KB Financial Group Inc. (NYSE:KB) Q3 2023 Earnings Call Transcript

KB Financial Group Inc. (NYSE:KB) Q3 2023 Earnings Call Transcript October 28, 2023

Peter Kweon: Greetings. I am Peter Kweon, the Head of IR at KBFG. We will now begin the 2023 Q3 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 Q3 major financial highlights from CFO and SEVP Scott YH Seo and then have a Q&A session. I would like to invite our SEVP to deliver our 2023 Q3 earnings results.

Scott YH Seo: Good afternoon. I am Scott YH Seo, CFO of KB Financial Group. Thank you for joining KBFG’s third quarter 2023 earnings presentation. Allow me to first walk through key performance metrics as of cumulative Q3 2023 before going into the details on business performance. KBFG’s third quarter ‘23 cumulative net profit was KRW4,370.4 billion, up 8.2% year-over-year. Despite difficult internal and external operational backdrop supported by balanced banking and non-banking subsidiary growth and widening of non-interest revenue and G&A control group’s earnings capacity is currently well sustained. Just to note, IFRS 17 has been retroactively applied to our 2022 earnings. Also, cumulative ROE this year was 11.7%, sustaining improvement following last year.

Annualized EPS, earnings per share reported approximately KRW14,691, up 8.3% year-over-year with the impact of treasury share buyback and cancellation coming through. In Q3, net profit reported KRW1,373.7 billion, sound interest income growth and continuing cost savings efforts drove earnings in line with market consensus and even based on retroactive treatment of IFRS 17, there was increase in earnings year-over-year. However, due to greater financial market volatilities and sizable reduction in other operating income, as well as one-off losses arising from insurance subsidiaries’ use of the actuarial assumption guideline of the supervisors, net profit was down 8.4% Q-on-Q. Next, credit cost on a cumulative basis for the Group in Q3 was 52 basis points, reporting a wide year-over-year expansion.

This is because on top of general provisioning during the first quarter, there was no overlay provisioning during Q2 following changes in the expected loss model, which amounted to KRW490 billion of large-scale provisioning in the first-half of the year, which was a continuation of conservative and preemptive provisioning stance against economic uncertainties at the Group level. We believe such provisioning policy will eventually have a positive impact on mitigating possible economic shock in the future and sustaining a stable net profit generation at the Group level. Also, in light of internal/external business backdrop, level of current provisioning and possibility of needing additional provisioning in the fourth quarter, full-year ’23 group credit cost is expected to not exceed 50 basis points.

Group’s NPL ratio as of end of September ’23 was 0.48%, up 4 basis points versus end of June. This is in the context of rising delinquency rate on top of which there was rise in NPLs from affiliate lending providers, real estate trust and savings bank. Nonetheless, NPL coverage ratio for the group and the bank as of end of September were 180% and 228%, respectively, attesting to ample loss absorption capacity when and if there is to be credit risk deterioration. Lastly, today BOD of KBFG decided to payout quarterly dividend of KRW510 per share. In terms of the update on share buyback and cancellation which was announced last July, we have been buying our shares since August under the trust arrangement and will immediately cancel the shares once the purchase is complete.

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Q&A Session

Next, I will walk through the details of the Q3 ’23 business results. Group’s net interest income for Q3 ’23 was KRW3,087.9 billion, driven by loan growth and interest income widened, posting a Q-on-Q rise of 3.8%. Net fee and commission income for Q3 came in at KRW901.4 billion, down 5.3% Q-on-Q. Even though increase in stock trading volume drove up broker fees, softer investment banking income and decline in trust fees had a dampening effect. Nevertheless, thanks to efforts put in to diversify Group’s business portfolio, net fees and commission income this year had been around KRW900 billion level on a quarterly basis which goes to show enhanced capacity of the Group in generating its fee income. Next is other operating profit, which includes income from prop trading and insurance operations.

In Q3, there was other operating loss of KRW23.1 billion on the back of higher market rate and rising $1 exchange rate, which led to somewhat of a muted performance of securities, derivatives and FX currency operations. For the insurance business, with the application of supervisory guideline on actuarial assumption, including changes in loss ratio for medical indemnity product for the P&C insurance, there was a one-off loss of around KRW71 billion. However, excluding such one-off loss this quarter, net profit of KB Insurance in Q3 is above KRW200 billion, which is quite steady, even considering second-half seasonality seen in the nonlife insurance industry, while the company’s market dominance is widening, pivoting on long-term protection insurance.

Next, I would like to cover G&A expenses. Q3 G&A expenses posted KRW1,564.7 billion and through continuous cost rationalization efforts, it went down slightly Q-o-Q. On the other hand, Q3 cumulative group CIR posted 37.4% and nominal CIR and recurring CIR, excluding non-recurring items, all greatly improved Y-o-Y. Group CIR is showing a market downward trend, thanks to solid top line growth and results from continuous cost efficiency efforts. Our goal is to achieve a mid to long-term annual CIR target of early 40% range, and we forecast that 2023 full-year CIR will be managed within our target range. Lastly, group provision for credit losses. Q3 provision for credit losses posted KRW448.6 billion and decreased greatly Q-o-Q, due to the additional provisioning underlying effect in Q2.

Since we have been continuing a conservative provisioning policy until now and have been securing a buffer preparing for external internal uncertainties, we find that there is a limited possibility for the Group’s credit cost to rapidly increase going forward. There have been recent concerns regarding financial company’s asset quality. And in order to prepare for these possibilities preemptively, we will do our best to manage asset quality by strengthening management of potential non-viable exposure and by maintaining our conservative risk management stance. From the next page, I’ll cover our major financial highlights. First, looking at the bank loans in won growth graph, bank loans in won as of end September 2023 posted KRW336 trillion, and increased 1.8%, compared to late June and 2.4% YTD.

Corporate loans posted KRW172 trillion, and increased around KRW5 trillion, compared to late June and is leading loan growth. This was due to the deterioration in the corporate bond insurance market and with the increase of overall loan demand, large corporate loans increased 8.9%, compared to end June and SME loans increased 1.6%, compared to end June. Household loans posted KRW164 trillion and with increased demand following the real estate recovery trend centering on mortgage loans and Jeonse loans, it has increased by 0.6% compared to late June and reduced negative growth. Amidst of spreading internal and external uncertainties in order to focus on qualitative growth based on high-quality assets, we have been continuing rebalancing for potentially non-viable loans and maintaining a conservative loan policy.

Next is net interest margin NIM. 2023 Q3 Group and Bank NIM posted 2.09% and 1.84%, each, respectively, and went down 1 bp Q-o-Q. This was mostly due to the increase of funding burden centering on time deposits and marketable deposits according to the loan growth recovery amid the decreasing trend of the loan asset repricing effect, which had been leading the NIM improvement trend. On the other hand, regarding 2023, Q4 NIM, despite the continuous downward pressure, including continuing funding burden and contraction in the net interest spread we expected to maintain a level not greatly different from the Q3 level. Next, let’s go to the next page. I would like to elaborate on the Group’s capital ratio on the upper right-hand side. Estimated group BIS ratio as of late September posted 16.76% and CET1 ratio posted 13.70%, respectively.

With corporate loan focused growth, risk-weighted assets relatively greatly increased, won — weakening of KRW32 per $1 in the quarter led to a negative effect on RWA management, which all caused a slight decline in BIS and CET1 ratio compared to late June. However, we are still maintaining a higher CET1 ratio level among the bank financial holdings companies. From the next page, we have details regarding the performance I have been covering, so please refer to if needed. With this, I will conclude KBFG’s 2023 Q3 business performance report. Thank you for listening.

Operator:

A – Peter Kweon: Thank you very much for the presentation. We would now like to begin the Q&A. For those of you joining us via the Internet, please refer to the contact info on the very last page of the presentation screen. [Operator Instructions] We have not yet received any questions, just bear with us one moment. We will take the first question from Yuanta Securities, Jeong Tae Joon. Mr. Jeong Tae Joon, please go ahead with your question. Mr. Jeong Tae Joon from Yuanta Securities. We cannot hear you. Just one moment, please. Please go ahead. I think we are having some technical problems. We cannot hear you. Just please one moment. Mr. Jeong, can you hear us? I think we have a very bad connection at this point. So just please give us one moment. Yes, please go ahead. We are, at this point, experiencing technical difficulties. I understand that the sound — the outgoing, as well as incoming sounds have some issues. So please, one moment.

Jeong Tae Joon: [Technical Difficulty]

Scott YH Seo: Yes, this question related to a dividend payout policy. Yes, hello this is the CFO, you asked about a possibility of a change in our dividend payout policy going forward. I understand that to be your question. As you know, in 2023, as well as for our dividend policy going forward. Based on our year — beginning of the year business plan, we’ve made the relevant disclosures, and we’ve been continuously communicating with our shareholders, the investors and the market. As you know, our stance is to adopt a progressive approach. Our stance is the same as before, we will adopt a progressive dividend payout. And our CET1 ratio, as you can see from our Q1 number, it was above 13.7%, so which is quite positive. So there is no reason for us at this point in time for us to shift gears and change our dividend approach.

We’ve been continuously emphasizing this, our price to book is around 0.4x. So for us, what’s important is for us to bring about improvement in the valuation of the company. So we will continuously to focus on canceling our treasury shares. Thank you.

Peter Kweon: We will move on to the next question from Hanwha Securities, Kim Do-ha. Please go ahead.

Kim Do-ha: [Technical Difficulty ] and I know that there were no reasons to change. But regarding the stress cyclical buffer, regarding the level — regarding the [bell] (ph), so can there be some changes here for the best estimate ratio liability for bell.

Oh Byung Joo: I am Oh Byung Joo. Thank you very much for your question. I’m the Managing Director of KBFG. I will respond to this question on the changes in the actuarial or the guidelines leading to the actuarial assumption by the supervisors. During the Q2 earnings presentation, we talked about the medical indemnities and the guidelines, supervisory guidelines, and we mentioned that there is some risk that there will be some changes. So we said that maybe a modified retroactive approach, there’s also a possibility of that. But KB Insurance, we have been applying a more conservative guideline, compared to the regulatory guideline. So if you were — but for the benefit of making apples-to-apples comparison, we have decided to approach a progressive method.

And basically, that has been what has been applied to our Q3 numbers. As the CFO of the financial holding company has mentioned on a one-off basis, the CSM buffer and also, there has been some decline in VIF. So there was one-off loss about KRW71 billion. This is one-off. But as Kim mentioned, BIS is the very specific, I guess, impact from that. I would like to share with you what impact it has on the best estimate liability later on off-line. But I can tell you that within the business plan that was established by KB Insurance, we were able to close accounts in alignment with the guidance of the supervisory authorities, and we will be able to achieve the previous targets that we have set for ourselves. Moving on to the stress test and the buffer capital.