KB Financial Group Inc

Greetings. I am Peter Kwon, head of IR at KB Financial Group. We will now begin the 2021 Q3 business results presentation, and thank you for your participation today. We have here with us our group CFO and SEVP, Lee Hwan-Joo, and other executives from the group. We will first have CFO and SEVP, Lee Hwan-Joo, walk us through the 2021 Q3 major highlights and then have a Q&A session after the presentation. I would like to invite our CPP to deliver the 2021 Q3 presentation.

Good afternoon. I am Yi-Hwan Ju, CFO of KB Financial Group. Thank you for joining KBFG's third quarter 2021 earnings release presentation. Before presenting on the company earnings, I will brief you on the overall operational backdrop first. Last August, in light of recovery trend of domestic economy and inflationary pressure and deepening financial imbalance, BOK hiked policy rate by 25 basis points for the first time in 15 months. Following the rate hike, expectations on NIM improvement drove rise in banking sector share prices, though temporarily. But with the spread of the Delta variant and concerns around peak out of economic momentum and early tapering in the U.S., Uncertainties both internal and external are adding up. Also, as big techs enter the financial business, there is a possibility that authorities may separate the business of manufacturing and sales of products, which may undermine incumbents' competitiveness. All in all, operational backdrop doesn't seem positive in the financial sector. Also, there may be another policy rate hike before the end of the year. And as financial support program for SMEs and small merchants harmed by COVID-19 pandemic has been extended by six more months, there is growing concern over deterioration in asset quality. Hence, a more fine-tuned risk management is required on the part of financial institutions. Under this backdrop, Let me assure you that KB's asset quality management is very solid underpinned by our rigorous risk management framework. However, even if asset quality management is quite solid, as financial business has a retrospective characteristics, one cannot completely preclude chance of crisis after the end of the support program. So we set up comprehensive plan for loan assets and strengthened creditworthiness monitoring on borrowers who are prone to negative impact and have preemptively set up sector policies for highly impacted and deteriorating sectors from the COVID pandemic in order to fully prepare for potential risks. Also, last year at the group level, we made around $380 billion in additional provisioning, securing sufficient buffer to counter uncertainties in the future. So even with the end of the financial support, we believe there will be limited chance of a sudden drop in asset quality or a surge in credit cost. Next, under the trend of digital transformation in financial transactions, which is speeding up on the back of COVID-19 pandemic, KB will accentuate our core competitiveness in financial services and expand customer touchpoint and further notch up our own platform to transform into a number one financial platform most loved by our customers. To elaborate, KB Bank last July, expanded and implemented PG, which is short for Partnership Group 2.0, which is an innovative model for the offline channel, moving away from the legacy one-size-fits-all branch system to one that is business-centric, i.e., for retail, corporate, and wealth management, fully reflecting branch environment, and our customer profile to beef up competitiveness of the offline channel. Also, by leveraging the MyData service to be fully launched this year based on in-depth data analysis on customers' scattered data, we will provide comprehensive asset management services which are super personalized so as to complete our unique channel competitiveness through the omni-channel cutting across both on and offline and by providing seamless services. We also made bold enhancements to the group's platform, KB Star Banking, from user convenience perspective and will showcase the new platform so that we may leap forward as a number one financial platform. I will provide more details on KB Star Banking in following slides. Also last June, KB adopted PCAF, which is short for Partnership for Carbon Accounting Financials, and SBTI, Science-Based Target Initiative, disclosing carbon emissions from our asset portfolio in a transparent manner and declared KB net zero star, STAR, seeking to target net zero by 2050. On the 14th of the month, we were the first Asia regional financial company and domestic company to receive SBTI approval on carbon reduction target. This is meaningful in that KBFG's carbon neutral strategy of KB net zero star was more than a mere declaration and has been proven to have global standard objectivity through rigorous and science-based carbon reduction target setting. With the SBTI approval, as we completed target setting, which is a prerequisite towards carbon neutrality. We will provide strong support to companies for emissions reduction and green investment and will continue to collaborate under various different global initiatives in order to continuously drive ESG management. Let me walk you through our Q3 2021 business results. KBFG's third quarter 2021 net profit reported 1 trillion 297.9 billion yuan. With solid growth in net interest income and net fees and commissioners' income, as well as reversal of provisioning of Hanjin Heavy after the end of the workout procedure, and KB insurances Q2 ERP and other one-off related base effect, net profit was up 7.8% Q over Q. Except for the one-off factors, including the reversal of provisions, Net profit on a recurring basis was around 1 trillion 250 billion won. Solid profit uptrend continued thanks to core profit growth and company-wide cost control efforts. In Q2, cumulative basis net profit was 3 trillion 772.2 billion won. Despite difficult internal and external operational environment, We solidified core business model of each business line, expanding source of revenue, and diversified business portfolio through MNAs, which all drove up profit 31.1% year over year. Let us now take a look at each of the segments in more detail. Third quarter cumulative net interest income was 8,255.4 billion won, which is up 15.6% on year. AB Bank's loan in won was up 5.5% compared to the previous year, sustaining sound growth, a NIM improvement interest income expanded, and consolidation effect from M&As, including prudential life, as well as non-bank subsidiary contribution to interest income also sustained its improving trend. Q3 cumulative net fee and commission income was 2,743.9 billion yuan, which is up 26.4% year-over-year, or $573.4 billion driven by fees from securities business around IB business, which reported around $116.4 billion, a sizable increase. And on growth and credit card payment volume, merchant fee income increased, driving improvement of non-bank subsidiaries' performance, And on increase in early redemption of ELS and growth in new sales, banks' trust income also posted an improvement. Also, third quarter net fees and commission income was 911.3 billion won, despite decline in stock trading volume, which led to lower securities business fee income, thanks to the IB business of the bank and improvement in the profit of the IB business of the bank and securities and higher trust income from the group. It was up 5.3% year over year. Q3, other operating account reported 114.1 billion won of loss slowing Q on Q. This is due to the rise in interest rate and FX rate in Q3, which led to lower translation gains from securities, derivatives, and FX, and higher loss ratio from PNC issuers on the back of seasonality, as well as greater stock market volatility, which led to greater guarantee reserving for prudential life. Next is on the group's G&A expense. Third quarter group GNA reported 1,664.9 billion won. With the impact of Q2 ERP of KB insurance and seasonal factor like the taxes and dues eliminated, there was a marginal Q on Q dip. On a cumulative basis, GNA reported 5,057.5 billion won which looks as though there was a slight increase year over year, but this is due to the consolidation effect from the M&A and ERP expense from the insurance business. Apart from these factors, G&A is kept at a steady state.

Next is provision for credit losses. Q3 cumulative provision for credit losses posted 596.5 billion won, a 157.8 billion won drop YOY. This was a result of qualitative growth centering on safe and prime assets, as well as continued credit quality management efforts and fading away of the additional provisioning related to COVID-19 in Q2 of the previous year. On a credit cost basis, it posted 0.22% and is maintaining sound asset quality. Q3 provision for credit losses posted 199.4 billion won, and despite loan asset increase with qualitative growth centering on prime assets, and around 23 billion won of reversal of provision for loan losses related to Hanjin Heavy, it was managed at a low level. Looking at the graph on the bottom right, the non-banking contribution in the group's net profit recorded a 44.5% level in 2021 Q3 on a cumulative level. This was a result of non-organic growth of financial investment and insurance industry areas through M&As and expanding profit stability and profit generation basis through strengthening core business models for each business area. KB, in order to overcome limitations in the domestic market and to secure sustainable growth engine, is expanding sales capabilities in Southeast Asia, including the bank recently securing 100% of product shares in Cambodia and with the upcoming acquisition by securities of Belvery Securities in Indonesia. The bank has also secured IB and capital market sales hub in Singapore and is heightening competitiveness in the advanced markets. and thus is heightening its status in the global market. Going forward, based on the results and competitiveness that has been achieved domestically, we will continuously expand our dominance and profit basis in the global market and enhance our corporate value. From the next page, I will go over the major financial indicators. 2021 Q3 cumulative group ROA and ROE on the back of group's core income growth and conservative asset quality management posted 0.81% and 11.85% respectively. And taking into consideration the recurring ROE, it recorded 12.06%. and is maintaining sound fundamentals and profitability. Next, I would like to cover banks' loans-in-one growth. Banks' loans-in-one as of 2021 September end posted 312 trillion won, a 5.5% YTD, and 3.4% QOQ increase, respectively. In detail, household loans centering on 전세 loans and prime unsecured loans continued solid growth and has increased 3.4% compared to end June. In the case of corporate loans, driven by increased demand following economic activity recovery trend, centering on SOHO and prime SME companies, SME loans grew stably at 2.8%. and large corporate loans grew substantially at 7.3% and rose 3.4% compared to end June. Next is net interest margin. 2021 Q3 Bank NIM posted 1.58%, a 2 BP increase QOQ. Despite the funding interest rate repricing effect, which ended last year following last year's big cut. This was a result of selective and sophisticated loan pricing policy and managed asset profitability improvement efforts. On the other hand, in the case of the group NIM with funding burden increase following card asset growth, card NIM contracted, but on the back of bank NIM improvement, It rose 1 BP QOQ. Going forward, KB, based on strong channel competitiveness, will focus on expanding low-cost deposits, including settlement accounts and corporate core deposits, and through flexible interest rate management based on profitability and asset quality, will secure appropriate margin and do our best to improve our NIM as much as possible. Let's go to the next page. I would like to cover our group's CIR cost income ratio. 2021 Q3 cumulative group CIR posted 46.6%, and as a result of solid core income increase and continuous cost management efforts, a downward stability trend is continuing. Excluding one-off factors, including ERP costs, Recurring CIR posted a 45% level, and additionally taking into account effect from others, we are seeing that the cost efficiency improvement trend is becoming more realized. Next, I would like to cover credit cost ratios, CCR. 2021 Q3 group and bank credit costs each posted 0.20% and 0.05% respectively, and on a Q3 cumulative basis, it is still being stably managed at 0.22% and 0.08% respectively. Even excluding the around 23 billion won of reversal for provision for loan losses following the conclusion of Hanjin Heavy Industries' workout in this quarter, The group credit costs maintained a low level of 0.23% in Q3, and even in the COVID-19 crisis situation, sound asset quality management capability is being proven. With the prolongation of COVID-19 related various financial support programs and the possibility of additional BOK interest rate hike, concerns over asset quality is increasing. However, since we are preemptively preparing for these possibilities and since we are more strengthening management for potential non-viable exposure, we expect to stably manage asset quality in the future as well. Next, I would like to cover Groups Capital Ratio. In 2021, September end Group EIS Ratio posted 16.11%, and CET1 ratio recorded 13.91% respectively, and grew 4 BPs and 18 BPs QOQ respectively, and is maintaining the highest level of capital buffer in the financial industry. Despite higher risk-weighted asset from loan growth, This was possible through substantial capital improvement on the back of factors such as solid net income generation and securities valuations gain increase. Let's now go to the next page. From this page, I would like to explain about KB Financial Group's representative digital platform, KB Star Banking, that we will be newly launching at the end of this month. Along with the acceleration of online financial transactions due to the COVID-19 pandemic, with the listing of Kakao Bank and opening of Tosbank's operations, competition with platform companies is deepening and digitalization is becoming more pronounced as important competitiveness in the financial industry. KB Financial Group, which has been responding one step ahead of these changes, focusing on customers' needs and pain points has been reinforcing the group's major platforms. And going forward, we aim to solidify top-tier status within the digital financial market by driving digital transformation from an all-around perspective, encompassing platform contents and marketing. As a part of these efforts, KB, starting with KB Star Banking, through boldly integrating and reconfiguring the group's core service from the perspective of customers' convenience, aims to strengthen KB's unique platform competitiveness and become the number one comprehensive financial platform, which is most beloved by customers. As you are well aware, the core factors for a platform to succeed are to secure the three T's, traffic, time sharing, and transactions. The essence is to develop and deliver killer content so that many customers can visit the platform and stay for a long time and make the customers use it often. The new KB Star Banking is an expandable, comprehensive financial platform, including the group's hub role, which offers core services of each subsidiary as one app. It enhances customer value through strengthening customer engagement by offering database personalization service and through implementing fast and safe service based on mobile optimized infrastructure, we will strengthen customer convenience and we expect that this will be a strong platform and secure the three T's that I aforementioned. To explain in more detail, first, By applying methods such as KB's own KB mobile certification and in-app browser, we aim to establish a expandable platform basis which can encompass not only KB financial group subsidiaries, but also diverse external channels. Going beyond simple service, focusing on inquiries and through internalizing the representative core services of subsidiaries, including securities, stock transactions, insurance coverage analysis, and insurance claims, and CARDS KB Pay, we aim to establish a KB ecosystem that could fully utilize related services without additional application or attrition. We will also connect to external channels including Government 24 and Home Tax and provide a flexible platform basis which connects seamlessly in the customer's life and will expand alliance with public and private institutions in the future to improve customer user convenience within the platform. Secondly, through methods including home screen curation and My Page service, More sophisticated personalization service will be implemented, and through sophisticated data analysis utilizing AI, machine learning, and others, and based on my data and open banking service, we will develop more segmented content for customers and provide customer personalized asset management services. Last but not least, the new KBSTAR banking is meaningful since, even if there is continued channel and service expansion in the future, there is an expandable basis which does not affect speed or stability. With the application of SPA, Single Page Application, a new technology, there will be flexible transition of the screen as well as a great increase in transaction speed. Even when errors occur, we expect that for essential transactions through establishing mobile banking optimized infrastructure systems, stability will be greatly improved. Apart from this, KB, through connection with non-financial platforms including Live Real Estate, KB ChaChaCha, and Healthcare, will complete KB's unique platform competitiveness which naturally connects finance and lives and become our customers' most beloved lifetime financial partner going forward. From the next page, please find the detailed materials related to the performance that I just aforementioned, so please refer to it if needed. With this, I will conclude my business results presentation for 2021 Q3 of KB Financial Group. Thank you for listening.