KB Financial Group Inc. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed April 24, 2020. This is an audited annual report, not a standalone 2019 fourth-quarter report. Consolidated statements use IFRS as issued by the IASB. 2018–2019 figures reflect IFRS 9; 2019 also reflects IFRS 16, and comparative periods were not restated for IFRS 16.
Business context and reporting period
KB Financial Group is a Korean financial holding company with banking, credit card, securities, insurance, consumer finance and asset-management businesses. Kookmin Bank represented approximately 74.7% of group assets at year-end. The group reported consolidated assets of ₩518.5 trillion, deposits of ₩305.6 trillion and equity of ₩39.1 trillion at December 31, 2019.
Key financial metrics
| Metric | FY2019 / year-end 2019 | Prior comparable |
|---|---|---|
| Interest income | ₩14.64 trillion | ₩13.73 trillion in 2018 |
| Net interest income | ₩9.20 trillion | ₩8.90 trillion in 2018 |
| Net fee and commission income | ₩2.36 trillion | ₩2.24 trillion in 2018 |
| Net insurance income | ₩300 billion | ₩490 billion in 2018 |
| Operating profit before credit-loss provision | ₩5.16 trillion | ₩4.94 trillion in 2018 |
| Provision for credit losses | ₩670 billion | ₩674 billion in 2018 |
| Profit before income tax | ₩4.53 trillion | ₩4.30 trillion in 2018 |
| Profit for the year | ₩3.31 trillion; ₩3.31 trillion attributable to parent shareholders | ₩3.06 trillion in 2018 |
| Basic EPS | ₩8,451 | ₩7,721 in 2018 |
| Net interest margin | 2.14% | 2.23% in 2018 |
| Efficiency ratio | 56.33% | 57.08% in 2018 |
Balance sheet and funding: Total assets rose 8.1% to ₩518.5 trillion. Gross loans increased 6.3% to ₩342.1 trillion; deposits increased 10.4% to ₩305.6 trillion. Debts and debentures totaled ₩88.8 trillion, compared with ₩86.3 trillion in 2018. Gross loans were 111.94% of deposits, down from 116.27%.
Cash flow: Net cash from operating activities was ₩9.40 trillion, investing activities used ₩12.33 trillion, and financing activities provided ₩2.28 trillion. Cash and cash equivalents declined ₩519 billion to ₩6.12 trillion. For a bank, operating cash flow includes large changes in loans, deposits and other financial balances and should not be read like industrial-company operating cash flow.
Credit quality and capital: Gross non-performing loans were ₩756 billion, or 0.22% of loans, versus ₩725 billion and 0.23% in 2018. Total non-performing and other impaired loans were ₩1.91 trillion, or 0.56% of loans, versus ₩2.10 trillion and 0.65%. Loan-loss allowances were ₩2.41 trillion, 0.70% of gross loans. Group total capital adequacy was 14.48%, down from 14.60%; group common equity Tier 1 was 13.58%. Kookmin Bank’s total capital ratio was 15.85% and its common equity Tier 1 ratio was 14.37%. The group’s disclosed 2019 minimum total capital requirement was 11.5%.
Liquidity and shareholder returns: Kookmin Bank’s December 2019 average liquidity coverage ratios were 105.81% in Korean won and 108.15% in foreign currency, above stated minima of 100% and 80%. The board recommended and shareholders approved a ₩2,210-per-share 2019 dividend, totaling ₩861 billion; the payout ratio was 26%. The group also repurchased approximately 5.92 million shares during 2019.
Material changes versus the prior comparable period
- Net profit increased about 8.2%, supported by loan growth and higher net interest and fee income; NII rose 3.3%.
- Margin pressure continued: NIM declined 9 basis points to 2.14% and net interest spread declined from 2.05% to 1.96%. Management attributed this partly to asset yields adjusting sooner than funding costs as Korean interest rates fell in the second half of 2019.
- Net insurance income fell 38.8% to ₩300 billion as insurance expenses, including claims, grew faster than insurance income.
- Credit-loss provision was slightly lower, but write-offs rose 10.1% to ₩1.19 trillion. Retail loan impairment increased: retail NPLs rose to ₩376 billion from ₩304 billion, while corporate asset quality improved.
- Total equity grew 9.5% to ₩39.1 trillion, reflecting retained profit and ₩399 billion of hybrid securities issued by the group. The capital ratio edged down as risk-weighted assets expanded.
- IFRS 16 increased depreciation and amortization and reduced reported rent expense; general and administrative expense rose 5.9% overall. This accounting change limits direct comparison with 2018.
- Fair-value results were volatile: the group reported ₩1.12 trillion of net gains on trading derivatives in 2019, versus a ₩284 billion loss in 2018, while losses on financial instruments designated at fair value through profit or loss increased to ₩1.40 trillion.
Outlook, management commentary, risks and unusual items
- Outlook: No quantified earnings or margin guidance is provided. Management describes the 2020 Korean and global outlook as highly uncertain, citing COVID-19, weaker activity, market volatility, lower interest rates, unemployment and exchange-rate movements.
- COVID-19: The filing, dated April 2020, says the pandemic could increase customer defaults, impair investments, disrupt operations and weaken asset quality. Management said the pandemic negatively affected first-quarter 2020 results, particularly the investment and securities segment; the full duration and magnitude were not predictable.
- Credit exposure: Retail loans were 48.6% of total lending. Other consumer loans, which are often unsecured, had grown, and retail delinquencies could rise with weaker employment, higher household debt or falling property prices. SMEs are also a significant exposure; government-directed lending and payment-relief programs may increase risk or reduce returns.
- Concentration and industries: Exposure to the 30 largest highly indebted Korean business groups was ₩24.9 trillion, or 5.2% of total exposures. The group also identifies construction, shipbuilding, shipping and large corporate borrowers as areas where deterioration could raise provisions. DSME-related exposures were ₩330 billion at year-end, including guarantees.
- Insurance and regulation: Claims or reserve assumptions may prove inadequate. The planned Korean insurance solvency regime and IFRS 17, then expected to take effect in 2023, could increase capital needs and alter reported insurance revenue and liabilities. Details remained subject to change.
- Funding and market risk: Approximately 96% of deposits matured within one year or were payable on demand. Risks include withdrawals, higher funding costs, interest-rate changes, foreign-exchange volatility and securities valuation losses. The group also disclosed LIBOR transition exposure in loans, deposits, debt and derivatives maturing after 2021.
- Contingencies: The filing describes ongoing Madoff-related clawback litigation involving Kookmin Bank, with approximately US$42 million sought in each of two proceedings; outcomes were uncertain. It also reports 207 lawsuits against the group and subsidiaries with aggregate claimed damages of ₩193 billion, excluding minor collection cases. KB Securities had ₩403.7 billion of exposure to suspended Lime Asset Management funds and related TRS contracts; potential repurchases and litigation remained uncertain.
- Post-year-end events: In April 2020, the group agreed to acquire all of Prudential Life Insurance of Korea for an expected ₩2.265 trillion, subject to regulatory approval and other conditions. The filing also describes a 70% PRASAC microfinance acquisition in Cambodia and an Indonesian consumer-finance acquisition process. These were not FY2019 operating results.
- Audit and controls: Samil PricewaterhouseCoopers gave an unqualified opinion on the IFRS financial statements and internal control over financial reporting as of year-end. Management also concluded disclosure controls were effective. KPMG was appointed as auditor for fiscal years 2020–2022 following regulator designation; no accounting disagreements or reportable events were disclosed.
Most important facts for investors to verify
- Confirm the exact full-year figures in the audited statements and do not treat this 20-F as a standalone Q4 earnings release.
- Review the quality and sustainability of earnings: NIM and spread compression, the large swing in derivatives results, insurance claims and IFRS 16 effects.
- Track retail and SME delinquencies, unsecured consumer lending, restructured credit-card balances and whether allowances remain adequate under IFRS 9.
- Check capital and liquidity headroom against regulatory requirements, including the impact of risk-weighted asset growth, dividend payments and insurance solvency changes.
- Assess the cash-flow statement in the context of banking balance-sheet movements and verify deposit stability, maturity concentration and funding costs.
- Monitor COVID-19 credit and investment effects, the Lime-related exposure and litigation, and the approval, funding and integration risks of the Prudential and overseas acquisitions.
- Verify subsequent dividend and capital actions, including the ₩2,210-per-share dividend and the 2019 share repurchases, against current regulatory and financial conditions.