Hyundai Securities, Kim Jin-Sang. You're on the line, sir.

Jin-Sang Kim, Analyst

Congratulations on your earnings. I have two questions. First is about something you previously mentioned regarding government limitations on aggregate loan limits, which cannot be overlooked concerning regulatory risks. Going further, it could get stronger, or there could be loss sharing for small merchants or borrowers, along with adjustments in interest rates or support for those borrowers and merchants. Given that we might have regulatory risks lagging until next year because of COVID-19, and there are also concerns related to real estate risks, what are your thoughts on this? Secondly, looking at this year's profits, we see a 30% increase, but for investors, given this high base, could you continue to expect ideal profit trends of more than single digit? NIM may improve, COVID-19 provisioning may be reversed, but the potential for asset effects or the NIM improvement could be evident. What do you think could happen? What is your thought process? Any proactive measures?

Unidentified Company Representative, CFO

Thank you, Kim Jin-Sang, for your questions. I am the CFO of the Bank. My name is Hwan Ju Lee. You asked about the regulation risk for household loans. As publicized in media reports, various economic experts indicate an overburden of household loans could present substantial potential risks for the Korean economy. With imminent policy changes—stemming from uncertainties like U.S. tapering—we must responsibly manage household loans. This is why I believe interventions about limiting household risk may be enacted soon. Furthermore, on the bank side, when household loans suddenly increase, risks could arise. For KB, we prioritize profitability and asset quality. As of the first half of this year, household loan growth stood at 1.5%, and adjustments were made towards ensuring limits that allow support for Jeonse or mortgage loans. Thus, we aim to restrict limits and fortify our mechanisms for DSR underwriting. Our strategy lies in sustainable growth with a focus on profitability and asset quality, gauging actual demand accordingly. As mentioned, for household loans, we optimized our work processes and enhanced burden alleviation via more online measures. Comprehensive credit underwriting and automation of technology will shift our focus onto marketing and customer management. In the post-COVID era, we believe our business structure will impressively reorganize, allowing us to pursue additional growth avenues. Hence, if we encounter slow growth in household loans, we'll strive to compensate through market adjustments. Our HQ is preparing for full-fledged marketing for prime SMEs and other promising companies, pursuing opportunities amid the government's initiatives regarding new developments and fourth industrial revolution industries. In focus, we want to include those in our plans, upgrading our credit rating model and policies to be more competitive across industries. Acknowledging IB growth has awakened the global market, we endeavor to invest further resources into it. You also asked about our measures towards vulnerable borrowers and small merchants following COVID-19. We have provided extensive support, though we are uncertain of whether that support will be prolonged post-March. If it concludes by March, we still aim to soften the impact on our borrowers. Possible actions include extending maturity periods or grace periods to ease repayment times. Our objective remains to retain these borrowers as customers, bolstering our competitive edge moving forward.

Hwan Ju Lee, CFO

Regarding your second question, you asked about long-term financial performance and whether a ceiling exists concerning earnings growth. While we cannot predict the market, our ambition is to outperform it. Within this framework, as we draft our business plans, we envisage a rolling three to five-year horizon. A sustainable portfolio structure remains our prime consideration. Considering the bank and nonbank sectors—currently, we are number one in banking, but not yet for nonbanking subsidiaries—there lies potential for growth. Should we manage to navigate market conditions wisely, nonbanking subsidiaries could make substantial contributions to our overall performance. Proactive endeavors in global initiatives will lay the groundwork for our resource allocation aimed at enhancing our market coverage. As noted in your inquiry, increasing coverage related to global profits could help us expand our profit generation base. Consequently, we plan to strategically incorporate inorganic growth within our portfolio to empower our future profit margin.

Peter Kweon, Head of IR

Thank you very much for your insightful questions. We will proceed with the next question from Samsung Securities, Mr. Kim Jaewoo. Please go ahead.

Jaewoo Kim, Analyst

Thank you for your good earnings report. I have two questions. First, I'd like to inquire regarding your plans for the new digital platform. I recognize the application is set to launch and that it will support stock trading. However, if it encompasses all these features, might it become overly loaded? Isn’t that a potential issue? Secondly, I would like to understand your envisioned solutions as various fintech providers typically adopt an open platform, providing comparison and referral services. What unique benefits does KBFG insurance intend to provide? Regarding Mydata services, what is KBFG's business strategy moving forward? Lastly, regarding KB Insurance performance, there appears to have been a notable rise relating to investment income, could you elaborate on this?

Unidentified Company Representative, CDPO

Thank you, Mr. Kim Jaewoo, for your question. I am Han Dong Whan, CDPO at KBFG. Our CFO provided detailed insights previously. If I may add to that, KB Star Banking represents a transformational shift, evolving into our core digital channel while integrating stock trading and insurance claims processing within this platform. Admittedly, the previous KB Bank app felt quite heavy, leading to your valid concerns. However, with the adoption of in-app browser technology, along with employing API technology, we intend to ensure seamless experiences. Compared to competitors such as Kakao Bank, our application performs competitively without overpowering the system's capacity. Thus, I assure you that there will not be an issue with the system's performance. In terms of mobile optimization, this new application is tailored for mobile functionalities, ensuring a more convenient experience for users. As for the solutions offered through our platform, whereas our big tech peers typically emphasize convenience, KBFG highlights its financial expertise and capabilities. By translating our knowledge base into a digital setting, we seek to empower customers in wealth building. With our extensive user base and significant data at hand, we believe we can deliver genuinely personalized services. Our platform's foundational elements hinge on streamlined, simple, speedy, and secure experiences. Personalization in our offerings will be paramount; through aggregate data proficiency, we aim to fortify user interactions while safeguarding privacy, thus enabling subscription and adoption of various products and services. By harnessing all these aspects, we commit to curating solutions delivering the ultimate user experience. Regarding your question about KB Insurance, this year, while we did not gain from bond dispositions due to the interest rate environment, our new money yield improved on a year-over-year basis. However, we feel there wasn’t ample time for this to reflect fully in this year’s performance. Nevertheless, we've noted significant gains from the equities market, especially with various IPO activities. Furthermore, successful liquidations involving PEF and alternative investments contributed positively to raising our investment gains substantially.

Peter Kweon, Head of IR

We will take the next question from Kiwoom Securities, Director Seo Young-Soo.

Seo Young-Soo, Analyst

Congratulations on your performance, and thank you for the opportunity to ask questions. I have two related questions. First, looking at the post-COVID landscape, vulnerable borrowers and small merchants are still concerns. Additionally, looking ahead, with forthcoming interest rate hikes and potential debt restructuring, will it impact young investors heavily affected in their 20s and 30s, who invested in stock and real estate markets with unsecured loans? Because of tightened regulations, could we face repercussions that may lead to increases in delinquency rates? Your thoughts on these matters would be appreciated. Secondly, until recently, the asset market appears to favor upward trends. Given that strong collateral supported good market conditions, does it differ from peers in terms of provisions for NPLs compared to advanced markets like the U.S? If the market adjusts due to governmental actions, might there be consequent provisioning burdens? Are there strategic measures planned for aggressive provisioning as a response to Q4 market dynamics?

Hwan Ju Lee, CFO

Regarding your first inquiry, when interest rates rise and regulations tighten, many younger investors with unsecured loans may pose increased credit risks. We have closely monitored consumer behavior, especially noting this year's cash flow dynamics favoring online or virtual assets. We have taken regulatory preemptive measures concerning unsecured loans and maintain a cautious approach to underwriting. The government's introduction of DSR regulation changes to 40% per individual is also noteworthy. While we have proactively managed such risks, the bank remains vigilant about any shifts affecting us negatively. As you indicated, there could be risks in the unsecured loan market; our focus is on managing these prudently. Our loan management department remains active in overseeing borrowers with multiple obligations across various financial institutions, ensuring that payday measures are enacted timely. Regarding provisioning, we have executed conservative measures thus far, given potential downturn scenarios post-COVID impact. This proactive strategy has led to a coverage ratio of around 180% as of September, consistently increasing over the past couple of years. Compared to other banks, our methodical management speaks to prudent market practices. While unforeseen conditions may arise, our preparations can effectively counter adverse impacts. As for your Q4 proposition about bold provisioning, and the reflection of changes due to prior economic conditions, it requires careful consideration. We focus on long-term impact and identified risks to ensure credit underwriting meets necessary standards while anticipating future fluctuations.

Peter Kweon, Head of IR

Thank you very much for your questions. We have spent a little over one hour. I believe we have time for one last question before we conclude. Any additional inquiries, please reach out to our IR Team. From Citi Securities, Yafei Tian, please go ahead.

Yafei Tian, Analyst

Hi, I have two questions, if I may. First, regarding the digital initiatives previously outlined, have you calculated the cost to serve for this new channel in comparison to traditional branch channels? Additionally, do you have profitability estimates for the new platform? My second question pertains to asset quality. Is there a possibility of write-backs next year given prior COVID provisions?

Hwan Ju Lee, CFO

Thank you very much for your question. Concerning our first inquiry about digital initiatives, we've set new internal standards to manage our digital progress. This includes tracking our digital customer percentage, acquiring new customers from digital channels, and sales contributions through these digital platforms. We are also in the middle of a managerial accounting project; once that is complete, we will acquire more insights into our digital contributions to our overall expense-income ratio. While we currently gauge user engagement and performance post-COVID, the digital channels are reporting satisfactory growth, with data analytics efforts continuing, aiming for more sophisticated insights.

Unidentified Company Representative, CFO

In terms of provisioning policy and strategy, KBFG has long practiced a preemptive and conservative stance. This sustainable approach is visible in data points gathered throughout the years. Moving forward, we will keep a conservative stance on provisions; there remain too many variables to predict accurately how provisioning will be influenced next year. The overarching view expects provisioning appropriateness stemming from our accumulated conservative practices.

Peter Kweon, Head of IR

Thank you for your responses. We will conclude the Q&A session and our earnings presentation on this note. Thank you very much.