KB Financial Group Inc

Greetings, I am Peter Kwon, the head of IR at KBFG. We will now begin the 2020 Q4 Business Results presentation. I would like to express my deepest gratitude to you for participating in our call. We have here with us our Group CFO and SEVP, Lee Hwan-joo, as well as other members from our Group Management. We will first hear the 2020 major financial highlights from our CFO and SEVP, Lee Hwan-joo, and then engage in a Q&A session. I would like to invite our CFO and SEVP to elaborate on our 2020 business results highlights.

Good afternoon. I'm Lee Hwan-Joo, CFO of KB Financial Group. Thank you for joining KBFG's earnings presentation for Q4 2020. Before moving on, To our earnings results, let's briefly look back on last year's operational environment and KBFG's key business results. Due to the COVID-19 pandemic, global real economy fell into steep contraction, and 2020 was an unprecedented year with high volatilities for the financial market as well. For the banking industry, since the 75 basis point cut in the rate by BOK, policy rate continued to be at its historical low. And with greater possibility of asset quality deteriorations with prolonging COVID-19 impact, there were concerns over fall in profitability, which led to share price declines. Notwithstanding such internal and external challenges surrounding the company, KBFG was able to bring meaningful results in 2020. Last August, once Prudential Life Industries' top-tier life insurer became our subsidiary, we completed our Q4 business portfolio ranging from bank, securities, non-life insurance, credit card, and finally life insurance, which enabled us to gain solid competitiveness. We also completed acquisition of Cambodia's biggest microfinancing institution, Prasak, and Bukopen Bank, which will be a foothold into the Indonesian market. As such, we made significant progress in our global business and further enhanced the group towards sustainability. In terms of financial performance, Despite NIM contraction following the rate cut and continuation of macro uncertainties, driven by solid loan growth which drove sustained increase in interest income, as well as sizeable increases in net fees and commission income from non-bank subsidiaries, we saw a balanced earnings improvement across bank and non-banking business. Also, our inorganic growth through M&As brought tangible results, leading to around 3.4 trillion won of net profit as we continue to sustain solid fundamentals. Today, the BOD meeting has decided on payout ratio of 20% and 1,771 DPS for this year. As we are mindful of possible economic depression against prolonged COVID-19 impact and macro uncertainties at home and abroad, We believe conservative capital management and supportive measures for the real economy are required. Hence, payout has been slimmed somewhat compared to last year. However, underpinned by solid earnings resilience and industry's top capital adequacy, we will continue to abide by progressive dividend policy as we've done so far. and commit yet again that we will be at the forefront of implementing various shareholder return policies that live up to the global standards. As you are aware, Korean economy is entering new normal characterized by ultra low rate and low growth. Also, financial market paradigm is changing fast. To respond to changing financial environment preemptively, KB Financial Group will upgrade Group's business portfolio. And based on KB's distinct all-around financial services capabilities, superior customer base, and channel competitiveness, we will rise to become a number one financial platform company. To this end, we named this year's strategic direction as Renew 2021. Renew stands for R, reinforce the core, E, expansion of global and new business, N, number one platform, E, ESG leadership, and W, world-class talent and culture. In 2021, we will strengthen competitiveness of core businesses of each of our business lines of the group. And on top of our traditional financial business, we'll bolster non-financial businesses, i.e. auto, real estate, and healthcare, so as to secure growth engine for the future. At the same time, we will become a number one financial platform company that offers differentiated and comprehensive financial solutions via customized financial products and services that have the underpinning of data. With that, I will now move on to financial highlights for 2020. KBFG's full-year net profit for 2020 was 3,455.2 billion won. Despite challenging business environment at home and abroad, driven by robust core earnings growth and tangible results from inorganic growth through M&As, there was 4.3% growth year-on-year as we maintained solid earnings fundamentals. However, Q4 net profit was down significantly, Q on Q, to 577.3 billion yuan on the back of ERP expenses and additional provisionings related to COVID-19 and the base effect from booking of negative goodwill benefit from Prudential Life previous quarter. Excluding these one-off factors, on a recurring basis, Q4 net profit was flat on quarter. Moving on to more details by breakdown. Group's 2020 net interest income was 9,722.3 billion won, up 5.7% on-year. continuing a stable growth trend despite falling rates. This is due to banks' solid loan growth, which helped to secure stable earning space, and the result of inorganic growth through M&As. Also, 2020 net fee and commission income was 2,958.9 billion won, up 25.6% year-on-year, or 603.9 billion won on-year, providing a big support to the group's core earnings growth. Such growth in net fees and commission is driven by a sizable increase of 347 billion won from securities business, mostly comprised of brokerage income, and higher credit card fee income on the back of robust marketing and cost savings efforts, which all led to better performances from non-bank subsidiaries. Meanwhile, Q4 net fee and commission income was 788.4 billion won. Although securities business fee income declined slightly due to lower average trading volume, an year-end increase in credit card transaction volumes and credit card fee income was up, driving the total fee and commission income to be flat Q1Q. Size of quarterly net fee commission income used to be around 500 billion won, but started to expand to around 800 billion since the beginning of the year and has sustained an uptrend ever since. Next is on other operating profit. In 2020, there was 188.6 billion won of other operating loss for the group, mainly from increase in other operating expenses, including credit and deposit insurance and depreciation on operating leases. But we've seen meaningful improvements from core businesses, i.e. securities, derivatives, FX, driven by favorable financial market backdrop, such as the share price and the rate, and increased in invested assets and efforts around portfolio diversification. Having said that, for Q4, there was seasonality impact of year-end cold weather wave, an increase in medical expense claims, and deterioration of loss ratio for auto and long-term insurance, which constrained insurance performance, with other operating income coming in at a level lower than that of the previous quarter. Next is on the group's G&A expense. Group's 2020 GNA expense was 6,833,000,000,000. This year, with ERP size growing for the group, there was approximately 344,000,000,000 of ERP expense. And with the consolidation of PRASAG, Prudential Life, and Bukopin Bank of Indonesia into the financial statement, there was around 243 billion of additional expense recognized, pushing up G&A expense 9% year on year. The rise may seem significant this year, But as I mentioned before, if we exclude one of special factors like the ERP expense and the M&A impact, on the recurring basis, the increase was around 2.6% on-year. Q4 G&A expense reported 2,187,000,000,000 won. which was a sizable increase, queue on queue. And once again, this is due to ERP and other seasonal impact, as well as expenses from Bukopin Bank, which was consolidated as a subsidiary as of September. Next is on PCL, provision for credit loss. Groups PCL for 2020 reported 1 trillion 43.4 billion won, up 373.1 billion won year on year. In order to preemptively counter uncertainties arising from COVID-19, we have made 206 billion won of provisioning during the second quarter. And we also added 171 billion won of provisioning this quarter as well. As such, since we set aside 377 billion of additional provisioning this year preemptively, if this impact is taken out, the trend is flat year on year.

For the fourth quarter, PCL was 289.1 billion won.