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 2023 first quarter earnings results by Kakao Bank. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 first quarter earnings results by Kakao Bank.

[Interpreted] This is Dianna Kang from Kakao Bank's IR team. We will now begin Kakao Bank's earnings call for the first quarter 2023. We are joined by members of management today, including our CEO, Daniel Yoon; Vice President, Jay Kim; [indiscernible] our Chief Operating Officer; Conrad Chen, our Chief Technology Officer; and [indiscernible], Chief Strategy 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. I will now hand over to Sean Kim, our COO, to present our first quarter business highlights and financial results.

[Interpreted] This is [ Sean Kim ] from Kakao Bank. Thanks to all the investors and analysts joining us today for our First Quarter 2023 Earnings Conference. Let me now take you through the key highlight results for Q1 on Page 3. In 2023, Kakao Bank has been moving forward under the goal of growing our operating profit and strengthening the influence of our platform. In the first quarter, we posted record high operating profit of KRW 136.4 billion, driven by above-market average loan growth. Our credit loan balance returned to growth with the turnaround to a net increase for the first time in 6 quarters. Our mortgage loan balance recorded KRW 2.4 trillion, 1 year after launch despite the slowdown in the real estate market. The influential power of our platform is becoming stronger, driven by our growing customer base and increase in traffic. We continue to see inflow of new customers who are drawn to signature products such as group accounts as we gain growing presence in people's daily lives when making payments or fund transfers. Among new customers acquired in Q1, 49% are using our group accounts with our market share in debit cards and number of transfers, also setting new records quarter-on-quarter. Our media accounts for teenagers have also seen a boost in traffic with our T-moneytop-up service, which was launched in the fourth quarter last year, offering greater usability to users in their everyday context. On to our customer base on Page 4. As of the end of Q1, number of customers totaled 21.18 million as we achieved an MAU of 16.35 million. Customers were evenly spread out across all age groups, with our penetration in the working age population reaching 73%, which is 8 percentage points higher year-on-year. Next on to our customer base expansion driven by group accounts on Page 5. Kakao Bank's group accounts are a widely loved product with half of all new users opening and using a group account, number of users has grown at an annual average of 26%, recording KRW 8.8 million as of the end of Q1. Group accounts share against total current deposits have increased to 24%. Going forward, we're planning to increase additional product features to support a wider range of financial and social activities that different group types may require while also expanding our partnerships further. On to Page 6. Not only have we grown our customer base significantly, but the activity level of our users has also become stronger. Our market share based on bank transfers is 10.6%, putting us in fifth place within the banking sector, which is quite encouraging when considering the difference in asset size between us versus the 4 major commercial banks and also the fact that their transfers cover both retail and corporate, whereas we're retail only. On to operating revenue on Page 7. Our operating revenue in the first quarter was KRW 56.5 billion, up 16% Q-on-Q with even growth across all business segments. Interest revenue increased significantly driven by lending growth, while noninterest revenue also grew 28% Q-on-Q with debit card transactions and advertisement business posting solid growth. Page 8 for our deposits. Our Q1 deposit balance was KRW 40.2 trillion, up 22% Q-on-Q, although our low-cost deposit portion decreased 4.9 percentage points from the previous quarter to 56.8%. It is still 17 percentage points higher than the broad banking sector as we maintain a highly competitive funding structure. In Q1, our funding cost ratio increased by 64 basis points Q-on-Q to 2.26% as our deposit balance increased. And then on Page 9, we will move on to our new product that was launched in April called my favorite savings products. Our new product called -- my favorite savings accounts is intended to provide a differentiated user experience that links to happy moments in people's daily lives with finance. You can choose an image of choice for your journal cover, set up your own deposit rules to accumulate savings the way you want. We believe the new format will make the services feel a bit more personal and special for users and provide them with a sense of togetherness with Kakao Bank. So far, we have only opened up my favorite savings account products for celebrity fan groups only, but we will soon be expanding our services to encompass diverse lifestyles incorporating themes like pets or taking care of babies. We expect this to really anchor itself as one of our signature deposit products alongside our 26-week installment savings plan and our group accounts. Moving on to Page 10 for loans. As of the first quarter, our loan balance stands at KRW 29.3 trillion, up 5% Q-on-Q. Mortgage loans were the biggest driver for loan growth with the outstanding balance increasing by more than double that of the fourth quarter. Credit loans were also another contributor to growth, turning around to a net increase for the first time in 6 quarters. Meanwhile, the share of mid-credit loans grew 0.3 percentage points to 25.7% of total credit loans, which we see as a meaningful outcome since it was achieved even as our total credit loan balance also increased. NIM in the first quarter was 2.62%, a 21 basis point decline Q-on-Q as the increase in our deposit balance resulted in a lower loan-to-deposit ratio. On the next page, I will move on to our mortgage loan performance. Page 11. Kakao Bank's mortgage loans surpassed the KRW 2.4 trillion mark within just 1 year from launch, making a safe landing in the market, thanks to convenient user experience and competitive rates with new loans, including the new balance for refinancing purposes, increasing by almost double every quarter. Our market share in the mortgage loan space within the banking sector expanded to 3.7% as of the end of the first quarter. We are planning on new offerings to be launched later this year to further ramp up our market coverage and carry forward strong growth momentum in the loan -- in the mortgage loan space. Moving on to Page 12 for our fee business. Our fee business continues to record revenue growth driven by our strong debit card performance with transaction value of KRW 5.4 trillion, expanding our market share to 12.3% in the debit card market, just on the strength of a single stand-alone product. We have been working to diversify our platform business portfolio, recording increased revenue on a quarter-on-quarter basis. Although our loan referrals and securities account opening service did not see high levels of growth due to the overall macro environment, we demonstrated our competitiveness as an advertising platform, signing on major advertisers, including Samsung Electronics and SK Telecom despite being the early phase of growth. As a result, advertising as a percentage of total platform revenue increased to 13% in Q1, and we expect us to continue to grow into a main pillar of our platform business going forward. And for further business performance details, please do refer to the slides from Pages 14 to 16. Next on to Page 17 for our mini performance. Mini has become a must-have app for teenagers for financial services, and we are looking to add on more services that are closely interlinked to our users' daily lives to expand our positioning into a must-have app for a broader everyday context beyond finance. As a starter, we launched the Mini Card T money top-up service in the fourth quarter, achieving meaningful results, including 600,000 users within just 4 months from launch and robust inflow of user traffic. This month, we are planning to incorporate another lifestyle-related element onto the existing Mini offering as a converged finance/everyday service while expanding to other age groups in the third quarter this year to let more young people experienced finance at a younger age. We will continue to build out our Mini lineup to encompass teenagers finance and everyday lifestyle needs. And then moving on to SG&A and CIR on Page 18. In the first quarter, our SG&A recorded KRW 92.8 billion, down 29% Q-on-Q as fourth quarter one-offs, such as payout of performance bonus and contribution into the employee welfare fund dissipate. In Q1, we recorded CIR of 33.1%, which is a significant improvement from the previous quarter. On to our operating profit on Page 19. First quarter operating profit increased 59% Q-on-Q, recording KRW 136.4 billion as our revenue increased significantly driven by loan growth. The uplift in operating profit resulted in improvements in our ROE and ROA, which was 7.16% and 0.96%, respectively, a significant improvement Q-on-Q. Next, moving on to next for asset quality. Page 20. In the first quarter, delinquency went up by 9 basis points quarter-on-quarter to 0.58%, while our NPL ratio was 0.43%, and our loan loss allowance coverage ratio 234%. Our credit costs improved by 9 basis points Q-on-Q, recording a ratio of 0.76% despite conservative provisioning against internal and external sources of uncertainties. And on to Page 21, where I will explain further about our portfolio stability. At Kakao Bank, we maintained high level of capital soundness based on stable asset management. As of the fourth quarter last year, our valuation loss and securities against total equity was the lowest in the banking industry at 2.4%, which was then reduced further to 1.3% in the first quarter. Also, we have continued to enhance the stability of our deposits by reinforcing our customer base, while lowering our liquidity risk. Our high level of stable deposits that are used for payroll transfers and credit card transactions stands at 37.3% as of the fourth quarter, and it is, in fact, the highest in the industry, and it is a good indicator of the close intimacy we enjoy with our customers, thanks to customer trust. We will stay committed to running our operations on a sound stable basis to further enhance the stability of our business and solidify customer trust. Lastly, on to Page 21 on key highlights of our ESG performance. As part of our drive to put ESG management into real practice, we will be seeking to acquire the ISO 14001 certification on environmental management system. Once acquired, this will make us the first Internet bank with this certification, and we expect this to enhance our assessment rating. And with that, this concludes our financial results and business performance for the first quarter 2023. We'll now move on to the Q&A session.

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

[Interpreted] I think starting the second half of last year, you did start to see some loan growth. And for full year last year, you achieved 8% growth. Rent just in the first quarter alone, you have achieved 5%, which suggests acceleration of growth. So do you have any plans to change your loan growth guidance for this year. At the end of last year, you spoke about mid-10% level. But given your plans to expand market coverage for your new mortgage loans, et cetera, do you think that the guidance will perhaps be upgraded? And your -- the second question has to do with other revenue and also SG&A. It seems that very strong loan growth has led to top line improvement. And I think that there's also a jump in some other revenue items as well if you could elaborate. And then in terms of SG&A on Page 18, it seems that advertisement and marketing costs and other expenses seems to have gone down significantly. So could you could provide a breakdown of those cost items and your comments on whether you think those trends are likely to be sustained. I would appreciate it.

[Interpreted] So to address your first question regarding loan growth. So in terms of the loan growth that we have seen in the first quarter, I think this was very much consistent with the growth guidance that we provided at the Analyst Day conference. So we believe that our present guidance on mid-10% loan growth for this year has a very high likelihood of being achieved. But as everybody is aware, there is a great deal of uncertainty across the macroeconomic environment, which is a source of concern. So to adjust our guidance at this present point, I think it would be too premature. So this year, of course, we have a plan to come up with more new loan products to supplement and reinforce our loan lineup. And we do have plans to grow our loan book through the supply of new products. That being said, there are many contingencies that could have in, for example, we're seeing increased fraud in the housing loan space, for example, for housing and deposit loans, I mean. So it is generally a very challenging environment to expect net increase in loans. So regarding the breakdown of our other revenue for the first quarter, well, it does include KRW 5.2 billion in disposal gain from loan receivables. And then also in the mix is KRW 30 billion in valuation or disposal gains on marketable securities. So as the loan deposit ratio has gone down, that means the size of our investable assets has increased. And so we have invested in certain marketable securities. And so that is reflected here, again, the amount being KRW 30 billion. And then otherwise, other cost items under SG&A are largely consistent with our original business plan, and we do not foresee any major change there. And as we explained during our Analyst Day conference in February, we intend to continue our efforts to further improve down our CRR ratio from somewhere around the high 30% level to a lower more improved level.

The Following question will be presented by Jihyun Cho from JPMorgan.

I'm interested in the -- some of the terms of your home mortgage loan product. So similar to your credit loans, is it true that there is no penalty against early repayment. So if you could explain that? And to maintain a certain loan balance, do you anticipate more intensive competition similar to dynamics we have seen in the low markets previously. And regarding NIM, you have seen a 21 basis point drop in the first quarter, mainly because of a very outsized loan growth in the first quarter. But going forward, considering the rising funding costs, how much more of a drop do you foresee in NIM in the upcoming quarter -- second quarter, third quarter? If you could provide a guidance.

[Interpreted] First regarding the early penalty for mortgage loans. So overall, we aim to achieve a relatively lower funding costs through the strength of our convenient offerings and outstanding customer service. So thanks to our competitive funding cost profile, we aim to maintain low lending rates to get as many people access to good lending terms as possible. But unlike credit loans, if you look at mortgage loans, just the nature of the product, they tend to, of course, have much longer maturities and long fixed interest term. So in the interest of portfolio stability, we do feel that a mechanism like early repayment fee, for example, may be required. However, while that may be true, we actually did not request early repayment fees on our mortgage loans because we wanted to stay consistent with all other loan products offered by Kakao Bank to the extent that we could manage, we wanted to ensure that we did not place that kind of penalty provision on any of our loan products for enhanced convenience of our users. So while we do not have any finalized plans to date, we will still engage in further discussions on possibility of applying this kind of mechanism, mindful of different factors, including market interest rates, the behavior of borrowers in terms of early repayment, also our funding costs, our deposit funding structure, also the returns we get on our assets as well. So we pride ourselves on having managed all of our loan products to date, very stably without having to apply penalty against early repayment for all of our loans, including credit loans, our housing deposit loans and also mortgage is as well without incurring loss. So we'll be closely monitoring the market environment to observe development and also engage in further negotiations to determine how we will proceed going forward. And your second question regarding NIM. As you know, we have observed big swings in market interest rates and also widening of uncertainty. So although we are cautious because the directionality of market interest rates are not clear yet. Still our view is that, as we explained during the Analyst Day session in February, we intend to manage our NIM at a level consistent with last year's NIM. So this assumption that we will be able to manage our NIM in a consistent -- at a consistent level similar to last year is based on certain assumptions. So we have taken into account the growing portion of home mortgage loans against our total loan portfolio. Also, we're assuming that the spread between market rates and the benchmark policy rate will resume to more normalized levels.

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

I'd like to ask 2 questions regarding deposits first and then your capital management policies. So in the first quarter, your deposit base has increased significantly by about KRW 7 trillion or so. And of that, I think your savings account and also savings products actually account for about KRW 4.6 trillion. So what was the purpose of that expansion in deposit base? So how do you intend to use the deposit proceeds? Is it mainly intended to grow your loan book? Or are you anticipating increased allocation to marketable securities towards the end of this year? Was that also a plan of one of the usage for the increased deposits. And if you look at the newly acquired deposits just in the first quarter, what is the average duration, average maturity of those defenses as well question is regarding your capital performance plan. I think you announced plans to do some share buybacks, assuming the loan growth assumptions that you have in mind, what is the big picture you're now recording retained earnings available for dividends. So with a lot of big capital position already, how do you intend to manage your capital deployment.

[Interpreted] So just briefly regarding the maturity structure of the newly funded deposits. So 80% to 85%. So most of the new deposits have a maturity of less than 12 months. And then actually, the highest concentration in maturity actually is 9 months. So this indicates some behavioral change and changing preferences among deposit holders. Previously, they would prefer to choose 1 year to 3 years maturity, but now we see that there is a clear preference for maturity under 1 year. In terms of the use of the deposit funding, well, first and foremost, they will go towards supporting loans. So unlike other commercial banks, although we have been given a credit rating, we have less experience doing fundraising on the capital market by issuing bank debentures. And then given a great uncertainty in terms of interest or market interest rates, we think that it would be in our favor to raise most of our funding through savings or check accounts, through deposits rather than financing on the capital markets by issuing bonds. So as much as we can, we want to raise most of the funding this year through deposits. And because retail Internet-only banks actually are imposed a certain disincentive or penalty in the calculation of loan-to-deposit ratio, we think, again, it is in our best interest to maintain a very large stable base of deposits relative to the size of our loan. And in terms of the raised funding, of course, most will go towards lending. But then what does not go to issue loans will be used for asset management. So they will be invested in assets to drive investment returns. Same as for any other bank. And so starting last year, we have been working to increase our trading of these types of investment instruments. And for our investment returns, previously, we have mostly focused on investments into treasury bonds for to secure liquidity. However, starting last year, we've been increasing the scope of our investments to also include agency bonds, bank debentures, also fixed income-type beneficiaries or ticket as well. And then your next question regarding our capital management. So in terms of our capital management policy, the goal for us is to use our recurring base of retained earnings. And to the extent that we find it manageable, we want to give back to investors either in the form of dividend payouts or through share buybacks. That is because of our unique positioning, which is different from that of the fintech players. We actually want to go full circle. So we want to carry out normal business operations and create a very stable and high cash flow and really demonstrate to the market our cash-generative capabilities and then take the recurring earnings to give back to our shareholders. And then again, in terms of the use of capital, the #1 priority is to go towards loans. And then we have ongoing discussions about possible investments, either global or in Korea. And so we will be crystallizing those discussions and perhaps we'll be ready to share more with the market sometime within the year.

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

Let me ask some questions regarding your delinquency ratio, which actually has gone up quarter-on-quarter, but this applies to the entire industry, not just Kakao Bank. I imagine that the increase in mortgage loans actually may have had a positive impact on your delinquency rate calculation. So could you provide some detail regarding what kind of delinquency trends you've been seeing, particularly for your credit loan or your overdraft loan type products starting third quarter last year to date? And then have you done any additional provisioning against loan loss in the first quarter, if you could explain.

[Interpreted] So in terms of the delinquency trend on our credit loans, we actually have been seeing similar trends with the broad market of an increase in the delinquency ratio. So as of March, I believe that the delinquency ratio on our credit loans currently stands at 0.7%, if I recall correctly. Actually, 0.64% to be exact. So this 0.64% applies to our high-credit credit loans and mid-credit credit loans all combined between the 2 types of loans, however, there is about a 3 to 4x difference in terms of the delinquency ratio. Starting in the second half of last year, while delinquency for our high credit -- credit loans has held steady. It is true that we have seen up trends for our mid-credit loan. In terms of additional provisioning that we have done in the second quarter last year, based on our consultation with the FSS, we at that time, did 100 -- excuse me, KRW 12.6 billion in additional provisioning, followed by KRW 7.4 billion in the fourth quarter at year-end. And then this year, first quarter, there was additional one-off provisioning of KRW 9.4 billion.

[Interpreted] So thank you to all the analysts and investors taking part in today's conference call. With that will now conclude the conference call for first quarter 2023, Kakao Bank. Thank you very much.