KB Financial Group Inc. (NYSE:KB) Q2 2024 Earnings Call Transcript

KB Financial Group Inc. (NYSE:KB) Q2 2024 Earnings Call Transcript July 24, 2024

Peter Kwon: Greetings. I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2024 First Half 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 SVP, Jae Kwan Kim, as well as other members from our group management. We will first share the 2024 first half major financial highlights by CFO and SVP, Jae Kwan Kim, and then engage in a Q&A session. I would like to invite our SVP to deliver 2024 first half earnings results.

Jae Kwan Kim: Good afternoon. I’m Jae Kwan Kim, CFO of KB Financial Group. Thank you for joining KBFG’s 2024 first half earnings presentation. Before going into the second quarter earnings results, I will first go over the company’s first half shareholder return plan, which was resolved by today’s BOD meeting. Please turn to Page 4 of the presentation deck. Despite difficult operational backdrop, KBFG has been pushing forward with industry-leading shareholder return policy with a sustained effort on capital management to maintain industry’s top-notch capital strength. As a result, CET1 ratio as of end of June was up 17 basis points Q-over-Q, expected to reach 13.59%, which is the highest capital ratio in the domestic market.

As you are aware, last quarter, we were the first in the industry to start paying out equal amount of dividend every quarter on a total amount basis, enhancing visibility on annual payout and EPS while retaining flexibility in implementing share buyback and cancellation with a view towards improving shareholder returns. As part of such effort, today, the BoD decided on quarterly cash payout of KRW791 per share and buyback and cancellation amounting to KRW400 billion. KRW791 EPS is a marginal increase following the impact from KRW320 billion share buyback announced during the first quarter, while additional share buyback and cancellation of KRW400 billion is yet again a testament of the commitment of the BoD and the management towards enhancing TSR, total shareholder return that is, and shareholder value.

All in all, we will, in total, buyback and cancel KRW720 billion, which distinguishes our shareholder return policy underpinned by industry’s top-notch capital strength and stable earnings capacity in spite of challenging operational headwind with growing macro uncertainty. KBFG will endeavor to continue on with a progressive dividend policy employing various means within the boundaries of sustaining robust capital adequacy so that we may meet the expectations of the market. Now, I will move on to KBFG’s earnings for the first half of 2024. First and key business performance highlights and metrics of the group. KBFG’s first half 2024 group net profit reported KRW2,781.5 billion. Because of sizable ELS compensation costs in Q1, this was a 7.5% decline year-over-year, but if you look at the second quarter, on the back of evenly spread growth coming from the bank and non-bank businesses and solid earnings expansion, particularly from non-bank subsidiaries, i.e., securities and insurance, net profit came in at KRW1,732.4 billion.

Putting aside one-offs such as reversals from ELS compensation costs and loan loss provision, normalized net profit is at around KRW1.6 trillion. KBFG will continue its efforts around keeping stable earnings fundamentals supported by conservative provisioning stance and diversified group portfolio so as to solidify its basis for sustainable growth. G&A expense in the first half was KRW3,222.1 billion, up 2% year-over-year. Cost-to-income ratio, which represents cost efficiency of the group, was supported by solid earnings growth trend and corporate-wide cost efficiency efforts, keeping in line with the controlled level of 36.4%. Group’s labor costs shifted to a downward trajectory last year, and with decline in number of headcount from early retirement program and cost efficiency efforts continuing, we expect to see group CIR trend to continue and stabilize downward.

First half cumulative credit cost for the group was 40 basis points, being kept at a steady level. Macro uncertainties are continuing this year, triggering concern on overall asset quality of the industry, but we have ample capacity to respond, backed by preemptive conservative provisioning and rigorous management against additional risks. As such, we believe group’s credit cost will be kept under a steady control. Meanwhile, banking sector prices in the market have displayed strengths on the back of high expectations placed on the value-up program since the beginning of the year. As I mentioned at the beginning, on the shareholder return page, KBFG has been at the forefront of progressive shareholder return, underpinned by stronger fundamentals, capital ratio strength and stable governance structure, writing its own version of value-up history.

Also to maintain consistency of our value up approach, we have faithfully implemented mid- to longer-term capital plan, which was announced last year, and was the first company in Korea to make preliminary value-up disclosures back in May. In the second half, in addition to scheduled value-up disclosures, we will continue to endeavor to drive corporate value and shareholder value enhancement. With that said, I will move on to detailed items. 2024 first half group net interest income posted KRW6,357.7 billion, and Q2 net interest income recorded KRW3,206.2 billion and went up 9% Y-o-Y and 1.7% Q-o-Q, respectively. This was possible on the back of loan average balance growth and continued interest income contribution expansion, including non-bank subsidiaries, such as insurance, despite the net interest margin contraction following the interest rate decline.

First half group net fee and commissions income posted KRW1,909.8 billion, and increased 2.4% Y-o-Y. This is mostly attributable to the increase in stock transaction amount following higher expectations regarding the value-up program, expanding brokerage income and increasing securities financial product sales fees, card fees and capital fees and commissions. However, Q2 group net fee income posted KRW919.7 billion. And with the IB fee decline following the real estate PF market contraction, it went down slightly Q-o-Q. However, on the back of strengthening group-wide sales activities and efforts to diversified business for six consecutive quarters, a KRW900 billion level of net fee income was recorded, assessing to the fact that group’s fee income generation fundamentals is being robustly maintained.

Next, I will cover other operating profits. Q2 other operating profit posted KRW323.1 billion, and with improvements in the financial market environment, including interest rate and stock index, on the back of expansion of securities investment performance, including bonds and beneficiary securities, they posted sound performance with a 19.5% Q-o-Q increase. On a first half cumulative basis, it posted KRW593.5 billion. And with the contraction and performance related to securities, FX and derivatives due to the interest rate and FX rate effect, the performance was lower than the same period compared to the previous year. On the other hand, in the case of the first half insurance income, it went up KRW185.7 billion Y-o-Y. This is attributable to the previous quarter’s non-life insurance IBNR reserve reversal and long-term and general insurance loss ratio improvement.

Next, I will cover G&A expenses. First half G&A posted KRW3,222.1 billion, and on the back of continuous cost rationalization efforts, it went up around 2% Y-o-Y and Q2 G&A decreased 2.1% Q-o-Q and is being well managed. Next is group provision for credit losses. Q2 provision for credit losses posted KRW552.6 billion, an increase Q-o-Q. Despite the provisioning reversal due to one-off in this quarter, this is mostly attributable to additional provisioning related to real estate trust and maintaining our conservative provisioning accumulation stance in case of future economic slowdown. On the other hand, first half cumulative provision for credit losses posted KRW981 billion, and decreased by a great degree Y-o-Y. This was caused by the underlying effect stemming from the preemptive large-scale provisioning, reflecting the conservative FLC scenario in the previous year.

Last, regarding the Q2 non-operating profit, on the back of the underlying effect following the previous Q1 large-scale ELS provisioning reversal, it grew by a large degree Q-o-Q. From the next page, I will go over key financial indicators. Next, the group’s profitability indicators. 2024 first half group ROE posted 10.78%. Non-operating profit, which declined steeply due to the previous quarter’s ELS compensation costs recovered, and based on a differentiated business portfolio, core profit growth continued and the recurring ROE, excluding one-offs, posted 12.26% and solid profitability is being maintained. Next, I will cover bank loans in won growth. 2024 June-end, bank loans in won posted KRW352 trillion, an increase 2.3% compared to end March and increased 2.9% YTD.

Due to our asset quality and profitability-based loan policy and overheated competition in the corporate loan market, the bank’s loans in won in the early part of the year showed slightly low growth, but from Q2, loan demand increased, centering on real demand and loan growth is gradually recovering. In detail, household loans posted KRW 172 trillion, and with the expansion in loan demand and loans from national funds due to home transaction increase, it went up 3.0% YTD, around KRW 5 trillion increase. In the case of corporate loans, in Q2, with the expansion in large corp loans and the addition of moderate SME loan growth, it increased 2.7% YTD. We will monitor the economic circumstances and household loan situation and focus on qualitative growth on asset quality and profitability in the second half as well and flexibly manage loan growth speed.

Next is net interest margin. Q2 group and bank NIM each posted 2.08 percentage points and 1.84 percentage points, respectively, and each declined by 3 bp Q-o-Q, respectively. This was mostly attributable to spread contraction and market interest rate decline and other factors leading to lower asset yields. However, on a Y-o-Y basis until now, group and bank each increased by 3 bp, respectively. Let’s go to the next page. I will cover the group’s cost-income ratio, CIR. As you can see in the top left-hand graph, 2024 first half group CIR posted 36.4% and with continuous core profit growth and group-wide cost management efforts, cost efficiency improvement trend is continuing and is showing downward stabilization. Next is the credit cost ratio.

Q2 credit cost posted a 43 bp level and slightly increased Q-o-Q, but is still maintaining stable asset quality, still within predictable scope. Last is group’s capital adequacy. Despite the won and dollar FX increase in the quarter, on the back of group’s levels active risk-weighted asset management efforts and solid net profit increase, June-end BIS ratio and CET1 ratio is expected to post 16.63% and 13.59%, respectively, the highest level in the financial industry. As we had mentioned in the capital policy that was presented in the early part of the year in the business earnings report, we will manage the CET1 ratio at a 13.5% level and continue group-wide efforts to improve capital adequacy so that shareholder return visibility can be enhanced.

The next pages are detailed material related to shareholder value related indicators and management performance, so please refer to it if needed. With this, I will conclude KBFG’s first half business results presentation. Thank you for listening.

Q&A Session

Operator: Thank you very much. We will now begin the Q&A. [Operator Instructions] We will take the first question from SK Securities, Mr. Seol, Yong-Jin. Please go ahead.

Yong-Jin Seol: Thank you for taking my questions. I have some questions relating to your shareholder return policy and value-up program. Before I begin, I would like to first thank you for implementing consistently in alignment with your past announcement. And you’ve mentioned that with regards to the value-up disclosure, you will continue to implement those disclosures. I’m just wondering will there be any changes that we need to be mindful of in terms of that value-up disclosure going forward?

Jae Kwan Kim: Thank you for the question. Jae Kwan Kim, the CFO. Although we haven’t yet made the value-up disclosure, as you know, starting this year, we have adopted the quarterly even dividend program and our share buyback and cancellation amounts to KRW720 billion, as we have announced. And although we have yet to make that relevant disclosure, under our value-up program, yes, we are implementing all of those measures one by one. With regards to the content that will be included in the value-up disclosure per se, we are at this point, discussing the details. But in terms of the capital ratio and how we are going to use the capital and also our efforts to improve the ROE are some of the aspects that will be included in that disclosure.

Operator: Thank you. We do not have any more questions in the queue, so please bear with us one moment. We will take the next question from HSBC, Won, Jaewoong. You’re on the line.

Jaewoong Won: Can you hear me?

Jae Kwan Kim: Yes, we can hear you well.

Jaewoong Won: Thank you for your good earnings despite the challenging environment and for shareholder return. I have two questions. My first question is related to Page 4 of the presentation deck. And it has 2023 and 2024 shareholder return comparison, and to my knowledge, on a physical basis, you were engaging in shareholder returns. And I think it seems that you have changed to a calendar schedule. So, does it mean that going forward, do we have to calculate shareholder return based on a calendar basis? So that’s my first question. My second question is, if you are going on a calendar basis, then 200 — KRW720 billion of shareholder return was given for shareholder buyback and cancellation. But can we think that there could be additional shareholder return that is added in this manner? Thank you.

Jae Kwan Kim: I am Jae Kwan Kim, the CFO of KBFG. Until now, regarding the total shareholder return ratio, there were two standards. So, I think there was a little bit of confusion in the market. So that is going forward, we are going to have it integrated in a calendar fashion going forward. And when we introduce the calendar method, then we have shareholder return firsthand, and then we have the net profit calculated afterwards. So that is why going forward, we plan to gradually increase it and to decide on the total shareholder return ratio in the beginning. And then, we can decide on the others as we go along, depending on the situation. And regarding what we planned for the rest of the year, we have not reviewed any possibilities at this point.

Operator: Thank you. We’ll take the next question Hye-jin Park from Daishin Securities. Please go ahead.

Park Hye-jin: Thank you. I have some questions relating to your provisioning. For your property project financing, I understand that there are four more granular categorization. Regarding the property market, I think you briefly mentioned what your — the trust arrangement. I would like to understand as to the size of provisioning relating to PF at your subsidiary level? And do you think that the impact from project financing will continue to linger, meaning, do you think there will be some additional provisioning that we have to be mindful of as we go forward?

Choi Cheal Soo: I will respond to the question. I am the CRO, Choi Cheal Soo. Regarding the [four] (ph) levels, as you know, in terms of the business feasibility assessment, it has become much more stringent. And in the case of KB, we had pre-emptively reserved very conservatively in terms of provision. So yes, there was an increase of NPL of tens of billions, but the provisioning impact was only at about a billionth level. And so, the impact has not been that great because we have already had quite a bit of provisioning ahead of time. In terms of the trust vehicles, property — the real estate trust, there has been a higher exposure this quarter, but in the other subsidiaries, we haven’t seen that big of an exposure regarding the project financing.

Regarding the real estate trust vehicle, as you know, because the unfilled lots are increasing and also the construction cost has gone up, there’s a lot of developer-related issue. So, most of the property trust that exist in the market is facing some difficulties. And basically, the biggest impact is going to be felt by the completion guarantee that’s been provided. So, in the second quarter, what we did was we went back and we inspected all of the sites. And what we did was we satisfied very conservatively the provision. So, if you look at the property trust, if there is money outflow, there is a trust account. And basically, there’s been about KRW300 billion of exposure for the ones with a completion guarantee. And at this point, we have about 70% reserves that could back that up.

And going forward, we have about 30% for the trust account. So, in terms of the loss absorption capability for those trust accounts, specifically for properties, I can tell you that we are amply ready. And regarding the project financing in the second quarter, there’s been quite a bit of increase, and that is mainly attributable to this — the property trust arrangement.

Operator: Thank you. From Hanwha Securities, we have Do-Ha Kim. You’re on the line.

Do-Ha Kim: Thank you for the opportunity. I also have a question about asset quality. And regarding the trust and the completion, you mentioned about the provisioning. Can you tell us about the amount? Because I’m sure that in the other subsidiaries, you mentioned that it is not very sizable. So, recurring CCR, well, I would like to know more about it so that I would like these numbers to calculate backwards. And regarding NPL, I think coverage ratio was affected. So, can you tell us about what was actually classified as NPL? And can you tell us about the appropriate level of coverage ratio that you think is optimal?

Jae Kwan Kim: So, when it comes to property trust, in Q2, we set aside about KRW80 billion. Now this is the provision that we set aside for Q2. And below substandard, there’s been some increase. You are right, we’ve seen some increase for substandard and below. And in Q2, if you look at the asset quality categorization, we applied more rigorous test. So, for borrowers with less capability of paying back, what we did was, in that case, the reserving ratio would have been higher. And for real estate PF, for loss-making sites, what we did was we also reflected for that. But when it comes to the big impact, it’s the construction sites where there is a completion guarantee and all of those exposures have been categorized under NPL.

That’s why the number seems like it is quite high. Now what — your question regarding what is the appropriate level of coverage, I look at coverage ratio from two different perspectives. The first one is during the COVID pandemic when there was very low interest rate, there has been a quite high amount of reserving, but these days, we’re now in a high rate environment and the macro uncertainties have widened. So, during COVID, the 200% coverage ratio, I think that’s very particular. So, if you look at pre-COVID, around 2019, I think 125% or 130% level will be a more appropriate level per se when it comes to coverage ratio. And when you calculate the coverage ratio, the assets under the NPL, now they have quite a bit of collateral strength.

And so basically, the probability of incurring a loss is not very high. So, if we consider for that aspect, if you think about the appropriate level of coverage because you can’t go too much, you can’t go too low, but I think 130% and 140% can be considered to be an appropriate coverage ratio.

Operator: Thank you. And we do not have any more questions in the queue, so we will wait. We have from HSBC, Won Jaewoong, who is asking an additional question.

Jaewoong Won: Thank you very much for giving me this opportunity once again to ask a question. I have a lot that I would like to know more about because in Bukopin, can you tell us more about what is going on abroad? Because I think regarding delinquency or income or CCR, can you tell us whether it is being stabilized? We would really appreciate more info.

Nam Che Kang: Thank you for your question. I am Kang, Nam Che, overseeing the overseas business. Regarding Bukopin, well, the name is KBI or KB Bank Indonesia. So, I will call it KBI. And for sustainable management, we are making continued effort. And regarding the non-performing assets of Bukopin, we have cleaned a lot of it up. And as of 2022, Bukopin, for [LAR] (ph), we had IDR35 trillion that was non-viable, but from — until the first half of this year, we had made many improvements and we had made many provisions so that we had cleaned up a sizable amount. So, the IDR35 trillion has gone down to IDR11 trillion. And regarding delinquency, regarding the net NPL, as of now, it is very stable, less than 5%. For your reference, it has not been announced yet, but regarding PPOP [Technical Difficulty] on a PPOP basis. Thank you for your question.

Operator: Thank you. Jongmin Shim from CLSA.

Jongmin Shim: Thank you. This is Jongmin Shim from [CCLS] (ph). I have two questions. First one is on your NIM outlook. I see that, over the past six quarters, your NIM trend has been quite steady and well controlled. As we go forward, we are expecting some interest rate volatility. So, we’d like to understand what the company’s take is with regards to NIM going forward. And if you assume that the interest rate is going to decline, do you have any defensive strategies? Second question is shareholder return. Previously, on a [passbook] (ph) multiple basis, I think that you said that 0.8 times is the fair value. And if your share price becomes closer to that, would that not reduce your share buyback and increase DPS? Or are you going to — what type of an approach will you take between share buyback versus DPS trend?

Unidentified Company Representative: Thank you. I am [Jong-Min Lee] (ph), the bank’s CFO. 1.84% is the [Q1] (ph) bank’s NIM. This was 3 basis points lower, and this is because of a stagnation in the core deposit growth. And despite the cut in the policy rate, there was market or — excuse me, the delay in cut in the policy rate, the market rate did fall. And also there was a spread contraction. In the second half of the year, we believe that the market rate will go down. And also there’s possibility that BOK would also cut rates, and there’s going to be more fierce competition, but that timing has been delayed. And by growing the core deposits, we think that we’ll be able to defend the decline in NIM. So for 2024, on a per annum basis, we think that the bank’s NIM is going to stay flat versus last year.

Now, the bank is going to do its best to expand its core deposit as well as the retail deposits to defend against NIM decline and also effectively manage the maturity structure and to reduce the funding cost. We will be mindful of the operational backdrop and be mindful of the interest rate outlook and be — and focus on securing the appropriate level of margins.

Jae Kwan Kim: This is CFO of the KBFG. Regarding the cash payout and the share buyback and cancellation, how we will balance between the two means, now, we are in the process of preparing for the value-up disclosure, so including the answer to your question that you posed today, we will include that into our upcoming Q4 disclosure. At the current PBR level, we’re going to focus more on share buyback and cancellation.

Operator: We will take the next question from Goldman Sachs, Park Sin-Young.

Sin-Young Park: Thank you very much for the opportunity. I am Park Sin-Young from Goldman Sachs. Regarding shareholder return, I have another question. Regarding the treasury shares that you have, are you thinking about canceling them? And I know that they’re not newly acquired, so I don’t think it will go into your annual calculation, but does the group share the same opinions?

Jae Kwan Kim: Regarding the treasury shares that we own, we have about 14 million and — shares. And we’re going to utilize them to our advantage at the appropriate time, but we don’t have any plans to actually put them out in the market. So, we are going to focus more on additional share buyback [Technical Difficulty].

Operator: Thank you. From NH Securities, Jun-Sup Jung.

Jun-Sup Jung: Hello. I am Jun-Sup Jung from NH Securities. Thank you for taking my question. I see that your Q2 performance is good, and especially, your CET1 ratio is also quite positive. When you announced your shareholder return policy, you mentioned 13% as the baseline for CET1. And I think you have really outperformed that basis. Do you have plans to further increase that benchmark? Or do you — would you — can we look forward to increasing the payout ratio going forward?

Jae Kwan Kim: Yes, last quarter — during last quarter’s earnings presentation, our CET1 ratio, we shared with you our commitment to keep it at mid-13% level. And already, on a total amount basis, as you know, our cash payout is at around KRW1.2 trillion, paid out equally across the quarters. And our payout ratio is 37.7%. And already, with regards to TSR, total shareholder return, we told you that our stance is progressive expansion. So, to be in line with that, we will continuously expand on share buyback and cancellation. Thank you.

Operator: I think this is probably the last question. Cho Jihyun from JPMorgan.

Jihyun Cho: Thank you for the opportunity. Despite the challenging environment, thank you very much for your dividend and total shareholder return policies. And regarding NIM, well, you mentioned that it will be probably maintained similar to the previous year, but for credit cost, I think you — maybe you have changed some of — from your initial guidance because, regarding the growth, I think it’s a little faster than what was expected for corporate loans. And I think you have some room in CET1 ratio. So, in the second half of the year, when you have competition coming in, do you have any plans to actively increase this? And regarding credit cost, there has been some provisioning reversal that was quite sizable. And during the past two years, you had accumulated a sizable amount of provisioning.

So from this year, can we expect more reversals? Is this the appropriate environment? And can you tell us about what is your expected credit cost for this year? And can you give us some guidance taking in too some changes in the environment? And last question is about asset quality, because related to property trust, you mentioned that you already have accumulated a sizable PF provisioning. And regarding your take on the situation for the PF for property real estate market, do you believe that there is less burden for you because you had accumulated sizable provisioning? Or do you think the industry itself has good fundamentals so they are able to withstand a big crisis? So, can you tell us about what is your stance on the current property PF situation in the market?

Jae Kwan Kim: I am Jae Kwan Kim, the CFO of KBFG. So, I will first answer, and I think other executives can add to my answer. Regarding the second half of the year, regarding asset growth, for CET1 ratio, it had gone up to 13.59% in this quarter, but we have many uncertainties. So, we don’t think this is sufficient. So, in the second half of the year, we will do our best so that — taking into consideration nominal growth — economic growth rate. And to enhance shareholder value, we have plans to actually have more improvement. And — because you mentioned that we have some room for CET1, so do we have any plans for fast asset growth, but we always are planning based on nominal economic growth rate level. And regarding CCR that you asked us about, we had 87 bp, but for Q2, it was 43 bp.

And there was some accumulation for property trust. So, excluding reversal, it’s at about a 40 bp level. So, for the recurring CCR level, it’s at about a 40 bp level. And if we have more provisioning from a conservative stance, well, please understand that we’re doing it from a more conservative outlook. Maybe this is the last question. And regarding the property PF market, you asked us about what our take was. And I think maybe this is more of a personal take. And for KB, we have had provisioning for property that was not as sizable compared to other sectors. Well, I think, first, it was conservative. And second, for KB, we have good-quality property. So, we have more than 95% for senior loans, and — so I think that is why we are at an advantage.

Well, I don’t think that there is a lot of optimism in the property PF market. So, regarding the real estate market and sales market, well, we need to see what happens. And we need to think about the soft landing that the government is actually planning for the PF market. And regarding the normal sites, well — and restructuring, well, that needs to be done very well, but it needs to be done for the situation to improve. Thank you very much.

Operator: We have a follow-up question from Do-Ha Kim from Hanwha Securities.

Do-Ha Kim: Yes, thank you for taking my question. This may be a quite specific question. I was doing some financial modeling. Because you’re paying out equal amount quarter-to-quarter, so on the dividend side, there is not going to be any earnings surprise, but on a treasury share, if you’ve changed the basis on a calendar year, that will mean that, since this quarter, it was an earnings surprise. But if we do some modeling, I think, for Q3 and Q4, actually the amount may actually fall. So, depending on the earnings, I’m just wondering, in Q4, this is calendar year basis, because I think your [indiscernible] implication was that you were closing any opportunity to make any additional share buybacks. Is my understanding correct?

Jae Kwan Kim: This is the CFO. The KRW400 billion share buyback and cancellation, basically this was in-line with progressive shareholder return policy. It was in full consideration of that. For Q4, we have not yet made any decision as to the additional buyback and cancellation. And as you’ve mentioned, if there’s any shortfall, then next year, those aspects will be fully considered for when we come to that dividend cycle next year.

Operator: We do not have any more questions in the queue, but just give us one minute.

Peter Kwon: I think, in a relative short amount of time, we have had many questions. And we have had a very dense and fruitful Q&A session, so we will wait for just a little bit more, and if there are no other questions coming in, we will conclude our earnings release. It seems that there are no other questions coming in, so we will complete the Q&A session. With this, we will complete our earnings release. Thank you very much for your participation.