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 Fourth Quarter Earnings Results by KakaoBank. This conference will start with the presentation, followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2022 fourth quarter earnings results by KakaoBank.

[Interpreted] Yes. Hello. This is Dianna Kang from KakaoBank's IR team. We will now begin KakaoBank's earnings call for the fourth quarter of 2022. Today, we are joined by members of management, including our CEO, Daniel Yoon; Vice President, [ Jae Kim ]; Chief Operating Officer, [ Sean Kim ]; Chief Strategy Officer, [indiscernible], Chief Financial Officer; [ Lee John ], and [ Conrad Shin ], Chief Technology 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. Yes, I will now hand it over to [ Sean Kim ], our COO, to present our fourth quarter business highlights and financial results.

[Interpreted] Yes. Good morning. This is [ Sean Kim ] from KakaoBank. Thanks to all the investors and analysts joining us today for our fourth quarter 2022 earnings conference. Let me take you through our key highlight results. So please turn to Page 3 for a summary of the highlights. For KakaoBank, 2022 was a year of reinforcing the underlying foundation for greater growth going forward. In terms of our banking business, we're able to complete our retail product portfolio, with the successful launch of our home mortgage loan product, while also advancing into corporate banking with the launch of business owner loans in November. With our strong lineup of signature deposit products, we're able to maintain an efficient funding structure, even within the rate hike cycle while reaffirming KakaoBank's unique competitiveness in deposits. On the Platform business front, we continue to explore many new services as drivers for future growth and revenue. These efforts translated into strong business performance, delivering meaningful growth in our customer base and overall business. Total number of customers passed the 20 million mark with 14% year-on-year growth, while operating profit improved by 38% year-on-year, recording KRW 353.2 billion, thanks to growth in our deposit and loan portfolio and also improved CIR. On to our customer base on Page 4. As of the end of Q4, number of customers totaled 20.42 million, as we achieved record MAU of 16.44 million with the launch of new services driving higher activity levels among our user base. Customers were evenly spread out across all age groups, with the working age population penetration recording 71%, which is 7 percentage points higher versus last year. Page 5 for operating revenue; amid rising market rates, we continue to see an increase in interest revenue, which recorded KRW 484.7 billion, up 57% YoY and 18% Q-on-Q. Full year interest revenue in 2022 accounted for 81% of total operating revenue, with platform revenue making up 5% and fee and other revenue making up the remaining 14%. On to deposits on Page 6; our Q4 deposit balance was KRW 33.1 trillion, up by 10% year-on-year. The balance decreased by 4% from the previous quarter, due to later adjustments made to our deposit rates. To manage our loan-to-deposit ratio more efficiently, taking into account the pace of growth we're seeing on both the loan and deposit side. In the fourth quarter, the percentage of low-cost deposits stood at 61.3%. And although Q4 continued to see reverse money movement out of the banking sector, KakaoBank was able to maintain competitiveness in funding, thanks to the strength of our differentiated deposit products such as group accounts. Funding costs recorded 1.62% in the fourth quarter, up by 40 basis points from the third quarter. However, on a full year basis, funding cost was 1.23%, up by 44 basis points YoY, although the policy interest rate rose by 225 basis points throughout the course of last year with 7 rate hikes, we were nonetheless able to minimize the rise in funding costs, thanks to efficient funding profile centered around our strong base of low-cost demand targets. Moving on to KakaoBank's differentiated deposit lineup on Page 7; users love our group accounts for their convenient services, from the chat room in my function to management function for member funds. The number of group account users now totals 8.2 million as of the end of 2022, up 28% versus the end of last year. Last month, we introduced new functionality, allowing the account holder to manage fee payment date, also overdue funds as well by members and also management of living expenses, as we work to more proactively reflect user needs, and we intend to come up with even more add-ons going forward. For our 26-week savings account, we have been working with different partners, offering different [ traded ] funds and benefits for users, with all new releases, receive a popular response every time. Each month throughout the fourth quarter, we launched a new 26-week savings product with a new partner, recording on average 300,000 or more users signing up per product. As KakaoBank's channel becomes more competitive, our 26-week savings accounts continue to evolve into a robust product offerings, providing a win-win for our partners and customers alike. On to loans on Page 8; in Q4, our loan balance recorded KRW 27.9 trillion, up 8% YoY and 2% Q-on-Q. Mortgage loans were the biggest driver for growth with the outstanding balance increasing by more than double that of the third quarter. With our new business owner credit loans, which were launched in November last year, also seeing stable growth with KRW 90.1 billion in outstanding balance. Meanwhile, the share of mid-credit loans grew to 25.4% of total credit loans, surpassing our annual target. Net interest margin in Q4 recorded 2.83%, which is a 27 basis point improvement Q-on-Q, amid widening interest revenue from rising market rates, and also due to our strong low-cost funding base. On a full year basis, we recorded net interest margin of 2.48%, which is 50 basis point growth versus last year. Moving on to the next slide, I will move on to our mortgage loan performance. Page 9; KakaoBank's mortgage loans, which were launched last year in February, surpassed the KRW 1 trillion mark within just 1 year or so from launch, despite the overall slowdown in the real estate market. In Q4, new loans increased by more than double versus the third quarter, following a steep growth curve, and our market share within the banking sector expanded to 2.7% as of the fourth quarter. This ramp-up in growth was possible due to KakaoBank's unique convenient user experience and competitive rates, which capture demand not only for home mortgage loans or home purchases, but also for home equity loans to fund daily living expenses. Since launch, we have been expanding through geographical coverage and also scope of housing types, with our mortgage market coverage growing to 32% as of the end of Q4, we plan to further strengthen our product lineup further this year to grow our coverage even more, to more than double the current level, to continue to drive steep growth in our new mortgage loan book. Starting from Page 10, I will move on to our key and platform business. Our fee business continues to record top line growth, driven by our strong debit card performance. Debit card transaction volume recorded KRW 20.9 trillion, up 18% year-on-year in 2022 and expanding our market share to 11.9%. On the Platform business side, we further diversified our product portfolio, by introducing new services such as domestic stock trading. At present, although revenue from referral loans and securities account opening comprise of more than half of our platform revenue, we expect to be able to achieve a more balanced revenue mix and growth at scale, as we continue to expand our service lineup. So I'll elaborate further details on our platform business from the next slide. Page 11, on our brokerage accounts business; at KakaoBank, we have been focusing on strengthening our relevance within the investment context, by incorporating essential services that users require for daily investments purposes into our apps. At present, we have been expanding coverage for stocks, which are the most common form of investment for most, launching a WTS or Web Trading System for domestic stock trading, in partnership with Korea Investment & Securities. Our WTS service has seen increased transaction per daily visitor since launch, having a positive impact on diversification of our platform business, also helping to boost the activity level of our users. We intend to continue to expand our scope of investment assets and introduce more diverse asset management services, to grow our securities business further. On to Page 12; for our referral loan business, last December, 8% joined as a new referral loan partner, adding up to a total of 21 financial partners as of the end of Q4. The total cumulative transaction amount grew by 38% year-on-year, recording KRW 5.7 trillion. We are working with 5 credit card companies for our co-branded credit card business, as we continue to expand market coverage, partnering with Samsung Card last November to launch a card for self-business owners only. The cumulative number of cards issued increased by 56% versus last year, recording a total of 570,000. On to Page 13; we have been looking to grow our advertising business, which we feel is a segment where we can maximize KakaoBank's platform power. We currently have 3 products available in our mix, including a premium ad offering. Premium ads placed on the home screen and loan ads targeting real demand users have shown a strong click-through rate with positive feedback from our advertisers. For third-party loan adds, all advertisers that purchased a slot during our pilot run last year, have all repurchased, despite the increase in unit pricing, which represents very meaningful performance for us. Kakao Biz ads have also been settling down nicely as a stable revenue stream, leveraging overwhelming traffic, driven by our 20 million strong user base. This year, we intend to ramp up our advertisement business even further and expect a significant uplift in revenue, as we examine greater diversity of advertising products to build up a sustainable advertising business. Next, on to our mini accounts on page 14; mini users grew 40% year-on-year, recording a total of 1.6 million users, and achieving 59% penetration within the age 14 to 18 population in Korea. The transaction value of mini card users grew 72% year-on-year, recording KRW 385.9 billion, maintaining sustained growth momentum. Starting on Page 15, let me explain about our new banking service for business owners, which we unveiled last November. Our business owner loans through 200,000 individual business owner customers within just 2 months from launch, allowing us to establish a strong position on the market. Last month, we launched our simple tax return filing services for business owners as well, as we advance further into the business domain of individual business owners, recording 180,000 customer views for tax inquiry services in the first 2 weeks alone. Going forward, we plan to build out an unmatched lineup of services that links up banking with the real-world business needs of our customers to support business orders in all of their journeys in running a business. On to Page 16, for our new service pipeline. This year, we wish to make more diverse user experiences available to our customers that link our financial services with people's day-to-day lives. Last January, we launched tech services for business owners to expand beyond the banking context, and build out into the broader business domain. In April, we plan on leveraging the fan base that has been accumulated so far to launch a new deposit product with a new element of fun to get more business owners into how fun finance can be. Later in the second quarter, we will be extending the age range of our many users to provide more essential financial services to a wider range of users. And we want to continue to strengthen our relevance in the investment context, coming up with more investment-related offerings in the second quarter and beyond, we will acquire a fund management -- fund license and introduce a new way of investment into funds going forward. Next on to SG&A and CIR on Page 17. In the fourth quarter, SG&A was KRW 130.3 billion, up 39% Q-on-Q. Labor costs increased by KRW 31.7 billion Q-on-Q due to one-off factors such as payout of performance bonus and contribution into the employee welfare fund. Advertising and promotion increased slightly as well, with new service launches, including banking for individual business owners. As a result, CIR rose to 47.7% in Q4, but was lower at 42.6% on an annual basis, which is a 2.5 percentage point drop from last year. Page 18; fourth quarter operating profit increased 65% year-on-year, recording KRW 85.8 billion, but down 18% Q-on-Q, again, due to the one-off SG&A factors that I mentioned before. We saw a slight Q-on-Q decline in ROE and ROA, which recorded 4.69% and 0.67%, respectively, from reduced operating profit. To asset quality on the next slide. Page 19; in the fourth quarter, delinquency went up by 13 basis points Q-on-Q to 0.49%, while NPL ratio was [ 0.26% ] and loan loss allowance coverage ratio 259%. Provisioning increased by KRW 11.8 billion Q-on-Q to KRW 59.5 billion. The credit cost ratio was 0.66%, up by 6 basis points Q-on-Q. The increase in provisions was mainly from additional provisioning set aside to reflect adjustments to the economic outlook for 2023. Credit costs not including this one-off was 0.59%. Lastly, Page 20; In 2021, KakaoBank established a dedicated ESG organization, and since have been moving at the forefront of ESG initiatives. Last year, we became the first Internet bank to become a member of the UN Global Compact and in December, introduced the financial safety insurance campaign together with KakaoPay to help prevent online financial fraud, as we play a leading role in financial consumer protection. We will continue these global initiatives further to consistently reflect ESG values across our entire business spectrum. This concludes our financial results and business performance for fourth quarter 2022. And with that, we will now move on to Q&A.

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

[Interpreted] Sinyoung Park from Goldman Securities. I have 2 questions. First, could you provide your guidance in terms of loan growth for 2023? I think you mentioned earlier that you expect high growth in the home mortgage loan space. And I think starting in the second half of last year, we did already see significant pickup in your business, as you expanded the scope of your geographical coverage and also the type of housing properties that qualified. This year, if you want to further increase our market coverage from the current level, I think definitely widening the scope of housing types to include villas or multifamily-type units outside of apartment building should help. But unlike with the more standardized apartment units, there tend to be less transaction volume for those types of residential units. So do you think that there will be any problem in obtaining, like adequate valuation or appraisal on the value of those types of properties. So what are your plans regarding those different housing types and also timelines? Second question has to do with costs. You mentioned certain one-off factors, so what is the total amount of one-off costs that you're talking about. And I think this links up with your hiring plans, because as of the end of the fourth quarter, I think your headcount is now approaching 1,400, and relative to the end of 2021, that means a net increase of 26% in terms of new hiring. So I think potentially that may be what is slowing down your improvement in CIR. Given the deteriorating global economic environment, many other companies actually have been scaling back their new hiring plans. So potentially, do you think that, that kind of change is also possible at KakaoBank?

[Interpreted] Yes, let me take your question. So you asked for a guidance on loan growth. I understand that there is a great deal of interest regarding this certain matter. So in terms of loan growth for 2023, our baseline position is that we want to achieve significantly higher level of growth versus the broader market. So considering the macroeconomic environment, our internal view at the moment is somewhere within the mid-10% range. So I think the general observation or assessment from other commercial banks, is that there is limited potential for loan growth this year, especially for household loans, I think the few among the commercial banks is that following 2022, there will be very low growth in that space this year, some potentially are looking at even negative growth. However, in contrast, we intend to continue to drive loan growth through the means that I will now explain. So the first way will be to expand our home mortgage loan lineup, which, as you mentioned, saw a significant -- very steep growth starting last year. So we will be working proactively to improve the product features and also reinforce the lineup. And then as we outlined in our presentation deck, our coverage within this particular market is about 30%, but our plan is to grow that line more than double. And so we are in discussions now on possible ideas, which include moving into the prefill subscription balance loan market, also taking part in the Korea Housing Finance Corporation, the [Foreign Language] loan program as well, and expanding into types of housing properties like villas or multifamily units that we have not previously served. So discussions on all 3 ideas are actually underway concurrently. And then for existing new products that we have already launched, including the business owner loans and also other unsecured credit loans, we will seek additional improvements to the product features and also new add-ons to the lineup. Then given our underlying capacity as a lending platform, we are actually receiving 1 million loan applications per month. And then this year, we have several major institutional changes lined up, launch of the refinancing platform, for example, or loan comparison [Technical Difficulty] and effective institutional changes, if anything, will actually drive the strength of our platform, and we believe that it will enhance our lending capacity significantly. And then regarding your second question, how nonregular housing types like villas or multifamily units will be appraised for value. So we have engaged in significant internal discussions about that topic and we do understand that the existing valuation appraisal method is quite time and cost consuming. And we do understand that there are certain inconsistencies that may make it difficult to implement on a non-face-to-face basis. So we have been preparing to actively adopt AVM, the automated valuation model that has already started initial discussions on the market. Of course, because we're still in the early stages of discussions, we do understand that there are many considerations that have to be taken into account. And throughout the implementation process, many supplemental measures may be required. Yes. So AI or machine learning-based types of operational methods to value different types of collateral. But we think that although it may be in the early stages now, it will eventually become mainstream. And so internally, our view is that, even if there are certain difficulties, we will actively seek out really dramatic ideas to implement this type of process, effectively. Next, regarding our hiring plan. So as we mentioned at our earnings call throughout 2022, after we were working very hard and preparing for new service and new product launches. And so when we did hiring, we focused on those relevant resources. So most of the new hires were in the planning, development and operational functions for these new services. So to provide further context, in 2021, we were focused on establishing the planning for new innovative products and services that were previously not available. So we look to plan out new test of financial services and also the platform side of our business as well. Starting from 2022, when we already had the underlying plan in place, and it was then about crystallizing further refining the plans further, we focused on necessary personnel that could do that. So compared to 2022, the scale of our hiring in 2023 will be much reduced. We are thinking maybe 1/3, maybe 40% of previous year levels. And lastly, on the cost side. So in terms of the one-off costs that we mentioned for the fourth quarter, it's a combined KRW 32 billion from labor expenses and also contributions into the employee welfare fund.

[Interpreted] The following question will be presented by Yafei Tian from Citi.

I have two questions, if I may. The first one is on net interest margin. We saw quite strong expansion over there in this new year with interest rates probably stable or even trending downwards a little bit. What is your expectation of margin trajectory from here, also in consideration of potential shift in your loan portfolio more towards secured loans. And the second one is on credit costs. We have seen a little bit of pickup over there. This is kind of broadly in line with what we are seeing at system-wide level, right? So it has been a quite a number of years that you've been operating in the credit space and building up operating history over there. So just wanted to check with you, what's your outlook on credit cost in this time of the much higher interest rate environment with the borrowers.

[Interpreted] Okay. Let me take your first question. So as you said, we share the same opinion in terms of our outlook for interest rates this year. So overall, in terms of the rate environment this year, we believe that current levels may be maintained and potentially they may go down slightly even. So that said, we think that compared to the high NIM of 2.48% that we achieved last year. This year, we may expect status quo, so maintaining similar levels or depending on the circumstances, we expect that there might be a slight correction, which I mean to the downside. And although secured loans as a percentage are increasing, still we have a certain target that we are working against, in terms of increasing our mid credit loans. And so we expect to retain the effects of improvement to our NIM from the increase in mid-credit loans. And then moving on to your second question on credit costs. So as you said or for the reasons that you mentioned, we did see our credit costs increase up to the fourth quarter last year. And because there are certain expectations upon KakaoBank from the market and also the government, namely in terms of how much we should increase the portion of our mid-credit loans, same as for the previous answer, we expect -- or excuse me, as we grow the portion of mid-credit loans going forward, we expect that the credit costs may continue to see upward pressure. However, we think that after 2024, the rate environment should gradually stabilize. And then with a bit of a time lagging effect, we think that there will be eventually a positive impact to overall soundness. So as the new loans that make up our mid-credit loan portfolio goes down or stabilizes beyond 2024, it should become more stable as well. We don't think that the credit costs will rise by as much as we have seen previously, again, after 2024. And as a last point, if we do realize steep growth in our mortgage loans as we expect, then we think that will have the effect of lowering our credit costs for the entire loan portfolio significantly after 2024.

[Interpreted] The following question will be presented by Do Ha Kim, Hanwha Investment & Securities.

[Interpreted] I have 2 questions. First, I think first quarter of last year or so, you did separately outline the delinquency ratio specific to your mid-credit loans. But I think since then, that number actually has been taken out from your deck. So nowadays, we are seeing NPL increase significantly within the industry, and there's more emphasis placed on asset soundness over profitability. So if you could provide the delinquency on the mid-credit loans separately, we would appreciate it. And I think the second question, you regarded, I think, certain policies regarding treasury shares, assuming JPY 90 billion or so in additional loan loss provisioning, we can come up with KRW 18 billion in retained earnings, when you calculate the profit available for dividends. What are the follow-up plans with -- in that regard?

[Interpreted] So regarding the delinquency rate, specific to our low to mid credit loan portfolio, we actually do not disclose that number separately. And so we seek your kind understanding as we are exercising a bit of caution, as it is subject to some sensitivity in terms of communications with the market, also the supervisory regulators regarding assets on this. And then to answer your second question regarding shareholder return policies, including our plans for the treasury shares. So I think there was a similar question for us at the last conference call. But as you can see from our disclosure filing as of today, which is, of course, on a preliminary basis. Fortunately, we think that after closing for full year 2022, we should have profits available for dividends. However, there are various issues that have to be taken into account with regard to disclosure requirements. So it is difficult for us to specify more right now in terms of the size of the profits, the tax method and the use or application right now. However, we are expecting the particular to be deliberated result upon in the near term through the BOD meetings. And so once things are finalized, we will get the information to you through a disclosure.

[Interpreted] The following question will be presented by Junsup Jeong from NH Investment & Securities.

[Interpreted] Yes. I will also ask 2 questions. First, regarding platform. I think we have -- it's quite positive that your user base appears to have increased both for your referral loan business and also the co-branded credit card business as well. But I think that kind of growth actually is not captured yet in the revenue numbers per se. Because if you look at platform revenue compared to the third quarter, actually, it has trended downward in the fourth quarter, while expenses climbed from Q3 to Q4. So of course, we may have to consider a bit of a time lag, but what were the factors behind the drop in top line revenue in the fourth quarter? And what is your expectations in terms of timing? When do you think the platform side will start really to deliver meaningful contribution to your revenue? Second question regarding your NIM outlook that you explained further -- previously. Maybe I missed something, and I'm not understanding, but could you elaborate and update us a little bit more. Over 2022, the average across the 4 quarters was 2.48%, and you saw quarter-on-quarter improvement last year. You said in terms of your NIM outlook for this year, it may maintain current levels, if not decline slightly. So if we assume that it's maintaining similar levels on a full year basis, does that mean that the NIM actually will have to go down steeply from one quarter to the next quarter. So could you update us on that?

[Interpreted] Okay. Let me cover your first question on platform business. So overall last year, the platform business, as a part of our overall fee business actually was significantly challenged. So as you know, more than half of our platform revenue comes from the brokerage account opening, fee income and also the referral loan income. But due to unfavorable market circumstances throughout last year, both revenue streams actually saw a significant drop year-on-year. Because going forward, we don't think that the stock market will be as bad as it was in 2022. We think that the brokerage account opening service and related management fees will recover to a certain extent and deliver performance to a certain extent as well. And for the referral loan business, as I explained, there is a major institutional change ahead for this year regarding, for example, the refinancing platform, also the loan comparison service as well, which represent opportunities for us to expand the referral loan business further. So we think that overall, the business environment for these loans will be better this year versus 2022. And we are examining different options in terms of growing our credit card, co-branded business, trying to look at whether there's something that actually delivers stronger performance compared to the individual partnerships that we have been working on. Plus, we think 2023 will be the defining year when we are able to really ramp up our advertising revenue in a meaningful way. And also, we believe that a vast part of our plans, in terms of the investment side of our platform will be ready by this year. So that's why we think that it will really start to deliver revenue starting 2024 and onwards. And we think that the biggest or the best measure of our underlying platform capacity is actually the deposits and the lending side of the business. And so I think on the deposit side, the fact that we have grown a significant user base, is really giving us a lot of opportunity to further leverage our platform capacity and that user base can be tapped, as we move into other revenue streams. And next I will move on to the additional questions you had about NIM. So there are different components that are factored into determining NIM. And of those, the most important is the interest rate environment in our view. So the policy rate adjustments by the Bank of Korea, for example, or the technical criteria, for example, the interest rate adjustment, interval that we apply to our loan and deposit portfolio, these are all incorporated into the calculation of NIM. And if you look at the market interest rate environment right now, you will know that the spread between the BOK policy rate versus the yield on financial bonds actually has -- actually held solid after the spreads narrowed. So it's hard to say what the directionality of NIM will be this year, because it depends on whether the spread will actually normalize to more wider levels as before, or maintain the current narrower level. If we assume that it goes back to more normal conditions and the spread widens, that potentially we could say, we maintain last year's NIM, if not improve upon them. But if we assume that the spread maintains the current narrower band, then in that case, NIM would be maintained at last year's levels, or see a slight decrease. So again, it's hard to say one way or the other at this point.

With that, for lack of time, we will now conclude the fourth quarter earnings call for KakaoBank. Thank you to all of our investors and analysts for joining. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]