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Edited Transcript of 105560.KS earnings conference call or presentation 24-Oct-19 7:00am GMT

Q3 2019 KB Financial Group Inc Earnings Call

Seoul Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of KB Financial Group Inc earnings conference call or presentation Thursday, October 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Joong Kwon Bong

KB Financial Group Inc. - Head of IR

* Ki-Hwan Kim

KB Financial Group Inc. - Deputy President & CFO

* Lee Jae Keun

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Conference Call Participants

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* 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

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Presentation

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

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Greetings. I am Peter Kwon, the Head of IR at KBFG. Let's begin the 2019 Q3 business results presentation. My appreciation goes to all the participants in today's meeting. We have here with us Ki-Hwan Kim, CFO and Deputy President of KBFG as well as other executives from the group.

We will first hear from our CFO and Deputy President Ki-Hwan Kim regarding our 2019 Q3 business results and then have a Q&A session. I will invite our CFO and Deputy President to cover our Q3 2019 business results.

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

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Good afternoon. I am Ki-Hwan Kim, CFO of KB Financial Group. Thank you for joining KBFG's Q3 2019 business result presentation. Before moving on to our earnings, let me briefly present on the operational backdrop.

In Q3, on the back of continued U.S.-China trade conflict, global trade contracted with Korean economy experienced a slowdown in trade and lower current account and deteriorating domestic demand with issues identified as concerns starting to rise up to the surface. And on top of it all, there was trade restrictions from Japan further growing concerns over economic depression.

In light of this backdrop, BOK moved to cut rates last July, again making another cut in October, leading to lowest ever policy rate at 1.25%. As the operational environment is unfavorable to the financial businesses, concerns over bank's profitability is growing. But KBFG was able to defend margin contraction as much as possible through its margin-focused operations. And with quality-based growth around prime and safe assets, we maintained our earnings resilience supported by careful management of asset quality.

However, for the time being, in a downward rate cycle, bank's NIM contraction is inevitable. We will, therefore, bring reasonable level of loan growth around prime SME loans to solidify interest income basis and also focus on growing nonbank profitability. To that end, we will further strengthen collaborations between securities and banking to expand the performance outcome from WM and CIB.

For the group's capital markets, through integrated group level management, we are currently employing strategies to enhance efficiency and synergies.

Also as domestic financial market has limited boundaries, overseas expansion is imperative. Hence we will speed up overseas expansion mainly to Southeast Asia as those are markets with high growth potential and good fit for our competitive edge.

Since it is quite difficult to expand revenue including interest, fee and commission income through corporate wide digital transformation, we will endeavor to accelerate cost efficiency in order to protect the group's earnings fundamentals.

Lastly, KBFG has been steadfast in implementing strategies to secure new growth engine for KBFG. For example, KB Bank has applied for financial regulatory sandbox and was designated as innovative financial services receiving MVNO, mobile virtual network operator, license from [FSC] last April. MVNOs can lease the network from a telco to offer telecom services at a reasonable price point. In November, KB Bank will launch Liiv and Service, which brings convergence between telecom and financial services.

Through industry first digital innovation Liiv, (inaudible) will be offering new experience in financial convenience and will help broaden service touch points with its 34 million banking customers.

Also from mid-to-long term, we will organically connect financial products and services from other subsidiaries to further up competitiveness of our core financial business through telecom as a medium. And by using data generated from this convergence between telecom and finance, we would be able to create new added value and secure additional growth engine.

All in all, despite it being an uncertain period for KBFG, we will be steadfast in strengthening our fundamentals and will continue our efforts to gain competitiveness and growth engine for the future. Now with that, I will move on to Q3 2019 business results.

KBFG's Q3 2019 cumulative net profit was KRW 2,777.1 billion. On a year-over-year basis, it is 3.2% decline. If you take out one-offs including last year's gain from sale of bank's headquarter building and write-back of provisions, on a running basis there was a marginal increase year-over-year.

Despite robust interest income growth and stable asset quality management, performance improvement was somewhat limited due to slightly higher expenses on the back of group's digitalization and ERP expenses from the bank and the insurance.

Q3 alone net profit was KRW 940.3 billion. On lower one-off profit from last quarter's provision write-back and weak insurance performance, net profit fell on a Q-on-Q basis. But KRW 900 billion of net profit on a recurring level is currently being maintained.

Moving on, I will delve into more details. Net interest income on Q3 cumulative basis was KRW 6,868.6 billion, driven by average loan balance increase of the bank, interest income increased leading to 4.2% NII growth year-over-year. Net interest income for Q3 alone was KRW 2,319.4 billion. On higher financial and installment asset of KB Card, there was a marginal increase Q-on-Q.

Q3 cumulative net fees and commission income was KRW 1,716.5 billion. As last year, there was large increase in securities custody fees on the back of bullish market, year-over-year there was a decline of 1.8%. But Q3 net fees and commission income, despite sluggish stock market performance and lower financial product sales which lead to softer trust income and securities custody fees on higher credit card receivable volume, which increased fee income from cards, Q-on-Q figure was flat.

Q3 other operating loss was KRW 30 billion displaying sluggishness Q-on-Q driven by auto insurance loss ratio of over 90% and overall increase in insurance product claims which lead to poor insurance performance. Also greater market volatility led to higher losses from equity, ETF and other securities.

Next is on G&A expense. Q3 cumulative G&A expense was KRW 4,456.7 billion, moderately up year-over-year. This is due to digitalization related to depreciation cost from the adoption of next generation system this year and ERP expense from the bank and the insurance as well as the accrued expense adjustments made on the yearend bonus payout which all lead to a sizeable increase. Once these factors are taken out, there was year-over-year increase of around 3.7%. Q3 G&A expense was KRW 1,455.9 billion, down Q-on-Q by 2.1%. After excluding ERP expense from KB Insurance, this quarter's figure was down 3.3%.

Q3 PCL was KRW 166.1 billion. Because in Q2 there was reversal of around KRW 81 billion from Hanjin Heavy Industries and others, it seems like a large increase on a Q-on-Q basis. But it is once again still kept at a subnormal level.

On a Q3 cumulative basis, group's credit cost reported 0.19%, being managed at a benign level underpinned by quality improvement in our loan portfolio and proactive risk management.

Next is on key financial indicators. 2019 Q3 cumulative group ROA and ROE recorded 0.75% and 10.11% respectively. As aforementioned, with nonrecurring income such as last year's gains from sale of the bank's HQ building disappearing, the increased costs related to groups digitalization and ERP, and with the decrease in insurance income, the ROE has slightly decreased YoY, but still is maintaining a 10% level on a recurring quarterly basis.

Next is the growth of bank's loans in won. Looking at the graph in the middle, bank's loans in won as of end September posted KRW 261 trillion, a 1.4% YTD and 0.5% QoQ increase respectively.

In detail for household loans centering on Jeonsae and unsecured loans, it increased 1.2% YTD and 0.3% QoQ respectively. And corporate loans centering on SOHO loans and prime SME loans grew 1.7% YTD and 0.8% QoQ respectively.

Due to our asset quality and profitability based loan policy and market's overheated competition, bank's loans in won is showing slightly low growth potential. However, from Q3 with a more flexible application of our loan policy and with the market competition easing, centering on SOHO loans, loan growth has been gradually recovering in August and September. Accordingly we believe 2% to 3% level of growth is possible for this year.

Let me now elaborate on the net interest margin. Q3 bank NIM, despite the time deposit and lightened burden of bond issuance with the lowered asset yield following the steep market interest rate cuts, the NIM posted 1.67%, a 3 bp drop Q-o-Q.

In addition, group NIM in Q3 posted 1.94% and with the card margin contraction effect caused by factors including the card loan interest rate cut, recorded a 3 bp decline QoQ. Taking into account the effect of the BOK rate cut in October and the loan conversion program effect, additional margin decline seems inevitable. However KBFG through more sophisticated loan pricing and growth of low cost deposits will guard against NIM contraction as much as possible and at the same time focus on noninterest income, including interest income.

Next is the group's cost income ratio. 2019 Q3 cumulative group's CIR posted 51.6% and the recurring CIR excluding ERP cost of the bank and KB Insurance ERP cost posted 50.9% respectively. For your reference, excluding the cost of adjustment factors including this year's group digitalization costs and the bank's bonus payout, the recurring level of CIR stood at a 49.4% level and with the realization of the ongoing ERP effect so far, the recurring level of CIR for the past 5 years has been showing clear market downward stabilization trend.

Next I would like to cover the credit cost. The group's Q3 cumulative group and bank's credit cost each posted 0.19% and 0.03% respectively. Excluding KRW 41 billion of credit cost reversal following this quarter's KCI conversion of investment, the group's cumulative credit cost is still being maintained at a low level of 0.23%.

Next I would like to cover the group's capital adequacy ratio. The group's BIS ratio as of September 2019 posted 15.29% and the CET1 ratio posted 14.39% respectively. And according to the impact from the decline of the risk-weighted asset according to the retail of credit scoring model change that has received approval of the FSS, it went up by 25 bp and 16 bp respectively compared to end June. Although it is a period when concerns about economic slowdown are rising, KBFG is maintaining the highest level of capital adequacy and we have sufficient buffer to prepare for future risks, including in cases of economic downturn.

Now let us go to the next page. From Page 5, I would like to cover our current situation in our response to the new LDR regulations and our strategies to respond to the new LDR regulations, which will start from January of next year. In addition, since the market is very concerned with the bank's profitability deterioration following the interest decline cycle, according to the economic slowdown, I will like to elaborate on our group's profit stability improvement strategy.

Looking at the new LDR, please refer to the graph on the left side. As of September end, KB Bank's LDR posted 95.7% and is continuously declining through strategic funding and loan growth preparing for the new LDR regulation. The new LDR in particular is declining at a fast speed from the second half of this year and is nearly the level of the 100%, which is the regulated ratio and as of end September and we believe that achieving the internal management goal of 99.5% level before the end of this year will be quite achievable in the case KB. Since the proportion of the household loans is comparatively high, it is true that there is a funding burden responding to that new LDR regulations.

But we have been closely and comprehensively monitoring the monthly growth and core deposit trends as well as the market interest rate and competitive situation. And we have been dividing the funding period and size, and have strategically responded through diversifying the funding basis through issuing time deposits, low-cost deposits as well as covered bond.

In the case of time deposits, with the favorable interest rate environment continuing from the latter part of this year, the funding burden has been much lighter than expected from the beginning. And taking into consideration the funding cost, we have been expanding this, focusing on financial institutions deposits.

In the case of covered bond, since 1% of the deposits in won and approximately up to KRW 2.6 trillion can be recognized as deposits, KB Bank issued for the first time in the industry in May KRW 500 billion of won denominated covered bond and have received KRW 2.1 trillion in funding. The covered bond that was unissued until now is a long-term maturity bond between 5 to 7 years of maturity and has a stable funding basis. And even taking into consideration the bank related fees and commission, it is more favorable compared to the time deposits in terms of interest rates.

For your reference, taking into consideration the market situation and additional KRW 500 billion of covered bond can be issued this year additionally. And we believe that loan conversion program will also greatly contribute to fulfillment of the new LDR regulations.

Next I would like to explain about our group's earnings stability improvement strategy. During the past 5 years, KB Financial group has worked hard to lower the interest income dependency and has been gradually increasing our noninterest income in the mid-to-long term. As a result, the proportion of net interest income in our group's total operating income has decreased from 89.1% at the end of 2014 to 79.6% as of September 2019.

In the Korean economy, since the low growth and low interest rate environment can take root, diversifying the group's earnings basis is most important. And KB Financial group is implementing the following strategies for the traditional loan-to-deposit business, fee income and asset management units.

First of all, the bank, which is the representative subsidiary of the traditional loan and deposit business, will convert the past household loan and SOHO base growth access to small and medium business loans, but also link trade finance and CMS and other additional services so that we can have competitiveness and we will also strengthen entry into new growth markets including platform loans.

Next, the fees and commissions are an essential part of our noninterest growth strategy and the securities WM and IB business is focusing on stronger cooperation with the bank so that we can have more tangible results. In particular, in the low interest rate environment, since the demand for investment can increase, the alternative investment product lineup will be strengthened and we want to increase the new IB business including airplane financing to strengthen competitiveness.

Lastly, asset management's importance is growing in the mid-to-long term. And we believe the group's integrated management and support is needed. Accordingly, we achieved efficiency through the collocation of the group's capital market in June, and is continuing to recruit talented management resources and to foster them. In addition, we have been working hard to improve the group's management synergy by including expansion in alternative investment through ways including utilizing our co-investment and network between subsidiaries.

As was mentioned so far, KBFG has established and implemented different strategic test to safeguard earnings fundamentals in a challenging operational environment. We will do our best going forward so that we can become the best leading financial group that is aligned with the market's perspective as well.

Please refer to the following pages for business presentation details.

I would like to conclude the KBFG 2019 Q3 business results presentation. Thank you for listening.

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Questions and Answers

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

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(Operator Instructions) We will take the first question from Hyundai Motor Securities, Jin-Sang 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. First is your NIM outlook. The CFO also talked about the BOK rate cut and potential additional cuts that may come in the coming years and that may impact your performance. But could you be a little more specific in sharing with us what your NIM outlook is for next year?

Number two is on loan growth. Compared to original expectations, the loan growth was lower. I see the Q3 loan growth was softer. Could you explain as to the reason why? And what is your next year guidance for loan growth?

Third question has to do with the loan conversion project or the program. You've mentioned that compared to 2015 the impact is going to be lower, but still the market does have concerns. I do understand that you probably don't have the final figures yet, but can you provide some color as to what impact this loan conversion program may have?

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [3]

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Thank you for the questions. Bear with us one moment as we prepare our response.

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Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [4]

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Yes, Mr. Kim, hello. Thank you for your questions. I see that your questions mostly relate to our bank. With regards to your question on NIM, I will respond to that. In terms of loan growth and the loan conversion program, Lee Jae Keun, who's the CFO of the bank will be responding to those questions.

First of all, with respect to NIM outlook, this year the BOK rate cut happened twice. The market interest rate also has priced in those rate cut. So overall we see that the entire banking sector is experiencing with the NIM contraction. In the case of our company, in October there was a rate cut and also considering the impact from the loan conversion program, we believe that for this year, on a per annum basis, there will be a low single digit basis point decline in terms of the NIM.

For next year, basically we would have to wrap up the planning process for loan growth and funding plan for next year. So we will have a more clearer figure once that plan is set. But in light of the rate cut as well as the loan conversion program impact, we believe that the annual NIM for next year will be mid-to-high single digit basis point. It will -- it could -- I do very cautiously project that it may fall down to that level. So with the decline in NIM, I understand that you would have some concerns over the profitability. So the loan growth and noninterest income and strengthening our global business and also nonbanking business and also very restrict cost control, we are going to do our best to control our earning power.

On top of that, with interest rate decline, there is a valuation gains from securities. And also from the asset quality, there are some positives that we can look forward to. So as we actively manage these different figures, we believe that we will be able to manage our profitability.

Responding to your question on loan growth and the conversion program, Mr. -- CFO Lee will respond to those questions.

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Lee Jae Keun, [5]

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Yes. Thank you once again for those questions. I'm the CFO of the Bank. And in the case of loan growth, the Q3 loan growth, why was it softer? And your question was, what's the plan for next year? In Q3, the growth rate compared to our peers, we internally believe that we have grown. If you look at end of Q2, on the large corporate we had 0.8 inflow of the ones with the limit and the beginning of July there was a outflow. So there was a one-off special impact of over KRW 800 billion. So if you take that off, we were quite okay.

If you look at SOHO and SME compared to our peers, in Q3 we believe that we grew above our peers. Our basic philosophy is that we have focused on margin and also with the low interest rate environment, we want to focus on profitability as well as asset quality. And also we want to minimize the under-impact of the spread as much as possible. So if you look at household loans, the good profitable products are unsecured and Jeonsae loans. And in those segments, we've seen quite sound growth. If you look at mortgage as well as collective loans where our margin is squeezed at this point, especially if you look at collective loan, there is a very fierce competition. So it's very close to zero margin or no margin. So we decided not to engage in price competition. So in those segments, we haven't grown that much.

If you look at our plan for next year, there is a new LDR regime if, once it gets concluded, we believe that we will be able to achieve loan growth which is quite similar to the level of nominal GDP growth rate. That is the objective and the plan that we have set for ourselves.

The impact of loan conversion program, currently in the market, it's about KRW 20 trillion in size. The mortgage, our market share is in the early 20%. So based on our expectation, we think that the impact for us will be around KRW 4 trillion. Having said that, basically we do not yet have this concrete number from KHFC yet. And what impact would this have on our profitability? If you look at home equity mortgage, the yield is around 3%. And because this is covered through MBS with the change, MBS currently is about 1.56%, slightly below 1.6%. So there is a gap in terms of the yield gap. So there will be about KRW 4 trillion impact that is attributable to the yield gap between the loan and MBS. And once again we do not know the specific extent of this impact, whether it will be KRW 4 trillion or not. But we will be able to communicate back with you with a more clearer figure once we have more clear numbers that we receive from the authorities. I hope this answered your question.

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [6]

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Thank you. We'll take the next question from Samsung Securities, Mr. Kim Jaewoo.

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Jaewoo Kim, Samsung Securities Co. Ltd., Research Division - Analyst [7]

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I'm Kim Jaewoo from Samsung Securities. I would also like to ask a few questions. The first question is about your profitability. And you mentioned that the margin will probably drop. And when we have the GDP issues, then the interest income pushup will -- might be difficult. So for SG&A or credit costs or others, if you can elaborate on next year's profitability guideline, it will be greatly appreciated if you can tell us about that.

And the second question is about insurance. And the insurance industry is going through challenges right now. And for KB Insurance, I know that they were in challenging times. So if you can tell us about improvement of the nonbank subsidiary profitability. And for KB Insurance, if you can tell us about your future plans going forward.

Last question is, because we're nearing the end of this year, I would like to ask questions about dividend. And what would be the appropriate level of dividend payout that you might give to the investors? If you could answer those questions, it will be greatly appreciated.

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [8]

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Thank you for the questions. And we will soon answer your questions. Thank you.

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

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Thank you very much, Jaewoo Kim, for your questions. You asked 3 questions. And regarding next year's earnings forecast and the question regarding dividends, I would like to answer them. And for KB Insurance, we will have the CFO of KB Insurance who will answer the second question.

For the profitability outlook, as you know, the Korean economic growth rate has been lower and we have had 2 insurance rate cuts by the BOK and there are some forecasts saying that we will have another rate cut. So the sales environment is not very conducive, but we will be very present and we will take into consideration these factors in setting our business plan for next year and I will explain in more detail afterwards. However, speaking from a long-term perspective, KBFG has had normalization of bank's profitability and we have had profit contribution that has been expanded for nonbanking subsidiaries and we have had stable realization of between 9% to 10% in ROE. However, we believe that next year the ROE could go down to low single digit, but we believe that we could make efforts so that we can try to guard this.

In the case of the bank, the NIM contraction is inevitable following the interest rate drop. But we want to actually safeguard our interest income decline through reasonable rate of loan growth that meets the nominal GDP growth rate. And for the nonbanking subsidiaries, we do recognize that meaningful performance improvement might be difficult for card and insurance, but we believe that for securities, it will be quite possible. So we will focus on this.

In addition, the top line growth, based on interest income, growth, could be limited. So we will do our best to have sustainable ROE and to have expansion of noninterest subsidiary income increase and to have more channels and digitalization and to cut costs. So from the mid-to-long term, we want to have this sustainable ROE as was mentioned and we are trying to maintain the target at 10%. We want to have less dependency on interest income and we want to have efficiency through digitalization and to strengthen our fees and commissions and capital market areas. And we would like to see visible results including our entrance into overseas markets.

You also asked about dividends, and first of all, before I talk about the dividend guidance or forecast, let me just briefly explain about KBFG's dividend policy so far. For the past 4 years, we have actually had KRW 1.4 trillion of share buyback. So we have been very advanced in utilization of capital and in our returns to shareholders. So we believe that we were very advanced in our actions. For example, last year we had the nominal dividend payout ratio of 24.8%. However, the real dividend payout ratio was 26.2%, taking into consideration the share buyback. And taking into consideration the KRW 250 billion of treasury buyback, you can see that we had total shareholder return of 31.9% in 2018. So we can say that our total shareholder return was relatively very sound compared to other peer groups.

However, we believe that going forward we will need to make more efforts and basically we will need to improve our ROE through M&As, have expansion of dividend payout ratio and to have more share buyback so that our total shareholder return can grow. However, in the low growth environment, we need to have sustainable growth engines. So we need to strengthen our nonbanking subsidiaries and we do need to accelerate our entry into overseas markets. So we need to take into consideration the retained earnings that we need in the group for the time being and to decide the dividend payout ratio. For this year's dividend payout ratio, we will need to hear the decision from the BOD and the management in concert. So I cannot answer you at this time, but our basic principle is to have a progressive dividend. So for the dividend payout ratio, we will do our best so that it is pushed up by -- it might be slightly compared to last year, but we will try to do so. And we believe that the net income can also have meaningful increase of KRW 3 trillion compared to last year and we believe that the dividend per share can reflect that going forward. In addition, we are now looking at different ways of additional treasury share buyback and please pay attention to what we are going to do. I would like to ask our CFO to answer the other questions for insurance.

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Unidentified Company Representative, [10]

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My name is (inaudible) from KB Insurance. Let me respond to the question about Q3 performance and the outlook. Now come this year, as you know, the nonlife insurance market's profitability has been deteriorating. If you look at KB Insurance, first of all including auto line as well as the other lines, the loss ratio actually increased. And so the performance was poor.

If you look at the drivers behind this trend is that despite the fact that there were 2 rate hikes, there was also repair cost increase. So there is an increase in cost and loss ratio as a result of that from the auto line had risen quite significantly. And also the long-term line loss ratio also went up because of the medical expenses. And also for general, there was a fierce market share competition which undermined profitability. KB Insurance, basically our net profit originally was targeted at KRW 300 billion, but we underperformed that planned target.

Our company, in light of the interest rate environment, the cost structure as well as the competitive landscape, we believe that such poor performance of the P&C industry may continue into the future. So rather than focusing on short-term outcome and increase in size, we want to focus on fundamentals so that we can really further maximize value. We want to have a clear focus on value creation. If you look at EV, embedded value, and also we want to increase our new business volume, we want to therefore be more refined in terms of our policy management. We want to also further increase our channel competitiveness. As a result, we want to improve our profitability and also be very cost efficient.

Also at the same time, in terms of asset management, in order to respond to low interest rate environment, we want to focus on alternative investment and outsourcing so that we can further up our yield.

Next year on realized medical product, there would be the price related aspects and also fierce competition. So in terms of performance aspect, there could be difficulties. But I believe that we will be able to really hit bottom and lay the foundation to rebound KB Insurance. We are going to do our best to focus on our fundamentals and with the coming of the new accounting standards, we will prepare ourselves fully for IFRS 17, et cetera.

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [11]

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Next, I would like to invite Mr. Byung Gun Lee from DB Financial Investment for your question.

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division - Team Leader [12]

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I'm from DB Financial Investment. I am Byung Gun. I would like to ask you 2 questions. The first question is something that was already mentioned previously, but I would like to know some more details which is about the loan conversion program because it will be focused at the latter part of this year and next year. And what is the impact on the LDR? Which impact do you forecast? I believe that you probably took that into account when you are planning your business plans for next year. So if you can talk about the LDR and the impact it will have on the NIM going forward that you expect. And I believe that your asset growth will decline at the end of this year and in the beginning of next year. So if you can tell us about how much of those considerations you made in making business plans for growth?

The second question is about next year's NIM and what do you think the competition landscape will be like? You mentioned previously that Jeonsae loans have been quite driven by your group and I think that is still the main for you. But your competitors, will the loan conversion programs, because if -- when they go down, they think that Jeonsae loans have to make up for that. But for the Jeonsae loans for RWA and others, you can see that it is quite a high margin product. If there is heated competition for next year, the interest rate, we believe, could go down. We cannot rule out that possibility. So if you can tell us what you believe the competition landscape will be like next year because in Q3 you mentioned the SOHO completion eased a bit, but can we also think that similar scenario can happen for next year, Jeonsae loans?

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [13]

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We will soon answer your questions. Please hold. Thank you.

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Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [14]

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Thank you very much, Byung Gun Lee, for your question. You asked several questions and for the loan conversion program, you mentioned the forecasted effect on next year and late this year. As you know, it's a household loan, it's a mortgage loan and from next year for household loans there will be 115% of deposit funding that needs to be realized and this has not been confirmed yet. But we believe that if KRW 4 trillion is book off, then 115% of KRW 4 trillion will be about KRW 4.5 trillion, which needs less funding as deposits. So that is the situation.

This year, we will have some book-offs and also some other book-offs next year, but according to the ratio we will have different impacts.

Regarding the impact on the NIM, for the mortgage loans, if it's KRW 4 trillion and if the interest was -- it's currently a little bit over 3%. However, if there is the MBS loans that it is converted to for KHFC, then it will be about -- there will be a difference. So we will have a minus on the interest income because of that, but when we think of the fees and commissions and the mid-term commissions and fees, we believe that we will also have a plus factor in the noninterest income and when we have book off in the assets, we have KRW 4 trillion flowing out of the assets.

But for households, we have KRW 143 trillion. So when we have KRW 4 trillion that flows out, then regarding this, we will need to look at next year's business environment and we will respond accordingly. But what is important is, as was mentioned previously, we believe that profitability and asset quality are important growth principles and when the spread contracts, well, we will do our best so that it falls within our principle.

And for next year's competition landscape, well, I am not a fortune teller. I cannot give you an accurate picture of the future. But I believe that speaking from this year, we had heated competition in the first half of this year, but after July we have had less competition and we have had the loan spread that we drove at the first half of this year and the loan spread for the latter part of this year will be quite different because we believe that it has recovered somewhat in the second half. And until the end of this year, we believe that the competition will probably remain at the current level. And for the early part of next year, we believe that early this year for the other banks excluding KB had very heated competition, in particular for different prices and cost. So for SMEs and our SOHO loans, a lot of them moved to other competitors, but it was because we wanted to not deteriorate our growth principle and we wanted to have a keen eye on the market and only have growth based on profitability and asset quality.

In addition, you mentioned that we had a drive for Jeonsae loans, but actually it was not our intention because the government was quite concerned about household debt. So we have had just a real demand for Jeonsae and we cannot actually stop them from coming to our bank and getting Jeonsae loans. So we can just extend loans to them because they come to us.

So even looking at the level of interest rate, we're not actually driving Jeonsae loans with a low interest rate.

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [15]

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We have one other person waiting to submit questions from Hana Financial Investment, Mr. (inaudible).

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Unidentified Analyst, [16]

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I would like to ask 3 questions. First is on your margin. Q3 there was a decline of 3 basis point. Other banks, I think, also is going to -- actually has experienced a bigger decline. Now KB compared to other banks, if the interest rate gap below 3 months is smaller. So in Q2 and beginning of 3Q, it seems like the market rate decline is not yet fully reflected on your loan book. I think this is going to continue to continue. And also there was rate cut in July and October and you're assuming another rate cut to come next year.

And in light of the loan conversion that you say that there will be a decline by mid-single digit. But aren't you too optimistic? So could you elaborate on this comment? And your delinquency ratio, although very slight, it did inch up. Can you paint some color as to what the trends looks like for Q4 and next year? And my last question is on credit card. There is a one-off corporate income tax impact. Could you explain as to what this is?

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [17]

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Please bear with us. We will respond in a moment.

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Ki-Hwan Kim, KB Financial Group Inc. - Deputy President & CFO [18]

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Yes, so (inaudible), thank you very much for your questions. You asked about the margin. As to the margin outlook, aren't we too optimistic in our projection was your first point. Second had to do with the delinquency trend, what the trend will look like next year. I will respond to the question on margin and delinquency question will be answered by the group CFO.

As you've mentioned, compared to Q2, there was a 3 basis point decline and other banks have actually experienced 6 to 7 basis point decline. There are multiple factors that come into play. In the first half of the year, the newly originated loans, usually they're like third cycle or sixth cycle, but in Q1 and Q2, come the September basically the -- it's MOR plus spread, that's the price. MOR in the first half of the year was relatively high and in the second half with the lower rate, this declined and also spread in first half because of tight competition, despite it was low. So in the second half, it's low spread plus lower MOR. So relatively speaking the price actually went down, which had an impact on the NIM for the other banks. That's our assessment. In our case, overall, the interest rate in the market, we believe that, if you look at Europe, they're in the negative realm and basically there was going to be a low interest rate and low growth environment which is going to become a new normal. A lot of people talk about this.

Now a lot of market experts believe that in a certain year, market rate may inch up. However, the secular trend is going to be a downward trend going forward. That seems to be the inevitable direction going forward. So in that aspect, you talked about the interest rate gap, although I can't share with you a specific number. Beginning of or the end of last year and as this year, as of end of September, the interest rate gap, we've narrowed that as quite significantly. So with the further decline of the interest rate and the impact, let's say if the impact is 100, right now we have been able to cut that impact by half. So any future interest rate declines, basically interest income -- it will be a negative factor to interest income, but compared to the past, that impact is going to be much lower because we were able to match asset and liability much more closely. So we will closely monitor the interest rate environment and really manage those gaps. So overall with interest rate decline, the extent of interest income decline has been limited, been constrained and we will continue to do so as we go forward.

Delinquency question, our CFO from the group will respond to that question.

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Unidentified Company Representative, [19]

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Recently due to the economic slowdown, the delinquency rate, the bank's delinquency rate for household, corporate and card, we see that delinquency rate is inching up very slightly. But if we look at these figures in an absolute basis, it's a low figure to begin with. But we do understand there is a slight increase. So we're very closely monitoring this in our underwriting and review criteria is very rigid and we are very much focused on vulnerable borrowers. So for household and SOHO, we are using integrated database, making preemptive analysis and proactive analysis. And by different types of sectors, we monitor so that we could minimize any potential losses. For credit card, we are focusing on multiple loan holders. So also for capital we are making use of machine learning to do a more thorough credit analysis.

So in Q4 of this year, our credit cost is going to be controlled within 20 basis points. So it's quite stable. For next year, there is going to be a decline in the reversal of write-back, a reversal of provisions and with slowdown in the economic cycle, basically the provisioning may inch up slightly. So there could be a slight -- there are factors for a slight increase. So we will control this quite rigidly. At this point, 80% is the so called high quality class, the prime class. So for the recent couple of years, we were able to increase that to 50% to 80%, which is testament to improvement in our asset quality. If you look at LTV compared to our competitors, it's being maintained at a quite robust level. So even if we do scenario analysis, even at the worst case scenario, we can contain the credit cost to around 48 basis point even at worst case. So credit cost, once again, we have strong commitment to control that rigorously. And also for credit card, our CFO from KB Card will respond.

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Unidentified Company Representative, [20]

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Yes, thank you, Mr. (inaudible) for great question. KB Card, there was a tax review and basically corporate cost -- corporate income tax of KRW 40.5 billon, we were notified with that and we did disclosure in June 27. We actually paid KRW 6 billion. In terms of the differential, we are going through some objection process because there is a gap that we do not agree with. And also based on the corporate accounting basis, there may be -- if there are any uncertainties on the corporate tax aspect with the help of the accounting firm, this -- the gap which is about KRW 29 billion, basically we received notification from this from the tax authorities and in Q3 accounting figures it has been booked as a one off. But there is re-review that has been undertaken by the tax authorities. So in term -- when it comes to the gap, the difference, once the final judgment is rendered, we will make appropriate accounting treatment. Thank you.

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Joong Kwon Bong, KB Financial Group Inc. - Head of IR [21]

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Thank you for your questions. We don't have any other questions on the line. We will hold. Thank you very much. We do not have other questions on the line and we will conclude our business results presentation. Thank you very much.