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.

Despite additional provisioning as explained, as there were sale of bank loans and writebacks related to specialty bonds, the increase was only 74.5 billion won queue on queue.

Next is on key financial indicators.

You can see the group ROA and ROE on the top left-hand side. Before I go further, I would like to mention that in the overall industry, there is increasing issuance of hybrid bonds, which is recognized as supplementary capital, and there is also the global trend of profitability indicators. Taking these factors into consideration, we would like to inform you that from this quarter, our ROE has been based on ROCE, which is return on common equity, which is a profitability indicator centering on common equity, excluding the effects of supplementary capital.

2020, KBFG's ROE posted 8.79%, a slight drop while wide.

However, the recurring ROE, excluding one-offs including preemptive provisioning and ERP costs, and the preemptive provisioning related to COVID-19, it stands at a 10.17% level. Even in a difficult operating environment with the downturn in the real economy and fall in the interest rate, profitability is being stably maintained as a result of the group's steady core profit increase and inorganic growth. Next, I would like to comment on the bank's loans-in-one growth. As of end 2020, banks Lonesome One posted 295 trillion won, and based on balanced qualitative growth of household and corporate, it increased by 9.9% YTD and 1.2% compared to end September.

Looking at the breakdown, in the case of household loans, with the sound growth of

there was a 9.5% growth in YTD and 2.6% growth compared to late September. In the case of corporate loans, there was an even growth of SOHO, SME, and large corp loans and grew 10.3% YTD. Compared to late September, centering on large corp loans, there was an increase of debt redemption at the end of the year, leading to a 0.5% decrease. In 2020, Loans growth was faster than was initially planned with the increase of fund demand and government's financial aid support due to COVID-19. However, from this year, we plan to take into consideration factors such as economic circumstances and household debt situation and focus on profitability and asset quality-centered qualitative growth and manage loan growth at an appropriate level.

Next is the NIM.

Group and bank NIM in 2020 Q4 each posted 1.75% and 1.51% respectively. Even in a situation where asset yield contraction continued following the interest rate decline, as a result of our strict margin management efforts, it improved to BP QOQ. In particular, in case of the bank's NIM from the funding side, with the approximately 9 trillion won growth of core deposits in this quarter and sizable decrease of time deposits, the overall funding cost burden was relieved, and as a result of focusing on selective loan growth, centering on profitability, we were able to relatively well safeguard our NIM. However, on a yearly basis, affected by the interest rate cut, there was a great contraction in both the group and bank NIM YOY. And since we expect that the effect from interest rate decline will continue for a while, We will make all our efforts to manage our NIM by focusing on increasing core deposits based on our superior sales capability and channel competitiveness and operate a profitability-based loan portfolio and apply advanced loan pricing. Let's go to the next page. I will now elaborate on the group's cost-income ratio. 2020 CIR posted 54.7%, and despite the group's ERP expansion and M&A-related one-off cost increase, as a result of improved overall revenue generation, it maintained the previous year's level. In particular, the recurring CIR, excluding one-off, stood at 49.4% level and has been steadily downwardly stabilizing for the past five years thanks to our route-wide cost-cutting efforts. Next, I would like to remark on the credit cost ratio. The group credit cost in 2020 posted 0.26%. And as a result of preemptive provisioning related to COVID-19, there was a slight increase YOY. But the credit cost excluding this stands at just 0.20% level and is still being managed at a stable level. With COVID-19 becoming prolonged, there are increasing concerns about asset quality.

However, in order to preemptively prepare for these uncertainties and to improve our capability to respond,

Next is the group's BIS ratio. As of end December 2020, the group's BIS ratio posted 15.27%, and CET1 ratio posted 13.29%. Despite the risk-weighted asset increase following the year-end dividend and loan growth, on the back of strategic capital management, including solid net profit increase and issuance of hybrid bonds, we are still maintaining the highest level of capital adequacy in the Korean financial industry. Now let's go to the next page.

From this page, I would like to cover ESG management leadership among KBSG's 2021 core management strategies.

Around the globe, ESG management has become both a core value of companies and also an essential management strategy to secure sustainability. In particular, due to COVID-19, with a globally heightened sense of crisis regarding environmental change, including climate change and natural disasters, the importance of ESG management is becoming more and more pronounced. KBFG, which has been always one step ahead of these changes, has for the first time as a Korean financial institution in March of last year newly established an ESG committee within the BOD. The ESG Committee in May set the ESG strategic goal to create sustainable value and enhance customer trust by promoting responsible management for environment and society and disseminating healthy corporate governance and established the KB Greenway 2030, a mid-to-long-term ESG strategy roadmap. KB Greenway 2030 holds the commitment that KBFG will preemptively respond to the crisis of environmental change and secure green leadership which will lead the environmentally friendly financial ecosystem.

We have the core goal of reducing our group's carbon emissions by 25%,

compared to 2030 when we compare 2017 to 2030, and to expand the ESG financial product sales, investment, and loan size, which stands at about 20 trillion won level now, to a 50 trillion won level by 2030. Keeping in step with this, in August, we have publicly declared our commitment to the Equator Principles, a global guideline for environmentally friendly finance, and are focusing our efforts on completing membership this year. And in September, we have announced for the first time as a Korean financial group that we are exiting whole financing, providing and proving that KB's ESG management philosophy is at a level higher than the others. And showcased our speedy execution capability.

Going forward,

KB Financial Group, following the recommendation of TCFD Task Force on Climate-Related Financial Disclosures, are managing various climate-related risk factors and are disclosing related information transparently. On the other hand, we are also establishing an advanced climate change response system, and we are working hard to faithfully implement the TCFD recommendations step by step. We were recognized for our differentiated ESG management efforts, and recently, for the first time as a Korean financial company, we achieved great results by receiving the highest grade of A-plus from Korea Corporate Government Service, or KCGS, in all categories, including environment, society, and corporate structure. Last but not least, we are actively participating in the government's Korean New Deal projects and have strengthened core areas of support in ESG, including innovative growth companies, green smart schools, and green energy to create social values. We promise that we will exert ESG management leadership and do our utmost fulfilling our responsibility and roles that refit our status as a leading financial institution. Please refer to the following pages for details regarding the business results that I have just covered.

With this, I will conclude KBSG's 2020 Business Results Presentation. Thank you all for listening