KB Financial Group Inc

Greetings. I am Peter Kwon, head of IR at KB Financial Group. We will now begin the 2021 first half earnings release presentation. I would like to express my deepest gratitude to everyone for your participation. We have here with us at today's earnings release, KBFG SEVP Lee Hwan-joo, who is our group CFO, and other executives from the group. We will first hear SEVP Lee Hwan-joo's presentation on 2021 first half major earnings highlights, and then we will engage in a Q&A session. I would like to invite our SEVP to deliver 2021 first half business results presentation.

Good afternoon. I am Ewan Ju, CFO of KB Financial Group. Thank you all for joining KBFG's first half 2021 earnings release presentation. Before presenting on the business performance, let me first brief you on the operational backdrop. In the second quarter, amid continuing COVID-19 vigilance, there were positive exports and capex investments, and with the full-fledged vaccine rollout, pent-up demand drove higher private consumption, speeding up momentum behind Korea's economic recovery. Share prices of the banking sector reflected expectations on market rate hikes, better performance and greater shareholder return, accompanying assessment that we've entered a re-rating cycle followed by outperformance above the market. However, on the flip side, Delta variant is currently spreading and with concerns over inflation, especially from the US, uncertainties both internal and external have surfaced, leading to a difficult operational backdrop for the financial industry. Under this environment, KB Financial Group is doing its utmost to enhance shareholder value through continued bottom-line improvement and efficient capital management and is determined to fulfill our role and responsibility befitting a leading financial group. First, during today's BOD meeting, for the first time since the launch of the financial holding company structure, we resolved to pay out interim dividend of 751 DPS as of June end 2021. This is so that underpinned by KBFG's industry's top capital adequacy and earnings fundamentals, we wish to provide to our shareholders more stable and fluid cash flow and also to continue with KB's steadfast progressive dividend policy. Going forward, we promise to continue to consider ways for efficient capital management and various different shareholder return policies so as to enhance shareholder value. I would also like to emphasize that as a leading financial group, KB continues to make robust its green leadership in the financial industry. In order to provide financial support to companies that drive environmental and social values, KBFG is issuing various different types of ESG bonds and are actively participating in the government's New Deal project by way of launching a New Deal infrastructure fund whose size is 200 billion. Korean Won making investments into renewable energy sources, environmental facilities and electric vehicles. As such, we've been undertaking ESG management with quite some speed. Also last June, we were the first domestic financial group to disclose amount of carbon emissions from our asset portfolio and declared KB net zero star, S-T-A-R, which is an objective to go carbon neutral by 2050. By applying partnership for carbon accounting financials and science-based target initiatives, we were able to measure carbon emissions in a scientific manner that meet global standards, and it is meaningful in that there was transparent disclosure of amount of carbon emissions that relate to investing and lending activities. KBFG will upgrade its ESG management through continuous collaborations under global initiatives and will do our best to bring finance that changes the world where every one of us can grow. Now, let me present on the earnings for the first half of year 2021. KB Financial Group's 2021 first-half net profit was 2,474,000,000,000 won. Driven by solid growth from core earnings, there was stronger earnings stability supported by non-organic growth from M&As. As such, net profit was up 44.6% on-year from base effect of additional provisioning in Q2 of last year, recording biggest half-year figure since the establishment of the company. Q2 net profit was 1 trillion 204.3 billion won. While net interest income was up on the back of solid loan growth, net fee and commission income growth was somewhat subdued due to a decline in securities trading volume and the bank's trust sales. And valuation gains from bond declined on higher market interest rate, which led to a Q-on-Q 5.2% decline. But on a recurring basis, excluding ERP expenses from KB Insurance, the non-life insurance arm, Q-on-Q performance was quite solid. Let's now look at each of the segments in more detail. Group's net interest income for the first half of 2021 was 5,401.1 billion won. Driven by prudential life acquisitions and other M&A impact, and banks' solid loan growth and non-bank affiliates' greater contribution to interest income, there was 15.3% year-over-year growth. First half group's net fees and commission income was 1,832.6 billion won, up 32.7% year-on-year, or 451.3 billion won, which is a sizable increase. This is driven by growth in clients' asset under management and activation of our IB business, which led to sizable increases in brokerage income, accompanied by growth in banks' trust income on higher ELS sales, as well as growth in credit card merchant fee income from recovery of private consumption. Second quarter's fee commission income was $865.4 billion, which is down 10.5% QonQ. Despite solid growth of securities IB business, in Q2, equity trading income fell, leading to lower fee income from securities business, and on reduced sale of trust products, trust income dipped marginally. Second quarter other operating loss was 57.2 billion won, somewhat subdued queue on queue, which is mainly due to lower valuation gains on bond against the market rate hike. Insurance underwriting profit was 161.7 billion won. Apart from one of factors, i.e., payment for large-scale fire that took place this quarter, there was a slight queue-on-queue increase. This is driven by lower auto accident rate and increases in premium, which led to continued improvement in loss ratio around the auto insurance. Next is Groups G&A. Q2 group GNA reported 1,669.5 billion won. On the back of cost-saving efforts across the group, there was absence of impact from last quarter's setting aside of welfare fund, which led to a decline in GNA expense of 3.1% Q1Q. Excluding the ERP cost impact for the quarter, the figure is lowered by around 5%. Meanwhile, first FG&A was 3,392.6 billion won. It seems slightly elevated year over year, but this is due to prudential life and other M&A impact, as well as the ERP expense for the non-life insurance business. Excluding these factors, G&A is being managed solidly. Next is on PCL. Group's first half, PCL, reported 397.1 billion won. Together with quality growth around prime assets and preemptive risk management efforts, additional provisioning impact of Q2 of last year was absent, with PCL down significantly by 26.4% year-over-year. Q2 group PCL was 223.7 billion won. Driven by banks' asset growth and decline in the reversal of specialty bonds, there was an increase, but credit cost reported 0.25%, keeping to a premier asset quality. Next, if you look at the graph on the lower right, Non-bank's share of Group's net profit in first half of 2021 was around 45.2%. This is due to the efforts of business portfolio diversification through M&As and strengthening of core business models that has been made which solidly contributed to the revenue base. We will continue to explore sustainable growth engine and to make group portfolio more solid while bolstering core competitiveness of our subsidiaries so as to enhance the corporate value. Next is on key financial indicators.

2021 first half cumulative group, ROA and ROE, each recorded 0.81% and 11.95% respectively. Earnings capacity improved on the back of stable growth in core income as well as diversified business portfolio through M&As. Taking into account major one-offs, recurring ROE also posted 12.38%, maintaining sound fundamentals and profitability. Next, to elaborate on the bank's loans-in-one growth, As of end June 2021, banks' loans-in-one posted 302 trillion won, a 2.0% increase YTD, and in Q2, on the back of profitability and asset quality-centered qualitative growth and focus on sales, there was a 1.7% growth compared to the end of the previous quarter. Household loans posted 164 trillion won and driven by and prime unsecured loans, it increased 1.5% YTD and 0.9% compared to the end of the previous quarter respectively. Corporate loans continued stable growth, driven mostly by Soho and Prime SMEs, and grew 2.8% YTD and 2.7% compared to the end of the previous quarter, respectively. KB Financial Group will monitor the economic situation and household debt situation in the second half and continue qualitative growth centering on asset quality, but also apply a flexible and timely pricing policy to secure a growth basis. Next is the NIM. 2021 first half, Group and Bank NIM each posted 1.82% and 1.56% respectively and rose by 4BP and 3BP YOY respectively. As a result of efforts to expand low-cost deposits, core deposits grew around 11 trillion won in the first half, but savings-type deposits decreased around 4 trillion won, and with factors including the contribution growth of low-cost deposits in the total deposits, funding burden alleviated, and on the back of profitability-centered loan strategy, margin increased. leading to a continued overall improvement trend. However, Q2 NIM was at the level of the previous quarter due to the loan asset repricing effect, which reflected the interest rate cut last year. KB, based on our highest level of channel competitiveness domestically, will focus on expanding low-cost deposits. And on the other hand, through a more sophisticated loan pricing method, we will improve asset yield and focus on managing NIM and do our best to diversify our income sources as a group. Next, I would like to cover our group cost-income ratio, CIR. 2021 first-half cumulative CIR posted 47.1%, and as a result of top-line growth and results of cost control efforts, it increased by a significant improvement, YOY, excluding one-offs, including ERP costs. Recurring CIR posted 45.3%, continuing a stable downward trend and additionally taking into account the adjustment for accrual of bonus expenses from the bank. First half CIR is at a 44.1% level and the cost efficiency improvement trend is becoming more visible. Going forward, we will do our best to improve management efficiency through continuing earnings expansion efforts and company-wide cost control. Next, I would like to cover the CCR credit cost ratio. 2021 first half group and credit cost posted 0.22% and 0.10% respectively. As a result of high-quality asset-centered qualitative growth and preemptive risk management efforts, it is being managed stably at a low level. We are aware that there are concerns over asset quality deterioration after the financial support ends due to the prolongation of various COVID-19-related financial support programs. Regarding interest forbearance that the market is most concerned about, the loan balance as of end June posted around 1%. 300 billion won, which was only around 0.1% compared to total loans in won. Prime loans and secured loans are 70% and 90% respectively, and considering that the loan balance is on a downward trend due to voluntary repayment from companies that had applied, we expect that it will be managed stably even after the end of financial support. The group last year additionally provisioned 380 billion won and since we preemptively have secured a buffer, we believe that the possibility that the group's credit cost will rapidly increase is very limited. KBFG will maintain our preemptive and conservative risk management stance, including strengthening potential NPL management and having a more sophisticated risk management system for industries and borrowers so that even in the future, we can stably manage asset quality. Next, I would like to cover the group's capital ratio. As of late June 2021, group BIS ratio posted 16.03%, and CET1 ratio posted 13.70%. Despite the increase of risk-weighted assets following loan growth and interim dividend effect, on the back of strategic capital management including solid net income growth and hybrid bond issuance, we are still maintaining the highest level of capital adequacy in the domestic financial industry. Let's now go to the next page. From this page, I would like to cover our insurance division's collaboration strengthening strategy within KBFG. Through acquiring Prudential Life in August of last year, we have strengthened our life insurance business portfolio, and through providing continuous financial services, keeping in step with the customer's lifelong life cycle, taking into consideration that we can sustain and strengthen a contact point with the customer, We expect that the role of KB Insurance, Prudential Life, and KB Life in the group will be expanded. KBFG, in order to increase group-level business value and synergy, is strengthening our collaboration system in all areas including product, channel, and organization. First, we have established STAR WM Wealth Manager, the group's premium outbound channel, and we are pilot operating it, and through this, Prudential Life's Superior Life Planner, LP organization, and the Bank and Securities PB will collaborate and establish an advanced WM service including providing integrated advisory services, including inheritance, retirement, and older age management, and strengthen customer experience regarding KB financial services so that we will steadily increase our influence in the affluent market. In addition, in the case of asset management for insurance subsidiaries, we will expand outsourcing to KB Asset Management, which has expertise in this area and establish an integrated asset management system. Through this, The insurance subsidiaries will be reorganized, centering on planning and review, leading to advanced ALM and strengthening its review function. On the other hand, the asset management company, through establishing a basis for economy of scale for asset management and based on asset management experts and a superior network in and out of Korea, we aim to secure differentiated management capability by a close collaboration system with our insurance subsidiaries. We expect KB Asset Management's AUM after migration of management assets of KB Insurance and KB Life as of late June to post 98 trillion won and in end 2021 when Prudential Life's assets are expected to be migrated It is expected to increase to a 114 trillion won level and is expected to grow to be the second biggest in the industry based on asset management companies, AUM. On the other hand, we are expanding collaboration between our insurance subsidiaries and through activating cross-selling between insurance subsidiaries, we will increase customer inflow by securing sales channels and through expanding product sales opportunities for other subsidiaries within the group, we will strengthen sales competitiveness of dedicated channels. and through systematic planner training and management, we will reduce mis-selling sales risk, leading to a practical synergy between insurance subsidiaries. For your reference, the number of cross-selling customers between insurance subsidiaries in Q2 was about 280,000 customers, and it increased by about 9% after Q4 of last year. right after acquiring Prudential Life. Going forward, through sales of high-value products and expanding sales-capable manpower, we have plans to have a stepwise activation of cross-selling. In addition, with the accelerating trend of manufacturing and sales separation in the insurance industry, KB Financial Group taking into consideration that GA's product sales influence is growing, aims to share the GA channel management capability owned by KB Insurance and KB Life and execute collaboration marketing to maximize the organization's operational efficiency. The contribution of GA new sales of insurance subsidiaries in Q2 of this year was around 52% compared to total sales, and through balanced growth of the dedicated channel and the GA channel, we aim to increase our market share. Apart from this, we are applying the shared service center to the overall insurance division and are expanding our group's synergy. Before the adoption of IFRS 17 accounting system in 2023, We will share working capability between insurance subsidiaries to establish business management methods, and by exchanging human resources and sharing know-how, we are expanding collaboration for product development centering on values. We are also improving cost efficiency in many ways, including establishing IT and call center collocation operational model and utilizing shared infrastructure to execute digital marketing to secure a sustainable growth momentum. From the next page, we have the details regarding the results that I have aforementioned. With this, we will conclude KBFG's 2021 First Half Earnings presentation. Thank you for listening.