KB Financial Group Inc

Greetings. I am Peter Kwon, the head of IR at KBFG. We will now begin the 2020 Q1 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, Kim Ki-hwan, as well as other members from our group management. We will first hear the 2020 Q1 major financial highlights from our CFO and Deputy President, Kim Gi-hwan, and then have a Q&A session. I would like to invite our Deputy President to walk us through the 2020 Q1 major financial highlights.

Good afternoon. I am Kim Gi-hwan, CFO of KB Financial Group. Thank you for joining KBFG's presentation on Q1 2020 business results. Before moving on to the earnings, let me briefly present on our operational backdrop. In Q1, due to COVID-19 pandemic, global production and consumption slowed, leading to a rapid slugging of global real economies. Investment assets contracted as there was move towards safe assets and liquidity as global equity markets triggered off multiple number of circuit breakers, heightening global financial market uncertainties as ever before. Korean economy also saw great contractions in consumption, slowing of CapEx investment and exports as signs of economic depression surfaced. In line with the policy stance to respond to such shock, BOK swiftly moved to cut policy rates by 50 basis points last month. Under such trying business environment, banks Q1 loans in Juan increased 4.2% year-to-date, attesting to solid asset growth. Net fee and commission income also continued to expand as KBSG manages to sustain its earnings capacity. However, regrettably, COVID-19 pandemic has triggered index declines, rise in exchange rate, and credit risk spread, which generated other operating losses with Q1 results reporting somewhat of an underperformance. We believe such a black swan event like the COVID can happen anytime, yet again, in the future. And so we are determined to build on strong resilience and fundamentals that can help us ride over any crisis that may arise. To this end, based on our unmatched base of 35 million customers, we will enhance core competitiveness of each of our subsidiaries and further bolster both the non-banking and the global business. Although financial business environment is at its worst due to the unforeseen impact of COVID-19, KBFG will leverage this opportunity to solidify its core fundamentals so as to leap forward as a true leading financial group. Now I will move on to Q1 2020 financial risk highlights. KBFG's Q1 2020 net profit was $729.5 billion. In the absence of ERP and other seasonality factors, interest income and fee and commission income growth drove 36.4% Q1Q growth. However, there was a 13.7% year-on-year decline, a subnormal performance driven by steepening volatility of the financial market in the first quarter, which led to other operating losses. Aside from this factor, overall earnings capacity of the group continues to be robust. I will now elaborate on each line item in more detail. Groups Q1 net interest income was 2 trillion 349.2 billion won. Despite interest rate cuts and NIM contraction, from loan conversion program, thanks to solid asset growth from the bank and KB Card, NII was up 4.3% year over year. A decline in market rate and LOC, line of credit depreciation expense, from loan conversion, NII was flat Q on Q. Also, banks' loan in won was around 280 trillion won as of March end, up 4.2%, or around 11 trillion won year-to-date. Groups Q1 net fee and commission income was 670.1 billion won, up 21.7% year-over-year. This is mainly driven by improvement in brokerage fees and ID business, which led to higher commissions income for the securities business, as well as increases in credit card fee income, which is an outcome of cost-efficiency efforts. Also, despite difficult operational environment owing to the efforts of all of the affiliates to fully leverage their operating capacity, there was a Q&Q increase of 4.9%. Next is on the group's other operating income. In Q1, the group reported $277.3 billion of other operating loss. Insurers' underwriting profit was $78.1 billion, displaying Q12 recovery driven by overall loss ratio improvement, including the auto insurance. However, market volatility was severe on the back of COVID-19, impacting banks' trust on principal preservation, incurring loss of $66 billion, and ELS hedging-related loss of around $48 billion from KB Securities, leading to sizable securities, derivatives, and FX-related losses. I will provide more details later on our strategy against other operating losses which have been incurred as a result of greater capital market volatility. Next is on the group's G&A expense. Q1 group G&A expense was $1,459.2 billion, with the absence of ERP and AMP expenses and other seasonal costs there was a sizable decline of 19.6% Q on Q. On a YOY basis, with Q1 2019 ERP impact removed and with the delay in reaching agreement with the labor union on welfare benefit funds, there was 3.6% decline. For the time being, speed of G&A expense improvement may slow somewhat, on the increase of digitalization expenses at the group level, but we believe this investment is warranted for the group's future growth. Aside from such investment for future, we will revisit all of the expense items from the zero basis, reorganize our rate schemes of each affiliate so as to tightly control cost as we go forward. Next is on PCL, provision for credit losses. Credit costs Q1 group PCL was $243.7 billion on asset growth and absence of any large write-backs, and on one-off provisioning from securities, there was a slight increase both Q on Q and year over year. However, credit costs reported 0.25%, sustaining high level of asset quality. On the next page, I will walk you through key financial indicators. On widened financial market volatility, which triggered marketable securities, derivatives, and FX-related losses, Q1 2020 group ROE reported 7.64%. If eliminating non-recurring factors for the quarter, such as CVA, credit valuation adjustment-related losses, which is an adjustment for counterparty credit risk for OTC derivatives, recurring basis ROE is at 8.66%. Although this quarter's profitability indicators have dipped compared to the historicals due to temporary rise in other operating losses, group's earning fundamentals continues to be solid as we endeavor to diversify revenue sources and improve cost efficiencies to respond to the low growth and low interest rate environment. Next is on the growth of the bank's loans and wants. As of March end 2020, banks' loans in won was 280 trillion won, up 4.2% year-to-date, or approximately 11 trillion won. Household loans was 152 trillion won, driven by Cheon Sae loans and high-quality unsecured loans, reporting 3.2% growth year-to-date. Corporate loans reported 128 trillion won, with an even growth across SMEs and large corporates, posting a YTD growth of 5.5% for 7 trillion won. In particular, as large corporates sought to secure liquidity, demand for loan and loan growth, therefore, was significant, with 20.2% year-to-date increase. KBFG will closely monitor for signs of prolonged economic recession and also closely monitor our property market and continue quality-driven growth around prudential soundness and employee flexible loan policies so as to solidify basis for growth.

Next, let's look at the NIM graph on the right. Q1 2020 Group and Bank NIM posted 1.84% and 1.56% respectively. Q1 bank NIMS, despite the steady increase of low-cost deposits and funding cost reduction, fell 5BP QOQ mainly due to decline of market rate and loan conversion program. Q1 group NIMS fell 4BP QOQ mainly due to card NIM contraction from lowered card asset yield, in addition to pressure on the bank NIM. Going forward, KBFG, based on superior sales competency, will expand low-cost deposits, including settlement-type accounts and corporate customer deposits, and improve loan pricing so that we can do our utmost to manage our margin. Let's go to the next page. First, I will cover our group's cost-income ratio. Q1 2020 group CIR marked 53.2%, but excluding non-recurring items in this quarter, including digitalization costs and CBA losses, on a recurring level, Q1 CIR posted a 50% level. CIR, on a recurring basis, excluding ERP expenses and other one-offs, has been controlled stably at around the early 50% level over the last four consecutive years, and KBFG will do our best so that we can improve our cost efficiency through HR management and group-wide cost controls. Next, I will cover the CCR. 2020-21 group credit cost posted 0.25%. and slightly increased due to the absence of large-scale reversals and one-off provisioning, but is still maintaining a low level. This quarter's rise in credit costs can be seen as a process of being gradually normalized from a subnormal level with the decrease of large-scale provisioning reversals. Despite the concerns in the market about asset quality due to COVID-19, KBSG has been proving its superior soundness and risk management competency. Next, I will elaborate on the group's capital ratio. As of 2020 and March, the group's BIS ratio posted 14.02% and CET1 ratio posted 1%. 12.96% respectively. Due to increase of RWA following the financial market volatility included corporate loan center loan growth and FX rates, both slightly contracted year-to-date, but KBFG has been maintaining the highest level of capital buffer in Korea against economic downturns. Let's go to the next page. From page five, I will explain about the background behind the low performance of other operating income and our asset management strategy responding to the capital market volatility widening. I will also elaborate on our group's profitability management strategy responding to the recent financial environment changes. As aforementioned, in Q1 of 2020, with the COVID-19 pandemic, there was a large shock to the global economy, and in particular, the capital market volatility rapidly rose. In our group, with the market rate dropping Q1, the bonds in Korean won that we hold incurred valuation gains, but in the case of bonds in foreign currencies and some OTC derivatives, since the credit spread greatly widened and the exchange rate hiked, valuation losses took place, and in the case of securities ELS, hedging losses incurred, meaning losses were recognized mainly in derivative products and FX-related products. Related to this, I would like to cover our asset management strategy responding to the future capital market volatility. First, out of the foreign currency financial investment that KBFG is currently managing, the bank and securities foreign currency bonds managed is around 6 trillion won and more than 80% have a or higher credit rating and most are investment grade highly rated bonds. Since we believe that there is a possibility for the bond market to normalize according to the major countries fiscal and foreign currency policies, we believe that we will build our strategic position and partially maintain our hold and carry strategy. Next, the valuation losses of some OTC derivatives took place due to CBA losses stemming from third-party credit risk valuations, and this was a result of factors such as the FX rate hike, leading to temporary increase of exposure in Q1, as well as a great widening of forward credit risk spread compared to the previous quarter. For example, for CBA assessments in Q1, the bankruptcy rate of companies with an A credit rating went up six times year-to-date. We expect that when the FX and credit markets become stabilized in the future, a substantial part will be reduced and reversed. Lastly, I will explain about the ELS hedging losses. Currently, KB Securities' ELS hedging position is around 3 trillion won and around 48 billion won of losses incurred influenced by market volatility expansion including the indices in the market. But we expect that a great amount will be recovered when the financial market is stabilized in the future. In order to minimize our operating loss expansion possibilities, following market volatility widening, but also maintain our profitability through flexible product issuance, we will revise our issuance strategy, including rebuilding our hedging strategy for ELS and other derivative operations, and change the proportion of underlying indices linked to foreign stock markets so our performance can be stably managed. Next, I would like to cover our group's profitability management strategy Responding to the Management Environment Changes. A major topic in the financial industry nowadays is the financial institution's profitability management strategy responding to the management environment changes in an era when a new normal is being set with a low interest rate and low growth regime. Within KBFG, we are also rearranging our groups' mid- to long-term strategic directions so that we can proactively respond to these changes. And among the many responding methods, we believe the core tasks are to strengthen channel competitiveness, strengthen new business competitiveness, and to expand our global entry. First, KBFG considers our IB and WM business to be our core business to secure our group's growth drivers. since they could best utilize our superior capital competency, funding capability, and retail customer basis, and we'll focus on strengthening both. IB is expanding our preemptive underwriting so that we can strengthen our dominant market position in ECM and DCM, and we will also at the same time uncover new deals related to corporate financial structure improvement, including asset securitization. In the case of WOMs, We are focusing on securing product competitiveness that meets customers' needs, including highly recoverable products, including products with low barriers and low knock-ins. In addition, KBFG is the leading financial group with the largest sales channel in Korea based on 35 million customers and unmatched sales capabilities. and we have been strengthening our non-face-to-face sales channels, keeping in step with the untapped trend following the development of digital technology development. In particular, we want to lead the industry in non-face-to-face channel competitiveness by improving our non-face-to-face channel customer convenience, entering on loans, WM, and cards, and strengthen channel competitiveness through strengthening our product lineup. Last but not least, KP Financial Group is working hard to secure mid- to long-term growth momentum through expanding global business. As a result of these efforts, on April 10th, we acquired 70% of shares from Cambodia's biggest microfinance company, Prazak, and incorporated it as our subsidiary company. With the acquisition of Prazak, the net profit contribution from overseas, which was at a 1.5% level will be increased to around 4%. Going forward, KBFG will strengthen our group's profit basis by accelerating our global business expansion. Please refer to the following pages for details regarding the earnings that I have just covered. With this, I will conclude KBFG's 2020 Q1 Business Results presentation. Thank you for listening.