KB Financial Group Inc.
Q2 2021 Earnings Call Transcript

Published: 22 Jul 2021

[Peter Kwon:]

Greetings. I am Peter Kwon, Head of IR at KB Financial Group. We will now begin the 2021 First Half Earnings Release Presentation. I would like to express my gratitude to everyone for your participation. We have here with us at today's earnings release, KBFG SVP, Ki Hwan Ju, who is our Group CFO; and other executives from the group. We will first hear SVP Ki Hwan Ju's presentation on 2021 first half major earnings highlights, and then we will engage in a Q&A session. I would like to invite our SVP to deliver 2021 first half business results presentation.

[Ki Hwan Ju:]

Good afternoon. I am Ki Hwan Ju, CFO of KB Financial Group. Thank you all for joining KBFG's first half 2021 earnings release presentation. Before presenting on the business performance, let me first brief you on the operational backdrop.

[A - Peter Kwon:]

Thank you to our CFO for the presentation. We will now move on to a Q&A session. . From Samsung Securities to Jae Woo Kim, please go ahead.

[Kim Jae Woo:]

Hi. I am Kim Joo from Samsung Securities. Thank you very much for good performance in Q2. I have two questions. First is your shareholder return policy. KBFG, this is the first time for you to pay out your interim dividend. And now you think that this makes your shareholder return policy quite solid. So we are happy to see that. When it comes to shareholder return, together with the annual guidance - payout guidance, a lot of U.S.-based banks have been quite aggressive in share buybacks. I'm just wondering whether KB also has planned to do share buybacks. From a long-term perspective, I think that - I'm wondering whether you could make the interim payout more regular. And also, from the mid to long-term perspective, what will be your payout ratio? If possible, I would like to ask for your answer regarding that. And the second question is and rollover, loan related platform. With regards to my data, and if the rollover loan platform gets combined, I think that this would have a significant impact on your loan sales. Unlike the financial holding companies, the non-bank and smaller financial providers, for them they will be quite actively making use of that platform. Because they will provide them with the new channel. From KBFG's perspective, you have a very strong platform, you have a very strong customer base. So we'd like to understand that what is your assessment is with respect to the introduction of the possible rollover loan platform.

[Peter Kwon:]

Thank you for those questions. Please give us one moment.

[Ki Hwan Ju:]

Thank you. This is CFO, Ki Hwan Ju. Thank you very much, Mr. Kim for your questions. Regarding the shareholder return policy, I will respond to that question, CFO from KB Bank will be responding to that question. As I mentioned in the opening presentation during today's BOD, for the first time in the establishment of KBFG, we have decided on reserve - resolved on KRW751 per share for dividend. As you know, the financial authority had made recommendations with regards to the dividend payout. And in light of the capital strength and asset quality, as well as many other factors, we have made a very comprehensive assessment. And as part of a shareholder friendly approach, we have decided to pay out an EPS of 751 for the interim payment. In terms of mid to long term payout ratio. I understand that that was your question. On a payout ratio for an annual basis, I think it's a bit too early for us to provide you with a specific number. Because we have to wait and see how the COVID situation plays out in the second half as well as the policy direction of the financial authorities. We will be mindful of that in making the final decision. But as long as the macroeconomic indicators don't fluctuate significantly, we believe that we will be able to probably return to the payout ratio pre-COVID-19 era. At this point in time, that is our assessment that we'll be able to go back to the former level. In terms of the share buyback, as you know, KBFG for the current year, when it comes to the payout ratio at the end of the year. And we will also look at the overall market backdrop and also communicate with the supervisory authorities. We have always done that to actually go ahead with certain plans. And for the past many - for the past years, we were able to continuously increase our total shareholder return stance over many years. We have utilized the dividend and share buyback in the past as well. In terms of dividend payout policy, we have really implemented the progressive dividend policy stance. Based on that consistent policy, we will continuously up our payout ratio continuously towards that 30% level. One last point, I would like to say is that, KB Financial Group, as we've done in the past, we will efficiently make use of our capital. And when it comes to shareholder return, we will engage in in depth review. And we will always be a step ahead so that we can really payback the trust and the support that our shareholders have shown us to-date.

[Unidentified Company Representative:]

Thank you, Mr. Kim Joo for your question. I am CFO of KB Bank. I am Tong Wun Cho , Senior Managing Director. You asked me a question about the rollover loon platform. FSC has come up with proposed system whereby that, they will provide a platform for rollover loans and some interest rate comparison services. But their whole objective is to reduce the interest burden for the users and also to enhance convenience. But in this process, one of the aspects that we have a bit of a concern about is, if there is excessive rollover, this could trigger a very fierce interest rate competition, which could undermine profitability of the banks. And also, when it comes to the customer facing, there could be a transition or movement from bank to BigTechs or FinTechs that could actually accelerate. So from that perspective, from the bank's perspective, we are a bit mindful of those negative impact. If you look at local provincial banks, for them in terms of securing new channel to provide their product. The FinTech and BigTechs have their interest rate comparison product. And these smaller institutions are already providing their information via that platform. But a large institution like ours, the banking institution, we more or less have similar concerns as well as our peers in this industry. So we are making recommendations to the FSC and we are in discussions with the government authorities. At this point in time, there has not been any decisions as to what the fee commission structure will be like or who will be the main entities that will operate this platform. None of these details have been decided yet. Rather than however, focusing on short term gains or short term disadvantages, we want to take a long-term horizon. We need to be able to secure our customer base in order for us to be able to bring about bottom line in our business. So we will decide on our strategy with a very long haul approach. Also, with regards to the rollover loan platform, we will of course need to respond to this. But at the same time, we need to further enhance competitiveness of our lending business. On the digital channel, the online channel, we are currently making improvements on the process. For instance, proposing interest rate and product that best fit and that is most personalized and customized to the customers. And also, we have our strength in offline channel as well. For instance, people who apply for loans on the digital channel can fulfil that application on the offline and vice versa. There could be many different connections between offline and online. And in terms of their process, we're making many efforts to bring about improvement in the overall process. And when it comes to different occupation or credit ratings of the borrowers or the customers, we will go more granular and give a certain loan limit and interest rates that best fit that specific category. Thank you.

[Peter Kwon:]

Thank you for the answer. We will take the next question. From Hyundai Motor securities, we have Mr. Kim Jin-Sang on the line.

[Kim Jin-Sang:]

Greetings. Congratulations on your earnings. And I have two questions. With the COVID situation getting more serious, there are concerns over on credit risks of SOHOs. Also, regarding financial support for the SOHOs, do we have to be concerned that this is going to be expanded to them and cause - some cause for concern? Second, KB in Q1 had weaker loan growth. But in Q2, I think you have recovered. But looking at the industry as a whole, I think your loan performance was very good. And I think it's still good. So for the government, I think they have some loan related regulations for household loans coming up. So can you tell us about your plans for them going forward?

[Peter Kwon:]

Yes, we will soon answer your questions please hold.

[Ki Hwan Ju:]

Thank you very much. Mr. Kim Jin-Sang for your questions. You gave us two questions. First was about asset quality and second was expected loan growth. Regarding asset quality, I would like to briefly answer your question. Due to concerns about prolonged the COVID-19 situation, it is true that the economic situation is still very difficult. And for SOHOs and small business owners, there has been some forbearance. And there are still are steadfast concerns about asset quality. Regarding the group's asset quality status, as of June 2021, delinquency 0.14% and 0.26% respectively. And this is becoming stable to manage. And for the credit card delinquency rate, it is still being managed quite favorably. So even in this situation seems to be very - it seems that it is very favorable. And for the NPL is 0.2% and 0.32% respectively. So, you can see that we are seeing downward stability. As I have for aforementioned in the presentation, regarding the government's financial support programs, there are the concerns about principal repayment and interest forbearance. And they are only at a KRW500 billion to KRW300 billion level. And regarding the prime and secured loans, they are more than 80% or they are about 70% or so in higher up. So it is being well managed. And the credit costs for this year we believe can be cautiously managed at a similar level in the market. I know that after the financial support ends, there might be deterioration in the credit or a rapid increase in provisioning. But after the financial support ends, the repayment will not be called back at once. But according to your credit rating, it could be a general - there could be prolongation and there could be the prolongation of the maturity for the new loans. And for the repayment of principal, it is going to be the rescheduled. So it will not cause serious credit crunch at once. We also have had about KRW380 billion of additional provisioning. So we have pre-emptively secured a buffer for potential NPL. However, I know that as you have voiced your concern, if the government's financial program support ends in September, there might be some possibilities that there will be NPLs going forward. So, we will re-review our loan classification and situation for different industries. And we will also look at our vulnerable borrowers. And as we have done in the past, and do our best so that we can safely manage this situation. Regarding your second question, it was about loan growth. And as I had mentioned in the presentation, in Q1, it was a bit slow and in Q2, it recovered. And for the household and the corporate side, I think we can look at it separately. And for the household loans, on a yearly basis, within a 5% range. This is being managed. And we have a portfolio based on asset quality and profitability. And we believe that we can grow based on that. For the corporate loans, as we have been voicing continuously, we put a priority on asset quality. And because we're going to grow based on profitability, we believe that 5% to 6% growth per annum for this year will be possible. Thank you very much.

[Peter Kwon:]

Thank you for that answer. We will now take the next question from Hana Investment Securities, Kim Do Ha, please.

[Kim Do Ha:]

Yes. I am Kim Do Ha from Hana Investment Securities. I have a question on margin. This quarter your NIM was quite flat. If you look at the profitability on the loan side, as well as some of the factors that contributed to this. It seems like from June their short rated rate is going up. I would like to understand how the profitabilities are coming in and the funding costs. Is it not because of the funding costs or do you think that the profitability can actually go up and start to contribute to your NIM? When do you think that that could actually materialize?

[Peter Kwon:]

We will soon answer your question please hold.

[Ki Hwan Ju:]

Thank you very much, Do Ha Kim for your question. You asked a question about NIM, about the current status, and I believe the future expectations. As I had mentioned in my presentation, in this quarter - in the previous quarter we had 5 BP increase. And for this quarter it is flat. And for Q2 NIM to explain briefly, we have the management side and the funding and lending side. And we had the low cost deposits increase with our efforts. And in Q2, we had KRW4.4 trillion one increase in core earnings. And for the time deposits, we have the average balance going down. So in the funding side, in Q2 as well as in Q1, we had the funding burden going down. And you can see that we had profitability and quality-based selective loan management stance that was well managed. And like in the previous quarter, we had a favorable situation surrounding the NIM. However, in early last year, there was a big cut in the interest rate. So this led to the repricing and some influence in the loan side for the assets. And we had the flexible LCR management, and we had the deposit insurance fee that was adjusted. I believe these factors led to offsetting some factors that you had mentioned. So that is why in this quarter, it was similar to the previous quarter. So for the bank NIM, it might seem that it is stalled compared to our competitors. But as you're well aware, looking at the bank NIM flow, we're not looking at certain quarters, but looking at 4 or 5 NIM quarter trends. I think it could help you actually know more about the margin. And after the big cut of last year, looking at the NIM flow of our competitors as well. For the quarterly fluctuations, you can see some differences. But looking at the asset liability portfolio and duration differences, I think that led to some differences. But as a result, after the big cut from Q2 of last year to Q4, you can see that it might seem similar. But there has been a 6 BP increase. So comparatively speaking, I think we can see that we have very favorable NIM trend. In the second half of this year, the repricing effect from the big cut will be alleviated. And the low cost deposits, and there will be the average balance effect coming in from time deposit differences. And this will continue. And as I have mentioned, since we are going to maintain our loan policy based on asset quality and profitability, we believe that for the bank NIM, we can safeguard to the first tap level. And if we have changes in the interest rate environment or other factors, there could be a slight improvement. As you have voiced your concern for our funding and lending, we will do our best to have more sophisticated profitability banishment, so that we can have an appropriate level of earnings. Thank you.

[Peter Kwon:]

Next question from DB Financial Investment, Mr. Lee Byung Gun.

[Lee Byung Gun:]

Thank you, I am Lee Byung Gun from DB. I would like to first thank you also for good performance. I have two questions for you. First one is soon we will see the IPO price for KakaoBank. Right now, KakaoBank is really promoting the online mortgage loans. But when it comes to this whole mortgage loans, there is mortgage, a mortgage and home equity is going to be part of their initiative. But can you really make this or sell this to the online through digital channel. And also if you look at not just the internet bank, but the commercial banks, basically they're trying to provide and handle home equity or home mortgage loans and distributing that via online. So we'd like to understand what your plans are regarding mortgage and home equity loans using non-offline channels? So what types of process are you envisioning? Second question is quite simple relating to Prudential. I know that you mentioned this previously. On a standalone basis. If you look at the profit versus the consolidated profit, we see a gap between the two figures. I would like to understand where this trend is going to stay in Q3 and next year and year after?

[Peter Kwon:]

Thank you very much. Just give us one moment.

[Ki Hwan Ju:]

Mr. Lee Byung Gun, you asked me questions about mortgage and home equity loans. When it comes to mortgage loans and Jeonse loans are most likely mortgage loans. They are closely related to government's property or real estate policy direction. So it's very complicated, and how you actually pledged your security or collateral. There are a lot of exceptions. So would you be able to actually handle this on a digital channel or an online channel? One would have to say that there will be quite difficult. When it comes to home equity loans, at KB, we actually already have a process where people don't have to actually visit offline branch. But as you've mentioned, compared to unsecured loans, the usage of this process is much lower. If you look at mortgage and home equity loans, unlike other types of smaller loans, if it's a loan for a large amount to actually pay for a property, you have to really match the timing. For instance, for Jeonse loans, if you don't meet that deadline or meet that timing, it creates a big fuss for the users. That is why customers would still prefer an offline face-to-face channel. Having said this, I believe that the overall transition is definitely towards online. And I believe that at the end of the day, there will be much more need for such digital online channel rather than having to do this on a face-to-face basis. So we are aware of this trend. At KB, we are currently upgrading our Star Banking platform. We are going to improve this whole process more intuitively and innovated so that he can actually cater better to the types of products that you have mentioned. We want to be able to have a process where we can really offer and recommend a product that best fit a borrower. For instance, if there needs to be a joint title pledged or if this is a type of a rollover loan, home mortgage loan that involves another financial institution, it becomes quite complicated/ But we are at this point improving the overall origination process so that the users can very conveniently make use of the non-offline channels.

[Unidentified Company Representative:]

Thank you, Mr. Lee Byung Gun for a good question. Responding to your second question relating to Prudential. After we acquired Prudential for PPA adjustment, and there's standalone and there's consolidated basis, and there's a gap between the two. And you're asking for how long that will continue? Last year, as well as this year, we think that that situation will continue until the end of the year. And we think that that could actually go into a year after as well. But 2023, IFRS 17 is going to come into play. And in that case, I believe that from that point in time, there could be some changes from what you're seeing right now. So that's what we're thinking internally. Thank you.

[Peter Kwon:]

Now, we are at 53 minutes. And we will take the next question from Kim Securities.

[Unidentified Analyst:]

I am So Yunsoo from Kim Securities. I would like to ask a question from a bit of a different perspective. Regarding the household loan management plan by the government, which was actually announced. Regarding the DSR, they have mentioned that I think it will be full-fledgedly adopted going forward. And credit management, I think will be based on repayment rather than on the delinquencies. Can you give us your take on what you're doing to actually prepare for this change? I believe that it is - after you give out a loan, it is hard to recover it for the DSR. And for the new customers. I think it will be hard. So maybe it will be better to implement this standard two years in advance before it is adopted two years in the future. And regarding my second question regarding DSR, this actually includes all that. But realistically, I think a lot is still missing. In particular rather than mortgage loans, there are people that could use KB's Jeonse loans and make invents investments which will lead to more leverage and higher risk. But looking at the situation, I believe that through the DSR evaluation, you could actually shift through this and find out what is real. So including Jeonse loans and others, I think this might be calculated. And your risk will be managed. So do you have any plans to do this in the future? Thank you.

[Peter Kwon:]

Thank you very much, Director So Yunsoo. We will soon answer your question.

[Ki Hwan Ju:]

Thank you very much, Director So Yunsoo. In April, there was the household that advancement plan announced by the government. And there were two plans. And first is to have appropriate management of household loans and to limit it to about 5% this year. And secondly, for do the DSR management not based on the bank, but on the borrower's. So from KRW600 billion of mortgage loans for the unsecured loan over a certain amount. So going level by level, they had a set forth some strategies and regulations rules. As you had aforementioned in managing the DSR some of the loans could have been left out from calculating the DSR. For example Jeonse loans and the moving loans or the mid-repayment loans. And regarding the DSR, firstly, as you mentioned customers might use this and get leverage. And you mentioned that it may lead to higher risk by the bank. And there is a possibility of that. As you mentioned, I think there will be a partly some possibilities. But I think it will take some - since we have some time left regarding how to reflect it in this calculation standards and models. I think we will use our time to do that. And we will also have some demand. So we are managing this at an appropriate level now. And when we have strengthened adoption of DSR, I believe that the customers will have a lower profit than before. So we will have advancement of the credit review model and come up with more detailed models. So we will give them the appropriate limitations and interest rate so that we can grow it accordingly. For example, looking at the different customers, some people's income might be very evident and some people's incomes might not be very easily seen or visible. So we will need to actually consult with the government, so that it will be at an appropriate level. Regarding the DSR, I think this will be my answer. Thank you very much.

[Peter Kwon:]

Next question from Citi Securities .

[Unidentified Analyst:]

Couple of very good follow ups. The first is on dividends. Is this going to be a quarterly dividend or it is interim dividend? And then the second question is around the net interest margin. Under circumstance, if there is going to be competition, do you expect it to grow your loan book or maintain the margin? Thank you.

[Peter Kwon:]

Give us one moment

[Ki Hwan Ju:]

Thank you very much for those questions. Regarding the quarterly dividend, I think I could just simply answer by saying that, if you look at the current circumstances, in terms of providing you with a definitive answer, I think we are not at a position to be able to do that at this point. And I've mentioned shareholder return and cash flow fluid cash flow, flexible cash flow. So in light of the economic situation and the policy direction of the government authorities, we were definitely. We are engaged in discussions and once we know of more concrete direction, then we will come back to you and communicate to you with respect to that quality dividend. You've asked me a question then about the NIM. Well, in the past, when it comes to growth and profitability, as well as asset quality, there seemed to be some trade off relationship between all of those three factors. That was how we thought in the past. But we think that growth, profitability and quality, I would like to emphasize that we have a policy in place to help us attain all of those three at once. So we are not going to go for excessive growth that's going to undermine our profitability or our margin. We have a very clear stance on that. In q1, the reason why the growth of the loan book was slow, is because we did not jump into price competition, which will undermine our profitability. So that actually is the reason why the NIM was where it was. But that doesn't mean that we're going to give up on our growth, just to protect our bottom line. On our basis, we want to make sure that we can guarantee our profitability and at the same time bring about growth. That is our approach. Thank you.

[Peter Kwon:]

I think one hour has passed. And there are no other questions in the queue, so we will wait a moment to check. I believe that all the questions have been posed. And we will conclude our Q&A session. With this we will end our earnings presentation. Thank you for your participation.