Greetings. I am Peter Kweon, Head of IR at KB Financial Group. We will now begin the 2021 Q3 Business Results Presentation and thank you for your participation today. We have here with us our group CFO and SEVP, Lee Hwan Ju, and other executives from the group. We will first have CFO and SEVP, Lee Hwan Ju, walk us through the 2021 Q3 major highlights and then have a Q&A session after the presentation. I would like to invite our SEVP to deliver the 2021 Q3 presentation.

Good afternoon. I am Lee Hwan Ju, CFO of KB Financial Group. Thank you for joining KBFG's third quarter 2021 earnings release presentation. Before presenting on the company earnings, I will brief you on the overall operational backdrop first. Last August, in light of recovery trend of domestic economy and inflationary pressure and deepening financial imbalance, BOK hiked policy rate by 25 basis points for the first time in 15 months. Following the rate hike expectations on NIM improvement drove, rise in banking sector share prices, though temporarily. But with the spread of the delta variant and concerns around peak out of economic momentum and early tapering in the U.S., uncertainties, both internal and external are adding up. Also, as big tech enter the financial business, there is a possibility that authorities may separate the business of manufacturing and sales of products, which may undermine incumbent competitiveness. All in all, operational backdrop doesn't seem positive in the financial sector. Also, there may be another policy rate hike before the end of the year. And as financial support program for SMEs and small merchants harmed by COVID-19 pandemic has been extended by six more months, there is a growing concern over deterioration in asset quality. Hence, a more fine-tuned risk management is required on the part of financial institutions. Under this backdrop, let me assure you that KB's asset quality management is very solid, underpinned by our rigorous risk management framework. However, even if asset quality management is quite solid as financial business has a retrospective characteristics, one cannot completely preclude chance of crisis support program. So we set up comprehensive plan for loan assets and strengthened creditworthiness monitoring on borrowers who are prone to negative impact and have preemptively set up sector policies for highly impacted and deteriorating sectors from…

[Operator Instructions] Our first question is from Hanwha Securities, Do Ha Kim. Please go ahead with your questions.

Thank you. I would like to ask you two questions. First, we're happy to see that the margin did go up even slightly. Basically, the impact of rise in loans. Do you think that the impact will play out and full fledge in Q4 because in Q3, if you look at NIS figure, the stand-alone figure in terms of -- rather than rebound in interest income, I think there was a bigger impact on the improvement of the funding cost. So I would like to understand whether the profitability improvement is actually going to be translated into a higher margin in the fourth quarter? My second question is over many years, you've conducted multiple number of M&As. And with regards to credit card, insurance, capital P&C, it seems like your subsidiary portfolio has become very much diversified. Now then every year, this earnings capacity of KRW4 trillion per annum, I would like to understand how you could best leverage off of this significant capital that you're going to be generating in terms of making M&A investment or going abroad or cancellation of shares or buyback of shares. So what are some of your plans regarding the use of the capital?

Thank you, Ms. Do Ha Kim, for the questions. I will respond to the question on NIM. Regarding M&A, Chang Kwon Lee, our Senior Executive VP, will respond a question on M&A. If you look at the quarter NIM profile on a Q-on-Q basis, we saw one basis point increase. In terms of investment, we've -- I guess, we had a very selective policy on loans. So on household loans, we were able to make -- bring about improvement in spread. And investment yield on securities also went up. So that also drove that improvement in NIM. On the funding cost, we really focused on expanding the deposit with low funding costs. We had around KRW3.8 trillion increase in core deposits. Now in August, there was interest rate hike. So short-term rate really surged. So the MDA really improved quite significantly. So there was a limit on the -- there was a ceiling on the improvement on NIM. Now, the nominal improvement of two basis points; but if you look at the fractional basis, if you round that up or round that down, there's been a 1.3 basis point increase to be quite accurate. Now if you look at on a cumulative basis, bank's NIM, respectively, is 1.82% and 1.57%. And so compared to the previous year's NIM, there's been a 6 basis points improvement for both the group and the bank. Now last year, there was a 75 basis point of big cut, and it was a very difficult environment for us to defend our net interest margin, but we were able to continuously grow our core deposit, and we really focused on a bottom line centric lending policies as well as asset management policies. In terms of the NIM outlook. Starting fourth quarter, now the asset repricing impact is gradually being seen following the interest rate hike in August and also with the regulations on households loans as well as more alleviated competitive landscape, we expect the loan-to-deposit spread to improve and NIM to continue on with the gradual improvement trend. However, we think that a full-fledged NIM expansion will come into play from first quarter of next year. Including this year, November and up to first half of next year, if we assume that there will be two more rate hikes, then next year, following this year's trend, we think there will be meaningful improvement in NIM. Our company is very much focused on profit-centric lending policies, and we comply with the government's aggregate loan limit regulation and under a very conservative growth approach, we will increase on a prime unsecured loans. And also, I've mentioned this during the presentation, but we will be introducing the settlement account as well as company's core deposits. So these are the low-cost deposits, and we believe that on a funding aspect, we will be able to really manage our profit and make sure that we get appropriate level of profit from these businesses.

I am CSO, Lee Chan Kwon from KB Financial Group. Thank you very much for a great question. In terms of capital plan and whether we have any plans for further M&As going forward. As you know, KB, we acquired Prudential Life, and also we've acquired Bukopin Bank from Indonesia and made investment into Cambodia's PRASAC Bank as well. So there were mega deals for us. So for the time being, rather than entering into another M&A, we will focus more on stabilizing these acquired entities organization and really focus on maximizing synergies across our subsidiary. So value up is our focus, but that doesn't mean that we're completely close to M&A possibilities. If we think that there are any good assets and opportunities that could help with the corporate value of KB, we will definitely look at the capital efficiency aspect as well as different potentials in making the decision. If we were to go ahead with an M&A project, we won't just focus on growing the size. We would look at the target group, and we would assess whether that company can give us 10% level of ROIC and the attractiveness of the sector as well as whether the strategic fit is good with our company. And after post-acquisition, what are some of the synergies that we could look for. So those different aspects and factors will be considered. Also, in the global market, for geographies where we think there is high growth potential, we will look at opportunities where we could further expand our influence. But if you look at the global market, there is a sovereign risk as well as regulatory environment and financial market environment. All those aspects must also be considered. At the same time, in order to counter the upcoming trend in financial industry, we will look at potentially investing into good investments to fintech companies and venture companies and innovative technology companies. I hope this answers your question.

One more thing I would like to add in terms of shareholder return. And I think our dividend-related policy question is an area that other analysts are also quite interested in. So if I may respond to that question. With respect to the payout ratio as well as making interim or quarterly payment more regular and also share buyback, I think those are three topics that you have quite a bit of interest in. So since you've mentioned shareholder return, let me just cover all of those topics. So, during our earnings call I've mentioned this on numerous occasions, now we have a progressive dividend policy in place. And that policy, first of all, is still valid. There is no change in that approach. With respect to this year's payout, although I can't be definitive, we -- there is the COVID pandemic and also we would consider the regulatory direction of the authorities. Our decision will be made based off of that. We mentioned this in Q2, but as long as there is no significant macroeconomic changes, we believe the pre-COVID level, which is 26%, payout ratio of 26%. Normalizing to that level, we think is not a big problem at this point. As you know, we currently hold 6% treasury shares. And so the actual payout ratio could actually be higher than the 26% payout ratio. And because our size of profit has increased significantly compared to previous year, we believe that on a DPS basis, there will be some meaningful increase as well. In terms of quarterly payout, I know Shinhan Holdings has done payout in Q2, and they have not yet disclosed for the third quarter, but we expect there will be a dividend in the third quarter as well. As you know, this year, for the…

Thank you very much for the detailed answer. We will take the next question from Hyundai Securities, Kim Jin-Sang. You're on the line, Sir.

Congratulations on your earnings. I have two questions. First question is about something that you have already mentioned about government limitations on aggregate basis the loan limit, and we cannot ignore the regulation risk. Going one step further, it could get stronger or there could be loss sharing for the small merchants or for the borrowers. There could be interest rate adjustments or support for those borrowers and merchants. Because of COVID-19, we could have a regulation risk that could lag until next year. And some are also saying that we could have real estate risk. So I think that there could be some concerns over this. So related to regulation risk, can we ask the executives about what your thoughts are and how you're going to respond? Secondly, looking at this year's profit, we see that 30% increase rates results. But on the other hand, for the investors, because this is on a high base, the ideal profit trend of more than one digit to single digit, can that continue. For next year, NIM can improve and COVID-19 provisioning can be reversed. But I think that regarding the asset effect or the NIM improvement and the credit costs, well, they could be picked out. And at that time, your profits can visibly decrease and even have an impairment. So, can you tell us about what can happen? So what are your thoughts on this; what is your thought process? And any pre-emptive measures.

Thank you very much for your insightful questions. We will soon answer them.

Thank you, Kim Jin-Sang, for your questions. I am the CFO of the Bank. My name is [indiscernible]. You asked about the regulation risk for household loans. And as you are probably aware in the media, many economic experts are saying that because of overburden of household loans. It could be a substantial potential risk for the Korean economy. And when we have the policy changes and if we do have U.S. tapering and other changes and other uncertainties that could increase, I think everybody thinks that we need to have appropriate household loan management. That is why I believe that there is some intervention about limiting household risk to a certain limits. And I believe that next month, the government will announce some measures. On the bank side, when there is household loans that increase suddenly, there could be risks. And if we have the interest rate cycle, it will be important for us to pursue conservative policies. In the case of KB, we always think of profitability and asset quality. At the forefront, so until the first part of this year, there was 1.5% growth for loans, and there was a balloon effect by other competitors. And at end September, there was 4.9%. And adhering to the aggregate loan limit in order to provide loan support for Jeonse or mortgage loans or others, we will decrease the limit and to have strengthening of the underwriting of DSR. And going forward, pursuing growth based on profitability and asset quality will continue, and we will see what the actual demand is and control accordingly. As you've mentioned, in the household side, if this these types of regulations continue what will KB do. Going forward, our bank's performance was differentiated because rather than household loans, large corporates or WN or future…

I would like to answer the second question, and I believe that you asked about mid- to long-term financial performance and pick out -- peak out. Well, we can't win the market. That's my basic thoughts. I believe that we need to overcome the market. And under this presupposition for next year's business planning, that's what we're doing at the group. And when we plan, we don't think just ahead for one year. We have a rolling plan, looking ahead for three to five years' time. And what we're thinking of at this point is for us to have a sustainable portfolio structure. It could be bank and nonbank, and it could be different business portfolios for different subsidiaries. So rather than focusing on short-term profits, we want to focus more on sustainable performance. What I believe is when we look at the bank and nonbank subsidiaries for the bank, we are number one, but I think we have the potential to become the overwhelming number one. And for nonbanking subsidiaries, securities, insurance, card and others, we are not number one yet. This means that we have the potential to become number one. And if we can overcome the situation, non-banking can also provide more contribution. And in response to your third question, we are making many efforts in global, and we are investing many resources. In our portfolio, global contribution is, as you probably know, compared to our competitors is quite low. And when we think about increasing our coverage, global-related profits, if it helps us greatly, then I believe that it can help us increase our profit generation basis. And as was mentioned in your question, through our great capital or earnings capability, if we can have inorganic additions, then not only for next year, but I believe that we do have some leeway for more growth in the future. So we will make efforts and we will make plans to do so. Thank you very much.

Thank you. We now move on to next question from Samsung Securities, Mr. Kim Jaewoo. Please go ahead.

Thank you for good earnings. I have two questions. First, I think you did provide some detail on digital platform. I understand there's a new application that's going to be launched, and I know that it's going to support stock trading as well. And I think that's going to have some positive impact. But if all of these features are included in this application, isn't the app going to become overly too heavy? And first, is that not a problem? That's the first question. And also, what are some of the solution offerings that you are envisioning? Because there's a lot of fintech providers. They adopt open platform, and they provide comparison and referral services. But what then is a differentiating point for KBFG's financial platform? What's the consumer benefit that you're planning to provide? And second, now Mydata service will be launched. I would like to understand what KBFG's strategy for Mydata business looks like. Another question is KB Insurance performance. It seems like there has been quite a bit of an increase relating to the investment income. Could you provide some elaboration on what that factor is?

Yes, we will respond to that questions shortly.

Thank you. Mr. Kim Jaewoo, for your question. I am Han Dong Whan, CDPO at KBFG. Our CFO provided a lot of information. If I may also add, KB Star Banking. If I were to characterize what this is, basically a bank's core digital channel. It's now going to become the group's core digital channel that's the transition. So in terms of stock trading and claims process for insurance, all of these features are now housed within this platform. Yes, the previous KB Bank app was very heavy. So I understand where your concern is coming from. However, if we adopt in-app browser technology and API technology is utilized to make sure that interface is seamless. So if you look at the capacity of this app compared to our competitors like Seoul Kakao Bank, our application on a comparative basis is not overly heavy compared to our peers. So, I assure you there is no problem with regards to the system capacity. And in terms of mobile optimization, this is a new application that is optimized for the mobile platform. So the users when it comes to their experience, they're going to feel more convenient and easy to use on top of the mobile platform. So compared to Kakao Bank and other big tech companies, I believe that we are on par in terms of the optimization level that we're providing. Now what are some of the key solutions that we may offer on this platform? The big tech platforms, they really focus on convenience aspect. But KBFG, we have financial capabilities and expertise. And we have strength and knowhow in how we could help our customers build their wealth. And incumbent financial institutions have strengthened that aspect, and we just need to translate that into a digital environment. And…

Yes. I'm from KB Insurance. I will briefly respond to your question on KB Insurance. As you know, this year, if you look at interest rate environment, we weren't able to get gains from disposition of a bond, but our new money yield improved year-over-year basis. But we think that we didn't have ample time for it to actually be reflected in this year's performance. But this year, the equities market, there were a lot of IPOs, and all the PEF and alternative investments, there were liquidation of those positions. So there were gains from the liquidation of such positions, and that really had a bigger impact on increasing our investment gain.

We will take the next question from Kiwoom Securities, Seo Young-Soo. Director, Seo Young-Soo?

Congratulations on your performance. Thank you for the opportunity for me to ask questions. I have two questions, they are interrelated. The first question is that, in this situation, we need to think about post-COVID, and there will be vulnerable borrowers and small merchants that many are concerned about. But I also think that going forward, there is the debt restructuring interest rate hike that the government has in mind. And right after COVID-19 crisis, there could be the people in their 20s and 30s that invested heavily in the stock market and the real estate market and a lot of those investments were unsecured. And because of tightening regulation, we could have some repercussions, and I believe that may be another point of concern that we need to be actually more concerned about for the credit card delinquency rate for the first time. After March of 2020, it went up 5 basis points. And in the precautionary and below, it seems that it also went up. There were loan regulation strengthening. And if we have more regulations for loans, then there will be more delinquencies going forward. So can you tell us about what you're thinking and how you're going to respond? That is my first question. This is my second question. Until now, we only saw the asset market up both trends, and there was strong collateral and good market situation. So even if there was less provisioning for the NPLs, it seems that you had provisioned greatly. But looking at your total assets and our provisioning, it seems that our provisioning is low compared to advanced markets such as U.S. However, we -- if there's adjustments in the future because of government policies and others, I think there will be a burden because of this provisioning. There is IFRS 9 and others. And if we utilize them, we could provision more. But in Q4, generally, I think it is a good opportunity for a big path. So going forward, do you have any plans to have bold provisioning? And that can also be in adherence with the government's policies going forward. So do you have any plans for big path or others related to provisioning?

Thank you very much, Director Seo, for your questions, and we will soon answer them.

I think you asked two questions. First is when interest rate goes up and when that restructuring regulations are strengthened, those in their 20s and 30s had invested unscrupulously leading to more credit risk because of unsecured loans. And we saw the cash flow for this year, and we saw some going to online assets or virtual assets and others. And we had monitored them and until now, it seems that the limit for unsecured loans, we try to limit them to a certain extent and to have appropriate management. So we believe that we are not overly concerned about this. And the government's DSR regulations, they said that it will be changed to 40% per person. And the banks on average, 40%. And they ask the banks to regulate this and to have it less than 3% for the bank and 5%. So we had been already regulating this to a low amount. So for the unsecured loans, we do not think that they will actually act as big burdens to us in the future, but we need to be aware that there is a possibility. So for the loan management department, there are multiple borrowers or there are borrowers that have board against us and other secondary financial institutions. So in those cases, when there is maturity period, then we can allow them for partial repayment and to come up with a plan. So we will be very thorough in the management of these cases. And for provisioning, you also ask for a possibility of bold provisioning. After next year, I believe that many people believe the economy will recover and become more rosy. And after COVID ends, there will be some polarization of possibilities in the economy, and there could be interest repayment burden. And for some…

Thank you very much for your answer. So, we've spent a bit more than one hour. I think we have time for one last question before we close. And if you have more questions, please contact our IR Team. From Citi Securities, Yafei. Go ahead.

Hi, I have actually two questions, if I may. So the first question is around the digital initiatives that you have laid out. And I just wanted to understand, have you done much calculation what is the cost to serve for this new channel compared to the traditional branch channel? And have you done any estimate what will be the profitability in the new channel? That's the first question. And then the second one is around asset quality. Are there any possibility you might be able to do write-backs next year given that you have provisioned for COVID previously?

Yes, Yafei, just give us one moment. We will respond to that question shortly.

Ms. Yafei Tian, thank you very much for the question. Regarding your first question on digital transformation or digital initiative. Starting this year, we internally have set some internal indicators to manage against. First, basically, we would look at percentage of so-called digital customers. And also when we attract or acquire new customers, how much of a new customer are we getting from this digital new channel? And also, when there is sales across our digital channel, out of our total sales, what's the mix of our sales via this digital channel? So those are some of the measures that we are monitoring. In terms of cost structure and profitability, at this point, we are currently undertaking a project for managerial purpose accounting. So once that project is complete, we will be able to get more insight in terms of CIR, how much of a digital channel contribution are we getting in terms of cost income ratio. So we will be able to meet that level. But right now, we're only at the level of activity rate of our users through the digital channel. The post-COVID, we're following COVID in terms of the performance that we're getting from digital channel. We are seeing good performance that come out of digital channel. However, we are in the process of making this data more sophisticated. And once we get that, we will come back to you and communicate to you more detail.

Thank you very much for that question. In terms of the provision and provisioning policy, we provide you with some explanation before. Just overall to provide you with the big picture, our coverage -- if you look at our coverage ratio and other measures, KBFG's provisioning policy is preemptive and is also quite conservative. That has been our approach over the years. And I think that aspect could be seen from all the data points. Going forward, we will continue to be quite conservative when it comes to provisioning. If you look at this year, and your question was with respect to the potential reversal or write-back of provisions next year, end of this year, we will look at the scenarios at the system level. So there is forward-looking scenarios, which are systems based. And also, there are some sector-based scenario analysis as well. Last year, there was provisioning of KRW380 billion at the systems level, forward-looking FSC. So basically, we have provisioned more conservatively based -- compared to just the systems level analysis. Next year and years to come, what will the economic cycle look like? So depending on that, are we going to add more on top of the current size of provisioning? Basically, we would have to wait and see how things play out. I think it's a bit too early for me to give you a definitive answer as to whether we would actually be writing back some provisions next year. All in all, basically, our position is -- our provisioning policy is very preemptive and conservative.

Thank you for your answer. And we will conclude the Q&A on this note and also conclude our earnings presentation. Thank you very much.