Business context and reporting period
KB Financial Group Inc. filed this Form 20-F on April 30, 2019, for the fiscal year ended December 31, 2018. It is an annual report, not a standalone 2018 Q4 earnings filing. Consolidated financial statements are prepared under IFRS as issued by the IASB and audited by Samil PricewaterhouseCoopers, which gave an unqualified opinion on the financial statements and internal control over financial reporting.
KBFG is a Korean financial holding company with banking, credit card, securities, life and non-life insurance, consumer finance and other operations. Figures below are consolidated and in Korean won (KRW) unless stated otherwise; KRW billions are abbreviated as ₩bn. The filing’s translated USD figures use ₩1,112.85 per US$1 at December 31, 2018.
Key financial metrics
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Interest income | ₩13,735bn | ₩11,919bn | Up 15.2% |
| Net interest income | ₩8,905bn | ₩8,247bn | Up 8.0% |
| Net fee and commission income | ₩2,243bn | ₩2,050bn | Up 9.4% |
| Net insurance income | ₩490bn | ₩594bn | Down 17.5% |
| Operating profit before credit-loss provision | ₩4,941bn | ₩4,564bn | Up 8.3% |
| Provision for credit losses | ₩674bn | ₩548bn | Up 23.0% |
| Profit before tax | ₩4,302bn | ₩4,138bn | Up 3.9% |
| Profit for the year | ₩3,062bn | ₩3,343bn | Down 8.4% |
| Profit attributable to parent shareholders | ₩3,061bn | ₩3,311bn | Down 7.6% |
| Basic earnings per share | ₩7,721 | ₩8,305 | Down 7.0% |
| Net interest margin | 2.23% | 2.27% | Down 4 basis points |
| Efficiency ratio | 57.08% | 58.65% | Improved |
| Total assets | ₩479,588bn | ₩436,786bn | Up 9.8% |
| Total loans, gross | ₩321,811bn | ₩292,233bn | Up 10.1% |
| Deposits | ₩276,770bn | ₩255,800bn | Up 8.2% |
| Total liabilities | ₩443,875bn | ₩402,741bn | Up 10.2% |
| Debts and debentures | ₩86,284bn | ₩73,814bn | Up 16.9% |
| Total equity | ₩35,713bn | ₩34,045bn | Up 4.9% |
| Cash and cash equivalents | ₩6,643bn | ₩8,405bn | Down from prior year-end |
| Net cash from operating activities | (₩8,958bn) | (₩4,836bn) | Cash outflow widened |
| Net cash from investing activities | (₩4,480bn) | (₩8,729bn) | Cash outflow narrowed |
| Net cash from financing activities | ₩11,744bn | ₩14,689bn | Positive, but lower year over year |
Banking cash flows are affected by movements in loans, deposits and financial investments. The filing attributes the operating cash outflow largely to the increase in loans and other operating assets; it should not be read like operating cash flow at a non-financial company.
Material changes versus prior year
- Net interest income grew as loan balances and yields rose, but higher deposit and wholesale funding costs outpaced asset yields: interest expense increased 31.5%, compared with interest income growth of 15.2%. Net interest spread fell from 2.11% to 2.05%.
- Credit-loss provisions increased to ₩674bn, principally on credit cards and retail loans; corporate asset quality improved and corporate impaired-loan ratios declined.
- Profit fell despite higher pre-provision operating profit and pretax income. Higher tax expense was a major factor: effective tax rate rose to 28.8% from 19.2%, reflecting reduced non-taxable income and the Korean corporate tax rate increase.
- Net insurance income declined, with claims and surrender-value refunds rising. Comparability is affected by KB Insurance becoming consolidated in May 2017 and contributing for a full year in 2018.
- Net fee income increased, but reported credit-card fee income and expense were both affected by adoption of IFRS 15. The 2018 presentation is not directly comparable to prior years.
- KBFG adopted IFRS 9 in 2018 without restating 2016 and 2017. Opening allowances for expected credit losses increased by ₩544bn, with an opening reduction in retained earnings; 2018 amounts may therefore not be directly comparable with prior periods.
Guidance, outlook, risks and unusual items
The filing provides no specific earnings or margin guidance. Management described the Korean and global economic outlook for 2019 and beyond as uncertain. It cited household debt, interest-rate and funding-cost movements, slower growth, trade and geopolitical tensions, real-estate conditions and possible deterioration in borrower credit quality as factors that could affect results.
- Credit and concentration: Retail loans were 49.4% of gross loans, and other consumer loans—often unsecured—were 35.4% of retail loans. Retail non-performing loans rose to ₩304bn from ₩252bn; the credit-card delinquency ratio rose to 1.31% from 1.29%. Restructured card loans can make reported delinquency ratios less complete.
- SME and industry exposure: SME loans reached ₩106,015bn. The group also disclosed exposure to construction, shipbuilding and shipping borrowers, as well as Korean conglomerates; further defaults or restructuring could increase provisions and losses.
- Liquidity and capital: About 95.5% of deposits had maturities of one year or less or were payable on demand. Consolidated capital adequacy was 14.60%, above the stated 10.625% minimum for 2018; the group was designated systemically important, with a higher additional capital requirement applying in 2019. Kookmin Bank’s December 2018 liquidity coverage ratios were 102.20% in won and 139.44% in foreign currency, above the then-applicable stated minimums.
- Insurance: KB Insurance and KB Life Insurance reported risk-based capital ratios of 187.09% and 203.74%, respectively. Future solvency-rule changes and IFRS 17 adoption may require additional capital or affect reported insurance results.
- Unusual items and accounting: 2018 included a ₩138bn loss from remeasurement of net defined-benefit liabilities in other comprehensive income. The 2018 cash dividend was ₩1,920 per share, equal to 2017’s amount; total dividends were ₩759.7bn. The group repurchased 3,486,286 shares during 2018.
- Contingencies: KB Kookmin Card faced 113 customer lawsuits related to the 2013 personal-information breach, with claimed damages of about ₩6.9bn; a ₩9.9bn provision was recorded. Other disclosed proceedings include Madoff-related recovery litigation and Cambodian litigation; outcomes remain uncertain. Kookmin Bank and the group faced 291 and 185 lawsuits, respectively, in the ordinary course of business as of year-end.
- Other risks: Management highlighted cyber and technology incidents, market and foreign-exchange volatility, legal and regulatory actions, collateral-value declines, competition and reliance on subsidiaries for holding-company dividends and liquidity.
Most important facts an investor should verify
- Review the audited consolidated financial statements and notes for IFRS 9/IFRS 15 transition effects, including the ₩544bn opening expected-credit-loss allowance increase and the IFRS 15 card-fee presentation change.
- Check subsequent loan-quality trends, especially retail and credit-card delinquencies, restructured card balances, SME exposures and the adequacy of expected-credit-loss allowances.
- Assess whether loan and fee growth can continue to offset higher deposit and borrowing costs, and monitor net interest margin and funding mix.
- Verify capital and liquidity buffers against updated regulatory requirements, including the 2019 systemic-bank capital add-on and the short-term deposit concentration.
- Track insurance claims, surrender activity, capital ratios and preparations for IFRS 17 and the planned Korean solvency regime.
- Confirm dividend capacity and holding-company liquidity, given reliance on subsidiary distributions; the filing reports a ₩1,920-per-share 2018 dividend, approved in March 2019.
- Monitor legal proceedings, cyber risks, and the results of overseas investments and acquisitions, including the Cambodian bank and Indonesian bank interests acquired in 2018.