Kasikornbank Public Company Limited (KBANK) Earnings Call Transcript & Summary

Good morning, everyone. I'm Kattiya Indaravijaya, CEO of KBank. Thank you for joining KBank Virtual on the Roadshow of Year 2023 today. Together with me are the management team, Krit Jitjang, President of KBank; Dr. Adit Laixuthai, Senior Executive Vice President; Mr. Chongrak Rattanapian, CFO; Porvarate Chetphongphan; and Surat Leelataviwat, Co-Division Head of Enterprise Risk Management. In the meeting today, I would like to share our view on the economic outlook, how it would impact banking industry, followed by our 2022 performance highlights, our growth strategy onward and summary of our financial targets for the year 2023. According to the latest World Bank forecast, the global economy will likely face a significant slowdown. The major global economies may show no growth in 2023 from a consequence of aggressive rate hikes in 2022 and ongoing energy crisis. Though Thai GDP is likely to grow at 3.7% in 2023, driven by tourism sector amid China's reopen policy. Thai economy still faces several challenges. Slow down global economic momentum would put down pressure on Thai export sector. High household debt, elevated inflation, ongoing geopolitical risks, fading government stimulus remain a concern. The recovery of Thai business sectors will be in K-shape recovery. Export-related businesses and their supply chain, which accounted for almost 60% of Thai GDP will be largely impacted by the global economic slowdown. In addition, domestic consumer spending is expected to weaken amid persistent inflation and fading pent-up demand and subsequently put pressure on property sector. Retail customers still have limited purchasing power and small SMEs continue to face challenges from uneven economic recovery. The outlook of Thai banking sector in 2023 remains challenged from limited recovery of core business income. Asset quality is still one of the key challenges. But still, Thai Bank stability remains sound with strong capital and liquidity position to help guard against lingering economic risks. Thai authority could launch additional measures to curb household debt and also other measures to manage digital asset-related businesses and open communication by licensing the virtual bank. Digital lending product, digital asset market, wealth management and financial planning services could view as opportunity for banking sector to generate higher yields and new fee income. For KBank performance of year 2022, loan growth was around 3% in which is -- if include effect from NPL outflow management, loan from business growth would be around 6%. Year 2022 NPL ratio was 3.19%, lower than that in 2021. Coverage ratio was 154%, along with higher ECL and cleanup balance sheet. With regard to very high ECL set aside, in the fourth quarter of 2022, I'm here today to explain why we did what we did in the fourth quarter last year and provide you with further information. I do hope that you will find our action to be reasonable and prudent despite the unpleasant surprise that the high ECL gave the market. We have monitored and observed increasing flows of NPLs. The NPL inflows may come from problem loans before COVID-19 that we continued to clean up and customer impacted from COVID-19 who could not survive after the expiration of loan relief programs, which we proactively classified them into NPLs, and around 10% to 12% of inflows was loan from new strategy on small ticket lending. By the time the third quarter ended, the picture became clearer. We saw the signal of global economic slowdown that will impact Thai economy and expected that it will have additional effect on some customers that had COVID relief program expired in the first half of year 2022, mostly were SME customers. So in the fourth quarter, the bank had decided to take additional prudent measure to manage accordingly to the true financial health of each customers. Instead of transferring most problem loans into the new Bank of Thailand comprehensive debt relief program and enjoy relaxation benefits, we performed proactively classification for each customer and exited with nonviable customers and focused on keeping our high viable customers on our comprehensive restructuring program, which helped reduce percentage of comprehensive debt restructuring to 6.9% of total loans. Also, with good partnership with JMT, we saw the opportunity to manage NPLs with enhanced efficiency by setting up JK AMC Thailand first joint venture co-owned by a commercial bank and an asset management company. In June 2022, it gave us additional strategy to deal with our NPL inflows. In 2022, write-off loans were THB 59 billion, and NPL sales were THB 72 billion, which were mainly sold to JK AMC. This extra cleanup, especially from problem loan before COVID-19 and problem loans impacted by COVID-19 used additional credit cost of 50 basis points. Credit cost in 2022 rose to 211 basis points, the peak level in this cycle along with prudent financial policy, reserve remained high. ECL buffer for uncertainty with management overlay remained around 20%. NIM in year 2022 was 3.33%, driven by higher yield on loan from rising small ticket lending as well as high lending and market rate. Small ticket lending is part of our strategy. We had acquired almost 800,000 new small pocket sized credit customers in year 2022. We have collected data and learned to enhance our credit capabilities. We will be more selective and gradually improve the quality of this portfolio. We will also continue to manage asset quality and credit cost to maximize risk-adjusted return. The credit enhancement plan, which will be implemented in year 2023 include credit origination capability and differentiating credit models and onboard process by subsegment to acquire qualified customers, fraud prevention from digital channel with fast detect and tight integration with credit models. Monitoring capability and expedited action have to be taken to increase speed and granularity of monitoring to provide well-timed action. And we have to focus on cost effectiveness and speed up collection to maximize recovery. CASA is also our main strength, reflecting in continued low cost of deposit, which is our main funding source. Accrued interest receivable decreased from ongoing prudent income recognition and better interest collectability. Interest cash payment to interest income received was more than 90%. Noninterest income dropped 8.42% in which was 6.89% decrease in net fee income, mainly from fund management and brokerage business due to unfavorable market condition and insurance business. In 2022, Wealth management business were significantly impacted from the volatile market and global economic slowdown. However, this year, we expect to see performance recovery in wealth management business with both mutual fund and bancassurance. The key strategy in wealth management business is comprehensive product offerings and advisory services. The bank will also enhance sales and service model with digital technology enablement and KBank brand strengthening. Mutual Fund will also improve from rearranging wealth management team, focusing more on the medium risk and high-fee multi-asset and revising sales model with support from wealth practitioners. Insurance business had bottomed out last year. We expect net profit to gradually improve. We will focus on products with high value added to both KBank and MTL. In 2022, we ranked #1 in whole life and health bancassurance with 40% and 35% market share, respectively. For our 3 years expiration, we aim to grow customer wealth AUM by 20% with mutual fund AUM growth at 38% from potential opportunities to gain more share of wallet in high net worth and affluent segment. We also aim to grow wealth customer base by 1 million customers, focusing on upper middle income segment. The bank aims to make payment accessible anytime, anywhere for everyone. We continue to dominate digital payment share by embedding into ecosystem with seamless experience at lower cost and using payment-related data for better lending and investment. We will also strengthen our share and service experience in digital-led experience with various ecosystem and leveraging K PLUS, our mobile banking, supporting by optimized physical service with better human touch and enhancing basic infrastructure to harmonize physical and digital customer experience. Those help strengthen our #1 position in K PLUS. In 2022, we had 21 million K PLUS users with 73% active and the bank target to have around 24 million users this year. For regional business, we expect that substantial contribution in 2023 and 2024 will come from Vietnam, Indonesia and China, respectively. Also, we seek to grow the proportion of regional business income from 2.5% of net total income in 2022 to 4% in 2023. In August 2022, the bank officially launched its first branch in Ho Chi Minh City, Vietnam. In December 2022, the bank became the controlling shareholders with 67.5% stake in Bank Maspion Indonesia. The footprint expansion will help support our credit growth, along with uplifting IT capability and collaborating with tech partners to expand and cover more substantial portion of customer base in the region. For innovation and technology, we have KBTG or KASIKORN Business Technology Group, continue supporting the bank operation as well as creating the future for finance. There were several things KBTG did in 2022, including 144 new IT project deliveries, operational excellence with minimum downtime for key system and cybersecurity with no high impact on IT security incident. Example of innovation products are Kubix, launching its first ICO project, the DESTINY TOKEN. KX launching Coral, NFT arts marketplace platform and Bigfin as digital asset investment tracker made by KBank, a money management platform with around 1 million users, giving the personalized financial management with newly designed features and KhunThong , a social chatbot with 1 million users, helping friends settle, expand within the chat. In terms of company structure, we believe that our current structure, KBank as a top-level model company has shown the effectiveness and leveraging strengths that we have together among our group such as customer base, sales and service channel, both offline and online platform and data to deliver excellent customer experience and maximize our real value to stakeholders. Regarding our plan to unlock shareholders' value, the bank maintained the same direction that we have made decisions and unlock value. When we are certain that a spin-off company will deliver meaningful and sustainable value to investors, the business has growth opportunity and scalable and the capital market funding is necessary. The bank continued to conduct business with the bank of sustainability philosophy and aspire to an ESG leader among bank in Southeast Asia through 3 dimensions: environment, social and governance. We are fully aware that ESG is not CSR, but it should be real as business opportunity. Thus, while we are supporting customer towards a net zero transition, we have to be profitable, practical and well balanced. For environment, we have announced net zero commitment since late 2021, focusing on net zero in our own operation by 2030 and net zero in our finance portfolio in line with Thailand aspiration, and we will accelerate this journey while possible. We have set target allocated at least THB 100 billion to THB 200 billion in sustainable finance and investment and initiating more beyond financial solution. For society, we aim to create sustainable society by ensuring financial inclusion, promoting financial literacy and respecting for human right. For governance, we will be an accountable bank by integrating ESG factor in the whole value chain. To summarize all the strategy in financial target of year 2023, our revenue growth engine will still be net interest income driven by higher interest rate and small ticket sized lending strategy. As Bank of Thailand plan to license Virtual Bank to help improve financial inclusion in Thailand by offering digital financial service for small customers. KBank currently run our business in the same direction on helping small customers access financial services with embedded ecosystem and partners. Our competitive advantage are that we had step ahead and entered this business before others. We have been through the whole loop of economic cycle, both during economic growth and economic downturn, and we had collected data and learned a lot and prepared for the upcoming competition with virtual banks. NIM is targeted to be one of the rising trend and be in the range of 3.3% to 3.45%. Contribution rate to FIDF will be back to normal level at 46 basis points from a temporary reduction to 23 basis points in the past 2 years during the COVID-19 pandemic. The bank continues to focus on more well-balanced loan portfolio to improve risk-adjusted return to the overall loan book. Loan growth this year is targeted to grow at 5% to 7%. The bank target to grow corporate loan by 4% to 6%, SME loan by 1% to 2%, and retail loan by 2% to 4%. We will continue to focus on quality using effective data analytic capability. In this year, the bank will continue our proactive asset quality cleanup and prudent financial policy. Credit costs will gradually drop from the peak last year, but remain high to cover future uncertainties. The credit cost this year will gradually reduce to be in the range of 175 to 200 basis points. But the time of normalized credit cost at 140 to 160 basis points will depend on economic recovery. NPL ratio will be relatively stable from last year with manageable level at less than 3.25%. Net fee income growth will be flat, though there are still traditional transaction service and product provided. Several of customers gradually migrated to digital service, resulting in continuously declining transactional service fee. Hence, we are exploring new source of revenue from wealth management business, including mutual fund and bancassurance. Amid moderate revenue growth, cost management and productivity improvement will continue. Thus cost to income will remain in low to mid-40s. We will speed up and scale up our growth strategy under the principle of a bank of sustainability to create sustainable long-term return and maximize our real value to all shareholders. Lastly, we often receive questions when we will see the double-digit ROE again. With our long-term key growth strategy, as I mentioned, I would say we expect it to take 3 to 5 years to be back to that level. Thank you.