KakaoBank Corp. (323410.KS) Q2 FY2025 Earnings Call Transcript & Summary

[Interpreted] Good morning, ladies and gentlemen. Thank you very much for joining us at the KakaoBank earnings call. We will start with the presentation of performance by management followed by a Q&A. [Operator Instructions] We will now begin the second quarter 2025 Earnings Conference Call for KakaoBank.

[Interpreted] This is Dianna Kang from KakaoBank's IR team. I'd like to thank all analysts and investors for joining us today at our earnings conference call. We will be proceeding with the presentation of performance by management via simultaneous translation, followed by a Q&A with consecutive translation. [Operator Instructions] And with that, we will now begin KakaoBank's earnings call for the second quarter 2025. We are joined by members of management, including our CEO, Daniel Yun; Vice President, Jade Kim; Tae Kwon, our Chief Financial Officer; Conrad Shin, our Chief Technology Officer; Paolo Lee, our Chief Business Officer; Sean Kim, Head of the Banking Group; [ Vesper Ko ], Head of the AI Group; [ Buddy Song], Head of the New Business Group; and [ Eli Lee ] Chief Risk Officer. The financial results contained in today's call are preliminary unaudited results based on K-IFRS and may be subject to change upon review by an independent auditor. And with that, I will now hand over to Tae Kwon, our Chief Financial Officer, to present on our second quarter business highlights and financial results.

Yes. Greetings. This is Tae Kwon from KakaoBank. Let me take you through our key highlights for the first half of 2025 on Page 3. We continue to see solid fundamentals backed by continuous customer and deposit growth in the first half, underpinned by our core competitiveness, T&E growth. Number of customers passed the 25.86 million mark, up by 980,000 from the end of last year. Our deposit balance was KRW 63.7 trillion, up 19% Y-o-Y. Meanwhile, first half platform revenue rose by 13% Y-o-Y. And as a result, we recorded operating profit of KRW 353.2 billion cumulative in the first half. And let me now move on to more details on second quarter performance. Page 4, our customer base. In the second quarter, customers totaled 25.86 million, with inflow of 1 million new users within the first half. In the second half, several new -- excuse me, several new offerings were launched in the second quarter, including our AI search and financial calculator service, our balance check service for crypto assets as well as various benefit tax services, boosting both our MAU and WAU by 1 million Q-on-Q, very encouraging performance. Let's move on to Page 5 on operating revenue. Second quarter operating revenue was KRW 778 billion. Compared to the first quarter, there was a slight decrease in dividend income from fund investments, also less disposal gains from NPL sales. And overall, our operating revenue was down 1% or so Q-on-Q. But nonetheless, we saw even growth across all components Y-o-Y. Notably, growth from non-lending components with such as fee and platform, also invested assets drove overall top line growth and the share of revenue, excluding interest income from loans continues to grow. Next, on to our deposits on Page 6. In the second quarter, our deposit balance totaled KRW 63.7 trillion, up by 5% Q-on-Q. As our time deposit -- installment deposit balance rose, the portion of low-cost deposits did decline slightly but still remains more than 20 percentage points above the banking sector average, demonstrating our differentiated and competitive funding capacity. Group accounts, which are the biggest contributor to our low-cost deposit mix continues robust growth in both the number of users and balance, thanks to a favorable network effect despite follow-on products from competitors. Please refer to Page 7 for further details on group accounts. On to loans on Page 8. Our second quarter loan balance totaled KRW 44.8 trillion, up 1% Q-on-Q, driven by growth in mostly unsecured household loans and SOHO loans. Meanwhile, NIM in the second quarter was 1.92%, down 17 basis points Q-on-Q from a decline in our asset-to-liability ratio and reduced net interest spread. Reflecting government measures introduced late June, imposing tighter controls on household loans, we expect SOHO loans and policy-related loans, such as the Bogeumjari Loans will lead loan growth in the second half. Page 9. At KakaoBank, despite overall challenging business conditions, we have been seeking loan growth by expanding our SOHO lending and policy subsidized loans. Notably, our SOHO guaranteed loans, which offer added convenience, have been steadily growing in number of users, now accounting for 62% of the total SOHO loan balance. In the second half, we plan to launch secured e-SOHO loans as we expand coverage to address the diverse needs of our customers. Meanwhile, our e-Bogeumjari Loan, which is a policy loan for real housing demand customers will be applying a chatbot-based conversational interface as part of a 100% non-face-to-face process. Following the launch of our Bogeumjari Loan in July, our mortgage loan coverage has now increased to 56%, and we'll be working to expand this further going forward. On to Treasury Management, Page 10. As of the end of the second quarter, our financial investment AUM increased to KRW 25.2 trillion. Our financial investment profits widened to KRW 181 billion, up by KRW 16.2 billion Q-on-Q as our average AUM balance and valuation gains from fund investments increased. We intend to respond nimbly to changing market conditions while leveraging our raised funding efficiently to continue to expand our earnings. Page 11 on our loan platform. We have been enhancing the competitiveness of our loan comparison services, expanding the product line up to include not just unsecured personal loans, but also home mortgage loans in April, while also onboarding new partners, including Samsung F&M. As a result, the execution value of our loan comparison services have been growing consistently every quarter, and our market share has been rising quickly. In the second half, we will continue to expand partnerships and reinforce our product line up in the SOHO loan and policy loan segments to strengthen our influence as a lending platform even further. Page 12, on to ads. For our ad perform, we have been adding on more services structured to connect customers with partners for win-win on all sides. In April, we launched Draw for Benefit services, which provides diverse benefits for our customers as well as advertising exposure for our partners, taking full advantage of KakaoBank's platform power. New service offerings like this has been driving continued growth in advertisement revenue, which increased 69% in the second quarter. Page 13 on our investment platform. With the goal of offering easy and intuitive investment experiences for our users, we have continuously been expanding our presence in the investment context. To expand our product lineup, we launched our MMF box service in June, which achieved more than KRW 50 million in cumulative balance within just 1 month from launch, demonstrating our proven platform capability. We continue to expand the scope and coverage of our investment products and services with add-on function. For example, function to check crypto prices and virtual asset holdings in real time. Page 14 on to our payment platform. Debit cards, which make up the biggest component of fee revenue. Despite being a single card offering has continued steady growth since launch, recording 13% market share based on transaction volume in the first half. To expand further into the payment context, we partnered with Shinhan Card launching PLCC services this July as we look to integrate the entire credit card cycle within the KakaoBank app, from card management, tracking transaction, checking statements, et cetera, to strengthen our capabilities as a complete payment platform. On to our global business, this is Page 15. Superbank, which was a 10% equity investment we made in Indonesia in 2023, has continued to show solid performance since launching customer services in June 2024, attracting 1 million customers in just 1 month and turning around to profit within the first year. For Thailand, after being chosen as a virtual bank license operator in June, we have been following procedures to set up a JV entity, aiming to start sales operations in the second half of 2026. We are not limiting ourselves to any particular country or region and are doing our best to explore opportunities to unleash our experience and know-how on the global stage. On to AI on Page 16. We have been introducing various AI-related services on to the market. We were the first in the financial industry to launch a customer-facing AI search and AI financial calculator service powered by generative AI. Last week introduced our mobile ID service based on AI, including AI-enabled facial recognition technology. We are convinced that AI represents a new paradigm that can transfer -- transform user experience, and we'll continue to incorporate AI technologies into our products and services to completely transform everyday finance through AI. With that, this concludes our business highlights and financial performance for the second quarter. Thank you.

[Interpreted] Yes. We will now move on to our Q&A. Because of the limited time, I ask that you please limit your questions to 2 per person. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Do Ha Kim from Hanwha Investment & Securities.

[Interpreted] I will ask two questions. First of all, if you could provide further details on second quarter NPL write-offs and sales. It does mention -- or your presentation mentioned that there were some write-offs for sales, but it doesn't mention the exact size. So I'd appreciate that. Second, you do state loan growth and aggregate loan growth. It seems on a Q-on-Q basis, it's in the low 1% range. But relative to the size or extent of loan growth, it seems your risk-weighted assets, RWA actually grew by more extensively. So if you could provide further details on that.

[Interpreted] So regarding second quarter disposal gains from NPLs, in the first quarter, the amount was KRW 12.1 billion. In the second quarter, it went down by KRW 2.6 billion, recording KRW 9.5 billion. And regarding your second question, why RWA actually rose by more compared to loan growth? Well, in the second quarter, there was about KRW 500 billion in additional loan growth, mostly from unsecured personal loans, also SOHO loans, which carry higher RWA. That is the reason why.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The following question will be presented by Sinyoung Park from Goldman Sachs Securities.

[Interpreted] Yes. This is Park Sinyoung from Goldman Sachs Securities -- at Goldman Sachs. I'd like to ask two questions. Just in terms of the portion of your low-cost deposits, it does seem to be slightly down. In the mid- to longer term, do you expect to be able to maintain the gap that you currently enjoy versus the other large commercial banks? Do you think that, that gap is sustainable? Second question regarding your platform revenue. It seems that there are certain factors certainly in the second half of the year that may weigh on platform revenue, including the lending environment, loan referrals may become more challenging. That said, what are your outlooks or plan for the platform side of your business?

[Interpreted] So in terms of our deposit base in the second quarter, we recorded KRW 63.7 trillion, which is up Q-on-Q by 5.5%. So amid changing market rates, there was increasing demand for savings-type products. And overall, the share of low-cost deposits did decline slightly to 55.8%. But still, compared to the broader market average, it is still quite a significant high level, driven mostly by our competitive group accounts. So over the last 3 years, we have seen not only top line growth, but very strong substantive growth with the average balance of our group accounts growing by about 15% every year. So going forward, we are going to continue with our very distinct signature products that address the needs of our customers with added convenience and ease of use in order to maintain our competitive edge in terms of the portion of low-cost deposits over our competitors. Let me take your second question. So in terms of our fee platform business, in the second quarter, we saw 8% Y-o-Y growth in performance. And this earnings growth actually has been driven mostly by our loan comparison service and our ad business, which grew by 75% and 69%, respectively, on a Y-o-Y basis. On a Q-on-Q basis, we did see a negative 2% decline. This was due to the markdown in merchant fees and commissions that was affected in June this year, which lowered our earnings from the debit card and also mini cards. And so considering how compared to our business plan, we expect a slight reduction in our debit and mini card earnings from the reduction in merchant fees. And also due to the effect of the June 27 measures on our loan comparison service, we believe that our fee and platform business growth will possibly be below our previous double-digit annual guidance. However, we will continue our efforts to build out further earnings and diversify into different earnings source. We will certainly be boosting our advertisement revenue further and also reinforcing service offerings, including the Bogeumjari loan that was launched in July and also PLCC type services and offerings.

[Interpreted] The following question will be presented by Jun-Sup Jung from NH Investment & Securities.

[Interpreted] This is Jun-Sup Jung from NH Investment & Securities. I will also ask two questions. First is on your overall strategy in terms of both deposits and loans. And so first -- in the first quarter and also second quarter, loan growth actually was quite challenged while your deposit growth actually -- there was some deposit growth. It seems that as a result, your loan-to-deposit ratio has dropped somewhere around the 70% range. Given tighter lending conditions expected in the second half, what are your internal expectations or strategy in terms of both loans and deposits? And what is your target loan-to-deposit ratio? And second, this may be a bit outside of your core business area, but there is certainly a great deal of market interest towards stablecoins. There has been some media coverage suggesting that there is a task force among the industry players as well. So if you could provide any details if there are any significant progress updates, please?

[Interpreted] Yes. Thank you. I will take your first question. So in terms of the overall directionality of our growth, at KakaoBank, we seek funding or deposit-driven growth. Our loan-to-deposit ratio as of the end of the second quarter 2025 is 70.4%. So if the deposit growth that we have observed in the first half continues, then based on the old loan-to-deposit ratio formula, we can expect somewhere around the high 60% range. In terms of overall loan growth for the full year, we believe that it will be close to our initial guidance of around 10%. Of course, inevitably, there will be a slowdown in household loan growth in the second half resulting from the government measures announced on June 27, imposing tighter controls on household loans. But nonetheless, we expect to achieve similar to prior guidance or 10% level loan growth for the full year, driven by SOHO loans, also policy-related loans, including the Bogeumjari Loan that we launched earlier in July. And moving on to the second question. So regarding the stablecoin, I believe at this point, we are not able to elaborate too much on our strategy because the related legislation has not been passed yet, and there are just too many variables. However, within the Kakao Group, a Kakao stablecoin task force actually has been established to mobilize our capabilities together. So our CEO, Daniel Yun, also CEO, Chung Shina from Kakao and also CEO, Shin Won-Keun from Kakao Pay are also heading up this task force. We intend to address digital assets very proactively, reflecting changing market conditions, together with the Kakao Group, and we're exploring opportunities across a wide array of digital asset-related services, including origination, distribution, custody, intermediation, et cetera. And just to elaborate a little bit on our capabilities regarding stablecoin, where technology and also security and safety are of essence. Over the last 3 years, we have developed and operated, a know your customer real name identity authentication service for crypto exchange transactions and also been implementing real-world risk surveillance as well. And we have been a part of Phase 1 and Phase 2, the CBDC pilot run by the Bank of Korea, and we have achieved success across many service lines, including wallet opening, transaction remittance and treasury function, et cetera. So we have already built up significant experience and know-how in terms of digital assets.

[Interpreted] The following question will be presented by Jaewoong Won from HSBC Securities.

[Interpreted] Thank you for delivering good performance despite the difficult business environment. I have two questions. First, on NIM, it seems that your annual target for this year, obviously, was somewhere in the 2% range. But compared to -- or due to the trend of loan growth in the second quarter, your NIM has -- actually, your NIM has decreased by a greater margin versus lending growth in the second quarter. So can you explain what are the big factors behind that NIM movement? Is it because of seasonality in the first quarter that led to a boost in inflow from group accounts? And then turning back to more normal levels in the second quarter. So was it more driven by the deposit side or the impact of the loan side? If you could break down the NIM movement, I'd appreciate it as well as an outlook for the second half. Also, it seems that you're gradually building the asset management or investment side. And I understand that you have hired investment professionals. So is that pretty much done? Or will you need to continue to hire more investment officers?

[Interpreted] Yes. Thank you. Let me take the first question. So second quarter NIM decreased by 17 basis points Q-on-Q. This is from a decrease in our net interest spread as well as a decrease in our asset to liability ratio. So net interest spread decreased as we saw reduced asset investment returns from falling market rates, and this happened despite improvements to our funding costs. We also saw a decline in our asset to liability ratio. What happened was as our deposits grew, our investment AUM also increased and there was notably an increase in assets like MMF that are not included in the calculation of NIM, which resulted in, again, the decline in the asset to liability ratio. In terms of a breakdown of the attributing factors, the decline in the net interest spread was responsible for a 12 basis point decline. The decline in the asset to liability ratio, a 5 basis point decline. For full year 2025, we are expecting our NIM to be up 1.9%. So previously, we had been aiming to defend somewhere around the 2% level based on the assumption that there would be about 2 policy rate cuts. However, amid growth in our deposit base and expectations of more rate cuts, we have revised our guidance to NIM of 1.9%. And if I may elaborate a little bit more on Kakao Bank's NIM. So our NIM actually has declined by more versus other banks, and this actually is due to the structure of our asset and liability portfolio. So on the asset side, we have a high proportion of MMF or investment funds that are not included or factored into NIM calculation. On an average balance basis, that amount is KRW 7.2 trillion. So it actually takes up about 11% of total investment AUM and is continuing to rise as our deposit base increases. And on the liability side, for other commercial banks, they can actually cut the interest offered on their savings type deposits, and it's favorable in terms of defending their spread, whereas for us, given that we have a higher portion of low-cost deposits as total funding mix with a declining interest rates, it costs -- relative funding costs go down, but there is a more limited impact in terms of how much we can defend our spread versus the other commercial banks. So it is mostly due to this underlying structural difference also coinciding with the declining market interest rates that we experienced a larger drop in NIM versus the other commercial banks. But separate from this kind of volatility, still compared to the other banks, our NIM remains higher by 20 to 50 basis points.

[Interpreted] And let me take your second question. So in terms of our financial investment profit in the second quarter, on an average balance basis, it increased by KRW 16.2 billion as our invested asset AUM increased from bigger deposits, and we saw valuation gains. Going forward, we will continue to explore different type of investment opportunities to boost our returns further, while maintaining asset base, a stable portfolio underpinned by bonds. To further boost profitability and liquidity, we will also expand into higher-margin blue-chip type bond instruments as well and other investment fund increments as well. And so because our plan is to continue to grow our investment AUM, obviously, we will continue to strengthen the investment professionals and also our internal processes as well.

[Interpreted] The following question will be presented by Jihyun Cho from JPMorgan Securities.

[Interpreted] I will also ask two questions. It seems that the proceeds or gains from NPL write-off and sales has declined slightly. Is it because of less favorable pricing conditions for NPLs in the market? Or is it that the absolute amount of the write-off has decreased? If you could provide more color, I'd appreciate it. And although NPL continues to go up slightly, it seems that you are quite well provisioned. So if you could provide your outlook in terms of NPL also provisioning for the second half of the year?

[Interpreted] So let me address the second question first. So as we saw reduced net increase in lending on a Q-on-Q basis in the second quarter, our loan loss provisioning amount was KRW 57.7 billion. And given expected economic conditions in the second half of the year, we do expect it to weigh negatively on our bank earnings with widening uncertainties in and outside of Korea and also a decline in domestic demand, which is why we intend to continue to maintain a conservative provisioning stance throughout 2025. But on a full year, our credit cost is expected to be slightly improved, where we're expecting about 0.6%. And then regarding our NPL sales. So the decline in NPL sales or write-off gains actually is due to the reduced amount of NPLs that were written off or sold -- sold, sorry. And the main reason for the reduced NPL that were sold is because of the effect of various individual borrower or debtor protection-type mechanisms. So overall, due to tighter protection measures for individual debtors. Overall, the size of NPL sales, also the amount of disposal gains overall has gone down.

[Interpreted] We'll accept the final question because of the time.

[Interpreted] The last question will be presented by Ji-Young Kim from Kyobo Securities.

[Interpreted] First, if you could share on recent developments regarding the AI side, appreciate it. Also, I understand that mobile ID service or solution has been released by Kakao Group. So does this relate to any part of your business? And second, I understand that you were chosen as an operator in the Thai market. So if you could share more on your global strategy, global business outlook.

[Interpreted] Yes. Thank you. Let me take the first one. So AI actually represents a significant paradigm shift that completely transforms user experience. So I don't think it's enough just to offer individual products or services that incorporate or that simply link up to AI? So for us, at KakaoBank, our goal is to use AI to completely transform finance living, everyday finance for our customers. So already, in the first half of the year, upon designation as the innovative financial service, we were the first in the financial industry to launch customer-facing Gen AI-based services, including AI search and AI financial calculator service, which has attracted 700,000 users since launch. And in the second half of the year, we are planning on launching AI-enabled group secretary services for our group accounts. So based on our accumulated operational know-how in AI services, in the longer term, we actually want to make AI the basic grammar or the basic interface for all financial activities through the KakaoBank app. Also, a mobile ID service was launched as part of the Kakao Consortium. So we have high expectations in terms of the boost to our traffic, as this is the first collaboration of its kind, where there's an app-to-app connection between KakaoTalk, the messenger service and KakaoBank. And this, of course, was possible since the mobile ID business actually was made open to the civil sector. So we actually -- we will be able to enjoy optimal accessibility to -- through the KakaoTalk Messenger, where 50 million Korean public actually use the messenger app. And we will be incorporating the AI-based facial recognition technology and also other authentication security-related technologies that will deliver a very robust safety so that our users can have peace of mind as they use our convenient mobile ID services. And then more on our global business. So Superbank in Indonesia, where we made a 10% equity investment actually has continued to grow steadily since first launching services in June of 2024. And for Thailand, we actually submitted an application to be licensed as a virtual bank in Thailand as of September 2024 as part of the SCBX, KakaoBank and WeBank Consortium. And so in June this year, we were finally, chosen as a preliminary license operator. So this came after 9 months. So we are preparing for establishment of our joint venture entity within the year and are planning to inject equity capital. So we expect about 1 year of further preparation from June 2025, and the final license for the virtual bank may be issued sometime in the second half of next year and upon which, we will sequentially launch services.

[Interpreted] With that, we will conclude the second quarter 2025 earnings conference call for KakaoBank. I'd like to thank all of our participants, including our analysts, investors and journalists for joining us today. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]