KB Financial Group Q1 2024 Earnings Call Transcript

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April 25, 2024

There are 2 speakers on the call.

Operator

Greetings. I am Peter Kwon, the Head of IR at KB Financial Group. We will now begin the 2024 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, Chaewon Kim as other members from our group management.

Operator

We will first hear the 2024 Q1 major financial highlights from our CFO and SEVP, Chaewon Kim, and then engage in a Q and A session. I would like to invite our CVP to deliver 2024 Q1 earnings results.

Speaker 1

Good afternoon. My name is Jae Kyung Kim, CFO of KB Financial Group. I would like to extend my sincere appreciation to all of you for joining us in our Q1 2024 Earnings Presentation. Before presenting our Q1 results, I would like to share with you once again KB Financial Group shareholder return policy and capital management policy, including the change in the dividend policy starting from this quarter. As you are well aware, KB Financial Group has been implementing an industry leading shareholder return policy for over a decade based on solid profitability and strong capital base.

Speaker 1

We were the 1st company in the industry to buy back and retire its own shares, introduced a quarterly dividend policy and to announce a mid- to long term capital policy. And in this way, we have continuously enhanced and developed our shareholder return policy. Building on these efforts, while maintaining the existing mid- to long term capital policy to enhance the visibility and predictability of cash dividend, Today, our Board of Directors passed a resolution on a new shareholder return policy, which is evenly paid quarterly dividends based on total dividend policy. To explain our new shareholder return policy in more detail, first, we plan to introduce, starting from this year, an evenly paid quarterly dividend to enhance the predictability of our cash dividends. 2nd, we plan to calculate cash dividends per share based on total dividends.

Speaker 1

This year, our Board of Directors plans to approve a cash dividend per share for each quarter based on total dividends at a level of around KRW 300,000,000,000 per quarter and around KRW 1,200,000,000,000 per year. At the same time, we will continue to actively buy back and retire shares so that the effect of share buybacks and share cancellation can translate into a higher dividend per share. As shown in the graph at the bottom right of the chart, if the company pays out KRW 300,000,000,000 in cash dividends every quarter while also buying back and retiring shares, this will automatically lead to increased EPS. 3rd, we expect to maintain or increase our annual cash dividend at a level of at least 1 point to KRW 1,000,000,000,000. At this point, we are at the low end of our valuation in absolute terms.

Speaker 1

So we intend to maintain the total cash dividend at the current level and intend to gradually increase the shareholder return rate through share buybacks and share cancellation. However, in the future, if our valuation approaches fair value per share or our earnings improve meaningfully, then we may increase the aggregate amount of our annual cash dividend. As you can see from KB's shareholder return history, leveraging our strong capital base, we have consistently strived to pursue an industry leading shareholder return policy. In order to respond in an agile manner to future economic uncertainties, such as the heightened risks to global security in recent months and the sharp exchange rate fluctuations, while continuing to implement KB's industry leading shareholder return policy, above all else, we believe it is crucial for KB to have its own differentiated capital competitiveness. Therefore, despite the ELS impact, increased profitability across the group and tight management of risk weighted assets will enable us to maintain a CET1 ratio of at least 13.5% at year end to enhance the visibility of future shareholder returns.

Speaker 1

Finally, we will strengthen market communication on our shareholder return policy, Focusing on the per share metrics, including EPS, DPS, we will actively and consistently disclose the status of our shareholder return and related indicators from the perspective of per share value through our quarterly earnings presentations. To this end, we have prepared a slide on the following page that provides an overview of our shareholder return and related metrics. Please refer to it at your leisure. Our Board of Directors and Management firmly believe that shareholder and enterprise value enhancement efforts must continue unwaveringly over the medium to long term based on market trust. Through the consistent pursuit of the shareholder return policy announced today, we will do our best to achieve substantial and sustainable shareholder and corporate value enhancement.

Speaker 1

Next, I would like to share with you KB Financial Group's Q1 2024 Business Results. I'll start by highlighting the group's key business results and key financial indicators before going into greater detail. For your information, please note that KB Life Insurance's quarterly results for 2023 has been restated retrospectively as KB Life has applied in Q4 of 2023 the FSS, Insurance Liability Valuation Model guidelines. KB Financial Group's net income based on net income attributable to controlling interest for the Q1 of 2024 was KRW 1,000,000,000,000,000,000,000,000, down 30.5 percent y o y. The weaker first quarter results were due to a significant widening of non operating losses as the approximately KRW 8 62,000,000,000 was recognized as provisions for customer compensation costs related to Hong Kong H index linked ELS issues.

Speaker 1

However, the group's gross operating income increased by 0.9% compared to the previous year when gains on valuation had significantly increased due to market rate cuts in Q1 of 2023. And profitability of the group's major non banking subsidiaries, including securities, non life insurance and cards, improved, enabling continuing solid earnings fundamentals. Provision for credit losses amounted to KRW 428.4 billion, down 35.9 percent Y o Y and down 38.9 percent QoQ, owing to the base effect of last year's large additional provisioning that had been set aside preemptively. The group's credit cost ratio remained stable and within expected ranges at 38 bps in Q1. And the bank's credit cost ratio also remained low at 11 bps as well.

Speaker 1

In addition, the group's CIR for Q1 of 2024 was 36.9%, down from the previous quarter, continuing the downward stabilizing trend. As had been previously announced, the Board of Record today approved the evenly paid quarterly dividend based on total dividend policy and resolved a cash dividend of KRW 7.84 per share for the Q1. Now I'd like to share with you a more detailed breakdown of our performance by business

Operator

segment. 2024 Q1 group net interest income posted KRW 3,151,500,000,000 and went up 11.6 percent y o y. With strong earnings growth of the bank on the back of loan average balance increase and NIM improvement, This was also a result of nonbank interest income contribution increase. However, compared to the previous quarter, there was a slight decrease of 1.0 percent due to factors such as decrease of business days. Q1 group net fee and commissions income posted KRW990.1 billion and increased 8.3 percent Y o Y and 9.2 percent Q o Q, respectively.

Operator

The increase in net fee and commissions income was mainly attributable to increase in securities fee income on the back of improvement of brokerage fee income and IB business despite the challenging business environment, including suspension of ELS sales as well as card fee income growth, thanks to increase in card members and card fees. This was due to non banking subsidiary fee income growth. Next, I will cover other operating profit. Q1 other operating profit posted KRW 270 170,400,000,000. And due to the effect from changes in the market interest rate and the increase in $1 FX rate leading to weak securities, derivative product and FX performance, it decreased KRW 366,200,000,000 y o y.

Operator

On the other hand, it increased by KRW762,800,000,000 with the reflection of the base effect from bank social contribution program expenses in Q4, insurance operating profit increased with the writeback of KB Insurance IB and R reserves and improvement in loss ratio. Next, I will walk you through G and A expenses. Q1 G and A expenses posted KRW 1,628,200,000,000 and increased KRW 61,900,000,000 y o y, a 4 point 0 percent increase and is being well controlled. Last but not least, group provision for credit losses. Q1 provision for credit losses posted KRW 428,400,000,000.

Operator

And due to the base effect from preemptive additional provisioning set aside in 2023, it went down KRW239,800,000,000 and KRW949,800,000,000 in order to prepare for internal and external uncertainties continuing from last year, we have been implementing a conservative provisioning policy to this year as well. However, since we have already secured sufficient loss absorption capabilities through accumulating large scale provisioning last year, we expect there to be limited possibility for the group's credit cost to rapidly increase this year. Next, I will cover major financial highlights. Let's cover the group's profitability. 2024 Q1 group ROE posted 8.15%.

Operator

The recurring level of ROE, excluding one off items, including Yale's customer compensation expenses, posted 12.18%. And under a diversified business portfolio, stable profitability is being maintained. Next, I will cover bank loans in 1 growth. 2024 March end, bank loans in 1 posted KRW 344,000,000,000,000 and grew 0.6 percent YTD. Household loans posted KRW 167 1,000,000,000,000,000.

Operator

And centering on home mortgage loans, it grew 0 point 4 percent YTD, around KRW0.7 trillion increase, and corporate loans posted KRW177 trillion. And SOHO loans and large corporate loans grew evenly and grew 0.7 percent YTD, a KRW 1,400,000,000,000 increase. We are taking into consideration the economic circumstances and household debt situation and are focusing on qualitative growth, focusing on profitability and asset quality. This year, we will take into consideration a balance between improving capital efficiency and securing an appropriate level of profit basis and plan to flexibly manage the speed of loan growth. Next is net interest margin.

Operator

2024 Q1 Group and Bank NIM, e posted 2.11% and 1.87%, respectively, and grew 3 bps and 4 bps QoQ, respectively. Bank NIM, in terms of funding, with the increase in low cost deposits in Q1 and with the drop in the expense ratio with the higher interest rate time and savings deposits reaching maturity, grew 4 bps Q o Q. In the case of the group NIM, even with the increase of card funding costs, on the back of efforts to improve card financial asset profitability and bank NIM increase grew 3 bpsqoq. Let's go to the next page. Next is group CIR.

Operator

2024 Q1 group CIR stands at 36.9 percent level. And thanks to core profit growth and group wide cost control efforts, it is showing a steady stabilization of downward trend. I will skip group CCR since I previously covered this and now go over the group capital ratio. 2024 Q1 estimated group BIS ratio is expected to post 16.54 percent, and CET1 ratio is expected to post 13.40 percent. And with the recognition of ELS customer compensation costs, it went down slightly Q o Q.

Operator

Although the CET1 ratio slightly declined in this quarter, we plan to exert efforts to improve group wide capital efficiency to recover the year end CET1 ratio to at least 13.5% or higher. Please refer to the next pages for details related to the earnings that I have just covered. With this, I will conclude KBFG's 2024 Q1 business results presentation. Thank you for listening.

Speaker 1

Those of you who are joining us via online, please look at the last page of the presentation deck for the contact number. If you have any questions, please press

Operator

We'll take the first question. NH Securities, Jeong Joon Suk, you're on the line. Thank you very much. I am Jeong Joon Suk. Well, despite the challenging environment, congratulations and thank you for your good results.

Operator

And I have two questions. My first question is related to well, I know that your asset quality is very good, but you can see the delinquency rate or the NPL ratio. It seems that it has gotten up Q o Q. And regarding credit risk or including the TF until the end of the year, can you tell us about your forecast? And regarding the by the financial regulators, can you tell us about the situation about the situation and how you're going to respond?

Operator

And regarding the interest rate or the FX rate, there has been changes in the environment. And for your loan growth or for NIM forecast or guidance, can you give us your feedback? Thank you very much. We will soon get back to you. Please hold.

Operator

Regarding your question regarding credit risk, I believe that the asset quality indicators are actually improving. Regarding credit risk, well, I think it is actually an indicator that follows the economic circumstances. So it's a lagging indicator. And I think we should actually see it in different categories for the bank. Before COVID level, I believe that we are probably in the situation in the middle before and after COVID.

Operator

And I think for the other subsidiaries, maybe it is a little bit worse than before COVID. So regarding asset quality, well, I think it may increase compared to pre COVID days. And I believe that group wide, well, we need to look at the different subsidiaries and the weak sectors. So we will need to focus on that and reinforce that by the end of the year. And regarding the real estate financing that you have mentioned, regarding the real estate slowdown and the interest rate fluctuations, it seems that real estate or the well, it seems that we're not going to see improvement in the short term.

Operator

And I believe the regulators also for this well, I know that they're planning to restructure to actually see what is good from the bad. And regarding the real estate market, we're going to strengthen reviews, and we're going to have conservative provisioning. And for the problematic sites, we're going to actually see what can be normalized and what needs to be provisions against and for KBFG. Regarding the government's FG. Regarding the government's restructuring direction, well, our direction actually was matched the government's or the regulators' direction for last year.

Operator

There was conservative reviews of these sites, and we had very conservative provisioning preemptively. And regarding some of the sites that we could sell off, we did. And through the NPF fund, we were we cleaned it out to a large extent. So and we had auctions as well. And I have mentioned this previously that regarding conservative provisioning for real estate and regarding how we've managed this situation, I believe that going forward, the impact will not be worse than now.

Operator

Of course, I'm not saying that we will not be completely impact free. But regarding the non metropolitan area, some of the sites, there could be some worsening. But I think that, on the whole, it will be well managed. And we are going to, of course, respond on a group level. And for the subsidiaries, there will be different groups that will be made to respond to the government's or the regulators' large direction for restructuring.

Operator

And we're going to give support to what can be normalized. So we're going to actually strengthen normalization of what needs to be normalized and see the good from the bad. And I would like to remark on the bank NIM and provisioning. And regarding the bank's NIM, we had the core deposit growth, and we had the decrease in the deposit. And we had 4 bps increase Q o Q.

Operator

And I think this is similar to what I mentioned. And we had the fading away of the loan asset repricing. And there is a possibility of interest rate changes, and that is why we believe that the NIM will actually show a downward trend this year. However, the interest rate cut, we believe that by the Central Bank, we believe that there is a possibility that it will be delayed. So I believe that, regarding the slight increase that we've mentioned, we believe that, actually, it could decline a bit.

Operator

So I think for the household loans, it will be at a level similar to nominal growth rate. And for corporate loans, we are going to focus on high quality loans. So there will be about 6% or so growth rate.

Speaker 1

We will receive the next question from Tae Shin Securities. Good afternoon. I'm Park Hae Jin. First of all, thank you very much for announcing this capital policy. I have two simple questions.

Speaker 1

First, with regards to your share buyback, with regards to the buyback shares or canceled shares, Do you have any plans to regularize this? Or do you have any guidance for minimum level annually? Secondly, with regards to the SLU compensation, is it fully provisioned or is it partially provisioned this time? I'm the CFO, Kim Jae kwon. With regards to the plans for share buyback and cancellation,

Operator

due to the announcement of the dividend policy today, since the visibility of gross annual dividends has become more transparent, we will flexibly implement share buyback and cancellation and meet the diverse needs of the market and expand shareholder return flexibility. The amount of share buyback will take into consideration comprehensively factors, including annual income, total shareholder return ratio and CET1 ratio changes and others. And based on communication with the market, this will be determined from the perspective of enhancing total shareholder returns. And regarding the timing, we will consider not only the year end when the income is finalized, but also consider our share price in the market situation, thus have appropriate parallel implementation during the year as well. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]

Speaker 1

So regards to the ESL compensation, in the Q1, we have JPY 860,000,000,000 set aside in the Q1. So that was said on the figures based on the end of March figures. So if we look at the rise of the H index, we don't think there will be any additional losses. So it's going to be a one off factor, basically.

Operator

We will take the next question from Korea Investment Securities. Paek Doo san, you're on the line. I am Paek Doo san from Korea Investment Securities. I also have two questions. My first question is regarding your previous quarter and in this quarter as well, regarding the Real Estate Trust performance.

Operator

It is, I believe, a little bit lackluster. So do you have any underlying factors, including that led to these results? My second question is about the government's value up program. And in regards to this, in May, there will be guidelines to enhance the shareholder value or customer value. And how are you going to respond after the government sets out more detailed guidelines for corporate value program?

Operator

Thank you very much. Thank you very much for your question. Regarding Real Estate Trust, as you're well aware, there are some sites with responsible construction. So there were some issues. And at the end of last year, we had provisioned sufficiently.

Operator

And due to this, at the end of last year, there was some of the deficits. But in Q1, from that perspective, we had additionally provisioned very conservatively. So we had a full wide on reviews of all these sites that need to be responsibly constructed. So if there are other factors, we will also conservatively accumulate provisioning. In addition, regarding the value of program that you've mentioned and how we're going to respond, Regarding the value of program response, we mentioned the evenly paid quarterly dividend on a total annual amount basis.

Operator

So it's at a KRW 1,200,000,000,000 level. So we have the evenly paid quarterly dividend as well as share buyback and cancellation that we're going to use together. So we're going to increase DPS and TSR. And regarding the level of net income and CET1 ratio, it could fluctuate, and we're going to communicate with the market through events like today's earnings release.

Speaker 1

Next question from HSBC Securities, Won jae woong. Can you hear me? Yes, we can hear you well. Hello? Yes, we can hear you very well.

Speaker 1

In a very difficult environment. Thank you very much for those excellent results. I have two questions. First question is, CET1 ratio movement, you showed this movement. Regarding this, how much was the portion for operation risk?

Speaker 1

That's my first question. What was the impact of the FX exchange rate? And second question is, ratio and CCR ratio is quite impressive. The CIR ratio, what is your planned target or planned level? Or for CCR as well, do you have any planned level or expected level for this year?

Speaker 1

In the CET1 ratio, I think you asked about the ELS portion. It's about 47 bps. And related to operational risk, it's about 28 bps. However, at the year end last year, from 13.59%, we have come to 13.40% as an estimate. And so there has been a down of 19 bps.

Speaker 1

However, our net income has gone up, and also we made efforts to reduce the RWA. And so we have made up about 28 bps. And your second question was about the CCR level, right? So last year and this year, as well into Q1, from a conservative point of view, we are setting aside provisions. However, last year, we had additional large scale provisioning.

Speaker 1

Through that provisioning, we have a secure sufficient loss absorption capability. And so we think there will be less burden of additional provision going forward. On a quarterly basis, 48 bps or so, I think, on a quarterly basis, I think that level can be maintained.

Operator

We will take the next question from Hanwha Investment Securities. Kim Do You're on the line. Well, I have a question related to the answer you just gave regarding the CET1 drop, 47 bps influence for CET1. So can you tell us about the losses? And can you tell us about what was actually cut and what the impact on RWA increased?

Operator

It's about RWA 6.8 trillion, the impact on RWA

Speaker 1

increase. So in a very short period of time, we have had a lot of questions. But at present, we don't have any more questions coming into the queue. So we'll wait for a while for further questions. We'll receive the next question from JPMorgan Securities.

Speaker 1

Cho Ji Hyun, your line. Thank you very much for this opportunity. I have two questions. First question is on, you talked about market outlook. So the overall exposure from that, what percentage has been provisioned?

Speaker 1

Can you give me a figure? And second question is for overseas real estate. In this quarter, Has there been any provisions that have been set aside for this exposure? What is our exposure? What is the market outlook for the exposure that we have?

Speaker 1

Can you give more color to your outlook? And finally, the CCR target. I think you said on a quarterly basis, it will be managed at 40 bps level. Is this a guidance for Q3? Or is this guidance for the whole year on annual guidance, so to speak?

Speaker 1

So the sides have unique characteristics. 95% is senior debt. And there's a lot of sites in the metropolitan area, and there's a lot of sites located in the public sector as well. So these are high quality product sites. And what you mentioned is about 5%.

Speaker 1

The provisioning rate against exposure is about 5%. With regards to we talked about 40 bps. This relates to both quarterly and an annual basis, yes.

Operator

It seems that there are no other questions in the queue, so we will hold. I think we had a opportunity to ask many questions in a short amount of time. So I think many questions have been answered. And please contact our IR team if you have any additional questions. We will hold just a little more to see if there are other questions.

Operator

We will take the next question from CLSA Securities, Shim Jong min, you're on the line. I am Shim Jong min from CLSA. Thank you very much for the opportunity to ask a question. Regarding your shareholder return policy, I have a question. And you mentioned that for the valuation, it is still actually undervalued.

Operator

So when the valuation becomes normalized, then you mentioned that you're going to actually increase this. So can you tell us about the valuation that is your target by the management? If you can share your valuation target with us, it will be greatly appreciated. And from the mid- to long term, can you tell us about the total TSR ratio that you are targeting? If you can actually announce it to us, it will be greatly appreciated.

Operator

I am Jaehwang Kim, the CFO of the Financial Holdings Group. Regarding the evenly paid quarterly dividend on a total annual amount basis, we have our thinking of KRW 1,200,000,000,000 level currently. And regarding the valuation, regarding how we're going to enhance this and what is our target, ROA about ROE, about 10% is what we're thinking of. And PBR, around 0.8% is what we are currently thinking. And regarding our mid- to long term total shareholder return policy, we have been continuing that we're going to enhance our DPS in levels incrementally.

Operator

And we're also going to have parallel share buyback and cancellation so that we can increase this gradually and continuously. I would like to emphasize that once again. Well, the reason why we are increasing the cash amount on an annual amount basis, it could be that there is no absolute standard, but it will depend on the [SPEAKER

Speaker 1

UNIDENTIFIED COMPANY REPRESENTATIVE:] We'll receive the next question from Citi Securities. Thank you very much for the update on the shareholder return policy. I have one question. Last year's cash dividend was 1,170,000,000,000 yen and this year, you're talking about 1,200,000,000,000 yen So I think the growth rate is about 2%. Can you elaborate on the logic behind this, JPY 1,200,000,000,000?

Speaker 1

And also in relation to the EPS growth rate as well? So last year, cash dividend was about 25%. The starting point for this new dividend policy was similar to last year at 25%, similar to 24% of last year. So let me elaborate. JPY 1,200,000,000,000 for about past 2 years.

Speaker 1

Last year, it was about 1,170,000,000 yen and the year before that was 1,150,000,000,000 yen. So I think there were regular intervals behind the amount, and the payout ratio was 25% last year. And this year, in consideration of the market consensus,

Operator

It seems that there are no other questions in the queue. We will hold. And if there are no other questions coming in, we will conclude today's earnings business results presentation. It seems that there are no other queues. So we will conclude today's Q1 business results presentation.

Operator

Thank you very much for your participation.

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Key Takeaways

  • New Shareholder Return Policy: Introduced evenly paid quarterly dividends of KRW 300 billion (KRW 1.2 trillion annually) with continued share buybacks and cancellations to boost EPS, targeting at least KRW 1 trillion total annual dividends and potential increases if valuation improves.
  • Q1 Net Income Down 30.5% YoY: Net income attributable to controlling interest fell due to KRW 862 billion provisions for Hong Kong H-index ELS compensation, despite a 0.9% rise in gross operating income and stronger non-bank subsidiary profits.
  • Net interest income rose 11.6% YoY to KRW 3.15 trillion on higher loan volumes and NIM improvement, while net fee and commission income grew 8.3% YoY to KRW 990 billion, driven by securities brokerage, IB and card fees.
  • Credit cost ratio remained stable at 38 bps (bank at 11 bps) with provisions for credit losses down 35.9% YoY to KRW 428.4 billion, reflecting last year’s preemptive provisioning; Group CIR improved to 36.9%.
  • Capital and profitability metrics: Q1 CET1 ratio at ~13.4% with plans to restore ≥13.5% by year-end, while Group ROE was 8.15% (12.18% recurring) and CIR continues a downward trend.
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KB Financial Group Q1 2024
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