KakaoBank Corp. (A323410) Earnings Call Transcript & Summary

[Interpreted] Good morning, and good evening. Thank you all for joining the conference call for the earnings results of KakaoBank. This conference will start with a presentation, followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on KakaoBank's fourth quarter earnings of the fiscal year 2024.

[Interpreted] Hello, this is Dianna Kang from KakaoBank's IR team. I'd like to thank all of our analysts and investors for joining us today at our earnings conference. We will now begin KakaoBank's earnings call for the fourth quarter of 2024. We are joined by members of management, including our CEO, Daniel Yoon; Vice President, Jay Kim; Tae Kwon, who is our Chief Financial Officer; Conrad Shin, Chief Technology Officer; Paolo Lee, Chief Business Officer; Eli Lee (sic) [ Seok Kim ], Chief Risk Officer; [ Sean Kim ], Head of the Banking Group; [ Vesper Ko ], Head of the AI Group; and [ Buddy Song ], Head of the New Business Group. 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 Tae Kwon, our Chief Financial Officer, to present on our fourth quarter business highlights and financial results.

[Interpreted] Good morning. This is Tae Kwon from KakaoBank. Let me take you through our key highlights in 2024, starting on Page 3. Kakao Bank continues to shape solid fundamentals driven by strong growth in our customer and deposit base. As of the end of 2024, our customers totaled 24.88 million, up 2.04 million year-on-year. This increase in users drove robust deposit growth, which recorded KRW 55 trillion as of 2024 end, up 17% year-on-year. As a result, we reported platform revenue of KRW 94.2 billion, up 31% year-on-year; and operating profit of KRW 606.9 billion, an increase of 27% year-on-year. Let me now take you through our fourth quarter operating performance. Please refer to Page 4 for further details on our customers, while we will move on to Page 5 for operating revenue. Operating revenue in the fourth quarter was flat Q-on-Q despite a decline in fee revenue, thanks to significant upside from our loan comparison and advertisement revenue. Revenue from our loan comparison service increased 37% Q-on-Q, with quarterly revenue exceeding KRW 10 billion. Ad revenue increased by nearly 40% Q-on-Q, driven by strong traffic and enhanced competitiveness of our product offering. Fee revenue meanwhile went down Q-on-Q, impacted by one-off settlements, including refund of credit card processing fees for small merchants. Moving on to Page 6 for deposits. As of the fourth quarter, our deposit balance totaled KRW 55 trillion, up 1% Q-on-Q, driven by an increased share of low-cost deposits, which rose to 60.6% of the total deposit mix, driven by a rise in demand deposits, widening our gap versus the broad banking sector. Our funding costs dropped by 4 basis points Q-on-Q to 2.2% for group. Please turn to Page 7 for further details for group accounts. In Q4, our loan balance totaled KRW 43.2 trillion, up 1% Q-on-Q, driven by growth in SOHO and unsecured personal loans. The NIM was flat Q-on-Q despite lower loan asset yields from adjustments to our financial investment portfolio. This was thanks to more stable funding costs and improved spread. Page 9. We continue to expand our ecosystem for SOHO business owners, including not only loans and payment services, but also tax inquiries and payments. As of the end of Q4, the number of SOHO customers has passed the 1 million mark, with our SOHO loan balance increasing by near double in just 1 year to KRW 1.9 trillion. Over the next year, we intend to launch higher-value unsecured loans above KRW 100 billion as well as new secured loans to further expand our coverage for SOHO to maintain strong growth momentum in the SOHO segment. On to our loan platform on Page 10. Our unsecured loan comparison service continues to grow quickly as we expand our partnerships and work to enhance the competitiveness of our services. We expanded our coverage to the insurance sector in the fourth quarter, and we are now working with 10 more partners for a total of 56 partnerships as of the end of the quarter. In the fourth quarter, the execution value of our loan comparison service rose by 11% Q-on-Q to KRW 1.1 trillion. Please refer to Page 11 for further details on our investment context and performance. Moving on to our advertisement business, Page 12. For ads, we have been focused on boosting traffic and enhancing the competitiveness of our ad platform. We have seen a big traffic uplift from the benefit tab, which was newly introduced in August, and are seeing growing demand for ad space within the benefit tab. Our strategy is to integrate signature products like our 26-week installment savings plan with advertisement. This has been very well received by our advertisers and users alike. Please refer to Pages 13 to 14 for details on our SG&A and operating profit, and we'll move on to asset quality on Page 15. As of the end of the fourth quarter, delinquency rose 4 basis points Q-on-Q to 0.52%, which is flat on a Q-on-Q basis. This is due from a slowdown in mortgage loan growth and the reduced scale of write-offs. Full year credit cost meanwhile dropped by 11 basis points year-on-year to 0.65%, mostly due to additional preemptive provisioning in the fourth quarter. Recurring credit cost, not including the additional provisioning, was lower, within the 0.5% range. And this concludes our financial results and business performance for the fourth quarter of 2024. And with that, we will now move on to the Q&A session.

[Interpreted] [Operator Instructions] The first question will be provided by Jung Jun-Sup from NH Investment & Securities.

[Interpreted] Two questions. First has to do with AI. At the time of your value-up program disclosure, you announced that you intend to expand AI-related investments. So if you could provide a progress update and also some idea in terms of the time line, when we can expect a more visible outcomes for your AI investments. And recently, we have heard of the partnership between Kakao and OpenAI. So is this, in any way, related to our AI initiative? And second question is on the 2025 guidance. If you could provide your guidance in terms of loan growth, also noninterest income growth, SG&A, credit costs, et cetera.

[Interpreted] Yes. Let me take your first question. So obviously, the collaboration by Kakao and OpenAI was only announced yesterday. So while the details have not been finalized or confirmed, we intend to continue our collaboration with Kakao to become an AI-native bank, bringing together our strength in terms of innovative technology and our specialty and expertise in the area of finance. And we have been designated by the FSC as an innovative financial service provider. So we are planning to use the OpenAI GPT service to provide a conversational type of financial consultation service for users to provide information about interest rates or credit limits. And so we are preparing for this type of product launch. And then let me take you through our guidance for the items that you asked about, first, in terms of loan growth. So the financial authorities have announced that they want to keep the pace of growth for household loans within nominal GDP growth rates this year as well. So we will reflect that guidance from the authorities and maintain loan growth similar to last year level. So as you know, we have a very strong competitiveness in the loan market compared to other providers, very high level of capital adequacy, lower cost of capital and funding costs as well and lower loan deposit spread. And so leveraging these strengths, we will maintain growth momentum in loans that are subject to less rigorous regulatory control, for example, SOHO loans, et cetera, while enforcing very strict risk management and control. Second, in terms of noninterest income. So noninterest income actually has increased from 27.1% as of the end of the prior year now to 30%. And as we explained during our value-up disclosure, the target is to grow that portion of our spend, which is what we will be focusing on. And then moving on to credit cost. So we intend to maintain similar levels to last year. Although institutions, including the IMF, have forecasted a slowdown in domestic economic recovery and also a slower pace of economic growth overall, nonetheless, we will be maintaining strong asset quality based on our strong portfolio of mortgage and guarantee-backed products. And then in terms of our CIR, so our CIR recorded in 2024 was 1 percentage point lower versus the prior year. So the reason why we did not see a sharper improvement or drop in our CIR has to do with increased advertising spend for TV or online marketing campaigns. Also, there was an increase in labor costs incurred at the end of the year upon payout of performance bonuses. So for 2025, we do not anticipate a significant year-on-year improvement as we're anticipating investments into the computer or IT infrastructure, but through efficient management of SG&A, we intend to maintain it at a mid-30% level, which is similar to last year.

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

[Interpreted] Yes, this is Sinyoung Park from Goldman Sachs. I'd like to ask first about the composition of your loan assets. So if you look at the quarterly net increase in your loan assets throughout 2024, it seems that the mortgage type loans were flat, while it was mostly the credit unsecured loans that increased as a proportion of the total mix. So you're planning to launch your SOHO secured loan sometime in the fourth quarter of this year. And that said, is there any change to your mid- to long-term target in terms of the split between secured and unsecured loans? Previously, your guidance was 7 to 3. So is there any change to that target split? And what do you anticipate in terms of the mix for this year? Second question, if you look at your total deposits, it is very encouraging to see that the low-cost portion is increasing. But within low-cost card deposits, there are different types. I'm particularly interested in the parking account type of deposits, which do carry a higher interest rate. So how has that portion changed, if at all? What are the trends, from what kind of historical levels to what levels now? Are you seeing some plateauing of that parking account portion?

[Interpreted] Yes. Let me start with your first question. So in terms of the balance mix between secured and unsecured loans, we are looking at a 7 to 3 split also for 2025. Going forward, we are looking at the split moving to 6 to 4 as a proportion of corporate or household loans increase. And regarding your second question, so the proportion of parking accounts within current accounts is somewhere around 50%. So it has held steady with no major change. Going forward, overall, the portion of current or demand accounts will continue to rise as the total deposit base sees double-digit growth and as we maintain the portion of low-cost deposits. We are providing a more versatile use for our deposit holders, automatic remittance payments for apartments, maintenance payments, for example. And so more are choosing us as their main deposit of choice, which is why a lot of them are parking their excess funds in our demand or current accounts.

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

[Interpreted] I will also ask two questions. It may be that I missed your answer earlier, but when you were mentioning the guidance for 2024, I don't think you covered your NIM outlook. So if you could share that, I would appreciate it. And I think we can look forward to a lot of growth from your fee and platform revenue side. Fee revenue, of course, comes from your check or debit card or core banking business. Platform has the loan comparison service, advertisement, securities and credit card business. And you did provide guidance that you expect about 20% growth on a cumulative basis from the fee and platform side this year. If you look at the platform revenue components though, which of those components do you think will likely see stronger growth coming through? Will it be mostly from the loan comparison side, which will show the strongest growth?

[Interpreted] Yes. Thank you. Let me take the first question. So we are expecting a certain degree of decline for 2025 full year NIM for the following two reasons. So overall, lending rates will have to go down this year amid a sluggish economic environment for Korea, which will lead to a cut in the policy rate this year. And as we shared during our value-up program introduction, we do intend to significantly grow our low-cost deposit base, which will, in turn, lead to a drop in our loan deposit spread, which will inevitably mean lower NIM. However, as we explained earlier, we will be strengthening growth of our low-cost deposit base while working to expand the scale of our overall earnings by growing our loan business and also by boosting returns from our invested assets to defend full year NIM at around the 2% level, overall backed by strong earnings. And as our deposit base increases, this will weigh on NIM because of the drop in the difference between interest-bearing assets and liabilities. However, this will be offset to a certain extent as a portion of our deposits, including MMF, et cetera, are not included in the NIM formula, and therefore, it will have an offsetting effect and defend the decline in NIM. And let me now move on to the second question. So platform revenue has grown by 30% year-on-year. And we are expecting a very strong growth in platform revenue for this year as well, expecting strong growth mostly from the loan comparison and advertisement business. So we're expecting double-digit growth, in fact, from loan comparison and advertisement this year. Loan comparison services actually, which were expanded significantly in December 2023 beyond referral loans, increased drastically to 80% of the revenue stream in just a matter of a year. So we're expecting this to provide significant upside. And we will be maintaining the strong growth momentum as we launch loan comparison services for the home mortgage loans in the first half of this year as well. And for advertisement, we will focus on maximizing traffic and increasing per traffic efficiency to boost the revenue contribution. And we'll be introducing new add-on products like PLCC to further solidify our platform revenue base.

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

[Interpreted] My first question has to do with your platform business, and it may overlap a little bit with a prior question. But it does seem that you show a very remarkable performance in the fourth quarter, especially from your loan comparison and ad business. So do you see this type of improvement as being more of a one-off? Or is it part of a longer trend? So with loan comparison, you have increased the partnerships and the execution value has increased and unit pricing on your ads have increased. Overall, do you think these are temporary one-off drivers or drivers for trend growth? Second, when you introduce your value-up program, you mentioned possible M&As. And while the commercial banks are not looking at PEG or payment companies as potential targets, I do believe KakaoBank, you are looking at some of those type of providers. What kind of synergy do you see in the PEG company?

[Interpreted] Yes. Let me take your first question. So for this year, our target is to grow our loan comparison service and advertisement service or the revenue by more than 40% this year. So the earnings growth will not be one-off or temporary, but we are looking to achieve continuous trend growth. And we see significant potential, particularly for further growth in the loan comparison business as already, we are seeing increase in new credit loan origination from our unsecured loans platform. And also, we see significant upside in terms of our mortgage and housing loans in terms of potential growth. And advertising revenue also is showing consistent growth trends. We are seeing continuous increase in traffic. The number of advertisers is increasing, and we're seeing more improved advertising efficiency as well. And let me cover your second question. So for any type of M&A, whether it covers PEG-related targets or other targets, always, the goal is to strengthen our service offerings for our customers and users. So we look at the payment service business and also the asset management business as being a very crucial part of the total package in providing a more complete set of financial services to our users. So we are exploring many different types and means of investment opportunities that will not necessarily be limited to direct investments, but we're looking at strong tie-ups through partnerships.

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

[Interpreted] I have just one rather simple question. It seems that if you look at DPS, the company has been more thoughtful in terms of shareholder return. So it is significantly higher versus 2023, for example. And your payout also seems to be starting from a higher base as well. So what are your plans in terms of dividends and shareholder returns for 2025?

[Interpreted] Yes. Thank you. Let me answer your question. So at the time of introducing our value-up program last November, we did also share our mid- to long-term shareholder return policies as well. So our shareholder return plans for this year and beyond will follow the value-up plan that was previously announced. So for fiscal years 2024 up to 2026, we will gradually increase the ratio to 50%. And then from 2027, we will either maintain or gradually increase per share dividend. So our shareholder return policies are all geared to achieving our mid- to long-term ROE targets and based on strong assumptions for robust asset and earnings growth going forward and efficiency in terms of our capital management.

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

[Interpreted] I'd like to ask two questions. It seems that credit costs have increased a bit in the fourth quarter, mostly due to the preemptive provisioning that you did mention. So could you provide further details about credit costs in the fourth quarter? It seems that with plans to launch, for example, the KRW 100 million or above SOHO unsecured loans, this may weigh on your credit cost going forward. So what is the company's strategy in terms of credit cost management as well, also in light of various regulations on different types of loans, including mortgage loans as well? And the SOHO loans, credit loans above KRW 100 million, that will be newly launched later this year. What is the current average balance of the SOHO borrower at present? Second question, it seems that following the second quarter, we have seen a slowdown in overall growth and also deposit growth has been stagnant as well. Do you have any plans to be more aggressive in terms of boosting deposit growth above the pace of loan growth to more proactively increase your earnings? You did mention how you're going to boost return on invested assets, et cetera, but do you have plans to potentially further boost deposit growth further?

[Interpreted] Yes. So let me take your first question. So in terms of our loan loss provisioning, we actually do a [ PB ] calculation based on real measurement every year. And so per our calculation in 2024, we determined that additional provisioning of KRW 25.9 billion was required. So the total provision amount was KRW 95.1 billion. So overall, our credit cost for 2024 was 0.65%, which was 11 basis points lower versus 0.76% recorded in 2023. And we are expecting a gradual improvement in overall asset quality. We are going to increase the portion of guaranteed-backed loans for the SOHO borrowers, which in the case of default will be paid back by the guarantee providers. And also we're planning the launch of secured loans in the second half, which will also help improve asset quality. And then regarding your second question on deposits, our competitive deposit base is actually core to KakaoBank's business model. And by introducing new comparison services, we will maintain double-digit deposit growth this year. So we have already achieved double-digit growth in 2024, and we'll maintain double-digit or higher deposit growth this year as well. So if you look at incoming deposit trends so far early this year, we continue to see surprisingly high inflows even in the first quarter. So we do not anticipate any income lowering or slowdown in the COGS.

[Interpreted] And because of the time, we will now conclude the 2024 fourth quarter earnings call for KakaoBank. We'd like to end by thanking all of our analysts, investors and members of the media for attending. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]