Earnings Call Transcript - KB Q1 2020

Peter Kwon, Head of IR

Greetings. I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2020 Q1 Business Results Presentation. I would like to express my deepest gratitude to everyone for participating in our call. We have here with us our group CFO and Deputy President, Kim Ki-Hwan, as well as other members from our group management. We will first hear the 2020 Q1 major financial highlights from our CFO and Deputy President, Kim Ki-Hwan, and then have a Q&A session. I would like to invite our CFO and Deputy President to walk through the 2020 Q1 major financial highlights.

Kim Ki-Hwan, CFO and Deputy President

Good afternoon. I am Kim Ki-Hwan, CFO of KB Financial Group. Thank you for joining KBFG’s presentation on Q1 2020 business results. Before moving on to the earnings, let me briefly present on our operational background. In Q1, due to the COVID-19 pandemic, global production and consumption slowed, leading to a rapid slowdown in the global real economy. Investment assets contracted as there was a move towards safe assets and liquidity as global equity markets triggered multiple circuit breakers, heightening global financial market uncertainties like never before. The Korean economy also saw great contractions in consumption, a slowdown in CapEx investment, and a decline in exports as signs of economic depression surfaced. In line with the policy stance to respond to such shocks, the BOK swiftly moved to cut policy rates by 50 basis points last month. Under such challenging business conditions, the bank’s Q1 loans in won increased 4.2% year-to-date, attesting to solid asset growth. Net fee and commission income also continued to expand as KBFG managed to sustain its earnings capacity. However, regrettably, the COVID-19 pandemic has triggered index declines, a rise in exchange rates, and credit risk spreads, resulting in other operating losses, with Q1 results reporting somewhat of an underperformance. We believe such a black swan event like COVID-19 can happen anytime yet again in the future. Therefore, we are determined to build strong resilience and fundamentals to help us overcome any crises that may arise. To this end, based on our unmatched base of 35 million customers, we will enhance the core competitiveness of each of our subsidiaries and further bolster both the non-banking and global business. Although the financial business environment is at its worst due to the unforeseen impact of COVID-19, KBFG will leverage this opportunity to solidify its core fundamentals to leap forward as a true leading financial group. Now I will move on to the Q1 2020 financial risk highlights. KBFG’s Q1 2020 net profit was KRW 729.5 billion. In the absence of ERP and other seasonal factors, interest income and fee and commission income growth drove a 36.4% Q-on-Q growth. However, there was a 13.7% year-on-year decline, a subnormal performance driven by steepening volatility in the financial market in the first quarter, which led to other operating losses. Aside from this factor, the overall earnings capacity of the group continues to be robust. We now elaborate on each line item in more detail. The group’s Q1 net interest income was KRW 2,349.2 billion despite interest rate cuts and NIM contraction from the loan conversion program, thanks to solid asset growth from the bank and KB card. NII was up 4.3% year-over-year. Due to a decline in market rates and LOC, line of credit depreciation expense from loans, NII remained flat Q-on-Q. The bank's loans in won amounted to around KRW 280 trillion as of March end, up 4.2% or around KRW 11 trillion year-to-date. The group’s Q1 net fee and commission income was KRW 670.1 billion, up 21.7% year-over-year, driven mainly by improvements in brokerage fees and ID business, leading to higher commission income for the securities business, along with increases in credit card fee income as an outcome of cost efficiency effects. Despite a difficult operational environment, owing to the efforts of all affiliates to leverage their operating capacity fully, there was a Q-on-Q increase of 4.9%. Next is on the group’s other operating income. In Q1, the group reported KRW 277.3 billion of other operating loss. Insurance underwriting profit was KRW 78.1 billion, showing Q-on-Q recovery driven by overall loss ratio improvement, including auto insurance. However, market volatility was severe due to COVID-19, impacting banks' trust in principal preservation, incurring losses of KRW 66 billion and ELS hedging-related losses of around KRW 48 billion from KB Securities, leading to sizable securities, derivatives, and FX-related losses. I will provide more details later on our strategy against other operating losses, incurred due to greater capital market volatilities. Next is on the group’s G&A expense. Q1 group G&A expense was KRW 1,459.2 billion. With the absence of ERP and A&P expenses and other seasonal costs, there was a sizable decline of 19.6% Q-on-Q. On a year-over-year basis, with Q1 2019 ERP impact removed and with the delay in reaching an agreement with the labor union on the welfare benefit fund, there was a 3.6% decline. For the time being, the speed of G&A expense improvement may slow somewhat due to increased digitalization expenses at the group level. But we believe this investment is warranted for the group’s future growth. Aside from such investments for the future, we will revisit all expense items on a zero-based basis, reorganize our rate schemes for each affiliate to tightly control costs as we move forward. Next is on PCL, provision for credit losses. Credit costs Q1 group PCL was KRW 243.7 billion on asset growth and the absence of any large write-backs. On one-off provisioning from securities, there was a slight increase both Q-on-Q and year-over-year. However, credit costs reported 0.25%, sustaining a high level of asset quality. On the next page, I will walk you through key financial indicators. With widened financial market volatility, which triggered marketable securities, derivatives, and FX-related losses, Q1 2020 group ROE was reported at 7.64%. Eliminating non-recurring factors for the quarter such as CVA, credit valuation adjustment-related losses, which is an adjustment for counterparty credit risk for OTC derivatives, on a recurring basis, ROE is at 8.66%. Although this quarter’s profitability indicators have dipped compared to historicals due to a temporary rise in other operating losses, the group’s earning fundamentals continue to be solid as we endeavor to diversify revenue sources and improve cost efficiencies to respond to the low growth and low interest rate environment. Next is on the growth of the bank’s loans in won. As of March end 2020, bank loans in won was KRW 280 trillion, up 4.2% year-to-date or approximately KRW 11 trillion. Household loans were KRW 152 trillion, driven by Jeonse loans and high-quality unsecured loans, reporting 3.2% growth year-to-date. Corporate loans reported KRW 128 trillion with even growth across SMEs and large corporates posting a year-to-date growth of 5.5% or KRW 7 trillion. In particular, large corporates have sought to secure liquidity, thus demand for loans and loan growth was significant, with a 20.2% year-to-date increase. KBFG will closely monitor signs of prolonged economic recession and also monitor our property market, continuing quality-driven growth around prudential soundness and employing flexible loan policies to solidify the basis for growth. Next, let’s look at the NIM graph on the right. Q1 2020 group and bank NIM posted 1.84% and 1.56%, respectively. Q1 bank NIM, despite the steady increase of low-cost deposits and funding cost reduction, fell by 5 bps Q-on-Q, mainly due to declines in market rates and the loan conversion program. Q1 group NIM fell by 4 bps Q-on-Q due to card NIM contraction from lower card assets yield, in addition to pressure on the bank NIM. Going forward, KBFG will expand low-cost deposits, including settlement-type accounts and corporate customer deposits, and improve loan pricing to do our utmost to manage our margin. Let’s go to the next page. First, I will cover our group’s cost-income ratio. Q1 2020 group CIR marked 53.2%. However, excluding non-recurring items in this quarter, including digitalization costs and CVA losses, on a recurring level, Q1 CIR posted a 50% level. CIR on a recurring basis, excluding ERP expenses and other one-offs, has been controlled stably at around the early 50s level over the last four consecutive years, and KBFG will do our best to improve our cost efficiency through HR management and group-wide cost controls. Next, I will cover the CCR. Q1 2020 group credit cost posted 0.25%, slightly increasing due to the absence of large-scale reversals and one-off provisioning, but it’s still maintaining a low level. This quarter’s rise in credit costs can be seen as a process of being gradually normalized from a subnormal level with the decrease of large-scale provisioning reversals. Despite concerns in the market about asset quality due to COVID-19, KBFG has been proving its superior soundness and risk management competency. Next, I will elaborate on the group’s capital ratio. As of 2020, end March, the group’s BIS ratio posted 14.02% and CET1 ratio posted 12.96%. Due to the increase of RWA following the financial market volatility, including corporate loans and loans growth and FX rates, both slightly contracted year-to-date, but KBFG has been maintaining the highest level of capital buffer in Korea against economic downturns. Let’s go to the next page. From Page 5, I will explain the background behind the low performance of other operating income and our asset management strategy, responding to the capital market volatility widening. I will also elaborate on our group’s profitability management strategy, responding to the recent financial environment changes. As previously mentioned, in Q1 of 2020, with the COVID-19 pandemic, there was a large shock to the global economy, and in particular, capital market volatility rose rapidly. In our group, with the market rate drop in Q1, the bonds in Korean won that we hold incurred valuation gains. But in the case of bonds in foreign currencies and some OTC derivatives, since the credit spread greatly widened and the exchange rate hiked, valuation losses took place. In the case of securities ELS, hedging losses were incurred, meaning losses were recognized mainly in derivative products and FX-related products. Related to this, I would like to cover our asset management strategy responding to future capital market volatility. First, out of the foreign currency financial investment that KBFG is currently managing, the bank and securities foreign currency bonds managed is around KRW 6 trillion, and more than 80% have A or a higher credit rating and no sub-investment-grade, highly rated bonds. Since we believe that there is a possibility for the bond market to normalize according to the major countries' fiscal and foreign currency policies, we believe that we will build our strategic position and partially maintain our hold-and-carry strategy. Next, the valuation losses of some OTC derivatives occurred due to CBA losses stemming from third-party credit risk valuation. This was a result of factors such as the FX rate hike, leading to a temporary increase of exposure in Q1, as well as a significant widening of forward credit risk spreads compared to the previous quarter. For example, for CBA assessments, in Q1, the bankruptcy rate of companies with an A credit rating went up six times year-to-date. We expect that when the FX and credit markets become stabilized in the future, a substantial part will be released and reversed. Lastly, I will explain the ELS hedging losses. Currently, KB Securities' ELS hedging position is around KRW 3 trillion, and around KRW 48 billion of losses were incurred due to market volatility expansion, including the indices in the market. However, we expect a significant amount will be recovered once the financial market stabilizes in the future. In order to minimize our operating loss expansion possibility following market volatility widening, but also maintain our profitability through flexible product issuance, we will revise our issuance strategy, including rebuilding our hedging strategy for ELS and other derivative operations and changing the proportion of underlying indices linked to foreign stock markets, so our performance can be steadily managed. Next, I would like to cover our group’s profitability management strategy responding to management environment changes. A major topic in the financial industry nowadays is the financial institution’s profitability management strategy responding to the management environment changes in an era when a new normal is being set with a low interest rate and low growth regime. Within KBFG, we are also rearranging our group’s mid-to-long-term strategic direction so that we can proactively respond to these changes. Among the many responding methods, we believe the core tasks are to strengthen channel competitiveness, enhance new business competitiveness, and expand our global entry. First, KBFG considers our IB and WM business to be our core business to secure our group’s growth drivers since they could best utilize our superior capital competency, funding capability, and retail customer base and will focus on strengthening growth. IB is expanding our preemptive underwriting so that we can bolster our dominant market position in ECM and DCM. We will, at the same time, uncover new deals related to corporate financial structure improvements, including asset securitization. In the case of WM, we are focusing on securing product competitiveness that meets customers' needs, including highly recoverable products, with low barriers and low knock-in. Additionally, KBFG is the leading financial group with the largest sales channel in Korea, based on 35 million customers and unmatched sales capability. We have been strengthening our non-face-to-face sales channels, aligning with the untapped trend following the development of digital technology. In particular, we want to lead the industry in non-face-to-face channel competitiveness by improving our non-face-to-face channel customer convenience, centering on loans, WM, and cards, and strengthening channel competitiveness by enhancing our product lineup. Last but not least, KB Financial Group is diligently working to secure mid-to-long-term growth momentum through expanding global business. As a result of these efforts, on April 10, we acquired 70% of shares from Cambodia’s biggest microfinance company, PRASAC, and incorporated it as our subsidiary company. With the acquisition of PRASAC, the net profit contribution from overseas, which was at a 1.5% level, will increase to around 4%. Going forward, KBFG will strengthen our group’s profit basis by accelerating our global business expansion. Please refer to the following pages for details regarding the earnings that I have just covered. With this, I will conclude KBFG’s 2020 Q1 business results presentation. Thank you for listening.

Operator, Operator

From Hyundai Motor Securities, Mr. Kim Jin-Sang, please proceed.

Kim Jin-Sang, Analyst

Thank you very much for the detailed presentation. I have three questions. First, is with respect to your outlook. Q1 results were underperforming. Of course, there are multiple reasons behind that. Given the interest rate environment and holistic directed support, I feel that this year’s performance cannot be all that positive. Basically, consensus is also subject to potential downgrade by around 10%. So I think that we should take a more conservative stance. So I would like to understand your outlook in terms of loan growth and also guidance on margin. My second question is on Q2, KB Securities. Of course, I do understand that there have been industry-wide difficulties, but KB Securities' performance was very slow and sluggish, and you provided some explanation. Would like to understand how you’re going to leverage the strengths and how you’re going to overcome the weaknesses to further strengthen your fundamentals. So I’d like to ask you questions on KB Securities. Third is on dividend policy, potential share cancellation, and overall shareholder return policy. I would like to understand that the regulators are trying to curb the payout ratio. But KB, you’ve acquired PRASAC as well as Prudential. So you had instances where you had to actually spend your capital. I know that by accelerating the application of Basel III there, you could receive some help in terms of capital management, but I would like to see some more color on what your capital plans are for this year.

Unidentified Company Representative, Company Representative

Yes. Thank you for your questions. We will respond to those questions. Please bear with us. One moment. Yes, Mr. Kim Jin-Sang, thank you very much for submitting your questions. You asked three questions. The first and the third question, why don’t I respond to those questions? And on the securities, the financial results of the Securities, Mr. Park Kang-Hyun will respond to that question from KB Securities. In terms of the outlook for this year, as you have pointed out, with the COVID-19 pandemic and the following downturn in the economy and also the rate cut, it seems that it’s inevitable that we’re going to experience some decline in net profit. Interest income inevitably is going to be very stagnant. So for this year, on the non-banking side, including fees and commissions, we wish to exert our efforts to further upgrade that and also do cost control so that our annual net profit can reach above KRW 3 trillion. We will endeavor to bring that into reality. In terms of loan growth, currently, Korea’s GDP growth outlook has been downgraded, and companies are now moving to secured liquidity. There is growth in the demand for loans. With more broadened policy-led loan support, in light of all these environmental factors, we believe that loans in won for the bank will grow slightly higher than our original plan. So we’re targeting about 5% to 6% growth on a per annum basis. Household high-quality unsecured loans, as well as Jeonse loans, we believe that about 3% growth is possible. For corporate loans, if you look at investment-grade SMEs and large companies, we are currently shooting for 7% to 8% growth for corporate lending. In terms of NIM outlook, originally, we were expecting NIM at around 1.6%. However, last March, BOK cut rates by 50 basis points, which was a swift move. The timing of the rate cut was accelerated and the extent was significant as well. Also, with the COVID-19 pandemic, there’s been more extensive support policy-led financial support. Under this very sluggish business operational environment, it would be difficult for us to improve the spread against our target. So for this year, we think that the NIM target is going to be in the early to mid-1.5%. In this situation, looking at interest income, in light of the NIM contraction, things are not going to be easy. However, we aim to defend interest income as much as possible and secure interest income sources from card and securities so that we can increase interest income, even if only marginally. To improve profitability, increasing the non-interest income portion is critical. Under our framework, we have banks, securities, and card. All affiliates and subsidiaries are fully leveraging their operational capabilities to maximize fee and commission income. For insurance, thanks to the improving loss ratio profile, the performance is actually better than we had originally expected, and we think that such loss ratio profile will aid further increasing non-interest income. On non-interest income, especially regarding other operating losses, the index price, FX, and the rate movement and volatilities have widened. Thus, other operating accounts have underperformed. We believe that starting this quarter, we will be able to stabilize, and going forward, we can recover and regain our footing on other operating losses as well. On the cost side for G&A, this year, we have planned digitalization-related expenses and ERP expenses. We wish to control G&A costs within 2% on a per annum basis. Despite the very difficult business environment, we will revisit all of our expense items from a zero-based perspective, and we are very tightly managing all the expense items. On a recurring basis, CIR for the past couple of years was in the early 50% level. For the bank and card subsidiaries, we’ve completed IT investments and improved the headcount organization. Once that impact starts to show, we are quite certain that we could see the CIR improve to the mid-40% range. For PCL and provisions, based on credit cost, 25 basis points will be the level we control. This is quite a steady level. The driver behind that is because we are living in an ultra-low interest rate environment. We’ve also been very proactive in managing our risk. We have downsized our exposure to potentially bad loans, and our exposure to cyclical sectors has been reduced while our exposure to high-rated assets has increased over the months. So on the provisioning side, we think that the burden will be limited. Lastly, I want to add, at the beginning of April, we completed the acquisition of PRASAC, a Cambodian company. In Q3, our acquisition of Prudential Life will come to a close. After the acquisition and if we reflect the gains for the duration, we think that there will be a positive impact of KRW 100 billion. We are in a tough situation. Therefore, to respond to such deteriorating situations, we’re going to prioritize soundness and risk management over growth while focusing on managing our profitability and fundamentals. As for your questions about dividends and our share - treasury shares, I would like to answer that question. As you are well aware, the COVID-19 crisis has led to the realization of a global financial crisis, prompting European banks and other countries' central banks to recommend ending treasury share buybacks. The Korean Financial Authority has also noted this. Now there is a very conservative stance towards capital policy. Being a leading group in Korea, we want to be conservative and prudent in our approach, but we also wish to utilize our ample capital to ensure we can provide shareholder returns. The decision regarding this year’s dividend payout ratio will ultimately be based on our shareholders, our board of directors, and our management, but our 30% level of dividend payout ratio will still stand. We plan no changes in that regard. We will be very flexible regarding treasury buybacks or share cancellations and our stance is to maintain the dividend payout ratio at 30%. That direction will still hold, but we will need to review the direction of the Korean fiscal authorities and decide on the final dividend payout ratio. I will respond to your question about KB Securities and its business results. First of all, I would like to talk about the reasons behind this result and how much we could recover as we move forward. In Q1, yes, we underperformed. Due to the COVID-19 impact, global indices fell, leading to heightened volatility. On S&T and ELS, there were product investment vehicle-related losses. Furthermore, with asset management, there were held assets that incurred valuation losses, which are one-off losses booked. On S&T, we faced ELS hedging and challenges with overseas foreign currency bonds, resulting in around KRW 40 billion in one-off asset management losses. Additionally, we had receivable bonds that incurred above provisioning, causing about KRW 59 billion of one-off losses tied to intermediary trade-related provisioning. On the NP side, yes, we significantly underperformed. However, aside from certain elements, our overall business operation posted positive results. For WM, we saw an increase of KRW 34 billion. We reported an operating profit of KRW 140 billion. Won-denominated bonds yielded about KRW 35 billion in profit. In IB, including DCM and ECM, we exhibited market share number one. Under project management, profitability rose, resulting in total operating profit increasing by KRW 25 billion year-over-year. Though the top-line number appeared weak, if you consider Q1 losses, main drivers behind those elements indicate that, once the market recovers, we will achieve recovery. FX stabilization, coupled with effective government policy intervention, is expected to lower credit risk. We look forward to reversals and write-backs. With the recovery of the market, we anticipate about KRW 20 billion in positive impacts. We plan to increase sales of early repayment products like ELS amidst interest rate volatility, adjusting the interest rate cushion accordingly. Additionally, we will strengthen WM-related wealth management products as much as possible and customize those products to customers to recover from the losses incurred thus far.

Operator, Operator

And from Samsung Securities, we have Mr. Kim Jaewoo on the line. Sir?

Kim Jaewoo, Analyst

You just mentioned the gains and losses. So could you actually remark on recovery once again for securities and for the bank as well and give us the breakdown? When do you think recovery could happen? Thank you. Secondly, for asset quality, you mentioned credit costs, 25 basis points. But compared to last year, I think it hasn’t really moved or has gone up. We have the liquidity contraction of SOHOs and export issues. We believe that you will have a higher asset quality burden than you just mentioned. So excluding all of this, can you tell us about the impact you expect from COVID-19? Also, you mentioned a potential M&A with Prudential in Q3. Can you elaborate on the synergy going forward after the M&A is completed and any changes you foresee in the future? Thank you very much.

Jong-Kyoo Yoon, Unidentified Company Representative

Thank you very much, Mr. Kim Jaewoo, for your questions. Regarding the first and second questions, I will answer them. For the Prudential question, Mr. Kim Jang Gon, who is in charge of strategy, will answer your question. Concerning the underperformance of other operating losses, we mentioned earlier that the reason for other operating losses is the widening financial market volatility, which resulted in temporary losses. I believe we can identify five major contributors. In securities management, for foreign currency bonds, credit spreads suddenly widened, leading to about KRW 45 billion in valuation losses. The bank incurred roughly KRW 66 billion in valuation losses due to trust vehicle-related challenges. For line asset management-related losses tied to TRS transactions, there were valuations lost amounting to around KRW 40 billion. Furthermore, related to OTC derivatives, we faced FX-related losses with CVA leading to valuation losses extending to about KRW 34 billion, and ELS hedging, due to index volatility, caused about KRW 38 billion in losses. These five major contributors have resulted in our performance. Regarding the update on our foreign currency valuation losses for the bonds, we experienced significant impacts from credit spread widening. In preparing for this, we adopted proactive positioning, including purchasing U.S. futures. Amidst surging CDS and credit spreads globally, the aforementioned losses incurred about KRW 45 billion. Our investment-grade bonds from the bank and securities constitute about 97%, with 3% being BBB-grade. Thus, we believe that with the realization of various countries' policy measures, we will witness rapid recovery soon. We will uphold our strategic position and maintain our hold-and-carry strategy. Secondly, regarding the trust vehicle, we have principles regarding preservation and these are tied intimately with ELS and derivative-related products. As global stock market indices and other market factors stabilize, we believe these losses will recover swiftly. Regarding CVA-related losses, the rise in the foreign exchange rate has escalated risk, and credit spread also amplified these impacts, hence our valuation losses. As the foreign currency and credit markets stabilize, we expect a significant part of these can be reversed. In terms of ELS hedging management, indices suffered significant volatility, resulting in management losses. KB Securities will revise its issuance strategy while maintaining existing hedging but also will remain flexible in issuing new products. Overall, due to the widening financial market volatility in Q1, we incurred a temporary loss of approximately KRW 300 billion. Should the COVID-19 pandemic abate and the credit and stock markets stabilize, we believe if we recover 70%, it may reach KRW 200 billion of recovery. Conversely, if we recover just half, traceable reversals and write-backs could yield around KRW 100 billion. We will ensure thorough management of our capital market strategies going forward. Regarding COVID-19's impact on asset quality, as you know, domestic demand is decreasing, and global trade contractions affect manufacturing. As such, concerns about asset quality are legitimate. COVID-19 directly impacts industries like airlines and travel. Protracted implications will affect sensitive sectors. We have already classified these sectors and are monitoring vulnerable borrowers closely to manage their loans effectively while preparing contingency plans. For sensitive industries, we will pursue stringent credit officer management. We’re equipped with timely action plans, providing sophisticated loan quality management while maintaining strong asset quality indicators.

Lee Chang-Kwon, CSO

Yes, I am Lee Chang-Kwon, in charge of Strategy at KBFG. Your question relates to gains from bargain sales and also acquisition synergies, et cetera. In terms of gains on bargain purchase, as you know, gains on bargain purchases occur when you acquire assets at a lower price than their fair value. It’s a preliminary assessment, and I won’t share specifics yet. Still, we expect to see gains from the bargain purchase. Fair value will be recalculated by an outside accounting firm, ensuring that we make the most conservative assessments to minimize one-off impacts. The timing for recognizing gains from the bargain purchase involves regulatory approval, making it hard to specify a timeline, but we believe that by the end of August, assuming we close this transaction within the year, we should be able to account for gains from the bargain purchase. After the acquisition, boosting sales capabilities and stabilizing Prudential Life is our priority. We seek to preserve their business philosophy and culture while leveraging our strengths to facilitate a seamless integration into KBFG. Our resources will be utilized to create synergies that upgrade value. We anticipate four different synergies: First, expanding sales capabilities through Prudential's strong tied agent organization alongside our customer base will maximize cross-selling opportunities. Second, Prudential's clients, typically high-income earners, will benefit from WM-based customized products tailored to their needs. Third, strengthening asset management capabilities through integrated management of insurance subsidiaries will enable economies of scale and enhance bargaining power, leading to better investment efficiencies. Fourth, as we value Prudential's products and enable entry into new business areas, we can create additional revenue opportunities. This acquisition allows us to enhance Prudential Life's product competitiveness.

Operator, Operator

Next question. From Deutsche Bank, please proceed.

Unidentified Analyst, Analyst

I have two questions, please. So one is related to the regulatory treatment of the COVID-19 situation. Has FSS provided or is thinking of providing any regulatory forbearance for banks? For example, allowing delayed recognition of NPLs or maybe reduced risk weights on certain loans or reduced capital buffers. So this is question one. The second question is probably two parts. Given the asset quality stress, has KB identified a total share of its loan exposures considered high-risk but not yet non-performing? Additionally, do you feel the group is under pressure to issue more subordinated bonds this year, whether Tier 2 or additional Tier 1? Thank you.

Unidentified Company Representative, Company Representative

Various supporting measures are in place. Sell CR regulations and loan-to-deposit regulations have eased, and the early adoption of Basel III can be anticipated as early as June. Thus, the bank will have less burden in supporting companies. Therefore, they are allowing early adoption of Basel III. For SOHO loans, when applying LDR regulations, we previously had 100%. This has now been eased to 85%. The government has numerous policy measures for the bank to provide support to companies. You also asked about high-risk loan exposure that we have that hasn't turned into NPLs yet; we will share this information as soon as it is available. As for subordinated debt or other capital product issuances, I believe my earlier mention of our BIS ratio is relevant. In Q1, our BIS ratio was 14.02%. This year, with global M&A including Prudential Life pending, we anticipate a burden on our capital. Therefore, positions will be managed through products issuances like subordinated debt or hybrid bonds going forward to manage RWA. We will reduce non-degree exposures while making adjustments to our loan limits to maintain our target BIS ratio of 14.5%. Thank you for the detailed answer. Actually, our conference call has been lasting for more than an hour or so. I believe that we have time for one more question, and then we will conclude our call for today.

Operator, Operator

From Kiwoom Securities, we have Mr. Seo Young-soo on the line.

Seo Young-soo, Analyst

Yes. Regarding the government’s measures, there has been a six-month delay in the repayment of SLEs repayments. According to the MSS for the banks, there will be about KRW 92 billion that banks have been loaning as loans for SMEs and small owners. Can you tell us about the contribution by KB? How do you plan your future positioning strategy following this? In the U.S., with preemptive provisioning, they are preparing for contingencies going forward. KBFG, in comparison to other banks, is operating with a lower provisioning ratio. So I believe we need to improve preemptive provisioning. Can you share your plans for that in the future? Another question relates to your loan growth, which has been quite high, above 4%, and over 20% for corporate loans. Is this growth sustainable? In April, media reported that your corporate loans compared to the previous month actually went up. Could you inform us of what you expect the fixed trend to be and your strategies for loans going forward? Thank you.

Jong-Kyoo Yoon, Unidentified Company Representative

Thank you, Mr. Seo Young-Soo, for your question. Your first inquiry pertains to amoritization or grace period for repayments. You asked about the government’s announcement regarding the figures to be allotted across banks. I do not have precise figures currently. Thus, we will get back to you with that information. In relation to how we will account for grace periods and interest payments, we haven’t made a specific decision yet. It will be treated as interest income but will also form part of provisioning on the balance sheet. Provisioning for accrued interest will be our accounting approach. However, it is preliminary. While some losses are inevitable, we expect that amount to be minor. As we see U.S. banks, especially JPMorgan, preparing substantial provisions, I am unsure of their exact methods. However, unlike them, we have implemented forward-looking approaches in our provisioning due to IFRS 9. So by the end of last year, we made conservative projections and accounted for provisions. This year, if conditions worsen beyond those conservative stands, we will reconsider our forecasts according to different scenarios, a proactive approach we are currently addressing. This method differs slightly from U.S. companies with their projected reserves versus our established forward-looking provisions. Loan growth at 4.2%, with large corporations increasing by KRW 3.6 trillion, shows enterprises’ push to secure liquidity, thus driving loan growth. Our focus is on catering to high-quality businesses first. For those with potential problems, we aim to limit loan opportunities. Our loan review process will ensure we continue offering loans to high-quality organizations.

Peter Kwon, Head of IR

I believe that we have had a very fruitful and lengthy Q&A session. Please contact the IR team if you have any more questions. We will conclude our Q&A session and our earnings results presentation. Thank you very much.