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Edited Transcript of 105560.KS earnings conference call or presentation 18-Jul-19 7:00am GMT

Q2 2019 KB Financial Group Inc Earnings Call

Seoul Jul 22, 2019 (Thomson StreetEvents) -- Edited Transcript of KB Financial Group Inc earnings conference call or presentation Thursday, July 18, 2019 at 7:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Joong Kwon Bong

KB Financial Group Inc. - Head of IR

* Ki-Hwan Kim

KB Financial Group Inc. - Deputy President & CFO


Conference Call Participants


* Byung Gun Lee

DB Financial Investment Co., Ltd., Research Division - Team Leader

* Jaewoo Kim

Samsung Securities Co. Ltd., Research Division - Analyst

* Jin-Sang Kim

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

* Sam Wong

Citigroup Inc, Research Division - Research Analyst




Joong Kwon Bong, KB Financial Group Inc. - Head of IR [1]


I am Peter Kwon from KBFG IR. I am the IR Head, and I would like to introduce the 2019 First Half Business Results of KBFG. Thank you very much for your attendance.

I would like to introduce our CFO and Deputy President, Kim Ki-Hwan and other executives who are here with us today. Today, we will have the 2019 first half business results presentation by our Deputy President and CFO, Kim Ki-Hwan, and then engage in a Q&A session.

I will now like to invite our Deputy President and CFO.


Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [2]


Good afternoon. I am Kim Ki-Hwan, CFO of KB Financial Group. Thank you for joining KBFG's 2019 first half earnings presentation.

Before moving on to the earnings results, let me briefly first update you on the operational backdrop. KBFG has seen sustained increase in the bank's interest income with nonbank subsidiaries, such as securities and insurance profitability stabilizing as it regains earnings resilience at the recurring level. But as you know, business environment around the financial industry is worsening than expected.

Prolonged trade conflict between the U.S. and China is having its impact on the Korean economy. And the compounding effect of export declines and sluggish domestic demands led to Q1 GDP growth to be in the minus, with the overall economy feeling great difficulties. And we expect such economic sluggishness may continue into the second half of the year.

Also recently, with higher expectations over rate cuts in the United States, this morning, BOK announced 25 basis points policy rate cut. And it's such heightened uncertainties in, both domestic and overseas operational environment, we believe it's most important to gain market trust through achieving robust performance. To that end, we are focusing on qualitative growth around safe and prime assets and on broadening stable sources of revenue.

First of all, for the bank, in order to foster qualitative growth around prime assets, we have been selective in loan origination and applied conservative loan policies, at the same time, strengthening pre-monitoring on quality indicators. Also nonbank subsidiaries are endeavoring to diversify sources of earning in order to enhance profit-making capabilities.

The case in point is KB Securities, who after acquiring license for short-term finance business by FSS in May, started issuing promissory notes last month, adding another support for revenue creation. IB business is also leading the efforts to expand fee income by utilizing its superior corporate network and sourcing capabilities.

At the holding company level, in order to diversify funding sources from the international financial market, where there are ample investment appetite, we recently received credit ratings from global ratings agencies, Moody's, and it was rated A1, which is the highest rating among Korean financial holding companies.

We expect the strong creditworthiness and funding capability will greatly contribute to performances at the group level in relation to overseas and IB business in the future.

Now I will move on to First Half 2019 Earnings Results. KBFG's Q2 2019 net profit was KRW 991.1 billion, driven by stable growth in core profit and lower provision for credit losses. Net profit was up 17.2% Q-on-Q.

Excluding the key one-offs, such as write-backs following debt-to-equity swap from Hanjin Heavy Industries & Construction, Q2 net profit was around KRW 932 billion, up 5.9% from Q1's recurring basis profit, clearly showing recovery of the group's earnings capacity.

First half 2019 net profit was KRW 1 trillion 836.8 billion down 4.1% year-over-year. But on recurring basis, carving out last year's gain from sale of Myeongdong office building and this year's ERP expense, profit was year-over-year flat, thanks to robust growth in interest income, despite the decline in net fee and commission income on the back of bearish equity market.

Taking a deeper look by each business. First half net interest income was KRW 4 trillion 549.2 billion, up 4.8% year-over-year. This is thanks to increase in average balance of loans and sustained growth in interest income contribution from nonbank subsidiaries, such as KB Card and Securities, and its somewhat slow loan growth from the bank.

Q2 net fee and commission income was KRW 585.1 billion, driven by stronger drive behind bank's fee business, i.e., trust and fund sales. In KB Securities IB fee improvement, there was a growth of 6.3% Q-on-Q. First half net fee and commission income was KRW 1 trillion 135.7 billion, which is down year-over-year basis. But through company-wide efforts to strengthen sales activities and expand businesses, net fee and commission income is displaying a sustained growth trend this year.

First half other operating profit was KRW 79.1 billion, driven by rate declines which led to improved return from bonds and beneficiary certificates and other marketable securities. Performance was good year-over-year. But Q2 other operating profit dipped Q-on-Q on overall sluggish equity market and index decline. However, driven by improvement in general and long-term insurance's loss ratio and higher investment yield from KB Insurance, underwriting income was up 11.9% Q-on-Q, gradually improving from the poor performance of the fourth quarter.

Next is on G&A expense. First half G&A expense was KRW 3.000800 trillion, up year-over-year on the impact from Q1 ERP expense. Q2 G&A was KRW 1 trillion 486.9 billion, down 1.8% Q-on-Q. In light of the fact that large-sized nonrecurring items, such as employee benefit contributions and ERP expenses, in the Q1 were absent this quarter, Q2 expense may look elevated. So allow me to provide you with some background information.

First, KB Bank at the year-end booked bonus expenses according to the annual performance evaluation, all at once at Q4. But starting this year, in order to enhance visibility of quarterly performance, we changed the policy to a portion and adjust projected year-end payout on a quarterly basis. Accordingly, we set the bank's payout amount at 100% of ordinary wage level, recognizing KRW 31 billion in Q2, amount to which corresponds to the first half of the year.

Also in light of recent agreement reached and collective widening for 2018 reaches for KB Insurance, we booked additional year-end bonus of KRW 18 billion.

Next is PCL, Provision for Credit Loss. Q2 PCL was KRW 102.1 billion and Hanjin Heavy debt-to-equity swap and sale of Orient Shipping's pledged assets, which entail the write-back of KRW 81 billion pre-tax bases, PCL declined by 46.7% Q-on-Q.

On a cumulative basis, group credit cost for the first half was 18 basis points flat year-over-year. On a recurring basis, excluding the write-back impact, it was 23 basis points, being well kept still at a quite sound level.

Lastly, first half nonoperating profit was KRW 55.3 billion, which is slightly less year-over-year. Since last year, there was KRW 115 billion impact of gains from sales of Myeongdong office.

Next is on key financial indicator. The 2019 cumulative first half group ROE posted 0.76% and ROE posted 10.22%, respectively. In addition, Q2 ROE recorded 10.89%, a sizable improvement Q-o-Q, and the recurring level of ROE excluding one-off items posted 10.25%, showing a continuous quarterly earnings improvement.

Next, I would like to elaborate on the bank's loans in won growth. If you look at the graph in the middle, you can see the bank's loans in won as of end June 2019, which posted KRW 260 trillion, a 0.9% increase YTD.

Looking at the different segments, the household loans grew 0.9% YTD, driven by prime safe assets, including Jeonsae and monthly lease loans, as well as Police Officer and Public Servant loans. In the case of corporate loans on the back of steady increase of prime SME loans and large corporate loan growth recovery, corporate loans grew 1.2% Q-o-Q. In order to preemptively respond to the economic downturn cycle and to focus on prime borrower-driven, quality-based growth, we are continuing to rebalance for potential NPLs and maintain a conservative loan policy. However, recognizing the fact that the earnings base growth is partly needed from a mid- to long-term perspective, in the second half, we plan to expand loan growth through a more flexible loan policy.

Next is the NIM, Net Interest Margin. Q2 Bank NIM posted 1.70%, a 1 bp Q-on-Q drop. This was mostly driven by the growth of prime safe asset-based growth, including Jeonsae and monthly lease loans and benchmark interest rate declined, despite the alleviation of the funding burden following the time deposits and bank-issued bond rate decline.

On the other hand, the Q2 group NIM posted 1.96%, following the credit card loan interest rate decline, leading to card NIM contraction, resulting in the group NIM dropping 2 bp Q-on-Q. Taking into account the overall market competition environment and the interest rate trend, it seems that this year's NIM expansion will not be easy. But based on our biggest strength of superior sales capability, we will focus on expanding low-cost deposits and try our utmost to safeguard the NIM.

Next is the group's cost-income ratio. 2019 first half cumulative group CIR posted 52.1%, and on a recurring basis, excluding ERP costs, posted 51.2%. Taking into consideration the KRW 31 billion sized bank expense adjustment effect mentioned previously, CIR maintained a 50.7% level, showing that for the past 5 years, the downward stabilization trend of recurring CIR level is continuing.

We forecast that with continued robust top line growth and realization of the group-wide cost-cutting efforts, the group's cost efficiency can additionally improve.

Next, I would like to remark on the credit cost ratio. 2019 Q2 group and bank credit cost each posted 0.15% and minus 0.03%, respectively, and is being maintained at a 0.18% and 0.01% level in the first half on a cumulative basis, respectively, and is being maintained and managed at a sub-normal level. In particular, even when the write-backs of large-scale provisioning is excluded from this quarter, the group's first half credit cost posted a 23 bp level, proving KB's differentiated risk management capability.

Next, I would like to elaborate on the group's capital adequacy ratio. In the graph on the right, as of end June 2019, the group's BIS ratio and CET1 ratio, each recorded 14.94% and 14.14%, respectively, and went up 18 bp and 3 bps Q-o-Q, respectively, on the back of robust net profit and hybrid bond issuance and is still maintaining the highest level of capital adequacy in the financial industry.

Let's go to the next page. From Page 6, I would like to elaborate on KB Insurance's value-driven management philosophy. Currently, in the nonlife insurance industry, following last year, with the GA channel-based new business competition continuing, concerns about increasing sales expenses and relaxation of underwriting standards is increasing. And going forward, there are voices, warning of mid- to long-term profit deterioration and increased risk.

Early this year, there was a stronger forecast that the insurance industry performance would enter into a improvement cycle, driven by insurance premium, rationalization, centering on auto insurance. However, with the continuing of the overheated market in the first half, now we have to be concerned about not only net performance, but also about the possibility of future value deterioration. Against this backdrop, we want to share with you KB Insurance's management principle at this earnings' release and share the future strategic direction with you to date.

KB Insurance, after becoming fully integrated as a wholly owned subsidiary of KB Financial Group in 2017, has been continuing value-driven management, enhancing future value-based on mid- to long-term soundness and stability, rather than on short-term results and external growth. We believe that because of the insurance business' characteristics and because of the limitations posed by the current accounting standard, we find that our current performance does not always guarantee future value. And that there is a limit to the future value being completely reflected in our current performance.

Accordingly, rather than managing short-term performance indicators, such as net income and net insurance sales, we believe that indicators measuring insurance policies, qualitative growth and future value, such as embedded value and new business value, should be enhanced, and this should be the core management philosophy of KB Insurance.

As you can see on the right-hand graph on Page 6, KB Insurance's embedded value, or EV, has reached KRW 6.2 trillion as of late June 2019 and has grown 41.3% yearly from 2018. And it has grown 26.9% YTD in the first half of this year and is maintaining a robust growth rate. The adjusted net worth amount KRW 6.2 trillion of embedded value posted KRW 3.9 trillion and is steadily increasing from KRW 2.6 trillion as of late 2017. The value of in-force business, the stream of future earnings achieved KRW 2.3 trillion. And when compared to end 2017, when KV Insurance became integrated as a wholly owned subsidiary, a compound annual growth rate, or CAGR, posted a 87.2% growth rate.

The graph on the bottom left refers to the value of new business, which is the present value of future earnings stream after capital expenses have been taken out. The value of new business generated in the first half of this year recorded KRW 498 billion, a 8.5% increase Y-o-Y. And even in a fiercely competitive market, there has been appropriate management and quality with Q2 new business margin rates slightly increased in Q-o-Q.

On the other hand, KB Insurance has been working diligently, preemptively, to prepare for the new regulatory environment changes, including the adoption of IFRS 17 and K-I-C-S, or K-ICS. To prepare for the implementation of IFRS 17 in 2022, we will complete the relevant system by the first half of next year and enhance system stability through sufficient pilot operations. At the same time, we are strengthening the comprehensive duration management to prepare for the adoption of K-ICS, or K-I-C-S, and engaging in risk management to cut down on risky assets.

As mentioned previously, with concerns of earnings deterioration growing, the nonlife insurance industry is in a very difficult situation overall, with average duration widening in an unfavorable interest rate environment. However, even in these times, KB Insurance will not be swayed by external competition and endeavor to steadily build future value through growth based on quality.

The following pages are details about the earnings results previously mentioned, and please refer to them as needed. With this, we will conclude KB Financial Group 2019 first half earnings release presentation.

Thank you for listening.


Questions and Answers


Unidentified Company Representative, [1]


We will now entertain your questions. (Operator Instructions)

Bear with us, as we wait.

For your information, there is about 20 second lag between the Internet, the website and the phone. So please bear with us for one moment.

From Hyundai Motor Securities. Please go ahead.


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


I would like to ask 3 questions. First, as the CFO has mentioned, this year, the loan growth has been quite slow and year-to-date is 0.9%. So I think this is quite different from your peers. So I do understand that you have your focus on asset quality and soundness, but could you also elaborate a little more and explain this loan grade related trends? And so would you be adjusting your loan growth guidance? And also, in the second half, what are your plans in terms of household and corporate loans?

Second question is, BOK has decided to cut its policy rates. What do you expect the NIM outlook would be like going forward?

And lastly, at the end of last year, you've announced KRW 300 billion of share buyback, and I know that recently you have completed this process. Are you, at this point, considering to conduct more share buybacks?


Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [3]


Please bear with us until we are ready to give you answers. Thank you.

Thank you very much, Mr. Jin-Sang Kim, for your questions.

Regarding our loan growth, in Q1, KRW 0.7 trillion growth or 0.3% growth, and in Q2, we had KRW 1.7 trillion growth, 0.7% growth. So as you mentioned, it's 0.9%, which is KRW 2.4 trillion growth as a whole in the first half of this year. So it is not as high as could be expected. But as previously mentioned, for asset quality and profitability, we had a conservative loan policy and in the market, so competition was quite fierce. So we had, I believe, a comprehension of different factors. And in the household area, in the first half, 0.9% growth from KRW 1.3 trillion. So we had Jeonsae monthly loan growth and unsecured loan growth and KRW 2.9 trillion for household. And we had KRW 800 billion for unsecured loans for mostly Police Officers and Public servants. So it was mostly for safe, unrisky assets. And for the household loans, we had very strict credit review.

And between the banks, there was interest rate competition between the banks. So there was a bit of overheated environment. So we had the minus growth there. And for corporate loans, in Q1, we had minus growth, and in Q2, we had grown substantially. So in Q3 -- in the first half, we had a 0.9% growth, KRW 1.1 trillion. So we can say that for mostly prime SME loans, we had KRW 800 billion of growth. And for SOHO loans, we had the fiercest competition. And in SOHO, we had flat growth.

For large corporate loans, in Q1, we had minus growth. But in Q2, we had stronger marketing. And as a result of that, we had more than KRW 800 billion of growth. So we had, in the first half, about KRW 300 billion of growth.

Actually, in the beginning, we gave the guidance for this year on a yearly basis, 4% to 5% loan growth that was our target. But in the first half, we had 0.9% growth. So it is less than 1%. So we believe that going forward, we will need to make some adjustments.

Currently, there is heated competition, but we believe that there are signs that competition is weaning off. So on a yearly basis, we believe that our 3% growth would be probably achievable, and in household loans, about 2% level growth. And for corporate level, 4% level of growth, we believe, would be our target. And for household loans in -- similar to the first half of this year, Jeonsae monthly loans. And for the prime loans, we were -- unsecured loans, we're going to focus our efforts. And for the collective loans and other mortgage loans, we believe the competition is going to be fiercer there, and we have the LDR regulation revision and other. So we believe that we will not focus a lot of our efforts there.

And for the corporate loans, we are going to maintain a similar stance. And it will be about asset quality and profitability, which is our principal. And we're going to do our best to have earnings base, so that we're going to accelerate growth. So for Prime SME loans and for trade financing and other added-value services, we're going to improve our competitiveness. And taking into consideration the comprehensive profitability, we are going to have lesser price-related -- we're going to have more selection and improve. And we believe that for SOHO, in the second half, we're going to have less competition. So we believe that we will have more room to grow for SOHO loans.

And regarding NIM, I think you also asked the question about this year's NIM figure. And in this year's guide, well, last year's NIM level was 1.71%, and we mentioned that we're going to safeguard that level of NIM this year. And with the LDR revision burden, we believe that would be appropriate. However, for low-deposit loans -- low-cost loans, we worked hard to have improvement of 1 to 2 bps. And in the first half, there was fiercer competition and interest rate was on a downward trend. So we had about 1 bps going down. And in -- the Bank of Korea decided to push down the policy rates today. And in the market, there was already pre-reflection of the interest rate drop. So this was a burden on the NIM from the past. So we believe that it was already reflected partly and some uncertainty about the future in the market has been alleviated. So we believe that additional repricing burden will be limited.

In the second half of this year, we believe that we will probably have 1 or 2 bps of decline, but we're going to expand low-cost deposits, and we're going to have a more advanced review system -- loan review -- loan pricing system, so that we can have an improvement in these figures. However, the decline of the interest rate, while it can alleviate the burden in the funding area, but in the receivables or bonds, there could be more gains, and we can have better gains in asset quality. And we believe that we will have a positive side as well, and it could work in tandem together.

I believe the next question was about the treasury shares. And as of late November, there was about KRW 300 billion of treasury stock that we acquired and in -- from 2016 to now, we had 4 rounds. And it was about KRW 1.4 trillion of treasury shares that we acquired. And in order to improve shareholder value, we are working very hard.

For this year, well, our plans to acquire treasury shares, as of now, we do not have concrete plans yet. However, taking into consideration the share prices and the dividend ratio and asset quality, we're going to consider all factors before we make the decision. We have been working hard to have better treasury share acquisition and to have better dividend payout ratio for our shareholders. So we are going to do the same.

Thank you very much.


Unidentified Company Representative, [4]


We will take the next question from Samsung Securities, Mr. Kim Jaewoo.


Jaewoo Kim, Samsung Securities Co. Ltd., Research Division - Analyst [5]


I would also like to ask 3 questions around your performance outlook. The first one is, if you look at G&A for Q2, as you've mentioned during the presentation that basically, you've made some adjustments in terms of the accrued expenses. Even if we consider for that, I think still the G&A level is quite high. Basically, last year, there's been a ERP-related expenses and also the employee benefit contributions. So if you consider for that, I -- you must have seen that there would have been a lower. So could you elaborate on that?

And also, I would like to ask for seasonality. At the year-end, the Q4 expense, there is uncertainty relating to that, the digitalization, as well as ERP-related expenses. Including all those aspects, can you elaborate and explain on your G&A outlook?

And number 2, for KB Securities, last May, it was licensed to engage in short-term financing business. What is your target issuance volume and how much of a profit contribution will this have? And also, KB Securities have seen improvement in Q2 performance. But compared to other peers, its capital size is still lagging behind. So what are your plans to actually catch up in terms of the capital of KB Securities?

Last question is on KB Insurance. I see that the trend is upward, which is desirable. But because market competition is very fierce, I feel that overall, not just KB Insurance, but the overall insurance industry is currently one of the concerns. So what is your performance outlook or earnings outlook for KB Insurance going forward?


Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [6]


Thank you. Just give us one moment as we prepare to respond to your questions.

Mr. Jaewoo Kim, thank you very much for a good question. First, responding to your question on G&A. In Q1, KRW 1.5 trillion was G&A. But if we consider ERP as well as other one-off, there was 150 billion. If you consider for that, then Q2, it's around KRW 1.3 trillion.

I mean I'm sure you would have expected that it would decline to KRW 1.3 trillion, excuse me. So if I were to provide you with some more information, in Q2, basically, we had a decline of KRW 75 billion in labor cost and also KRW 43 billion from -- for other supplies. But in terms of the labor cost, if I were to explain what the adjustable or the changes were, if you look at the bank, there was the KRW 32 billion of adjustments relating to accrued expense. And also, with the collective agreement, there was KRW 18 billion. And also for KB Securities, there's KRW 20 billion impact.

So in total, there was about upward impact of KRW 70 billion, in terms of labor costs. So if you were to consider for that because there were KRW 73 billion decline, so on a Q-on-Q basis, you would expect the figure to be flat.

On the material-related to G&A administration cost, there is also seasonal impact. There's property transfers with comprehensive property holding tax of KRW 15 billion. And also there was A&P, advertisement and promotion cost of KRW 15 billion as well.

And on the IT side, there is depreciation-related cost that was elevated. So because of that, that all added up to about KRW 46 billion. So there was a plus -- about JPY 47 billion. So you will see that this will be quite similar on a Q-on-Q basis.

Then looking ahead to Q4, as was the case last year, for many years' year-end, there is ERP. And the year-end bonus, we have been paying out 300% of PS payment. So in Q4, there was a significant amount of one-off expenses. Because of the seasonality, we feel that there's been concern relating to the visibility of quarterly results. So we decided that we would make adjustments on the accrued expenses. I believe that will make things better. So for ERP, in 2017 and '18, basically, KRW 150 billion to KRW 200 billion amount was used for ERP expense.

This is an item that is subject to negotiation and agreement with the Labor Union, so I cannot be more specific than this. But in light of -- I think you could also refer to the previous level of ERP expense.

On digitalization, for next-generation and IT computer center, which is currently under our plan from this year to -- from this -- starting this year, we think that every year, there will be about KRW 100 billion of overall depreciation cost, which, if you consider for a depreciation period of 3 to 5 years, I believe that this year, we will be trying to actually manage this cost within about 3% level.

Moving on to KB Securities about the license for short-term financing business. On May 8, they received license for short-term financing business and they issued the promissory note as of end of June. [devalkerer] issued KRW 960 billion. This year, our target is KRW 2 trillion by the end of the year; next year, KRW 1 trillion; following year, KRW 1 trillion. So every year, we wish to increase the issued amount by about KRW 1 trillion.

Basically, we will allocate 55% in new corporate financing assets and also highly liquid as well as our properties. So we would like to maintain the level at 80 basis points to 100 basis points.

And KB Securities performance, if I were to elaborate, last Q4, the S&T performance was not good. But this first half of the year, we were able to improve under management system. We've actually hired experts, we have realigned the risk management system for KB Securities. So we have normalized the earnings from KB Securities. Having

said that, compared to other financial companies with KRW 4 trillion of shareholder equity, KB Securities' performance may seem lagging. Hyundai Securities' profit mix basically was basically focused on brokerage. So it was quite sensitive to movement in the market.

Currently, we're in the process of WM transformation. Whereby, we want to diversify our revenue source, focusing on IB and also product management, we want to further increase its contribution to our revenue, and we are seeing visible results. Especially, for wealth management, we see synergy impact with the bank. So we are seeing encouraging results.

If we look at KB Securities on a stand-alone basis, in 2017 and '18, they've done about KRW 70 billion to KRW 80 billion. This quarter, they did KRW 81 billion. Q2 is KRW 88 billion. So we see continuous improvement. So at the group level, ROE 8%. More than KRW 800 billion of net profit, we believe, is achievable.

And also the group's synergy impact, once it becomes more visiblized (sic) [visualized], I think that the improvement will start to accelerate as well.

Moving on to your question on KB Insurance. So other companies have been quite aggressive to increase their market share in the insurance market. And KB Insurance, in terms of growth rate have lagged behind, especially, the medical indemnity, loss ratio has been under pressure, as well as the auto line, and that has impacted KB Insurance as well. So there are difficulties. And yes, the -- we admit, there are concerns.

So on this aspect, as I've mentioned during my presentation, we are going to focus on value-driven management, and we have been doing so over the past 3 years. In terms of value of new business, we want to focus there, and also look at net profit, as well as balance that with future earnings stream. So we will be very much value-focused.

So first of all, the appropriate level of topline will be maintained, so that we could control the net profit. Basically, we will design the product, focusing on the customers, so that they can actually select our product with high level of retention rate and persistency rate, which will help with the improvement of the loss ratio as well.

And for the auto line, the CEM channel, the online channel, we want to further expand our competitive edge, so that we can increase our market share.

And in terms of counseling subscription and also insurance claims based on the process, we want to significantly shift and transform this process, so that we can improve with the customer-facing and really try to increase on the premium income and really increase our topline revenue.

And second aspect. When it comes to value of new business, basically, year-term products are going to play an important role. Basically, in 2017, the mix of the year-term product was 40%. In 2018, we've expanded that to 60%, and our target is to increase that mix to 70%, having a focus on product portfolio that is year-term based.

And also, in terms of loss ratio, as well as lapse ratio, we want to improve, so that we can increase the value of in force, so that VIF can actually convert to the net profit and contribute to net profit, and we will continue to focus on improving loss ratio. If you look at the general line, the loss ratio had gone down by 7.4%. Long-term line, basically, it improved by 0.1%. And also for auto line, the loss ratio is still in an upward trend, so 1.7% increase. However, if you look at the secular trend, we are seeing a gradual improvement.

So those are 2 value-driven management. Last quarter, basically, we did net profit of KRW 75 billion. In Q2, KRW 91 billion of net profit.

And so on a per annum basis, we will be doing about net profit in the early KRW 300 billion level. It's not a full normalization of profitability, but we believe this is a process towards recovery. So rather than focusing on short-term performance and growing our volume, we really want to focus on our fundamentals, so that we can be successful in the long run. Thank you.


Unidentified Company Representative, [7]


We will take the next question. From DB Securities, we have Mr. Byung Gun Lee.


Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division - Team Leader [8]


I am from DB Investment. My name is Byung Gun Lee. I have 2 questions. First question is about the LDR. And looking at your current level of LDR, can you give us the figures?

Second question is, how are you going to manage the LDR? It's because when we see the improvement of the regulation, it will not be enough for you to keep with your Q1 efforts. So are you going to continue more efforts in what direction for Q1 for LDR? And secondly, you mentioned the value-driven management for KB Insurance. And it seems that it is very admirable compared to your peers. But when you actually calculate the value of any new business, can you give us some more information?

For example, we have the present value of future in premium, but it is about how you are going to assume the capital expenses? So I think there could be a big difference there.

And for last year, or in the -- capital expenses that you assumed for December of 2017, can you tell us more about the capital expenses that you have assumed?


Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [9]


Thank you very much, Mr. Lee. And we will prepare to answer your questions. Please hold.

Thank you very much, Mr. Lee, for your questions. The first question was about LDR. And as of June end, it's 97.72%, and it was 99.5% last year-end, so we are managing the LDR very well.

And in the first half, we have been funding based on our loan growth. So that was the type of management of LDR. So we issued covered bonds and there were marketable CDs or the trend of core deposits and the loan competition trend. We took all of those factors into consideration, CD and the time deposit situation, and we matched all of that. 97.7% is the current LDR ratio, but we'll need to have about 103.3%.

And in the second half of this year, we're going to more tightly manage the LDR. So for the new LDR, while there are some bonds that are not recognized or for some CDs -- or some marketable CDs that are going beyond the limit, we're going to have recovery and we're going to use covered bonds and others so that we can manage this in the appropriate way.

And for expansion of low-deposit loans -- low-cost deposits, there is fierce competition. So it is not going to be easy, but the bank, the insurance and securities, we're going to work very hard for card settlements accounts and for salary accounts so that we can have a minimization of the funding costs.

As you're well aware, in May and in June, we were the first in the banks to actually issue covered bonds amounting to KRW 900 billion, and we're going to issue more in the second half. And in calculating the LDR, we are exchanging opinions with the government regulators. So we are voicing our opinions as well.

Now in terms of the value of new business, the capital cost. What was our assumption behind capital cost? That was your question. And just 2017, capital cost on an RBC basis, we assumed 150%. That was the basis. Currently, under the K-ICS, it's a required capital of 100%, and we convert that to RBS basis. And basically, you get a little more than 200%. So this means that when it comes to capital costs, we've made a bit more conservative assumption.

So with regards to what was just said, I would also like to elaborate and add a little more. In 2018 -- December 2018, basically, we have used the TV EV and adjusted MCEV methods. So we made the change. The biggest difference is that, in the past, on RBC basis, we applied RBC-based capital ratio, but we've converted that to K-ICS base. So the discount rate has gotten down.

So in the case of the VIF, which is aged-term product, the actual figure has gone down. In terms of the new business, where the year-term products mix is more high, there is a bigger upward impact. So the overall VIF went up slightly. So meaning the EV had went up. But if you were to look at the elements on the new business, there's been an increase. And in the VIF, there's been a bit of a decline.


Unidentified Company Representative, [10]


We will take the next question from Citi Research, Sam Wong.


Sam Wong, Citigroup Inc, Research Division - Research Analyst [11]


This is Sam Wong from Citi Research. Congratulate on the strong results. I actually have one question on noninterest income.

Credit card fee's been a bit weak for second quarter. Is it structural or seasonal? And what is your target for full year fee in noninterest income growth?


Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [12]


We will wait until we have the answer prepared. Thank you very much.

Mr. Sam Wong, thank you very much. In the case of the interest income -- in order to continue on with the interest income, basically, we would have to make improvements on growth as well as margin.

In terms of growth, it's something that we need to sustain. And this year -- in the first half of this year because of fierce competition, the growth was actually laggard. So we really focused on interest rate policy that focuses on profitability as well as soundness.

And in terms of the different profitability aspects, as well as the individual's soundness and basically in terms of growth, we have continued to exert our efforts to increase our interest income.

On the interest rate, the constant interest rate has turned to a downwards trend. And because during a competitive landscape, interest rate is under pressure. And on LDR also, there is an interest rate related pressure. So from this aspect, we will continuously focus on profitability-based pricing strategy, so that we can continue to increase interest income.

So with regard to growth, basically, we will be focusing on more than 5% growth from a mid- to long-term perspective. And we'll try to maintain the margin at an adequate level, so that we can continue to expand on interest income.

And on the noninterest income, there is fee, and there is the capital market and there is the insurance underwriting income. On the fee income market share, we plan to continuously increase. And if you look at the in-commission income, we have the equity-type ELS, and equity-type fund actually has the big mix. So when the market is bullish, our fee income actually goes up significantly. If the market is bearish, then it does go down a bit.

So in terms of wealth management or in the areas of wealth management, we are currently adjusting our portfolio so that we can have a product that can resist the volatilities of the market, and we want to increase our market share and the fee and commission income.

And also on the Capital markets side, this year, with the bond yield coming down, there's been a significant improvement on our performance. But on the capital market, the bank, securities, insurance and asset management, we will develop management strategies and will allocate across the portfolio, so that we could improve on the P&L and implement the strategy, so that we can further enhance our capabilities in managing these assets. And through asset allocation, we will continue to improve on the profitability.

Especially, for the Securities, the S&T, the Sales and Trading business, we want to implement a derivative system and also hire new managers, portfolio managers and improve on the risk portfolio. Through these efforts, we can say that there's been a significant improvement on the insurance through loss ratio and persistency ratio management. We have to continue to increase profitability. And this year, the loss ratio has improved continuously. So on the noninterest side, we want to further make improvements.


Unidentified Company Representative, [13]


Thank you. I'm the CFO, [E Zagin]. On the case of interest gains, on the bank's basis, out of the total operating profit, we have about KRW 7.5 trillion. And of that, roughly, interest income is about KRW 6.4 trillion, noninterest is about KRW 1.1 trillion. That's basically the structure that we have.

And on the interest income side, you have to look at 2 aspects. Basically, we have KRW 220 trillion of asset bearing. If NIM goes down by 1 basis point, basically, this has a KRW 32 billion of impact. And also if 10 basis points, we get KRW 320 billion impact.

So if we undermine the profitability with growth, that means the NIM is going to go down and interest income is going to go negative. So when you grow, you have to think about the profitability. You need to have a good balance. So in the first half of the year, when there was very fierce price competition, we endured very strategically. And because of that, in 2Q, basically, we've seen a significant increase in interest income and basically, despite the fact that won deposits have not really grown.

And on the noninterest income side, as the CFO has clearly explained, as we said before, on the equity type, we have high exposure equity type. So we are sensitive to movement in the market.

Hong Kong H Index is currently 10,800 level. If it's maintained at that level, then in the second half of the year, I believe, that we will be able to get fee income about the level -- similar level as first half.

On the Capital Markets side, the one denominated securities of KRW 51 trillion in foreign currency of KRW 6 trillion. So we have totaled KRW 57 trillion.

And if you look at the size of our assets, we have KRW 370 trillion. So compared to our asset, our marketable securities percentage exposure is comparatively low. So right now, our business plan target is KRW 7 trillion, but we're going to plus alpha. Even if the market rate goes down, we believe that we can get valuation gains from marketable securities, so that we could normalize our returns.


Operator [14]


We will take one more question, [Won Jung] from HSBC Securities.


Unidentified Analyst, [15]


Congratulations on your performance, and I have 2 simple questions. The first question is about the nonoperating gains. And it has, I think, risen significantly. Are there any special reasons behind it?

And second question is 22 bps decline in Q2 for the treasury bonds and any bond valuation gains that you have gleaned from that? Or was this not positive on your figures?


Unidentified Company Representative, [16]


Thank you very much, Mr. Won. And we will quickly answer your question. Please bear with us.

Thank you very much, Mr. Won for your questions. From nonoperating gains and losses in securities, in Germany, we had the sale of [German] sales property, which was KRW 26 billion. And we had -- in group banking, we had the repayment of taxes, which was about KRW 20 billion. And we had increases because of those nonrecurring factors.

And for the 3-year treasury bonds, for the bond segment, we had the yield that actually declined greatly and it led to higher profits. And I don't have the numbers with me right now, but we will get back to you with the detailed figures.

Well, regarding some numbers. In Q1, in the Securities for we had about KRW 180 billion for these overseas, and in Q2, it was about KRW 130 billion. And for OCI, I'm not sure if this is accurate, but I think, I believe that it was about KRW 60 billion in Q2. So I believe that with the interest rates going down, we had the longer duration bonds which went to OCI, which is -- it was -- went to above KRW 60 billion.

Just one thing to note, on Page 6, Mr. Lee, the numbers on Page 6 are based on K-ICS.


Unidentified Company Representative, [17]


We don't have any more questions in the queue. But let us just wait for one moment.

Thank you very much. We believe that there are no other questions in the queue, and we will conclude our business results presentation. Thank you very much.