Greetings and Summary
Greetings. I am Peter Kwon, the Head of IR at KBFG. We will now begin the 2020 first half business results presentation. I would like to express my deepest gratitude to everyone for participating in our call. We have here with us our group CFO and Deputy President, Mr. Ki-Hwan Kim, as well as other members from our group management. We will first hear major financial highlights from our CFO and Deputy President, Mr. Ki-Hwan Kim, and then engage in a Q&A session. I would like to invite our CFO and Deputy President to walk us through 2020 first half major financial highlights.
Good afternoon. This is Ki-Hwan Kim, Deputy President and CFO of KB Financial Group. Thank you for joining KBFG’s presentation on 2020 first half business results. Before moving on to the earnings, let me briefly explain the operational background. Despite prolonged uncertainties surrounding COVID-19, financial markets have regained some level of stability through strong fiscal policies worldwide in order to overcome economic recession. Nevertheless, concerns over the global economy persist. Despite the expansionary fiscal policies and other policy measures, if and when the second wave of the coronavirus spreads across the globe, economic recovery may well be delayed significantly. In addition, the banking industry is facing a tough business environment with the market rates at record low levels.
In such unprecedented crisis brought on by the pandemic, KBFG aims to fully live up to its social responsibility and also proactively respond to paradigm changes in the industry to solidify its position as a leader in the financial sector. First, in order to support companies and vulnerable individuals most exposed to the virus pandemic, KB Financial Group continues to provide financial support while also providing support through other means to help local businesses.
Second, we are fully committed in our management of risk and asset quality. In closely monitoring potentially problematic loans and conducting fine-tuned management of marginal borrowers, we have reinforced our overall risk management system to be better prepared for a potential extended economic recession. For this quarter, we have incurred additional provisioning of KRW 206 billion as part of proactive and conservative provisioning policy against possible asset quality deterioration in the future.
Next, KB Financial Group is steadfast in pursuing and successfully implementing key strategic initiatives that will help us secure future growth engines. To this end, we have successfully acquired PRASAC, Cambodia’s biggest microfinance company, as a second-tier subsidiary. In the upcoming third quarter, we also expect to finalize the acquisition of Prudential Life Insurance Company of Korea, which is recognized as best in the industry in capital adequacy and channel competitiveness. In addition, just this past month we entered into a strategic alliance with the Carlyle Group and issued KRW 240 billion in exchangeable bonds with the Carlyle Group as the investor. As the bonds were issued at zero coupon with an exchange premium at a high level, KB’s discounted stock value and future growth potential were highlighted by the market and KB’s recent EB issuance was recognized for its strategic use of treasury shares and diversification of funding sources.
Last but not least, KB Financial Group is focused on ESG based responsible management and innovation. We plan to expand ESG related products, investments, and loans to KRW 5 trillion by year 2030. As in our recent product release of KB Ocean Clean Deposit and KB Clean Ocean Public Trust, we have incorporated ESG factors into new product and service development. As such, KB Financial Group aims to continue to lead ESG innovation and growth at the very forefront of the financial industry.
(2p) 1H20 Financial Highlights-Overview
With that, I will now move on to business results for the first half of 2020. In Q2, KBFG recorded a net profit of KRW 981.8 billion. On the back of substantial recovery in other operating income due to improvement in financial market conditions and improvement in net fee & commission income as well as insurance income, net profit increased by 34.6% QoQ. First half net profit recorded KRW 1,711.3 billion, which is 6.8% down YoY. Excluding Q2 additional provisioning, last year’s Q1 ERP expenses and other one-off items, earnings on a recurring basis continued to be solid despite the difficult operational environment caused by COVID-19 pandemic and market rate decline.
Now moving on to more details, Group’s 2020 first half net interest income recorded 4,683.2 billion. Despite NIM pressure from rate cuts and loan conversion program, net interest income increased 2.9% YoY on the back of strong loan growth in bank and card. Group’s first half net fee and commission income was KRW 1,381.3 billion, which is up 21.6% or KRW 245.6 billion YoY. Although bank’s trust income decreased due to limits on sales volume of ELT as enforced by regulation, brokerage fees from expanded trading volume and IB related fees in securities company combined increased by KRW 126 billion and credit card income also increased significantly on the back of effective marketing and cost-saving initiatives.
Next, in Q2, other operating profit recorded KRW 227.7 billion, improving significantly from the previous quarter due to near full recovery of market related losses incurred in Q1 on foreign currency bonds, CVA, ELS and others, as well as increase in insurance income resulting from loss ratio decline.
Next, Q2 Group G&A expenses were KRW 1,586.4 billion which increased 8.7% QoQ based on seasonal factors such as increase in welfare funds for bank and card and one-off items such as incorporation of PRASAC. Excluding such factors, G&A expenses only increased slightly QoQ. For the first half, G&A expenses were KRW 3,045.6 billion and remained at a similar level YoY due to effective cost management.
Next, provision for credit losses in Q2 recorded KRW 296.0 billion, which is a 21.5% increase QoQ. Although there were some large scale reversals, Q2 provision increased significantly due to additional provisioning incurred based on FLC or Forward Looking Criteria. Without the additional provisioning, Q2 provision for credit losses actually decreased by 26% QoQ. In Q2, we made an additional provisioning of KRW 206 billion by applying conservative FLC and reclassifying the more risky Stage 1 loans to Stage 2 loans. For your reference, as of the end of June, the group’s NPL ratio when including current reserve for credit losses posted 296.5%, increasing by 3.0%p QoQ and maintained at a high level.
(3p) 1H20 Financial Highlights-Key Financial Indicators
On the next page, I will walk you through key financial indicators. 2020 first half cumulative ROE posted 8.88% and when excluding one-off items such as addition provisioning in Q2, ROE on recurring basis is maintained at a very stable level. Such strong results are based on the group’s efforts to strengthen the non-banking business going forward KBFG will respond low-growth, low interest rate environment by continuing to diversify revenue sources.
Next, I will move onto the bank’s loans in won growth. As of the end of June, the bank’s loans in won recorded KRW 287 trillion, which is an increase of 6.8% YTD and 2.4% QoQ. Household loans increased 4.2% YTD based on strong growth in quality unsecured loans and Jeonse loans. Household loan growth was however rather limited QoQ because most loans from the loan conversion program are now off our books after securitization this past quarter.
In the corporate loan book, SOHO, SME and large corporates showed balanced growth, recording a 10% growth overall YTD and 4.2% growth QoQ. In particular, SME loans including SOHO loans, grew KRW 8 trillion YTD on the back of COVID-19 related financial support program.
While KBFG continues to seek quality growth in stable and highly rated assets, in the second half, we will focus more on increasing profitability and defending asset quality by reinforcing higher standards in loan review and reducing potentially problematic loans.
Next, Q2 bank NIM posted 1.50%, which is a 6bp drop QoQ. This is mainly due to contraction in asset yields with rate cuts and increased pressure for funding in foreign currencies despite the increase in low-cost deposits and decrease in time deposits. Group NIM for Q2 recorded 1.74%, which is a drop of 10bp resulting from a decrease in card NIM in addition to the bank NIM due to decrease in higher interest rate products such card loans cash advances.
Considering the recent rate cuts and related policies, it remains difficult to defend NIM. KBFG, however, aims to expand low-cost deposits and apply selective and sophisticated loan pricing in order to maintain NIM at the highest level possible.
(4p) 1H20 Financial Highlights-Key Financial Indicators
Let's go to the next page. First, I will cover our group's cost income ratio. 2020 first half cumulative group CIR recorded 50.6%, but excluding nonrecurring items for this quarter, such as IT related investments and digitalization costs, recurring CIR in the first half posted 48.5%, which is a significant improvement YoY. With expansion in non-interest income and effective cost management, cost efficiency is showing tangible improvement and we expect to hit mid 40% level in the mid to long term.
Next is the credit cost ratio. Q2 CCR recorded 0.29%, increasing slightly due to additional provisioning. On a recurring basis, however, Q2 CCR recorded 0.14% and was maintained at a very stable level.
Next, I will elaborate on the group's capital ratio. As of the end of June 2020, the group's BIS ratio posted 14.13% and CET1 ratio posted 12.80%. Despite the growth in risk weighted assets from strong loan growth driven by corporate loans and unsecured loans, KBFG maintains the highest level of capital buffer in the industry with strong growth in net profit and strategic capital initiatives such as issuance of hybrid bonds and disposal of FVOCI securities.
With this, I will conclude KBFG's 1H20 business results presentation. Thank you for listening.