Greetings. I am Peter Kwon the Head of IR at KBFG. We will now begin the 2020 Q1 Business Results Presentation. I would like to express my deepest gratitude to everyone for participating in our call. We have here with us our group CFO and Deputy President, Kim Ki-Hwan as well as other members from our group management. We will first hear the 2020 Q1 major financial highlights from our CFO and Deputy President, Kim Ki-Hwan and then have a Q&A session. I would like to invite our CFO and Deputy President to walkout through the 2020 Q1 major financial highlights.

Good afternoon. I am Kim Ki-Hwan, CFO of KB Financial Group. Thank you for joining KBFG’s presentation on Q1 2020 business results. Before moving on to the earnings, let me briefly present on our operational background. In Q1, due to COVID-19 pandemic, global production and consumption slowed, leading to a rapid slugging of global real economy. Investment assets contracted as there was move towards safe assets and liquidity as global equity markets triggered off multiple number of circuit breakers, heightening global financial market uncertainties as ever before. Korean economy also saw great contractions in consumption, slowing of CapEx investment and exports as signs of economic depression surfaced. In line with the policy stance to respond to such shock, BOK swiftly moved to cut policy rates by 50 basis points last month. Under such trying business environment, bank’s Q1 loans in won increased 4.2% year-to-date, attesting to solid asset growth. Net fee and commission income also continued to expand as KBFG manages to sustain its earnings capacity. However, regrettably, COVID-19 pandemic has triggered index declines, rise in exchange rate and credit risk spread, which generated other operating losses with Q1 results reporting somewhat of an underperformance. We believe such a black swan event like the COVID can happen anytime yet again in the future. And so we are determined to build on strong resilience and fundamentals that can help us write over any crisis that may arise. To this end, based on our unmatched base of 35 million customers, we will enhance core competitiveness of each of our subsidiaries and further bolster both the non-banking and the global business. Although financial business environment is at its worst, due to the unforeseen impact of COVID-19, KBFG will leverage this opportunity to solidify its core fundamentals so as to leap forward a true…

[Operator Instructions] From Hyundai Motor Securities, Mr. Kim Jin-Sang, please go ahead.

Thank you very much for the detailed presentation. I have three questions. First question with – is with respect to your outlook. Q1 results were underperforming. Of course, there are multiple reasons behind that. In light of the interest rate environment and holistic directed support, I feel that this year’s performance cannot be all that rosy. Basically, consensus is also subject to potential downgrade by around 10%. So I think that we shall take a bit of a more conservative stance. So I would like to understand your understanding of your outlook in terms of loan growth and also guidance on margin. Now my second question is on Q2, KB Securities. Of course, I do understand that there’s been an industry-wide difficulties, but KB Securities' performance was very slow and sluggish, and you provided some explanation. Would like to understand how you’re going to leverage the strength and also how you’re going to overcome the weaknesses so that you can further strengthen your fundamentals. So I’d like to ask you questions on KB Securities. Third is on dividend policy, potential share cancellation and also the overall shareholder return policy. I would like to understand that the regulators are trying to curve on payout ratio. But KB, you’ve acquired PRASAC as well as Prudential. So you had instances where you had to actually spend your capital. I know by accelerating the application of Basel III there, you could receive some help in terms of the capital management, but like to see some more color on what your capital plans are for this year?

Yes. Thank you for your questions. We will respond to those questions. Please bear with us. One moment. Yes, Mr. Kim Jin-Sang, thank you very much for submitting your questions. You asked three questions. The first and the third question, why don’t I respond to those questions? And on the securities, the financial results of the Securities, Mr. Park Kang-Hyun will respond to that question from KB Securities. In terms of the outlook for this year, as you have pointed out, with the COVID-19 pandemic and the following downturn in economy and also the rate cut, it seems that it’s inevitable that we’re going to experience some decline in net profit. Interest income inevitably is going to be very stagnant. So for this year, on the non-banking side, including fees and commissions, we wish to exert our efforts to further upgrade that and also do cost control so that our annual net profit can be incurred above KRW 3 trillion that we will endeavor to actually bring that into reality. So let me look at some of the details. In terms of loan growth, currently, Korea’s GDP growth outlook has been downgraded, and companies are now moving to secured liquidity. And so there is growth in the demand for loans. And also with more broadened policy-led loan support, in light of all these environmental factors, we believe that loans in won for the bank, the growth that is, we think that it’s going to be slightly higher than our original plan. So we’re targeting about 5% to 6% growth per annum basis. Household high-quality unsecured loan and also Jeonse loans, we believe that about 3% growth is possible. For corporate loans, if you look at investment-grade SMEs and large companies, we are currently shooting for 7% to 8% growth for…

I will respond to your question about KB Securities and its business result. First of all, I would like to talk about the reason behind this result and how much we could recover as we go forward. In Q1, yes, we underperformed. Due to the COVID-19 impact, global indices all fell, and there was heightened volatility. On S&T and ELS, there was product investment vehicle-related losses. And also second, with 9 asset management, there were assets that we held and there was valuation losses, and these are the one-off loss that we booked. On the S&T, basically, there was ELS hedging and also overseas foreign currency bonds. We had around KRW 40 billion loss one off-line asset management-related losses. Basically, we had beneficiary certificates and CBs that we hold, and there was a KRW 40 billion of valuation losses. And another is with respect to receivable – bond receivables, and we have above provisioning. So there was about KRW 59 billion of one-off losses that has to do with the intermediary trade-related provisioning. On the NP side, yes, we significantly underperformed. But other than certain elements, our overall business operation, however, posted a positive result. WM, basically, we saw increase of KRW 34 billion. We – OP, reporting KRW 140 billion. Won-denominated bond, basically KRW 35 billion in profit. And IB, including DCM and ECM, we reported market share number one. And also under project, profitability went up and total of operating profit actually went up by KRW 25 billion on a year-over-year basis. So these other performances were good. Yes, the top line number was bad. But if you look at Q1 losses, main drivers behind those or the elements, we think that once the market recovers, we will be able to recover. FX, once that gets stabilized and FX swap, at settlement, we think that reversal will be possible. And if the equity market recovers, as we are seeing at this point and if government’s very strong policy intervention comes into play and effective, in terms of the overseas bonds that we currently hold, they’re all investment grade and high graded. So the credit risk is going to go down, and we are looking forward to reversals and write-back. So with the recovery of market, we think that there will be about KRW 20 billion positive impact. Other than these factors, for early repayment period like ELS products that have a shorter repayment period, we want to sell more of that. And in light of the volatility of the interest rate, we are going to adjust the interest rate cushion and also really proactive appropriate products that best befit this in the environment. We’re going to also strengthen WB wealth – WM-related wealth management product as much as possible and customize those products for the customers so that we could really make up the losses that we have incurred so far.

And from Samsung Securities, we have Mr. Kim Jaewoo on the line. Sir?

You just mentioned the gains and losses. So could you actually remark on recovery once again for securities and for the bank as well, and give us the breakdown? And when do you think it could recover? Thank you. Secondly, for asset quality, you mentioned credit costs, 25 bp. But compared to last year, I think it hasn’t really moved or has gone up. We have the liquidity contraction of SOHOs and export issues. And we believe that you will have a higher asset quality burden than you just mentioned. So excluding all of this, can you tell us about the impact that you expect from COVID-19? And how it will impact your asset company? And you mentioned about Prudential M&A possibility in Q3, and there will be gain from – gain on bargain purchase. And can you tell us about the synergy going forward after the M&A is completed? And any changes that you foresee in the future? Thank you very much.

Yes, please, sir, hold, and we will soon give you the answer.

Thank you very much, Mr. Kim Jaewoo, for your questions. Regarding the first and second questions, I will answer them. And for the Prudential question, we have Mr. Kim Jang Gon, who is in charge of strategy, and he will – Lee Jong Cheon, and he will answer your question. Regarding the underperformance of other operating losses, I would like to answer your question. We mentioned this previously, but the reason why we have underperforming other operating losses is because with the financial market volatility widening, we had a temporary loss that widens. And I believe that we can look at five major contributors. So in the management of securities, for foreign currency bonds, the credit spread suddenly widened. And for foreign currency bonds, we had about KRW 45 billion of valuation losses. And for the bank, we have had the trust vehicle-related losses and we had about KRW 66 billion of valuation losses. And for line asset management-related losses, for TRS transactions, we had about KRW 40 billion of valuation losses as well. And for derivatives and FX, for OTC derivative products, there was the CVA. And in this assessment, we had the FX rate rising and we had about KRW 34 billion of losses, valuation losses. And in our ELS hedging because of the index volatility, we had about KRW 38 billion of losses. So there – these are the five major contributors, and then we have some portfolio investment such as ETF investments that are minor factors. To give you an update on our foreign currency valuation losses for the bonds, we had a great impact from the credit spread. And to actually be prepared for this widening, we had such positioning, including the buying of U.S. futures. So future positioning. And for major countries, CDS and…

Yes, my name is Lee Chang-Kwon . I’m in charge of Strategy at the KBFG. Your question relates to gains from bargain sale and also acquisition synergies, et cetera. In terms of gains on bargain purchase, as you know, the gains on bargain purchase basically, you look at the – if you’re acquiring at lower the price compared to the fair value of the asset, then that’s when you have those gains. It’s a preliminary assessment, and I won’t be able to share with you specifics. But we are currently expecting to see gains from bargain purchase. Fair value is going to be calculated by an outside accounting firm. There would be recalculation down on the fair value of this asset. Of course, we will make the assessment in the most conservative – taking most conservative assessment so that the one-off impact could be minimized. So the timing of booking for the gain from bargain purchase, basically, we would have to go through the approval process by the regulator. So it will be difficult to give you a specific time line, but we think that by the end of August, if we reach closing of this transaction by the end of the year, we will be able to account for and book gains from bargain purchase. Now after the acquisition, what will be our approach and our business strategy? After acquiring of this entity, our number one priority is to further boost the sales capabilities and also stabilizing of the organization of Prudential Life. That will be our priority task. The business philosophy and also corporate culture, we want to make sure that it stays intact. We want to be able to leverage the strength of this entity and so that they can very naturally and smoothly become part of…

Next question. From Deutsche Bank, we have [indiscernible], please.

I have two questions, please. So one is related to the regulatory treatment of the COVID-19 situation. Has FSS provided or is thinking of providing any regulatory forbearance for banks? For example, allowing delayed recognition of NPLs or maybe reduced risk weights on certain loans or reduced capital buffers. So this is question one. And the second question is probably two parts. So given the asset quality stress, has KB identified a, let’s say, total share of its loan exposures, which is considered high-risk which are not NPLs yet, but are likely to go into NPL in the foreseeable future? And because of that, so if you could share any overall possible would be good. And because of that, do you feel that the group is under pressure to issue more subordinated bonds this year, whether Tier 2 or additional Tier 1? Thank you.

There are various supporting measures. Sell CR regulations and loan-to-deposit regulations have been eased and the adoption of Basel III can be adopted early on from early June. So the bank actually will have less of a burden in providing support to companies. So that is why we – they are allowing us to have early adoption of Basel III. For SOHO loans, when there are LDR regulations, when we had 100% that was applied like for corporate loans, they will allow us to apply 85%. So the government has many policy measures for the bank to provide supporting measures for companies. You also asked about the high-risk loan exposure that we have that have not yet been turned into NPLs, but we will actually send you the information as soon as we have it available. You also asked about sub debt or other issuance of capital products. And I believe that I have mentioned our BIS ratio. And in Q1, our BIS ratio was 14.02% tentatively. And this year, we have some global M&A, including Prudential Life on the table, and that is why we are going to have a bit of a burden on our capital. So we are going to have issuance of some products to have the buffer. And we are going to issue sub debt or hybrid bonds going forward and to manage RWA. There are non-degree exposures that we are going to reduce or we’re going to have a reduction of our loan limits so that we can manage our BIS ratio related to RWA. And we have 14.5% of BIS ratio at the end of the year that we always have targeted. So we’re going to manage our RWA and have issuance of products so that we can actually maintain our capital adequacy. Thank you very much.

Thank you for the detailed answer. Actually, our conference call has been lasting for more than an hour or so. So I believe that we have time for one more question, and then we will conclude our call for today.

From Kiwoom Securities, we have Mr. Seo Young-soo on the line.

Yes. And Regarding the government’s measures, there has been a six-month delay in the repayment of SLEs repayments. And according to the MSS for the banks, there will be about KRW 92 billion, that the banks have been loaned and giving out as loans for our SMEs and small owners. So can you tell us about the contribution by KB? How are you going to have the future positioning strategy or plan going forward following this? In the case U.S., with preemptive provisioning, they are, I believe, preparing and – for any contingencies going forward. KBFG, well, when we compare our banks to other banks, our provisioning ratio is low compared to other countries. So I believe that the banks need to make an effort to have preemptive provisioning. So can you tell us what are your plans going forward for preemptive provisioning? Another question is about your loans. I know that your loan growth has been quite high, above 4%, and you have had more than 20% of growth for corporate loans. And is this a temporary growth? Or do you think this growth can be maintained? In April, in the media, it was said that your corporate loans compared to the previous month actually went up. So can you tell us about what you believe the fixed trend will be? And what are your loan strategies going forward? Thank you.

Please bear with us for one moment.

Thank you, Mr. Seo Young-Soo, for your question. Your first question is amortization or grace period on the repayment of interest. You asked about the size. The government announced a certain figure. And basically, you are asking the percentage that the banks would have to bear. And basically, it’s according to that, that it will be allotted or allocated across banks. At this point, I do not have the specific figures. So we will come back to you with that. In terms of grace period and interest payment and how we’re going to do accounting treatment, we haven’t yet made the specific decision. It’s going to be accounted as interest income. But basically, in the balance sheet, it’s going to be part of the provision in the balance sheet as well as accrued interest. So basically, we will have provisioning for accrued interest. That will be the accounting treatment that we will employ. But once again, that is not a final or confirmed method. So provisioning for accrued interest as well as funding costs, these will be the elements that we will look at. And of course, some amount of loss is inevitable, but that amount is going to be quite minor. And also companies like JPMorgan, they have really reserved quite a bit of a provisioning preemptively. U.S. banks, I do not know the exact mechanism, but based on the incurred loss, they have been provisioning based on the amount of incurred loss. But as we move to IFRS 9, basically forward-looking approach was taken. So in the U.S., they followed that concept, and they really provisioned a significant amount of reserves. So for us, end of last year, we’ve made some conservative projections, and we have set aside provisions as well. So for this year, if things go worse than our conservative stands, then we can revisit and reconsider and also we’ll make forecast and projections by different scenarios. And we’re currently working on that as we speak. So comparing to U.S. companies and the way they reserve for the provision and the way we do it, there is a slight difference. Now Korea basically have been already provisioning based on the forward-looking approach already at the end of last year. So this is not an apples-to-apple comparison with the U.S. companies. And loan growth was 4.2%, and large corporates was KRW 3.6 trillion increase. So large companies are trying to secure liquidity, and that basically is a driver behind the growth of loans. Now of that, the high-quality companies or highly rated, credit-rated companies. We want to first satisfy their demand. If there are some potential problems, we want to make sure we limit the origination of loan. And loan review or loan screening process is put in place so that we can continuously expand on offering loans to high-quality companies.

I believe that we have had a very fruitful and lengthy Q&A session. Please contact the IR team if you have any more questions. We will conclude our Q&A session and our earnings results presentation. Thank you very much.