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Edited Transcript of 105560.KS earnings conference call or presentation 20-Apr-17 7:00am GMT

Thomson Reuters StreetEvents

Q1 2017 KB Financial Group Inc Earnings Call

Seoul Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of KB Financial Group Inc earnings conference call or presentation Thursday, April 20, 2017 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jae Keun Lee

KB Financial Group Inc. - MD and CFO

* Peter Kwon

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Conference Call Participants

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* Byung Gun Lee

Dongbu Securities Co., Ltd., Research Division - Team Leader

* Chan Young Hwang

Macquarie Research - Head of Korea Research

* Chung Uk Choi

Daishin Securities Co. Ltd., Research Division - Analyst

* Jaewoong Won

NH Investment & Securities Co., Ltd., Research Division - Analyst

* Jinsang Kim

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

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Presentation

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Peter Kwon, [1]

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Greetings. I am Peter Kwon, IR manager of KBFG. We will now begin 2017 Q1 business results presentation of KBFG. We express our deepest gratitude to all participants.

We have here with us our Group CFO, Lee Jae Keun; as well as group executives. First, our CFO, Lee Jae Keun, will give a presentation on 2017 Q1 business results, and then we will have a Q&A session.

Now I will invite our CFO to deliver presentation on Q1 earnings release.

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Jae Keun Lee, KB Financial Group Inc. - MD and CFO [2]

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Good afternoon. I am Lee Jae Keun, CFO of KB Financial Group. Before going into Q1 2017 earnings results, let me present on the overall business highlights.

In Q1, despite a bit of a slowdown in loan growth led by household loans, driven by aggressive NIM improvements and core marketing with newly launched KB Securities, core income displayed sound growth.

Thanks to a series of ERP and corporate-wide cost controls, G&A was kept at a sound level, with overall asset quality and credit cost within the expected stable range.

Also, last Friday, as you know, the BOD resolved to conduct tender offerings and share swap for acquisition of outstanding shares in KB Insurance and KB Capital. Once this process is complete under an accountable management of the majority shareholder, both companies' business activities will become more efficient, which we expect will lead to better group-level profitability and synergies across subsidiaries.

With that, let me move on to Q1 2017 earnings results. Please refer to Page 2. KB Financial Group's Q1 2017 net profit was KRW 870.1 billion. This is 59.7% higher year-over-year, driven by growth in net interest income on the back of NIM improvement and growth in fees and commissions income from the consolidation effect of Hyundai Securities. On a quarter-over-quarter basis, the increase was 91.7%. There was significant improvement in noninterest income, driven by fees and commissions and other operating income. G&A also normalized, and in Q1, there was one-off factor from BCC sales, all leading to higher performance than market expectation.

Looking at the line item. Q1 net interest income was KRW 1,726,400,000,000. Underpinned by asset growth and better margin, the growth was 14.6% year-over-year. On a Q-on-Q basis, despite NIM growth, net interest income fell 1.4%. The reason for the decline is higher interest expense for the principal preservation trust from fluctuations in market rate and its overall slow asset growth and less absolute number of days.

Q1 net fees and commissions income was KRW 520.6 billion, up 41.4% year-over-year on consolidation effect of Hyundai Securities among others. On a Q-on-Q basis, the growth was 9.2%, mostly on higher ELS sales from the bank, which led to higher trust fees, as well as overall improvement in fees and commissions from fund, Bancassurance and brokerage services.

Q1 other operating profit was KRW 61.9 billion, improving significantly year-over-year and Q-on-Q, especially due to one-off factors. There was sizable loss last quarter, but we've seen significant improvement this quarter. There was dissipation of one-off loss factors such as integration cost for valuation model for derivatives and higher gains related to securities. And with lower FX rate, there was increase in gains from derivatives for the bank and the securities subsidiaries.

Q1 G&A was KRW 1,167,200,000,000, up 10.8% year-over-year due to consolidation effects of Hyundai Securities. But with this factor excluded, there was decline driven by labor cost savings from ERP.

Q1 CIR, thanks to even growth in interest and noninterest items, gross operating income recovered above KRW 2 trillion level. And with good control over G&A, cost income ratio came in at 50.6%. Q1 PCL provisioning was KRW 254.9 billion, somewhat of an increase compared to previous year, where there was a sizable reversal from accounting standard changes as well as compared to the previous quarter when there were write-backs for certain companies, which pushed down the PCL level significantly. One factor to note for Q1 is provisioning of mid-KRW 60 billion in relation to DSME.

Nonoperating income recorded KRW 78.5 billion in Q1. It declined from the previous quarter when gain from bargain purchase took place. You can find the profitability by major subsidiaries on the bottom left side of the page.

KB Securities, which was launched early this year as disclosed today, posted KRW 108.8 billion of net profit in Q1 based on own consolidated financial statement basis. It is quickly adjusting to the collaboration system within the group and improving sales performance. However, KB Securities results are included based on KB Group's consolidated financial statements and recorded as KRW 63.8 billion, so please take this into account for this earnings release.

Let me cover the key financial indicators from Page 3. 2017 Q1 group ROE posted 11.17% and 0.94%, respectively. As mentioned previously, it recorded a high level attributable to the noninterest income profitability improvement and one-off factors including BCC stake disposal. NIM, the main indicator of interest income in Q1, posted 1.95% for the group and 1.66% for the bank, respectively, and rose 6 bp and 5 bp Q-on-Q, respectively. With the market interest rate edging up gradually, NIM has been steadily edging up each quarter and is supporting the interest income upward trend.

KB Group will keep on pursuing growth backed by strong profitability going forward and will steadily strive for appropriate level of margin growth.

Looking at the cost income ratio on the upper right-hand side, you can see the improvement with 50.6% posted in Q1. This is a result of realization of stable top line growth and cost-cutting effect from ERP. We plan to strive to a level lower than 15 -- 50% mid to long term.

Next, credit cost ratio on the bottom left side. Groups credit cost ratio compared to the group total loans posted 39 bp in Q1 and rose slightly Y-o-Y. But excluding the Daewoo Shipping and Marine Engineering or DSME effect, last year's sound asset quality trend seems to be continuing.

Group and March BIS ratio and CET1 ratio posted 15.75% and 14.94%, respectively. The bank also recorded 16.71% and 15.47%, respectively, an increase compared to the previous year and still maintaining the highest level of capital adequacy in the financial market.

From Page 4, I will elaborate on KB Securities' synergy results and the background behind KB Insurance and KB Capital becoming wholly owned subsidiaries. When you see the synergy creation after KB Securities' consolidation on the top left-hand side, you can see very encouraging results. First, in WM, you can see the WM referral sales from collaboration between the bank and KB Securities. Referral sales are cases when a customer that was referred by the bank branch buy securities products such as securities, bonds, ELS or fund products from a securities branch for the first time. As you can see on the graph, the assets increased through referral sales in Q1 surpassed KRW 1 trillion, already exceeding last year's annual performance and the numbers of clients and sales income is steadily increasing.

CIB collaboration is also showing high performance centering on infrastructure investment and real estate financing. Successful collaboration in various sectors including corporate bonds, IPOs, securitization is taking place, contributing to synergy generation. Going forward, more efforts to expand synergy will be made through expansion of hybrid branches and a closer collaboration or co-marketing system.

You can see the background and current status behind the 100% stake acquisition of KB Insurance and KB Capital on the right side of the slide. When both subsidiaries become wholly owned subsidiaries, the nonbank portion of the group's net income will reach 39% level from 32% level in Q1.

It will be expanded. We will do our best to improve profitability by completing a more balanced group portfolio going forward.

From the next page, I will not be covering them because the contents have been mostly covered in my presentation.

This ends my presentation for KB Financial Group's 2017 Q1 earnings release. Thank you for listening.

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Peter Kwon, [3]

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Thank you very much, CFO. We will now engage in a Q&A session. For those who are joining via Internet, please refer to the contact information on the last page of the presentation (Operator Instructions) Now we will wait for the questions.

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Questions and Answers

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Peter Kwon, [1]

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First question from HMC, Mr. Kim Jinsang.

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

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I would like to ask 4 questions. NIM improved 3 basis points last quarter, so we were expecting a more slower movement on NIM expansion. But despite that, we've seen a higher improvement. So I would like to understand if there were any particular reason, or do you expect to see the current trend continue going forward? And also, I would like to understand what your annual group base NIM is. And also, secondly, we see that the NIM has improved, but the loan growth has been stagnant. And at a group level, the interest income had actually declined. You talked about some of the one-off factors and the calendar effect as well. I would think that those were the 2 drivers. But the fact that the loan growth was stagnant is because the government has announced the household debt management master plan, so I was wondering whether that impact is being -- coming through, or do you expect in the second quarter, you'd be able to see normalization of loan growth? Third has to do with your asset quality and your soundness. KB has been quite conservative in its provisioning policies. I would think that if you look at your credit cost, there's been some increases, especially for credit cards. That credit cost trend has been in an upward trend. Is this a signal that tells us that the marginal borrowers are now being faced with some difficulties? Could you elaborate? And also fourth question is that, you are in the move to make KB Insurance and KB Capital to make them into wholly owned subsidiaries, and I find that to be a very desirable direction in terms of the speed as well. Compared to the shareholding of the past, you now have 100% stake. So can you elaborate and provide some color as to what potential additional synergies that we may expect, will there be new initiatives that you are currently envisioning? And if you could quantify that impact, that would be helpful. I apologize for asking too many questions.

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Peter Kwon, [3]

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Thank you very much for the questions. Just give us a moment to prepare for the answer. Hold for a minute.

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Jae Keun Lee, KB Financial Group Inc. - MD and CFO [4]

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Thank you, Mr. Kim, for the questions. You've asked 4 questions. One question has to do with the NIM trend. What would be the year-end NIM be for us? Second question had to do with loan growth. It was quite stagnant in Q1. You were asking what our projection would be for the year-end. You had talked about the increase in credit cost results, so I will respond to that question as well. And also potential synergies with KB Insurance and KB Capital. Relating to your question on NIM, from end of last year, after the U.S. election, the market rate has gone up quite a bit. If you look at historically, from 2011, the market rate has fallen, and hence, NIM had also declined. Then came last year from Q1, Q2 and 3, we've seen NIM growth -- NIM expansion. And also for this year, 5 basis points and 6 basis points for banking group, we've seen some increases. With the market rate increase in Q1, we've seen a lot of growth in the demand deposits, the low-cost deposits, and we were able to reduce on the funding cost and that had an impact. And also in the first quarter on the household loans and on the SOHO, we've focused on pricing and that also led to NIM expansion. Especially, we further segmented on the grades of the customers, so we are very much focused on segmenting the pricing aspects. So that really is coming through to the profitability side. And in terms of the card loan, last year from the second half of the year, we've been really trying to expand the card loan receivables, and thanks to that, that also contributed to a NIM expansion. By the end of the year, in light of the U.S.'s FOMC projections, they say that there will be about 2 to 3 interest rate hikes by the end of the year. But if you look at Korean economic situation, it's not such that we could cut the rate. So we assume that the interest rate in Korea will be flat. And also, with the increase in U.S. rate, I think -- in the first half, I think we can defend it at the current NIM level. And in the second half, if there are rate hikes in the U.S., there could be additional maybe room for 2 to 3 basis points upward movement in NIM. Responding to your second question on loan growth, in Q1, as you know, the loan growth also for our peers and competitors were lackluster. And the background to that is also seasonal effect. In Q1, loan growth traditionally are quite subdued because there is a seasonality factor. And also, if you look at high-margin assets, that's where we are really pushing to give momentum to. So in light of that, for household loans, we are looking at about 3% to 4% year-end target. And for corporate loans, we are thinking of 5% to 6% growth. So this will be in line with the GDP real growth. Additional 1% to 2% on top of the GDP, real GDP growth rate. So basically, our plan is to achieve those targets that I have just stated. In terms of the credit cost, if I were to elaborate, in Q1, KRW 255 billion, so this figure seems to be quite significant. But every quarter, we have been reserving the KRW 140 billion. But last year, there was a write-back and we had about 1,700 -- KRW 170 billion, so that's actually KRW 180 billion on a quarterly basis. On Q4, it was KRW 32 billion, and there was a write-back, and there were about 1,200 -- KRW 120 billion. So we are looking at -- there's about KRW 70 billion more and that has to do with DSME, in the mid-KRW 60 billion of provisioning has been reserved. So if you were to take that away, compared to our plan, we are being controlling it within the plan. At a CCR basis, it's 35 to 40 basis points per annum. So we are being controlling it within that level. In terms of the synergy, by May 12, for insurance and capital, we are conducting tender offering, and beginning of the July, we want to make them into wholly owned subsidiary, including the share swap process, so we're currently in the middle of this process. Hence, it would be difficult for me to give you the quantification of the impact as this process is currently ongoing. And on the bank side, our marketing capabilities are quite strong. So in line with the bank, we believe that the insurance and the capital side, we will be able to see more synergies that we will be able to leverage. For KB Capital, on the auto financing and also for KB Insurance, we are looking at how we could better utilize the bank network and how the insurance agents could further up their capabilities. So on the sales network side, there is a plus factor. And also, as they become -- and if -- when they become part of the wholly owned subsidiary, the decision-making process is going to be much more efficient as well as overall organizational management. So we believe that there will be a significant help in enhancing our corporate value as well. I hope these answered your questions. Thank you.

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Peter Kwon, [5]

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Now the next question is coming from Mr. Hwang Chan Young from Macquarie Securities.

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Chan Young Hwang, Macquarie Research - Head of Korea Research [6]

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I am Hwang Chan Young from Macquarie Securities. Congratulations on your earnings. I have 3 basic questions. First question is related to provisioning. For DSME, you mentioned the one-off provisioning, and apart from that, I think that for your fee income and from your other operating income, it also has improved markedly. So can you tell us in more detail why? Second is our SG&A. And after consolidating with Hyundai Securities in Q4 of last year, you mentioned that your cost can go up. However, it seems lower than expected. So maybe it's because of your cost-cutting efforts? And then there was a net off effect with the increase in cost for Hyundai Securities or is it because the effects coming from ERP of last year and the previous ERPs, you have had that cost-cutting effect? Can you tell us the breakdown? Last question is about the deal between KB Insurance and KB Capital. So -- related to this question, you mentioned that the previous IR that you would think about it after capital requirement guideline has been established, but it seems that you have finalized your decision. So can you tell us your stance on that?

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Peter Kwon, [7]

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Yes, thank you for those questions. We will prepare for the answers and then get back to you soon.

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Jae Keun Lee, KB Financial Group Inc. - MD and CFO [8]

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Thank you for your questions, Mr. Hwang Chan Young. And I think you asked about 3 questions, and you mentioned that other operating income, the reason why it has gone up. Second question was about SG&A management. And the third was the capital issue related to KB Insurance and KB Capital related to other operating income. Q-o-Q, we have increased KRW 485 billion. And looking into it in Q1, we had good ELS sales because in the previous quarter, it was about KRW 250 billion that was sold. And in this quarter, we have had about KRW 600 billion that was marketed. So trust income gained substantially. Also in the previous quarter, there was the integration cost of about KRW 95 billion that existed for the derivative valuation model of securities. And with the effects of currency rate going down, we have had the securities and derivatives-related gains that also grew substantially. And for short-term bonds, we had a lot of increase. So that is why we also had interest rate going down, which led to the gains of the bond valuations. And we had dividends that also grew from that, so that is why it all added to the increase in other operating income. So it is a reason. Well, a reason behind that is the FX currency exchange rate dropped and the derivative and securities-related gains that have gone up substantially for this quarter. And for the SG&A, for Hyundai Securities, they actually spent about KRW 600 billion on costs. And then we were looking at KRW 150 billion per quarter. And before Hyundai Securities' consolidation for SG&A, it was about KRW 4 trillion. So per quarter, it's about KRW 1 trillion to KRW 1.1 trillion each quarter in a won basis. And in this quarter, it's about KRW 1.2 trillion. And a lot of it was because of Hyundai Securities' consolidation. However, with the ERP last year, we were expecting that we would have on an annual basis KRW 250 billion decline. And apart from the consolidation effect from Hyundai Securities, we were looking at our breakdown of about KRW 60 billion going down from the labor cost and about KRW 30 billion going for -- going down for administrative costs. So that is why we are now seeing the realization of cost-cutting effects. Looking at the top line, it's about KRW 2.3 trillion that we're seeing. And if we exclude Hyundai Securities, it's more or less KRW 2 trillion or a little bit higher. So we can see that the bottom SG&A and others have been covering up for the top line before, but this time, the top line has been managed well. And also, we have seen good bottom line management as well. So I think that is why we had good S& --- SG&A management. Regarding KB Insurance and KB Capital, as you know, for capital -- KB Insurance, we were thinking about when we should incorporate it as our wholly owned subsidiary. However, interest rate went up last year and that impact had RBC ratio and the IFRS 17 ratio, we saw the impact it would have. And based on our guideline, we can't tell you in a minor detail, but with the 10 bp interest rate going up, you can see that for the liabilities, there has been less capital decrease, so it was about 12x higher in the case of interest rate hike. So if the interest rate keeps on going up, then regarding IFRS 17, we can see that the concerns about capital will disappear. So we don't know what will happen to the interest rates, but we will be vigilant to control it and to look into our capital situation. I hope that answered your question. Thank you very much.

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Peter Kwon, [9]

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We will take the next question from Dongbu Securities, Mr. Byung Gun Lee.

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Byung Gun Lee, Dongbu Securities Co., Ltd., Research Division - Team Leader [10]

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Yes, I am Lee Byung Gun from Dongbu Securities. I would like to first also thank you for good performance. I have 2 questions. First question has to do with BCC. You mentioned that there was a one-off factor of BCC. Can you share with us the number for that? And also, compared to what we were expecting, I feel that your basic fundamentals are much more sounder. So in light of the breakdown between the recurring aspects and nonrecurring aspects, what is your assessment on the profit on a recurring basis? And second question is on your KB Insurance. We, of course, also view very positively about the potential synergistic effect. But if you look at IFRS 9 application starting next year, on the P&C insurance side, if you look at stand-alone and consolidated, the impact is going to be different. So at the holding level, holding company level, and if you are all consolidated, I would like to understand, in terms of the risk management, there's going to be new variables and parameters that you have to consider. If IFRS 9 is consolidated, then there would be early application. Then when it comes to asset management of the KB Insurance, you basically would have to -- there is a possibility there will be new type of intervention that would be required at the holding company level. What is your view on this?

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Peter Kwon, [11]

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We will respond to that question in a moment.

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Jae Keun Lee, KB Financial Group Inc. - MD and CFO [12]

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Yes, Mr. Lee, thank you for those questions. Relating to BCC, in terms of the size, please understand that we won't be able to disclose the specific number. It is somewhere around KRW 150 billion to KRW 200 billion. And once again, this is on a nonrecurring basis, it's a one-off factor. In terms of our basic fundamentals, we also feel that a lot has improved in terms of our pricing capabilities and various other capacities. I think overall, our organization has become much more sounder. Based on KRW 870 billion, if you were to take off all the one-off, I would think that mid-KRW 600 billion would be on the so-called the ones that actually exclude the one-off. We believe that going forward in terms of our business fundamentals, we are very confident that we would be able to continue to further strengthen our might and with making them -- making Insurance and Capital our wholly owned subsidiaries. With companies whose ROE is 13% or 14%, we think that our capabilities will be upgraded. With regards to KB Insurance, I think our executive from the insurance arm will respond to that.

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Unidentified Company Representative, [13]

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Yes, I am from KB Insurance. My name is [ Tae Hyun Kim ]. Would like to respond to Mr. Lee's question. With the inclusion as a subsidiary and potential synergies with KB Insurance, our CFO has amply responded to that question. So moving on to IFRS 9 and potential variables and factors that we need to consider for risk management. In terms of asset management, as we become included into KB, overall asset management strategies and asset allocation, everything will be based on mid- to long-term plans, focusing on soundness and safety. And this will be linked with the overall risk of the group. And all our work is being done based on that premise. So we've conducted our prior checks and we believe that things will go as planned without much difficulty. So before becoming part of the group compared to the competitors, in terms of the duration of the asset and liabilities, we want to extend them. And rather than focusing on the investment yield, we want to have a safer asset. So that was the efforts that we have exerted to date. Thank you.

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Peter Kwon, [14]

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Thank you for the good answer. We have no other questions in the queue. So please hold. The next question from Daishin Securities, Mr. Choi Chung Uk.

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Chung Uk Choi, Daishin Securities Co. Ltd., Research Division - Analyst [15]

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Yes, I'm Choi Chung Uk from Daishin Securities. Well, I think this question wasn't asked. For the -- I know that you have had a KRW 150 billion or so corporate tax impact. It went down. So can you give us the breakdown and the background?

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Peter Kwon, [16]

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Let us get back to you after we prepare an answer. So please hold.

Well, actually, I think we need to look into this further. So IR Department will contact you personally after this IR presentation. Thank you.

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Peter Kwon, [17]

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From NH Securities, Mr. Won Jaewoong.

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Jaewoong Won, NH Investment & Securities Co., Ltd., Research Division - Analyst [18]

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Yes, I am Won Jaewoong from NH Securities. First of all, I would also like to thank you for good performance. I have 2 questions. First, you talked about corporate loans and you're expecting about 5% to 6% growth going forward. Now if you were to break that down between large corporation and SMEs, can you share with us what the respective growth rate would be? And secondly, for KB Securities, the results are quite good. And especially with regards to derivatives-related gains, you mentioned that there was a significant increase. I would think that this is intrinsically a one-off factor. So then, I'm concerned that maybe going forward, this aspect -- or this income is going to decline. On fees and commissions income, that also went up. And on the trust, I would think that there were trust-related income increase as well. Index itself has actually risen. So in Q1, there was a lot of prepayment and ELT sales was much more promoted. So I would think that Bancassurance and others would have also sold as well at the same time. But under the current backdrop with prepayment and the funds all selling well, I think, cannot really sustain. So can you share with us your view?

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Peter Kwon, [19]

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Thank you for the questions. Please give us a moment.

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Jae Keun Lee, KB Financial Group Inc. - MD and CFO [20]

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And thank you, Mr. Won, for your questions. For the corporate loans, I've mentioned that 5% to 6% growth previously, and what we want to focus on mostly is on the SOHO loans. As I mentioned at the very beginning of the presentation, on the household, unsecured and SOHO loan, because the gains we get is more attractive and we expect the market will be positive for us -- for these segments, so that's where we are targeting. So it's a growth that we think is going to be mostly driven by SOHO loans. In terms of securities, the derivative-related gains in Q1 was quite sizable. And going forward, with interest rate hikes, can we continue to expect this level of income? That is a valid point. And if you look at KB Securities, as we would capitalize to KRW 4 trillion on ROE basis, we think that we will be able to achieve more than 6%. So on a per annum basis, 6% to 7% ROE is what we are expecting. In terms of fees and commissions income in Q1, basically, there were a lot of pre-redemptions. And so on the trust side, we've seen increases on the fees and commissions income. Going forward, I agree that it may not be as current level. But if you look at ELS trust product, if you look at the product, we were the first to launch it into the market in the banking industry. And also, there were some customers who bore a certain amount of loss. And so right now, we are -- have organized the products in such a way that it's more safer, meaning the return level is a little lower, but we've lowered the barrier. We actually eliminated the barrier so that it is more stable and safe for our client base. So we've seen quite a bit of sales of these types of products. So in line with the market trend, rather than if a certain product sells well or not, I can say that our product portfolio is quite diverse. So under the current -- if there is a customer that does not satisfy the interest rate in our hurdles, then basically this is a trust product where 3% to 4% return is possible. So this --- regardless of how the market plays out, we think these types of trust vehicles will sell well. And the extent of the gain can decline slightly, but not to a larger extent is what we think. Thank you.

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Peter Kwon, [21]

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Thank you very much for the answer. We don't have any other questions coming in. So I think we have had a very fruitful Q&A session. However, we will hold a little bit more.

Since there are no other questions in the queue, we will conclude our Q&A session. With this, we will conclude 2017 Q1 KBFG earnings performance release. Thank you.