KB Financial Group - Earnings Call - Q4 2024

Transcript

Operator (participant)

We will now begin the 2024 full-year business presentation. Thank you very much for participating in today's earnings release. At today's earnings release, we have here with us executives from the group, including Managing Director and CFO, Sang Rock Na. First, our group CFO will cover 2024 major earnings results, and after that, we will engage in a Q&A session. Please note that from this presentation, after our real-time Q&A session, we have set aside additional time for the management team to answer questions that were previously submitted by our shareholders through our website. I will now invite our group CFO to walk us through 2024 full-year business results.

Sang Rock Na (CFO)

Good afternoon. I am Sang Rock Na, CFO of KB Financial Group. Thank you all for joining KBFG's earnings presentation for FY 2024. Before going into earnings results, I will first run through business highlights. As concerns over household debt and the real estate market persisted in 2024, we saw financial market volatilities expand on the back of major countries' monetary policy stance, U.S. presidential election, and surge in the FX rate. For banking in particular, rate cut cycle eroded profitability, and there were rising concerns on asset quality due to a slump in the real economy, and ELS-related compensation booked at the start of the year exerted a downward pressure on bottom line. Despite all this, net profit for the year reported more than KRW 5 trillion, sustaining a solid profit uptrend for the group.

These results are meaningful in that despite a structural difficulty of profitability declines, concerns on soundness, and heightened economic uncertainties, our fundamentals have proven solid on the back of business portfolio diversification efforts that we've placed over the years. Also, 2024 can be regarded as the inaugural year of Value-up, as we placed emphasis on sustainability and predictability, based on which we announced a sustainable Value-up plan last October, embodying KB's philosophy, which was met with positive market reaction. We were the first to implement share buyback and cancellation in the sector and introduced equal quarterly dividend distribution based on total payout, which shows KBFG is leading the market in shareholder return and has continued to develop such policies, thereby laying a fertile ground. Underpinned by this foundation, I would like to emphasize yet again that we will implement KB's Value-up plan firmly with no interruptions.

From next page onward, I will walk through KBFG's performance highlights for 2024. Firstly, KBFG's FY 24 net profit was KRW 5 trillion 78.2 billion, driven by balanced top-line expansion across all domains, reporting a 10.5% year-over-year increase. If you look at pre-provisioning operating profit for '24, it came in at KRW 10 trillion 89.6 billion, up 5.9% year-over-year. And compared to FY 21, merely three years back, this is around 38.5% expansion, attesting to solid earnings capacity of the group. Also, ROE for 2024 recorded 9.72%, improving 0.59 percentage points year-over-year, while EPS was KRW 12,880, up 12.2%, whilst still maintaining a mid-13% level, which is industry's top tier. I will elaborate on the CET1 on the following pages. Let me also talk about resolution on shareholder return made by the board of directors today.

KBFG's BOD today decided on a total of KRW 300 billion cash payout with DPS of KRW 804. DPS, including the paid dividend in 2024, amounted to KRW 3,174, which is an increase of around 3.7% year-over-year. Do note that total yearly dividend payout of KRW 1.2 trillion and KRW 820 billion of share buyback and cancellation during the year will amount to TSR of 39.8% for FY 24. The BOD today also resolved on KRW 520 billion of share buyback and cancellation as well. In accordance with our Value-up framework that aligns TSR to CET1 ratio, based on year-end CET1 ratio of 13.51%, capital in excess of 13%, which equals approximately KRW 1.76 trillion, was used as resources for cash payout for 2025 and first-half share buyback and cancellation.

For your information, we are looking at a slight year-on-year increase in total cash payout in 2025 by around KRW 40 billion, but nothing has yet been confirmed. Once the BOD decision is reached, we will make appropriate disclosure in due time. Next, moving on to breakdown and details of the earnings results. In Q4, in accordance with supervisors' interpretation and accounting rules, insurance subsidiaries, including KB Insurance and KB Life, applied changed accounting rules in relation to experience variance and expiring contract. Q4 2022 and Q4 2023 earnings have been restated retrospectively for your reference. The main lever behind the group's top-line performance in 2024 was bigger and sustained profit contribution from non-bank portfolio, defining solid earnings enhancement of the group. Firstly, in 2024, group NIM was KRW 12 trillion 826.7 billion, up 5.3% year-over-year.

Despite NIM moving downwards on the back of rate cut expectations, loan demand rose, expanding the bank's average loan balance, while interest income contribution from non-bank subsidiaries from credit card and insurance continued to rise. Group's net fee and commission income in FY 24 reported KRW 3 trillion 849.6 billion, up 4.8% year-over-year, or around KRW 176.1 billion. Now, this is despite suspension of ELS sales and depressed real estate PF market, which pushed down the bank and real estate trust fee income. Rather, on the back of increase in credit card merchant fees and cost efficiency gains, credit card fee income posted a whopping KRW 99.7 billion increase year-on-year. Also, with higher securities business net fee income for investment banking and steady lease fee income at the KB Capital, enhanced fee income across non-bank subsidiaries were key levers. Worth noting is fourth-quarter net fee commission income at KRW 997.2 billion.

Despite a decline in merchant fees following a short-term acquiring cycle and a decline in stock trading volume and other market events, securities made bigger contributions through acquisition financing, IPO, real estate PF, and other IB fees, driving 5.8% growth Q over Q.

Next, 2024 other operating income posted KRW 351.9 billion. And with the fading of the base effect from the previous year's bank social contribution program costs, it increased 8.5% YOY. However, Q4 other operating income due to a significant decrease in performance related to securities derivative products' effects caused by the rise of FX rates and the narrowing bond yield decline, as well as seasonal factors including cold waves and heavy snow, led to a reduction of insurance-related income and recorded muted performance. Next, I will cover SG&A. 2024 SG&A posted KRW 6 trillion 938.6 billion. And despite the increase in related costs, including ERP expansion and increasing depreciation and admin costs of subsidiaries, thanks to ERP implemented over the past several years, led to the reflection of the accumulated labor cost reduction effect and is being stably managed. In addition, 2024 group CIR posted 40.7%.

On the back of solid top-line growth based on core profit and efforts to improve HR structure and manage costs, it declined 0.4 percentage points YOY and is showing a marked improvement trend in our group's cost efficiency. Going forward, KBFG plans to strengthen cost efficiency improvement efforts. In particular, in the case of capital budget, we plan to refrain from Big Bang method large amount injections. Through diversified investments in line with market trends, we will minimize its effect. Also, in the case of recurring costs, we will minimize fixed cost expenditures in order to improve the rigid cost structure. Lastly, is group provisioning for credit losses. 2024 group provisioning for credit losses posted KRW 2 trillion 44.3 billion and decreased greatly YOY by KRW 1 trillion 102.1 billion.

This was attributable to the effect from preemptive additional provisioning late last year, preparing for potential real estate PF and other risks, as well as the effect from reversal of about KRW 263 billion yearly provisioning stemming from the bank's valuation re-rating. In addition, 2024 group credit costs posted 43 basis points and improved 24 basis points YOY, and some reversals took place at selectively normalized PF sites and is being stably managed within the expected range. On the other hand, Q4 provisioning for credit losses posted KRW 565.1 billion and increased 13.5% QOQ. And this was caused by the conservative provisioning stance of all subsidiaries preparing for potential economic condition worsening despite the bank's sizable provisioning reversals. Going into detail, according to the asset quality rating adjustment of the bank, around KRW 68 billion was provisioned against overseas CRE exposure.

In the case of securities, around KRW 58 billion was provisioned against real estate PF and overseas acquisition financing. Leasing subsidiaries, including card and capital, have provisioned an appropriate amount reflecting the recent asset quality ratio trend under a conservative management approach. From page nine, I will cover major financial indicators. First, Group's profitability indicators. As aforementioned, KB Financial Group's 2024 ROE posted 9.72% and improved 0.59 percentage points YOY. ROE on a recurring basis, excluding one-offs, stands at 10.76% level. In particular, as you can see on the right graph, this was a result of the business diversification efforts made during the past years and was possible since we secured an optimal business portfolio, including 40% non-banking contribution. Going forward, KBFG, responding to the low growth interest rate decline regime, will strengthen efforts for each business. On the other hand, continue RORWA-focused qualitative growth efforts.

Let's go to the next page. Next, I will cover bank loan growth. 2024 year-end, bank loan growth posted KRW 364 trillion and increased 6.4% YTD and 0.5% compared to late September. In case of household loans, following key interest rate cuts and real estate market transaction volume increase, saw an increase in home mortgage loans and credit loans centered on actual home buyers and rose significantly by 6.2% YTD. Corporate loans, as a result of solid growth rates centered on high-quality SME and SOHO loans, led to a 6.6% increase YTD. We plan to conservatively manage our loan policy, focusing on asset quality and profitability, taking into account factors including economic cycle, real estate market, and household debt trends and other factors this year as well, and on the other hand, minimize quarterly fluctuations considering RORWA and plan to manage so that loan growth will be predictable.

Next is net interest margin. Group and banks' 2024 yearly NIM posted 2.03% and 1.78% respectively and went down slightly YOY. Despite the fact that the effect from two rounds of key rate cuts that were made in Q4 was reflected early on in the market interest rate, bank NIM stopped at dropping 5 basis points YOY and once again proved profitable key management capabilities centered on internal soundness. On the other hand, Q4 bank NIM posted 1.72% and increased 1 basis point QOQ, which was a result of partial improvement of new and balanced loan deposit spread enabled through household loan growth speed control and following funding amount control as well. We expect the downward NIM trend to continue for the time being this year as well.

But in line with our asset growth speed, we will flexibly control the volume and speed of funding and strengthen ALM management to strictly manage our NIM. Lastly, let's go to page 12. I would like to cover group's capital adequacy-related indicators. First, as you can see on the graph on the left, 2024 end group BIS ratio posted 16.41% and CET1 ratio posted 13.51% respectively. I will explain in more detail regarding CET1 ratio on the right-hand graph.

Group CET1 ratio declined 33 basis points QOQ caused by the Q4 net income amount decrease, which limited its contribution to CET1 ratio to a 20 basis points level and 2.9% RORWA increase due to factors including FX rate surge in the quarter. In addition, KRW 3,300 billion of quarterly dividends and shareholder returns, including share buyback, which took place during the quarter, led to around 19 basis points level downward effect.

As you can see on the graph on the bottom right of the page, Q4 RWA posted KRW 346.9 trillion, a 2.9% increase QOQ. There was around KRW 7.5 trillion of credit risk increase due to FX rate surge, including quarterly $1 FX rate rising more than KRW 150. This contributed to a decrease of about 30 basis points to the Group CET1 ratio. However, despite these downward factors, Group, thanks to rebalancing efforts, including reduction in unused credit limit, is still maintaining the industry's highest level of differentiated capital capability. In order to steadfastly implement our Group's Value-up framework, we will strictly manage the RWA total amount limit. Through continuous ALM monitoring, we will manage the volatility of asset growth. To the extent that it does not impair revenue-generating ability, we will strengthen efforts to improve capital efficiency through efficient asset rebalancing considering our RWA.

Please refer to the details of our business results from the next pages. And with this, I will conclude KBFG's 2024 business results presentation. Thank you for listening.

Operator (participant)

Thank you for the presentation. We will now begin the Q&A. For those of you joining through the internet, please refer to the contact information on the very last page of the presentation screen. And for those of you using the phone, press star and one to submit your questions. Please bear with us one moment. From Hanwha Investment & Securities, Kim Do-ha, please go ahead.

Do-ha Kim (Analyst)

Thank you very much for taking my question. I would like to first get an insight on the guidance for your growth and margin.

The second question, I believe that these questions are upcoming, but if you look at CET1 ratio, in light of the FX sensitivity that we understand, even if the Korean won was weak, the CET1 ratio was lower than what we had expected. I think the outcome of the share buyback was less. I think the RWA increase was not mainly attributable to the bank. What were the key levers? Can we understand the FX sensitivity on a dollar basis? In terms of our shareholder return policy, the CET ratio of the year-end and mid-year is going to be quite important. I know that in order for you to control the year-end CET ratio, I mean, did you endeavor to do so?

Because if you compare it to other companies, we were able to see that there were a lot of efforts put in to really defend the CET1 ratio at the end of the year because the timing is an important factor. So of course, I'm not recommending that you arbitrarily do asset rebalancing in order to defend CET1. But having said that, that year-end CET1 is quite important. So on a year-end basis and mid-year basis, for you to control CET1 ratio, do you have intention to really focus on controlling that number through any specific policies?

Operator (participant)

Thank you for that question. Just give us one moment before we answer your question.

Sang Rock Na (CFO)

Hello, I am CFO Sang Rock Na. Thank you very much for the question.

Regarding the guidance on growth and margin, first, if you look at growth on a nominal GDP basis, that would be our key benchmark against which we will manage our growth. Basically, on a quarterly basis, we want to minimize the variability from one quarter to the next. So we want to be able to achieve a steady growth. Now, the market is looking at about one or two or three basis points decline. If you look at the secular trend, the decline in margin seems inevitable because of the rate cut cycle that we are in. However, we want to make sure that the volatility on the asset side is minimized and so that we can save on the funding cost, and not just interest, but we want to be able to narrow any fluctuations or the big fluctuations that we've seen in the NIM.

For CET1 ratio, if you look at Q4, the FX impact was quite sizable. So as we mentioned last year, KRW 10, the sensitivity is about two basis points for every KRW 10. In Q4, there's been a decline in profit and also with cash dividend payout in Q4. On top of that, we had had a share buyback and cancellation of more than KRW 100 billion. So the plus impact has been offset because of these levers. Now, FX increase had impacted on increase in RWA, which lowered the CET1 ratio. Now, as you've mentioned, we are not arbitrarily going to bring down the asset growth for Q3 and Q4 to keep to a certain number because that is going to impact our earnings capability in a negative way. We want to minimize the volatility and fluctuation as much as possible from one quarter to the next.

So if you take a look at our Value-up plan at the mid-year and year-end, yes, those are very important timing. Shareholder return is not just going to end with one single point. Basically, there is going to be sustainable shareholder return that is ongoing. So rather than arbitrarily cutting the level of asset, we want to make sure that we achieve steady growth of asset and striking a right balance between shareholder return and that asset growth. We felt that was important because if we try to increase this number arbitrarily at the end of the year, then that is going to work as a pressure on the shareholder return at the end of the day. So from a first-half basis, 13.51% CET1 ratio is what we've seen. We believe that we'll be able to increase that up more as we go forward. I hope that answered your question.

Operator (participant)

Thank you very much for the answer. We don't have any questions in the queue as of now, so we will wait. We will take the next question from HSBC Securities. We have Won Jaewoong on the line.

Jaewoong Won (Analyst)

Can you hear me?

Sang Rock Na (CFO)

Yes, we can hear you well.

Jaewoong Won (Analyst)

Thank you very much for the good performance despite the difficult environment. I have two questions. The first question is about shareholder return or Value-up because when you announced those plans, you mentioned that in the first half, if it exceeds 13% for that excess capital, you would use all of that for shareholder return, and after that, in the second half, there would be the amount exceeding 13.5%, that excess capital would be utilized for shareholder return, and there is some confusion on our part.

So I would like a more clearer understanding because I think with the profits that have increased, CET1 increase, it could be 0.2 or 0.3 per quarter. So in Q2, so when you have the earnings presentation in July, well, based on that, if it exceeds 13.5%, will that be used for shareholder return or after Q3 in September? If you look at the trend and if you had lower results in Q2, but if it goes beyond 13.5% at that time, would you be more flexible and let us know about the results? So is this a rigid schedule or is it more flexible in your approach according to the different circumstances? And my second question is about loan growth forecast and CCR forecast as well. Thank you.

Operator (participant)

We will soon answer your question. Thank you.

Sang Rock Na (CFO)

I would like to answer your questions and thank you very much for your insightful questions. In the second half of this year for shareholder return, we will be quite flexible. We're not going to have a hard pinpoint in June, but we will see the situation and there will be CET1 at the end of the year and we will need to take that into consideration as well as its repercussions, so we will be as flexible as possible, and for loan growth and CCR, I will ask our CRO of the Financial Holdings Group to answer that question. So I would like to invite Mr. Jong-min Lee.

Jong-min Lee (CFO)

I am Jong-min Lee, the CFO of the bank, and I would like to answer your question about growth. In 2025, considering profitability and asset quality, we will pursue appropriate growth centering on high-quality assets and also risk management.

We are expecting about 5% growth of the bank loan growth rate. For household loans, through improving non-face-to-face loan process and dedicated product expansion, we will have growth portfolio based on non-face-to-face channel growth. We will also have growth based on high-quality credit loans and mortgage loans that have profitability. We expect about 4% of household loan growth rate considering the market situation. For corporate loans, we will consider asset quality. We will pursue about 6% of loan growth for corporate loans. We will have control of the growth speed strategically of large corporations and have flexible growth considering the market's opportunities. For SME loans, we will have appropriate growth based on high-quality assets. For SOHO, we will have growth and have portfolio diversification for different categories and regions.

Hong Sun Yum (Chief Risk Management Officer)

I am the CRO of the group.

Thank you very much for your question related to CCR. For this year, like the previous year, the financial environment is slated to be quite subdued and economic outlook is not very good as well. So we will maintain our conservative provisioning stance as we had maintained. However, the CCR that we are expecting, we believe will be in line with the previous year about the mid-40 basis points level.

Thank you. Next, Mr. Jeong Tae-jun from Mirae Asset. Please go ahead.

Tae Joon Jeong (Equity Analyst)

Yes, hello. I am Jeong Tae-jun from Mirae Asset. Can you hear me okay? Yes. Can you hear me okay? Yes, we hear you fine. Please go ahead. Thank you for taking my question. I have two questions. The first one is that the shareholder buyback that you've announced, is it same as relating to the first-half figure?

Or when you made the Q1 earnings presentation, basically, if the capital ratio is in excess of what you have shared, would there be additional share buyback? In Value-up Program that you have mentioned, you specifically talked about phase one and phase two, but you now say that you're going to be quite flexible in paying out, conducting share buyback. So I would like to gain some more clarity on that. Second question is, when we calculate your TSR compared to last year, we think that the total shareholder return rate may go down on a year-over-year basis. Is this a possible scenario that we should be mindful of? Thank you.

Sang Rock Na (CFO)

Just give us one moment. I'm the CFO. Responding to your question, based on Value-up Program, we have, yes, phase one, phase two, first and second leg.

My previous answer is that with regards to timing of that second return, basically, it is on that aspect that we will be more flexible. In terms of TSR, compared to 2024, we expect TSR will rise in light of the year-end profit guidance and the CET1 ratio that we're projecting for the second half. And if we redo the calculation, we will definitely not scale back from where we were last year. So we expect there to be an increase. So just to add on that, basically, when we made the disclosure, it is two times. So the second is second half. This could be Q3, and it means the second half of the year. So thank you.

Operator (participant)

SK Securities, Seol Yong-jin, you're on the line. Please ask your question.

Yong Jin Seol (Research Analyst)

Thank you very much for the opportunity. I have a question related to insurance.

Yes, with regards to the insurance reform council regarding CSM and P&L and K-ICS, what impact does the recent rule change or rule revision have on these different indicators? Give us one moment to respond to that question.

Sang Rock Na (CFO)

Yes, thank you very much for the question. I will respond to your question. Out of all of the rule changes and regulatory changes, especially changes on the experience variance related assumption, basically, in Q4, we applied the best estimate figure. So KB Insurance, basically, the CSM impact was around KRW 400 billion downwards. Mostly, it had to do with assumption changes relating to lapse-supported product. Now, basically, this means that compared to previous Q4, there's been quite a bit of a decline.

Operator (participant)

Thank you very much for your answer. We don't have any questions in the queue as of now, so we will wait.

We have the next question from Goldman Sachs.

We have Park Shin-young. Please ask your question.

Shin Young Park (Analyst)

Thank you very much for the opportunity. I'm Park Shin-young from Goldman Sachs. You mentioned the CCR and the mid-40 basis points level outlook in your previous answer. And in 2024, regarding additional provisioning burden that existed, it seems a little bit high. So on a recurring level, do you think this will actually climb? And if that is true, then can you give us your assumption in that background or the outlook? Thank you very much.

Hong Sun Yum (Chief Risk Management Officer)

Well, I will explain about that in my answer. Regarding the mid-40 basis points level, you mentioned that it may be a little bit of a burden some level for us, but we are seeing the economy recover and seems to be delaying. And for real estate PF or for overseas CRE, it seems that there is a possibility that it could deteriorate.

That is why we have been preemptively provisioning, and we want to have additional provisioning on a conservative basis. Of course, we will have some reversals for our previously accumulated provisioning, but we believe that we need to be ready and prepared for this year. That is the background behind that. Thank you. You could understand it as a very conservative level of guidance of provisioning.

Operator (participant)

And Cho Ji-hyun, next question, please.

Ji Hyun Cho (Executive Director)

Thank you very much for the question. My question also has to do with credit cost. In Q4, you are more conservative in provisioning. And in 2025, you have also mentioned that you would be conservative going forward. But if you look at the increase in provision in Q4, it was not by a large margin. And you say that there are also factors that will drive reversals.

Can you provide a little more detail relating to this? The write-back of provisioning in Q4 had an impact on the overall size of the provision. We would expect that the 40 basis point will start to, well, will start to go down. Basically, what are some of the one-off factors in this mid-40 basis point guidance that you have just shared? Is it conservative as we stand, or is this just an appropriate level projection as of today?

Sang Rock Na (CFO)

Yes, let me respond to that. Regarding any one-off factors for the bank regarding real estate and valuation related, there were some write-backs which was booked. 40 basis point, your question is, is this a neutral projection or is it conservative? My answer to that is that we have taken a conservative stance. That 40 basis point is a conservative view that we have.

Operator (participant)

From NH Securities, we have a question from Jeong Jun-seop.

Jun-seop Jeong (Analyst)

I'm Jeong Jun-seop from NH Securities. Thank you for the opportunity. Regarding loan growth guidance that you remarked on, you mentioned about 5% growth that you are thinking of. I think it's a little bit higher than I had expected. Regarding RWA growth, do you think it will be a similar level? I would like to know more about your rationale.

Sang Rock Na (CFO)

Regarding the 5%, well, it could be seen as a little bit high, but for household loans, well, it's similar to nominal growth rate of 4% is what we are expecting. For corporate loans, we are expecting about 6% in line with the previous year. I don't think it could be seen as too high, but I think it will be appropriate thinking of the previous year and RWA growth rate about 4.5%.

So it will be a little bit lower than the asset growth rate. Thank you.

We do not yet have any other people have asked or submitted questions. If there are no additional questions, as I have guided at the very beginning, let us walk through the questions that we received from our shareholders before the start of today's conference call. But we will still wait a little more to see if there's anybody else who has questions. If there are no further questions, then why don't we move on to the questions that we received from shareholders? So there are three questions that we will be talking about today. The first one is some of the changes relating to the record date, the dividend record date of 2025. Second question is the cash dividend plan going forward.

Last question is the timing and the size of share buyback and cancellation in 2025. There may be some overlap with what we have already mentioned, but I would still like to turn it over to our CFO to respond to these questions. Yes, regarding the quarterly dividend record date this year with the adoption of the capital markets act revision, in the past, basically, the record date was set as of end of March, June, and September. Basically, we can change that to the date after the decision on dividend is made. When we make quarterly earnings presentation, it is at that point in time where we will be able to announce a date on which we will be distributing the dividend. Regarding the cash payout this year as well, basically, we will continue to implement equal quarterly distribution.

Last year, we have done about KRW 1.2 trillion of cash dividend payout. And according to this year's information, as you know, we have a total shareholder return amount. And if you subtract the share buyback and cancellation, the rest is going to be in the form of a cash dividend payout. So on a year-over-year basis, we believe there's going to be about KRW 40 billion increase, but nothing yet has been confirmed. But going forward, once we have the resolution by the BOD, we will be able to come back to you with more detail through disclosure. Another question was asked about when we will have the share buyback and cancellation for 2025. And we will have some changes according to CET1 results. And regarding the timing, as we had mentioned, we have first half and second half of the year. So there will be two rounds.

And it will be basically two rounds. And in the second half, we will be more flexible, keeping an eye on the trend. Thank you very much. We will conclude today's earnings release. And thank you very much for participating today.