KakaoBank Corp. (A323410) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. Thank you all for joining this conference call, and now we will begin the conference of the Fiscal Year 2022 Third Quarter Earnings Results by KakaoBank. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2022 third quarter earnings results by KakaoBank.

[Interpreted] This is Kaylin Kim from KakaoBank's IR team. We will now begin KakaoBank's earnings call for the third quarter of 2022. We are joined by members of management today, including our CEO, Daniel Yoon; Vice President, [ Jay Kim ]; [ Sean Kim ], Chief Strategy Officer; [ Paulo Lee ], Chief Business Officer; [indiscernible], Chief Service Officer; and [ JB Young ], Chief Technology Officer. Please be advised that the financial results contained in today's call are preliminary unaudited results based on K-IFRS, which may be subject to change upon review by an independent auditor. I will now hand over to Sean Kim, our CSO, to present on our third quarter business highlights and financial results.

[Interpreted] Yes. Good morning. This is Sean Kim from KakaoBank. I'd like to thank all analysts and investors joining us today for our third quarter 2022 earnings conference. So I will take you through key highlights of our financial performance on Page 3. As of the third quarter, we now have a total of 19.78 million users, which means we have attracted close to 20 million users within 5 years from launch. Building on this immense broad customer base, we saw continued growth across our products and services in the third quarter, driven by our mortgage loans and mini accounts. We recorded operating profit of KRW 104.6 billion, representing 47% growth year-on-year. Let me go over more details on the performance of our mortgage loans and mini accounts. As you can see from Page 4, despite the slowdown in the local housing market, KakaoBank's mortgage loans have recorded consistent growth since rollout. In September, the new loan amount surpassed the KRW 150 billion mark, giving us 2% market share within the banking sector based on the monthly outstanding balance of new loans. Convenient chatbot-based UX and competitive interest rates appear to be having a big impact and improving awareness for our mortgage products and an improving customer satisfaction. We have continued to expand the geographical coverage of our mortgage products, which are now offered nationwide starting from August. This has been driving steep growth in our new mortgage loan balance in the second half as we look to achieve a target balance of KRW 1 trillion by the end of this year. On to Page 5 for our mini accounts. As of September end, we recorded a total of 1.5 million users as mini accounts have become an essential item for teams in managing their financial lives. The activity level has been getting even stronger with many using their mini accounts every day with monthly average log-ins per user increasing to 24.3x and monthly average transactions per user also up to 34.9x. We're planning to open new services within the year where users can use mini to top up their T-money cards and check their balance. This is expected to continue to drive activity level as well as transaction volume of mini going forward. Next on to Page 6 for our customer base. Yes, as mentioned earlier, we have ramped up our customer base very quickly since launch, with 19.78 million users as of the end of the third quarter. MAU, which is a good measure of the activity level of our users, is now at a record high of 15.51 million. Our customers are evenly distributed across all age groups and our working age population penetration is now 68%, up 7 percentage points Y-o-Y. Moving on to Page 7. As our customer base continues to grow, the activity level of our users is also getting stronger compared to the 4 major banks. Although our market share in the first half of the year is 2% based on assets, it stands at 16% based on the number of transactions. This is particularly encouraging considering that the number from the 4 major banks also grew their corporate account transfers. Thanks to high activity levels, current deposits per user has grown at a CAGR of 24% over the last 5 years with the share of users linking up their KakaoBank accounts with simple mobile payment services also growing quarter-on-quarter, now reaching 52% of MAU in Q3. Yes. Now I will move on to the third quarter financial results. Page 8, our operating revenue. Interest income continued growth, driven by the policy rate hike and expansion of housing deposit loans and mortgage loans. As a result, our third quarter operating revenue came in at KRW 411.8 billion, up 49% Y-o-Y and 11% Q-on-Q. On a cumulative basis, interest income accounted for 80% of operating revenue in the third quarter, with platform fee and other revenue accounting for the remaining 20%. Next on to deposits and funding on Page 9. In the third quarter, our deposit balance grew 19% Y-o-Y and 4% Q-on-Q, recording KRW 34.6 trillion. The share of low-cost deposits increased to 62.1% as of the end of the third quarter, driven in large part by growth in contribution from group accounts which contributed 14%. Our funding cost recorded 1.22%. We had 7 rate hikes this year alone with a benchmark policy rate increasing by 2 percentage points versus the end of last year. But nonetheless, we continue to maintain an efficient low funding profile as we continued to grow our low-cost deposit base. Next, moving on to our differentiated deposit products on Page 10. Our group accounts are quite beloved by many users, thanks to very convenient services. You can use them to send out chat room invites and manage membership fees. The number of group account users is now 7.8 million as of the end of the third quarter, up 22% YTD. We'll be adding on even greater functionality later this year with the launch of membership fee management services, reflecting user needs. For our 26-week installment savings accounts, we have been collaborating with many different partners to provide differentiated benefits and fund to our users, and they have been quite popular and well-received every time. September, we launched our 26-week savings product with KakaoTalk and had 100,000 new accounts just within 1 day of opening. Right after the 26-week installment savings with GS Caltex was launched this October, the GS Caltex app shot to the #1 position in the App Store popularity ranking, demonstrating the competitive strength of KakaoBank as a distribution channel. Next on to loans on Page 11. In the third quarter, our loan balance recorded KRW 27.5 trillion, up 10% Y-o-Y and 3% Q-on-Q. As we resumed issuing credit loans for high credit borrowers in June, this had the effect of easing the decline in our credit loan balance, amid continued growth in our housing deposit and mortgage loans. Although credit loans account for more than half of our loans at present, we plan to change the loan mix so that secured loans, which is having deposit loans and [ more ] mortgage loans account for more than 50% of the total mix. Meanwhile, mid-credit loans now account for 23.2% of our credit loans and net interest margin recorded 2.56%, which is 29 basis points higher versus the second quarter due to the rise in benchmark rates and increased proportion of low-cost funding. Let me now go into more detail about our platform business, starting Page 12. For our securities brokerage accounts, the number of new account openings was 80,000 in the third quarter amid a broad-based contraction in the equity market with a total of 6.09 million accounts on a cumulative basis. We started partnering with Mirae Asset Securities as well, and we'll be adding on more partnerships in the fourth quarter to provide greater options to our users. For referral loans in the third quarter, we added on Shinhan Savings Bank as a new referral loan partner, making for a total of 20 financial partners. The cumulative loan referral balance increased by 33% YTD, recording a total of KRW 5.5 trillion. We will be adding on more diverse lending partners from the banking sector to offer users a wider range of loan referral services. Moving on to Page 13. For co-branded credit cards, we are currently working with a total of 5 credit card partners with the number of cards issued recording 520,000 on a cumulative basis, a 42% increase versus the end of last year. We are building out our advertising business starting out with Kakao Biz board ads and loan ads. We've been executing Kakao Biz board ads cautiously in terms of propriety and sensitivity, specific to the sector that is being advertised. Building on our 20 million strong customer base, we have been able to boost in-app exposure consistently gaining a positive response from our advertisers. We've been maximizing the advertising effect of our loan adds through direct placement of exposure to real demand users. By expanding ad inventory, we are targeting significant growth in our ad business in 2023. Next, moving on to mini on Page 14. Mini users grew 30% YTD, recording a total of 1.5 million, achieving 64% penetration in the age 14 to 18 population in Korea. The transaction value of mini card users grew 61% YTD, recording KRW 361 billion in the third quarter, seeing ongoing growth momentum. All right. Starting on Page 15, let me explain about our brand-new banking service for business owners that we rolled out just this week. As an online-only bank, KakaoBank, we were the first to launch a lineup of banking services, targeting business owners, including banking accounts, payments and business loans. This is our first step moving into the corporate banking sector, leveraging the know-how we have accumulated in retail banking. Our goal is to provide individual business owners who up to now had to use complicated inconvenient banking services with an innovative and brand-new user experience in financial services. Page 16. We will be starting with basic business banking services, gradually expanding into a full lineup of business solutions so that ultimately business owners can take care of all of their business banking needs on the KakaoBank app. We will build on our initial offerings of bank account, check cards, credit cards and loans to provide diverse and practical content so that we can ultimately expand beyond simple banking into other business management-related services, for example, tax or credit management and become an all-in-one total solution for business owners in their entire journey running a personal business. On Page 17 is a reference line, so please refer to that for further details on our business banking services. On Page 18, let me touch briefly on our move into the certification business. So verification is an essential process for mobile banking. By acquiring and utilizing diverse verification or certification related licenses, we aim not only to improve in-app processes, but in the mid to longer term, provide seamless 1-step access to third-party products and services as well. We were designated as an identification service agency in September and plan on acquiring further licenses as a certified electronic document intermediary and also electronic signature certification service provider within the year so that we can expand into areas such as the identified and verified electronic signature service as well as the registered e-document delivery service. Ultimately, our entry into certification will serve as a bridge into diverse business processes that we are preparing to move into at KakaoBank. Next on Page 19 are our plans for new service launches. In November, we will be providing Coinone, a crypto exchange users with real name-based deposit account services to support stable and convenient trading of crypto assets. In December, we will be adding on stock market news alerts, domestic stock MTS function to provide full in-app coverage for the user's stock trading needs. Yes. We're planning to launch fund trading services within the first half of next year, which will be designed to be easy to use even for beginners so that they can start investing funds easily. We expect this to lay the foundation for expanding our services into the asset management context going forward. Also by seeking the main license for My Data service, we wish to provide a new UX in financial services that offers greater convenience than ever before. Next, moving on to Page 20 on our SG&A and CIR. In the third quarter, SG&A recorded KRW 93.5 billion, up 3% Q-on-Q. Advertisement expense increased KRW 4.5 billion versus Q2, following our TV ad campaign for the newly-launched mortgage loans as well as for promotional activities for our group accounts. IT expenses rose slightly on increased cloud usage. CIR was 39.7%, which is down 1.3 percentage points Q-on-Q. Moving on to Page 21. Our third quarter operating profit increased 47% Y-o-Y and 41% Q-on-Q recording KRW 104.6 billion from improved interest income. We saw a slight Q-on-Q improvement in ROE and ROA, which recorded 4.86% and 0.7%, respectively. Page 22. In the third quarter, delinquency went up to 0.36% as the share of mid credit loans increased while NPL ratio was 0.29%, and loan loss allowance coverage ratio 273%. We have been managing risk at a stable level to prepare against changes in the internal and external environment, which I will be explaining in the next slide. Page 23. First, we are increasing the proportion of secured loans in our loan portfolio to maintain stability against any potential abrupt swings in the business cycle. As of the end of the third quarter, secured loans accounted for 46% of the loan mix, up 11 percentage points YTD. In the mid to longer term, we will adjust the loan mix between secured and unsecured loans to be aligned with the banking sector average while taking into consideration our share target for mid-credit loans. We have consistently been engaged in preemptive risk management against macro uncertainties. We maintained a loan-to-deposit ratio more conservatively versus regulatory requirements, while centering our investment portfolio around safe assets, consequently building up a strong liquidity position. We also have a very solid balance sheet with sufficient loss absorption capacity against credit exposure. We've also enforced preemptive provisioning policies as an added buffer against the loss in the event of further deterioration in the economy. This concludes our financial results and business performance for the third quarter 2022.

[Interpreted] With that, we will now move on to the Q&A session.

[Interpreted] [Operator Instructions] The first question will be provided by Jihyun Cho from JPMorgan.

[Interpreted] It seems that you have seen improvement in your NIM on a cumulative basis versus last year also versus the prior quarter as well by 27 basis points. It does seem that the main driver is more low-cost funding versus other commercial banks. However, it does seem that the trend is more market in the third quarter. So are there any one-off factors that will explain that kind of bigger increase in NIM in the third quarter? And what is your outlook for the fourth quarter and also next year? Second question has to do with SG&A. It seems that your labor head count continues to grow in the third quarter as well whereas your labor expenses have decreased on a quarter-on-quarter basis. Is there any one-off factors that came into play in the second or third quarter this year? I would think intuitively that as you roll out new products like the [ home ] loans, you will need to do new hires of underwriters and development personnel? So what is your outlook in terms of labor cost, labor headcount, trends going forward? And ultimately, what level of CIR do you think is achievable?

[Interpreted] Yes. This is Sean Kim, the CSO. Let me take your questions. So first, regarding your question on the more market improvements we saw in NIM, particularly in the third quarter versus other quarters. I think the main driver actually is the way we manage our loan-to-deposit ratio, the LDR, that is responsible for the slightly different pattern of NIM growth in the third quarter versus other quarters. It so happens that in the third quarter relative to the growth we saw on the loan side, our deposits grew by a greater margin and through adjustment of interest rate or pricing competitiveness, we saw a more marked increase in NIM in Q3. So in the fourth quarter, there are various outstanding factors that are currently depending on how the funding markets will evolve or whether there are more adjustments to the policy benchmark rate in Korea. So based on these additional variables in the fourth quarter, we think that the NIM patterns will return back to historical quarter trends, similar to the trends that the other commercial banks in Korea have been witnessing. So I believe that in prior IR sessions, we did explain how there was a slight difference in the structure of our portfolio versus the other commercial bank. That does definitely impact our NIM trends versus the other banks. A higher proportion of credit loans, and so for -- in a rate hike cycle, adjustments to the floating rate on these unsecured loans actually have been [indiscernible] rate hike cycle, the increase in the rates are applied factor on the loan side, which is reflected in our NIM trends. In terms of our outlook for NIM for next year, because we're still right in the middle of discussions about next year business plan, it is hard for me to say [indiscernible] many factors there maybe change [indiscernible] loan-to-deposit ratio, but we will try to shape [indiscernible] around finding adequate NIM target level. And then to address your question on labor expense and CIR. So I believe we mentioned this at the conference call for the second quarter, but it is true that there were certain one-off cost items on the labor side in the second quarter regarding payment of health insurance contribution or other employee welfare and fringe benefits. So again, in the second quarter, there were one-off cost factors, including the health insurance contributions and also [indiscernible] into the employee-employment insurance scheme as well. However, these one-offs no longer are in place in the third quarter, which by why saw a decrease in our labor expenses. However, as a growing company, we will continue to roll out new products and services, and we'll need to invest continuously in new people for these new developments, and so new hiring will continue. But that said, we intend to maintain a robust CIR targets somewhere slightly above 40% for this year. And for next year, although it's hard to say because the business planning is still underway, there are certain market expectations that we see or that we are mindful of. So relative to the commercial banks, we do think that we should aim for much more competitive CIR versus the other banks.

[Interpreted] The following question will be presented by Hye-jin Park from Daishin Securities.

[Interpreted] So it does seem that in the third quarter relative to the size of your revenue, you did incur a slight increase in related expense. If you could outline some of those key items, I would appreciate it. Second question has to do with the data center fire, it seems that it did not affect KakaoBank's main server. So I do not imagine that you had a big damage. But if -- could you share the extent of the damage, please?

[Interpreted] Okay. First regarding the data center. So regarding the data center fire, I imagine that through media reporting, you have probably already read or heard about Kakao. As a bank, we have responded throughout the incident period and the [indiscernible] size of damage. So as a bank, we have been in operation fully in compliance with all regulatory requirements regarding data storage and retention, also disaster recovery and redundancy as well. And so we have not suffered any big damage as a result of that fire. So our assessment is that we did not see meaningful damage amongst any of the KakaoBank customers. And if you look at the actual figures for the number of customers, also our deposit balance before and after the fire incident, we have not observed any major change. But nonetheless, as an affiliate of the larger Kakao Group that shares in the Kakao brand, we believe it's very key and essential for us to earn the trust of all Kakao users. And so we are very committed to working on a continued basis for more stable [ opportunities ] going forward. I am cautious about sharing further details, but we are in current discussions with the SSS, the authorities, regarding this matter. But again, because they're still ongoing, I cannot share further details. And then regarding your question about the fee. So perhaps, the purpose of the question had to do with the composition of the fee expense because we actually categorized those expenses as fee expenses related to loans and deposits and then fee expenses not related to loans and deposits. And in the course of preparing for future businesses, we do sometimes incur certain fee expenses. However, because it is still in the preparation phase, we do not have -- we cannot officially attribute which business item is correlated with which fee expense. And so regarding the fee expenses that pertain to our loan or deposit business, a lot of that has to do with the projects that we have underway together with the Housing Finance Corporation, for example, associated with our housing deposit loans. So there are certain fees that are incurred. And so as the portion of those types of products increases, as a percentage of the total portfolio, again, the fee portion also increases.

[Interpreted] The following question will be presented by Byung Gun Lee from DB Financial Investment.

[Interpreted] Yes. It is a little bit late, but I'd like to congratulate you on achieving good results in line with market consensus or expectations. I have a question. If you look on Page 23, you do highlight the fact that you do have a sufficient capital buffer to fund and acquire assets necessary for future growth. But it seems -- it can be interpreted that actually, you're used to [ pay ] in capital from your shareholders, but that is, in fact, lowering your capital efficiency parameters like ROE. So if you're talking about risk-weighted assets of KRW 13.2 trillion, I think that is probably enough capital to fund 5 years' worth of future growth, roughly speaking. So in that sense, what is your outlook in terms of loan growth next year, in terms of the loan amount? And then how do you intend to further improve the efficiency of your excess capital that you are bidding on? And the second question has to do with returning shareholder value. So I think our previous guidance from the company was that sometime after the General Shareholders' Meeting, you may be ready to elaborate further on any share buybacks or dividend payments to shareholders. But from certain articles that have been published in the press, they cited problems with AOIC or AOCI and some credit cost ratio that would make it likely that you may actually have very limited, if not 0 profit available for dividends. So at the end of this year, what are your projections in terms of the size of profits available for dividend payments, pursuant to the commercial ads and also your plans regarding any share buybacks also?

[Interpreted] So last year in August at the time of our IPO, we had discussions, of course, with our investors and also market participants regarding what our future outlook would look like in terms of growth in the next 3 to 5 years. And so we had discussions regarding how much capital would be required to fund growth over that kind of time line. And as a result of the IPO, of course, we raised more than KRW 2 trillion. So even if the regulatory environment or the overall macro environment may have been favorable to our business, we have no intention of using up the hard raised capital within just a short period of 1 to 2 years. So the foundation of our business as a bank, of course, is the lending business, which requires a great deal of accumulated operational experience and data to achieve sustainable soundness, growth and profitability. So just because we have a sufficient capital base, we do not believe that it was -- it would be a right approach to try to dramatically increase loan growth within just 1 to 2 years. So in this context, in terms of capital deployment, we are thinking of it along 3 possible perspective. So in terms of use of capital, the first use may be in growing our lending business. Of course, the conditions are not very favorable right now. But the new mortgage loan product that was launched this year is increasingly being well received by the market. And based on this conviction that it will continue to do well, we intend to grow lending in 2023, particularly for the mortgage loan and also the housing deposit loans that have so far been doing very well at a higher rate versus 2022. And then, of course, it was just yesterday that we newly launched our business loan product for individual business owners. We think that this can represent a new alternative to the household loans. And we see this as a very strong driver for loan growth going forward for KakaoBank. And then we believe that we will not be able to really deliver ongoing innovation to the local financial markets just on our own, which is why we're always looking to continue investing in good partners, good companies with very competent services and very strong capabilities as well. And these partnerships, of course, will not be limited just to the local market. In line with the commitment that we expressed at the time of our listing, we continue to carry out these efforts outside of Korea as well. And we believe that in the short future, we may be able to produce and show you some visible outcomes. And then regarding your last question on share buyback. So as you are well aware, because of additional provisioning requirements for loan loss reserves, it is hard to say at this point what the potential size of any share buyback would be or could be. But irregardless of the potential size of any share buyback, we have already clearly promised and outlined our commitment that after closing our accounts in March next year, and once the exact amount of profit available for dividend payment is confirmed, we intend to determine what level would be adequate in line with shareholder views and expectations as we continue to think hard, of course, about growth to formulate or, excuse me -- to execute share buybacks to the extent that it is manageable.

[Interpreted] The following question will be presented by Sinyoung Park from Goldman Sachs.

[Interpreted] So the first question has to do with the previous question regarding share buybacks or dividend payments. Your multiple is still above book value at 1.4x. But as a growth stock, I would think that in terms of achieving greater shareholder value rather than these buybacks or other types of policies, I would think that focusing more on growth higher than the other industry peers or achieving economy of scale may serve as a stronger share price driver. So you talked about your plans for share buybacks, but is it your policy to continue to do these share buybacks on a continued basis? The second question has to do with asset soundness. We have seen that for certain savings bank in Korea offering low to mid credit loans, they have been seeing a meaningful increase in their delinquency rates. So KakaoBank, you have also been increasing your mid to low credit loans starting August last year, in line with your target share. But amidst the increase in the market rates, what is your outlook in terms of the soundness of those loan assets? And just to check, I think some of the NPL ratios, there is a bit of a mismatch or delinquency depending on what data set you're looking at, I couldn't catch everything, but between the test book versus the business report, it seems like other banks include certain items where it may actually be left out for KakaoBank. So if you could clarify?

[Interpreted] So let me address your first question, whether share buybacks would actually represent an appropriate policy. So we also do relate to your concerns, and we really understand the purpose behind your question, and it really is something that deserves a lot of serious review and thoughts. But that said, our current position is that because we have a sufficient capital base fund growth for KakaoBank, that should be the key driver for our concerns over growth. So again, regarding possible buyback policies, we will engage in thorough discussions after closing in March next year, engaging with market participants, our shareholders and also paying a great deal, of course, through internal discussions as well. So we will try to find a level that we can manage and also we will consider what impact that kind of decision-making can have potentially on our share prices and also market expectations to our KakaoBank. And regarding -- your question regarding mid-, low-credit loans, asset soundness surrounding the savings banks, in particular, we do also agree that maintaining asset soundness is a very pressing and important matter. But we are in a position where we do have to achieve policy goals that have been outlined for us in terms of the share of mid credit loans. And we have been enforcing very tight management of asset soundness already. And so let me explain further. So we had mentioned already many times that we have been adjusting the split between secured versus unsecured loans in our loan portfolio. And second, regarding the mid-, low-credit loans that we started focusing on starting August last year. Since it's been more than a year now, we have actually been able to accumulate a great deal of actual transaction data. So this will inform our underwriting criteria and also our credit-related policies going forward, and it is quite helpful. So for example, at the time of origination of those loans, we had run projections on possible delinquency through risk analytics and our projected delinquency rate versus actual delinquency actually are quite well aligned. But of course, we are -- we continue to be concerned about asset soundness as the BOK actually did increase benchmark rates significantly. And so relative to our initial expectations, the amount of interest on loans that have to be borne by the borrowers has increased substantially. And so in order to run a sustainable credit loan and mid-low credit loan business, it's very important to acquire an adequate level of margins or profitability first. So this will be factored into our determination for adequate NIM level. So we want to secure a level of profitability that can offset and cover any increase in delinquency. And we have been preparing many different initiatives to support our asset soundness and, of course, using various accumulated data to feed into our credit scoring model for further improvement. Our KakaoBank's scoring system actually has been found to be very highly discriminating, delivering good improved results. And we think going forward that this will also have a major impact in improving overall asset soundness. And then regarding the NPL number. So if I understood your question correctly, I will provide my following answer, but if I did not understand the question, please do contact our IR team after today's call. We will follow up with you. As far as I understand, for the [Foreign Language] and lease loans, targeted at the use, it's called [Foreign Language], they are backed by the Housing Finance Corporation through 100% payment guarantees. So as far as we understand, by definition, they are -- they fall out of the scope of the definition of NPL. But again, if this is not your question, please get in touch with us.

[Interpreted] Yes, if there are no further questions, we will conclude the third quarter 2022 conference call for KakaoBank. I'd like to thank all analysts and investors. Thank you very much for joining us today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]