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Edited Transcript of 105560.KS earnings conference call or presentation 25-Oct-18 7:00am GMT

Q3 2018 KB Financial Group Inc Earnings Call

Seoul Oct 26, 2018 (Thomson StreetEvents) -- Edited Transcript of KB Financial Group Inc earnings conference call or presentation Thursday, October 25, 2018 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jong Cheon Lee

* Ki-Hwan Kim

KB Financial Group Inc. - Senior MD & CFO

* Peter Kwon

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Conference Call Participants

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* Chung Uk Choi

Daishin Securities Co. Ltd., Research Division - Analyst

* Jin-Sang Kim

HMC Investment Securities Co., Ltd., Research Division - Analyst

* Munyoung Cha

BNP Paribas, Research Division - Analyst

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Presentation

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Peter Kwon, [1]

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Good morning. This is Peter Kwon in charge of IR at KB Financial Group. We will now start the 2018 third quarter earnings conference call. Thank you very much for joining us. We will -- we have our CFO of KB Financial Group, Ki-Hwan Kim, as well as executives of our subsidiaries present on today's conference call. We will start with a presentation by our CFO, Ki-Hwan Kim, on our third quarter earnings before taking your questions. Now our CFO, Kim, will go our third quarter earnings.

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Ki-Hwan Kim, KB Financial Group Inc. - Senior MD & CFO [2]

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Good afternoon. This is Ki-Hwan Kim, CFO, of KB Financial Group. Thank you very much for joining our third quarter earnings conference call.

Now before going into our third quarter results I would like to share some business updates. In Q3 KB Financial Group once again recorded healthy results thanks to solid loan growth and stable cost management. In particular we delivered solid growth around high quality household unsecured loans and SME loans with KB Bank's Korean won loans growing by 7.3% YTD and 3.2% q-on-q. However, overall, outlook for the financial sector has been turning towards negative.

As trade dispute between U.S. and China takes on a long-term nature, the Korean economy has started to feel actual pressure also with accelerated U.S. rate increases, concern of capital outflow from [EM] has been increasing resulting in a higher level of global volatility.

At the same time, the Korean economy continues to face domestic challenges such as slowdown in exports, weak employment and concerns over household debt which has led to downward adjustment of our economic growth rate projections. Overall, concerns over the economy has been increasing. Accordingly, KB has strengthened its monitoring of various risk indicators as a part of its group-wide effort for preemptive risk management. Also each line of business is thoroughly preparing against change in their respective business environments. In particular, given the realistic possibility of the bank's growth being limited due to various household loan regulations and economic slowdown we will strategically prepare against such concerns at the entire group level.

In the case of KB Bank we will leverage our customer base as well as sales network competitiveness to gain a larger share of growth in the market while actively seeking growth opportunities such as mid-range interest rate loans by using our group level integrated credit management system. At the same time, we are accelerating overseas business expansion to overcome the limited domestic growth opportunities and to gain drivers for our future sustained growth.

Acquisition of stake in the Indonesian Bukopin Bank last July is a part of this initiative and we plan to continue to expand overseas at an active pace especially around Southeast Asian market with strong growth potential such as Vietnam, Indonesia and Cambodia by leveraging KB's retail bank expertise, risk management capabilities and digital technology.

As such, despite the challenging business environment as a leading financial group KB will continue its efforts to enhance enterprise value by persistently identifying future growth engines, strengthening the fundamental competitiveness of each subsidiary and maximizing intercompany synergies.

Now let's go over the third quarter results. 2018 Q3 cumulative net income was KRW 2,868.8 billion which is a 4% growth year-on-year thanks to balanced growth in both interest and noninterest income as well as the effects from consolidation of KB Insurance. When one-off factors from last year such as KB Insurance bargain purchase gain and corporate tax resulting from sales of BCC sales as well as this year's gain from sales of the Myeongdong building is accounted for, this is approximately a 13.3% year-on-year increase.

Q3 net income was KRW 953.8 billion which is a slight increase thanks to solid loan growth despite overall decrease in net fee income and commission income including bank trust commissions and security commissions due to weak stock market. Also third quarter cumulative operating income was KRW 3,879.3 billion which is a 22.4% growth year-on-year, reflecting structural improvement in the group's profitability as top line continues to improve while cost remains stable.

Now let's look at the results in more detail. Q3 cumulative net interest income was KRW 6,591.5 billion which is a 8.4% year-on-year growth. KB Bank's Korean won alone grew by 7.3% cumulatively leading to increased interest income. And also interest income contribution by nonbank subsidiaries is also continuing to expand.

Next, the group's net fee and commission income. Q3 cumulative net fee and commission income was KRW 1,747.7 billion which is a 14.8% year-on-year increase. This is mainly thanks to increased sales of investment products such as ELS and ETF with a strong equity market in the first half and also significant increase in trust income and security commissions with increased securities trading.

However when we just look at third quarter, fee and commission income was KRW 523 billion, which is a 12.2% decrease Q-on-Q as a result of significant increase in bank trust income due to decrease in new and early redemption of ELS with the overall weak stock market. Stock market related fee and commission income continues to slow down with greater volatility in the stock market in the second half of this year. And KB plans to expand fee income while at the same time managing volatility by decreasing dependence on certain products, increasing fee income base through active marketing to corporate customers and enhancing the competitiveness of KB's IB business.

Third quarter cumulative other operating income was KRW 42.2 billion which is a significant year-on-year increase, thanks to consolidation of KB insurance. Also this is a slight Q-on-Q improvement resulting from interest rate and lower exchange rate in Q3 which has helped increase security related income and derivatives and FX conversion related income.

Q3 cumulative G&A was KRW 4,074.3 billion which is a 7.3% year-on-year increase. When effects of KB Insurance consolidation is excluded G&A only increased by 2.4% and remain under good control.

Next, provisioning for credit loss. Third quarter cumulative credit loss provisioning expense was KRW 427.8 billion which is a 10.9% year-on-year increase despite increased loan assets, thanks to preemptive asset quality management and portfolio credit quality improvement efforts.

Credit loss provisioning expense in Q3 was KRW 146.5 billion and a large reversal of loan loss provisioning of approximately KRW 93 billion including Kumho Tire continued in Q3 keeping overall provisioning expenses at well controllable levels. Q3 cumulative nonoperating income was KRW 96.1 billion which decreased significantly year-on-year due to one-off factors last year including KB Insurance bargain purchase gain.

Next page is about our major financial indicators. 2018 Q3 cumulative group ROA posted 0.84% and ROE posted 11.10% respectively. This was a slight drop y-o-y. But taking into consideration the aforementioned one-off gains in 2017, including KB Insurance gains from bargain purchase, the group's recurring profitability is meaningfully improving and is steadily posting at around 10% to 11% of ROE on a quarterly basis this year.

Next is the bank's loans in won growth. Looking at the graph in the middle, as of September end 2018 bank's loans in won reported a 7.3% YTD and 3.2% Q-o-Q increase and posted KRW 252.1 trillion. Household loans increased 6% YTD and 2.9% Q-o-Q, centering on prime unsecured loans and Jeonsae loans and corporate loans grew 8.9% TYD and 3.6% Q-o-Q centering on prime SME loans.

We have been growing household loans in a limited manner for the past few years and have been growing based mainly on SME-centered corporate loans. We wish to continue these efforts so that we can pursue a more balanced loan portfolio.

Next, looking at the NIM. Q3 NIM posted 1.99% and bank NIM posted 1.72%. First regarding the bank NIM, because of the recent market environment low cost core deposit growth was slightly modest and the time deposit funding proportion expanded leading to a continued overall funding cost burden. However, due to the asset repricing reflecting this market interest rate rise and profitability centered portfolio management efforts NIM slightly increased Q-o-Q.

However, the group NIM despite the bank NIM improvement as a result of credit card asset yield decline leading to the card NIM drop maintained the previous quarter levels. We will exert all efforts to improve the NIM, including strengthening marketing capabilities to expand the low cost core deposit funding and managing profitability centered portfolio for different business segments. At the same time we will continuously diversify noninterest income sources so that the group's interesting income dependence can be gradually improved.

Let's go to the next page. Next is the group's cost-income ratio. On the CIR graph on the left side, Q3 cumulative group CIR posted 48.6%, a significant improvement Y-o-Y, thanks to group-wide efforts for cost efficiency improvements and is showing a clear quarterly improvement trend this year. Going forward with realization of the solid growth on the top line and cost cutting efforts, the group CIR is expected to improve in the mid to long term to a mid-40% level.

Next is the credit cost ratio. 2018 Q3 cumulative credit cost ratio compared to group's total loans posted 0.18%. This was a result of the group's efforts for preemptive asset quality management and portfolios credit quality improvement efforts and with the 2 bp improvement Y-o-Y downward stabilization is continuing. In particular, the bank's Q3 cumulative credit cost recorded 0.01% and is being maintained at a very low level.

The group's capital adequacy ratio as of end September 2018 posted BIS ration 14.93% and CET1 ratio 14.39% respectively. And with corporate loans centered growth RWA has been increasing leading to a slight decline Q-o-Q. But still the highest level of capital adequacy in the financial sector is being maintained. In a situation where internal and external issues are leading to continued uncertainty, solid capital power of KB will be regarded as our competitiveness.

From Page 5, I will explain about KB's loan growth for the past 5 years and the future growth strategy. As mentioned previously, there have been concerns about future bank rules with household loan regulation strengthening and the economic turn down. I believe the explanation given on this page will be helpful for your understanding. KB in order to better balance the loan asset portfolio has been expanding corporate loans centering on SMEs and has lowered the growth dependence on household loans, including housing collateralized loans.

As can be seen in the first graph, Kookmin Bank from 2015 has been selectively handling household loans and have seen limited growth compared to the market. However in the case of corporate loans, a relatively high growth rate has been achieved. With this the loan portfolios corporate loan proportion which stood at 43.2% at 2014 end has grown to 45.5% as of end September 2018, and the corporate loan size has grown approximately by KRW 30 trillion. In the same time period the corporate loans compound annual growth rate or CAGR posted 8.4% level, a result of the efforts of KB to break away from the existing household loan centered loan structure to better balance the loan portfolio.

On the other hand, as can be seen from the graph in the middle right-hand side, after 2014 the major growth drivers of our household loans were 3 types of loans, including unsecured loans, Jeonsae loans and collective loans. The size of the loans grew by KRW 24 trillion, and the proportion of these loans in the overall household loans expanded from 35.8% in 2014 end to 46.6% percent. On the other hand, in the case of other housing collateralized lending as a result of selective handling for portfolio adjustment and risk management, there was a reverse growth in the same period.

On the whole, KB clearly changed the household loan growth momentum. To add, we have been expanding our corporate loans but also steadily improved our portfolio's credit quality. As an example, as you can see on the graph on the bottom, the loan proportion of prime borrowers with a credit rating of triple BBB- or higher among corporate loans has expanded greatly from 55.4% at end 2014 to September end 2018, 76.6% respectively.

Next, I would like to elaborate on KBFG' growth strategy. First, KB aims to utilize the current situation of household loan regulation strengthening as a positive opportunity to accelerate efforts for balanced growth between the household and corporate portfolio. Since we have been focusing on prime household unsecured loans and SME loan growth strategically and lowering our growth dependence on real estate related loans, we believe that the shock from the regulations will not be relatively high and we wish to focus more on prime SME loan expansion.

Second, since the real estate market under the influence of many regulations is expected to change to a real demand-based market based on our exceptional customer base and channel network, this will be an opportunity where KB's sales capability can be exerted. In particular, we want to responds from a group-wide basis collaborating between all subsidiaries including banks, securities, card and capital.

Third, in order to gradually lower the dependence on loan assets in growth and to expand the growth basis, we wish to widen the collaboration scope between [WB] and CIB. In the case of WM, we want to expand the group collaboration system to the subsidiary's asset management efforts. In the case of CIB, through expanding large corporate customers, proven cooperation capabilities and programs to the SME, we want to expand synergy creation opportunities.

Lastly, with the digitalization turning point we want to preemptively expand the corporate sector's growth momentum. We have established a mid- to long-term corporate finance digitalization road map centering on CMS and trade finance from 2017. And it's implemented in stages and have also tangible results including the first new product launched in the financial industry in the area of supply chain finance.

KB Financial Group has for the first time in the financial industry integrated the subsidiary data in the group, leading to the establishment of the group integrated credit rating system. Based on this we will activate the group's integrated mid-interest rate loan service.

Likewise, we will actively uncover growth opportunities in the difficult business environment and expand the growth momentum so that the corporate values can be strengthened. Please refer to the detailed information on the next pages for your reference.

With this we will conclude KBFG' 2018 Q3 business results presentation. Thank you for listening. Now we will open the floor for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take the first question from Hyundai Motors Security, Mr. Kim.

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division - Analyst [2]

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I have 3 questions. The first question is about your positioning, it's still very low, yes, but I think considering that there was a large reversal of your provisioning it seems that at least versus the previous quarters your provisioning in Q3 was relative large. What are the reasons? Do you have any signs of concern about asset soundness? And can you give us some outlook on that, on provisioning? The other is about loan growth. As the CFO already mentioned with the new real estate policy and stronger CSR I think it's inevitable that your loan growth will slow down. Can you give us a bit more detail of how much impact that would be? You mentioned how you will be countering it. So based on that what would be the loan growth you're expecting next year? And Shinhan Holdings recently bought -- Shinhan Financial Group recently bought Orange Life. I think you have enough capital to go out and do an M&A. What are your thoughts or plans about MNA? Are you interested about a life insurance company? Are you still valid on that point?

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Unidentified Company Representative, [3]

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Yes. Thank you very much for your wonderful questions. We will prepare the answers to your questions if you give us a minute. Thank you very much. These were very large 3 questions, so please excuse if I take a long time to answer all of them. First about the credit loss provisioning in Q3. Even though the absolute amount of provisioning expense has come down, I think that sort of shows a lot of fluctuation relatively even if there are any credit quality issues. Q3 provisioning in that sense appears to be an increase Q-on-Q because we're at such low levels. Considering the amount of reversals that we saw previous quarters, we have no concern about asset quality. Asset quality deterioration was not a factor in any of our provisioning. One is that there was a long holiday in September and therefore there were some delinquent assets that actually were not collected on time because of the long holiday and that was about a KRW 11 billion effect on the credit card side of provisioning increase but that has all been resolved as of October. Regarding asset soundness outlook, our asset quality outlook whether we're seeing any signs of deterioration. Well in the non-bank subsidiaries capital and KB card has about minus 2 bp credit cost ratio. But this is mainly because of the temporary effects due to the long holiday in September, and that's actually making it impossible to collect the loans during the holidays. During the past several years we have been monitoring our asset quality and we are actually at the best quality ever in the past several years. And we will continue to very vigilantly monitor our asset quality. Now, from next year we are under the premise that there could be several issues coming up at the same time next year, and so we have already a monitoring and preemptive control program in operation. About our outlook next year in terms of asset quality. Some of the risk factors that we are looking at on our radar is the U.S. interest rate increase, U.S.-China trade tension, the economic uncertainty that may follow. These are the main risk factors on our radar. With higher interest rates there could be a large credit charge and many of the SOHOs and there could be marginalized loans. There are these migrations that theoretically may happen but we are already analyzing the potential impact and making countermeasures. For example, leading indicators for household loan delinquency is already in place and being monitored and we have segmented the household loans. In this -- also in these borrowers at multiple loans and other at-risk borrowers we have a customized counter policy. Also we actually are monitoring the total amount of loans for borrowers with multiple loans as well as their asset quality. Regarding SOHO and household loans, actually we have created a system that combines SOHO borrowers and household loan borrowers and actually identify whether they are the same borrower so that we are able to manage the loan exposure at the same borrower level. We also have impact analysis of margin, know companies that are at most risk. Regarding the U.S. interest rate increases, we are actually very closely monitoring. For example, companies in the export center or that will be affected by supply chain issues in case the U.S.-China trade dispute becomes long term. So we continuously are monitoring the companies in terms of [TE] and early warnings to identify signs early on. Also in terms of risk management at the group level, which is an ongoing process, of course we have run a stress test, if I share that report, even if the base rate goes up by a 100 bp, stock prices come down, the interest rate come down and household prices or housing prices decline, in all of that worst-case scenario our credit cost for the bank will not go above 20 bp even in these extreme scenarios bank credit cost being at 5 to 10 bp. Group even in the worst case will stay below, about 20 to 25 bp in terms of credit cost. So we are very vigilantly monitoring our asset quality to minimize any possible impact down the road. In terms of negative economic outlook, we are preparing against it by operating a very conservative provisioning policy. Now, about your second question. Regarding the impact from the loan regulation, the government measures. Regarding the September 13th real estate government measures. Well actually even preemptively before that we have been actually doing our rebalancing. So we are actually cutting down on our household loans. And for our real-estate it's about the 20% or so. So you can see the lease business is a very small part of our corporate loans. And for the commercial type of real estate that are quite vulnerable to real estate economy, we have been actually reducing 30% to 40% of the commercial real estate because it's vulnerable and it's the lowest level in the industry. We have been actually preemptively preparing even before the September 13th real estate government measures that have been publicized. And the -- for the Jeonsae loans or the other loans we know that there will be quite limited and with these are regulations that are strengthened. We know that the unsecured loans will also have a difficult situation. We did some internal analysis. And regarding the September 13th government announcement, we believe that KRW 2.4 trillion will go down. And for the income it will also not be a great amount. So we have come up with preemptive measures even before this. And regarding the DSR from March of this year we have been actually been actively doing the DSR. And for the household loans, for the new loans that we'll handle, the average DSR has been 34.4% and for those with DSR ratio of higher than 70% is worth about 14%. So overall, for the unsecured loans the average DSR was about 32%. So for the home -- collateralized loans it was about 41%. So even if you adopt the strengthened guidelines, it will not have an impact on us, or even if a slight impact. We could have a downturn in our loan growth but for the asset quality management we will have more high quality reviewing of our borrowers. And we believe that it could actually work in our favor positively. Regarding the loan growth for next year, well, for our household loans we have grown until the end of September by 6%. But we believe there will be a downturn. And regarding the downturn we will come up with strategies to come up for the offsetting and we will continue to grow. We are currently drawing up our management plans for next year so I cannot give you the exact target. But regarding the potential U.S. interest rate hike and U.S. trade issues, we know that the U.S. economy might see some changes going forward. So overall, we believe that we could cautiously say maybe 4% to 5% growth. So for the company's 7% to 8% and for household 2% to 3% and for households it will be mostly for the prime unsecured loans and collective loans. And for the housing loans it will be Jeonsae or collective loans. And if we dominate the market, we believe that it will not be difficult to reach 2% to 3% growth. And for corporate loans we have been continuing uncovering new companies and consulting to our existing companies, our customers. And with collaboration between us and the bank we will extend and strengthen our prime SME loans. And we believe that we can meet the 7% to 8% growth goal. Regarding downturn of the retail market, the capital market or CIB or the fees and commission business. To those types of businesses we will actually diversify our profitability. And regarding the potential downturn of the real estate market for the vulnerable borrowers we are going to continue our monitoring and we're going to have a very conservative provisioning policy. And about the M&A strategy which was your third question. Well, in terms of the group's business portfolio, I guess the part that's relatively weak is life insurance. And we are very favorable towards acquiring a life insurer when the opportunity arises. However, if there is other good opportunities, we're also open to the idea of acquiring other businesses such as securities or M&A overseas. So both possibilities are always open as well. So KB Financial Group actually is looking to various opportunities at different angles to how to make its business portfolio stronger or more diversified. And so we are not restricted to a certain sector or region. Regarding acquisition possible of a life insurance company as we have repeated several times, we don't think that it's something that's very urgent. And so we will take our time to see if there's a good opportunity that arises in the past -- in the process of industry reorganization. Thank you very much. I hope that's answered your questions.

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Operator [4]

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We will take the next question from Daishin Securities, Mr. Choi.

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Chung Uk Choi, Daishin Securities Co. Ltd., Research Division - Analyst [5]

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I am Chung Uk Choi from Daishin Securities. I have 2 questions. The first question is about your policy. And next is about the alleviation or separation between industry and finance. As you know, in the global stage securities market and in Korea the securities market went down and plummeted. And for KB also it suffered. So for the yearly profit it seems to be going up. And for Q3 you can see -- for the CET1 ratio it went down. But I think you have enough room to have a buyback of shares. So do you have any internal plans for buyback of shares and to next year? I'm curious about the dividend yield or payout ratio and any plans to actually push it up. You mentioned this previously. And because of the strengthened loan regulation environment, the growth potential will probably be lower than this year. And I believe that your investors really are pursuing this. So I'm curious about the dividend payout ratio prospects. Second is the alleviation of the industry and financial sector separation law. And it will be quite easy to have more investments in finance. And there are some people that say that neighbor or others are going to get internet bank licenses. And for KB I know that you are a shareholder of Kakao. And what do you think will be the competitive landscape for the Internet-only banks and others? And how are you going to respond on a group basis?

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Unidentified Company Representative, [6]

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Well, we will be preparing your answers, if you give us a minute. Thank you very much, Mr. Choi, for your questions. And regarding the share buyback, return to shareholder value, well regarding the share buyback possibility it is true that we are undervalued compared to our fundamentals. And in order to actually push up our shareholder value it is -- and to actually have a higher stock price, we do know that there are comments about the share buyback going forward and comments that it is needed. We understand where you're coming from. And during the past 3 years we have actually bought KRW 1.1 trillion of our own shares in 3 stages. And we always are open to the additional share buybacks. And I would like to tell you that we are always thinking of how to enhance our shareholder value including possibilities such as share buyback so that we can meet the expectations of their shareholders. Regarding the dividend payout ratio, we have been communicating steadily that through the mid to long term we want to at least have a upward push of our dividend payout ratio to 30%. However, because realistically it is hard to push it up quite rapidly for next year, for example, it's 23.2% this year, but maybe 24% or 25% can be our goal for next year. And we can have a gradual rise, so that we can push it up to the 30% percent level, that is our mid to long-term dividend payout ratio goal. There are Japanese banks that have been actually maintaining a low dividend payout ratio, but recently they're showing 30% level of dividend payout ratio nowadays. So I think that could be a good benchmark opportunity for us. It is true that probably our current dividend payout ratio is not a level that can satisfy our shareholders, but we will try our best. And we also will have better returns to our shareholders through inorganic growth through M&As and through share buyback possibilities. Regarding the Internet-only banks that you asked about. It is true that if there is alleviation of the separation of industry and finance, Internet-only banks can be additionally established. And through the expansion of capital, they can aggressively market themselves. However, for the Internet-only banks they will only have limited businesses for the loans to companies. And taking into consideration the household loan regulation environment it will be difficult for them to have asset growth. For the Internet-only banks we will need to see whether their performance will continue as they had high performance in the beginning. And we will need to see whether this will be connected to their profits in the future. And we also will need to have a keener eye on them if they can actually respond in the interest rate cycle and the economic downturn cycle and if they can have true risk management capabilities. We also have the Internet-only because UI/UX, the transaction convenience and the product attractiveness aspect that we can learn from, from the Internet-only banks. And we are trying to benchmark them very actively. However, in the case of KB we have face-to-face channels. We can improve the convenience of our customers. And for asset management or the corporate services we can have our own competitiveness with our many face to face channels. In addition, based on our portfolio between the different subsidiaries in our group, we can also offer diverse products and services. So that is why we are more at a more advantageous position compared to Internet-only banks and we are also uncovering many new businesses that have synergy between online and off line. So we are going to strengthen not only our face-to-face but also online channels as well. To summarize, the loan market penetration rate of Internet-only banks is only about 2% for overseas markets according to our research. And considering the capital management and profitability aspects, we believe that rather than them emerging as our direct competitors, they will probably compete with us in certain areas on a limited manner and we will be preparing for those actions in the future. Thank you.

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Operator [7]

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We will take the next question, DB Financial Investments, Mr. Lee.

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Jong Cheon Lee, [8]

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I have 2 questions. The first question is a simple question regarding CSR. I think you gave us a very detailed explanation of CSR. What about RTI? What would be that impact? Have you done any assessment? The other is that it's related any way the loan demand –- there is going to be a lot of pressure downward. And so even the collective loans or Jeonsae deposit loans is that going to change too in terms of demand? How are you going to counter that? My second question is the RWA did increase. I think more than most people expected. And as -- if you maintain that growth rate that you provided as guidance, your RWA may look very different to what it looks now. So if you have that payout ratio that you provided as guidance, what would be after dividend payout end of this year? And next year RWA how much do you think RWA would increase? And what would be the reasonable level of CET1 to expect end of this year post dividend and next year?

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Unidentified Company Representative, [9]

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Yes. We will prepare the answer. Well, it's nice to talk to you again, Mr. Lee. If I may answer your second question first. And regarding the RTI and mortgage impact, I will ask the CFO of KB Bank to answer the first question. You mentioned about the expected RWA or CET1. Given the payout ratio guidance that we provided and so this year our BIS ratio RWA increased by about KRW 8.1 trillion assuming, and if it increases more than our income increase our BIS ratio declined slightly due to that about by 19 bp. CET1 ratio also dropped by about 18 bp because our RWA increased faster than our income. Now as of end of third quarter, we issued KRW 300 billion of [subdebt] which has increased our CET1 by 10 bp. Also there will be window dressing effects and our RWA will come down as a result of that. So end of the year actually we are expecting low 15% maybe 15.1%. Below 15.1% is the outlook that we have about the capital ratio. Next year we are currently in the process of establishing our strategies for next year including loan growth. So we have to consider our piece of growth as well as the amount of risk we will be taking on. But basically in terms of capital adequacy, our target is 15% for BIS and 14% for CET1. Those are the guidelines that we are operating against for BIS and CET1.

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Jong Cheon Lee, [10]

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My name is Lee Jong Cheon. I'm the CFO of KB Bank. You mentioned RTI. And the lease business operators where there's about KRW 20 trillion under SOHO and there is about KRW 2 trillion under SME. So in combined it's KRW 22 trillion of loan balance that's subject to RTI. So it's only about 20% of our total corporate loan book. And the 1.5X of RTI it will be the impact. And we've done simulation. And the impact of this new RTI level is limited. The Jeonsae deposit loans and the mortgages, well, the impact of the new real estate policy is that there will be no Jeonsae deposit loans for people with 2 houses, people with no houses is not impacted. And so that will be the policy towards new customers coming to us for Jeonsae deposit loans. There are existing customers who already have deposit loans. And so we have to track whether they are 2 householders or 3 houses, how many houses they own. We are in the process of identifying that. So we need to do that first before assessing the impact. In terms of mortgages, we're thinking that that will have an impact about KRW 2 trillion decrease in mortgages due to the new real estate policy.

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Operator [11]

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We'll receive the next question from BNP Paribas, Cha Munyoung.

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Munyoung Cha, BNP Paribas, Research Division - Analyst [12]

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I am Cha Munyoung from BNP Paribas. I have 2 questions. First question is about your margin and NIM prospect going forward and your outlook. I want to know in more detail. And there are some external variables like the market interest rate or the interest rate hike that we cannot control. But there are some variables that we can control. For example, strategies or spread or funding structure. So can you explain this on a yearly basis for the basis of that outlook? And related to KB Insurance, I'm curious about the business cycle going forward? And there was -- it was consolidated this year but the proportion was small but I believe that looking at the earnings it was not quite good and there was the car insurance and others that the premiums will be adjusted. And can you give us your outlook for KB Insurance as well?

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Unidentified Company Representative, [13]

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Regarding the NIM outlook, let me elaborate. For Q3 the bank had 1 bp going up, reflecting the market interest rate rise, so the asset repricing and with the portfolio adjustment Q-o-Q there was 1 bp rise. And on a yearly basis for the NIM and the delayed response to the interest rate hike, actually it is lower than we had expected. But for this year for the bank on a yearly basis the bank NIM will be similar to last year's level. Or in Q4 I believe that to spread management and other measures it might go up 1 bp within that range. Regarding our NIM management, regarding the difficulties, well with the interest rate going up our core deposits, the low-cost core deposits went up. So that is why we had the funding burden and for our management because we have been growing our prime loans, some of the spread was actually shortened and that is why with asset quality improvement we had some of the contractions. Going forward, in this process this year the NIM was not as high as we had expected, but regarding next year's NIM outlook currently because we are drawing up our business plans if that is finalized we will communicate with guidance and with the asset growth with our growth it will be 1 to 2 bp expansion. With our -- centering on profitability and if there's interest rate hike in November then it will be Y-o-Y 1 bp increase or so. So regarding the bank NIM, the previous CFO - the CFO from the bank can explain if he wishes and then I will actually give the floor to KB Insurance CFO.

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Jong Cheon Lee, [14]

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For KB Insurance about KRW 100 billion per quarter, so about KRW 400 billion per year should be our net profit -- net income. But for the -- the -- this year loss ratio especially for automobiles has gone up so there was about KRW 60 billion of impact. And there was increase in the different long-term expenses for the long-term policies. So there was an additional burden for that. That is why the level of profit was lower than we had expected. But this year we believe for KB Insurance for each quarter about KRW 70 billion to KRW 80 billion will be the final number. So after Q4 we will improve our product mix or structure and to have better competitiveness so that we can have more revenues to finalize in end of the year. And for the underwriting or compensation we will have more efficiency so that we can improve our loss rate. We also will have company-wide cost efficient measures. So it is true that the insurance industry is having a difficulty in many different aspects but we want to have more than KRW 40 billion of yearly income on a recurring basis.

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Operator [15]

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Currently no questions are waiting in queue. We will wait for a few minutes. We are actually engaging quite in-depth Q&A. Currently there is nobody asking for an opportunity to ask questions, but we will wait. Since there are no further questions we will close the earnings conference call here. This completes the 2018 third quarter earnings conference call. Thank you very much.