KakaoBank Corp. (323410.KS) Q3 FY2025 Earnings Call Transcript & Summary

[Interpreted] Good morning. I would like to welcome you to KakaoBank's earnings conference call. We will start with a presentation by the management, followed by a Q&A session with our participants. [Operator Instructions] Now then we will begin Third Quarter 2025 Earnings Conference Call for KakaoBank.

[Interpreted] Good morning. This is Dianna Kang from KakaoBank's IR team. I'd like to thank all our analysts and investors for joining us today at our earnings call. We will proceed with a presentation by management via simultaneous translation first, followed by a Q&A with consecutive translation. [Operator Instructions] And with that, we will now begin KakaoBank's earnings call for the third quarter 2025. Today, we are joined by members of management, including our CEO, Daniel Yoon, Vice President, J. Kim; Tae Kwon, our CFO; Seok Kim, Head of the Banking Group; [indiscernible], Head of the AI Group; Paolo Lee, Chief Business Officer; [ Conrad Shin ], Chief Technology Officer; Ho-Geun Song, Head of the New Business Group; and [ Ellie Lee ], our Chief Risk Officer. The financial results contained in today's call are preliminary unaudited results based on K-IFRS and therefore, may be subject to change upon final review by an independent auditor.

[Interpreted] Yes. Good morning. My name is [indiscernible] Ted Kwon, the CFO from KakaoBank. Let me take you through our key highlights for the third quarter of 2025 on Page 3. Based on a framework view of improving performance based on core competitive drivers, we continue to see T&E growth in the third quarter. As of the end of the third quarter, number of customers recorded 26.24 million, up by 1.36 million from the end of 2024. Our deposit balance increased to KRW 65.7 trillion, up 21% year-on-year with the increase allocated efficiently across loans and treasury management. Meanwhile, platform revenue rose by 7% year-on-year, recording KRW 23.3 billion. Moving on to further details on third quarter results. Page 4, this is our customer base. As of the third quarter, our customer base totaled 26.24 million with continuous inflow from new services, including Mobile ID, My Kids Services and government subsidy search. In the third quarter, MAU was 19.97 million; WAU, 14.54 million as continued -- as we saw continued solid traffic inflows. Moving on to operating revenue, Page 5. Third quarter operating revenue was KRW 764.7 billion. On a year-on-year basis, driven by growth in platform revenue and treasury management, operating revenue increased by 2%. On a Q-on-Q basis, however, operating revenue declined slightly as market interest rate movement led to a decline in interest income from loans as well as income from treasury management. Moving on to deposits, Page 6. In Q3, our deposit balance totaled KRW 65.7 trillion, up KRW 2 trillion Q-on-Q from even growth across all product categories. The portion of low-cost deposits increased slightly quarter-on-quarter to 59%, which remains above the banking sector average. In order to boost our deposit base, which is a core source of our competitiveness, we are ensuring stable operations for signature products such as group accounts as we continue to launch new offerings as well. My Kids Services, which was launched in September while we continue to add to the lineup, which now includes a card account and installment savings account for one stop management of children's financial assets as we build and expand and integrate it into an asset management platform. Please refer to Page 7 for details. Page 8 for loans. Impacted by external factors like regulations, growth in household loans was minimal, where SOHO loans grew by more than 9% Q-on-Q with our third quarter loan balance totaling KRW 45.2 trillion. Given the structural nature of our deposits comprising a high share of low-cost deposits, during a period of falling interest rates right now, there is limited room for further reduction in our funding cost. Consequently, Q3 NIM was down Q-on-Q, recording 1.81%, although, of course, still significantly above the average of other major commercial banks. Page 9. In October, looking to expand our coverage on to -- or into SOHO secured loans, which account for 80% of the SOHO loan market, we launched property-backed secured loans. The entire process from loan application to document submission and post-loan management after the loan is executed is all done inside the KakaoBank app using a chat-based interface as we seek to deliver overwhelming convenience expand our market share within SOHO Lending. Page 10, treasury management. As of the end of the third quarter, driven by a rise in deposit inflows, our treasury management AUM increased to KRW 25.7 trillion. As market interest rates rose at the end of the quarter, valuation gains on funds and other instruments decreased, but this was offset by an increase in interest income from bonds. And on balance, treasury management profit grew by KRW 100 million versus Q2. Meanwhile, in the third quarter, we invested in a real estate fund for the acquisition of Pangyo Tech One Tower as we continue to diversify our portfolio across alternative assets as we seek to expand treasury management profits on a continuous basis. Pages 11 and 13 are about our main platform business highlights. For our loan comparison service, while the loan execution amount decreased slightly from the impact of household loan regulations in June, we are seeing continued demand for loans and have been working to expand our partnerships and product lineup. For our ad platform, we introduced new services such as the joy of earning money, incorporating elements of fund together with benefits, expand traffic and grow the influence of our ad platform. And the number of advertisers, of course, seeking us out is on the rise. On to our investment platform, the MMF Box product, which was released late Q2, continued successful performance. In the third quarter, we captured nearly 70% of the MMF market net incremental at KakaoBank as we believe it accurately address customer needs. Please refer to the respective pages for further details. Page 14. Third quarter SG&A rose by 17% year-on-year from rising labor costs and advertising and marketing spend for newly launched service promotion. Due to the temporary increase in cost, cumulative CIR was 36.9%, up slightly from 2024. Please refer to the slides for further details on other performance items, and I will move on directly to Page 17. At KakaoBank, we have been featuring customer services incorporating AI since the second quarter. Following on AI search and our AI financial calculator, which reached 1.3 million cumulative customers to date, in the fourth quarter, we plan to introduce AI transfer services, which allows users to carry out remittances and transfers, which are core to mobile banking using a natural conversational language without any complicated steps. We'll also be launching AI Group Treasurer, which is a group account embedded with AI as we broadly expand AI application across our services. With that, this concludes the key business highlights and financial performance for the third quarter 2025.

[Interpreted] Thank you. We will now move on to Q&A. Due to the limited time, I ask everyone to please limit yourself to 2 questions each.

[Interpreted] [Operator Instructions] The first question will be provided by Sinyoung Park from Goldman Sachs.

[Interpreted] Yes, I have 2 questions. First, regarding your loan growth, it does seem that growth has been quite slow. It may be due to government policy and whatnot. But do you think that you may need to revise down your initial guidance that you shared at the start of the year, which was around low 10% lending growth? Or is it ahead of the SOHO secured loan product launch? Was it intentional to moderate the pace to leave a bit of a buffer for the fourth quarter? Second question is on stablecoin regarding licensing. Cautiously, I may say that the legal risk concerning the Kakao Group overall has not been completely alleviated just yet. Do you think that this could potentially serve or present some kind of a constraint on your stablecoin initiative?

[Interpreted] Yes. So impacted from regulations that were announced in June on the 27, it is true that any net increase in household loans were actually quite minimal throughout the month of July to August. However, starting in September, we saw robust net increase for the policy-backed Bogeumjari Loan. And in the fourth quarter, the Bogeumjari Loans will start to be executed at full scale and will contribute significantly to driving loan balance growth. Also, we launched the SOHO secured loan product in July. And overall, the SOHO loans should also be a significant driver of lending growth, and we expect a significant improvement in loan growth relative to the second or the third quarter. So while it does seem that we might be slightly off of the initial annual guidance of 10%, again, in the fourth quarter, we expect that the SOHO loans and also the Bogeumjari Loans will be a contributor to significant growth, and we again expect much higher loan growth in the fourth quarter over Q2 and Q3. And then moving on to the Won-Pegged stablecoin. So because we do not have legislation passed and in place yet, it is hard to comment at any detail. And regarding the ruling by the lower court, I do agree that because the prosecution has since appealed the ruling, the majority shareholder eligibility issue has not been completely resolved. However, for the wider Kakao Group, we have a joint task force that is operational, and we are preparing proactively ahead of the won stablecoin. So 3 parties, Kakao Core, Kakao Bank and Kakao Pay are very much involved and working hard to prepare. And so we will be seeking to drive group-wide synergy. And for Kakao Bank regarding licensing, although again, the law has not been legislated yet, and it is hard to say. But at this point, we do not anticipate any difficulty in acquiring the necessary license. And actually, the stablecoin consortium, well, we can actually join the consortium with no problem irregardless of court rulings. And because of the court decision, the appellate court's decision will be finalized next year. We think that, that will have the effect of clearing up a lot of the uncertainty.

[Interpreted] The following question will be presented by Seung-Gun Kang from KB Securities.

[Interpreted] This is Seung-Gun Kang from KB Securities. I would like to also look at the loan growth in the third quarter. So although lending growth was not very strong, nonetheless, your RWA actually has increased significantly on a Q-on-Q basis around by 8.2%. So what is the big reason for that jump? And relative to the amount of deposit growth that you have seen, I think under noninterest other revenue, particularly for the security or marketable securities side, your revenue actually was a little bit sluggish in comparison in the third quarter. So any reason in particular? And what is your outlook going forward?

[Interpreted] Yes, in the third quarter, our RWA increased by KRW 2.226 trillion. So actually, this is mostly due to our investment in the Tech One building, the REIT fund and also the effect of a temporary rise in accruals from the low-income recovery support program. So for the Tech One investment, the RWA was 210% had the effect of increasing RWA by KRW 960 billion. The accruals, we applied 100% risk weighting and the effect was about KRW 482.5 billion. For the accruals, however, because this was a temporary accrual, we expect it to recover in the next quarter. And in the third quarter, our operating revenue decreased by KRW 13.3 billion. So the main reason was amid falling market interest rates, we saw a fall overall in our lending-related investment assets also with an increase in interest rates at the end of September that led to a decrease in our valuation gain. And then the main reason for the sluggishness in the noninterest revenue, mostly again was due to the rapid rise in KTB interest rates in September, where we saw the KTB yield actually go up by 14 basis points very abruptly. So this again led to a decrease in valuation gains on our trading assets as well as other investment assets. However, overall, we continue Q-on-Q improvements in terms of our investment yield overall from treasury management as the size of our fixed income bond holdings increased and reflecting our bond portfolio rebalancing. And we actually expect the Monetary Policy Committee to cut the benchmark interest rate in November, and we think that this kind of overall stance will continue throughout the first half of 2026. That being said, we are intending to increase the size of our bond holdings further. And rather than KTB, we will increase our exposure to the higher-yielding high credit type investments as well. And we will be shifting our duration strategy to be more flexible in terms of managing our assets.

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

[Interpreted] First, I would like to ask about the drivers behind the rise in labor costs. Actually, as you increase different products, especially SOHO loans, I do expect that you may need more labor and headcount and also as you increase your application of AI as well. So what are your plans in terms of SG&A and labor expense in particular for this year and next year, if you could share? And second question, I know it has not been too long since you launched your SOHO secured loan products. But still, what is your growth target for this type of product for this year and next year? And while it does not seem likely that household loans overall will see growth or substantial growth this year. What about if your SOHO loans do not grow as quickly as you anticipate or if the household loan regulations are not unwound, do you have any intention of perhaps using the resources to further increase your payout? So overall, what are your payout plans for this year and next year?

[Interpreted] Yes. Let me answer your first question. So in the third quarter, our SG&A increased by KRW 8 billion Q-on-Q due to a rise in labor costs and also advertising marketing spend. So as we launched various new service offerings, there was an increase in the advertising or marketing for those promotions. And as we increased our hiring for new business areas, including AI, this also led to an increase in labor expense. And as of the third quarter, on a cumulative basis, CIR was 36.9%. And we do expect that full year CIR is likely to increase slightly from last year levels as we expand hiring, which will lead to higher labor costs and also due to a rise in IT-related expenses from increase in cloud usage. However, in 2026, we will continue to work on improving our CIR further through more rigorous cost or efficient cost management. And then on to secured loans for SOHO. So with the launch of our SOHO secured products earlier this year in October, we are now fully expecting that this category of SOHO loans will start to grow in full scale starting next year, which is why we expect that loan growth for 2026 will be higher than what we saw in 2025. But in terms of the actual numbers, I think I can communicate with you later on because we are still in the process of setting up our business plan. But once it is finalized, we will share. And then on to shareholder returns. So as we shared at our Value-Up plan announcement, our plan is to gradually increase our total shareholder return to up to 50% by 2026. So while we will have to consider our capital ratio and ROE to come up with the final size or scale, we do expect somewhere in the mid-40% range for 2025.

[Interpreted] The following question will be presented by Min Wook Na from DB Securities.

[Interpreted] I will also ask 2 questions. I think overall for your platform business, you are seeing some slowdown in growth, largely impacted by loan-related regulations, also the cut in the merchant fee level as well. As we can expect more regulations to come in going forward, what are your plans to mitigate the circumstances, including new service or new product launch, if you could elaborate? Also, second question is on AI. Could you share more of your AI-related plan?

[Interpreted] Yes. Let me address your first question. Yes. So for the third quarter 2025, it is true that we did see a 2% or negative 2% decline Y-o-Y in our fee and platform revenue. So in terms of our platform, core offerings include our loan comparison and advertising business, which respectively grew by 27% and 50% Y-o-Y. However, the check card, the debit card, although the transaction volume increased due to the cut in the merchant fees, overall, we saw a significant Y-o-Y decline in fee revenue. So overall, we believe that our underlying business fundamentals remain very solid. It's just the impact of external factors, including the cut in the merchant rates that led to a decline in our fee income. So overall for 2026, we expect all 3 core platform offerings to grow, including our loan comparison, advertisement and investment platform. And with new service add-ons, including firm banking, Bogeumjari Loan and other mobile services, we expect double-digit growth. And on to your second question. So we have been applying AI for the products and services that are most frequently used and enjoyed by our bank users, and we are really anchoring ourselves as an AI native bank. So throughout the first half of this year, we introduced the AI smishing text verification service as well as our AI search and AI financial calculator as well. In the second half, we followed with AI transfer and will follow with the AI group treasury signature service as well, which embeds and applies optimized AI models to provide for a much significant user upgrade -- user experience upgrade. And so relative to any other financial institution in Korea, we believe that we will grow into the #1 institution in terms of AI application and use cases.

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

[Interpreted] Yes. I would like to ask another question. I think one of your charts showed rising penetration across different age groups. So how did you achieve this? Was there a certain strategy or maybe a certain product that served as the driver? Or is it still primarily the effect of your group accounts?

[Interpreted] So as we mentioned in the presentation, there were many new offerings launched in the third quarter, including the Mobile ID, My Kids Services and also searching for government support and subsidies, whatnot. These all had the effect of driving up traffic, especially the My Kids Service, as it involves not only the parents, but their children as well. So this was a significant driver in the inflow. And we also introduced many various investment products, RPs, funds or MMF. And so this has the effect of driving a lot of traffic from older-aged users who tend to have more personal assets.

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

[Interpreted] I would just like to check on a number. So what is your expectation for the credit cost ratio in the fourth quarter and also your outlook for 2026?

[Interpreted] Yes, let me talk about credit costs. So from the effect of the real estate regulations announced on June 27, we saw a decrease in net increase in mid-credit loans. As a consequence, our loan loss provisioning also went down by KRW 2 billion quarter-on-quarter. While in the fourth quarter, there might be an adjustment to the asset value, which may actually lead to some increase in provisioning. Overall, we think that credit cost will be somewhere in the mid 0.5% range, which is improved from last year's level. And for 2026, we largely believe that it will be similar to this year's levels, although there are lots of uncertainties, including the business cycle or interest rates. Notwithstanding, this is our expectation.

[Interpreted] With that, we will now conclude the conference call for the third quarter 2025 for Kakao Bank. We'd like to thank all of our analysts, investors and the press for your valuable time today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]