KB Financial Group Inc

Greetings. I am Peter Kwon, the head of IR at KBFG. We will now begin the 2020 Q3 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 Q3 financial highlights, from our 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 2020 Q3 major financial highlights.

Good afternoon. I am Kim Ki-hwan, CFO of KB Financial Group. Thank you for joining KBFG's presentation on Q3 2020 business results. Before presenting on the earnings, let me first brief you on the operational backdrop. As of end of August, KBFG completed the consolidation of Prudential Life, Korea's top-tier insurer in terms of capital adequacy, sales capabilities, and financial stability as its 13th subsidiary. With that, we have finally completed the acquisition of a life insurer, which was a long-harnessed aim, gaining a meaningful market position in the life insurance industry. With a perfected business portfolio, second to none in the financial industry, we are now able to further enhance the group's potential for sustainable growth and profitability. Driven by robust earnings fundamentals following the expansion in our non-bank portfolio and preemptive and precise risk management, once again, we were able to record a quite stable earnings in the third quarter. However, with the prolonged COVID-19 pandemic, overall business environment for the financial industry is turning unfavorable. With social distancing, and restrictions on economic activities, macro outlook for the Korean economy continues to be negative. While financial support program for hard-hit SMEs and SOHOs have been extended by six more months, which deepened concerns over asset quality deterioration and have once again put to test risk management capabilities of the Korean banks. Firstly, I would like to affirm that under the crisis brought on by COVID-19, KB has kept its asset quality stable, underpinned by its rigorous risk management framework. With the extension of the financial support, i.e. moratorium on repayment, it is true that for some marginal companies, there could be a carryover effect of deteriorations, which would eventually lead to erosion of asset quality. However, by taking basic financial information of the borrowers and cash flow projections which factors in the COVID crisis, we are reviewing debt servicing capacity and possible liquidity issues holistically as we segment risk exposures accordingly. And through such sophisticated follow-up management, we are rigorously preparing against potential risks. Also, credit quality for the company has been improving over the years, and based on conservative forecast economic scenarios, we have made preemptive provisionings, maintaining a fundamentally robust risk management framework. As such, we expect possibility of asset quality deteriorations to the extent that it will erode our fundamentals is quite limited. In the meantime, COVID-19 has triggered the spread of the so-called untaxed behavior, quickly shifting the center of gravity to digital channels when it comes to customer touchpoints. KB Financial Group, even before the COVID pandemic, had its focused on customer pain points, making improvements on convenience aspects on our platforms like Star Banking, Mable, and LiveMate. And as a result, Amid competitions with the big techs and other financial service platforms, our core apps are outperforming in terms of usage. We will continue to strengthen our competitiveness in the untapped channel, and by connecting with our existing powerful offline channel, we will lead the efforts in starting a new chapter in channel competitiveness and develop into a future-proof platform with a key focus on customers and core of financial business. With that, I will move on to the third quarter earnings results. For your information, Q3 group performance is based on 100% consolidation of prudential life. So please note that in light of the acquisition date, we reflected the earnings results for a single month of September. Now, KBFG's Q3 net profit was 1,166.6 billion won, unsustained growth of net interest income and net fee and commission income, and the base effect of additional provisioning in Q2, as well as the negative goodwill benefit from prudential life. Net profit was up 18.8% Q on Q. Excluding negative goodwill benefit of 145 billion and other one-off items, recurring basis net profit was in the upper 900 billion won at a steady level underpinned by core profit growth and asset quality management. In terms of cumulative net profit up to Q3 2020, it came in at 2,877.9 billion won, Despite NIM being in a narrowing cycle from the rate cuts supported by net interest income growth following solid loan growth and successful efforts to increase fee and commission income, this figure reported a 3.6% growth year-on-year. On a running basis, excluding the one-offs such as last year's ERP expense and this year's preemptive and additional provisioning and negative goodwill benefit, the increase was 5.1%. Moving on to more details by line item, Q3 cumulative net interest income was 7,143.4 billion won. Driven by loan growth from the bank and the KB card and consolidation effect from PRASOC acquired last April, we saw sustained growth of 4% year on year. Q3 cumulative net fee and commission income was 2 trillion, 170.5 billion won. Notwithstanding difficulties, i.e., economic recession and curtailed financial product sales driven by growth in customer assets and efforts around IB business activation, there was sharp rise in brokerage commissions pushing up the income by 454 billion won on-year. Also Q3 net fee and commission income reported 789.2 billion won supported by improvement in commission performances from the brokerage financial business and trust income which was subdued in the first half due to the regulatory impact on sales ceiling saw improvements on better sales and higher ELS early repayment posting a growth of 11% on quarter. Next, Q3 other operating income posted a loss of 17.7 billion won, which is a steep decline Q on Q. This is mainly due to the base effect of Q2, where financial market recovery has significantly pushed up gains from marketable securities and derivatives. And with August forming the trough, market rates started to rise, somewhat compressing valuation gains from bonds. Next is on group's G&A expense. Q3 G&A expense was 1 trillion 600.6 billion won, a marginal increase Q on Q on the consolidation effect from prudential life. On a cumulative basis up to Q3, it reported 4 trillion 646.2 billion won, which is up 4.3% year on year. Although it looks to be a sizable increase, taking PROSOC and prudential life impact aside, It is a 2.3 percent increase year-on-year basis. QCPCL provision for credit loss was 214.6 billion won. With additional provisioning impact in the second quarter removed, there was around 27.5 percent decline queue on queue, with quarterly credit costs reporting 0.22 percent. As such, costs are being well managed. Cumulative group PCL as of the third quarter increased significantly year-on-year on massive additional provisioning in Q2. However, credit cost continues to be at a lower range at 0.25 percent. Next is on key financial metrics.

2020 Q3 cumulative group ROE and ROA respectively posted 9.76% and 0.70% and is maintaining sound fundamentals and profitability despite concerns over an economic downturn. The recurring ROE, taking into account major one-offs, posted 10.01% on the back of group's core profit growth and conservative asset quality management. I would now like to cover the bank's growth in won. As of late September 2020, banks' loans in won posted 292 trillion won, a 8.6% growth YTD. In Q3, the focus was on quality growth centered on profitability and asset quality and grew 1.7% compared to late June. In the case of household loans, with the solid growth of Jeonse loans and prime unsecured loans, it grew 2.4% compared to late June. In the case of corporate loans, large corp loans decreased 1.9%, but on the other hand, SME loans grew steadily by 1.3%, centered on SOHOs, and as a result of conservative loan policy, it grew 0.8% compared to late June. Next is the NIM. Q3 group and bank NIM each recorded 1.73% and 1.49% respectively, and although there was a contraction in asset yields following the interest rate cut through efforts to increase low-cost deposits and through overall reduction in funding costs, we were able to guard the NIM so that it only went down 1 BP QOQ. Going forward, KB, based on outstanding sales capability, will focus on expanding low-cost deposits, and through a more precise and sophisticated loan pricing system, we will improve profitability and do our best to safeguard the NIM as much as possible. Let's go to the next page. Next, I would like to cover the group's cost-income ratio. 2020 Q3 Cumulative Group CIR shows posted 50.3%, and on a recurring level, excluding expenses including digitalization-related costs, posted 48.3% on a recurring level. With sound top-line growth and efforts to manage costs, the Group CIR is consistently showing a downward trend. With the realization of our group-wide cost-cutting efforts, we forecast that it will improve to a mid 40% level in the mid to long term. Next, I will cover the credit cost ratio. 2020 Q3 credit cost posted 0.22% and 0.25% on a cumulative basis and is still being maintained at a stable level. In addition, excluding one-offs, including Q2 additional preemptive provisioning and sizable write-backs, the cumulative credit cost posted a 0.20% level and is maintaining a low level despite the COVID crisis and concerns over an economic downturn, proving our asset quality management capability. With various financial support programs being prolonged, There are some spreading concerns over asset quality. However, we have been preemptively preparing for these possibilities, and since we have been strengthening management of NPL exposure, we believe that we can safely manage asset quality going forward in the future as well. Next, I would like to cover our group's capital ratio. As of end September 2020, the group's BIS ratio posted 14.69%, and CET1 ratio posted 13.08%, and is still maintaining the highest level of capital adequacy in the Korean financial industry. Even after the acquisition of Prudential Life Insurance, BIS ratio on the back of stronger capital through net earnings increase and hybrid bond issuance as well as the RWA reduction effect following the early adoption of Basel III BIS Ratio Rose 45 BP QOQ. For your reference, KB has applied the Basel III Credit Risk Calculation Revision Plan that the Financial Services Commission decided to adopt early in March. And accordingly, we assume that the group BIS ratio has been pushed up by around 130 BP. Let's now go to the next page. From page 5, I would like to explain about the management strategic direction related to Prudential Life Insurance, which became integrated as a group subsidiary from late August, and the synergies we expect. Through acquiring Prudential Life Insurance, we were able to acquire a life insurance company that we had yearned for for a long time. In the recent low-interest environment, it is an undeniable reality that there is a bigger burden to guard life insurance companies' profitability. Capital management burden is also increasing with the upcoming accounting standard and capital regulation changes. However, as aforementioned, we believe that it can be an opportunity for solid life insurers, and in this vein, we believe that Prudential Life can be a good partner that can develop along with our group. As you are fully aware, Prudential Life Insurance has the industry's highest level of financial soundness and tied agent channels. The RBC ratio as of late June this year posted 456.4% and is much higher than the industry's average and is being recognized as the safest and most solid insurer from the perspective of RBC. We believe that even after the adoption of IFRS 17 or KICS, the highest level of RBC solvency in the industry can be maintained. In the case of Major financial indicators of life insurers, the persistency ratio and loss ratio in the 13th month, as of end June, each posted 87.9% and 51.8% respectively, and is maintaining a market financial soundness compared to the industry average. In addition, the organization of tight agents, a.k.a. life planners, are recognized fully in the market, as having outstanding capabilities. Prudential Life Insurance is called the Insurance Consultant Officer Training School and has a great strength in its systematic and professional training system and has around 2,000 tight agents that have received this training of the highest quality. The 13-month agent retention ratio is 52.8%. Next slide, please. To explain about Prudential Life's management strategy, in order for the smooth settlement of Prudential Life Insurance into the group and to stabilize business, we will operate Prudential Life Insurance independently without merging with KB Life Insurance for the time being, while the group will continuously support Prudential Life so that it can exert its unique competency as much as possible. In the mid to long term, with Prudential Life's outstanding Life Planner Channel, we have plans to establish a premium sales model, converging the diverse financial services of KB Finance and offer differentiated customer service through digital innovation. In addition, with the acquisition of Prudential Life, the group's business portfolio has been further strengthened and the position of the insurance company within the group has been heightened. The non-banking sector contribution to the group's net profit rose from around 31% late last year to around 40% based on the current portfolio. And based on the sum of net profit of Prudential Life and KB Life Insurance, our group's life insurance has become number five in the industry. Apart from these results, we are setting up strategies from the group perspective to create synergy and value in all areas, including product, channel, organization, and just to mention a few, we will utilize the outstanding Prudential Life insurance agent organization as our group WM outbound marketing channel to promote more cross-selling opportunities between subsidiaries we will expand diverse financial and asset management services including real estate tax and legal services to prudential life 650,000 customers with a high ratio of affluent customers and create new value in the WM business in addition Through Prudential Life, since we have better economy of scale and bargaining power from the group, better deal sourcing will be possible and we expect that the group's asset management competitiveness will get stronger. We are aware of some concerns in the market about cannibalization with KB Life Insurance, but since we have a strong bank insurance channel at KB Life Insurance, and an outstanding life planner or insurance agent organization at Prudential, we are pursuing a strategy to maximize synergy at the sales channels. Through the acquisition of Prudential Life, KBFG has solid competitiveness in all areas of core business, including securities, non-life insurance, capital, and now life insurance, and we will leap forward once again as a leading financial group. Please refer to the following pages regarding the details of the earnings that I have mentioned so far. With this, I will conclude 2020 Q3 earnings report by KBFG.