KB Financial Group Inc. (NYSE:KB) Q4 2021 Earnings Conference Call February 8, 2022 2:00 AM ET
Scott Seo – CFO
Conference Call Participants
Jin-Sang Kim – Hyundai Securities
Jaewoo Kim – Samsung Securities
Do Ha Kim – Hanwha Investment
Lee Byung Gun – DB Securities
Yafei Tian – Citigroup Inc.
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
0:02 Greetings. I’m Peter Kweon, the head of IR at KBFG. We will now begin the 2021 Yearly Business Results Presentation. I would like to express my deepest gratitude to everyone for participating today. We have here with us our group CFO and Senior Managing Director, Scott Seo as well as other members from our group management. We will first hear the 2021 major financial highlights from our CFO and Senior Managing Directors Scott Seo and then have a Q&A session. I would like to invite our Senior Managing Director and CFO to deliver our 2021 earnings results.
0:45 Good afternoon I am Scott Seo CFO at KB Financial Group. Thank you all for joining KBFG Q4 and full-year 2021 earnings release presentation. Before presenting on the 2021 business performance allow me to first run through key highlights. First, 2021 net profit on a controlling share basis was up 28% on year to 4.4 1 trillion Won, meeting the market consensus. Diluted EPS was KRW10,891, up 25%. ROE was 10.2%, up 1.4 percentage points year-over-year, which is a testament to notched up earnings capacity. In the middle of the COVID pandemic, Korean economy posted a record high export growth last year on the back of global recovery, achieving 4.0% economic growth rates showing a clear sign of recovery.
1:50 Driven by solid loan growth, interest rate hikes booming stock market, core income, including interest income and commissions posted a growth driving earnings improvement. This earnings improvement however is not merely driven by interest income, but an outcome of stronger competitiveness gained from WM and IB, as well as better insurance market backdrop and M&A impact of Prudential Life and acquisitions in Cambodia and Indonesia.
2:18 Also non-Bank Contribution to net profit, which used to be 30% has risen to 43% level in 2021. Second point to note is that net profit growth and double digit ROE were achieved even under the group’s conservative provisioning stands which took voluntarily. 2021 Group’s credit costs was around 30 basis point, 1.5 times the pre-COVID average of the preceding three years. Also 2021 NPL coverage ratio was 209%, up 62 percentage points versus pre-COVID level.
2:58 All this is an outcome of pre-emptive provisioning for 2021 in the midst of softening of the asset market experienced in the equities, fixed income and real estate market on the back of lower liquidity and interest rate hikes, as well as concerns from the market on asset quality regarding household debt levels and government led COVID-19 forbearance support.
3:21 Third, during today’s DOD FY2021 payout ratio was set at 26% and we were able to bring back payout ratio to the pre-COVID levels after the temporary decline to 20% since the pandemic. In terms of the DPS for full year 2021, including interim dividend of 751 per share paid out in August, amounts to [Indiscernible] supported by normalization of payout policy and higher net profit DPS was up 66% year-over-year. There was also a DOD revenue solution to cancel KRW150 billion worth of treasury shares. This is equivalent to 3.4% of 21 net profit.
4:07 This decision was part of our commitment to enhance shareholder value in the midst of difficult that got brought on by COVID-19 pandemic. We will continue to explore wide ranging options for a more advanced shareholder return policy and do what we must to raise it up to the global standard.
4:28 Lastly, let me provide an update on our digitalization efforts. Over the course of 2021 to redefine ourselves as a number one financial platform company, we undertook bold strategies. Last year, we launched the new KB store banking, a super app and the group’s hub platform, the connect core subsidiaries, including the bank through which we were able to level up platform competitiveness as a comprehensive financial group. In the same vein, we also launched Liiv Next, which is a financial platform for Gen Z’s to ensure potential customers for the future. This year, my data service will fully initiate, triggering a fiercer competition between financial versus non-financial and big tech versus financial incumbents. Nonetheless, underpinned by valuable information of KBFG 36 million customers, we will utilize data analytics capabilities, critical content of affiliate and expert Asset Management knowhow to rise as a number one financial platform in 2022.
5:38 I will now run through our Q4 and full year 2021 business results in more detail. Page two KBFG’s 2021 net profit was KRW 4,409.6 billion on the back of interest income and net fees and commissions income, which are solid core profits growth and through inorganic growth via M&A. There were sizeable year-over-year growth of 27.6% attesting to enhanced earnings capacity of the group. Meanwhile, Q4 net profit was KRW 637.2 billion, a large decline Q-on-Q due to ERP expense this quarter, pre-emptive provisioning one-off items and seasonality. But recurring basis net profit was around KRW1.1 trillion sustaining a robust earnings capacity.
6:31 As can be seen from the bottom right graph through continuous efforts to improve business competitiveness of our subsidiaries, bank, securities, insurance and credit card have all seen meaningful performance improvements. Non-bank contribution to group net profit hence expanded to 42.6%.
6:54 I will now dive into the details of each item. 2021 Group’s net interest income was KRW 11,229.6 billion, up 15.5% year-over-year or around KRW1.5 trillion, a sizable increase which drove goose performance improvement. This result is driven by the bank solid loan growth and NIM improving driving interest income of 11% while impact of financial life and Cambodians prospect M&A further drove around KRW500 billion of rise in interest income.
7:30 Q4 net interest income was KRW2,974.2 billion, up 4.2% Q-on-Q, on the bank of the bank’s loan in one going up 2.2% versus September and continuing the uptrend, as well as NIM improvement of three basis points Q-on-Q.
7:51 Next 2021 Group’s net fees and commissions income was KRW3,625.6, up 22.5% or KRW667 billion year-over-year. This improvement is due to increases in credit card fee income writing on the recovery and consumption and banks trust product sales recovery, which lead to better trust income, as well as strong equities market and IB competitiveness driving a growth in fee income from securities business. On the other hand, Q4 net fees and commissions income came in at KRW881.7, a marginal Q-on- Q declined on the back of seasonal squeeze on fee income from securities business mainly around brokerage and IB.
8:37 But compared to KRW2 trillion of annual group fee Commission’s income, in 2021, we notched up that level to mid KRW3 trillion level, which endorses groups improved capacity in generating such income. Next is on other operating profit, Group’s 21 other operating profit was impacted by rising market rate and $1 exchange rate, which squeezed earnings related to securities derivatives and FX driving other operating balance down KRW183 billion year-over-year. But for the insurance business with gradual earnings improvement from KB insurance, and acquisition of Prudential Life making its mark, there was KRW256.7 improvement year-over-year.
9:21 Q4 other operating profit was impacted by higher financial market volatilities in terms of interest rate and equities index, which led to erosion of securities trading performance. Also seasonal factors like cold wave and heavy snowfall and high value accidents drove up loss ratio, constraining insurance underwriting income, all leading to a lower Q-on-Q result.
9:42 Next [Indiscernible] Group’s G&A. Q4 Group G&A was KRW7,200.9, up 5.4% or KRW 368 billion year-over-year, mainly due to the acquisition of Prudential Life, Indonesia spooking bank and Cambodia’s prospects, which added approximately KRW 300 billion of expenses.
10:02 Apart from such M&A impact, G&A was up only 0.8% on year, which we believe is the tangible outcome of COVID wide efforts on cost management and headcount efficiencies. Q4 G&A was KRW2,143.4 billion on the back of KRW262 billion of ERP expenses and higher adding promotion expense and other seasonal factors reporting a significant increase.
10:30 Next is on provision for credit losses. Q421 grew PCL was KRW588.6 billion. As part of pre-emptive risk management. Large additional provisioning amounting to three times usual quarterly size took place up to Q3 of 2021 and due to such one off impact, there was KRW389.2 billion rise Q-on-Q. To fully prepare for COVID-19 related uncertainties during the fourth quarter, we used conservative economic forecast scenarios reclassifying certain loans related to COVID-19 which led to around KRW 264 billion additional provisioning.
11:18 As you know, on top of KRW377 of pre-emptive provisioning made last year, we’ve set aside yet additional provisions, which we believe has given us ample buffer against the COVID-19 uncertainties. For the credit card business in compliance with Basel III revisions new PD probability of default model was applied and accordingly in line with the required upgrade of the retail credit score in model, there was additional provisioning of KRW34 in Q4.
11:54 2021 PCL reported for the full year KRW 1,185.1 billion, credit cost was 30 basis point following KRW1,43.4 billion of FY20 provisioning and credit cost of 26 basis points, we decided to take a conservative approach to meaningfully provision above the 20 basis point level for two consecutive years.
12:23 Next is on key financial indicators. Page 3, first is on Group’s profitability. KBFG’s 2021 ROE was 10.22% on solid growth in core earnings and diversified revenue sources, gross earnings fundamentals notched up with recurring basis orally sustaining a steady 10% quarterly level since the beginning of the year.
13:00 Next is growth in one denominated banks. Banks loan in one as of end of ‘21 is KRW390 trillion, up 7.9% year-to-date and 2.2% versus September end. Also learned reported KRW170 trillion and driven by [Indiscernible] loans underpinned by actual event demand, there was fair level of growth of 5.1% year-to-date. However, that growth slowed down in Q4 due to the regulatory impact on household loans.
13:33 Corporate loan reported KRW149 trillion on YTD basis. SME loan continued steady uptrend at around 3% quarterly basis and large corporates recovery in demand and stronger CIB business leading to a solid growth and acquisition financing driving 11.2% growth. On a Q over Q basis as corporate bond market was constrained on rate hikes. There was rising demand for loans on top of acquisition financing, which drove around KRW4 trillion of large corporate lending leading to a Q-on-Q growth [Indiscernible].
14:07 Next I will elaborate on the NIM 2021 Q4 Group and bank NIM each posted 1.85% and 1.61% respectively and continued an expansionary trend for two consecutive quarters. In particular bank name reflected the interest rate hikes and while the loan asset replacement was taking place, as a result of our continued efforts to improve manage asset profitability and selective loan policy centering on profitability, it improved three basis points Q-on-Q. On the other hand, in case of the group and banks 2021 annualized NIM, the spread widened on the back of profitability center portfolio management and with the effect of lighter funding burden following the core deposit profit growth, it improved by 7 basis points YoY and let the group’s interest income expansion. We will not only thoroughly manage funding costs taking into consideration balloon pricing, advancements and market circumstances going forward, but also improve profitability through securities management portfolio advancements and manage the NIM thoroughly from Q1 of this year, we are expecting the NIM traditional expand with the full fledge with such an effect on the UK interest rate hikes.
15:25 Let’s go to the next page, page four. First I want to cover the group cost efficiency 2021, group cost income ratio posted 49.7% and greatly improved YoY and on the back of solid increase support earnings and improvements of headcount structure. The cost efficiency improvement trend is truly taking place. In particular when they exclude one-offs including ERP and digitalization costs, CIR posted 46.3%, a record though.
16:01 Going forward, the strengthening profit generation capacity and group wide cost management, we plan to manage the CIR so that the CIR which was at a standstill at a mix of 3% level in the past can approach it early to make 40% level in the mid-to-long-term.
16:18 Next is the credit cost ratio. 2021 Group credit cards posted 30 basis points and if the aforementioned size of a pre-emptive provisioning effect, it increased slightly YoY, but the credit cards excluding non-recurring items posted 21 bps and has been safely maintaining at 20 VP level for the last five years and has been proven industry leading risk management competencies. Although there are increasing concerns about asset quality with interest rate up cycle and impending COVID-19 forbearance program termination, since we’re securing sufficient buffer by accumulating additional provisioning, we believe that the credit costs will be safely managed going forward.
17:02 Next, I will cover the capital ratio of the group. 2021 Year End group CIS ratio posted 15.78% tier 1 ratio recorded 14.55% and CET1 ratio posted 13.46%, all increasing YoY, despite the increase of RW following loan growth and increase of dividends on the back of strategic Capital Management, including solid profit generation capacity and hybrid bond issuance, we are still maintaining the highest level of capital adequacy in the industry.
17:39 Let’s go to the next page, it is page 5. From this page, among the many challenges that the financial industry is facing this year in 2022, I would like to cover those that the market is very concerned about I’m interested in the 2022 challenging factors and then elaborate on KB financial group’s counter measures. This year, there are concerns that are non-interest income, which performed positively last year in a favorable sales environment, including the strong equities market will weaken due to many reasons including equity markets slowed down interest rate hike and credit card merchant fee cost. There are also concerns that with the reflection of the possibility that the asset quality can also worsen with a key interest rate hike and termination of the COVID-19 forbearance program, the earnings improvement momentum might slow down in addition to lowering boundaries between financial and non-financial and not only that platform competition between fintechs & bigtechs intensifying. But also with the complete rollout of my data services full-fledged competition to secure data initiative and early market dominance. This year will be a very important time for financial companies to find ways to secure platform competitiveness market dominance and disappear them as soon as possible.
18:57 To defend we broke down the 2022 challenging – challenge factors in Q4, first concerns about non-interest business deterioration, second possibility of asset quality worsening, third intensifying platform competition, and fourth full-fledged my data competition and are coming up with strategies to respond to the fourth. First of all, regarding concerns about weakening non-interest income I would like to elaborate on KB’s counter measures. 2021 was the year when the performance of non-banking business was prominent in the overall financial industry. In particular, KB finance was evaluated to have improved our level of non-interest earnings power based on the most diversified business portfolio in the industry. We also expect that we will be able to continue our additional growth momentum this year as well by recent visible results in the group four major growth businesses including WM, CIB, capital markets and insurance.
19:55 In the WM area basically, we will expand product sourcing including ETF alternative investment and overseas investment in asset management service, we will attach channels products and services for customer segments and provide differentiated asset management service. We’re also high asset customers and a non-face-to-face asset management, we will link my data and expand market share. In the CIB and capital market, we will expand the group CIB coverage and expand revenue sources through new investment and eco-friendly and future oriented business investment ID and global ID version. Diversify capital market management portfolio and strengthen our treasury book management capability to thoroughly manage profitability. In insurance, we will advance the PC customer product channel operating system that expands revenue sources and increase investment in high yield assets including alternative investment and structured products so that we can improve are managed asset profitability.
20:59 Next, I would like to cover our countermeasures to the second challenge which is related to the possibility of asset quality deterioration. KB Financial Group has been proving the highest level of risk management capability until now, 2021 and banks comprehensive delinquency rate and comprehensive NPL ratio equals 0.36% and 0.27% respectively. And it’s being managed strictly at the lowest level in the industry and the group’s NPL coverage ratio closer 208.9%. And it’s being evaluated to safely secure loss absorption capacity. Despite this, this is the year when credit risk can rise with the interest rate hike and COVID-19 forward bearings program termination, we will do our best to more strengthen our asset quality management system to response the interest rates upcycle, we have defined high risk sectors of multiple borrowers and are monitoring them and strengthening stretch sets for high exposure borrowers and to respond to post and with COVID, we are tightening credit reviewable volume effectors and issue industries and executing proper rebalancing based on semi-annual intensive examination on potential and MTL and we plan to support soft landing of firms after the termination of the COVID-19 forbearance programs to stage support.
22:25 Let’s go to the next page, [Indiscernible] intensifying platform competition, KB Financial Group is focusing on our group’s capacity and support so that we can sit short tops here level digital platform competitiveness through KB star banking, the group Super App, which strengthen the connectivity of core services and representative comprehensive asset management plus platform and comprehensive digital KB Pay. We established the basic banking app and of course a financial platform, which will do asset management and the settlement markets. And we have to enable many which targets the MZ generation investment and stock market analysis and Liiv Next the financial platform customized for the Z generation we are now expanding our coverage of our customers. Moreover to KB’s our corporate banking, we plan to lead the platform market in the corporate finance sector. With this platform competitiveness if we can secure seamless connectivity with the offline channel and provide the most optimal products and high quality services from the customer’s perspective. We believe that we can secure top tier competitiveness.
23:43 Lastly, I would like to cover our countermeasure to my data, which is the most talked about topic in the financial industry. With the full rollout of my data in January of this year, the data economy era opened up KB Financial Group strategies to provide not only KBs unique differentiated content based on our financial expertise, and also linked business specialized services to our group platform but also provide hyper personalized asset management services, that will reflect the daily activities of our customers going into more detail in the area of asset management service. In the case of the bank, it will provide comprehensive asset management service based on offline omnichannel, securities and card each will provide investment special life and lifestyle based asset management services respectively. It is a specialized service not our insurance will provide health management service which converges healthcare and finance. Capital will provide auto financing and auto related lifestyle platform service and customized lifestyle financial content will be provided for different businesses. If we can secure KB unique content competitiveness through this method, we believe that we can have early dominance in the my data market and contribute to accelerating our group top tier platform competitiveness. In 2022 this year, KB Financial Group will respond to these challenges through a ceaseless innovation focusing on our customers. The two are sustainable growth and the we forward once again as a leading financial group.
25:09 From the next page there are details regarding the earnings results that I have a forementioned. So please refer to them as needed because I will concludes KB Financial Group 2021 earnings release presentation thank you for listening.
25:28 We will now begin the Q&A for those of you joining us via the internet. please refer to the contact info on the very last page of the presentation screen. [Operator Instructions] Please give us a moment as we wait for questions. We will take the question from Mr. Kim Jin Sang from Hyundai Motors Securities. Please go ahead.
26:08 Good afternoon. Thank you for good results. I would like to ask you two questions. First relating to capital management in terms of your treasury share cancellation and normalizing your dividend payout ratio. I’d like to extend my gratitude to your decision and also would like to understand what your direction going forward would be from mid-term perspective as well as for this year because this year you have already cancelled some of the shares, but I think the size is not that significant so would you be making some additional share cancellations as we go forward and also you’ve paid out interim dividend Are you – at the same time considering quarterly dividend payouts, I would like to understand whether that will be your approach and your payout ratio is 26%. So we’d like to understand from a progressive payout policy perspective, I know that is the position that you have taken. Could we also expect a more increase from your payout ratio? And second question, the CFO has already mentioned that some of the challenges that you – the company would probably face is only non-interest earning side. If we break that down, they’re going to be called business securities and insurance business. So these are the non-bank related businesses. These three businesses already reported a high base. So do you see some discrepancies across these different businesses with some subsidiaries perform better visibly this year? And some others not? We’d like to get some color on that.
28:06 Thank you very much for that question. Just give us one moment. Thank you very much for your question. Would like to say hello, and also say Happy New Year. I would answer the question on Capital Management and then the second part of the question, including our Commission’s income and overall operational backdrop with regards to that question, I’m going to invite our CFO from KB Bank and Managing Director [Indiscernible] from KB Securities and also senior EVP, Kim of KB insurance and also managing directors [Indiscernible] to respond to that question.
29:05 So let me first talk about our capital, capital management. There’s DPS, there’s payout ratio and third, there is also trudging share cancellation and share buybacks. Based on our strong fundamentals. And based on our strong capital strength, we want to adopt a more advanced shareholder return policy, as we go forward. As part of those efforts, for the past two years, due to the COVID-19 crisis, dividend payout had been capped. We want to however, very quickly normalized to the 30% level. KB has a sufficient capital buffer. So we believe that we do have capability to pay out to that level, we need to continue to also grow our earnings and make sure that the DPS continue to show an uptrend. We do have earnings capacity as well as the fact that we have a very conservative policy in terms of provisioning as also we expect DPS to also go up as we go forward.
30:13 And also another very important aspect is about interim dividend. We are thinking of many different options, so that we could further boost up total shareholder return level. We have not yet made firm decision on share buyback or cancellation. But that is always an option that we are open to, including interim dividend – including quarterly dividend. We are going – we are fully benchmarking against global advanced financial institutions, and we will listen to the feedback of the shareholders so that at the end of the day, we can come to a more shareholder friendly policy.
30:47 I would now like to turn over the microphone to the CFO of the KB Bank who will provide you with the elaboration on how they see the market.
Unidentified Company Representative
31:00 So since we’re only at the beginning of the year and considering there are many different variables, I would like to take a cautious stance in responding to this question, in terms of interest income or the NIM income. As you know, due to the upcycled and interest rate on a per annum basis, we’re looking at about 7 to 8 basis point growth and the loan market 5% to 6% growth we think it is achievable on the non-interest income side, looking at the volatilities of the financial market that we are experiencing, we believe there will be some difficulties, but at this point we are growing our flow biz and considering the growth of our IB business, we expect the non-interest earnings power, we will be able to further build on that capacity.
31:53 In terms of G&A, looking at some potential future business areas, we are continuously increasing our investment, but all of that investment is based off of on the premise that we are going to be very much cost efficient. In provisioning, we’ve taken a conservative approach and we’ve been provisioning continuously, and we plan to continue on with that stance this year. The PPOP basis on an a net profit basis, at a certain level we believe the uptrend in terms of provisioning to continue.
A –Unidentified Company Representative
32:34 Hello, I am [Indiscernible] from KB securities. You will probably know well about the current stock market situation. So putting that aside, in terms of the trading volume, it’s gone down about 20% compared to previous year, so we expect brokerage income to somehow declined to a certain extent. Having said that, as you know, KB Securities, we were the one of the main arrangers for the LG Energy Solution IPL and hence we expect our more big deals to come this year. And also for the global acquisition financing is another area that we’re actively participating and also, we are seeing continuous growth and so out of the WM, any declines from the WM, we think we will be able to make up for that in other businesses and sales and trading, interest rate is going up and also equity prices going down. So what impact would that have on our P&L would be one of the areas that you will be probably interested in. And a bond side we’re taking a short position and an ESS, short delta, long gamma is the positioning so that we could be protected on the equities market declined. So our performances more or less well defended.
On the institutional clients side, domestic brokering, maybe the income may decline, but starting last year, on the outbound sales activities, we were able to really boost that business. So that will maintain so overall brokerage income declined, how much can we offset that from other business lines, there may be some fluctuation and our P&L income. However, we think that impact is not going to be all that significant, to a level that it could be felt at the group level.
Unidentified Company Representative
34:42 Yes, good afternoon. I’m [Indiscernible] from KB Insurance. So let’s first look at the overall insurance market there is both pros and cons in this market. So structurally, the medical indemnity is loss ratio, the extensive increase is going to slow, but it will take time for it to fully normalized. Also, as we enter into the so called risk COVID phase, we expect auto loss ratio to aggravate. Now having said that, looking at 2021 last year and if you look at the breakdown of our P&L, profitability of a PNC insurance is the investment yield and underwriting income. Basically, in ’21, we were able to reach the earnings with a better underwriting profit. Basically key drivers behind underwriting profit is improving loss ratio, as well as expense ratio. So in 2022, we expect there to be a quite steady level of profit making capabilities in ’22. And on top of that, last year, the focus that we have really looked at is increasing and improving the long-term persistency ratio and increasing the high quality policies that really underpins our growth. And then, if you look at the lines of businesses, we want – we’ve been improving on the portfolio of the policies for the auto and we’ve made improvements on the labor cost is over expense structure.
36:23 And if interest rate starts to go up, we expect that there’s going to be a higher yield from investment. So through hard work this year, we think that we will be able to outperform what we were able to achieve last year.
Unidentified Company Representative
36:56 Yes. Good afternoon, I am [Indiscernible]. Now, credit card company this year, after the merchant fee reduction in 2019, we have been expecting similar level of cut in merchant fees. So we will be able to minimize the impact from that. We have our core businesses, we have new business, we also have platform as our key business line, we want to secure key competitiveness. And we are at this point really focusing on building on both the profitability and the top line. Basically, we will grow based on our credit card numbers in driving up our income. And in the payment business, we will stay away from excessive marketing, which is not profitable. In terms of financial business, in order to increase high quality customers, we’re going to further upgrade our credit scoring, model and respond to a new marketing and regulatory environment and in order to expand on new revenue sources. Last year, global business contributed to our profit, we want to further bring about organic growth of these global businesses through which we could expand on our new business earnings.
38:12 On KB pay, I would like to also further upgrade and make that service more sophisticated and strength, make it more stronger so that we can expand on our capabilities in the platform – on the platform. Thank you.
38:25 Thank you for the very detailed answers. We will take the next question. From Samsung Securities, we have Mr. Kim Jaewoo on the line. Please sir.
38:38 I’m Kim Jaewoo from Samsung Securities. Thank you for your question. I have two questions. The first question is about your digital transformation. I know that you have new scar banking and other impressive feats and what I’m curious about is [Indiscernible] quite competition nowadays, what is your MAU goal and I think not only the MAU numbers are important, but also I think the time is important in using the app. So how are you going to increase the time people use? Time spent using the app and can you tell us about what will be the merits of your platform? Why should customers use your platform and tracking data quality that was aforementioned, of most concern is for the social for those alone and it is in the news often nowadays. So I think people have a sense of apprehension. So can you tell us about your take on those upcoming shareholders and compared to the past? I know that for the bank, there is capital buffer and other capacity that can lead to a soft landing going forward. But can you tell us about your plans going forward? And if there are problems that occur, then what is the amount of forces that the brain can withstand? Because I know that those security has increased? So you have other ways, but can you tell us about how much you can take. Thank you very much Kim Jaewoo for your questions, and we will wait for an answer.
Unidentified Company Representative
40:21 Thank you very much for your questions. Thank you very much. Mr. Kim Jaewoo and we would like to answer your questions in two ways. So for the digital questions, we have digital platform [Indiscernible] Senior Managing Director from KB Financial Group that will answer that question and for asset quality and so hold and the soft landing and concerns and what happens if we suffer losses? Our risk head [Indiscernible] Seniors Executive Vice President of KB Financial Group will answer that question. So I would like to hand the microphone to two [Indiscernible] Yes, that’s me. I’m the senior managing director of KB Financial Group.
41:12 And regarding three questions you asked, I would like to answer them in Korea overall. Looking at the mobile banking app, we think that MAU about KRW7000 and for a financial platform to be recognized. We would need to have more than KRW10 million MAU and we have a challenging goal of becoming the number one financial platform, so our star banking Super App MAU goal is KRW15 million. For Star banking after its revamp them. We have reached MAU up to KRW9 million and so on a login basis, we will make the calculation and through many strategies, I believe that we can reach 15 million full. And to do this end, we will have the structure of the product so that it can induce MAU, so we are currently updating that as well. And for our base customers, we have a new, great number of them. So we have our 24 million base customers, we are having our Super App strategy played focused on them. So we are planning targeted marketing as well. And secondly, regarding how we can extend the time people spend on the app, I think it will be quite important and to this end last year with the bank and the Financial Group. There is the digital content Center, which is belonging in both of our groups, subsidiaries, and I think that was the first attempt and in order to improve MAU, our products and transaction services are very important. But at the end of the day, we need to have a development of content that will induce customers to visit our app. So we are going to do our best to innovatively improve this and since this is the first year full rollout of my data, we have the asset management and expense management services if they’re well included in our Super App, it will be very conducive to attracting customers.
43:17 And we believe that our differentiating points are as follows. First is our capability in asset management. We have 36 million Financial Group customers and our we have a long-term relationship with them, and we believe that we will make extra efforts, so that we can have a lifecycle-based asset management cycles. So that in our WM, we have developed an Asset Management Solution and we are going we have put that on that. So we will link it together so that we can try to strengthen customer management I think that is an advantage we have over others and in big tech. Thank you very much for your questions.
Unidentified Company Representative
44:00 I am [Indiscernible] you in charge of risk at the KB Financial Group regarding so who loans and concerns of vulnerability and future prospects, I would like to explain our stance. So we have for the corporate SOHO’s, their delinquency rate is 16 bps, and they have 93% security or collateral, and we have 19 bp for retail delinquency rates and their security rate is also similar. So in a COVID situation, it is true that many people can be concerned but looking at delinquency rate and the collateral rate it is very high. So we believe that we will not see accumulating risk also related to additional losses for SOHO’s. Their collateral rate or security rate is very important and in our case, we got to LGD in the collateral role. So if the loss rate is 5 VP, so if you are collateralized or if you are secure that even if there is a default only 5 VP of losses, so we have more than 90% of security rate or collateral rate. So even if the situation deteriorates very seriously, you do not have to be very concerned about additional losses going over that, of course for SOHO loans for retail SOHO’s, then for the borrowers, well, it can be linked to individual loans. So we can have the risk of multiple borrowers. So from late last year, for the SOHO loan holders, if they are the individual, they have other individual loans, then we have a cap on how much of the loans we grant to them. So we are tightly managing these multiple borrowers.
45:52 So for the SOHO loans, we don’t think that the risk will accumulate. Even if the situation aggravates in 2022, we believe they’re looking at the situation in 2021 for the provision for so who knows it was only between KRW10 billion to KRW20 billion. So in this situation in 2022 this year, if we believe that it will be at a similar level to 2021. Thank you very much.
46:22 Thank you very much for your answer. We will move on to take the next question from Hanwha Investment Securities, Do Ha Kim. Please go ahead.
Do Ha Kim
46:30 Hello, I am Do Ha Kim from Hanwha Investment Securities. I have one question on banks margin and the other question relates to Prudential Life. Last year in Q1, your margin uptrend was quite steep. But in Q2 and Q3 compared to your peers that increase was not an increase was not as fast. If it’s due to the cycle difference. For this year 7 basis points to 8 basis points margin improvement is your target but on a quarterly basis in light of the timeline, when do you think will we be able to really see this feed into the actual numbers as we move into different quarters.
47:17 Regarding Prudential Life, now, because it has a lot of variable exposure, in terms of the right facts regarding the increase in the interest rate, but if we look at the reserves, that may not be the case, it seems like the investment yield is also moving in a similar manner. Maybe the hedge ratio is quite high. Can you provide some more details regarding the variable exposure at Prudential Life? So give us one moment to respond to that question.
Unidentified Company Representative
48:03 Yes, regarding the margin, the net-interest margin. So the CFO, as the bank CFO has previously mentioned, as of today, if we assume that there’s going to be a policy rate hike in Q4, we are currently looking at 7 basis points to 8 basis points increase. If the policy rate moves quicker and by a larger margin, then net-interest margin we have, we think has room to go up further.
48:38 Second point, I would like to also add is that if you look at the balance sheet of the bank, and if you think that they are sensitive to the asset, and if the NIM analysis conducted based on the rate hike cycle or the loan cycle, repricing cycle, but one thing I want to emphasize is that we also have to take into consideration the funding side. So this has to do with the interest free funds, KBFG or KB bank compared to the competitors, the net interest margin on the absolute basis and this is because of the bigger contribution of the interest free aspect. So for demand deposit, KBFG has outstanding deposits franchise, and out of the total shareholder equity, the size is big, and it’s low loss reserves, the size and coverage is also big compared to the peers. So that also makes contribution to the overall NIM profile.
49:41 As you know, if the absolute level of interest rate goes up, then there’s going to be a bigger impact on NIM. So my view is my personal view is if the policy rate actually goes up more or moves quicker than our forecast, then the interest free funds contribution, because that’s bigger for KBFG, we think that therefore KPFG could be higher NIM improvement compared to peers. In terms of strategy. For interest rate hikes, we are going to be very flexible in terms of the policies of the variable interest as well as the mixed interest rate exposures. And we will make sure that we secured appropriate level of margin and grow our loans in one accordingly, and we will expand our capabilities in the [Indiscernible] and also respond to the changing regulatory environment so that compared to our fee peers, we will endeavor more to further expand our NIM margin.
50:46 Regarding your question on Prudential Life, we will come back to you through our IR team after the call. Thank you.
51:00 We will take the next question. The next question is from DB Security’s Lee Byung Gun team leader.
Lee Byung Gun
51:05 Greetings. I am Lee Byung Gun from DB Security. Thank you very much for your detailed answers. I would like to ask a more detailed question if possible. For growth for KB, we know that you are seeing very stable growth. So I don’t think there is cause for concern. However, in January looking at the loan trends, looking at what was reported in the media, it seems that there is a change compared to the past in the past in your world. For the [Indiscernible] of rooms that contribute abortion to the bank and after 2017 It seems that has decreased so it seems that maybe the market environment is changing so I think there might be some cause for concern.
51:58 Looking at the sunset, or household loan trends, can you tell us about your thoughts and your quarterly growth strategies? breaking them down? Second question is about the NIM. So for the bank, I know that you’re doing a great job, and there is no cause for concern, but in the case of credit card for the funding rates for your products. For other credit card companies that deliver their earnings, it seems that it has already reached average interest rates on a rated basis. So for your part NIM, can you tell us about your outlook for the year?
Unidentified Company Representative
52:47 I would like to first answer your questions, and for our loan goal for household loans and for corporate loans, and then looking at the data points in January. For those implications. We have our bank CFO. Mr. Kim, who would answer that question and for the funding costs increase concern for credit card, we will hear from the [Indiscernible] the CFO of KB human card. First for household loans for this year, we have a goal of 5% growth this year. Of course, the government regulations exist, we are aware of that. But looking at the recent demand for household loans, we believe that 5% growth is possible for corporate loans. With the trend of global economic recovery trend. We believe that there is strong demand from SMEs for loans, and for large corporates. We believe their loan demand will be solid as well for corporate side in 2022. We believe that there will be 7% growth YoY. And next we will hear from the bank and credit card.
Lee Byung Gun
54:05 I am [Indiscernible] from the bank in January. In it’s a seasonal effect, because we see the household loans going down because of the bonuses. But with more people moving in February we believe there will be more demand for Jeonse loans. And in July, we will have the increase of the guarantee for Jeonse loans with determination of some regulations. So we have the household loan cap and DSR and due to that, although we do believe there will be some obstacles to household loan growth, because of the household cap it’s about 4.5%. So we believe that there will not be many obstacles in achieving growth. And because there is a limited goal for growth, we will have support for the real demand for Tanzania and others. And we will try to give selective loans to the high quality borrowers based on our profitability and asset quality.
Unidentified Company Representative
55:21 And I would like to answer the question from [Indiscernible]. Looking at our balance, it’s about KRW90 trillion and this year for the credit card debt receivables, it was KRW1.5 to KRW1.8. But for three years in a row, it’s about 2.7 and on a five-year basis compared to a three year basis. We are seeing those rates. So what we can do at this time is except for the credit receivables for a long-term CPS or for those notes, there are some plans, so we have about KRW401 million of FX receivables that we have and abs and others we plan to do our best to push down the funding costs and for the interest rate. Some people are expecting interest rate hikes in two four and others are saying that there will be additional interest rate hike in the first half of this year. But regarding what will happen we will keep a close eye on the trend and on a two to three-year bond basis. If they are too expensive, then we will give out then – we will take out or we will surely change them to two to three-year bonds, dated bonds.
57:04 I think we are having a very fruitful discussion about the industry, and it has already been almost one hour since we started our presentation. So we will wait for further questions. If you don’t have any further questions at this time, please contact our IR department and we will provide you with a detailed answer. We will take the next question from Citi Securities, Yafei Tian.
57:34 Hi, thank you for taking my questions. I have two quick questions. The first one is on buyback. [Technical Difficulty] The second question is really on the IP expenses? Hello, can you hear me?
Unidentified Company Representative
58:06 [Foreign Language].
58:08 No, I think you’ve disconnected. Can you repeat your second question Yafei?
58:14 Yeah, yeah, yeah. The second question is on the technology spending [Technical Difficulty] investment time pressure. So just wanted to understand how much additional spending needs to report all these initiatives [Indiscernible] Thank you.
Unidentified Company Representative
59:17 Yes. Give us one moment. We will come back to you with the answers just one moment. Thank you for the question. Regarding buyback as we mentioned previously, share buyback is always on our list. We will look at the market conditions and underneath faces and whenever possible, we will employ share buyback. And in terms of dividend payout ratio, we want to first normalize that payout ratio and share buyback is going to be an additional way for us to further bolster shareholder return. And it’s always in our minds. And it’s always on our list. Regarding your second question on technology, and IT cost and spending. The US banks released their Q4 earnings and said that due to the IT investment that impacted some negative stock prices. So if that was the basis for your question, we are fully aware of that and prepared for that in 2022. Although it’s difficult to share with you specific numbers, in order for us to achieve sustainable growth, including IT spend, and for investment, we will take bold and aggressive investment approach on a recurring basis on our GNA spending, we will continue to be very conservative. All in all, our top line revenue growth is basically the basis upon which we will decide on the spending, the cost to income ratio of the group in ’22 is going to show a downward trend compared to 2021. That basically is direction that we have in mind. If you need more specific details regarding this technology or IT spending, please contact our IR team.
61:25 Thank you very much for that answer. I think this will become our last question from JPMorgan. We have to [Indiscernible] on the line.
61:35 Thank you very much for the opportunity. I have a simple question for your provisioning for this quarter. I think you were quite conservative and looking at the macro processes and others, I, because they were sufficiently conservative, I thought that they were well reflected. So but it seems that your macro view was actually changed. So can you tell us about the extent of your conservativeness? So can you give us some assumptions about your macro? And the BASIL III model changes and COVID-19 and others you have mentioned? So can you give us a breakdown for that, for the COVID-19 forbearance program about the amount of deferral and how much of the default or NPL, do you think you’ll be covered and if you can give us some numbers, it will be greatly appreciated.
Unidentified Company Representative
62:37 I will give a big picture and our risk head [Indiscernible] of KB Financial Group will give a more detailed answer. During my presentation, I have a forementioned that before COVID-19 outbreak, our average credit cost was 2222 bps – 21 bps and looking at the credit costs it was 26 bps and in 21, it was 30 bps. So, as we have aforementioned we are fully aware that there are market concerns and ultimately to improve and increase our shareholder value. And to give return to our shareholders, we are going to focus on our earnings and have higher dividend payout and bps. So, from this perspective in 2022, pre-emptively we have our planning, we have planned to have pre-emptive provisioning and on in a bigger picture during the past 20 years. You can see that we have taken into calculations the highest risk for our assumption. So I will give the floor to [Indiscernible] our risk head of KP Financial Group, thank you.
Unidentified Company Representative
64:00 [Indiscernible] and for FLC for the assumptions, I would like to explain on a group wide basis for provisioning policy and risk policy on an overall basis. We mentioned they will be pre-emptive and conservative. So we have continued with that trend and this year. Looking at our solvency capacity, we will also be quite conservative, and there’s Omni and others are risks that still linger. So in 2022 looking at provisioning, we will be quite conservative, as mentioned by our CFO looking at the past with the Asian financial crisis and others, looking at the past 20 years’ time and a very dire financial situation looking at those GDP growth numbers and the real estate numbers and other numbers, well, we took into assumption a very serious financial situation crisis. And you asked about some detail numbers about COVID 19 forbearance programs. So it is planned to be terminated in March. So principal and interest payment deferral will be a very important point. And we believe that it will be about KRW860 billion for those and to divide them up for the borrower that can stay there voluntarily, they will just normally pay back. So KRW370 is for that amount.
65:46 So for the borrowers looking at their asset quality, it’s hard to say whether they will defer or not. But there are borrowers that said they will repay earlier than is expected. So that is about KRW370 and looking at their delinquency rate, or LP amount, it’s about KRW440 billion so less than 1%. So among that 85% is secured. So for the other, even if it’s KRW500 billion, if they pay back in March, then looking at the repayment capacity and their collateral, then we believe that we will not have a risk for additional losses.
66:34 And another point to add is that for the companies with the determination of COVID-19 forbearance program if it is a problem for companies, then with the interest rate hikes with the household borrowers, well we are very interested in the asset quality and managing those loans. And currently, among the household borrowers, they might not have turned delinquent with the interest rate hikes, there might be a possibility that the asset quality might deteriorate for those borrowers. And we believe that the multiple borrowers are at the greatest risk. So, if we see the multiple borrowers with lower rates, then credit rating of five or with high DSR, well for those borrowers, we believe that we have provisioned enough to prepare for those situations and for household likewise. So for those borrowers for multiple borrowers, then they might be normal now, but there might be a possibility of them turning delinquent going forward.
67:47 So, we have sophisticated or a system to classify them and to look at our exposure and to set our limits and last year on an overall basis for the household. We have that early warning system so that if these events occur in the future, then we can extract them and target them so that we can have very detailed management of these borrowers. Thank you.
Unidentified Company Representative
68:23 I believe that that was a sufficient answer by our CRO, and it is not he instead including the IMF crisis, but actually this is 2022. So it – I – we will change the wording to the last 20 years.
68:46 Thank you, we do not see any further questions waiting in the queue. Just give us one moment before we close. I see that there are no additional questions raised. This brings us to the end of KBFG’s earnings release. Thank you.