Greetings and Summary
Greetings. I am Peter Kwon, the head of KB Financial Group IR Department. We will now begin the 2018 Q1 Business Results Presentation. I express my deepest appreciation to all participants. We have here with us today KBFG's CFO and Senior Managing Director, Ki-Hwan Kim, as well as other group executives. Today, 2018 Q1 results will be covered by CFO, Ki-Hwan Kim, followed by a Q&A session. I would now like to invite our CFO to cover Q1 business results.
Good afternoon. I am Ki-Hwan Kim, CFO of KB Financial Group. Thank you for joining KB Financial Group's First Quarter 2018 Earnings Presentation.
This year, under the vision of Global Financial Group Leading the Asian Financial Industry, all our employees and the management are focused on recovering the bank's profitability and expanding synergies across subsidiaries. During the first quarter, we've seen solid growth around high-quality corporate loans. And driven by improving cost efficiency and risk management, we were able to achieve sound performance. After launching the integrated KB Securities in order to expand the securities business, KB Insurance and KB Capital became 100% completely owned subsidiaries, and KBFG was able to have a meaningful year in 2017, going one step toward our vision of regional leading banking group.
For the Korean economy, on the back of global economic recovery and better Korea-China relations, GDP growth is expected to be around 3%. And with the holding of the summit talks between the 2 Koreas, geopolitical risk is expected to alleviate, creating an overall favorable backdrop. Under such backdrop, underpinned by stable group margin, we plan to grow loans to high-quality SMEs. And by offering proactive support to promising venture, start-ups and SMEs with technological capabilities, we would position ourselves as a leading financial group living up to its role as a financial partner in the inclusive society.
Also, we are mindful of policy rate hikes from the United States, reversing the interest rate differential between Korea and the U.S., which can heighten concerns over capital outflow, earnings deterioration of export companies due to stronger Won, higher credit risk and borrowers on the margin going bad. And so we are thoroughly preparing to respond to such concerns preemptively. I also like to note that we have been bold in removing inefficiencies from the organization and speeded up adoption of innovative systems, thereby improving overall operational efficiencies.
Based on the balanced business portfolio, we will exert our best efforts this year to further enhance profitability towards becoming a financial institution equipped with global competitiveness. Please note that starting Q1 of 2018 results, we applied Korean IFRS 1109, IFRS 9, in representing our statements.
(2p) 1Q18 Highlights
Let me now move on to Q1 2018 earnings results. KBFG's Q1 2018 net profit was KRW 968.2 billion, up KRW 98.1 billion, which is 11.3% rise Y-o-Y, driven by the bank's net interest income and non-banking subsidiaries' commission income growth and consolidation effect of KB Insurance. There was a one-off gain from the sale of Myeongdong KB Bank building amounting to KRW 115.3 billion, after-tax basis KRW 83.4 billion. With the Q4 impact of the bank's PS and ERP expense removed, there was a significant Q-o-Q growth of 74.9%.
Looking at each performance line item in more detail, Q1 net interest income was KRW 2,143.8 billion, up 15.9% Y-o-Y. With solid growth of loan assets underpinned by high-quality SMEs loans as well as rising market interest rates and our efforts to expand on low-cost deposits, NIM improved. However, in Q1, despite solid growth of 1.8% in loans in won, due to the difference in recognizing interest income between IFRS 9 and the previous accounting standards and higher borrowing costs for KB Securities, there was a slight Q-o-Q decline.
To note one point regarding accounting treatment of net interest income, of the financial assets at FVPL, we have previously classified interest income from certain assets like bonds under other operating income. But for better comparison with other companies, we reclassified them to interest income from this quarter. Please note that we applied such treatments retroactively on the relevant figures. For your information, the amount reclassified under interest income from other operating income ranges from around KRW 120 billion to KRW 140 billion per quarter.
Next is on the group's net fee and commission income. Q1 fee and commission income was KRW 628.9 billion, up 20.8% Y-o-Y and 19.1% Q-o-Q, recording for the first time KRW 600 billion in a single quarter. This was driven by growth in equities trading volume on the back of bullish stock markets, leading to a great expansion of brokerage commission income as well as higher trust fees for the bank on the back of bullish ELS and ETF sales.
Q1 other operating income declined Q-o-Q with the dissipation of FX-related one-off gains from the previous quarter and rise in loss ratio, which lowered the insurance profit. But there was a significant improvement Y-o-Y with the consolidation effect of KB Insurance.
Q1 G&A posted KRW 1,391.7 billion and rose 19.2% Y-o-Y with KB Insurance consolidation. On a recurring basis, G&A rose KRW 18.3 billion, a 1.6% growth and is being maintained stably. In addition, compared to the previous quarter, G&A improved greatly by 24% Q-o-Q as a result of the removal of the bank's one-off costs recognized in Q4.
Next, Provision for Credit Losses. Q1 provisioning for credit losses posted KRW 164.5 billion, an increase from the previous quarter when approximately KRW 60 billion of large-scale write-backs took place. It is still being maintained at a low level of 23 bps of Credit Costs.
Lastly, Q1 non-operating profit posted KRW 116.3 billion, with the one-off gain reflected from the sale of the bank's Myeongdong building.
(3p) Financial Highlights
I will now elaborate on the major financial indicators from Page 3. 2018 Q1 the group’s ROA posted 0.87% and ROE 11.45%, respectively. In particular, in the case of the group’s ROE, excluding Q4 of the previous year when one-off costs rose greatly, from 2017, it is being maintained at a level higher than 10% continuously for each quarter on a recurring basis.
Next is the NIM. Q1 NIM posted 2% for the group and 1.71% for the bank, respectively. Group NIM improved 2 bps Q-o-Q with the card NIM increase effect from card loans and installment finance interest rate hike. The bank NIM recorded a similar level to the previous quarter due to factors including funding cost burden related to Mugunghwa loan for police officers and others.
Next is the group's Cost-Income ratio on the upper right-hand side. Q1 the group’s CIR posted 50%, a great improvement compared to the previous quarter, which had sizable one-off costs. The group's recurring CIR, excluding KB card ERP-related one-off costs, recorded 49.6% and is estimated that it will reach to a high 40% level, which is this year's group management goal.
Looking at the group's Credit Cost Ratio graph on the bottom left side, Q1 credit cost ratio compared to the total loans posted 0.23% for the group and 0.08% for the bank, respectively, and greatly improved from 39 bps in Q1 of the previous year when sizable provisioning took place against DSME.
As of 2018 March-end, the group’s BIS ratio and CET1 ratio posted 15.08% and 14.52%, respectively, and the bank's BIS ratio and CET1 ratio posted 15.8% and 14.89%, respectively, and is still maintaining the best level of capital adequacy in the financial sector.
(4p) Financial Impact under IFRS9
From Page 4, I will elaborate on the aforementioned financial statement impact related to the implementation of IFRS 9. IFRS 9 is an accounting standard, which reclassifies financial products according to the business model and contracted cash flow into FVPL, FVOCI, and AC, applies the expected credit loss regarding the expected loss period when recognizing the loan loss provision.
Let me now elaborate on the financial impact from the implementation of IFRS 9.
As aforementioned, for loans and some financial products, the loan loss provisions recognized applying the expected credit loss for the expected loss period or lifetime and with the factors including increase in loan loss provisions, the group’s total assets declined 0.13%, approximately a KRW 570 billion decrease compared to the previous accounting standards.
Regarding the reclassification of financial assets, FVPL financial assets increased KRW 12,994 billion but FVOCI financial assets declined KRW 12,136 billion. Theoretically, the increase of FVPL financial assets can be through the expansion of earnings volatility because of fair value assessment.
However, among the securities that we hold, POSCO and SK securities have been classified as FVOCI, thus we expect minimal earnings volatility. The group's net assets due to the aforementioned provisioning increased and tax effect decreased 1.24%, approximately by KRW 420 billion compared to the previous accounting standards. The table on the upper right-hand side is the opening balance comparing IFRS 9 with the previous accounting standards.
I will not cover the other pages as they are explained in detail on the paper related to the performance that I have covered already. With this, I will conclude KBFG's 2018 Q1 business results presentation. Thank you for listening.