Greetings and Summary
Good afternoon. My name is Peter Kwon, in charge of the IR department at KB Financial Group. We will now begin the earnings conference call for our first half results. Thank you for your participation.
We will have the CFO, Mr. Kim Ki-Hwan as well as the executives heading the major subsidiaries within the group. We will first have the earnings presentation by the CFO, Mr. Kim, and this will be followed by a Q&A. And now CFO Kim will present this year's first half results.
Good afternoon. I am Kim Ki-Hwan, CFO of KB Financial Group. Thank you for joining KBFG's 2018 first half earnings release.
Before going on to earnings highlight, let me brief you on the operational backdrop for the first half of the year. KBFG's loan asset displayed a solid growth of 4% year-to-date based on banks loans in won. Household loan on the back of real estate regulations was up 3%, mostly around non-mortgage loans, i.e., loans for cheonse, rental and prime unsecured loans. Corporate lending was up 5.1%, mostly around low-risk SME loans displaying an overall positive performance.
In terms of profitability, based on well-balanced business portfolio which underpins solid profit-making fundamentals and through continuous efforts towards cost efficiencies and asset quality improvements, profitability figures for this quarter was also overall positive. However, broader business environment for the financial industry cannot be deemed to be necessarily favorable. Under the rate hike cycle, there is growing concern for widening household and corporate credit risks, and with continuing global trade dispute, there is negative outlook for the Korean economy, which is known to have high external dependencies. Also, following the U.S. rate hike and strong dollar, there is greater concern for foreign capital outflow from emerging nations, and with higher volatilities of the global financial market, investment sentiment has been constrained, as shown through lackluster share price performance of domestic banks.
The company, therefore, has strengthened monitoring of various indicators and is closely following risk factors for the overall group in order to preemptively prepare for both internal and external uncertainties and also to diversify revenue sources and expand cross-subsidiary synergies as we enhance earnings stability. At the same time, as a leading financial group, KBFG is committed to its corporate social responsibilities in making a society where its citizens are most happy. To that end, we are taking more than just a passive donation but an active contribution befitting the stature of a leading financial group and, hence, are thinking hard about social problems and also discovering and designing various different programs.
In line with such efforts, we have multiple activities ongoing, such as providing support to build childcare facilities to respond to the issue of low birth rate, organizing expos for job seekers to solve youth unemployment problem, running a program to help start-ups and SMEs who have technical expertise and setting up funds to nurture social enterprises. Through such proactive corporate social responsibility programs, KB Financial Group is committed to bringing a real change to our society as the people's lifelong financial partner, and we believe such activities will eventually support the company's sustainable growth and corporate value enhancements.
(2p) 1H18 Highlights
let me now move on to first half 2018 financial highlights.
KBFG's first half 2018 net profit was KRW 1,915.0 billion which is up 2.9% YoY. On a recurring basis, excluding the one-offs of first half last year, including KB Insurance share bargain purchase gains, deferred corporate tax impact from BCC and gains from the sale of Myeong-dong KB Bank building, net profit was up around 17.3% YoY.
2Q net profit was KRW 946.8 billion. This is a slight decline QoQ due to the one-off gain from the sale of the bank's headquarter building in previous quarter. But on a recurring basis, it was up approximately 7%.
Also, first half 2018 operating profit was KRW 2,551.2 billion, underpinned by even growth from interest income and fee and commissions income, together with cost reduction and asset quality improvement which led to structural improvement for profitability. All in all, it posted a growth of 27.4% YoY.
Now moving on to the breakdown. First half net interest income was KRW 4,340.2 billion, up 10.8% YoY on solid loan growth, which led to a sizable increase in the bank's interest income and higher interest income contributions from the nonbank subsidiaries. 2Q net interest income was KRW 2,196.4 billion, driven by even growth in interest income across subsidiaries, including the bank, securities and nonlife insurance. It was up 2.5% QoQ.
Next is on the group's net fee and commission income. First half net fee and commission was KRW 1,224.7 billion, up 18.8% YoY. This is due to the bullish stock market, which led to higher sales of ELS and ETF, supporting a sizable increase in the bank's trust income and higher brokerage fee income from higher trading volume. However, in 2Q with the overall sluggishness in both the domestic and overseas equity market, fee and commission income dipped marginally QoQ, mostly around trust and fund sales commissions income.
First half group's other operating profit significantly improved due to the consolidation effect from KB Insurance. However, for 2Q, although there was gains from the block sale of loans to KAMCO, held by the Happy Fund, as part of the debt redemption program, with the rise in the FX rate and widening losses from derivatives and FX translation, there was a QoQ decline.
First half G&A expense was KRW 2,743.7 billion, rising 10.2% YoY on KB Insurance consolidation effect. But excluding this factor, there was only around 1.8% rise. 2Q G&A expense was down 2.9% QoQ, overall sustaining the group-wide cost efficiency improvement.
Next is on PCL, provision for credit losses. First half PCL was KRW 281.3 billion. Despite growth in loan asset, it was down 8.6% YoY, with cumulative credit cost recording 18 bps for the first half. In 2Q, there was a large-scale reversal with PCL, down 29% QoQ, coming in at KRW 116.8 billion. Lastly, group's non-operating profit in 2Q recorded a loss of KRW 20.9 billion due to one-off gain from the sale of Myeong-dong headquarter building in 1Q and higher donations in 2Q.
(3p) Financial Highlights
Next, on Page 3, our financial indicators. The group's cumulative ROA and ROE in the first half of 2018 recorded 0.85% and 11.24%, respectively. Core earnings growth is continuing on the back of diversified business portfolio, and the recurring ROEs maintained at a level higher than 10%.
And now the NIM. The group's NIM for 2Q was 1.99%. It contracted 1 bp QoQ because of the falling card NIM due to decreased returns on credit card revolving loans and cash advance assets.
The bank NIM remained steady at 1.71%, similar to the previous quarter.
Despite the asset repricing reflecting the hike in the market rates and portfolio improvement effect, growth was much more pronounced in the low-margin assets in 2Q, including the housing loans for cheonse and rent and loans for the police officers. In addition, the funding cost increased as funding for time deposits outpaced that for the low-cost deposits.
In the second half, in order to minimize the impact of the funding cost on the NIM, more focus will be on attracting retail customers' low-cost deposits, including more payroll transfer accounts. And by business segment, there will be active NIM management, such as portfolio and margin management based on profitability and adjusting the securities portfolio.
The top right shows the group CIR, which was 49.2% in the first half on a cumulative basis. It's showing a steady improvement due to the even growth of both interest and noninterest income, and also, the cost efficiency-driven efforts are paying off. Going forward, as the top line grows robustly and as the cost-cutting measures produce visible results, the group's CIR is expected to improve to mid-40% level in the mid-to-long term.
On the bottom left is the group's credit cost ratio. The first half cumulative CCR was 0.18% for the group and 0.01% for the bank, posting an improvement YoY. With the overall improvement in credit quality, we expect the subnormal cycle to persist for some time, and we expect this year's group credit cost will remain within the range of 20 to 25 bps.
As of June end this year, group BIS ratio and CET1 ratio were 15.14% and 14.59%, respectively. And the bank's BIS ratio and CET1 ratio were 15.89% and 14.84%, respectively, showing the industry's highest capital adequacy.
(4p) The Group’s digital strategy
The group's digital strategy is discussed on Page 4. KB Financial Group's digital strategy is summed up in the word ACE, in which A stands for agile, C stands for customer centric and E stands for efficiency. KB Financial Group aims to take the next leap forward as the customer's first choice and the first mover, quickly responding to the changes of the digital era enabling new financial environment for the customers through the use of new technologies.
We are witnessing rapid changes in the customer contact channels, especially in the bank. Looking at the digital banking transactions on the top left. The number of customers who engage in Internet banking reaches 23 million people or 72% of the KB Bank's total customer. The number of customers on Star Banking app or the mobile banking platform amounts to 14 million people or 45% of the total customers, out of which 61% are active customers.
Looking at the frequency of the channels used for transaction. The online channels account for about 90% out of the total banking transaction, indicating a clear shift in that direction. By major financial transaction type, 60% of the new installment deposit customers signed up through the online channel, and the channel is also picking up quite rapidly in the new fund and household loans as well. Especially for the household loans, there are a lot of Internet and mobile loan products available, and the annual growth rate is as high as 260%.
In order to respond to these digital changes in a timely manner, the group is enhancing customer access by digitalizing the customer contact channels. And by strengthening the channel linkage, it plans to provide customer-centered, seamless omni-channel services. As can be seen from the top right, the group has in place many platforms, including Liiv, which is core banking service-oriented platform; and Liiv On, the real estate specialized platform. By providing many online platforms suitable to different customers' needs, the group is expanding the contact points for the customers and reinforcing digital competitiveness.
For the sake of work efficiency, project-based agile groups are run within the group for speedy decision-making and implementation. Robotic process automation is introduced to maximize work efficiency by adopting digital technologies even in middle and back offices. We're also dedicated to building an inclusive financial ecosystem by discovering fintech start-ups with high-growth potentials, providing them with the right amount of support and internalizing relevant technologies within KB. Please refer to the following pages for the details.
And this brings me to the end of first half 2018 earnings presentation for KBFG. Thank you.