KB Financial Group Inc

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 Kim Ki-hwan, as well as other members from our group management. We will first hear the 2020 first half major financial highlights from CFO and Deputy President Kim Ki-hwan, and then engage in a Q&A session. I would like to invite our Deputy President to walk us through the 2021 Staff Major Financial Highlights.

Good afternoon. I am Ki-hwan Kim, CFO of KB Financial Group. Thank you for joining KBFG's presentation on First Half 2020 Business Results. Before moving on to earnings results, allow me to first present on the operational backdrop. Despite prolonged uncertainties surrounding COVID-19 curve repeating the flattening and rising cycle, helped by strong monetary fiscal policies worldwide in an effort to overcome economic recession, financial markets regained some level of stability. Nevertheless, concerns over global crisis of real economy continues. If and when COVID-19's second wave hits us, despite massive quantitative easing, economic recovery could may well be delayed significantly. Thus, we are in no position to loosen our vigilance, and in the face of ultra-low rate, banking industry is tasked with countering structural pressures as well. In such an unprecedented crisis brought on by the pandemic, KBFG will fully live up to its role and responsibility, befitting a top-tier company, and will proactively respond to changes in the financial paradigm so as to solidify our position as a leading financial group. First of all, in order to support companies hit by the pandemic and the vulnerable class, we have provided financial support and KB independently is running various programs including good consumption movement to help small local business operators. Also, we are fully committed to asset quality and risk management. We operate continuous monitoring system on potentially problematic loans and conduct fine-tuned ex-post management of marginal borrowers and have uplifted the group's risk management system to be prepared for possible extended economic recession. Also, to be preemptively ready for possible quality deterioration, we made additional provision of 206 billion won this quarter. In addition, KBFG, is steadfast at its strategic tasks that seek to enhance earnings stability and gain growth engine for the future. To that end, last April, we acquired Prasak, Cambodia's biggest microfinance company, as a sub-subsidiary, and in Q3, we'll complete the acquisition process for Prudential Life Korea, a best-in-class company in terms of capital adequacy and channel competitiveness. Last month, we also entered a strategic alliance with global investor Carlyle Group, issuing 240 billion won of EBs, exchangeable bonds. The EBs were issued at zero coupon. As the company's high exchange premium on treasury shares were highlighted, KB's undervalued corporate value and growth potential were recognized. It is also considered a best case in the 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 growth in innovation. Including renewable energies and green industry for environmentally friendly investment, we plan to expand ESG-related product investment loans to 5 trillion won by 2030. As seen from recent launches of KB Clean Ocean Deposit and KB Clean Ocean Public Trust, we incorporated ESG elements to new product and service development. As such, we will endeavor to lead ESG innovation growth at the very forefront as a leading financial group. With that, I will now move on to business results for the first half of 2020. KBFG's Q2 2020 net profit was 981.8 billion won. On recovery of other operating income from a more stable capital market in the second quarter and improvement from net fee and commission income and underwriting profit, net profit was up 34.6% Q on Q. First step net profit was 1,711.3 billion won down 6.8% year on year. But setting aside additional provisioning aligned with our future economic forecast and Q1's ERP expenses and other one-off items, on a recurring basis, our earnings capabilities continue to be solid despite difficult operational environment triggered by COVID pandemic, which led to economic recessions and interest rate declines. Now, moving on to more details. Group's first half 2020 net interest income was $4,683.2 billion. Despite lowering of the policy rate and loan conversion program, which squeezed the NIM, supported by solid loan growth for the bank and the card, NII was up 2.9% year-on-year. Group's first half net fee and commission income was 1,381.3 billion won, up 21.6% or 245.6 billion won year-on-year, continuing a solid growth trend. This is because although banks' trust income fell due to restrictions and limits in ETF sales and increases in trading volume, brokerage-related fee income soared 126 billion won of sizable increases. And also, active card marketing and cost savings efforts led to sustained rise in the credit card fee income. Next, in Q2, other operating income recorded 227.7 billion won, improving significantly over the previous quarter. We saw recovery from first quarter's securities, derivatives, FX-related losses, including foreign currency bonds, CVA, and ELS valuation losses, incurred from steep volatilities in the financial markets. Insurance underwriting performance also improved on overall decline of loss ratio. Since there still exist further volatilities in the financial market from resurge of COVID-19 cases, and deteriorating real economy, we will continue on with a defensive posture for the time being and manage our earnings in a stable manner. Next is on the Group's G&A expenses. Q2 Group G&A was 1 trillion 586.4 billion won. On seasonal factors, i.e. setting aside for banks and cards welfare fund and payment of taxes and dues and inclusion of PRASAC, The sub-subsidiary in the financials, GNA, was up 8.7% Q on Q. But excluding these factors, there was only a minor Q on Q rise. For the first half, GNA reported 3 trillion 45.6 billion won, flat year on year, and well under control thanks to our group-wide cost savings efforts.

Next is the provision for credit losses. Q2 provision for credit losses posted 296 billion won, a 21.5% increase QOQ. This was a result of additional provisioning based on FLC or future economic outlook scenario despite some large-scale reversals. Excluding these one-offs, it decreased by around 26% QOQ. In this quarter, KB applied forward-looking criteria from a conservative perspective and reclassified some high-risk loans in Stage 1 to Stage 2. KBFG provisioned an additional approximately 206 billion won in order to improve capability to respond to future uncertainties. For your reference, as of end June, the group's NPL coverage ratio, including the current reserve for credit losses, posted 296.5 percent, a 3.0 percent point improvement QOQ, and is maintaining a high level. I will explain the major financials from the next page. 2020 first half cumulative group ROE posted 8.88%, and the recurring ROE, excluding additional provisioning, is being maintained quite stably. These results are the fruit of our continued efforts to strengthen our non-banking side, and going forward, KBFG will respond to the low-growth, low-interest rate regime and continuously diversify our revenue basis. Next, I will cover the bank's loans-in-one growth. As of end June 2020, the bank's loans-in-one posted 287 trillion won, a 6.8% increase YTD, and 2.4% increase QOQ. In the case of household loans, driven by our focus on expanding jeonse loans and quality unsecured loans, it grew 4.2% YTD and compared to the end of the previous quarter, most of the safe conversion loans were securitized and there was a slight downturn in growth. In corporate loans, SOHO, SME and large corporate loans showed balanced growth, recording a 10% growth YTD and 4.2% growth QOQ. In particular, SME loans including SOHO loans grew 8 trillion won YTD on the back of expansion of COVID-19 related financial support programs. KBFG in the second half of this year will continue to have qualitative growth centering on safe quality assets and also strengthen low review standards as a measure to preemptively manage risk and to reduce potential NPLs. KBFG plans to focus more on profitability and asset quality management going forward. Next is NIM. Q2 Bank NIM posted 1.50%, a 6 BP drop QOQ. This was mainly a result of a slight contraction in asset yield with key rate cuts taking effect in earnest and with a partial increase of FFS liquidity management burden, although funding burden was relieved through growth of low-cost deposits and decrease of time deposits. On the other hand, The Q2 group NIM posted 1.74%, with decreasing mid-interest rate products, including car loans and cash advances. The car NIM also dropped, leading to a 10 BP drop QOQ. Taking into consideration the recent key rate reduction and expansion of policy loans, it will be quite challenging to safeguard our NIM this year. But based on the best channel competitiveness in Korea, we will focus more on expanding low-cost core deposits and apply a selective and sophisticated loan pricing program to guard the NIM as much as possible. Let's go to the next page. First, I'll elaborate on the group's cost-income ratio. In 2020, first half cumulative group CIR posted 50.6%. Excluding one-offs, including digitalization expenses, including next generation IT investment costs, CIR on a recurring level posted a 48.5% level and showed a significant improvement compared to the recurring CIR level of the previous year. With non-interest income source expansion and group-wide cost-cutting efforts, Cost efficiency is gradually, tangibly improving, and we plan to improve it to a mid-40% level in the mid-to-long term. Next, I would like to cover credit cost ratio. 2020 Q2 group credit cost posted 0.29%, and it rose slightly QOQ on the back of additional provisioning that I aforementioned. However, excluding one-offs at 0.14%, it is still being well-managed at a low level. Next, I will cover the group's BIS capital adequacy ratio. 2020 June end group BIS ratio posted 14.13%, CET1 ratio recorded 12.80%, similar to the previous quarter. Despite the risk-weighted asset growth following corporate loan and unsecured loan-centered loan growth, along with sound net profit growth, strategic capital adequacy management, including issuance of hybrid bonds and disposition of securities, FEOCI, we are maintaining the industry highest level of capital buffer. Please refer to the following pages since they cover the details related to the earnings that I just aforementioned. With this, we will conclude KPFG 2020 first half management results presentation. Thank you for listening.