Earnings Transcript for 105560.KS - Q1 Fiscal Year 2023

Peter Kweon: Greetings. I am Peter Kweon, the Head of IR at KBFG. We will now begin the 2023 Q1 business results presentation. I would like to express my deepest gratitude to everyone for participating today. We have here with us our group CFO and SEVP, Scott YH Seo, as well as other members from our group management. We will first hear the 2023 Q1 major financial highlights from CFO and SEVP, Scott YH Seo, and then engage in a Q&A session. I would like to invite our CFO and SEVP to deliver 2020 Q1 earnings results.

Young Ho Seo: Good afternoon. I'm Scott YH Seo, CFO of KB Financial Group. Thank you for joining the company's first quarter 2023 earnings presentation. Before going into the details of Q1 '23 earnings performance, I will first run through key performance metrics for Q1. As you're all aware, starting Q1 of '23 results, our accounts are based on IFRS 19 standards -- IFRS 17 standards, and we have retroactively restated '22 earnings of the group and its insurance subsidiary. First, KBFG's Q1 net profit was KRW 1,497.6 billion, which is up 2.5% year-over-year. Driven by balanced growth from bank and nonbank business, we were able to report earnings which was 6.5% higher than market consensus. Group's Q1 ROE was 12.4% and annualized EPS, earnings per share, was approximately KRW 15,224, increasing by 2% year-over-year and sustaining an uptrend. PPOP, pre-provisioning operating profit in Q1 was KRW 2,793.8 trillion, growing 36% year-over-year. SVB bankruptcy in the U.S. and Credit Suisse merger led to greater financial market uncertainties, despite which we were able to drive solid quarterly results driven by strong customer trust, underpinned by KBFG's robust capital base, and large improvements in contributions from sales and trading -- or market business, which was previously under pressure due to greater financial market volatility in 2022 as well as greater profit contribution from our insurance subsidiaries. As a result, nonbank business share against group's net profit increased to around 41%, while group's earnings profile also improved with contributions from interest income decreasing significantly to 64%. Cost-to-income ratio, which is a measure of cost efficiency, decreased to 35.9% driven by solid profit growth trend and cost efficiency efforts that cut across the entire group. Now during this quarter, there was a significant increase in the group's PCL. This is largely due to conservative provisioning initiated at the group level for relatively weaker positions at card, capital and savings bank business in light of concerns over economic recession. In addition, 48% of group PCL was reserved as part of the bank's general provisioning irrespective of delinquencies, in loan assets or NPL formation. As a result, NPL coverage ratio for the group and the bank end of March were 196% and 264%, respectively, maintaining highest loss absorption capacity in the industry against potential losses. I am aware of great market concern over the operational headwind faced by the financial industry, looking at group's CET1 ratio for the first quarter of 2023. It reported 13.67%, which shows despite higher shareholder return, there was a 40-basis point improvement versus end of '22. This is a clear demonstration of the fact that KBFG is a strong and stable business partner to our customers. Under a challenging market, KBFG outperformed market expectations in Q1 underpinned by solid fundamentals and diversified business portfolio. We will continue to endeavor to meet expectations of customers and market players going forward. Lastly, KBFG's BoD today decided on quarterly dividend payout of KRW510.1 per share. As you know, we've put in place quarterly dividend schemes since last year, and due to treasury share buyback and cancellation which took place early this year, DPS inched up slightly year-over-year. We will continue to think of ways to further enhance shareholder value of KBFG and implement such measures in a consistent manner. With that said, I will now walk through our business performance in more detail. Group's Q1 '23 NII net interest income was KRW2.785.6 billion, up 5% year-over-year, which was due to rise in average balance of interest-bearing assets and sustained improvement in NIM year-over-year. However, on a Q-on-Q basis, NII fell 7%. Whilst NIM relatively fared okay, overall loan growth had been lackluster. The bank's NII decline was the first in 16 quarters. Next is net weak and commissions income group's Q1 net fee commission income was KRW918.4 billion, up 22% Q-over-Q. This was driven by good performance from the bank's IB business, winning and arranging for mega deals, as well as increase in brokerage volume and efficient top-line management of the credit card business. On a year-over-year basis however, net decommission income dipped marginally which is due to the high space effect from Mega IPOs Q1 last year, which drove IB income substantially, and due to software fee income from the bank's trust business. Next, is other operating profit, which includes profits from prop trading and insurance business? Q1 other operating profit was KRW656.1 billion reporting sizeable improvement both Q-on-Q and year-over-year. It was thanks to our timely response to market rate declines and stock market rebound. And through a nimble rebalancing of portfolio we were able to improve prop. trading gains across all subsidiaries and expanded insurance underwriting income by a large margin. Sales and trading business underwent massive reorganization across the group in terms of organizational structure, performance evaluation, and hiring of talent from outside. As such, we expect to generate steady earnings in '23, compared to the previous years. For the non-life business insurance, underwriting profit was up KRW243 billion Q-on-Q. Despite one-off such as massive fire incident in Q1, lower accident rates and improvement in claims from long-term lines continued, which drove KB insurances Q1 net profit of KRW263 billion on a separate basis reporting 29% year-over-year increase. The company has worked hard over the years to reduce its dependence on interest income and gradually grow noninterest income business and such efforts behind diversifying profits sources paid off as noninterest income share, which used to be around 20% increase to 36% as of March end '23. Next on G&A. Q1 group G&A was 1,566.3 trillion or 5.7% year-over-year, excluding expenditures related to KB Life Integration and CapEx for digitalization, G&A was kept well below the past 12-month inflation. In light of concerns of the economic recession this year, rigorous cost management has to be part of the company's priority. As such, we will focus on corporate-wide cost management revisiting cost items from the zero base so as to ensure cost efficiency. Last is our group's PCL. Q1 PCL reported KRW668.2 billion a sizable increase year-over-year. As mentioned before this is due to the conservative provisioning stance taken across the entire group in light of recently elevated potential for credit risk. Next, page is on key financial metrics. Bank loans in won growth graph shows as of March end '23, total loans in one was KRW327 trillion, down 0.6% year-to-date, and as such overall loan growth has been quite lackluster. House on loan reported KRW163 trillion on the back of concerns of an economic slowdown, which drove a decline in loan demand, including unsecured loan and transit loan, with decline being 2.2% year-to-date, posting a negative growth rate. On the other hand, corporate loan was KRW164 trillion up 1% year-to-date increasing around KRW1.6 trillion on the back of loan growth for large corporates. As both internal and external environment dictate conservative risk management we plan to focus on managing soundness and profitability and drive quality growth centering on quality assets. Next net interest margin, NIM. 2023 Q1 group and bank NIM each recorded 2.04% and 1.79% respectively and increased Y-o-Y. Looking at the details Q1 bank NIM despite the continued outflow of core deposits, as a result of asset repricing and flexible funding portfolio management efforts, deposit beta became stabilized and rose 2 BP Q-o-Q. In the case of group NIM with bank name improvement and improvement of CART asset yield essentially loan installment finance asset yield improved for card and those rose 5 BP Q-o-Q. Let's go to the next page. This is the status of our group's asset quality, Q1 Group NPL posted 0.43% and slightly deteriorated Y-o-Y and Q-o-Q. Q1 quarterly group NPL net increase was added KRW360 billion level and the increase in NPL from card capital savings bank accounted for 66% of the total group NPL increase in Q1. In addition, PF bridge loans took up 31% of this net increase, continuous asset price adjustments and the realization of economic downturn are analyzed as the biggest cause of NPL increase. The Group NPL ratio is they'll lower than the 2019 level, and we expect that it will be controllable to a level that does not greatly exceed the current level through strict pre and post-NPL management. From this page, I would like to elaborate on ESG leadership toward a sustainable society among KB Financial Group's 2023 management strategy directions. KB Financial Group centering on our ESG Committee has been establishing systematic ESG strategies and goals and have been implementing diverse implementation tasks step-by-step. As major ESG strategic goals first, KB net zero star in order to achieve carbon neutrality of our internal emissions by year 2040 and finance emissions by year 2050. Second, KB Green Wave 2030 to expand ESG finance to KRW50 trillion by year 2030. Third, KB Diversity 2027 to foster female talent in the Group and to secure diversity among our members. Of this ESG finance is at a KRW28.1 trillion level as the end of 2022 and taking into consideration Group's plan to continuously expand, support and gradually increasing trends, it is expected that the original goal will be achieved earlier. In addition, the goal of fostering female leaders by removing the glass ceiling and glass walls, and to expand gender equality based on providing their opportunities has slightly improved compared to a year ago. As the pool of excellent female talent is gradually expanding, we also expect the increasing speed to naturally accelerate. Our differentiated ESG management efforts is being assessed and recognized as of the highest level at human abroad. In particular, in the MSCI ESU ratings announced last month, we were the first and only domestic financial institution to be rated AAA and we demonstrated ESG ratings results at a global top-tier level. Next, in order to create a sustainable future in society, which is our ultimate goal we want to achieve through ESG management. We are pursuing harmonious growth with society and diverse efforts for mutual prosperity. As of the end 2022, the balance of social financing reached about KRW12 trillion and we are implementing efforts such as carrying out KRW223 billion of social contribution projects during last year. Not resting on our low goals this year as well, we plan to continue promoting mutual growth efforts entering on three key focus areas, which are mutual prosperity, community and future generation. Through efforts we are just strengthening the competitiveness of SME small businesses and practicing inclusive finance, we will create a soil, which will enable joint growth, will pursue community growth through job creation contribution to the expansion of social safety net and expansion of investment in social enterprises. We will take the lead in nurturing the future generation of our society by supporting the establishment of elementary school and after school care programs applies that growth of teenagers and social economic independence of young people preparing for self-reliance. Going forward, KB Financial Group will switch actively act to implement financial service delivering change to create a better world. Based on a higher level of ESG management leadership, we promise to fulfill our responsibility and we will be fitting our status as a leading financial institution. Let's go to the next page. Finally, on this page, I would like to elaborate on KB Financial Group's digital competitiveness. Along with non-face-to-face financial transactions accelerated by COVID-19 pandemic, as competition is intensifying with Internet banks such Capco Bank and [indiscernible] Bank, digitalization is being emphasized as an important competitive edge in the financial industry. KB Financial Group, which has been one step ahead in responding to these changes, has been strengthening its major platform centering on customer needs and pain points and going forward from an omnidirectional perspective that encompasses platform content and marketing. We will pursue digital transformation so that we will solidify our top-tier position in the digital financial market. As a part of these efforts, we are pursuing the super app strategy centering on KB Star Banking, and are concentrating our capabilities on group's core platforms such as KBP and model focusing on the four major non-financial areas real estate, automobile, healthcare, and telecommunications and aim to expand the non-financial areas and are continuing our efforts to become a customer-oriented number one financial platform, which offers the best customer experiences. As a result, as of the end of March 2023 digital platform NAU grew rapidly by 42%, compared to the end of 2021 exceeded 22.95 million people. KB start banking the group's flagship app was the first commercial bank to achieve 11 million NAU live mobile was the first in the financial sector to operate a service combined with telecom and achieve 400,000 subscriber retention. And we also recently obtained final approval for NV, NO full service from the Financial Services Commission. In addition, KB commence certificate acquire three government certifications for the first time in the industry, and grew 34%, compared to 2021 and exceeded 12.84 million users, and is growing as a representative private authentication service in the financial sector. Apart from this in order for strategic and preemptive investment in promising startups, we established the CVC fund enabling partnerships with promising platform-related ventures startups and new technology companies, which can spread strategically cooperate with subsidiaries and made around KRW418.7 billion one of strategic investments. Through the KB start this program, we discovered around 202 excellent start-ups by March 2023, and established around 274 partnerships with KB subsidiaries, and have been supporting overseas expansion through KB global Fintech Lab. Likewise, we're also operating innovative financial service programs at the highest level in the financial sector. Going forward along with our group's flagship app, KB Star Banking will also activate KB pay and others and through continuous expansion of service areas and content enhancement work hard to become a part of daily lives of our customers. From the next page there is detailed data regarding the business performance I've covered so far, so please refer to it if needed. With this, I will conclude my report on the 2023 Q1 business performance report of KBFG. Thank you for your attention.

Jae Hyung Lee: Good afternoon. I am Hyung Jae, from Hyundai Motor Securities. I have questions relating to KB insurance. Would be helpful if you could provide some color on the CSM movement for 2022. And if you could just also share with us what the CSM amortization looks like? And also, the size or the gap between the expected and the actual. Can you share with us what the gap is and what the reasons were? And in Q1, if there is any difference between the expected versus actual, what is the size of that? And also, what is the size of your new business CSM? And this may be a very minor question, but out of your new business for the long-term business line, if you could break down drivers’ or children's insurance for the new business CSM for each of the different types of insurance products, what is the multiple that you're seeing?

Unidentified Company Representative : Thank you very much, Mr. Lee for all those questions. Just give us one moment to prepare for the answer. Just one moment please.

Oh Byung Joo: Yes, hello, I am Oh Byung Joo, Managing Director from KB Financial Group. You asked about your 2022 CSM, for KB Insurance in terms of CSM movement, and also the difference of the size of the expected versus actual. Now regarding this specific question, we will provide you with the details through our IR division. Just to provide an overall high-level picture regarding this question from KB Insurance over the past three years, we have focused on selling high-margin medical products -- health insurance products. And in the recent three years, we were able to further strengthen and expand our market position. And as a result, we've been able to further expand the size of the CSM. And if you look at Q1 numbers, previous year, KB Insurance was about KRW7.9 trillion. And as of Q1 end, it reported a trillion about KRW120 billion so there has been about an increase of KRW250 billion. Now, this is actually an outperformance of the business plan that we have initially set for ourselves. You also asked about regarding the new business for Q1 like drivers and children's insurance. You asked about the CSM conversion ratio and amortization. But as mentioned before, KB Insurance in terms of competition, especially if you get children's insurance product, which Intel's high margin we've been able to successfully sell that into the market through the GA channel. And in Q1 we were able to expand our market share through the GA channel. Looking at drivers like insurance, if you look at CSM conversion is about 18%, for children's insurance, it's above 20%. So that is the figures that I can share with you at this point. Thank you.

Operator: We will take the next question Kim Jae-woo from Samsung Securities.

Kim Jae-woo: I have some questions and first question is about your provisioning. It says here you had some preemptive provisioning. So, can you tell us about what was one-off and what wasn't? Along with this looking at the credit costs for this year. Can you give us some guidance for this year? Thank you very much. Second question. So, for other operating income, well, it seems that there have been some changes. And can you tell us about the increase and can you tell us about the background? Because I think some will be linked to the rate, and some may be stabilized because of other reasons. So, can you give us some color into the background behind this? Thank you very much.

Unidentified Company Representative: We will soon answer your question. Please hold. I would like to answer your question. First, it is about provisioning. As we aforementioned, for general provision, which is unspecified provisioning, in Q1, it was about KRW320 billion. So, it was provisioned through the Bank. The reason behind this was that in Q1, we had the credit cost that actually surged, and second is the guidance for credit cost. We believe that, the market interest rate, well, there is NPL and credit cost, which is deeply linked, and this is the main reason for that. And the Group's business, Research Institute says that, for Q2 and Q3 for interest rate, it will have ups and downs. And from 2024, it will continuously drop. So, based on those projections, looking at the NPL ratio and credit cost ratio, if we make assumptions, it seems that until now through our IR sessions, we have been saying that, the Group credit cost from the mid-30s to 40-s is what said. But in 2023, we believe that this will keep in line with our guidance. We don't believe that, the credit cost will fluctuate greatly. And for credit cost, for our guidance, I believe what I can -- this is what I can say and for other operating income, you test about whether it is stable or not. And I couldn't really catch your question perfectly, because I couldn't hear the sound clearly, but for other operating income, we have a prop trading and insurance income. So those two are the parts. And for the insurance part of our income, in Q1, we had not only one-off in Q1, but we believe that in Q2, Q3, and Q4, we will have a stable contribution by the insurance for the Group's earnings. Secondly, for securities, we believe that going forward, for securities for FX and for derivative, the earnings and income from that in Q2 will greatly -- has greatly increased, and I believe as you had asked, we will need to see the interrogate situation to see whether this will hold. But in 2022 for the Group, we have all the prop trading-related groups that were completely revamped during the year. And as a result, we have the best and the stable traders that have been rooted. So, we believe that, there will be some trading income changes according to the changes in the market that we believe, compared to our competitors, it will be a Stabler and less volatile. Thank you very much.

Unidentified Company Representative : Thank you very much for the answer. We waiting for additional question to come in from Hanwha Securities, Do-ha Kim. Please go ahead. Miss Do-ha Kim. Please go ahead.

Kim Do-ha: Yes. I would also like to ask one question. Regarding previous earnings, I think you have given us more details relating to the application of the IFRS 9. And I think there has been significant fluctuation on the securities-related income under other income. Even if you provide us with the details later on, if you look at Q1, looking at FVPL, can you give us a carve-out of that FVPL because under nonlife, it is just included in others line item. But I would like to understand because it's quite difficult for us to carve out just the impact from FVPL. So, if you could tell us what that is, I think it would be helpful for us to further understand. And also, from the banks, you talked about KRW320 billion of additional provisioning, if you could share more details as to what the assumptions were? And also, are these all regarding the current COVID-related counter cyclical buffer or if you could provide a little more breakdown as to this additional general provisioning? That would also be helpful.

Unidentified Company Representative : Thank you. Just give us one moment. [indiscernible] Kim. Regarding KB insurance and the devaluation of assets. And then regarding the application of IFRS 9 as you have correctly mentioned that KB insurance we have internally applied IFRS nine since 2018, and last year IFRS 17. And if you look at P&L, like I thought was 19 has already been embedded last year because of the interest rate movement and also the impact from the stock market. The FVPL, value PCL [ph], there has been a valuation loss that was booked that is the fact. However, in Q1 with the interest rate movement and the rate cuts as well as improvement of the stock market last year. In FVPL, there has been some plus impact. So, if you just look at KB insurance, out of the FVPL asset, there was about plus KRW41 billion of valuation gains that we were able to book. Regarding the general provisioning, if you look at Q1 PCL of the group, it was a KRW668.2 billion and out of that KRW320 billion had to do with that countercyclical COVID related provisioning. Let me revisit this once again. This is irrespective of project financing this is it purely for general provisioning purposes. And then the remaining KRW300 billion is to respond to increase in NPL et cetera. So that is the running basis provisioning amounting to KRW300 billion.

Operator: It seems that we don't have any questions in the queue yet. So, we will wait for questions to come in. You can also contact our IR team any time after our earnings release to ask questions. Cho Jihyun from JP Morgan.

Cho Jihyun: Thank you, very much for the opportunity. You answered a question about provisioning. So, I would just like to add to the question for PF journal provisioning. You mentioned that PF hasn't been reflected in the journal provisioning and others have been included. And I think for card and capital, you have seen appeal increase, especially for PF and bridge loans. I think you mentioned that. And recently the PF loan exposure or other loan exposure, if you can remark on that. And can you tell us about, how you think it will change and be managed in the latter half of this year. If you can provide some color to that it would be greatly appreciated.

Unidentified Company Representative: Regarding the PF exposure, it's about KRW11 trillion. And our CFO commented that it's not for specific provisioning in the PF for the different areas, but regarding delinquencies or any problematic businesses, well, we are just provisioning it according to our general standards and PF loans are a great issue in the market nowadays. So, it is four different businesses in our group that we are responding to this risk preemptively and we are responding to it individually and also because of the market situation. So, we have had soft landings with the agreements and others. So, we will need to wait and see. And we also expect many businesses to normalize and we are responding to each case individually. And if looking at the market, we are seeing some slow speed then we will also be looking toward for additional provisioning if required. Thank you very much for your question. It seems that we are waiting for questions to come into the queue, we will wait.

Unidentified Company Representative: While preparing for today's earnings presentation, we felt that you would be interested in our insurance as well as our provision-related positions. So, I think there were an ample number of questions that came in regarding those topics. We will still wait just one more moment for any additional questions I see that there are no further questions in the queue. So, this brings us to the end of the Q&A. Thank you very much.